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Political Institutions and Government Spending Behavior: Theory and Evidence from Iran

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  • Sajjad Faraji Dizaji
  • Mohammad Reza Farzanegan
  • Alireza Naghavi

Abstract

This study examines how the quality of political institutions affects the distribution of the government budget in Iran. We first introduce a mechanism through which democracy can shift government expenditure from national defense (military) to productivity-enhancing public spending (e.g., education). Using impulse response functions (IRF) and a variance decomposition analysis (VDC) on the basis of a vector autoregressive (VAR) model, our results imply that the response of military spending to an improvement (a deterioration) of democratic institutions is negative (positive) and statistically significant, whereas that of education spending is positive (negative) and significant. Our results are robust to other indicators of political institutions, different orderings of variables in the VAR and alternative specifications of government spending categories.

Suggested Citation

  • Sajjad Faraji Dizaji & Mohammad Reza Farzanegan & Alireza Naghavi, 2015. "Political Institutions and Government Spending Behavior: Theory and Evidence from Iran," CESifo Working Paper Series 5505, CESifo.
    • Handle: RePEc:ces:ceswps:_5505
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    More about this item

    Keywords

    political institutions; military spending; education spending; Iran; VAR modeling;
    All these keywords.

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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