Why do some democracies choose economic policies that promote economic growth, while others seem incapable of prospering? Why are some polities able toprovide the public goods that are necessary for economic growth, while others turn the machinery of government toward providing private goods? Why are some countries able to make long term credible policy commitments, while others cannot?
In what follows, we present a theory that argues that the diversity of economic policies is rooted in the diversity of democratic institutions in each country. Each polity, according to the divisions and necessities of its society chooses a set of democratic institutions to resolve its basic political problems. These institutions define a sequence of principal–agent relationships (Madison, Dahl 1967), commonly numbering at least three. First, the sovereign people delegate decision–making power (usually via a written constitution) to a national legislature and executive. The primary tools that the people retain in order to ensure appropriate behavior on the part of their representatives are two: the power to replace them at election time; and the power to set the constitutional rules of the political game.
A second delegation of power occurs when the details of the internal organization of the legislature and executive are settled. This process entails the creation of ministerial positions, of committees, and of agenda control mechanisms. Here too constitutional regulations of the relationship between the legislature and the executive (is the legislature dissoluble? can cabinet ministers sit in the legislature?) come into play.
Third, the legislature and the executive delegate to various bureaus and agencies to execute the laws. In this delegation, administrative procedures and law set the terms of the delegation.