FISCAL RULES, FISCAL INSTITUTIONS AND FISCAL PERFORMANCE
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important one. Electoral institutions in particular allow voters to hold policy
makers personally accountable for past policies and create competition among
politicians.
It is plausible to assume that politicians are opportunistic in the sense that
they care about their rents and wish to remain in office. If so, elections give
voters the opportunity to hold them accountable for past performance. This is
the main tenet of the retrospective-voting paradigm. Voters reappoint incum-
bents, if, based on the information available to them, they find their behaviour
satisfactory. Otherwise, they vote for alternative contestants competing for the
same office. Rents will be the more limited, the stronger is accountability and
the fiercer is competition.
Electoral rules can be compared according to district magnitude, i.e., the
number of representatives in parliament elected from each electoral district.
At one extreme, exactly one representative is chosen from each district, i.e.,
the candidate with the largest number of votes in a district wins the seat in
parliament. This is the plurality rule. At the other extreme, an entire country
is just one large electoral district and candidates for all seats in parliament are
drawn from national party lists according to the share of votes cast for that list
in the entire country. This is the rule of proportional representation, which
prevails, e.g., in the Netherlands. Less extreme forms of proportional
representation divide a country into several large electoral districts, with
party lists presented for each of them.
Plurality rule focuses the election on the personal performance of the
individual candidates, thus maximising personal accountability. Proportional
representation, in contrast, weakens personal accountability, as voters can
assess only the average performance of all candidates elected from the party
list. However, plurality rule also gives voters the opportunity to reward
politicians for channelling general tax funds to the specific region where they
live. Under proportional representation, a similar opportunity to reward
politicians for channelling general tax funds to specific groups in society exists
only if political parties are organised social, ethnic, or other clear-cut cleavages
in society. In contrast, proportional representation reduces the politician’s
incentives for using distributive policies to secure his reelection if parties
encompass many social groups.
This reasoning has three public finance implications.
• As personal accountability puts a check on the politician’s ability to extract
rents, we should expect less waste and smaller levels of public spending
under plurality rule than under proportional representation.
• As specific groups of voters reward politicians for distributive policies in
their own favour, plurality rule and proportional representation with many
small parties lead to a higher share of distributive policies rule than