First, I consider several fundamental reasons why the analysis of incentives should be included in political institutions in modern economics. Second, I explore two fundamental features of political institutions: the electoral rule contrasting majoritarian and proportional electoral systems and the regime type, contrasting presidential and parliamentary regimes. I derive specific theoretical predictions regarding policy choice. Empirical results of policy outcomes in democratic countries, either in pure cross-sections or in panel confirm predictions and I highlight important analogy between the obtained results by comparing electoral rules and regime types. The main finding that political institutions determine the extent of competition among voters or politicians is manifested here as: more competition always brings about a lower supply of public goods, lower rents for politicians, lower taxes, smaller welfare programs and small size government (majoritarian electoral rule and presidential regime). The third section deals with the advantages and the disadvantages of the choice of majoritian vs. proportional systems and presidential vs. government for quality of governance in new democracies in transition countries and accentuates that the absence of any serious constitutional debate remains one of the puzzles of transition from communism. In the fourth section I try to focus on the basic constitutional dilemmas in Serbia.