How does democratization affect the composition of government expenditure?

This study examines the effects of democratization on the size and composition of government expenditure using the data of 125 countries between 1972 and 2010 at most. Specifically, we focus not only on the total expenditure but also on the composition, and we employ dichotomous indices of political regimes rather than score indices. Moreover, we construct instruments for democratization based on the democratization wave and conduct an instrumental variables estimation to address endogeneity problems. Our results show that while democratization does not have a significant impact on total expenditure, it increases expenditure on health. Democratization decreases expenditure on defense, although the result of the instrumental variables estimation is not significant. Furthermore, considering the time-varying effect of democratization, defense expenditure starts decreasing immediately after a regime change and health expenditure increases in the medium and long run, while they do not significantly vary before a regime change. Thus, while focusing only on total expenditure does not uncover the effects of democratization, considering detailed categories of government expenditure enables us to understand how democratization changes governments’ behaviors.