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 R eview, 83(4) (1989) 1181-1206) bargaining model to describe public investme nts in a setting of budgetary politics. Specifically, we show that underinv estment inherently arises from distributive politics within a majoritarian institution. The inability of current majorities to contract with future on es drives a wedge between spending on consumption today and investing for f uture consumption. Extensions to the model demonstrate that earmarking futu re returns to specific players and/or detaching consumption from investment decisions yields more efficient levels of public investment. (C) 2000 Publ ished by Elsevier Science S.A. All rights reserved.