Tests of institutional versus non-institutional models of local public expenditure determination

Abstract

Are institutional or non-institutional factors more important determinants of local public expenditure decisions? Employing data that allows us to directly identify the entire distribution of voter expenditure demands, we estimate models of deviations of actual expenditures from the expenditure demand of defensible benchmarks — namely, the median voter's expenditure demand and the mean of voters' expenditure demands. Three competing paradigms are employed to specify these models; namely, a non-institutional model, the reform government movement's explanation of how institutions affect local government decisions and a transactions-cost model of this same phenomenon. Predictions from these three competing models differ in many respects. Comparisons of results from estimating models of expenditure deviations are found to be generally more consistent with the non-institutional model than with either of the two institutional models. These results suggest that a competitive local public service market helps limit the ability of governments to tax and spend in excess of the demands of the median or mean voter.