Small Is Beautiful, at Least in High-Income Democracies : The Distribution of Policy-Making Responsibility, Electoral Accountability, and Incentives for Rent Extraction

Abstract

Why is there significant variation in rent extraction among high-income democracies? A large number of political economy investigations into this research question have found that a long period of democratic rule and high per capita income are associated with less rent extraction among public policy-makers. However, attempts to explain the residual, yet significant, variation in rent extraction among countries that possess both these characteristics have been significantly more circumspect and disputed. This paper explores how the distribution of policy-making responsibilities between electorally accountable decision-makers and their electorally unaccountable public policy-making counterparts determines the optimal level of rents extracted in any given high-income democracy context. Specifically, the paper formally models how: (1) variation in the ratio of electorally accountable decision-makers to electorally unaccountable decision-makers, by altering (2) voters' evaluation of incumbent competency, changes (3) the incentives that policy-makers, wishing to remain in office, have to minimize their short-term level of rent extraction in order to signal their competency and hopefully retain office. Given these "career concerns," the theoretical model predicts that an increase or decrease in the ratio will be associated with more or less rent extraction. This hypothesis is then tested empirically. Establishing that the ratio does robustly predict variation in rent extraction is a significant finding, as it can enable analysts to predict how changes in policy-making contexts may affect the incentives for good governance in this sub-set of countries.