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on Positive Political Economics |
| By: | Gene M. Grossman; Elhanan Helpman |
| Abstract: | Polities differ in the extent to which political parties can pre-commit to carry out promised policy actions if they take power. Commitment problems may arise due to a divergence between the ex ante incentives facing national parties that seek to capture control of the legislature and the ex post incentives facing individual legislators, whose interests may be more parochial. We study how differences in %u201Cparty discipline%u201D shape fiscal policy choices. In particular, we examine the determinants of national spending on local public goods in a three-stage game of campaign rhetoric, voting, and legislative decision-making. We find that the rhetoric and reality of pork-barrel spending, and also the efficiency of the spending regime, bear a non-monotonic relationship to the degree of party discipline. |
| JEL: | D72 H41 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11396&r=pol |
| By: | Karacaovali, Baybars; Limão, Nuno |
| Abstract: | There has been an explosion in the number of preferential trade agreements (PTAs) in the last decade. PTAs are characterized by liberalization with respect to only a few partners and thus, they can potentially clash with and retard multilateral trade liberalization (MTL). Despite this important concern with PTAs, there is almost no systematic evidence on whether they actually affect MTL or not. We model the effect of PTAs on MTL and show that PTAs slow down MTL unless they have a common external tariff and allow for internal transfers. Next, we use detailed data on product-level tariffs negotiated by the European Union in the last two multilateral trade rounds to structurally estimate our model. We confirm the main prediction – the European Union's PTAs have clashed with its MTL – and find that the effect is quantitatively significant. Moreover, we also confirm several auxiliary predictions of the model and provide new evidence on the political economy determinants of MTL in the European Union. |
| Keywords: | MFN tariff concessions; multilateral trade negotiations; preferential trade agreements |
| JEL: | D78 F13 F14 F15 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4973&r=pol |
| By: | Schwarz, Michael; Sonin, Konstantin |
| Abstract: | Many conflicts and negotiations can be viewed as a dynamic game, where parties have no commitment power. In our model, a potential aggressor demands concessions from the weaker party by threatening a war. The absence of commitment makes a continuous stream of transfers a more effective appeasement strategy than a lump sum transfer. Based on such a strategy, it is possible to construct a self-enforcing peace agreement between risk-neutral parties, even if transfers shift the balance of power. When parties are risk-averse, a self-enforcing peace agreement may not be feasible. The bargaining power of the potential aggressor increases dramatically if she is able to make probabilistic threats, e.g. by taking an observable action that leads to war with positive probability. This ‘brinkmanship strategy’ allows a blackmailer to extract a positive stream of payments from the victim even if carrying out the threat is harmful to both parties. Our results are applicable to environments ranging from diplomacy to negotiations within or among firms, and are aimed to bring together ‘parallel’ investigations in the nature of commitment in economics and political science. |
| Keywords: | brinkmanship; commitments; conflicts; war and peace |
| JEL: | C78 D74 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5075&r=pol |
| By: | Azam, Jean-Paul; Bates, Robert H; Biais, Bruno |
| Abstract: | Economic growth occurs as resources are reallocated from the traditional sector to the more productive modern sector. Yet, the latter is more vulnerable to political predation. Hence, political risk hinders development. We analyse a politico-economic game between citizens and governments, whose type (benevolent or predatory) is unknown to the citizens. In equilibrium, opportunistic governments mix between predation and restraint. As long as restraint is observed, political expectations improve and the economy grows. Once there is predation, the reputation of the current government is ruined and the economy collapses. If citizens are unable to overthrow this government, the collapse is durable. Otherwise, a new government is drawn and the economy can rebound. Equilibrium dynamics are characterized as a Markov chain. Consistent with stylized facts, equilibrium political and economic histories are random, unstable and exhibit long-term divergence. Our theoretical model also generates new empirical implications on the joint dynamics of income inequality, output and political variables. |
| Keywords: | Economic Development; Political Economy; political predation; reputation |
| JEL: | D82 H11 O00 O17 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5062&r=pol |
| By: | Eugene Beauliue (Univeristy of Calgary & International Trade Canada); Ravi Yatawara (University of Delaware); Wei Guo Wang (University of Calgary) |
| Abstract: | This paper examines individual trade policy preferences across the 17 countries in Latin America. The focus is on whether skilled or unskilled workers are more likely to support liberalized trade and on whether country characteristics, such as factor endowments, alter the preferences of skilled and unskilled workers. Based on the standard Heckscher-Ohlin model and the Stolper-Samuelson theorem, wage inequality in developing countries will decrease under free trade and unskilled workers will benefit. We find that on average skilled workers are more likely than unskilled workers to support free trade in Latin American countries. Separate country regressions reveal that this pattern is only statistically significant in 8 out of 17 Latin American countries. However, there are no countries in our sample in which unskilled workers are statistically more likely to support free trade than skilled workers. Not even in the lowest skill endowed country among our 17 Latin American countries. We also find that people from Latin American countries with higher GDP, faster growth, more cropland, and a longer period of time since reform were more likely on average to support free trade. |
| Keywords: | Trade policy; Latin America; Stolper-Samuelson theorem |
| JEL: | F1 F2 |
| Date: | 2005–06–04 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpit:0506002&r=pol |
| By: | Fernández, Raquel; Levy, Gilat |
| Abstract: | In this paper we analyze the interaction of income and preference heterogeneity in a political economy framework. We ask whether the presence of preference heterogeneity (arising, for example, from different ethnic groups or geographic locations) affects the ability of the poor to extract resources from the rich and, conversely, whether income inequality affects which preferences are given precedence in society. We study the equilibrium of a game in which coalitions of individuals form parties, parties propose platforms, and all individuals vote, with the winning policy chosen by plurality. Political parties are restricted to offering platforms that are credible (in that they belong to the Pareto set of their members). The platforms specify the values of two policy tools: a general redistributive tax which is lump-sum rebated (or used to fund a general public good) and a series of taxes whose revenue is used to fund specific (targeted) goods tailored to particular preferences or localities. Individuals differ both in income and also as to whether they receive utility from some specific good. Our analysis demonstrates that taste conflict first dilutes but later reinforces class interests. When the degree of taste diversity is low, the equilibrium policy is characterized by some amount of general income distribution and some targeted transfers. As a group, however, the poor obtain less income distribution than if taste heterogeneity did not exist. As taste diversity increases in society, the set of equilibrium policies becomes more and more tilted towards special interest groups and against general redistribution. As diversity increases further, however, these policies are not sustainable. There exists a critical threshold of diversity above which the only policy that can emerge supports exclusively general redistribution. In fact, this policy is identical to the one that would be instituted in the absence of any taste diversity at all. |
| Keywords: | diversity; income inequality; political parties; preferences; redistribution |
| JEL: | D30 D72 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4834&r=pol |
| By: | David Kiefer |
| Abstract: | In the new Keynesian model of endogenous stabilization governments react quickly to lean against the macroeconomic wind. Governments have ideological objectives with respect to macroeconomic performance, but are constrained by an augmented Phillips curve. Voter influence on macroeconomic policy should be noticeable during election years, when the government and voters disagree about goals. We offer an econometric test of this principal-agent characterization of government control of the political-economic equilibrium and voter control over their governments. This methodology yields an inferences about the functional form of stabilization preferences, the stabilization ideology of Left and Right governments, and possibility a measure of voter ideology. |
| Keywords: | Stabilization; philips curve; public policy |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:uta:papers:2005_03&r=pol |
| By: | Gehlbach, Scott; Sonin, Konstantin |
| Abstract: | We initiate examination of the political boundaries of the firm by exploring the phenomenon of ‘businessman candidates’: business owners and managers who bypass conventional means of political influence to run for public office themselves. We argue that in-house production of political influence will be more likely in institutional environments where candidates find it difficult to make binding campaign promises. When campaign promises are binding, then a businessman may always pay a professional politician to run on the platform that political competition would otherwise compel the businessman to adopt. In contrast, when commitment to a campaign platform is impossible, then candidate identity matters for the policies that will be adopted ex post, implying that a businessman may choose to run for office if the stakes are sufficiently large. We illustrate our arguments through discussion of gubernatorial elections in postcommunist Russia, where businessmen frequently run for public office, institutions to encourage elected officials to keep their campaign promises are weak, and competition for rents is intense. |
| Keywords: | businessman candidates; citizen candidates; elections; institutions; political economy |
| JEL: | D72 N40 P16 P26 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4822&r=pol |
| By: | Conde-Ruiz, José Ignacio; Galasso, Vincenzo; Profeta, Paola |
| Abstract: | We provide a long-term perspective on the individual retirement behaviour 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 statistics 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 labour income – may lead middle-aged individuals to postpone retirement. |
| Keywords: | lifetime income effect; pensions; politico-economic Markovian equilibrium; tax burden |
| JEL: | D72 H53 H55 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4863&r=pol |
| By: | De Donder, Philippe; Hindricks, Jean |
| Abstract: | We study the political economy of social insurance in a world where individuals differ in both income and risk. Social insurance is financed through distortionary taxation and redistributes across income and risk. Individuals vote on social insurance that they can complement with insurance bought on the private market. Private insurance is actuarially fair but suffers from adverse selection, which results in a screening equilibrium with partial coverage. The equilibrium social insurance is the result of an electoral competition game where parties maximize the utility of their members. We calculate the equilibrium social insurance offered by the two parties as well as their equilibrium membership, and study how the equilibrium outcome is affected by electoral uncertainty, distortions from taxation, risk aversion and the distribution of risk and income. We then calibrate the model to US data from the PSID survey. Lastly, we study how the political demand for social insurance is affected by the possibility to redistribute through income taxation. |
| Keywords: | adverse selection; political economy; redistribution; social insurance |
| JEL: | H23 H50 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4864&r=pol |
| By: | Ginsburgh, Victor; Ortuño-Ortín, Ignacio; Weber, Shlomo |
| Abstract: | We consider a linguistically diversified society that has to select a set of official languages. We examine the notion of language disenfranchisement that is created when one or more languages fail to be included in the list of the official ones, implying that some individuals are denied full access to the documents and to the political process in their native tongues. To derive the first of our indices, we use the dichotomous approach that does not take into account a linguistic proximity between languages. To develop a more refined disenfranchisement index, we utilize the Dyen percentage cognate distance matrix that takes into account a linguistic proximity or remoteness of any pair of two languages. We then apply survey and population data on language proficiency in the European Union, calculate disenfranchisement indices and determine optimal sets of official languages that depend on two parameters, society's sensitivity against disenfranchisement and comprehensiveness of the language regime adopted. We also discuss the language challenges faced by the European Union after its enlargement in May 2004. |
| Keywords: | disenfranchisement; European Union; languages |
| JEL: | D70 O52 Z13 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4875&r=pol |
| By: | Fronti, Javier Garcia; Miller, Marcus; Zhang, Lei |
| Abstract: | The Argentine convertibility regime, where the peso was fixed at parity with the US dollar, ended with a ‘twin crisis’ – a tripling in the price of a dollar and a protracted closure of the entire banking system – accompanied by an economic contraction so severe that it is often referred to as ‘Nuestra gran depresión’. But the government's attempt to imitate President Roosevelt by pesifying dollar loan contracts (while simultaneously protecting dollar depositors) had the effect of destroying bank net worth in the absence of credible compensation. To analyse the macroeconomic effects of credit crunch and currency collapse (and of policies to mitigate them), we turn to a model of crisis, specifically that of Aghion, Bacchetta & Banerjee (2000). Our account, however, combines the supply contraction cause by balance sheet effect with a Keynesian demand contraction due to a domestic credit crunch, exacerbated by unsuccessful resolution of the banking crisis. The latter is analysed as a game of political economy played between government and banks about who pays for the banking crisis induced by default and asymmetric pesification. |
| Keywords: | Argentina debt crisis; asymmetric pesification; conflicting beliefs; keynesian recession; twin crisis |
| JEL: | E12 E51 F34 G18 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4889&r=pol |
| By: | Castanheira, Micael; Crutzen, Benoît SY; Sahuguet, Nicolas |
| Abstract: | We analyse how the governance structure of political parties influences electoral competition. Parties choose their organization to manipulate the incentives of politicians to provide effort. We show that intra- and inter-party competition interact to shape these incentives. We also get new insights on the role of information, polarization, and on the value of rents from office. More extreme parties tend to prefer less democratic governance structures. Instead, democratic structures are preferred when voters are ill informed about the candidates’ performance and when the rents from office are low. We use our theory to interpret the introduction of the Direct Primary system in the USA at the beginning of the 20th century. |
| Keywords: | candidates; incentives; internal organization; parties |
| JEL: | D23 D72 D81 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4890&r=pol |
| By: | Brocas, Isabelle; Carrillo, Juan D |
| Abstract: | We analyse an agency model where one individual decides how much evidence he collects. We assume that he has free access to information, but all the news acquired becomes automatically public. Conditional on the information disclosed, a second individual with conflicting preferences undertakes an action that affects the payoff of both agents. In this game of incomplete but symmetric information, we show that the first individual obtains rents due to his superior ability to decide whether to collect or forego evidence, i.e., due to his control in the generation of (public) information. We provide an analytical characterization of these rents, that we label ‘rents of public ignorance’. They can be interpreted as, for example, the degree of influence that a chairman can exert on a committee due exclusively to his capacity to decide whether to keep discussions alive or terminate them and call a vote. Last, we show that similar insights are obtained if the agent decides first how much private information he collects and then how much of this information he transmits to the other agent. |
| Keywords: | experimentation; incomplete and symmetric information; information control; informational rents; learning; optimal stopping rule; principal-agent; public ignorance |
| JEL: | D82 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4907&r=pol |
| By: | Bénabou, Roland; Tirole, Jean |
| Abstract: | International surveys reveal wide differences between the views held in different countries concerning the causes of wealth or poverty and the extent to which people are responsible for their own fate. At the same time, social ethnographies and experiments by psychologists demonstrate individuals' recurrent struggle with cognitive dissonance as they seek to maintain, and pass on to their children, a view of the world where effort ultimately pays off and everyone gets their just deserts. This paper offers a model that helps explain: i) why most people feel such a need to believe in a ‘just world’; ii) why this need, and therefore the prevalence of the belief, varies considerably across countries; iii) the implications of this phenomenon for international differences in political ideology, levels of redistribution, labour supply, aggregate income, and popular perceptions of the poor. The model shows in particular how complementarities arise endogenously between individuals' desired beliefs or ideological choices, resulting in two equilibria. A first, ‘American’ equilibrium is characterized by a high prevalence of just-world beliefs among the population and relatively laissez-faire policies. The other, ‘European’ equilibrium is characterized by more pessimism about the role of effort in economic outcomes and a more extensive welfare state. More generally, the paper develops a theory of collective beliefs and motivated cognitions, including those concerning ‘money’ (consumption) and happiness, as well as religion. |
| Keywords: | cognitive dissonance; ideology; inequality; memory; psychology; religion; self-control; social mobility; welfare state; willpower |
| JEL: | D31 D72 D80 E62 P16 Z12 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4952&r=pol |
| By: | Baldwin, Richard; Widgrén, Mika |
| Abstract: | In this paper, we evaluate the impact of Turkey's membership on EU voting. The aspects that we discuss are decision-making efficiency and the distribution of power in the EU's leading decision making body the Council of Ministers. We compare two alternative Council voting rules: those accepted in the Treaty of Nice and implemented by the Accession Treaty of ten 2004 entrants and the rules that are laid down in the Constitutional Treaty. |
| Keywords: | constitutional treaty; EU; Turkey; voting |
| JEL: | C71 D71 F02 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4954&r=pol |
| By: | Demange, Gabrielle |
| Abstract: | An unfunded Social Security system faces a major risk, sometimes referred to as ‘political risk’. In order to account properly for this risk, the paper considers a political process in which the support to the system is asked from each newborn generation. The analysis is conducted in an overlapping generations economy that is subject to macroeconomic shocks. As a consequence, the political support varies with the evolution of the economy. The impact of various factors –intra-generational redistribution, risk aversion, financial markets, governmental debt- on the political sustainability of a pay-as-you-go system is discussed. |
| Keywords: | intra-generational redistribution; overlapping generations; pay-as-you-go; political economy; risk; social security system |
| JEL: | C72 C78 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4966&r=pol |
| By: | Prat, Andrea; Strömberg, David |
| Abstract: | What is the effect of liberalizing a country’s broadcasting system on the level of information of its citizens? To analyse this question, we first construct a model of state monopoly broadcasting where the government selects the amount of television news coverage of different public policy outcomes, and then sets public policy and political rents. Voters vote retrospectively given the news provided. In equilibrium, the incumbent provides some news coverage, and more so to groups for which reducing policy uncertainty is more important. We then introduce a profit-maximizing commercial channel. It provides more news coverage to groups of voters valuable to advertisers or underprovided by the state monopoly. We test our predictions on a panel of individuals interviewed in the elections before and after the entry of commercial TV in Sweden. We find that people who start watching commercial TV news increase their level of political knowledge more than those who do not. They also increase their political participation more. The positive informational effects are particularly valuable since commercial TV news attracts ex ante uniformed voters. |
| Keywords: | commercial television; mass media; public service broadcasting; voter information |
| JEL: | L33 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4989&r=pol |
| By: | Cadot, Olivier; Estevadeordal, Antoni; Suwa Eisenmann, Akiko |
| Abstract: | The paper estimates the effect of NAFTA’s rules of origin (ROO) on Mexican access to the US market treating explicitly the endogenous determination of ROOs. The first equation determines Mexico’s NAFTA (preferential) exports to the US as a function of tariff preference and Estevadeordal’s qualitative ROO index. The second equation determines ROO strictness on the basis of a Grossman-Helpman model identifying channels through which lobbying by US intermediate-good producers leads to deep preferences and stiff rules of origin in downstream sectors. The estimates suggest that the creation of a captive market for upstream intermediate-good producers is indeed one of their political determinants. |
| Keywords: | NAFTA; regional integration; rules of Origin |
| JEL: | F10 F13 F15 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4999&r=pol |
| By: | Gersbach, Hans |
| Abstract: | We develop democratic mechanisms where individual utilities are not observable by other people at the legislative stage. We show that an appropriate combination of three rules can yield efficient provision of public projects: first, flexible and double majority rules where the size of the majority depends on the proposal and verifiable parameters and taxed and non-taxed individuals need to support the proposal; second, flexible agenda costs where the agenda-setter has to pay a certain amount of money if his proposal does not generate enough supporting votes; third, a ban on subsidies. We provide a rationale why double majority rules are used in practice. We also show that higher degrees of uncertainty about project parameters can make it easier to achieve first-best allocations and that universal equal treatment with regard to taxation is undesirable. |
| Keywords: | democratic constitutions; double majority rules; flexible agenda cost rules; unobservable utilities |
| JEL: | D62 D72 H40 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5013&r=pol |
| By: | Mayda, Anna Maria |
| Abstract: | This paper empirically analyzes both economic and non-economic determinants of attitudes towards immigrants, within and across countries. The two individual-level survey data sets used, covering a wide range of developed and developing countries, make it possible to test for interactive effects between individual characteristics and country-level attributes. In particular, trade and labour economics theories of labour markets predict that the correlation between pro-immigration attitudes and individual skill should be related to the skill composition of natives relative to immigrants in the destination country. Skilled individuals should favour immigration in countries where natives are more skilled than immigrants and oppose it in the other countries. Results based on both direct and indirect measures of the relative skill composition of natives to immigrants are consistent with these predictions. Individual skill and pro-immigration attitudes are positively correlated in countries where the skill composition of natives relative to immigrants is high. Individuals with higher levels of skill are more likely to be pro-immigration in high per capita GDP countries and less likely in low per capita GDP countries. Non-economic variables also appear to be correlated with immigration attitudes but they don’t seem to alter significantly the results on the economic explanations. |
| Keywords: | immigration attitudes; international migration; political economy |
| JEL: | F1 F22 J61 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5055&r=pol |
| By: | John Joseph Wallis; Barry R. Weingast |
| Abstract: | Why did states dominate investments in economic development in early America? Between 1787 and 1860, the national government%u2019s $54 million on promoting transportation infrastructure while the states spent $450 million. Using models of legislative choice, we show that Congress could not finance projects that provided benefits to a minority of districts while spreading the taxes over all. Although states faced the same political problems, they used benefit taxation schemes -- for example, by assessing property taxes on the basis of the expected increase in value due to an infrastructure investment. The U.S. Constitution prohibited the federal government from using benefit taxation. Moreover, the federal government%u2019s expenditures were concentrated in collections small projects -- such as lighthouses and rivers and harbors -- that spent money in all districts. Federal inaction was the result of the equilibrium political forces in Congress, and hence an equilibrium impotence. |
| JEL: | N0 N4 N7 H1 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11397&r=pol |
| By: | Nobuo Akai (School of Business Administration, University of Hyogo); Yusaku Horiuchi (Asia Pacific School of Economics and Government, Australian National University); Masayo Sakata (Faculty of Politics, Economics and Law, Osaka International University) |
| Abstract: | Theoretical studies suggest that corruption may counteract government failure and promote economic growth in the short run, given exogenously determined suboptimal bureaucratic rules and regulations. As the government failure is itself a function of corruption, however, corruption should have detrimental effects on economic growth in the long run. In this paper, we measure the rate of economic growth for various time spans - short (1998?2000), middle (1995-2000) and long (1991-2000) - using previously uninvestigated state-level cross-section data for the United States. Our two-stage least square (2SLS) estimates with a carefully selected set of instruments show that the effect of corruption on economic growth is indeed negative and statistically significant in the middle and long spans but insignificant in the short span. |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2005cf348&r=pol |