The literature on institutions and economic growth shows a close relationship between the quality of institutions and prosperity. This paper examines the impact of institutions on investment, and the resulting impact of investment on growth. The private investment rate of countries with better institutional quality is higher, and the productivity of any given level of investment is greater in countries with better institutions. Models that include various indicators of institutional quality along with inputs such as physical and human capital will generally underestimate the impact of institutional quality on growth because they do not account for the indirect impact of institutions on investment, as is done here. The paper also examines the direction of causality to show that higher institutional quality causes more investment, rather than the other way around. Further, future institutional improvements are more likely to occur against a background of poor economic performance than one of sustained growth. Copyright 2006 Blackwell Publishing Ltd..

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This article examines the degree to which rainy day funds eased the fiscal stress experienced by states during the 1990–1991 recession. In the first section, a state fiscal policy of neutrality over the business cycle is used as a benchmark for evaluating the use of budget stabilization funds. The next section looks at data from the last three recessions to see how recessions have affected the taxes and expenditures of states. A measure of degree of fiscal stress experienced by each state during the 1990–1991 recession is then calculated. These results are used to empirically investigate the impact of explicit state rainy day funds in easing state fiscal stress. Next, the article examines whether states that had rainy day funds in 1989 were more likely to have less fiscal stress, and whether the specific deposit and withdrawal provisions of these funds made a difference.

The literature on the impact of public investment in developing economies gives inconsistent results on whether it complements or crowds out private investment. Applying several pooled specifications of a standard investment model to a panel of developing economies for 1980 to 1997, this study finds that public investment complements private investment, and that, on average, a 10 percent increase in public investment is associated with a 2 percent increase in private investment. The results also indicate that private investment is constrained by the availability of bank credit in developing economies. The same empirical models are run on a panel of developed economies. In contrast to developing economies, public investment crowds out private investment in developed economies. The results show that in a number of important ways, private investment in developed economies is influenced by different factors than private investment in developing economies.

Data from 487 municipal governments with populations greater than 50,000 are examined to see the relationship between population density and per capita government expenditures. There is no statistically significant relationship between per capita total government expenditures and operational expenditures for cities smaller than 500,000, and for larger cities, higher population density is associated with higher per capita government expenditures. Infrastructure expenditures tend to decline with increases in population density for cities smaller than 500,000, whereas expenditures on services tend to increase with population density for cities larger than 500,000. The relationship between per capita total expenditures and population density has policy relevance because it indicates that when all government expenditures are taken into account, policies that increase population density will not reduce per capita government expenditures and, in larger cities, will lead to higher per capita government expenditures.