Essays on the Dynamics of Institutional Reform

This dissertation contributes to the knowledge on the emergence of political institutions related to checks and balances as well as their effects on economic outcomes. The first two chapters analyze the determinants of constitutional limits on executive authority and the implication of these limits for policy-making. The third chapter studies the process by which institutional reforms are enacted. While the past century witnessed a gradual adoption of limits on executive power, countries that oscillate between periods of strong and weak executive constraint-regimes still exist. The literature explains the emergence of strong political institutions that effectively curb the power of the executive with competitive electoral races. However, empirical evidence indicates that governments facing similar electoral pressures have made widely ranging institutional decisions on this issue. This observation suggests that factors besides a country's degree of electoral competitiveness must be influencing the extent of its reforms. To shed light on this discrepancy between the theoretical literature and the data, the first chapter of this dissertation constructs a dynamic model of political competition in which limits on executive decision-making that will constrain the future government are chosen by the current party in power. The basic results affirm an incumbent's main trade-off identified in the literature: While loose executive constraints permit an incumbent to enact his desired policies in case of re-election, the same would apply to his opponent under the opposite scenario. This chapter's contribution is to show that this trade-off is not constant. Specifically, the incentives that shape an incumbent's institutional decision evolve with his country's level of public sector development. The analysis suggests that this evolution is due to governments being more inclined to make common cause with their opponents when there exist mutually beneficial gains to be realized from public sector investments such as infrastructure spending. In these circumstances, the common cause motivation dominates the inherent conflict between parties over unproductive political spending. Consequently, executive constraints would initially be kept looser in order to enable such investments. The main results corroborate the empirical evidence by showing that higher levels of public sector development in a country will be associated with tighter constraints on the executive branch. Moreover, these tighter constraints will be less sensitive to swings in political power. While these results confirm the importance of the degree of electoral competitiveness in determining institutional outcomes, they offer an important qualification: The role played by elections depends on the country's public sector development. In addition, this chapter finds that public goods will be under-provided, even when political parties share the same preferences over it, due to the ever-present motive to restrict an opponent's political spending through institutional design. Overall, this chapter offers an explanation for the observed trend in executive constraints by focusing simultaneously on its relationship to indicators of electoral competitiveness and of public good provision. Generalizing the framework employed in the first chapter, the second chapter of this dissertation focuses on the broader question of why democratic regimes tend to persist once they are established. The model of political competition developed in this chapter features an incumbent who can make reversible investments into a future government's ability to reform constraints on the executive branch. Examples of these investments include strengthening of press freedoms or of judicial independence. The main results suggest that polarization between the political parties and the competitiveness of elections lead to high and persistent levels of such investments. These higher costs of institutional reform in turn result in durable strong executive constraint-regimes. The final chapter turns its attention to the process of institutional reform by analyzing within a bargaining framework the effect of a referendum option on the reform proposals already passed in the legislature. The findings indicate that surplus coalitions may be observed even though smaller coalitions would be sufficient for passage. An important result is that disparities in post-bargaining power such as campaigning resources incentivize challenge procedures to the detriment of grand bargains. Moreover, when achieved, such a grand bargain empowers the smaller parties in the legislature through favorable provisions in the reform bill. These results carry potential policy implications for forms of post-bargaining power during referendum campaigns, such as caps on campaign contributions