The Economic Effects of Electoral Rules: Evidence from Unemployment Benefits

This paper provides a novel test of the link from electoral rules to economic policies. We focus on unemployment benefits because their classification as a broad or targeted transfer may vary — over time and across countries — according to the geographical dispersion of unemployed citizens, the main beneficiaries of the program. A simple theoretical model delivers unambiguous predictions on the interaction between electoral institutions and the unemployment rate in contestable and safe districts. Due to electoral incentives, the difference in the unemployment generosity between majoritarian and proportional systems depends on the difference in the unemployment rate between contestable and safe districts. We test this prediction using a novel dataset with information on electoral competitiveness and unemployment rates at district level, and different measures of unemployment benefit generosity for 16 OECD countries between 1980 and 2011. The empirical analysis strongly supports the theoretical predictions.