New Economics Papers
on Collective Decision-Making
Issue of 2009‒02‒28
sixteen papers chosen by

  1. Tax Contracts and Government Formation By Gersbach, Hans; Schneider, Maik
  2. Storable Votes and Agenda Order Control. Theory and Experiments By Casella, Alessandra
  3. Fiscal Conservatism in a New Democracy: 'Sophisticated' versus 'Naïve' Voters By Arvate, Paulo; Avelino, George; Tavares, José
  4. Repeated electoral competition over non-linear income tax schedules By Casamatta, Georges; Cremer, Helmuth; De Donder, Philippe
  5. Increasing Voter Turnout: Is Democracy Day the Answer? By Henry S. Farber
  6. Public goods, participation constraints, and democracy: A possibility theorem By Grüner, Hans Peter
  7. Government Transfers and Political Support By Manacorda, Marco; Miguel, Edward; Vigorito, Andrea
  8. Media versus Special Interests By Dyck, Alexander; Moss, David; Zingales, Luigi
  9. Lobbying, Corruption and Other Banes By Campos, Nauro F; Giovannoni, Francesco
  10. Disclosure by Politicians By Djankov, Simeon; La Porta, Rafael; López-de-Silanes, Florencio; Shleifer, Andrei
  11. Political Intergenerational Risk Sharing By D'Amato, Marcello; Galasso, Vincenzo
  12. The Political Economy of the (Weak) Enforcement of Sales Tax By Besfamille, Martin; De Donder, Philippe; Lozachmeur, Jean-Marie
  13. Economic and Social Factors Driving the Third Wave of Democratization By Papaioannou, Elias; Siourounis, Gregorios
  14. Democracy and Reforms By Amin, Mohammad; Djankov, Simeon
  15. Voting on Parametric Reforms of the Pay-As-You-Go Pension System By Brasil Gondim, João Luis; Casamatta, Georges
  16. Democratization and Growth By Papaioannou, Elias; Siourounis, Gregorios

  1. By: Gersbach, Hans; Schneider, Maik
    Abstract: We introduce tax contracts and examine how they affect government formation and welfare of voters in a democracy with proportional elections. A tax contract specifies a range of tax rates a party is committed to if in government. We develop a new model of party competition in which parties choose tax rates, public-good provision, and perks, and we show that the introduction of tax contracts has two effects: a perks effect and a policy-shift effect. The former plays a central role in societies with a low degree of political polarization, where it tends to reduce politicians' perks. If a society is highly polarized, tax contracts can yield more moderate political outcomes. However, there are also circumstances in which tax contracts induce more extreme policies.
    Keywords: contract theory; government formation; voting
    JEL: D72 D82 H55
    Date: 2008–12
  2. By: Casella, Alessandra
    Abstract: The paper studies a voting scheme where members of a committee voting sequentially on a known series of binary proposals are each granted a single extra bonus vote to cast as desired - a streamlined version of Storable Votes. When the order of the agenda is exogenous, a simple sufficient condition guarantees the existence of welfare gains, relative to simple majority voting. But if one of the voters controls the order of the agenda, does the scheme become less efficient? The endogeneity of the agenda gives rise to a cheap talk game, where the chair can use the order of proposals to transmit information about his priorities. The game has multiple equilibria, differing systematically in the precision of the information transmitted. The chair can indeed benefit, but the aggregate welfare effects are of ambiguous sign and very small in all parameterizations studied. The theoretical conclusions are tested through laboratory experiments. Subjects have difficulty identifying the informative strategies, and tend to cast the bonus vote on their highest intensity proposal. As a result, realized payoffs are effectively identical to what they would be if the agenda were exogenous. The bonus vote matters; the chair's control of the agenda does not.
    Keywords: agenda power; cheap talk; committees; storable votes; voting
    JEL: C9 D02 D7 D8
    Date: 2008–11
  3. By: Arvate, Paulo; Avelino, George; Tavares, José
    Abstract: Several authors claim that voters in new democracies reward deficits at the polls and this fact is due to a lack of 'voter sophistication'. We test this claim for gubernatorial elections in Brazil, an important case study since it is the fourth most populous democracy in the world, displays a high variance in economic and social characteristics across states, and effectively imposes mandatory voting. Our evidence shows that voters are fiscally conservative, that is, they reward lower deficits, which is in contradiction to the literature. We do find that, when we use state income per capita, education and income inequality as proxies for 'voter sophistication', 'naïve' voters do not reward low deficits as opposed to 'sophisticated' voters, and education is the key element for this distinction. We propose that education rather than the youth of the democracy, is the key element for assessing voter 'sophistication'.
    Keywords: Budget Deficits; Elections; Fiscal Conservatism; Political Cycles
    JEL: D72 E62 H72
    Date: 2008–08
  4. By: Casamatta, Georges; Cremer, Helmuth; De Donder, Philippe
    Abstract: We consider a repeated electoral competition game between two parties, each representing a constituent with a given income level. Parties are unable to commit to any policy before the election; they choose a non-linear income tax schedule once elected. In each period, citizens cast a vote either for the incumbent or for the challenger. We first show that there exist (pure strategy) subgame perfect equilibria where both parties choose the most-preferred tax schedule of their constituent, subject to the constraint that they are reelected. We characterize a specific class of these BPR (Best Policy with Reelection) equilibria in which one of the parties plays its constituent's unconstrained optimal tax function. Equilibrium tax schedules are always piecewise linear. Depending on the income levels of the two parties' constituents, we obtain either classical left-vs-right equilibria (where poorer people vote for one party and richer people for the other one) or ends-against-the-middle equilibria (where both poor and rich people vote for one party while the middle class vote for the other party). In both types of equilibria both parties propose the same tax schedule to a subset of the population.
    Keywords: ends-against-the-middle; no commitment; piecewise linear income tax; Postelection politics
    JEL: D72 H24
    Date: 2008–11
  5. By: Henry S. Farber (Princeton University)
    Abstract: It has often been argued that voter turnout in the United States is too low, particularly compared with turnout in other industrialized democracies, and that a healthy democracy should have higher turnout. One proposal that has been considered by Congress to increase voter turnout is the creation of “Democracy Day,” making Election Day a national holiday. In this study I evaluate the likely effectiveness of an election holiday in increasing turnout by studying how state regulations making election day a holiday for state employees affects voter turnout among state employees in those states. I exploit these “natural experiments” in a difference-in-difference context, using various groups of non-state employees as controls. My analysis relies on data from Voting Supplements to the Current Population Survey in November 2004 and 2006. The results are clear. There is no evidence from the “natural experiment” of states providing an election holiday for state employees that such holidays significantly increase voter turnout. I conclude that having an election holiday, by itself, is not an effective strategy to increase voter turnout.
    Date: 2009–02
  6. By: Grüner, Hans Peter
    Abstract: It is well known that ex post efficient mechanisms for the provision of indivisible public goods are not interim individually rational. However, the corresponding literature assumes that agents who veto a mechanism can enforce a situation in which the public good is never provided. This paper instead considers majority voting with uniform cost sharing as the relevant status quo. Efficient mechanisms may then exist, which also satisfy all agents' interim participation constraints. In this case, ex post inefficient voting mechanisms can be replaced by efficient ones without reducing any individual's expected utility. Intuitively, agents with a low willingness to pay have to contribute more under majority rule than under an efficient mechanism with a balanced budget. This possibility theorem is not universal in the sense of Schweizer (Games and Economic Behavior, 2005).
    Keywords: Ex post efficiency; Majority voting; Participation constraints; Possibility theorem; Public goods
    JEL: D02 D61 D71 H41
    Date: 2008–12
  7. By: Manacorda, Marco; Miguel, Edward; Vigorito, Andrea
    Abstract: We estimate the impact of a large anti-poverty program – the Uruguayan PANES – on political support for the government that implemented it. The program mainly consisted of a monthly cash transfer for a period of roughly two and half years. Using the discontinuity in program assignment based on a pre-treatment score, we find that beneficiary households are 21 to 28 percentage points more likely to favor the current government (relative to the previous government). Impacts on political support are larger among poorer households and for those near the center of the political spectrum, consistent with the probabilistic voting model in political economy. Effects persist after the cash transfer program ends. We estimate that the annual cost of increasing government political support by 1 percentage point is roughly 0.9% of annual government social expenditures.
    Keywords: Conditional cash transfers; redistributive politics; regression discontinuity; voting
    JEL: D72 I38
    Date: 2009–02
  8. By: Dyck, Alexander; Moss, David; Zingales, Luigi
    Abstract: We argue that profit-maximizing media help overcome the problem of "rational ignorance" highlighted by Downs (1957) and in so doing make elected representatives more sensitive to the interests of general voters. By collecting news and combining it with entertainment, media are able to inform passive voters on politically relevant issues. To show the impact this information has on legislative outcomes, we document the effect "muckraking" magazines had on the voting patterns of U.S. representatives and senators in the early part of the 20th century. We also show under what conditions profit-maximizing media will cater to general (less affluent) voters in their coverage, providing a counterbalance to special interests.
    Keywords: media; muckraking; regulation
    JEL: L51 N41 P16
    Date: 2008–10
  9. By: Campos, Nauro F; Giovannoni, Francesco
    Abstract: Although the theoretical literature often uses lobbying and corruption synonymously, the empirical literature associates lobbying with the preferred mean for exerting influence in developed countries and corruption with the preferred one in developing countries. This paper challenges these views. Based on whether influence is sought with rule-makers or rule-enforcers, we develop a conceptual framework that highlights how political institutions are instrumental in defining the choice between bribing and lobbying. We test our predictions using survey data for about 6000 firms in 26 countries. Our results suggest that (a) lobbying and corruption are fundamentally different, (b) political institutions play a major role in explaining whether firms choose bribing or lobbying, (c) lobbying is more effective than corruption as an instrument for political influence, and (d) lobbying is more powerful than corruption as an explanatory factor for enterprise growth, even in poorer, often perceived as highly corrupt, less developed countries.
    Keywords: corruption; lobbying; political institutions
    JEL: D72 E23 H26 O17 P16
    Date: 2008–09
  10. By: Djankov, Simeon; La Porta, Rafael; López-de-Silanes, Florencio; Shleifer, Andrei
    Abstract: We collect data on the rules and practices of financial and conflict disclosure by politicians in 175 countries. Although two thirds of the countries have some disclosure laws, less than a third make disclosures available to the public. Disclosure is more extensive in richer and more democratic countries. Disclosure is correlated with lower perceived corruption when it is public, when it identifies sources of income and conflicts of interest, and when a country is a democracy.
    Keywords: Business interests; Conflict of interest; Disclosure; Politicians
    JEL: H7
    Date: 2009–02
  11. By: D'Amato, Marcello; Galasso, Vincenzo
    Abstract: In a stochastic two-period OLG model, featuring an aggregate shock to the economy, ex-ante optimality requires intergenerational risk sharing. We compare the level of time-consistent intergenerational risk sharing chosen by a social planner and by office seeking politicians. In the political setting, the transfer of resources across generations — a PAYG pension system — is determined as a Markov equilibrium of a probabilistic voting game. Negative shocks represented by low realized returns on the risky asset induce politicians to compensate the old through a PAYG system. Unless the young are crucial to win the election, this political system generates more intergenerational risk sharing than the (time consistent) social optimum. In particular, these transfers are more persistent and less responsive to the realization of the shock than optimal. This is because politicians anticipate their current transfers to the elderly to be compensated through offsetting transfers by future politicians, and thus have an incentive to overspend. Perhaps surprisingly, aging increases the socially optimal transfer but makes politicians less likely to overspend, by making it more costly for future politicians to compensate the current young.
    Keywords: Markov equilibria; Pension Systems; social optimum
    JEL: D72 H55
    Date: 2008–09
  12. By: Besfamille, Martin; De Donder, Philippe; Lozachmeur, Jean-Marie
    Abstract: The objective of this paper is to understand the determinants of the enforcement level of indirect taxation in a positive setting. We build a sequential game where individuals differing in their willingness to pay for a taxed good vote over the enforcement level. Firms then compete à la Cournot and choose the fraction of sales taxes to evade. We assume in most of the paper that the tax rate is set exogenously. Voters face the following trade-off: more enforcement increases tax collection but also increases the consumer price of the goods sold in an imperfectly competitive market. We obtain that the equilibrium enforcement level is the one most-preferred by the individual with the median willingness to pay, that it is not affected by the structure of the market (number of firms) and the firms' marginal cost, and that it decreases with the resource cost of evasion and with the tax rate. We also compare the enforcement level chosen by majority voting with the utilitarian level. In the last section, we endogenize the tax rate by assuming that individuals vote simultaneously over tax rate and enforcement level. We prove the existence of a Condorcet winner and show that it entails full enforcement (i.e., no tax evasion at equilibrium). The existence of markets with less than full enforcement then depends crucially on the fact that tax rates are not tailored to each market individually.
    Keywords: imperfect competition; intermediate preferences; majority voting; Tax evasion
    JEL: D43 D72 H26 H32
    Date: 2009–01
  13. By: Papaioannou, Elias; Siourounis, Gregorios
    Abstract: We identify permanent democratic transitions during the Third Wave of Democratization and the nineties, when many former socialist countries moved towards representative rule. Using political freedom indicators, electoral archives, and historical resources in 174 countries in the period 1960-2005, we identify 63 democratic transitions, 3 reverse transitions from relatively stable democracy to autocracy and 6 episodes of small improvements in representative institutions. We also classify non-reforming countries to stable autocracies and always democratic. We then use the dataset to test theories on the prerequisites for democracy in these countries that enter the Third Wave as non-democracies. Examining initially autocratic countries enables us to address issues of sample selection (in the beginning of the sample most developed countries were already democratic) and reverse causality (democracy can be both a cause and a consequence of wealth, for example). Our estimates reveal that democratization is more likely to emerge in affluent and especially educated societies. Economic development and education are also key factors determining the intensity of democratic reforms and how quickly democratic transitions will occur. These results appear robust to controls like the social environment (religion and fractionalization), natural resources, trade openness and proxies of early institutions.
    Keywords: democratization; institutions; political development
    JEL: O10 P16
    Date: 2008–10
  14. By: Amin, Mohammad; Djankov, Simeon
    Abstract: We use a sample of 147 countries to investigate the link between democracy and reforms. Democracy may be conducive to reform, because politicians have the incentive to embrace growth-enhancing reforms to win elections. On the other hand, authoritarian regimes do not have to worry as much about public opinion and may undertake reforms that are painful in the short run but bring future prosperity. We test these hypotheses, using data on micro-economic reforms from the World Bank’s Doing Business database. These data do not suffer the endogeneity issues associated with other datasets on changes in economic institutions. The results provide a robust support for the claim that democracy is good for growth-enhancing reforms.
    Keywords: Democracy; Reform; Regulation
    JEL: K20 L51 P11 P16
    Date: 2009–01
  15. By: Brasil Gondim, João Luis; Casamatta, Georges
    Abstract: We assess the political support for parametric reforms of the Pay-As-You-Go pension system following a downward fertility shock. Using a continuous time overlapping generations model, we show that, for a large class of utility functions, the majority of the population favor a cut in pension benefits over an increase in the contribution rate. Our framework also allows us to evaluate the political support for raising the retirement age and to determine how the timing of the different reforms affect their political support.
    Keywords: fertility shock; parametric reforms; Pay-As-You-Go
    JEL: D72 H55
    Date: 2008–10
  16. By: Papaioannou, Elias; Siourounis, Gregorios
    Abstract: This paper challenges cross-sectional findings that democratic institutions have a negligible direct effect on economic growth. We employ a newly constructed data-set of permanent democratic transitions during the so-called Third Wave of Democratization and examine the within effect of democratization in countries that abandoned autocracy and consolidated representative institutions. We study democratization in a before-after event study approach that enables us to control for time-invariant country-specific effects and general time trends. The panel estimates imply that on average democratizations are associated with a one half to one percent increase in annual per capita growth. The dynamic analysis also reveals a J-shaped growth pattern: during the transition growth is slow and on average negative; in the medium and especially long run, however, growth stabilizes at a higher level. The evidence supports "development" theories of democracy and growth that highlight the positive impact of representative institutions on economic activity. They also favour Friedrich Hayek (1960)’s idea that the merits of democracy appear in the long run.
    Keywords: annual growth; democracy; event study; institutions; political economy
    JEL: C30 E60 O40
    Date: 2008–10

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