nep-pol New Economics Papers
on Positive Political Economics
Issue of 2005‒01‒23
nine papers chosen by
Eugene Beaulieu
University of Calgary

  1. United We Vote By Eguia, Jon X.
  2. The Dreze and Grossman-Hart criteria for production in incomplete markets: Voting foundations and compared political stability By CRES, Hervé; TVEDE, Mich
  3. The Evolution of Retirement By J. Ignacio Conde-Ruiz; Vincenzo Galasso; Paola Profeta
  4. Can we insure against political uncertainty? Evidence from the U.S. Stock Market By Mattozzi, Andrea
  5. Voting for the Electoral System: an Experiment. By Ortona, Guido
  6. Social Capital, Creative Destruction and Economic Growth By Uwe Dulleck; Dirk J. Bezemer; Paul Frijters
  7. Judgment aggregation by quota rules By Franz Dietrich; Christian List
  8. Why the US and not Brazil? Old Elites and the Development of a Modern Economy By Uwe Dulleck; Paul Frijters
  9. The Clash of Liberalizations: Preferential versus Multilateral Trade Liberalization in the European Union By Baybars Karacaoval1; Nuno Limao

  1. By: Eguia, Jon X.
    Abstract: This paper studies the advantages that a coalition of agents in a larger electorate can obtain by forming a voting bloc to pool their votes and cast them all in one direction. We show under which conditions an agent will benefit from the formation of the voting bloc, whether being part of it or stepping out is most advantageous for an individual agent and what are the different optimal internal voting rules to aggregate preferences within the coalition.
    Keywords: voting bloc, coalition formation, voting rule
    Date: 2004–12
  2. By: CRES, Hervé; TVEDE, Mich (Institute of Economics, University of Copenhagen)
    Abstract: This paper studies corporate control in a general equilibrium model with incomplete markets. At the market equilibrium, shareholders typically disagree on the way to evaluate production plans outside the market span. Hence a collective decision mechanism is needed to resolve this conflict. A mechanism proposed by Drèze (1974), resp. Grossman & Hart (1979), consists in allowing (Lindahl-like) sidepayments between final, resp. initial, shareholders. Although it is likely to exhibit desirable efficiency properties, this mechanism is difficult to implement. Another mechanism (e.g., Drèze (1985) and De-Marzo (1993)) relies on majority voting by shareholders. Since voting occurs in a multidimensional setup, super majority rules are needed to ensure existence of equilibria. We give conditions under which sidepayment equilibria are voting equilibria for the smallest rate of super majority ensuring existence. Thereby we are able to compare the relative performances of the Drèze and Grossman-Hart criteria with respect to stability in the voting mechanism. We show that the endogenization of portfolio holding in the Drèze criterion can either help or completely jeopardize the aggregation process, depending on the shareholders' expectations. This ambivalence is absent in the Grossman-Hart criteria.
    Keywords: incomplete markets; super majority voting; sidepayments; corporate charter; self-fulfilling prophcies
    JEL: D21 D52 D71 G39
    Date: 2004–03–01
  3. By: J. Ignacio Conde-Ruiz; Vincenzo Galasso; Paola Profeta
    Abstract: We provide a long term perspective on the individual retirement behavior and on the future of early retirement. In a cross-country sample, we find that total pension spending depends positively on the degree of early retirement and on the share of elderly in the population, which increase the proportion of retirees, but has hardly any effect on the per-capita pension benefits. We show that in a Markovian political economic theoretical framework, in which incentives to retire early are embedded, a political equilibrium is characterized by an increasing sequence of social security contribution rates converging to a steady state and early retirement. Comparative statics suggest that aging and productivity slow-downs lead to higher taxes and more early retirement. However, when income effects are factored in, the model suggests that periods of stagnation — characterized by decreasing labor income — may lead middle aged individuals to postpone retirement.
  4. By: Mattozzi, Andrea
    Abstract: We show that existing stocks that are currently traded in the U.S. stock market can be used to hedge political uncertainty. Focusing on the 2000 U.S. Presidential election, we construct two "presidential portfolios" composed of selected stocks anticipated to fare differently under a Bush versus a Gore presidency. To construct these portfolios we use data on campaign contributions by publicly traded corporations and identify the major contributors on each side. Using daily observations for the six months before the election took place, we show that the excess returns of these portfolios with respect to overall market movements are significantly related to changes in electoral polls.
    Keywords: political uncertainty, financial markets
    Date: 2004–10
  5. By: Ortona, Guido
    Abstract: he choice of the electoral system should be delegated to the citizens. However, citizens are not sufficiently informed to choose the system directly. It is argued that they may instead state their preferences for two basic characteristics of a Parliament, i.e. Governability and Representativeness. It is then possible to choose the system through a purely technical procedure. An experiment illustrates the method.
    JEL: D72
    Date: 2004–12
  6. By: Uwe Dulleck; Dirk J. Bezemer; Paul Frijters
    Abstract: A distinction between individual and communal aspects of social capital is introduced, and their roles in production explored. Contacts are required to transact. contact formation and replacement are mediated by either market institutions or, less efficiently, by informal networks. Replacement of contacts is part of Schumpeterian creative destruction, leading to technological progress but with a negative externality. For output to increase, a "fundamental transformation" from informal to formal contact creation institutions is required. This may be blocked if political elite interests are threatened by the externality. Growth experiences in transition and developing countries are interpreted in this frameword.
    JEL: O11 O41 P16
    Date: 2004–04
  7. By: Franz Dietrich (University of Konstanz, Germany); Christian List (London School of Economics, United Kingdom)
    Abstract: It is known that majority voting among several individuals on logically interconnected propositions may generate irrational collective judgments. We generalize majority voting by considering quota rules, which accept each proposition if and only if the number of individuals accepting it exceeds some (proposition-specific) threshold. After characterizing quota rules, we prove necessary and sufficient conditions under which their outcomes satisfy various rationality conditions. We also consider sequential quota rules, which adjudicate propositions sequentially, letting earlier judgments constrain later ones. While ensuring rationality, sequential rules may be path-dependent. We characterize path-independence and prove its equivalence to strategy- proofness under mild conditions. Our results generalize earlier (im)possibility theorems.
    Keywords: Judgment aggregation, quota rules, collective rationality, path-dependence, strategy-proofness, formal logic
    JEL: D70 D71 D79
    Date: 2005–01–18
  8. By: Uwe Dulleck; Paul Frijters
    Abstract: Old elites can block changes, but not all do. Why is it that stronger elites may allow more changes than weaker elites? Why do economies with larger stocks of natural resources not grow faster than economies poorer in natural resources? We argue that old elites hold some power to extract rents from the economy. Whereas old sectors (i.e. agriculture or extraction of natural resources) are not affected by rent extraction, modern sectors require investments that do react to rent extraction. At the same time, a modern sector relies on networks of firms. These structures form the basis of political power of a new elite, which reduces the ability of the old elite to extract rents. We show that countries rich in natural resources provide their old elite with incentives to extract rents so high that the private sector has no incentives to build up a modern economy. If the old elite is either politically very strong or the natural resource sector is small compared to the potential of the modern sector, the old elite will choose to extract smaller rents from a growing sector. Some empirical evidence completes the paper.
    JEL: H11 O14 O38 D72
    Date: 2004–05
  9. By: Baybars Karacaoval1; Nuno Limao
    Abstract: There has been an explosion in the number of preferential trade agreements in the past decade. Preferential trade agreements are characterized by liberalization with respect to only a few partners and thus they can potentially clash with and retard multilateral trade liberalization. Despite this important concern with preferential trade agreements, there is almost no systematic evidence on whether they actually affect multilateral trade liberalization. Karacaoval1 and Limão model the effect of preferential trade agreements on multilateral trade liberalization and show that preferential trade agreements slow down multilateral trade liberalization unless they have a common external tariff and allow for internal transfers. Next, they use detailed data on product-level tariffs negotiated by the European Union in the past two multilateral trade rounds to structurally estimate their model. The authors confirm the main prediction—the European Union’s preferential trade agreements have clashed with its multilateral trade liberalization–-and find that the effect is quantitatively significant. Moreover, they also confirm several auxiliary predictions of the model and provide new evidence on the political economy determinants of multilateral liberalization in the European Union. This paper—a product of the Trade Team, Development Research Group—is part of a larger effort in the group to understand the interaction between preferential and multilateral liberalization.
    Keywords: International Economics
    Date: 2005–01–14

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