( _eo, eu, eb_ ); and they decide the trade-off between the fraction of the budget heads _within_ each group ( _fo, fu, fb_ ) and the depth of expenditure deviations ( _do, du, db_ ). These multiple levels are described by the following accounting relationships: _(4) e_ = _r + nf (6) e_ = _eo + eu + eb_ where _eu_ < 0 _(7) 1_ = _fo + fu + fb (8) e_ = _fo∙do + fu∙du + fb∙db_ where _du_ < 0 and The main conclusion thus far is that the quality of budget execution is rather poor in most countries, regardless of whether governments are prioritizing macroeconomic stability or public service delivery. Revenue targets are usually missed and under-estimated more often than overestimated. Even so, unanticipated revenue surpluses are saved less frequently than spent: only some governments employ counter-cyclical financing to smooth out revenue shocks. The result is a loose positive correlation between expenditure deviations and revenue deviations. Even in the best performers, it is rare for more than 15 of the 20 largest ministries to spend within 5 percent of their budgeted allocations. Moreover, the best performing countries in one year are not necessarily the best in the next year. Over-spending is common, even in the face of revenue short-falls. Yet, there are also more than a few observations of aggregate under-spending despite positive revenue deviations. This is rather surprising. Within the composition of the aggregate total, over-spending and under-spending often occur simultaneously, at least when resource shocks are not large. This simultaneity causes compositional deviations to be larger than the deviations in total net resources. Compositional over-spending and under-spending appears to be positively correlated with net resource deviations on a cross-country basis. In addition, there appears to be a tendency for a greater number of ministries to share in the impact of an unanticipated shock as the size of shocks increase, though this tendency is far from uniform within the sample.

The observations above could motivate a large number of hypotheses. There is a lot to explore. The remainder of this paper is devoted to the exploration of only a few topics: what are the correlates for aggregate revenue and expenditure deviations, _r_ and _e_ , and what are the correlates for compositional accuracy, defined as the share of the budget accurately spent, _fb_ ?

# **IV. Hypotheses**

This section presents a number of hypotheses that might explain the cross-country distribution of the budgetary deviations described above. These hypotheses are drawn from three strands of literature: political institutions, fiscal economics, and public financial management. The discussion below proceeds in stages, from general concepts, to a framework for hypothesis testing, and concludes with a list of specific, testable hypotheses.

## _A. General Concepts_

The now standard point of departure for discussions of budgeting and budget execution begins with a discussion of the theories of the common pool-problem and the principal-agent problem. Both problems create pressures for spending above socially optimal levels. As discussed in von Hagen (2002), the common pool problem arises when politicians can concentrate their spending on various targeted groups while taxing all members of the larger population.<sup>16</sup> This creates a gap

> 16 Weingast, Shepsle, and Johnsen (1981) put the common pool problem at the heart of their model of geographically targeted “pork barrel” projects.

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