nep-pol New Economics Papers
on Positive Political Economics
Issue of 2005‒01‒02
twenty-two papers chosen by
Eugene Beaulieu
University of Calgary

  1. Public Education for the Minority,Private Education for the Majority By Gilat Levy
  2. A Protectionist Bias in Majoritarian Politics By Gene M. Grossman; Ehanan Helpman
  3. Inflation and unemployment in OECD countries: The role of political ideologies, Central Bank independance and industrial relations By Borghijs Alain; Di Bartolomeo Giovanni; Merlevede Bruno
  4. Taxation of car-ownership, car use and public transport: insight derived from a discrete choice numerical optimisation model By De Borger B.; Mayeres I.
  5. Endogenous Lobbying By Leonardo Felli; Antonio Merlo
  6. Trade Policies Based on Political Externalities: An Exploration, Third Version By Wilfred J. Ethier
  7. Utilitarian Collective Choice and Voting By Hillinger, Claude
  8. Do Citizens Vote Sincerely (If They Vote at All)? Theory and Evidence from U. S. National Elections By Arianna Degan; Antonio Merlo
  9. A Dynamic Model of Voting By Arianna Degan
  10. A Political Economy Model of Congressional Careers By Daniel Diermeier; Michael Keane; Antonio Merlo
  11. A Political Economy Model of Congressional Careers: Supplementary Materiel By Daniel Diermeier; Michael Keane; Antonio Merlo
  12. Race, Bureaucratic Discretion, and the Implementation of Welfare Reform By Peter R. Mueser; Lael R. Keiser; Carolyn J. Heinrich
  13. A Measure of Media Bias By Jeffrey Milyo; Tim Groseclose
  14. Estate and Capital Gains Taxation: Efficiency and Political Economy Considerations By Saku Aura
  15. Inflation, Inequality and Social Conflict By Christopher Crowe
  16. Justice, Stability and Toleration in a federation of Well-Ordered Peoples By Andreas Føllesdal
  17. Poverty Trap in a Tributary Mode of Production: The Peasant Economy of Ethiopia By Berhanu Abegaz
  18. Do Liberals Play Nice? The Effects of Party and Political Ideology in Public Goods and Trust Games By Lisa R. Anderson; Jennifer M. Mellor; Jeffrey Milyo
  19. Revealed Preference for Car Tax Cuts: An Empirical Study of Perceived Fiscal Incidence By Samuel A. Baker; David H. Feldman
  20. Why Executive Power Centralizes Government By Samuel A. Baker
  21. Information Dynamics and Equilibrium Multiplicity in Global Games of Regime Change By George-Marios Angeletos; Christian Hellwig; Alessandro Pavan
  22. Is Economic Analysis of Any Help in Studies of Legitimacy in the EU? By Jan Gunnarsson

  1. By: Gilat Levy
    Abstract: Public provision of private goods such as education is usually viewed as a form of redistribution in kind. However, does it arise when income redistribution is feasible as well? In this paper I analyse a two-dimensional model of political decision making. Society has to choose both the tax rate and the allocation of the revenues between income redistribution and public provision of education. The political process that I analyse involves endogenous parties. Parties have a unique role in the model; I assume that parties increase the commitment ability of politicians and, as a result, increase the ability of different groups in society to compromise with one another. I find that public provision of education arises as an anti-majoritarian outcome; public provision of education arises only when those who benefit from education, e.g., voters with children, are a minority. The reason is that when education is consumed only by a minority, such redistribution in kind is 'cheap' relative to universal income redistribution, i.e., it can be effectively provided even with low taxes. Public provision of education arises then as a political compromise offered by the party of the poor who benefit from education and the rich voters who prefer low taxes. Thus, when those who benefit from education are a minority, it is publicly provided. When those who benefit from education are a majority, they have to buy private education, since there is no public provision of this good.
    Keywords: Education, redistribution, political parties.
    Date: 2004–03
  2. By: Gene M. Grossman; Ehanan Helpman
    Abstract: We develop a novel model of campaigns, elections, and policymaking in which the ex ante objectives of national party leaders differ from the ex post objectives of elected legislators. This generates a distinction between %u201Cpolicy rhetoric%u201D and %u201Cpolicy reality%u201D and introduces an important role for %u201Cparty discipline%u201D in the policymaking process. We identify a protectionist bias in majoritarian politics. When trade policy is chosen by the majority delegation and legislators in the minority have limited means to influence choices, the parties announce trade policies that favor specific factors, and the expected tariff or export subsidy is positive. Positions and expected outcomes monotonically approach free trade as party discipline strengthens.
    JEL: D72 F13
    Date: 2004–12
  3. By: Borghijs Alain; Di Bartolomeo Giovanni; Merlevede Bruno
    Abstract: This paper considers the effects of central bank independence, labor market institutions and the political partisanship on economic performance. In particular, we test if the partisanship of the government and the degree of central bank independence affect the relationship between labor market institutions and economic performance. We find evidence of interaction effects between the government’s partisanship and the labor market institutions. An increase in union density favors a left-wing government, while an increase in coordination favors a right-wing government. We also find that changes in the partisanship of the government have a larger impact on inflation and unemployment when the labor market is more institutionalized.
    Date: 2003–02
  4. By: De Borger B.; Mayeres I.
    Abstract: In this paper we study the taxation of car ownership, car use and public transport in the presence of externalities within the framework of a discrete/continuous choice model. We first derive optimal taxes in a simplified setting, emphasizing the specific role of fixed car ownership taxes and the relevance of public transport demand by non-car owners for the optimal tax structure. A numerical optimisation model is then constructed to study welfare-optimal public transport fares and two-part tariffs on ownership and use of gasoline and diesel cars in Belgium. Results are as follows. First, the current differences in tax treatment between diesel and gasoline car ownership and car use cannot be justified on the basis of external cost and budgetary considerations. Efficient pricing requires substantial increases in the relative user tax on diesel cars as compared to gasoline cars; optimal fixed taxes are substantially below current levels and only marginally differ between car fuel types, implying a ver y large decrease in the tax on diesel cars. Second, large differences in fixed car taxes do result (i) if for political or technical reasons variable car taxes cannot be optimally adjusted, and (ii) if optimal taxes are implemented but the government uses kilometre taxes as the main variable tax instrument. Third, the results of a series of marginal tax reform exercises suggest that a shift form gasoline towards diesel taxation is welfare improving, both for fixed and variable taxes. Somewhat surprisingly, a shift from fixed towards variable taxes is not necessarily welfare-improving: it is for diesel, but not for gasoline cars.
    Date: 2004–10
  5. By: Leonardo Felli (London School of Economics); Antonio Merlo (Department of Economics, University of Pennsylvania)
    Abstract: In this paper, we present a citizen-candidate model of representative democracy with endogenous lobbying. We find that lobbying induces policy compromise and always affects equilibrium policy outcomes. In particular, even though the policy preferences of lobbies are relatively extreme, lobbying biases the outcome of the political process toward the center of the policy space, and extreme policies cannot emerge in equilibrium. Moreover, in equilibrium, not all lobbies participate in the policy-making process.
    Keywords: Lobbying, citizen-candidate, representative democracy, electoral competition
    JEL: D72 D78
    Date: 2001–12–01
  6. By: Wilfred J. Ethier (Department of Economics, University of Pennsylvania)
    Abstract: During the past half century, multilateral trade liberalization has reduced tariffs to historically low levels. The Received Theory of multilateral trade agreements, based solely on terms-of-trade externalities between national governments, offers an explanation that has become the conventional wisdom among international trade theorists. But this explanation displays two puzzles that render it inconsistent with actual trade policy and actual trade agreements: the Terms-of-Trade Puzzle and the Anti-Trade-Bias Puzzle. This paper addresses inter-governmental political externalities in a model with terms-of-trade externalities. The model resolves the Terms-of-Trade Puzzle if and only if political externalities dominate terms-of-trade externalities. But it resolves the Anti-Trade-Bias Puzzle, and delivers results consistent with what we actually observe, only if terms-of-trade externalities play no role whatsoever.
    Keywords: Political externalities, trade agreements, the Received Theory, the Terms-of-Trade Puzzle, the Anti-Trade-Bias Puzzle
    JEL: F02 F13
    Date: 2002–11–23
  7. By: Hillinger, Claude
    Abstract: In his seminal Social Choice and Individual Values, Kenneth Arrow stated that his theory applies to voting. Many voting theorists have been convinced that, on account of Arrow?s theorem, all voting methods must be seriously flawed. Arrow?s theory is strictly ordinal, the cardinal aggregation of preferences being explicitly rejected. In this paper I point out that all voting methods are cardinal and therefore outside the reach of Arrow?s result. Parallel to Arrow?s ordinal approach, there evolved a consistent cardinal theory of collective choice. This theory, most prominently associated with the work of Harsanyi, continued the older utilitarian tradition in a more formal style. The purpose of this paper is to show that various derivations of utilitarian SWFs can also be used to derive utilitarian voting (UV). By this I mean a voting rule that allows the voter to score each alternative in accordance with a given scale. UV-k indicates a scale with k distinct values. The general theory leaves k to be determined on pragmatic grounds. A (1,0) scale gives approval voting. I prefer the scale (1,0,-1) and refer to the resulting voting rule as evaluative voting. A conclusion of the paper is that the defects of conventional voting methods result not from Arrow?s theorem, but rather from restrictions imposed on voters? expression of their preferences. The analysis is extended to strategic voting, utilizing a novel set of assumptions regarding voter behavior.
    JEL: D72 D71
    Date: 2004–12
  8. By: Arianna Degan (Department of Economics, University of Quebec at Montreal); Antonio Merlo (Department of Economics, University of Pennsylvania)
    Abstract: Understanding citizens’ electoral behavior (e.g., selective abstention and split ticket voting), represents a fundamental step in the analysis of democratic institutions. In this paper, we assess the extent to which sincere voting can explain observed patterns of participation and voting in U.S. national elections. We propose a unified model of turnout and voting in presidential and congressional elections with heterogeneous voters. We estimate the model using individual level data for eight presidential election years (1972-2000). Our main findings can be summarized as follows. First, a non-negligible fraction of the American electorate does not vote sincerely, and only a relatively small fraction of observed split-ticket voting can be explained by sincere voting. Second, there is a systematic, positive relationship between information and turnout. Third, the American electorate has become relatively more polarized over time.
    Keywords: Elections, turnout, selective abstention, split-ticket voting
    JEL: D72
    Date: 2004–03–15
  9. By: Arianna Degan (Department of Economics, University of Quebec at Montreal)
    Abstract: We propose and estimate a dynamic model of voting with asymmetric information incorporating the three main factors affecting voting choices of individual citizens: party identification, policy preferences, and candidates’ valence. Using individual level data on voting decisions in two consecutive presidential elections, we identify and estimate (1) the distribution of voters’ policy positions and (2) candidates’ valence. In addition to providing an equilibrium interpretation of the observed voting profiles and electoral outcomes, we use the estimated model to conduct counterfactual experiments to assess the relative importance of candidates’ policy positions, valence, and voters’ information on the outcomes of elections and to evaluate the performance of the electoral process.
    Keywords: Party identification, policy preferences, consecutive elections, valence
    JEL: D72
    Date: 2003–11–23
  10. By: Daniel Diermeier (Kellogg School of Management, Northwestern University); Michael Keane (Department of Economics, Yale University); Antonio Merlo (Department of Economics, University of Pennsyvlania)
    Abstract: Theories in political economy depend critically on assumptions about motivations of politicians. Our analysis starts from the premise that politicians, like other economic agents, are rational individuals who make career decisions by comparing the expected returns of alternative choices. The main goal of the paper is to quantify the returns to a career in the United States Congress. To achieve this goal we specify a dynamic model of career decisions of a member of Congress and we estimate this model using a newly collected data set. Given estimates of the structural model, we assess reelection probabilities for members of Congress, estimate the effect of congressional experience on private and public sector wages, and quantify the value of a congressional seat. Moreover, we use the estimated model to assess how an increase in the congressional wage or the imposition of term limits would affect the career decisions of politicians and the returns to a career in Congress.
    Keywords: Political careers, politicians, elections, term limits
    JEL: D72 J44 J45
    Date: 2002–07–01
  11. By: Daniel Diermeier (Kellogg School of Management, Northwestern University); Michael Keane (Department of Economics, Yale University); Antonio Merlo (Department of Economics, University of Pennsyvlania)
    Abstract: This paper contains additional details about the model in our paper “A Political Economy Model of Congressional Careers” (Diermeier, Keane and Merlo (2004)), as well as the computational methods we use to solve and estimate the model, and the construction of the data set.
    Keywords: Political careers, politicians, elections, term limits
    JEL: D72 J44 J45
    Date: 2004–09–01
  12. By: Peter R. Mueser (Department of Economics, University of Missouri-Columbia); Lael R. Keiser (Department of Political Science, University of Missouri-Columbia); Carolyn J. Heinrich
    Abstract: This paper explores the impact of the race of individual clients and of the local racial context on the implementation of sanctions for recipients of Temporary Assistance for Needy Families (TANF) in a Midwestern state. We find that although nonwhites are sanctioned at lower rates than whites overall, nonwhites are sanctioned more compared to whites in each local area. This paradox occurs because nonwhites tend to live in areas with lower sanction rates. Consistent with the literature on race and policy, we find that sanction rates increase as the nonwhite population increases until a threshold is reached where nonwhites gain political power.
    JEL: I38 L32 J78
    Date: 2004–10–20
  13. By: Jeffrey Milyo (Department of Economics, University of Missouri-Columbia); Tim Groseclose (Department of Political Science, UCLA)
    Abstract: In this paper we estimate ADA (Americans for Democratic Action) scores for major media outlets such as the New York Times, USA Today, Fox News’ Special Report, and all three network television news shows. Our estimates allow us to answer such questions as “Is the average article in the New York Times more liberal than the average speech by Tom Daschle?” or “Is the average story on Fox News more conservative than the average speech by Bill Frist?” To compute our measure, we count the times that a media outlet cites various think tanks and other policy groups. We compare this with the times that members of Congress cite the same groups in their speeches on the floor of the House and Senate. By comparing the citation patterns we construct an ADA score. As a simplified example, imagine that there were only two think tanks, and suppose that the New York Times cited the first think tank twice as often as the second. Our method asks: What is the typical ADA score of members of Congress who exhibit the same frequency (2:1) in their speeches? This is the score that we would assign to the New York Times. Our results show a strong liberal bias. All of the news outlets except Fox News’ Special Report and the Washington Times received a score to the left of the average member of Congress. Consistent with many conservative critics, CBS Evening News and the New York Times received a score far left of center. Outlets such as USA Today, NPR’s Morning Edition, NBC’s Nightly News and ABC’s World News Tonight were moderately left. The most centrist outlets (but still left-leaning) by our measure were the Newshour with Jim Lehrer, CNN’s NewsNight with Aaron Brown, and ABC’s Good Morning America. Fox News’ Special Report, while right of center, was closer to the center than any of the three major networks’ evening news broadcasts. All of our findings refer strictly to the news stories of the outlets. That is, we omitted editorials, book reviews, and letters to the editor from our sample.
    JEL: D29 D79 H89
    Date: 2004–12–27
  14. By: Saku Aura (Department of Economics, University of Missouri-Columbia)
    Abstract: In this paper a simple dynastic overlapping-generations model with homogeneous agents is used to analyze the optimal use of capital income tax, labor income tax and estate tax. The results of this analysis add to the conventional wisdom about capital income taxation: while it is true that in the long run the estate tax rate should be set to zero, it is also true that other capital income taxation is a usable policy tool even in the steady state. The other contribution of the paper is the building of a simple dynamic political economy model where the structure of capital taxes is determined. In a median-voter framework with no policy commitment, estate taxation is used too heavily as a capital-tax-revenue-collecting tool relative to the second-best optimum for the social planner.
    JEL: H21 H24
    Date: 2004–12–16
  15. By: Christopher Crowe
    Abstract: This paper presents a political economy model of inflation as a result of social conflict. Agents are heterogeneous in terms of income. Agents' income levels determine their ability to hedge against the effects of inflation. The interaction of heterogeneous cash holdings and preferences over fiscal policy leads to conflict over how to finance government expenditure. The model makes a number of predictions concerning which environments are conducive to the emergence of inflation. Inflation will tend to be higher in countries with higher inequality and with greater pro-rich bias in the political system. Conversely, the use of income tax will be higher in countries with lower inequality and less pro-rich bias. The model also predicts that although inequality and political bias will have an impact on the composition of revenue, it will have no effect on the overall level of government spending (assuming that spending is on public goods only). These results are largely confirmed by the empirical portion of the paper. The paper's novel features are its simplifications at the household level which allow for richer treatment of the income distribution and political process than in the related literature. The paper also gives unequivocal comparative statics results under relatively undemanding assumptions.
    Keywords: probabilistic voting, distributional conflict, fiscal policy, inequality, inflation
    JEL: D31 D72 E31 E50 E60 H20 H30
    Date: 2004–11
  16. By: Andreas Føllesdal
    Keywords: federalism; normative political theory; fundamental/human rights
    Date: 2004–12–22
  17. By: Berhanu Abegaz (Department of Economics, College of William and Mary)
    Abstract: The paradox of EthiopiaÕs agrarian economy is that, despite underwriting a world civilization, the transition to an industrial economy has eluded it. Using a model of AfroAsiatic tributarism, we attribute this outcome to endemic extractive contests between a predominantly landed peasantry and a titled, prebendary overlord class. The latterÕs strategy of political accumulation inevitably engendered immiserization of overlord and peasant alike by privileging diversion over production. The surplus was then dissipated on unproductive consumption, national defence, and internecine strife. Lacking a strong state to mitigate predation and political instability, the Ethiopian peasant rationally ÔchoseÕ to be efficiently, albeit self-sufficiently, poor.
    Keywords: Ethiopia, feudalism, tributarism, overlordship, landlordship, gebbar system
    JEL: N57 O55 P52
    Date: 2004–10–15
  18. By: Lisa R. Anderson (Department of Economics, College of William and Mary); Jennifer M. Mellor (Department of Economics, College of William and Mary); Jeffrey Milyo (Department of Economics and Truman School of Public Affairs, University of Missouri)
    Abstract: A popular perception among the American electorate is that Democrats and liberals are more caring and kind-hearted than Republicans and conservatives. This stems in part from the consistent finding in opinion surveys that left-leaning individuals tend to support increased public spending on social programs. In this study, we put conventional wisdom to the test by examining differences in the behavior of liberal versus conservative subjects in two classic experimental settings: the public goods game and the bilateral trust game. First, we test whether Democrats or liberals are more likely to contribute to a group account when such actions are contrary to self-interest. Next, we test whether Democrats and liberals choose to trust strangers or to behave in a trustworthy fashion, despite monetary incentives to the contrary. To address the concern that liberals may not behave more compassionately in the artificially egalitarian setting of the laboratory, we induce inequality among subjects by manipulating the show-up fee paid to all participants. We find that despite conventional wisdom and survey evidence, there is no tendency for adherents of either major party to play nice, nor do self-described liberals have a greater tendency to make contributions in a public goods experiment. However, in keeping with conventional wisdom (but not necessarily national survey results), we find some evidence that self-described liberals behave in a more trusting and trustworthy manner.
    Keywords: public goods, experiment, political ideology
    JEL: C9 H4
    Date: 2004–09–30
  19. By: Samuel A. Baker (Department of Economics, College of William and Mary); David H. Feldman (Department of Economics, College of William and Mary)
    Abstract: Voting in an election in which elimination of the local car tax is the central issue shows how a highly visible universal tax cut can prevail in the electoral process even if benefits are skewed toward upper income households. These results are consistent with positive models of fiscal structure choice in which fiscal systems are the consequence of support maximizing politicians attempting to supply net benefits to easily identifiable interest groups without generating significant opposition from other groups.
    Keywords: Targeted universalism, Personal property taxes, Tax revolt
    JEL: H2
    Date: 2004–11–10
  20. By: Samuel A. Baker (Department of Economics, College of William and Mary)
    Abstract: This paper examines the effects of political parties, executive power and efficiency on federal structure, proposing and testing a model of federalism in which different levels of veto power can lead to varying degrees of centralization in the provision of central and local governmental services when executive and legislative branches have disparate preferences over which level should provide services. Results for the US (1982-1992) find state and local spending centralizes with increased veto power because, absent offsetting political party advocacy for decentralization, central government spending interests dominate local government spending interests.
    Keywords: Federalism, Centralization, Political parties, Executive power, Veto
    JEL: H1
    Date: 2004–11–15
  21. By: George-Marios Angeletos; Christian Hellwig; Alessandro Pavan
    Abstract: Global games of regime change %u2013 that is, coordination games of incomplete information in which a status quo is abandoned once a sufficiently large fraction of agents attacks it %u2013 have been used to study crises phenomena such as currency attacks, bank runs, debt crises, and political change. We extend the static benchmark examined in the literature by allowing agents to accumulate information over time and take actions in many periods. It is shown that dynamics may lead to multiple equilibria under the same information assumptions that guarantee uniqueness in the static benchmark. Multiplicity originates in the interaction between the arrival of information over time and the endogenous change in beliefs induced by the knowledge that the regime survived past attacks. This interaction also generates interesting equilibrium properties, such as the possibility that fundamentals predict the eventual regime outcome but not the timing or the number of attacks, or that dynamics alternate between crises and phases of tranquility without changes in fundamentals.
    JEL: C7 D7 D8 F3
    Date: 2004–12
  22. By: Jan Gunnarsson (Institute of Economics, University of Copenhagen)
    Abstract: The transaction cost approach in economics has been applied in theorizing how Europe is governed. In providing a functionalist explanation of political organization, it encourages beliefs that reforms improving organizational efficiency also increase the legitimacy of European leadership. This paper discusses institutional perspectives on how democratic legitimacy is built by those, who aspire to rule the EU. An economist’s view will be discussed against a background of models of legitimacy by Scharpf and Schmitter. In addition, a governance practice directed to diffusion policy is fenced off and a future empirical study is outlined.
    Keywords: legitimacy; multi-level governance; transaction costs; social norms; institutional leverage
    JEL: H70 L50
    Date: 2004–09

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