nep-pol New Economics Papers
on Positive Political Economics
Issue of 2004‒12‒20
eleven papers chosen by
Eugene Beaulieu
University of Calgary

  1. Enforcement, Private Political Pressure and the GATT/WTO Escape Clause By Kyle Bagwell; Robert W. Staiger
  2. Bargaining Sets of Voting Games By Bezalel Peleg; Peter Sudholter
  3. The Political Economy of Immigrationa and Income Redistribution By Jim Dolmas; Gregory W. Huffman
  4. Institutions and Cyclical Properties of Macroeconomic Policies By César Calderón; Roberto Duncan; Klaus Schmidt-Hebbel
  5. How Does the Government (Want to) Fund Science? Politics, Lobbying and Academic Earmarks By de Figueiredo, John; Silverman, Brian
  6. Aging and the Welfare State: The Role of Young and Old Voting Pivots By Assaf Razin; Efraim Sadka
  7. Unilingual Versus Bilingual Education System: A Political Economy Analysis By Ortega, Javier; Tangerås, Thomas P.
  8. Own interest and foreign need: Are bilateral investment treaty programmes similar to aid allocation? By Eric Neumayer
  9. Reforming Reforms: Incentive Effects in Education Finance in Vermont By Stephen J. Schmidt; Karen Scott
  10. Value of Expertise For Forecasting Decisions in Conflicts By Kesten C. Green; J. Scott Armstrong
  11. No Easy Exit: Property Rights, Markets, and Negotiations over Water By Alan Richards; Nirvikar Singh

  1. By: Kyle Bagwell; Robert W. Staiger
    Abstract: We consider the design and implementation of international trade agreements when: (i) negotiations are undertaken and commitments made in the presence of uncertainty about future political pressures; (ii) governments possess private information about political pressures at the time that the agreement is actually implemented; and (iii) negotiated commitments can be implemented only if they are self-enforcing. We thus consider the design of self-enforcing trade agreements among governments that acquire private information over time. In this context, we provide equilibrium interpretations of GATT/WTO negotiations regarding upper bounds on applied tariffs and GATT/WTO escape clauses. We find that governments achieve greater welfare when they negotiate the optimal upper bound on tariffs rather than precise tariff levels; furthermore, when governments negotiate the optimal upper bound on tariffs, the observed applied tariffs often fall strictly below the bound. Our analysis also provides a novel interpretation of a feature of the WTO Safeguard Agreement, under which escape clause actions cannot be re-imposed in the same industry for a time period equal to the duration of the most recent escape clause action. We find that a dynamic usage constraint of this kind can raise the expected welfare of negotiating governments.
    JEL: F1
    Date: 2004–12
  2. By: Bezalel Peleg; Peter Sudholter
    Abstract: Let A be a finite set of m <FONT FACE="Symbol">&#179;</FONT> 3 alternatives, let N be a finite set of n <FONT FACE="Symbol">&#179;</FONT> 3 players and let R<SUP>n</SUP> be a profile of linear preference orderings on A of the players. Throughout most of the paper the considered voting system is the majority rule. Let u<SUP>N</SUP> be a profile of utility functions for R<SUP>N</SUP>. Using <FONT FACE="Symbol">a</FONT>-effectiveness we define the NTU game V<SUB>u<SUP>N</SUP></SUB> and investigate its Aumann-Davis-Maschler and Mas-Colell bargaining sets. The first bargaining set is nonempty for m = 3 and it may be empty for m <FONT FACE="Symbol">&#179;</FONT> 4. Moreover, in a simple probabilistic model, for fixed m, the probability that the Aumann-Davis-Maschler bargaining set is nonempty tends to one if n tends to infinity. The Mas-Colell bargaining set is nonempty for m <FONT FACE="Symbol">&#163;</FONT> 5 and it may be empty for m <FONT FACE="Symbol">&#179;</FONT> 6. Moreover, we prove the following startling result: The Mas-Colell bargaining set of any simple majority voting game derived from the k-th replication of R<SUP>N</SUP> is nonempty, provided that k <FONT FACE="Symbol">&#179;</FONT> n + 2. We also compute the NTU games which are derived from choice by plurality voting and approval voting, and we analyze some interesting examples.
    Keywords: NTU game; bargaining set; majority rule; plurality voting; approval voting
    JEL: D71
    Date: 2004–12
  3. By: Jim Dolmas (Federal Reserve Bank of Dallas); Gregory W. Huffman (Department of Economics, Vanderbilt University)
    Abstract: In this paper, we study several general equilibrium models in which the agents in an economy must decide on the appropriate level of immigration into the country. Immigration does not enter directly into the native agents' utility functions, and natives have identical preferences over consumption goods. However, natives may be endowed with different amounts of capital, which alone gives rise to alternative levels of desired immigration. We show that the natives' preferences over desired levels of immigration are influenced by the prospect that new immigrants will be voting in the future, which may lead to higher taxation to finance government spending from which they will benefit. We also show that changes in the degree of international capital mobility, the distribution of initial capital among natives, the wealth or poverty of the immigrant pool, and the future voting rights and entitlements of immigrants can all have a dramatic effect on the equilibrium immigration and taxation policies. Both the model and the empirical evidence support the notion that inequality can lead to reduced immigration. The results suggest that opposition to immigration can be mitigated by enhanced capital mobility, as well as from removing some of the benefits that immigrants ultimately receive, either in the form of government transfers, or the franchise to vote.
    Keywords: Capital mobility, immigration, political economy, taxation, voting
    JEL: D7 F16 F22 J61
    Date: 2003–05
  4. By: César Calderón; Roberto Duncan; Klaus Schmidt-Hebbel
    Abstract: Strong swings in business cycle conditions in industrial and emerging market economies (EMEs) alike have renewed the debate on effectiveness of stabilization policies. Traditionally it has been argued that EMEs are unable to pursue counter-cyclical monetary and fiscal policies due to financial imperfections and unfavorable political-economy equilibriums. However, we claim that EMEs with institutional features similar to those of industrial countries may be able to conduct counter-cyclical policies. Using a sample of 20 EMEs and annual data for the 1990-2003 period, we find that the level of institutional quality plays a key role in the ability of these economies to conduct stabilizing macroeconomic policies. We show that EMEs with strong institutions are able to implement counter-cyclical macroeconomic policies —reflected in extended monetary-policy (Taylor) and fiscal-policy rules.
    Date: 2004–12
  5. By: de Figueiredo, John; Silverman, Brian
    Abstract: This paper examines academic earmarks and its role in the funding of university research. It provides a summary and review of the evidence on the supply of earmarks by legislators. It then discusses the role of university lobbying for earmarks on the demand side. After a review of the literature of the impact of earmarks on research quantity and quality, the paper poses a number of public policy questions related to the funding of science.
    Keywords: Lobbying, Education, Political Economy,
    Date: 2004–12–10
  6. By: Assaf Razin; Efraim Sadka
    Abstract: An income tax is generally levied on both capital and labor income. The working young bears mostly the burden of the tax on labor income, whereas the retired old, who already acummulated her savings, bears the brunt of the capital income tax. Therefore, there arise two types of conflict in the determination of the income tax: the standard intragenerational conflict between the poor and the rich, and an ntergenerational conflict between the young and the old. The paper studies how aging affects the resolution of these conflicts, and the politico-economic forces that are at play: the changes in the voting pivots and the fiscal leakage from tax payers to transfer recipients.
    JEL: E6 H2
    Date: 2004–12
  7. By: Ortega, Javier (GREMAQ, IDEI, University of Toulouse, CEPR and IZA Bonn); Tangerås, Thomas P. (IUI, Stockholm)
    Abstract: We consider an economy with two language groups, where only agents who share a language can produce together. Schooling enhances the productivity of students and may modify their language endowment. Under a unilingual system, the language of the politically dominant group is the only language of instruction, and the members of the politically dominated group who attend school shift language. Instead, under a bilingual system, the members of the dominated group who attend school become bilingual. The dominant group chooses the education system, and then individuals decide whether to attend school. While agents do not get utility from speaking their own language, we show that a language conflict of the expected type endogenously arises in the choice between a unilingual and a bilingual system. Democracy (majority rule) always leads to the implementation of the socially optimal education system, while the unilingual system is too often implemented under minority rule. In the presence of productivity spillovers, there may be unanimity for unilingualism, even if this system is assumed to be technologically inferior. The model is consistent with evidence from Finland in 1919 and France in 1863, showing that the choice of bilingualism in education may not be related to the size of language groups.
    Keywords: education, language policies, skills, minorities
    JEL: I2 J15
    Date: 2004–12
  8. By: Eric Neumayer
    Abstract: Bilateral investment treaties (BITs) have become the most important legal mechanism for the encouragement of foreign direct investment (FDI) in developing countries. Yet practically no systematic evidence exists on what motivates capital-exporting developed countries to sign BITs earlier with some developing countries than with others, if at all. The theoretical framework from the aid allocation literature suggests that developed countries pursue a mixture of own interest and foreign need. It also suggests differences between the big developed countries and a group of smaller ones known as like-minded countries. We find evidence that both economic and political interests determine the scheduling of BITs. However, with one exception, foreign need as measured by per capita income is also a factor. These results suggest that BIT programmes can be explained employing the same framework successfully applied to the allocation of aid. At the same time, own interest seems to be substantively more important than developing country need when it comes to BITs and the like-minded countries make no exception.
    JEL: F3 F4
    Date: 2004–12–15
  9. By: Stephen J. Schmidt (Department of Economics, Union College, Schnectady, NY, USA.; Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA.); Karen Scott (Union College, Schnectady, NY, USA.)
    Abstract: In 1997, Vermont passed Act 60, which reformed its education finance system to achieve greater equality of spending within the state. Like other recent education finance reforms that included strong and transparent incentives to reduce spending, Act 60 was politically very unpopular. In February 2004, Vermont passed Act 68, an attempt to acheive court-mandated education equalization at a lesser political cost than that required by Act 60. In this paper we analyze the incentives for local spending created by Act 60 and Act 68, and estimate the effects the change will have on spending inequality in Vermont. We find that Act 68 greatly reduces spending disincentives created by Act 60, but reduces them disproportionately for wealthy towns. As a result it increases inequality of spending in Vermont relative to Act 60. Because spending is quite inelastic with respect to tax prices, however, the increase in inequality is not very large relative to existing inequality. Act 68 does result in lower tax prices in all towns in Vermont and hence produces a moderate increase in education spending statewide. It has also been more politically acceptable than its predecessor, though not unanimously supported. Our findings emphasize the importance of marginal effects of education finance, and suggest that understanding the way in which towns respond to the incentives those effects create is critical in designing successful education finance reforms. They also show that a rereform of education finance in response to political criticism of an initial reform can reduce political concerns without greatly decreasing the equalizing incentives.
    JEL: H71 I22
    Date: 2004–12
  10. By: Kesten C. Green; J. Scott Armstrong
    Abstract: In important conflicts, people typically rely on experts' judgments to predict the decisions that adversaries will make. We compared the accuracy of 106 expert and 169 novice forecasts for eight real conflicts. The forecasts of experts using unaided judgment were little better than those of novices, and neither were much better than simply guessing. The forecasts of experts with more experience were no more accurate than those with less. Speculating that consideration of the relative frequency of decisions might improve accuracy, we obtained 89 forecasts from novices instructed to assume there were 100 similar situations and to ascribe frequencies to decisions. Their forecasts were no more accurate than 96 forecasts from novices asked to pick the most likely decision. We conclude that expert judgment should not be used for predicting decisions that people will make in conflicts. Their use might lead decision makers to overlook other, more useful, approaches.
    Keywords: Bad faith, Framing, Hindsight bias, Methods, Politics.
    JEL: D74 D78 D81 D83 D84
    Date: 2004–12
  11. By: Alan Richards (University of California, Santa Cruz); Nirvikar Singh (University of California, Santa Cruz)
    Abstract: The role of water has featured prominently in the Israeli-Palestinian negotiation process, and in Arab-Israeli disputes in general. The allocation or reallocation of water rights is a particularly thorny problem. Recent work (Fisher, 1995) seeks to sidestep the issue of rights allocation by appealing to the Coase theorem, which provides conditions under which the efficient use of a good does not depend on the allocation of property rights. It instead emphasizes the small use value of the water in dispute, and concludes that a trade of “water for peace” should be eminently possible. Here, we provide a critique of this conclusion, based on two central ideas. First, the conditions of the Coase theorem are not satisfied, even approximately, and therefore the valuation of the use of water cannot be analytically separated from the allocation of property rights. Second, the existence of subnational interests, and the need to have an agreement acceptable to important actors at this level, creates a further difficulty for negotiating a resolution of any dispute. Even if a trade at the national level can be agreed upon, domestic losers must be compensated enough to make it politically feasible for the national government.
    JEL: O P
    Date: 2004–12–10

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