Academic journal article Journal of Private Enterprise

Spatially Targeted Government Spending and Heterogeneous Constituent Cost Shares

Academic journal article Journal of Private Enterprise

Spatially Targeted Government Spending and Heterogeneous Constituent Cost Shares

Article excerpt

Abstract

The law of 1/n (Weingast, Shepsle, and Johnsen, Journal of Political Economy, 1981) posits a positive relationship between the size of an elected body and government spending because the taxpayers in each district bear only 1/nth of the total tax burden. Relying on variation in the number of seats in elective bodies, evidence supportive of the law of 1/n has been found at all levels of representative government. It is possible, however, that these findings suffer from endogeneity bias: Polities preferring larger government spending may also prefer to have more elected officials. In this paper, we propose an alternative test of the law of 1/n. In addition to postulating that larger elective bodies will have higher levels of government spending, the law of 1/n also implies that, ceteris paribus, there will be a negative relationship between locally targeted government spending and a jurisdiction's share of the taxation required to finance the spending. We test this prediction by examining the relationship between spatially targeted government spending and the tax burden across states. We find a negative relationship between local tax contributions to the common taxbase and locally targeted government spending for aggregate locally targeted spending and for six of eight subcategories. These findings are robust to the inclusion of other variables thought to influence the distribution of spending on parochial projects.

JEL Codes: D72, H11, H50

Keywords: Law of 1/n; Representative government; Public expenditure; Fiscal commons

I. Introduction

Political economists have long viewed fiscal policy in democracies as a common pool problem - a tragedy of the fiscal commons. Selfinterested politicians seek to direct public resources from the common budgetary pool toward their constituents in order to enhance their political standing. A higher level of government spending, an overgrazing of the fiscal commons, is the result as logrolling politicians collude to support each other's projects. As noted by Tullock (1959), such overspending is facilitated by majority rule because party membership reduces the bargaining costs of logrolling and because the majority only bears a portion of the cost of public projects that benefit its interests. While the benefits of particular projects may be concentrated among a constituency, the tax costs are borne by the entire polity. Therefore, politicians may seek to approve local spending even where the total costs exceed the total benefits.

Weingast, Shepsle, and Johnsen (1981) applied the phenomenon of concentrated benefits funded by a dispersed tax burden to legislature size to develop the "law of 1/n." They hypothesized that the cost burden borne by constituents is a function of the number of geographically represented districts (n) in a legislature. Each district receives the full benefits of parochial spending, while bearing only 1/nxh. of the cost. As the number of legislative districts increases, the district cost share falls; thus, there exists a positive correlation between the number of legislative districts and public spending. Assuming legislators logroll with fellow members to ensure passage of pet projects until the gains from trade are exhausted (a phenomenon known as universali sm), spending will exceed the optimal level.

In recent years the law of 1/n has received strong empirical support. Relying on variation in the number of seats in elective bodies, evidence supportive of the law of 1/n has been found across U.S. states (Gilligan and Matsusaka, 1995 and 2001; Campbell, Finney, and Mitchell, 2007), across countries (Bradbury and Crain, 2001; Perotti and Kontopoulos, 2002), and across local government units (Baqir, 2002; Bradbury and Stephenson, 2003; Schaltegger and Feld, 2009). However, these studies may suffer from an endogeneity problem between legislature or council size and government spending because preferences for greater government spending may also be correlated with a desire for a larger representative body. …

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