nep-pol New Economics Papers
on Positive Political Economics
Issue of 2005‒05‒23
sixteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Trade Agreements Based on Political Externalities, Second Version By Wilfred J. Ethier
  2. ON ASYMMETRIC BEHAVIORS IF VOTING IS COSTLY By Francesco De Sinopoli; Giovanna Iannantuoni
  4. Tax policy design in the presence of social preferences: some experimental evidence By Lucy F. Ackert; Jorge Martinez-Vazquez; Mark Rider
  5. Human capital and economic development By Robert Tamura
  6. Trade liberalization and the politics of financial development By Matías Braun; Claudio Raddatz
  7. The macroeconomics of child labor regulation By Matthias Doepke; Fabrizio Zilibotti
  8. The politics of central bank independence: a theory of pandering and learning in government By Gauti Eggertsson; Eric Le Borgne
  9. A Theory of Bicameralism By Giovanni Facchini; Cecilia Testa
  10. "An Eye for an Eye, a Tooth for a Tooth." A Study of Political Violence and Counter-insurgency in Egypt By David Fielding; Anja Shortland
  11. The Political Economy of Financial Liberalisation By Sourafel Girma; Anja Shortland
  13. Can Domestic Institutions Explain Exchange Rate Regime Choice? The Political Economy of Monetary Institutions Reconsidered By Beth Simmons; Jens Hainmueller
  14. Incumbency Effects in German and British Elections: A Quasi- Experimental Approach By Jens Hainmueller; Holger Lutz Kern
  15. The Effects of Constitutions on Coalition Governments in Parliamentary Democracies By Daniel Diermeier; Hulya Eraslan; Antonio Merlo
  16. The political economy of job protection and income redistribution. By Bruno Amable; Donatella Gatti

  1. 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. This paper introduces inter-governmental political externalities into a model with terms-of-trade externalities. It delivers results consistent with what we actually observe, and thus resolves the puzzles, if and only if political externalities dominate terms-of-trade externalities.
    Keywords: Political externalities, trade agreements, reciprocity, the Received Theory, the Terms-of-Trade Puzzle, the Anti-Trade-Bias Puzzle
    JEL: F02 F13
    Date: 2002–11–23
  2. 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.
    Date: 2005–05
  3. By: Francesco De Sinopoli; Giovanna Iannantuoni
    Abstract: We study the strategic behavior of voters in a model of proportional representation, in which the policy space is multidimensional. Our main finding is that in large electorate, under some assumptions on voters' preferences, voters essentially vote, in any equilibrium, only for the extreme parties.
    Date: 2005–05
  4. By: Lucy F. Ackert; Jorge Martinez-Vazquez; Mark Rider
    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 among 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.
    Date: 2004
  5. By: Robert Tamura
    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 among 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.
    Date: 2004
  6. By: Matías 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 equilibrium level of financial system. This may be perturbed by the effect of trade liberalization on the strength of each group. Using a sample of 41 trade liberalizers, we 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 induce 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.
    Keywords: International trade ; Financial modernization
    Date: 2004
  7. By: Matthias Doepke; Fabrizio Zilibotti
    Abstract: We develop a positive theory of the adoption of child labor laws. Workers who compete with children in the labor market support the introduction of a child labor ban, unless their own working children provide a large fraction of family income. Since child labor income depends on family size, fertility decisions lock agents into specific political preferences, and multiple steady states can arise. The introduction of child labor laws can be triggered by skill-biased technological change that induces parents to choose smaller families. The model replicates features of the history of the U.K. in the nineteenth century, when regulations were introduced after a period of rising wage inequality, and coincided with rapidly declining fertility rates.
    Date: 2005
  8. By: Gauti Eggertsson; Eric Le Borgne
    Abstract: We propose a theory to explain why, and under what circumstances, a politician endogenously gives up rent and delegates policy tasks to an independent agency. Applied to monetary policy, this theory (i) formalizes the rationale for delegation highlighted by Alexander Hamilton, the first Secretary of the Treasury of the United States, and by Alan S. Blinder, former Vice Chairman of the Board of Governors of the Federal Reserve System; and (ii) does not rely on the inflation bias that underlies most existing theories of central bank independence. Delegation trades off the cost of having a possibly incompetent technocrat with a long-term job contract against the benefit of having a technocrat who (i) invests more effort into the specialized policy task and (ii) has less incentive to pander to public opinion than a politician. Our key theoretical predictions are broadly consistent with the data.
    Keywords: Banks and banking, Central ; Monetary policy ; Political science
    Date: 2005
  9. By: Giovanni Facchini (University of Illinois, Department of Economics); Cecilia Testa (Department of Economics, Royal Holloway, University of London)
    Abstract: We model the role of a parliament’s structure in shaping the accountability of elected representatives. In a setting in which lawmakers interact with a lobby through a bargaining process and with voters by means of elections, we show that only a single legislative body who can make take it or leave it offers to the lobby can be held unambiguously accountable to voters. Whenever the pressure group enjoys some bargaining power, two chambers might instead provide better discipline, depending on the rules governing their interaction, and in particular the allocation of the decision powers among them. We show that bicameralism with restricted amendment rights provides the best incentives, while unrestricted amendment rights result in a status quo bias. Furthermore, by adding complexity of the legislative process, the presence of a second chamber might lead to an undesirable outcome, i.e. a decline in the legislator’s bargaining power vis `a vis the lobby and a reduction in his accountability. Arguments suggesting that bicameralism is a panacea against the abuse of power by elected legislators should therefore be taken with due caution.
    Keywords: Lobbying, bargaining, elections, accountability, bicameralism.
    JEL: D72 C78
    Date: 2005–03
  10. By: David Fielding; Anja Shortland
    Abstract: This paper analyses a newly collected time-series database measuring the dimensions of violent political conflict in Egypt. Attention is focused on the interaction between politically motivated attacks by Islamists and the counter-insurgency measures used by the Egyptian government. The intensity of security force activities responds immediately to all kinds of Islamist violence, regardless of the target of the attack. However, there are significant asymmetries in the way that the different forms of Islamist violence respond to the different security force activities.
    Keywords: Egypt, Islamist violence; counter-insurgency; political rights; civil liberties
    Date: 2005–05
  11. By: Sourafel Girma; Anja Shortland
    Abstract: Political economy theories of financial development argue that in countries where a narrow elite controls political decisions, financial development may be deliberately obstructed to deny access to finance to potential competitors. This paper empirically examines whether the level of liberalisation of the banking system, the stock market and capital account depend on regime characteristics, using panel data from 26 countries from 1973 - 1999. Our results show that it is predominantly fully democratic regimes that have liberalised financial systems. Countries that are not fully democratic have a lower probability of having liberal banking systems and capital accounts and this probability decreases with increasing democratisation. This suggests that the attractiveness of using financial levers to allocate funds in the economy increases with the amount of competition the government faces.
    Keywords: Financial Repression; Liberalisation;Politics
    JEL: O16 D78 D72
    Date: 2005–05
  12. By: Axel Dreher (Thurgau Institute of Economics & University of Konstanz); Roland Vaubel (University of Mannheim)
    Abstract: By combining expansionary open market operations with sales of foreign exchange, the central bank can expand the monetary base without depreciating the exchange rate. Thus, if there is a monetary political business cycle, sales of foreign exchange are especially likely before elections. Our panel data analysis for up to 158 countries in 1975-2001 supports this hypothesis. Foreign exchange reserves relative to trend GDP depend negatively on the pre-election index regardless of the exchange rate system. The relationship is significant and robust irrespective of the type of electoral variable, the choice of control variables and the estimation technique.
    Keywords: Foreign exchange interventions, political business cycles
    JEL: F31 E58
    Date: 2005–05–18
  13. By: Beth Simmons (Harvard University); Jens Hainmueller (Harvard University)
    Abstract: Recent articles in International Organization and elsewhere have explored the role of domestic institutions in shaping exchange rate regime choice. These articles use some variation on the information reported by governments to the International Monetary Fund as their dependent variable. Even more recently, new data have become available that reflect actual (de facto) rather than declaratory (de jure) policies with respect to exchange rate regimes. The findings of the domestic institutionalists are significantly weakened, and in some cases reversed, when this more appropriate measure is used to test their claims. These tests cast doubt on whether a domestic institutional focus is the most fruitful way to study exchange rate regimes.
    Keywords: Exchange rate choiche, Political Economy of Monetary Institutions
    JEL: F3 F4
    Date: 2005–05–19
  14. By: Jens Hainmueller (Harvard University); Holger Lutz Kern (Cornell University)
    Abstract: Following the recent turn towards quasi-experimental approaches in the US literature on the incumbency advantage (Lee, 2001; Lee, forthcoming), we employ a Regression Discontinuity Design (RDD) to identify the causal effects of party incumbency in British and German post-World War II elections. The RDD framework exploits the randomized variation in incumbency status that occurs when a district race is close. Based on the assumption that parties do not exert perfect control over their observed vote shares, incumbents that barely won a race should be similar in their distribution of observed and unobserved confounders to non-incumbents that barely lost. This provides us with a naturally occurring counterfactual exploitable for causal inference under a weaker set of assumptions than conventional regression designs commonly used in the incumbency literature. In both British and German federal elections, we find that party incumbency has a signifcant positive impact on vote shares and the probability of winning in marginal districts, the sub- population of interest for which incumbency advantage is likely to make a difference. This stands in contrast to previous more ambiguous findings.
    Keywords: incumbency advantage, quasi-experiment, Germany, Great Britain, elections, causal inference
    JEL: D6 D7 H
    Date: 2005–05–19
  15. By: Daniel Diermeier (Kellogg School of Management,Northwestern University); Hulya Eraslan (Finance, Wharton School, University of Pennsylvania); Antonio Merlo (Department of Economics, University of Pennsylvania)
    Abstract: In this article we present an overview of our recent research on the effects of constitutions on coalition governments in parliamentary democracies. Our approach is based on the solution and estimation of a multilateral bargaining model which we use to investigate the consequences of constitutional features of parliamentary democracy for the formation and stability of coalition governments.
    Keywords: Political Stability, Coalition Governments, Constitutional Design
    JEL: D72 H19 C73
    Date: 2003–12–01
  16. By: Bruno Amable; Donatella Gatti
    Abstract: This paper presents a model allowing to analyze voting, welfare institutions and economic performance. We consider a political economy framework with three classes of agents: entrepreneurs, employed workers and unemployed workers. Agents vote on alternative institutional options: the degree of labour market flexibility and the intensity of redistribution. We show that the welfare state configuration depends on the nature of the political system - majoritarian, coalition, twoparty. Because internationalization reduces the possibility for national government to e.ectively tax profits, the existing political coalition is fragilized by the process of globalization. The model generates results concerning the macroeconomic equilibrium employment level. Hence we can assess the effects of internationalization on macroeconomic performance. The impact of internalization depends on the nature of the political system (majoritarian versus coalition government) and on the institutional configuration (positive flexibility versus positive redistribution).
    Date: 2005

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