Policy myopia and economic growth Toke S. Aidt a, ⁎ , Jayasri Dutta b a Faculty of Economics, University of Cambridge, CB3 9DD Cambridge, UK b Department of Economics, University of Birmingham, Edgbaston, Birmingham B15 2TT, UK Received 8 August 2005; received in revised form 6 April 2006; accepted 8 May 2006 Available online 7 July 2006 Abstract We develop a theory of second best policy myopia. Policy myopia arises when rational voters allow politicians to bias public investments towards short-term investments. We demonstrate that policy myopia is not an inevitable implication of the fact that voters cannot observe immediately how much their politicians invested in certain types of public goods; rather it is the interaction between observation lags, economic growth and binding revenue constraints that forces rational voters to accept a short-term bias. We argue that growth in government eventually leads to policy myopia. © 2006 Elsevier B.V. All rights reserved. JEL classification: D72; D82 Keywords: Myopia; Growth; Public goods; Electoral accountability 1. Introduction Are democratic governments likely to be short-termist in their policies? Should rational voters tolerate, or even expect their elected representatives to behave myopically? This paper develops a theory of second best policy myopia to answer some of these questions. Policy myopia arises when rational voters set performance standards that allow elected politicians to distort the portfolio of public investments towards short-term investments. An early and eloquent argument that systematic under-investment led to “public squalor” in the midst of private prosperity was made by Galbraith (1969). Since then, the growth of government expenditures has been a striking feature of most industrial democracies. As Tanzi and Schuknecht (2000, Table 1.1) document, general government expenditure as a percentage of GDP grew from 28% in 1960 to about 43% in 1980 in 17 industrial countries with European Journal of Political Economy 23 (2007) 734 – 753 www.elsevier.com/locate/ejpe ⁎ Corresponding author. Tel.: +44 1223 335231. E-mail address: toke.aidt@econ.cam.ac.uk (T.S. Aidt). 0176-2680/$ - see front matter © 2006 Elsevier B.V. All rights reserved. doi:10.1016/j.ejpoleco.2006.05.002