nep-pol New Economics Papers
on Positive Political Economics
Issue of 2005‒02‒13
fifteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Lobbying on Entry By Perotti, Enrico C; Volpin, Paolo
  2. Trade Standards and the Political Economy of Genetically Modified Food By Anderson, Kym; Damania, Richard; Jackson, Lee Ann
  3. Interregional Redistribution and Mobility in Federations: A Positive Approach By Hansen, Nico; Kessler, Anke
  4. Voice of the Diaspora: An Analysis of Migrant Voting Behaviour By Doyle, Orla; Fidrmuc, Jan
  5. Designing Democracies for Sustainability By Gersbach, Hans; Kleinschmidt, Tobias
  6. Who Runs the IFIs? By Faini, Riccardo; Grilli, Enzo
  7. Political Institutions, Environmental Policy and Growth By Marsiliani, Laura; Renström, Thomas I
  8. The Political Economy of Urban Transport System Choice By Brueckner, Jan; Selod, Harris
  9. Cross-Skill Redistribution and the Trade-Off Between Unemployment Benefits and Employment Protection By Boeri, Tito; Conde-Ruiz, José Ignacio; Galasso, Vincenzo
  10. The Political Economy of Immigrants Naturalization By Fabio, MARIANI
  11. On the Optimality of Decisions made by Hub-and-Spokes Monetary Policy Committees By Jan Marc Berk; Beata K. Bierut
  12. Stability and Growth Pact: An Index to Trigger an Early Warning Earlier? By Thierry Warin
  13. Property Tax Limitations and Mobility: The Lock-in Effect of California's Proposition 13 By Nada Wasi; Michelle J. White
  14. Trade Liberalization and the Politics of Financial Development By Matias Braun; Claudio Raddatz
  15. The Role of Importers and Exporters in the Determination of the U.S. Tariff Preferences Granted to Latin America By Peri Silva

  1. By: Perotti, Enrico C; Volpin, Paolo
    Abstract: We develop a model of endogenous lobby formation in which wealth inequality and political accountability undermine entry and financial development. Incumbents seek a low level of effective investor protection to prevent potential entrants from raising capital. They succeed because they can promise larger political contributions than the entrants due to the higher rents earned with less competition. Entry and investor protection improve when wealth distribution becomes less unequal, and the political system becomes more accountable. Consistent with these predictions, in a cross-section of 38 countries we find that greater accountability is associated with higher entry in sectors that are more dependent on external capital and have greater growth opportunities. Also, higher accountability and lower income inequality are associated with more effective legal enforcement, even after controlling for legal origin and per-capita income.
    Keywords: entrepreneurship; entry; financial development; growth; income inequality; investor protection; politics
    JEL: G21 G28 G32
    Date: 2004–08
  2. By: Anderson, Kym; Damania, Richard; Jackson, Lee Ann
    Abstract: A common-agency lobbying model is developed to help understand why North America and the European Union have adopted such different policies towards genetically modified food. Our results show that when firms (in this case farmers) lobby policy-makers to influence standards and consumers and environmentalists care about the choice of standard, it is possible that increased competition from abroad can lead to strategic incentives to raise standards, not just lower them as shown in earlier models. This theoretical proposition is supported by numerical results from a global general equilibrium model of GM adoption in America without and with an EU moratorium.
    Keywords: GMOs; Political Economy; Regulation of Standards; Trade Policy
    JEL: F13 O33 O38 Q17 Q18
    Date: 2004–08
  3. By: Hansen, Nico; Kessler, Anke
    Abstract: The Paper studies the effects and the determinants of interregional redistribution in a model of residential and political choice. We find that paradoxical consequences of interjurisdictional transfers can arise if people are mobile: while self-sufficient regions are necessarily identical with respect to policies and average incomes in our model, interregional redistribution always leads to the divergence of regional policies and per capita incomes. Thus, interregional redistribution prevents interregional equality. As we show, however, it at the same time allows for more interpersonal equality among the inhabitants of each region. For this reason, the voting population may in a decision over the fiscal constitution deliberately implement such a transfer scheme to foster regional divergence.
    Keywords: fiscal federalism; interregional transfers; migration; redistribution
    JEL: H71 H73
    Date: 2004–08
  4. By: Doyle, Orla; Fidrmuc, Jan
    Abstract: This Paper utilizes a unique dataset on votes cast by Czech and Polish migrants in their recent national elections to investigate the impact of institutional, political and economic characteristics on migrants’ voting behaviour. The political preferences of migrants are strikingly different from those of their domestic counterparts. In addition, there are also important differences among migrants living in different countries. This Paper examines three alternative hypotheses to explain migrant voting behaviour: adaptive learning; economic self-selection and political self-selection. The results of the analysis suggest that migrant voting behaviour is affected by the institutional environment of the host countries, in particular the tradition of democracy and the extent of economic freedom. In contrast, there is little evidence that differences in migrants’ political attitudes are caused by self-selection based either on economic motives or political attitudes prior to migrating. These results are interpreted as indicating that migrants’ political preferences change in the wake of migration as they adapt to the norms and values prevailing in their surroundings.
    Keywords: migration; political resocialization; voting; Z13
    JEL: J61 P26 P33
    Date: 2004–09
  5. By: Gersbach, Hans; Kleinschmidt, Tobias
    Abstract: Democratic processes may not take the welfare of future generations sufficiently into account and thus may not achieve sustainability. We show that the dual democratic mechanism – rejection/support rewards (RSRs) for politicians and elections – can achieve sustainability. RSRs stipulate that incumbents who are not re-elected, but obtain the majority support among young voters receive a particular monetary or non-monetary reward. Such rejection/support rewards induce politicians to undertake long-term beneficial policies, but may invite excessive reward-seeking. We identify optimal RSRs under different informational circumstances.
    Keywords: democracy; elections; incentive contracts; Q56; rejection/support rewards; sustainability
    JEL: D72 D82 H55
    Date: 2004–09
  6. By: Faini, Riccardo; Grilli, Enzo
    Abstract: The World Bank and the International Monetary Fund play a key role in the international economic architecture. Yet, they are also ‘political’ institutions and their activities inevitably respond to the national interest of one or a group of shareholders. Assessing the role of ‘influential’ shareholders is, however, made difficult by the fact that votes in the Boards of either institution are rarely recorded and at any rate are not made public. We take a different route and look at the pattern of lending of both institutions as a function of their institutional mission and the commercial and financial interests of their main shareholders. We find that the Bank and especially the Fund are quick to respond to the borrowing needs of their members, particularly during a balance of payments crisis. Apart from that, however, the lending pattern of the two institutions is influenced by the commercial and the financial interests of the US and, to a lesser extent, of the EU. European countries in particular seem to be much more concerned by their commercial interests. The role of Japan is even smaller and more regional, being largely confined to decisions concerning Asia.
    Keywords: influential shareholders; international monetary fund; world bank
    JEL: F02 F34
    Date: 2004–10
  7. By: Marsiliani, Laura; Renström, Thomas I
    Abstract: We analyse the impact of micro-founded political institutions on environmental policy and economic growth. We model an overlapping-generations economy, where individuals differ in preferences over the environment (as well as in age). Labour taxation and capital taxation is used to finance a public good and a public production factor, period by period. The underlying political institution is a parliament. Party entry, parliamentary composition, coalition formation, and bargaining are endogenous. The benchmark is when all decisions are taken in parliament. We compare this constitution with an independent regulator, elected in parliament. The regulatory regime causes lower pollution, but production inefficiency.
    Keywords: bargaining; comparative politics; endogenous growth; environmental policy; overlapping generations; taxation; voting
    JEL: D62 D72 E20 E62 H20 H55 O41 Q58
    Date: 2004–10
  8. By: Brueckner, Jan; Selod, Harris
    Abstract: This Paper analyses the political economy of transport-system choice, with the goal of gaining an understanding of the forces involved in this important urban public policy decision. Transport systems pose a continuous trade-off between time and money cost, so that a city can choose a fast system with a high money cost per mile or a slower, cheaper system. The Paper compares the socially optimal transport system to the one chosen under the voting process, focusing on both homogeneous and heterogeneous cities, while considering different landownership arrangements. The analysis identifies a bias toward over-investment in transport quality in heterogeneous cities.
    Keywords: income heterogeneity; multiple transport systems; over-investment in transport quality
    JEL: H41 R42
    Date: 2004–10
  9. By: Boeri, Tito; Conde-Ruiz, José Ignacio; Galasso, Vincenzo
    Abstract: We document the presence of a trade-off between unemployment benefits (UB) and employment protection legislation (EPL) in the provision of insurance against labour market risk. Different countries’ locations along this trade-off represent stable, hard to modify, politico-economic equilibria. We develop a model in which voters are required to cast a ballot over the strictness of EPL, the generosity of UBs and the amount of redistribution involved by the financing of unemployment insurance. Agents are heterogeneous along two dimensions: employment status – insiders and outsiders – and skills – low and high. Unlike previous work on EPL, we model employment protection as an institution redistributing among insiders, notably in favour of the low-skill workers. A key implication of the model is that configurations with strict EPL and low UB should emerge in presence of compressed wage structures. Micro data on wage premia on educational attainments and on the strictness of EPL are in line with our results. We also find empirical support to the substantive assumptions of the model on the effects of EPL.
    Keywords: employment protection; political equilibria; unemployment insurance
    JEL: D72 J65 J68
    Date: 2004–10
  10. By: Fabio, MARIANI (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper provides the first political economy model in which self-interested natives decide when voting rights should be granted to foreign-born workers. This choice is driven by the maximization of th net gains from immigration. We focus on the provision of a public good : immigrants could enlarge the tax base by increasing the total workforce, but at the same time they influence the tax rate by eventually exerting their political rights. We find that the quantity and the quality (human capital) of perspective immigrants, the political composition of the native population, and the sensitivity of the migration choice to voting rights, are all decisive factors in determining the political choice over the optimal timing of naturalization
    Keywords: Immigration; Naturalization policies; Voting; Public goods
    JEL: D72 F22 H2 J61
    Date: 2004–09–16
  11. By: Jan Marc Berk; Beata K. Bierut
    Abstract: Most monetary policy committees decide on interest rates using a simple majority voting rule. Given the inherent heterogeneity of committee members, this voting rule is suboptimal in terms of the quality of the interest rate decision, but popular for other (political) reasons. We show that a clustering of committee members into two subgroups, as is the case in hub-and-spokes systems of central banks (e.g. the Fed or the ESCB), can eliminate this inefficiency whilst retaining the simple majority voting rule.
    JEL: D71 D78 E58
    Date: 2005–02
  12. By: Thierry Warin
    Abstract: This paper addresses the question of a technical change in one the components of the Stability and Grown Pact (SGP). Indeed, the SGP is composed of (1) a political commitment, (2) a preventive element, and (3) a dissuasive element, and an improvement of the SGP efficacy can come from any of these three components. In this paper the author proposes a new early warning procedure, part of the preventive element. The ideal situation would be for the European Commission to be able to identify countries at risk as soon as they vote their national budgets. Although this is not possible, as the measures of the deficit are based on GDP forecasts, the conclusion this paper makes is that the EC should avoid relying on GDP forecasts by calculating a reference index.
    Keywords: europe, fiscal rule, stability and growth pact, political economics
    JEL: E61 E62 E63 F02 F42
    Date: 2005–02
  13. By: Nada Wasi; Michelle J. White
    Abstract: Proposition 13, adopted by California voters in 1978, mandates a property tax rate of one percent, requires that properties be assessed at market value at the time of sale, and allows assessments to rise by no more than 2% per year until the next sale. In this paper, we examine how Prop 13 has affected the average tenure length of owners and renters in California versus in other states. We find that from 1970 to 2000, the average tenure length of owners and renters in California increased by 1.04 years and .79 years, respectively, relative to the comparison states. We also find substantial variation in the response to Prop 13, with African-American households responding more than households of other races and migrants responding more than native-born households. Among owner-occupiers, the response to Prop 13 increases sharply as the size of the subsidy rises. Homeowners living in inland California cities such as Bakersfield receive Prop 13 subsidies averaging only $110/year and their average tenure length increased by only .11 years in 2000, but owners living in coastal California cities receive Prop 13 subsidies averaging in the thousands of dollars and their average tenure length increased by 2 to 3 years.
    JEL: H2 R2 H7 K2
    Date: 2005–02
  14. By: Matias Braun; Claudio Raddatz
    Abstract: A well developed financial system enhances competition in the industrial sector by allowing easier entry. The impact varies across industries, however. For some, small changes in financial development quickly induce entry and dissipate incumbents’ rents, generating strong incentives to oppose improvement of the financial system. In other sectors incumbents may even benefit from increased availability of external funds. The relative strength of promoters and opponents determines the political equilibrium level of financial system development. This may be perturbed by the effect of trade liberalization in the strength of each group. Using a sample of 41 trade liberalizers Braun and Raddatz conduct an event study and show that the change in the strength of promoters vis-à-vis opponents is a very good predictor of subsequent financial development. The result is not driven by changes in demand for external funds, or by the success of the trade policy. The relationship is mediated by policy reforms, the kind that induces competition in the financial sector, in particular. Real effects follow not so much from capital deepening but mainly through improved allocation. The effect is stronger in countries with high levels of governance, suggesting that incumbents resort to this costly but more subtle way of restricting entry where it is difficult to obtain more blatant forms of anti-competitive measures from politicians. This paper—a product of the Investment and Growth Team, Development Research Group—is part of a larger effort in the group to understand the relation between finance and the macroeconomy.
    Keywords: Domestic Finance; International Economics; Macroecon & Growth
    Date: 2005–02–08
  15. By: Peri Silva
    Abstract: Silva investigates the role played by domestic importers and foreign exporters in improving preferential access to the domestic market. To this end, the framework he uses extends the protection for sale analysis to explicitly model the role of domestic importers and foreign exporters in determining preferential trade treatment. The author tests the predictions of the model using data on preferential trade between the United States and Latin American countries. The results suggest that Latin American exporters and U.S. importers’ lobbying efforts have a significant and important role in determining the extent of preferential access granted by the United States. More interestingly, these findings also show that U.S. importers capture a substantial share of the rents generated by tariff preferences. These results therefore shed a pessimistic view on preferential trade schemes as a reliable source of gains for developing countries. This paper—a product of the Trade Team, Development Research Group—is part of a larger effort in the group to understand the political economy determinants of preferential trade.
    Keywords: International Economics
    Date: 2005–02–08

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