Demand-Side Determinants of Public Spending Allocations: Voter Trust, Risk and Time Preferences

Abstract

We examine whether public spending misallocations may reflect voter demand factors such as political and interpersonal trust or risk and time preferences. A model of optimal choice under public spending tradeoffs provides individual-level testable hypotheses. The data come from an original survey that offered voters in seven Latin American countries binary choices between public spending options in education and security. Respondents reporting higher mistrust or impatience are more likely to choose transfers over public goods; more impatient respondents are also more likely to choose short-term spending over public investment. Within public goods, however, political mistrust and risk aversion can shift voter demand from current to investment spending. Randomized experiments providing information about the benefits of public investment have the expected average demand impacts, while respondents with high political mistrust or impatience show attenuated treatment effects.

Keywords: trust, risk preferences, time preferences, transfers, public goods, public investment

JEL Classification: D72, H20, H50, O10