Legislative Bargaining and the Dynamics of Public Investment

Abstract

We present a legislative bargaining model of the provision of a durable public good over an infinite horizon. In each period, there is a societal endowment that can either be invested in the public good or consumed. We characterize the optimal public policy, defined by the time path of investment and consumption. In a legislature representatives of each of n districts bargain over the current period's endowment for investment in the public good and transfers to each district. We analyze the Markov perfect equilibrium under different voting q-rules where q is the number of yes votes required for passage. We show that the efficiency of the public policy is increasing in q because higher q leads to higher investment in the public good and less pork. We examine the theoretical equilibrium predictions by conducting a laboratory experiment with five-person committees that compares three alternative voting rules: unanimity (q = 5), majority (q = 3), and dictatorship (q = 1).