Institutions and public investment: an empirical analysis

This paper investigates the effect of institutional quality on the levels, volatility and quality of public investment. Our findings suggest an inverse relationship between public investment levels and institutional quality, supporting the idea that governments use public investment as a vehicle for rent seeking. We also find that lower quality of governance increases the volatility of public investment. Finally, we provide some tentative evidence of a positive relationship between institutional quality and the quality of infrastructure. Policymakers who aim to reduce infrastructure needs through capital spending should take measures to strengthen institutional capacity to manage public investments.