nep-pol New Economics Papers
on Positive Political Economics
Issue of 2004‒12‒12
fifteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Economic and Political Liberalizations By Francesco Giavazzi; Guido Tabellini
  2. Taxation in Latin America: Reflections on Sustainability and the Balance between Equity and Efficiency By Richard M. bird
  3. Patience and Turnout By James H. Fowler
  4. Optimal two stage committee voting rules By Ian Ayres; Colin Rowat; Nasser Zakariya
  5. Independence Before Conservatism: Transparency, Politics, and Central Bank Design By Andrew Hughes Hallett; Diana N. Weymark
  6. The Political Economy of Race and the Adoption of Fair Employment Laws, 1940-1964 By William J. Collins
  7. The Political Economy of State Fair-Housing Laws Prior to 1968 By William J. Collins
  9. Political Economy of Commuting Subsidies By Rainald Borck; Matthias Wrede
  10. Analyzing inter-organizational systems from a power and interest perspective By Boonstra, A.; Vries, J. de
  11. Political economy of tariff unification: the case of Russia By Sergey Afontsev
  12. The Allocation of the US Federal Budget to the States: Evidence on the Power of the Purse By Valentino Larcinese; Leonzio Rizzo; Cecilia Testa
  13. Judges' Cognition and Market Order By Benito Arruñada; Veneta Andonova
  14. How Should Large and Small Countries Be Represented in a Currency Union? By Helge Berger; Till Mueller
  15. Budget Processes: Theory and Experimental Evidence By Ehrhart, Karl-Martin; Gardner, Roy; von Hagen, Jürgen; Keser*, Claudia

  1. By: Francesco Giavazzi; Guido Tabellini
    Date: 2004–12–02
  2. By: Richard M. bird (International Tax Program, Rotman school of Management, University of Toronto)
    Abstract: My aim in this paper is to explore in an admittedly discursive and preliminary fashion some aspects of the complex balancing act needed to achieve economically and politically sustainable tax systems in Latin America. By a “sustainable” tax system I mean one that is sufficiently congruent with prevailing economic and political factors in a country to persist without the need for repeated major “reforms.” Specifically, my thesis is that one key to achieving a sustainable tax system is to strike the right “balance” between the equity and efficiency aspects of taxation in terms of the equilibrium of political forces. Experience suggests that any state that wishes to both grow and to implement redistributive fiscal policies -- whether the aim be much or little redistribution -- must first establish an administrable and efficient tax system. At the same time, however, to make such a system politically sustainable, it must be considered “fair” by a majority of the politically relevant population. Essentially, I suggest in these preliminary musings on this complex subject that one reason why many countries in Latin America do not appear to have either an efficient or a fair tax system is essentially because of the very limited scope of this segment of the population, so that the politically relevant “domain” of the fiscal system is considerably smaller than the population as a whole. Some specific suggestions are made in the paper with respect to how both the efficiency and the equity outcomes of Latin American tax systems might be improved. My general conclusion, however, is the perhaps somewhat pessimistic one that a more democratic and sustainable outcome cannot, as it were, be induced by better fiscal institutions. On the contrary, a more encompassing and legitimate state is itself the key ingredient needed for a more balanced and sustainable tax system. Countries with similar economic characteristics in similar economic situations can and do have and sustain very different tax levels and structures, reflecting their different political situation. In a variant of a phrase currently popular in the literature of political economics, when it comes to tax matters, in general “politics rule.”
    Keywords: Tax, Latin America, sustainable tax systems, political, economic
    Date: 2003–06
  3. By: James H. Fowler (UC Davis)
    Abstract: A number of scholars have demonstrated that voter turnout is influenced by the costs of processing information and going to the polls, and the policy benefits associated with the outcome of the election. However, no one has yet noted that the costs of voting are paid on and before Election Day while policy benefits may not materialize until several days, months, or even years later. Since the costs of voting must be borne before the benefits are realized, people who are more patient should be more willing to vote. I use a “choice game” from experimental economics to estimate individual discount factors which are used to measure patience. I then show that patience significantly increases voter turnout. Moreover, patience is significantly related to two other correlates of turnout, church attendance and political interest. The results suggest that variation in patience may explain why those who follow politics and those who attend church are more likely to vote.
    JEL: C9
    Date: 2004–12–03
  4. By: Ian Ayres (Yale Law School); Colin Rowat (University of Birmingham); Nasser Zakariya (FAS, Harvard University)
    Abstract: We study option management by committee. Analysis is illustrated by tenure decisions. Our innovations are two-fold: we treat the committee's problem as one of social choice, not of information aggregation; and we endogenise the outside option: rejecting a candidate at either the probationary or tenure stage return the committee to a candidate pool. For committees with N members, we find three key results: (1) a candidate's fate depends only on the behaviour of two `weather-vane' committee members - generalised median voters; (2) enthusiastic assessments by one of these weather-vanes may harm a candidate's chances by increasing others' thresholds for hiring him; and (3) sunk time costs may lead voters who opposed hiring a candidate to favour tenuring him, even after a poor probationary performance. We also characterise the optimal voting rule when N=2. A patient or perceptive committee does best with a (weak) majority at the hiring stage and unanimity at the tenure stage. An impatient or imperceptive committee does best under a double (weak) majority rule. If particularly impatient or imperceptive, this rule implies that any hire is automatically tenured. Perversely, the performance of a patient, imperceptive committee improves as its perceptiveness further declines.
    Keywords: intertemporal strategic voting, real options, social choice, heterogenous priors, tenure
    JEL: C73 D71 D72 D80 G12
    Date: 2004–12–09
  5. By: Andrew Hughes Hallett (Department of Economics, Vanderbilt University); Diana N. Weymark (Department of Economics, Vanderbilt University)
    Abstract: The problem of monetary policy delegation is formulated as a two-stage game between the government and the central bank. In the first stage the government chooses the institutional design of the central bank. Monetary and fiscal policy are implemented in the second stage. When fiscal policy is taken into account, there is a continuum of combinations of central bank independence and conservatism that produce optimal outcomes. This indeterminacy is resolved by appealing to practical considerations. In particular, it is argued that full central bank independence facilitates the greatest degree of policy transparency and political coherence.
    Keywords: Central bank independence, central bank conservatism, monetary policy delegation, transparency, policy coherence
    JEL: E52
    Date: 2002–03
  6. By: William J. Collins (Department of Economics, Vanderbilt University)
    Abstract: This paper explores the political economy of anti-discrimination legislation during the ascendancy of the Civil Rights Movement. It traces the diffusion of state-level fair employment legislation and evaluates the relative importance of various demographic, political and economic factors in promoting such legislation. The empirics indicate that non-southern states with higher proportions of union members, Jews, Catholics, and NAACP members tended to adopt fair employment legislation earlier than other states. There is also some evidence that the likelihood of passage was higher in states with more competitive political systems and in states with neighbors which had already passed a law. Predicted times of fair employment policy adoption for the southern states underscore the importance of federal intervention.
    Date: 2001–02
  7. By: William J. Collins (Department of Economics, Vanderbilt University; NBER; Model-Okun Fellow of Brookings Institution)
    Abstract: The confluence of the Great Migration and the Civil Rights Movement propelled the drive for "fair-housing" legislation which attempted to curb overt discrimination in housing markets. This drive culminated in the passage of the federal Civil Rights Act of 1968. By that time, 57 percent of the U.S. population and 41 percent of the African-American population already resided in states with a fair-housing law. Despite laying the political and administrative groundwork for the federal Fair Housing Act of 1968, the origins and diffusion of these state laws have not received much attention from scholars, let alone been subject to statistical efforts to disentangle multiple influences. This paper uses hazard models to analyze the diffusion of fair-housing legislation to shed new light on the combination of economic and political forces that facilitated the laws' adoption. Ceteris paribus, outside the South, states with larger union memberships, more Jewish residents, and more NAACP members passed fair-housing laws sooner than others. The estimated effects are not undermined by including controls for a variety of competing factors and are supported by historical accounts of the legislative campaigns.
    Keywords: Discrimination, Segregation, Civil Rights
    JEL: R0
    Date: 2004–06
  8. By: Constantino Cronemberger Mendes; Maria da Conceição Sampaio de Sousa
    Abstract: In this paper we estimated the demand for local public spending for the Brazilian municipalities within a median voter's framework. Results obtained are consistent with the theoretical background thus suggesting that this hypothesis might be useful to describe the demand for local public goods in Brazil. In particular, the use of quantile regression permitted to investigate the impacts of the conditioning variables on local public expenses across different expenditures classes thus allowing for heterogeneity across municipalities. Our results also suggest that the impact of the city size on the quality of club goods shows crowding effects as g is between zero and one. However, in the estimated models, marginal congestion slightly decreases with expenditure. This is a rather surprising result as one is tempted to conclude that the congestion effect should be higher on big cities. Yet, a more careful look shows the drawbacks of such interpretation. The indivisibilities that preclude the provision of certain services in small towns, concentrate their provision on larger cities. Hence, the higher expenditures of those big cities reflect not only a crowding cost but also the fact that these towns offer a wide range of services when compared to the small ones. So, in Brazil, contrary to the traditional results, the reduced congestion effect along the spending classes reflect the predominance of the scale elements measured by the population elasticities over the price effects.
    JEL: H70 C31 H72
    Date: 2004
  9. By: Rainald Borck; Matthias Wrede
    Abstract: We study the political economy of commuting subsidies in a model of a mono-centric city with two income classes. Depending on housing demand and transport costs, either the rich or the poor live in the central city and the other group in the suburbs. Commuting subsidies increase the net income of those with long commutes or high transport costs. They also affect land rents and therefore the income of landowners. The paper studies how the locational pattern of the two income classes and the incidence of landownership affects the support for commuting subsidies.
    Keywords: commuting subsidies, voting, monocentric city
    JEL: R14 R48
    Date: 2004
  10. By: Boonstra, A.; Vries, J. de (Groningen University)
    Abstract: Inter-organizational systems (IOS) are ICT-based systems that enable organizations to share information and to electronically conduct business across organizational boundaries. Especially since the increasing availability of the Internet, there have been less technological barriers to implement IOS. However, that does not imply that IOS-possibilities are implemented successfully in all occasions: other barriers may remain. Innovation is not only a technical process of solving problems, it also involves economic and political processes in which interests are articulated, alliances are built and outcomes are struggled over. To explore this observation, this paper presents a model that helps to describe and analyze IOS from a power and interest perspective of multiple parties. To illustrate this model, eight case studies of IOS are discussed, of which two in more depth. After that, we will put the findings of the analysis in a broader perspective. The paper concludes with the assertion that the scope for the design of an effective IOS depends on a combination of technical, economic and social factors, which are intertwined. The model may help users to assess and discuss these factors.
    Date: 2004
  11. By: Sergey Afontsev
    Abstract: When designing a trade policy reform, government of a transition country faces the problem of minimizing both trade distortions and losses in tariff revenues. One possible solution of this problem is tariff unification, which undermines stimuli for tariff evasion and thus saves budget revenues. We use Grossman-Helpman (1994) model of tariff formation extended for the case of asymmetric information to analyze a political economy basis of tariff unification in Russia (2000-2001) and prospects of further tariff unification during the WTO accession process.
    Keywords: Russia, political economy, endogenous protection theory, tariff regulation, policy formation in transition economy, trade policy
    JEL: F13 F14 P26 P33
    Date: 2004–10–05
  12. By: Valentino Larcinese (London School of Economics and Political Science, Department of Government and STICERD); Leonzio Rizzo (Universita’ di Ferrara, Department of Economics); Cecilia Testa (Department of Economics, Royal Holloway, University of London)
    Abstract: This paper provides new evidence on the determinants of the allocation of the US federal budget to the states. We find that the president has a strong influence on the budget allocation, while support for theories that give prominence to the Congress is rather weak. Membership of prestige committees is not used to divert federal spending nor does membership of the Armed Services committee affects defense spending. The presidential race matters. States that are historically volatile or extremely safe in presidential elections tend to receive more funds, while marginal states are not rewarded. Finally, we find good evidence in support of partisan theories. states whose governor has the same political affiliation of the president receive more federal funds, while states opposing the president’s party in Congressional elections are penalized.
    Keywords: Federal Budget, Pork-Barrell, President, Congress, Political Parties, Committees, American Elections.
    JEL: D72 D78 H11 H60 H77 H50
    Date: 2004–10
  13. By: Benito Arruñada; Veneta Andonova
    Abstract: We argue that during the crystallization of common and civil law in the 19th century, the optimal degree of discretion in judicial rulemaking, albeit influenced by the comparative advantages of both legislative and judicial rulemaking, was mainly determined by the anti-market biases of the judiciary. The different degrees of judicial discretion adopted in both legal traditions were thus optimally adapted to different circumstances, mainly rooted in the unique, market-friendly, evolutionary transition enjoyed by English common law as opposed to the revolutionary environment of the civil law. On the Continent, constraining judicial discretion was essential for enforcing freedom of contract and establishing a market economy. The ongoing debasement of pro-market fundamentals in both branches of the Western legal system is explained from this perspective as a consequence of increased perceptions of exogenous risks and changes in the political system, which favored the adoption of sharing solutions and removed the cognitive advantage of parliaments and political leaders.
    Keywords: Legal systems, institutional development, law enforcement
    JEL: K40 N40 O10
    Date: 2004–07
  14. By: Helge Berger; Till Mueller
    Abstract: The likely extension of the euro area has triggered a debate on the organization of the ECB, in particular on the apparent mismatch between relative economic size and voting rights in the Council. We present a simple model of optimal representation in a federal central bank addressing this question. Optimal voting weights reflect two opposing forces: the wish to insulate common monetary policy from changing preferences at the national level, and the attempt to avoid an overly active or passive reaction to idiosyncratic national economic shocks. A perfect match between economic size and voting rights is rarely optimal, and neither is the “one country, one vote principle”. Empirically, there are indications that the pattern of over- and under-representation of member countries in the ECB Council might be extreme by the standards of the US Fed and German Bundesbank and not always optimal.
    Keywords: Central Bank, Federal Central Bank, Currency Union, optimal representation, voting, ECB
    JEL: D72 E52 E58 F33
    Date: 2004
  15. By: Ehrhart, Karl-Martin (Universitaet Karlsruhe); Gardner, Roy (Indiana University and ZEI, University of Bonn); von Hagen, Jürgen (University of Bonn, Indiana University, and CEPR); Keser*, Claudia (IBM T.J. Watson Research Center, New York)
    Abstract: This paper studies budget processes, both theoretically and experimentally. We give a sufficient condition for top-down and bottom-up budget processes to have the same voting equilibrium. Furthermore, at a voting equilibrium, it is not always true, as often presumed, that a top-down budget process leads to a smaller overall budget than does a bottom-up budget process. To test the implications for budget processes of voting equilibrium theory, we conduct a series of 128 voting experiments using subjects in a behavior laboratory. The experimental evidence from these experiments is well organized by voting equilibrium theory, both at the aggregate level and at the individual subject level. In particular, subjects display considerable evidence of rationality in their proposals and votes. More complete information and fewer spending categories lead to greater predictive success of voting equilibrium theory, and reduce the time needed to reach a budget decision.
    Date: 2004–12–03

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