testing rejects all variables except those in rows 7, 9 and 10. In practice, this does not happen, as documented in Section VI below. All equations are well identified. In addition, there should be no risk of simultaneity bias provided that each of the explanatory variables are exogenous as maintained here.<sup>22</sup>

# _C. Key Hypotheses_

Short descriptions of key hypotheses concerning the role of political institutions and the capacity for public financial management are provided below. These are put into three broad categories: ( _i_ ) variables expected to worsen common pool behavior; ( _ii_ ) variables related to various aspects of political institutions; and ( _iii_ ) the technical capacity for public financial management.<sup>23</sup> The variables in the first group correspond to Σ _Xi_ above while variables in the second and third groups correspond to variables Σ _Yi_ . Each will ultimately be summarized in the context of equations 9, 10 and 11 along with the expected signs for each variable in Table 6 at the conclusion of this section.

# _1. Common Pool Behavior_

**_H01:  Fractionalization_ .** As noted at the beginning of this section, the common-pool problem arises when politicians can make targeted expenditures to various groups of potential voters.  It follows then that the common pool problem should be more evident when society is divided into various factions.<sup>24</sup> Thus, ethnic, linguistic or religious fractionalization could be expected increase aggregate expenditure deviations _r_ and _e_ and thus reduce compositional accuracy _fb_ .  To test these ideas, we use the three fractionalization variables from Alesina _et al_ (2003), assuming that the data do not change from year to year.

**_H02:  Dependency ratios._** The same logic can be used to generate a set of hypotheses based on demographics.  Tonizzo (2008) argued that a large share of the population over 65 years of age would increase the redistributive demand for social services, thereby increasing total expenditures. Perhaps, if the share of the elderly is very high, politicians might feel pressure to over-spend on hospitals, pensions, and other schemes.  Similarly, if the share of youth in the population is high, perhaps parents would pressure politicians for more spending on pre-schools and day-care.  To test these ideas, dependency ratios for those below age 15 and above age 65 are included as potential explanatory variables.  These data are sourced from the UN Population Division.

**_H03:  Civil Service Employment._** Most countries in the sample used for this paper are developing countries that finance most of their capital investments from external aid.  Conversely, rich countries such as Norway tend to have small capital budgets since the private sector takes on a greater role in providing infrastructure and utility services.  Either way, the portion of expenditures assigned to wages and salaries in this sample is often substantial.  Government hiring can be a form of patronage, and thus a likely contributor to the common-pool problem.  If so, there should be a positive correlation between the share of spending on civil service employment, _PCT_CSE_ , and

> 22 The author tested for the possibility that there might be endogeneity between PEFA scores and aggregate deviations in revenues or expenditures: perhaps it is easier for countries with low budgetary deviations to earn high PEFA scores.  This possibility was rejected by the data.  Some of variables could be deemed endogenous over longer time periods.  For example, youth dependency ratios could be positively correlated with expenditure deviations if such deviations led to higher birth rates through poorly executed health and education policies.

> 23 Some of these variables, which could be assigned to more than one group, will be re-grouped in Section VI after hypothesis testing.

> 24 There is an implicit assumption here that fractionalized groups are always and everywhere organized enough to warrant attention from one or more politicians.  This is almost certainly not true.

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