Political institutions and welfare: Does throwing the bums out promote efficiency?

Decisions about the composition of public goods provided and paid for with tax proceeds are typically made by government officials, who might prefer funding of inefficient local public goods that disproportionally benefit special interests. We investigate the effect of two political institutions, fixed-scheduled and recall-enabled replacement of government officials, on enhancing welfare through efficiency of public good provision.  In a fixed-scheduled institution the official serves unchallenged for a known period of time whereas in a recall-enabled replacement scenario the official can be challenged while in office. We show that, if the perfect equilibrium is the solution concept then efficiency is similar across the two institutions. However, higher efficiency of public good provision in recall-enabled replacement can be an equilibrium outcome if trigger strategies are utilized. Through a laboratory experiment, we differentiate officials’ behavior regarding use of public funds in situations that allow “citizens” to recall the official. In cases where officials take a “corrupt” decision (by choosing to use public funds to finance pork barrel goods, the G-good here), there is a substantially larger likelihood of a recall than when the official has decided to fund the collective public good. In addition, we find evidence that the culture of corruption is quickly affected by the recall treatment. We find that the prevalence of corrupt decisions falls early and significantly in the recall treatment. In the fixed schedule replacement of officials, there is an upward drift in the prevalence of funding of pork barrel projects. The institution of recall enabled schedule of replacement also shows promise for increased social stability as revealed by the higher equity in the distribution of income. The downside of this institution is that it can be manipulated for personal ambition of obtaining official powers. To reduce incentives for political manipulation, the use of supermajority rule for initiating recalls is warranted.