paper is to mend these cracks by studying the effects of the electoral rule on po-
litical outcomes — party structures and types of government — as well as economic
outcomes — fiscal policies and rents — in a common framework.4
We study the politico-economic interactions in parliamentary democracies as
a multi-stage, extensive-form game. Making use of many simplifying assump-
tions, we solve this game for equilibrium party structures, types of government
and economic policies under alternative assumptions about electoral rules and
other parameters characterizing the economic and political environment. Our
model rests on two key mechanisms. First, in party formation politicians trade off
expected electoral gains from a larger party against the sharing of rents when hold-
ing office. Second, policy formation is driven by electoral conflicts: between the
government and opposition (always), and the parties within government (under
coalition governments).
Solutions of the model imply several sharp predictions for the joint effects of
the electoral system on political outcomes and economic policy outcomes. We
then take these predictions to the data, using political and economic data from
up to 50 parliamentary democracies in the post-war period. Our estimates rely
alternatively on the cross-country variation in the data, or the within-country
variation associated with electoral reforms.
The central result of the paper, supported by both theory and evidence, is that
majoritarian elections cause less government spending because, by leading to a less
fragmented party system, they reduce the incidence of higher-spending coalition
governments. Party fragmentation can persist under majoritarian rule, however,
especially if constituencies for the different parties are unevenly distributed across
electoral districts and create strong geographical heterogeneity in the electoral
strength of different parties.
The next section (Section 2) presents and discusses our (many) assumptions
about party formation, government formation, economic policy formation and the
behavior of politicians and voters. We then solve the model and characterize the
solution under a proportional electoral system (Section 3), as well as a majoritar-
ian electoral system (Section 4). Following this, we extend the basic framework
(Section 5) by introducing asymmetries and heterogeneity among economic and
PR, but also take party structure as exogenous; and Persson and Tabellini (1999, 2000) study
the effects of electoral rules on a variety of policy outcomes, but always take party structure as
given.
4 A recent and very interesting paper by Bawn and Rosenbluth (2002), to which we owe
considerable inspiration, has a similar ambition.