nep-pol New Economics Papers
on Positive Political Economics
Issue of 2005‒05‒07
twenty-one papers chosen by
Eugene Beaulieu
University of Calgary

  1. Politics and Economics in Weak and Strong States By Daron Acemoglu
  2. Why do bigger countries have more problems with the Stability and Growth Pact? By Bodo Herzog
  3. Redistribution, Inequality and Political Conflict By Patricia Justino
  4. Globalization, Domestic Politics and Social Spending in Latin By Robert R. Kaufman; Alex Segura-Ubiergo
  5. Societal Institutions and Tax Effort in Developing Countries By Richard M. Bird; Jorge Martinez-Vazquez; Benno Torgler
  6. Intergovernmental Loans: Their Fit into a Transfer System By Dana Weist
  7. Tax Policy Design in The Presence of Social Preferences: Some Experimental Evidence By Lucy F. Ackert; Jorge Martinez-Vazquez; Mark Rider
  8. Fiscal Decentralization and The Functional Composition of Public Expenditures By F. Javier Arze del Granado; Jorge Martinez-Vazquez; Robert McNab
  9. Redistribution via Taxation: The Limited Role of the Personal Income Tax in Developing Countries By Richard M. Bird; Eric M. Zolt
  10. The Determinants of the Incidence of Intergovernmental Grants: A Survey of the International Experience By Jameson Boex; Jorge Martinez-Vazquez
  11. The Political Economy of Equalization Transfers By Stuti Khemani
  12. On Asymmetric Behaviors if Voting is Costly By Francesco De Sinopoli; Giovanna Iannantuoni
  13. Dictators and Their Viziers: Agency Problems in Dictatorships By Egorov, George; Sonin, Konstantin
  15. ON COMMITTED CITIZEN-CANDIDATES By Carlos Maravall Rodríguez
  17. Control structures and payout policy By Renneboog,Luc; Trojanowski,Grzegorz
  18. Loyalty and Power in Union–Party Alliances: Labor Politics in Postcommunism By Sabina Avdagic
  19. Fundamental dimensions of U.S. trade policy By alok k. bohara; alejandro islas camargo; theresa grijalva; kishore gawande
  20. Assessing the Determinants of Willingness to Pay for Urban Flood Control: The Role of Locational, Demographic and attitudinal Factors By David E. Clark; Robert Griffin; Vladimir Novoty
  21. Don’t Frighten the Horses – the Political Economy of Singapore’s Foreign Exchange Rate Regime since 1981 By Peter Wilson; Gavin Peebles

  1. By: Daron Acemoglu
    Abstract: While much research in political economy points out the benefits of "limited government," political scientists have long emphasized the problems created in many less developed nations by "weak states," which lack the power to tax and regulate the economy and to withstand the political and social challenges from non-state actors. I construct a model in which the state apparatus is controlled by a self-interested ruler, who tries to divert resources for his own consumption, but who can also invest in socially productive public goods. Both weak and strong states create distortions. When the state is excessively strong, the ruler imposes such high taxes that economic activity is stifled. When the state is excessively weak, the ruler anticipates that he will not be able to extract rents in the future and underinvests in public goods. I show that the same conclusion applies in the analysis of both the economic power of the state (i.e., its ability to raise taxes) and its political power (i.e., its ability to remain entrenched from the citizens). I also discuss how under certain circumstances, a different type of equilibrium, which I refer to as "consensually-strong state equilibrium," can emerge whereby the state is politically weak but is allowed to impose high taxes as long as a sufficient fraction of the proceeds are invested in public goods. The consensually-strong state might best correspond to the state in OECD countries where taxes are high despite significant control by the society over the government.
    JEL: P16 H10
    Date: 2005–04
  2. By: Bodo Herzog
    Abstract: The European Fiscal Framework and the Stability and Growth Pact (SGP) have had great significance since the completion of the European Monetary Union (EMU) in 1999. The current enforcement and credibility problems, and discussion about reforming the SGP, as well as the failure to impose sanctions and early warnings against states in breach of the Pact, have introduced a new subject for economic research. One of the most surprising observations in recent years is that the larger countries in the EMU have more problems with the budget thresholds in the SGP than the smaller countries. To explain this `stylized fact\' we solve a model of `ratio- nal\' delay in consolidation and relate it to several economic and political variables. The model shows that larger governments tend to prefer slower consolidation because they are not concerned about the risk of breaching the SGP and face less output volatility. Moreover we solve in the theoretical model one unexplored phenomenon in empirical macroeconomics: why does larger government size imply less macroeconomic volatility? We demonstrate this approach and its results with current empirical data on the performance of the EMU and the SGP.
    Keywords: Monetary Union, Fiscal Policy, Stability and Growth Pact
    JEL: E60 F30 F33
    Date: 2005–05–04
  3. By: Patricia Justino (Poverty Research Unit at Sussex)
    Abstract: This paper analyses the relationship between redistributive policies and civil unrest. This relationship is modelled in a discrete two-period recursive model. Key theoretical assumptions and outcomes are tested empirically using data for a panel of 14 major Indian states between 1973 and 2000. The analysis shows that, in the medium-term, redistributive policies have been significantly more effective in reducing civil unrest in India than more direct solutions, such as the use of police and military forces, and have resulted in important positive externalities on economic growth. This represents an important lesson for countries where social cohesion tends to break frequently but large-scale wars may be avoidable.
    Keywords: redistribution, conflict, inequality, economic growth, India, panel data
    JEL: C33 O1 O53
    Date: 2004
  4. By: Robert R. Kaufman (Rutgers University); Alex Segura-Ubiergo (International Monetary Fund)
    Abstract: This paper analyzes the impact of globalization on social spending in Latin America. It shows that trade integration has a consistently negative effect on social security expenditures, and that this effect is compounded by higher integration into capital markets. The importance of political institutions is also key. Popularly-based governments tend to increase social security transfers, which reach a relatively small but politically powerful constituency in the formal sector. By contrast, the change to democracy increases education and health spending, which reaches a larger segment of the population.
    Keywords: globalization, social spending, fiscal discipline, Latin America, trade openness, social policy
    JEL: D6 D7 H
    Date: 2005–04–30
  5. By: Richard M. Bird (Director of the International Tax Program, Joseph L. Rotman School of Management, University of Toronto); Jorge Martinez-Vazquez (Andrew Young School of Policy Studies, Georgia State University); Benno Torgler
    Abstract: “Will underdeveloped countries learn to tax?” asked Nicholas Kaldor (1963), forty years ago. Underlying this question is the assumption that if a country wishes to become ‘developed’ it needs to collect in taxes an amount greater than the 10-15 percent found in many developing countries. Kaldor’s answer to his question was essentially that since even the poorest country had sufficient ‘capacity’ in both economic and administrative terms to tax more, whether or not a particular country did so depended primarily on its political institutions. Would developing countries be fortunate enough to have those with political power voluntarily give up at least some of their power to block fiscal reform in exchange for social stability? Or would the ruling groups rather wait (in the spirit of après moi le deluge) for the revolutionary upheaval that he considered the only alternative?
    Keywords: Societal Institutions,Tax Effort,Developing Countries
    Date: 2004–09–01
  6. By: Dana Weist
    Abstract: Governments decentralize for various political and economic reasons. It can be a means to move decision making closer to people, to enhance the efficiency and responsiveness of service delivery, and to make tax systems more productive. In some countries, it may also promote national cohesion (e.g., Indonesia). Done well, decentralization can lead to all of the benefits promised by a multi-tiered intergovernmental system: better public services, enhanced local accountability, and a potential tool for poverty alleviation. But if decentralization is done badly, it can lead to macroeconomic instability, deterioration in service delivery, corruption and collapse of the safety net.
    Keywords: Intergovernmental Loans, Transfer System, dezentralization
    Date: 2004–11–01
  7. By: Lucy F. Ackert; Jorge Martinez-Vazquez (Andrew Young School of Policy Studies, Georgia State University); Mark Rider (Andrew Young School of Policy Studies, Georgia State University)
    Abstract: This paper reports the results of experiments designed to examine whether a taste for fairness affects people’s preferred tax structure. Building on the Fehr and Schmidt (1999) model we devise a simple test for the presence of social preferences in voting for alternative tax structures. The experimental results show that individuals demonstrate concern for their own payoff and inequality aversion in choosing between alternative tax structures. However, concern for redistribution decreases when it leads to increasing deadweight losses. Our findings have important implications for the design of optimal tax theory.
    Keywords: tax policy, social preferences, fairness
    Date: 2004–11–01
  8. By: F. Javier Arze del Granado (Andrew Young School of Policy Studies, Georgia State University); Jorge Martinez-Vazquez (Andrew Young School of Policy Studies, Georgia State University); Robert McNab
    Abstract: This study examines the relationship between fiscal decentralization and the functional composition of public expenditures. We develop a theoretical model based on a distance-sensitive representative agent model, some applications of the median-voter theorem, and the Tiebout choice model. In our model, higher levels of fiscal decentralization lead indiviuals to demand higher amounts of publicly provided private goods. We empirically test this hypothesis by employing several econometric models on an unbalanced panel data set of 45, developed and developing countries over a 28-year period. The empirical models used in this study improve upon previous empirical studies of expenditure composition by using up-to-date data and the most current estimation techniques for fractional data. We obtain strong evidence that fiscal decentralization increases the share of education and health expenditures over total expenditures. Most of our estimates reveal no statistically significant evidence that the effects of decentralization may differ between developing and industrialized countries. However, for one model we find evidence that the effect of decentralization on the composition of public expenditures is greater in developing countries than in industrialized countries.
    Keywords: Fiscal Decentralization, and Functional Composition of Public Expenditures
    Date: 2005–01–01
  9. By: Richard M. Bird; Eric M. Zolt
    Abstract: In developed countries, the income tax, especially the personal income tax, has long been viewed as the primary instrument for redistributing income and wealth. This article examines whether it makes sense for developing countries to rely on the income tax for redistributive purposes. We put forth three propositions. First, the personal income tax has done little to reduce inequality in many developing countries. This failure is not surprising given that in many countries personal income taxes are neither comprehensive nor very progressive—they often amount to little more than withholding taxes on labor income in the formal sector. Moreover, the personal income tax plays such a small role in the tax systems of developing countries that it would be unrealistic to believe that this tax could have a meaningful impact on distribution. Second, it is not costless to pretend to have a progressive personal income tax system. Tax systems generate real administrative, compliance, economic efficiency and political costs. The costs associated with badly designed and badly administered personal income tax systems likely exceed the costs associated with other taxes. There are opportunity costs as well. Third, given the ineffectiveness of the personal income tax, if countries want to use the fiscal system to reduce poverty or reduce inequality, alternative approaches merit consideration. Countries need to make better use of their expenditure programs in targeting resources to the poor. Given the dominance of taxes on consumption in the tax structure of developing countries, the distributional consequences of consumption taxes are of far greater importance than those of the personal income tax. Countries can also make greater use of benefit taxation and in particular fiscal decentralization may allow for better matching of those who benefit and those who pay for government activity. Finally, countries can consider alternatives to taxing income other than the current comprehensive income approach.
    Keywords: Redistribution, Taxation, Personal Income, and Developing Countries
    Date: 2005–03–01
  10. By: Jameson Boex (Andrew Young School of Policy Studies, Georgia State University); Jorge Martinez-Vazquez (Andrew Young School of Policy Studies, Georgia State University)
    Abstract: Although the presence of objective formula-based grants is an important component of a stable, equitable and efficient system of intergovernmental fiscal relations, the final incidence of grants is not always according to what is stated in the formula because there are other intervening institutional factors. Furthermore, the intergovernmental grant mechanism itself is often a function of the same interests or forces that ultimately drive the incidence of grant resources. This paper relates the horizontal allocation of intergovernmental grants directly to their potential underlying determinants, including normative policy issues, voter choice arguments and political considerations. An international comparison of empirical incidence studies reveals that besides local expenditure needs and local fiscal capacity, other factors including political influence and a jurisdiction’s size play important and consistent roles in determining the horizontal allocation of per capita intergovernmental grants.
    Keywords: Intergovernmental grants, survey of international experience, horizontal allocation of grants
    Date: 2005–03–01
  11. By: Stuti Khemani
    Abstract: Normative theories of fiscal federalism postulate that intergovernmental transfers should be determined by equity and efficiency considerations, to support local governments in providing differentiated public goods to heterogeneous populations, while ensuring an even distribution of basic services across all regions (Musgrave, 1959, 1983; Oates, 1972; Gramlich, 1977). However, a recent surge of empirical evidence shows that variations in intergovernmental transfers to sub-national jurisdictions within countries cannot be explained by traditional concerns of equity and efficiency alone, and that political variables representing electoral incentives of public agents are additional and significant determinants.
    Keywords: Political Economy,Equalization Transfers, determinants
    Date: 2004–11–01
  12. By: Francesco De Sinopoli; Giovanna Iannantuoni
    Abstract: Most of the voting models restrict themselves to the analysis of symmetric equilibria, i.e. equilibria in which ‘similar’ voters make ‘similar’ voting decisions. In this paper we investigate this assumption under costly plurality voting. In any pure strategy equilibrium, if two active voters have the same preference order over candidates, they do vote for the same candidate. However, as an example shows, this type of result cannot be hoped for mixed strategies equilibria.
    Keywords: Strategic Voting, Symmetric Equilibria
    JEL: C72 D72
    Date: 2005–05
  13. By: Egorov, George; Sonin, Konstantin
    Abstract: The possibility of treason by a close associate has been a nightmare of most dictators throughout history. Better informed viziers are also better able to discriminate among potential plotters, and this makes them more risky subordinates for the dictator. To avoid this, dictators – especially those which are weak and vulnerable – sacrifice the competence of their agents, hiring mediocre but loyal subordinates. One reason why democracies generally witness more talented people in the government is the dictator’s inability to commit to the optimal (less than the capital) punishment for those who unsuccessfully plotted to remove him from power. Furthermore, any use of incentive schemes by a dictator is limited by the fact that rewards are conditional on dictator’s own willingness to keep his promises, while punishments are conditional on dictator’s own survival. We model a principal-agent game between a dictator and his (probably, few) viziers both in static and dynamic perspectives. The dynamic model allows us to focus on the succession problem the insecure dictators face.
    Keywords: dictatorship; formal political theory; principal agent
    JEL: D72 P16
    Date: 2004–12
  14. By: Carlos Maravall Rodriguez
    Abstract: Does electoral competition make candidates reveal information that voters value? I study this question in a Downsian model of a repeated election consistent with six stylized facts of US Presidential Elections: (i) there are two candidates/parties, (ii) they are longlived, (iii) there is majority rule, competition is over many issues at a time (iv) some on which voters disagree, (v) others on which they do not, and (vi) prior to the election, not all information that voters value is available to them. In this election, even if candidates compete in multidimensional space and appear ex-ante identical, Nash equilibria exist.
    Date: 2005–04
  15. By: Carlos Maravall Rodríguez
    Abstract: I study if the equilibria of the citizen-candidate model analyzed in Osborne and Slivinski (1996) are robust to some degree of commitment from candidates. In particular, I consider a technology that allows candidates to commit to any policy as long as they prefer it to any other in the race. That is, commitment is costless to positions closer to one’s ideal point than any other candidate’s position, but it is too costly to positions further away. If voters are sincere, as in the reference above, this ensures candidates always vote for themselves. I show that, for the most common population distributions, all the multiple candidate equilibria analyzed in the above reference are not equilibria in this model, as the unique equilibrium with four or less candidates has a single candidate entering.
    Date: 2005–04
  16. By: Carlos Maravall Rodríguez
    Abstract: I consider an election with candidate entry and a state variable that affects all players’ utility, as it translates their ideal points. Candidates are informed of the realization of the state, whilst voters are not. I study the effect of candidates’ commitment on equilibria. I show that if they cannot commit, their private information is of no consequence for the election (i.e. even in a decisiontheoretic sense). Instead, when they can commit this is a standard signaling game.
    Date: 2005–04
  17. By: Renneboog,Luc; Trojanowski,Grzegorz (Tilburg University, Center for Economic Research)
    Abstract: This paper examines the payout policies of UK firms listed on the London Stock Exchange during the 1990s. It complements the existing literature by analyzing the trends in both dividends and total payouts (including share repurchases). In a dynamic panel data regression setting, we relate target payout ratios to control structure variables. Profitability drives payout decisions of the UK companies, but the presence of strong block holders or block holder coalitions considerably weakens the relationship between corporate earnings and payout dynamics. While the impact of the voting power of shareholders coalitions on payout ratios is found to be always negative, the magnitude of this effect differs across different categories of block holders (i.e. industrial firms, outside individuals, directors, financial institutions). The controlling shareholders appear to trade off the agency problems of free cash flow against the risk of underinvestment, and try to enforce payout policies that optimally balance these two costs. Finally, the paper improves upon some methodological flaws of the recent empirical studies of payout policy.
    JEL: G35 G32 G30
    Date: 2005
  18. By: Sabina Avdagic
    Abstract: Abstract Europe's 'political space,' its dimensionality and its impact on European policies have received increased academic attention lately. Yet, one very basic element of this political space, the party composition of EU member states' governments, has never been studied in a systematic way in the rich literature on European integration. In this paper we explain why the EU literature would benefit from a closer analysis of Europe's party-political 'center of gravity.' We give a systematic overview of the party composition of member governments from 1957 to 2003. This includes analyses of how the support for integration, the left/right political conviction, and the ideological homogeneity or heterogeneity of the member states affected strictly intergovernmentalist EU institutions like the Council over the course of time. We draw on expert surveys, the data of the Comparative Manifesto Project, and data about government composition. Our case study about the fate of European social policy from the Treaty of Rome to the present day highlights the argument that analyses of European integration require an understanding of the party-political dimension of this process.
    Keywords: corporatism; institutions; leadership; political parties; political opportunity structure; post-Communism; power analysis; social democracy; trade unions; transition processes; transition processes
    Date: 2004–11–04
  19. By: alok k. bohara (u. new mexico); alejandro islas camargo (itam, mexico); theresa grijalva (weber state u.); kishore gawande (texas a&m)
    Abstract: How many dimensions adequately characterize voting on U.S. trade policy? How are these dimensions to be interpreted? This paper seeks those answers in the context of voting on the landmark 1988 Omnibus Trade and Competitiveness Act. The paper takes steps beyond the existing literature. First, using a factor analytic approach, the dimension issue is examined to determine whether subsets of roll call votes on trade policy are correlated. A factor-analytic result allows the use of a limited number of votes for this purpose. Second, a structural model with latent variables is used to find what economic and political factors comprise these dimensions. The study yields two main findings. More than one dimension determines voting in the Senate, with the main dimension driven by economic interest, not ideology. Although two dimensions are required to fully account for House voting, one dimension dominates. That dimension is driven primarily by party. Based on reported evidence, and a growing consensus in the congressional studies literature, this finding is attributed to interest-based leadership that evolves in order to solve collective action problems faced by individual legislators.
    Keywords: Dimensionality; Roll call voting; Omnibus Trade Act; Interest; Ideology
    JEL: F1 F2
    Date: 2005–05–03
  20. By: David E. Clark (Department of Economics, Marquette University); Robert Griffin (Department of Communications, Marquette University); Vladimir Novoty (Department of Civil and Enviornmental Engineering, Northeastern University)
    Abstract: The urbanization of urban watersheds can influence flooding risks. Traditional Federal Emergency Management Agency (FEMA) flood risk maps identify 100 year floodplains. These maps are updated infrequently. However, as a community urbanizes, flood risks can change, especially for downstream residents. Thus, one would expect that the willingness to pay (WTP) to prevent the worsening of flooding risk would depend in part on the location of the household in the community and their associated flooding risk. Economists and regional scientists have evaluated the role played by traditional demographic factors. However, attitudinal factors measuring community norms, political philosophy, and other psychological factors that may be unique to the individual have not received the same level of scrutiny. Milwaukee, WI has experienced major flooding events, classified as floods with an expected frequency of once every 100 years or less, in 1986 and most recently in 1997 and 1998. In this study, 1000 residents of the Menomonee watershed in Milwaukee were interviewed in a two-wave panel survey (i.e., telephone interviews took place in 2000 and 2001) to determine their willingness to pay for a referendum which would prevent flood risks from worsening. The interviews queried respondents about their attitudes concerning flooding and ecological risks, political beliefs, information seeking behavior, and other psychological factors unique to the respondent. Information was also gathered on demographic characteristics of the respondent, and also that individuals address. The address was geocoded and hydrologic modeling was used to determine the unique flood risk associated with the residence. A willingness to pay function was estimated using Tobit analysis. Preliminary findings indicated that all three categories of factors influence willingness to pay, with psychological factors and flood risk factors having a relatively strong impact on willingness to pay. Paper prepared for the 2005 Annual Meetings of the Midcontinent Regional Science Association and the Southern Regional Science Association in Arlington VA, April 8-10, 2005. PLEASE DO NOT QUOTE WITHOUT PERMISSION.
    Date: 2005–04
  21. By: Peter Wilson (Department of Economics, National University of Singapore); Gavin Peebles
    Abstract: In this paper we explore the links between Singapore’s foreign exchange rate regime since 1981 and the broader aspects of its political economy. Singapore has been remarkably successful in achieving fast growth, low and stable price inflation and a strong external position. An important part of this strategy has been its managed floating exchange rate regime, which is generally regarded as being successful, but this needs to be viewed within the broader context of the government’s ‘pragmatic socialism’ to keep inflation low and stable as the bedrock for attracting inflows of mobile foreign capital to sustain long-run export competitiveness, and an economic strategy based on high levels of centralized saving and investment, a high degree of government involvement in the economy and the relentless accumulation of foreign exchange reserves. Indeed, part of the reason why managed floating has been successful in Singapore has been because the credibility of monetary policy has been enhanced through the government’s command over resources and its ability to respond quickly and flexibly to changes in economic circumstances using, where necessary, unorthodox policies of demand management to cut business costs. Exchange rate policy, therefore, becomes an integral part of the policy to redistribute income to capital to sustain employment and prevent mobile firms from leaving Singapore. By the early 1990s the imperative became to diversify the structure of the economy away from exclusive reliance on a predominantly foreign manufacturing base and to reduce the extent of government involvement in the economy and it became harder to justify high levels of centralized saving and investment. The dilemma is that the government is finding it difficult to extricate itself from the economy without compromising policy effectiveness, and there is little evidence that dependence of the economy on foreign capital and labour has diminished.
    Keywords: Exchange Rate, People’s Action Party, Political Economy, Singapore
    JEL: F4 O10 P16

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