nep-pol New Economics Papers
on Positive Political Economics
Issue of 2005‒06‒05
sixteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Politicians' Motivation, Role of Elections, and Policy Choices By Phongthorn Wrasai
  2. Trust and Fiscal Performance: A Panel Analysis with Swiss Data By Benno Torgler; Christoph A. Schaltegger
  3. Preferences regarding road transports of hazardous materials using choice experiments - any sign of biases? By Hiselius, Lena Winslott
  4. Special Interest Politics and Trade Policy – An Empirical Challenge By Belfrage, Carl-Johan
  5. Determining the Level of Transportation Costs in the Core-Periphery Model: a Majority Voting Approach By Gallo, Fredrik
  6. The Case for Utilitarian Voting By Hillinger, Claude
  7. Inequality, redistribution and the allocation of public spending in education. A political-economy approach. By Debora Di Gioacchino, Sergio Ginebri, Laura Sabani
  8. South Korea's Experience with International Capital Flows By Marcus Noland
  9. A Simple Scheme to Improve the Efficiency of Referenda By Alessandra Casella; Andrew Gelman
  10. Wealth distribution, endogenous fiscal policy and growth: status-seeking implications. By Thi Kim Cuong PHAM
  11. Political Election on Legal Retirement Age By Juan Antonio Lacomba; Francisco Miguel Lagos
  12. Postponing the Legal Retirement Age By Juan Antonio Lacomba; Francisco Miguel Lagos
  13. Political Relationships, Global Financing and Corporate Transparency By Christian Leuz; Felix Oberholzer-Gee
  14. Direct Democracy: Designing a Living Constitution By Bruno S. Frey; Alois Stutzer
  15. Do Large Cabinets Favor Large Governments? Evidence from Swiss Sub-federal Jurisdictions By Christoph A. Schaltegger; Lars P. Feld
  16. The Role of Direct Democracy and Federalism in Local Power By Bruno S. Frey; Alois Stutzer

  1. By: Phongthorn Wrasai (Faculty of Economics, Erasmus Universiteit Rotterdam)
    Abstract: We develop a simple two period model to study the importance of motivational differences among politicians in describing the role of elections and explaining policy choices. In our model, politicians differ in their motives of running public office. Good politicians care about policies while bad politicians care about rent extraction. Voters want to control politician misbehavior and to select good politicians. We show that reelection concerns may compel a good politician not to implement a socially desirable policy if he sufficiently cares about the future. Second, reelection concerns may induce a bad politician not to undertake a socially undesirable policy. The reason for this is fear of being ruled by another bad politician if unseated. This finding exhibits the disciplining function of elections. A striking result in our paper is that bad politicians may act more in tune with the public interest relative to the good politicians.
    Keywords: Politicians' Motivation; Role of Elections; Policy Choices
    JEL: D72 D78 D82
    Date: 2005–05–26
  2. By: Benno Torgler (Yale Center for International and Area Studies); Christoph A. Schaltegger (Swiss Federal Tax Administration University of St. Gallen and CREMA, Center for Research in Economics, Management and the Arts)
    Abstract: Citizens are willing to abandon their short-term financial interest in free-riding considerably, if governments act in their interest, if procedures of the public decisions-making process are felt to be fair and if other fellow-citizens have to contribute also an adequate share to the community. In such a situation trustworthiness of a government and trust in a government is high. This paper provides empirical evidence that trust is crucial for fiscal performance using data for the full sample of Swiss cantons over the 1981-2001 period. In cantons with high levels of trust, the level of indebtedness is significantly lower. Trust supports fiscal discipline. In order to get a useful approximation for mutual trust among citizens and between citizens and their representatives, we use information from direct voter participation on political issues (initiatives and public referenda) held in Swiss state (cantonal) governments. Electoral support of government proposals reveals an important aspect of trust in a real world setting. Hence, our trust variable measures the behavior at the ballots thereby reducing possible subjective biases derived from surveys and questionnaires.
    Keywords: Trust, Social capital, Fiscal performance, Indebtedness
    JEL: Z13 H11 O17 D72 E62
    Date: 2005–05
  3. By: Hiselius, Lena Winslott (Department of Economics, Lund University)
    Abstract: This paper uses the choice experiment approach to assess people's preferences regarding road transports of hazardous materials. In a mail survey, carried out in Stockholm, the capital of Sweden, changes in exposure to hazardous materials are used as a proxy for changes in accident risk. The results are analysed in the light of an earlier study on transports of hazardous materials by rail. Special attention is given to biases associated with the choice experiment method. The presence of hypothetical bias is studied by the use of self-reported degree of confidence that the respondent would vote the same way in a real referendum. The presence of a focusing effect is studied by an inclusion of information on other fatal risks. The indication is that there are no major differences in individual preferences for hazmat transported by rail or road. The estimates are also dependent on the confidence of stated choices and interpreting this dependence as a hypothetical bias, suggest that this type of bias tends to push estimated values downwards. The findings show that individual background data regarding transports of hazardous materials affect individuals in expected ways and there is no focusing effect.
    Keywords: Biases; Hazardous materials; Risk; Choice experiments
    JEL: C25 D61 D81 R41
    Date: 2005–05–23
  4. By: Belfrage, Carl-Johan (Department of Economics, Lund University)
    Abstract: The model of protectionist support for individual industries as an endogenous outcome of special interest politics pioneered by Grossman and Helpman (1994) is generalized and then empirically examined using data for a number of OECD countries and regions. Cross-sectional regressions are performed on the full sample,as well as on individual countries. The model generally holds up quite well to this empirical challenge. The estimates indicate that equilibrium ratios of special interest to general interest marginal utilities (with respect to protection levels) vary positively with protection levels as the theory has led us to expect. Terms of trade concerns seem important to the larger countries in our sample as implied by the present generalization of the GH model (as well as by the optimum tariff literature), but the influence of downstream interests does not come across in the estimates. The results seem robust also to inclusion of variables reflecting exogenous political concerns (indicated as relevant in other studies), although those bring a substantial addition to predictive power which strengthens the impression that (what is endogenously derived in) the GH model only captures a limited share of the considerations underlying trade policy decisions.
    Keywords: Trade policy; Lobbying; Special interest groups
    JEL: F13
    Date: 2004–06–03
  5. By: Gallo, Fredrik (Department of Economics, Lund University)
    Abstract: We analyse the political determination of transportation costs in an analytically solvable core-periphery model. In a benchmark case with certainty about where agglomeration takes place, we find that a majority of voters prefers low trade costs and the resulting equilibrium is an industrialised core and a de-industrialised periphery. Allowing for uncertainty we show that a high trade cost candidate, that guarantees the initial symmetric equilibrium, may defeat the core-periphery equilibrium candidate. The reason is that a coalition of risk-averse immobile factors of production votes for status quo due to uncertainty about which region that will attract industrial activity.
    Keywords: core-periphery model; majority voting; new economic geography; regional policy
    JEL: F12 F15 R12
    Date: 2005–05–31
  6. By: Hillinger, Claude
    Abstract: Utilitarian voting (UV) is defined in this paper as any voting rule that allows the voter to rank all of the alternatives by means of the scores permitted under a given voting scale. Specific UV rules that have been proposed are approval voting, allowing the scores 0, 1; range voting, allowing all numbers in an interval as scores; evaluative voting, allowing the scores -1, 0, 1. The paper deals extensively with Arrow's impossibility theorem that has been interpreted as precluding a satisfactory voting mechanism. I challenge the relevance of the ordinal framework in which that theorem is expressed and argue that instead utilitarian, i.e. cardinal social choice theory is relevant for voting. I show that justifications of both utilitarian social choice and of majority rule can be modified to derive UV. The most elementary derivation of UV is based on the view that no justification exists for restricting voters? freedom to rank the alternatives on a given scale.
    JEL: D72 D71
    Date: 2005–05
  7. By: Debora Di Gioacchino, Sergio Ginebri, Laura Sabani
    Abstract: The incidence of public expenditure in education appears to be skewed in favour of the middle and upper classes. This paper inquires into the determinants of this bias using a political economy approach. We develop a model with two time periods with an election occurring between the two. In the first period, agents differ in their initial wealth. In the second period, differences in wealth are combined with differences in income. In the first period, the incumbent government issues debt to finance public spending in education and decides how to allocate available resources between primary and tertiary education. Both increase aggregate income, but while investment in primary education reduces income inequality, investment in tertiary education increases it. At the beginning of the second period, a two-party electoral competition is held and probabilistic voting decides the winner. By varying the parameters of the linear income tax, the elected policy-maker can redistribute resources between low and high income individuals, while by choosing a debt default rate she can renege on the promise to fully repay public obligations, redistributing resources from bond-holders to tax-payers. We show that the investment in primary education might not be (politically) viable. Intuitively, investment in primary education, by reducing income inequality with respect to wealth inequality, might increase the desired debt default rate of future policy makers, making issuing debt to finance primary education unfeasible.
    Keywords: policy choices in representative democracies, public investment in education, redistribution, government debt repayment.
    JEL: D78 H63 H42 I28
    Date: 2005–05–27
  8. By: Marcus Noland
    Abstract: South Korea%u2019s experience is unparalleled in its combination of sustained prosperity, capital controls, and financial crisis. Over several decades, South Korea experienced rapid sustained growth in the presence of capital controls. These controls and the de-linking of domestic and international financial markets were an essential component of the country's state-led development strategy. As the country developed, opportunities for easy technological catch-up eroded, requiring more sophisticated corporate and financial sector decision-making, but decades of financial repression had bequeathed a bureaucratized financial system and a formidable constellation of incumbent stakeholders opposed to transition to a more market-oriented development model. Liberalization undertaken in the 1990s was less a product of textbook economic analysis than of parochial politicking. Capital account liberalization program affected the timing, magnitude, and particulars of the 1997-98 crisis. Despite considerable reforms undertaken since the crisis, concerns remain about both South Korea%u2019s lending culture and its authorities%u2019 capacity to successfully regulate the more complex financial system. The main lesson of the South Korean case appear to be that while the state-led model may deliver impressive initial gains, transitioning out of this approach presents an exceedingly complex challenge of political-economy.
    JEL: F3
    Date: 2005–05
  9. By: Alessandra Casella; Andrew Gelman
    Abstract: This paper proposes a simple scheme designed to elicit and reward intensity of preferences in referenda: voters faced with a number of binary proposals are given one regular vote for each proposal plus an additional number of bonus votes to cast as desired. Decisions are taken according to the majority of votes cast. In our base case, where there is no systematic difference between proposals' supporters and opponents, there is always a positive number of bonus votes such that ex ante utility is increased by the scheme, relative to simple majority voting. When the distributions of valuations of supporters and opponents differ, the improvement in efficiency is guaranteed only if the distributions can be ranked according to first order stochastic dominance. If they are, however, the existence of welfare gains is independent of the exact number of bonus votes.
    Date: 2005–05
  10. By: Thi Kim Cuong PHAM
    Abstract: We investigate the wealth distribution and endogenous fiscal policy in a two-classes growth model in which individuals exhibit a desire for social status. The latter is in- creasing with individual wealth and decreasing with the average level of the society. First, we show that status seeking is crucial in determining the long-run wealth dis- tribution: agents with stronger status motive end up holding a higher level of wealth. Second, a higher inequality can be associated with a higher growth if it is due to a stronger incentive to accumulate wealth of one class of agents. Third, the model implies that a higher growth rate may reduce welfare of one class of agents and raise welfare of the other one. Finally, when fiscal policy is determined through a voting mechanism, an increase in the strength of status motive of majoritarian class may lead to a reduced political equilibrium growth.
    Keywords: Individual welfare; endogenous growth; endogenous Þscal policy; status seeking; wealth distribution
    JEL: D31 H31 H50 O41
    Date: 2004
  11. By: Juan Antonio Lacomba (Department of Economic Theory and Economic History, University of Granada); Francisco Miguel Lagos (Department of Economic Theory and Economic History, University of Granada)
    Abstract: We use a lifecycle model in which individuals di ffer by age and by wage in order to analyze a pairwise majority voting process on the legal retirement age. We consider two di fferent retirement regimes. In the first one the retirees do not return to the labor market, regardless the new retirement age. In the second one, they have to return if this age is higher than her own age. We show that the final outcome of the voting process will crucially depend on the retirement regime as well as on the parameters of the Social Security, that is, the redistributive character of the system and the present legal retirement age.
    Date: 2005–06–01
  12. By: Juan Antonio Lacomba (Department of Economic Theory and Economic History, University of Granada); Francisco Miguel Lagos (Department of Economic Theory and Economic History, University of Granada)
    Abstract: This paper analyzes the reform of the pensionable age as an answer to the future financing problems of public pension systems. We use a two-staged model where, firstly, the government decides the redistribution level of the pension system, and, secondly, individuals face a voting process on the legal retirement age. Our results suggest that an increase in the re-distributive character of the system could lead to a larger social consensus to postpone the legal retirement age. Surprisingly, it could be the case that the richest people would support more redistribution if that implies to postpone the pensionable age.
    Keywords: Legal retirement age, pension benefits, redistribution level
    JEL: D72 D91 H55
    Date: 2005–06–01
  13. By: Christian Leuz; Felix Oberholzer-Gee
    Abstract: This study examines the financing choices of firms operating in a weak institutional environment. We argue that in relationship-based systems, global financing and political connections are substitutes: Well-connected firms are less likely to access foreign capital markets because (state-owned) domestic banks provide capital at low cost. Moreover, the additional scrutiny that comes with foreign securities might be at odds with close political ties at home. Using data from Indonesia, we provide strong support for this hypothesis. Firms with close political ties to former President Soeharto are significantly less likely than non-connected firms to have publicly traded foreign securities. We also examine how returns before and during the Asian financial crisis differ between firms with and without foreign securities. The former performed significantly better during the crisis, and their performance advantage increases considerably once we control for a firm’s closeness to the Soeharto regime. We show that simple return regressions in earlier work are downward biased if domestic opportunities such as political connections are ignored.
    Keywords: Disclosure; Cross listing; Financing choices; Emerging market economies; Asian financial crisis; Indonesia; Cost of capital
    JEL: P16 G32 G38 K22 K42 M41 G18
    Date: 2003–08
  14. By: Bruno S. Frey; Alois Stutzer
    Abstract: A crucial aspect of constitutional design is the provision of rules on how a constitution is to be amended. If procedures for constitutional amendment are very restrictive, changes will take place outside the constitution. These changes are likely to be against the citizens’ interests and their ability to influence the political process. We argue that the development of the constitution must be based on the rule of law. We propose direct democratic rights that allow citizens to participate in the amendment process. The direct democratic process of institutional change is theoretically and empirically analyzed. A number of counter arguments and issues for a gradual introduction are discussed.
    Keywords: collective decision-making; constitutional design; constitutional economics; direct democracy
    JEL: D72 H1 H7
    Date: 2003–09
  15. By: Christoph A. Schaltegger; Lars P. Feld
    Abstract: The fiscal commons problem is one of the most prominent explanations of excessive spending and indebtedness in political economics. The more fragmented a government, the higher its spending, deficits and debt. In this paper we investigate to what extent this problem can be miti-gated by different fiscal or constitutional institutions. We distinguish between two variants of fragmented governments: cabinet size and coalition size. Theoretically, they both describe the degree to which the costs of spending decisions are internalized by individual decision-makers. In addition, we evaluate whether constitutional rules for executive and legislation as well as budget rules shape the size of government and how the different rules interact with fragmentation in de-termining government size. The empirical study of the role of fragmented governments for fiscal policy outcomes is based on a panel of the 26 Swiss cantons over the 1980-1998 period. The re-sults indicate that the number of ministers in the cabinet is negatively associated with fiscal disci-pline. Furthermore, the fiscal referendum does effectively restrict the fiscal commons problem, but less successfully than the budget rule.
    Keywords: Fragmentation; Fiscal Policy; Referendums; Legislative Rules; Budget Rules
    JEL: E61 E63 H61
    Date: 2004–07
  16. By: Bruno S. Frey; Alois Stutzer
    Abstract: Alienation to politics weakens political competition and can undermine the acceptance and legitimacy of democracy as a political system. Governance and representation problems at the local level cause part of citizens’ lack of power and political alienation. Citizens have local power if they can influence the political process so that its outcomes are closer to their preferences and if they feel to be effective in the political sphere. In order to increase citizens’ local power, we emphasize the role of institutions of local governance. Local democratic governance is concerned about the relationship between citizens and local government institutions, political representatives and officials. This relationship is fundamentally shaped by the federal structure of a nation’s government and by the scope and depth of citizens’ participation possibilities in the political process.
    Keywords: collective decision-making; constitutional design; constitutional economics; direct democracy; fiscal federalism; local governance; local power; participation
    JEL: D70 D71 D72 H10 H77
    Date: 2004–10

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