Majority-rule bargaining and the under provision of public investment goods

Despite evidence that modern democracies systematically shortchange public investment goods, relatively little theoretical work exists to explain this phenomenon. We build on Baron and Ferejohn's (American Political Science Review, 83(4) (1989) 1181-1206) bargaining model to describe public investments in a setting of budgetary politics. Specifically, we show that underinvestment inherently arises from distributive politics within a majoritarian institution. The inability of current majorities to contract with future ones drives a wedge between spending on consumption today and investing for future consumption. Extensions to the model demonstrate that earmarking future returns to specific players and/or detaching consumption from investment decisions yields more efficient levels of public investment. (C) 2000 Published by Elsevier Science S.A. All rights reserved.