# **1. Introduction**

Political economy explanations for fiscal profligacy have been dominated by models of bargaining between interest groups over group-specific targeted benefits, financed by generalized taxation and borrowing (Alesina and Perotti, 1995, provide a review). Persson and Tabellini (2000, Chapter 13) draw upon much of the theoretical literature to distil a simple model to illustrate the bargaining problem. They show that when multiple interest groups are represented in the government, and given decision power over the budget, both taxes and borrowing are higher than with a single decision-maker, because group members take unilateral decisions and do not fully internalize the costs of financing group-specific targeted benefits. They posit that one natural indicator of the salience of interest groups in over-fishing the common property of public resources is whether the government (the political executive) consists of a single or multiple political parties. Persson, Roland and Tabellini (2007) develop more rigorously the idea of coalitions spending more than single-party governments through a general theory of political party formation to represent interest groups that organize under alternate electoral rules. Their model predicts that proportional electoral rules (in contrast to majoritarian rules) lead to greater number of political parties being formed, which increases the likelihood of coalition governments, and thence leads to higher spending.

Persson, Roland, and Tabellini (2007) find supporting evidence for their model from a sample of 50 parliamentary democracies. Using electoral rules as the instrument for instances of coalition government, they find that proportional systems lead to greater likelihood of coalition governments, and variation in instances of coalitions (arising out of variation in electoral rules) is associated with larger government spending. Early empirical support for this idea of fragmented fiscal policy came from Roubini and Sachs (1989) in their finding of a positive correlation between deficits and “type of government”, an indicator variable that ranked governments in ascending order of political fragmentation, from single-party majority governments to coalitions and minority governments. This influential paper spawned a substantial empirical literature with varying estimates of the impact of fragmentation on deficits.

Perotti and Kontopoulos (2002) examine the varied results that have been obtained and conclude that these are sensitive to the subjective coding of the “type of government” indicator. They instead test the impact of a more objective measure of government fragmentation—the number of political parties in a coalition government—using panel data for 19 OECD countries from 1970-1995. They find that coalition size is associated with larger spending on only one component, government transfers, and even this correlation is small in size and non-robust to alternate specifications.<sup>2</sup> It would appear, therefore, that the

> 2 Perotti and Kontopoulos (2002) develop new measures of “fragmentation”—one, the number of spending ministers in a cabinet, which is strongly, positively, and robustly associated with all components of spending and with deficits;

2