A political foundation of public investment and welfare spending |
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Authors: | Anne Villamil Xiaobing Wang Ning Xue |
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Institution: | 1. Department of Economics, Department of Economics, University of Iowa, Iowa City, Iowa, USA;2. Department of Economics, The University of Manchester, Manchester, UK;3. The York Management School, University of York, York, UK |
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Abstract: | This paper develops a political economy model to examine the implications of political selection under an authoritarian regime. We formalize the fiscal policy choice of local governments, focusing on two political selection mechanisms and their implications for public investment and welfare spending. A growth-oriented promotion system induces local officials to increase public investment, which may increase output but crowd out welfare transfers. This mimics the recent investment-driven growth in China and relatively low effort to tackle high inequality. Under a broader incentive structure, we show that it is possible for an authoritarian regime to attain the social welfare of a democracy. |
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