New Economics Papers
on Collective Decision-Making
Issue of 2011‒10‒22
four papers chosen by

  1. When does approval voting make the "right choices"? By Brams, Steven J.; Kilgour, D. Marc
  2. The Twoâ€Tiered Politics of Financial Reform in the United States By Wooley, John T.; Ziegler, J. Nicholas
  3. Political Uncertainty and Risk Premia By Pástor, Luboš; Veronesi, Pietro
  4. Political Origins of Financial Structure By Sambit Bhattacharyya

  1. By: Brams, Steven J.; Kilgour, D. Marc
    Abstract: We assume that a voter’s judgment about a proposal depends on (i) the proposal’s probability of being right (or good or just) and (ii) the voter’s probability of making a correct judgment about its rightness (or wrongness). Initially, the state of a proposal (right or wrong), and the correctness of a voter’s judgment about it, are assumed to be independent. If the average probability that voters are correct in their judgments is greater than ½, then the proposal with the greatest probability of being right will, in expectation, receive the greatest number of approval votes. This result holds, as well, when the voters’ probabilities of being correct depend on the state of the proposal; when the average probability that voters judge a proposal correctly is functionally related to the probability that it is right, provided that the function satisfies certain conditions; and when all voters follow a leader with an above-average probability of correctly judging proposals. However, it is possible that voters may more frequently select the proposal with the greatest probability of being right by reporting their independent judgments—as assumed by the Condorcet Jury Theorem—rather than by following any leader. Applications of these results to different kinds of voting situations are discussed.
    Keywords: Approval voting; election systems; referendums; Condorcet jury theorem
    JEL: D71 C61 D72 C72
    Date: 2011–10–22
  2. By: Wooley, John T.; Ziegler, J. Nicholas
    Abstract: The literature on regulation has typically emphasized the ability of concentrated interest groups to secure the rules they prefer. One view argues that concentrated interests are consistently able to impose diffuse costs across large and unorganized interests. A second, largely compatible, view emphasizes the ability of powerful interest groups to mobilize expertise and to provide informational goods to politicians who adjust their legislative proposals accordingly. This paper shows that the Dodd†Frank legislation for financial reregulation in 2010 departs from both versions of this now conventional wisdom. Instead, this paper shows that both political parties adopted what we call a twoâ€tier political strategy of (1) maintaining good relations with the established financial elite and (2) simultaneously responding to the demands of grassâ€roots advocacy groups for more stringent regulation. As a result, Doddâ€Frank Act falls far short of a thoroughâ€going redesign of the regulatory landscape, but also amounted to considerably more than business as usual. While the Doddâ€Frank Act creates new regulatory instruments and powers that hold the potential for farâ€reaching changes, most of the existing agencies and market participants remain intact. This pattern of twoâ€tier politics is evident through the four primary policy domains treated in the legislation: macroprudential regulation, consumer protection, reestablishment of the partition between deposit banking versus proprietary trading (the Volcker Rule), and the regulation of derivatives trading.
    Keywords: Finance and Financial Management
    Date: 2011–10–17
  3. By: Pástor, Luboš; Veronesi, Pietro
    Abstract: We study the pricing of political uncertainty in a general equilibrium model of government policy choice. We find that political uncertainty commands a risk premium whose magnitude is larger in poorer economic conditions. Political uncertainty reduces the value of the implicit put protection that the government provides to the market. It also makes stocks more volatile and more correlated when the economy is weak. In addition, we find that government policies cannot be judged by the stock market response to their announcement. Announcements of deeper reforms tend to elicit less favorable stock market reactions.
    Keywords: Bayesian; government; learning; political; put; risk premium; uncertainty
    JEL: G12 G18
    Date: 2011–10
  4. By: Sambit Bhattacharyya
    Abstract: There is a growing policy interest in the role of financial structure in promoting development. However, very little is known about how different financial structures emerge and evolve. In this paper we empirically assess the political origins of financial structure. Using difference-in difference estimation and annual data, we study the effects of democratization on financial structure in a sample of 96 countries covering the period 1970 to 2005. Democratization here corresponds to the event of becoming a democracy. We find that democratization leads to a more market-based financial system. Democratic change could also be incremental rather than a one off. To identify the causal effect of incremental democratic change on financial structure we estimate a separate model and find that democracy matters. We also find that countries with substantial democratic capital are more likely to have a market-based financial structure. Our main results are robust to a variety of controls, instrumental variable estimation using commodity price and rainfall as instruments, Arellano-Bond GMM estimation, alternative measures of democracy and financial structure, and across different samples.
    Keywords: Democratization; Democracy; Financial Structure
    JEL: G20 O10 P16
    Date: 2011

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