nep-pol New Economics Papers
on Positive Political Economics
Issue of 2005‒09‒29
twenty-two papers chosen by
Eugene Beaulieu
University of Calgary

  1. A Protectionist Bias in Majoritarian Politics By Grossman, Gene; Helpman, Elhanan
  2. Why is Fiscal Policy Often Procyclical? By Alberto Alesina; Guido Tabellini
  3. Political Selection and the Quality of Government: Evidence from South India By Besley, Timothy; Pande, Rohini; Rao, Vijayendra
  4. The Curse of Aid By Simeon Djankov; José Garcia Montalvo; Marta Reynal-Querol
  5. Populist Policies in the Transition to Democracy By Daniel Mejía; Carlos Esteban Posada
  6. Migration and the Welfare State: The Economic Power of the Non-Voter? By Kira Boerner; Silke Uebelmesser
  7. Has the Stability and Growth Pact Impeded Political Budget Cycles in the European Union? By Mark Mink; Jakob de Haan
  8. Equilibrium and Efficiency in the Tug-of-War By Konrad, Kai A; Kovenock, Dan
  9. What's the monetary value of distributive justice? By Corneo, Giacomo; Fong, Christina
  10. The Determinants of Asset Stripping: Theory and Evidence from the Transition Economies By Campos, Nauro F; Giovannoni, Francesco
  11. Political competition within and between parties: an application to environmental policy By Cremer, Helmuth; De Donder, Philippe; Gahvari, Firouz
  12. Biology & Political Science. Foundational Issues of Political Biology By Boari, Mircea
  13. The Making of Cultural Policy: A European Perspective By Frederick van der Ploeg
  14. The Stability of the Inter-war Gold Exchange Standard. Did Politics Matter? By Kirsten Wandschneider
  15. Did political constraints bind during transition? Evidence from Czech elections 1990 - 2002 By Orla Doyle; Patrick Paul Walsh
  16. Distributional conflict, the state, and peace building in Burundi By Léonce Ndikumana
  17. Racism, xenophobia, and redistribution By Woojin Lee; John Roemer; Karine van der Straeten
  18. It's Parties that Choose Electoral Systems (or Duverger's Law Upside Down) By Josep M. Colomer
  19. On the Origins of Electoral Systems and Political Parties. The Role of Elections in Multi-Member Districts By Josep M. Colomer
  20. Immigration and the Survival of the Welfare State By Francesc Ortega
  21. Policy Making in Divided Government. A Pivotal Actors Model with Party Discipline. By Josep M. Colomer
  22. Does Centralised Wage Setting Lead into Higher Taxation? By Pekka Sinko

  1. By: Grossman, Gene; Helpman, Elhanan
    Abstract: We develop a novel model of campaigns, elections, and policymaking in which the ex ante objectives of national party leaders differ from the ex post objectives of elected legislators. This generates a distinction between "policy rhetoric" and "policy reality" and introduces an important role for "party discipline" in the policymaking process. We identify a protectionist bias in majoritarian politics. When trade policy is chosen by the majority delegation and legislators in the minority have limited means to influence choices, the parties announce trade policies that favor specific factors, and the expected tariff or export subsidy is positive. Positions and expected outcomes monotonically approach free trade as party discipline strengthens.
    Keywords: comparative politics; party discipline; Trade policy; tyranny of the majority
    JEL: D72 F13
    Date: 2005–09
  2. By: Alberto Alesina; Guido Tabellini
    Abstract: Many countries, especially developing ones, follow procyclical fiscal polices, namely spending goes up (taxes go down) in booms and spending goes down (taxes go up) in recessions. We provide an explanation for this suboptimal fiscal policy based upon political distortions and incentives for less-than-benevolent government to appropriate rents. Voters have incentives similar to the “starving the Leviathan” classic argument, and demand more public goods or fewer taxes to prevent governments from appropriating rents when the economy is doing well. We test this argument against more traditional explanations based purely on borrowing constraints, with a reasonable amount of success.
    Date: 2005–09
  3. By: Besley, Timothy; Pande, Rohini; Rao, Vijayendra
    Abstract: This paper uses household data from India to examine the economic and social status of village politicians, and how individual and village characteristics affect politician behaviour while in office. Education increases the chances of selection to public office and reduces the odds that a politician uses political power opportunistically. In contrast, land ownership and political connections enable selection but do not affect politician opportunism. At the village level, changes in the identity of the politically dominant group alter the group allocation of resources but not politician opportunism. Improved information flows in the village, however, reduce opportunism and improve resource allocation.
    Keywords: decentralization; India; political economy; public provision of private goods
    JEL: H11 H42 O12 O20
    Date: 2005–08
  4. By: Simeon Djankov; José Garcia Montalvo; Marta Reynal-Querol
    Abstract: Foreign aid provides a windfall of resources to recipient countries and may result in the same rent seeking behavior as documented in the “curse of natural resources” literature. In this paper we discuss this effect and document its magnitude. Using data for 108 recipient countries in the period 1960 to 1999, we find that foreign aid has a negative impact on democracy. In particular, if the foreign aid over GDP that a country receives over a period of five years reaches the 75th percentile in the sample, then a 10-point index of democracy is reduced between 0.6 and one point, a large effect. For comparison, we also measure the effect of oil rents on political institutions. The fall in democracy if oil revenues reach the 75th percentile is smaller, (0.02). Aid is a bigger curse than oil.
    Keywords: Foreign aid, democracy, conditionality
    JEL: O11 O19 O16
    Date: 2005–04
  5. By: Daniel Mejía; Carlos Esteban Posada
    Keywords: This paper develops a political economy model that provides an explanation as for why ruling elites in oligarquic societies may rely on income redistribution to the poor (the masses) in order to prevent them from attempting a revolution. We refer to this kind of redistribution as populist redistribution because, first it does not increase the poor’s productive capacity (human capital), and second it seeks to “buy” political support (peace) to perpetuate the elite’s control of political power. We examine the conditions under which ruling elites choose to deter the poor (by means of military repression and/or populist redistribution), to engage in a dispute with the poor for the control of political power, or, alternatively, to extend democracy. According to the results of the model populist redistribution (or military repression), if any, increases with initial wealth inequality and with the amount of redistribution that the poor can undertake under democracy, and decreases with the relative importance of a human capital externality in production. The model explains why in some cases the use of an apparently ine cient policy of populist redistribution turns out to be optimal for both groups (the ruling elite and the poor class) when the alternative is to use of military repression or default to conflict.; Populism, oligarchy, democracy, conflict, inequality.
    JEL: H11 D73 D74 D78 D30
  6. By: Kira Boerner; Silke Uebelmesser
    Abstract: This paper investigates the impact of emigration on the political choice regarding the size of the welfare state. Mobility has two countervailing effects: the political participation effect and the tax base effect. With emigration, the composition of the constituency changes. This increases the political influence of the less mobile part of the population. The new political majority has to take into account that emigration reduces tax revenues and thereby affects the feasible set of redistribution policies. The interaction of the two effects has so far not been analyzed in isolation. We find that the direction of the total effect of migration depends on the initial income distribution in the economy. Our results also contribute to the empirical debate on the validity of the median-voter approach for explaining the relation between income inequality and redistribution levels.
    Keywords: migration, redistribution, voting
    JEL: D31 D72 F22 H50
    Date: 2005
  7. By: Mark Mink; Jakob de Haan
    Abstract: This paper examines whether there is a political budget cycle (PBC) in countries in the euro area. Using a multivariate model for the period 1999-2004 and various election indicators we find strong evidence that the Stability and Growth Pact has not restricted fiscal policy makers in the euro area in pursuing expansionary policies before elections. In an election-year – but not in the year prior to the election – the budget deficit increases. This result is in line with third generation PBC models, which are based on moral hazard. We also find a significant but small partisan effect on fiscal policy outcomes.
    Keywords: fiscal policy, political budget cycle, Stability and Growth Pact
    JEL: D72 D78 E62
    Date: 2005
  8. By: Konrad, Kai A; Kovenock, Dan
    Abstract: We characterize the unique Markov perfect equilibrium of a tug-of-war without exogenous noise, in which players have the opportunity to engage in a sequence of battles in an attempt to win the war. Each battle is an all-pay auction in which the player expending the greater resources wins. In equilibrium, contest effort concentrates on at most two adjacent states of the game, the 'tipping states', which are determined by the contestants’ relative strengths, their distances to final victory, and the discount factor. In these states battle outcomes are stochastic due to endogenous randomization. Both relative strength and closeness to victory increase the probability of winning the battle at hand. Patience reduces the role of distance in determining outcomes. Applications range from politics, economics and sports, to biology, where the equilibrium behaviour finds empirical support: many species have developed mechanisms such as hierarchies or other organizational structures by which the allocation of prizes are governed by possibly repeated conflict. Our results contribute to an explanation why. Compared to a single stage conflict, such structures can reduce the overall resources that are dissipated among the group of players.
    Keywords: all-pay auction; conflict; dominance; dynamic game; multi-stage contest; preemption; tipping; winner-take-all
    JEL: D72 D74
    Date: 2005–08
  9. By: Corneo, Giacomo; Fong, Christina
    Abstract: This paper develops a simple theoretical model that can be implemented to estimate the willingness to pay for distributive justice. We derive a formula that allows one to recover the willingness to pay for distributive justice from the estimated coefficients of a probit regression and fiscal data. Using this formula and data from a 1998 Gallup Social Audit, we find that the monetary value of justice in the United States is about one fifth of GDP. We also generalize the model to estimate the value of justice for different types of people (e.g., Republicans, Democrats, urban dwellers, rural dwellers). We find no evidence that the value of justice varies across types of people. This is consistent with the idea that political differences between types are due to differences in the beliefs about the fairness of the market system, rather than differences in the values they place on distributive justice.
    Keywords: distributive justice; fairness; governmental redistribution
    JEL: D63 H24
    Date: 2005–09
  10. By: Campos, Nauro F; Giovannoni, Francesco
    Abstract: During the transition from plan to market, managers and politicians succeeded in maintaining control of large parts of the stock of socialist physical capital. Despite the obvious importance of this phenomenon, there have been no efforts to model, measure and investigate this process empirically. This paper tries to fill this gap by putting forward theory and econometric evidence. We argue that asset stripping is driven by the interplay between the firm's potential profitability and its ability to influence law enforcement. Our econometric results, for about 950 firms in five transition economies, provide support for this argument.
    Keywords: asset stripping; corruption; law enforcement; transition
    JEL: H82 K42 O17 P26 P31
    Date: 2005–09
  11. By: Cremer, Helmuth; De Donder, Philippe; Gahvari, Firouz
    Abstract: This paper presents a political economy model that explains the low rate of emission taxes in the U.S., as well as the fact that neither Democrats nor Republicans propose to increase them. The voters differ according to their wage and capital incomes which are assumed to have a bivariate lognormal distribution. They vote over the emission tax rate and a budgetary rule that specifies how to redistribute the tax proceeds. The political competition is modeled à la Roemer (2001) where the two parties care for the policies they propose as well as the probability of winning; the equilibrium solution concept is the Party Unanimity Nash Equilibrium (PUNE). We calibrate the model using U.S. data and compute the PUNEs numerically. Two main results emerge. All "viable" PUNEs entail subsidies on emissions (as opposed to taxes). This indicates the importance of distributional concerns in garnering political support for environmental policies. Second, parties always propose an interior value for the budgetary rule even though all citizens prefer extreme values. This illustrates the emergence of political compromise to attract voters.
    Keywords: distributional concerns; Emission taxes; political competition; political compromise; PUNE
    JEL: D72 H23
    Date: 2005–09
  12. By: Boari, Mircea (Department of Political Science, University of Bucharest, Visiting ESSEC)
    Abstract: In their classic formulations, valid to this day, the issue of self-preservation is foundational for both political science and economics. In order to fixate this concept, the Modern theorists relied upon various assumptions about human nature. Due to the advances of biology and evolutionary theory, we are today in the position of explicating these assumptions in the form of stable scientific certainties. A foundational concept in biological theory is that of "fitness". The paper indicates the relationship between the less determined concept of self-preservation and the more rigorous one of fitness. By that, it accomplishes two things: it gives more solidity to the foundation of political theory and political economy, by anchoring them in biology; it opens the path towards a unification between two social sciences and their immediate juxtaposed science, biology. The emphasis of the paper is on political science, aiming to define, on the basis of the above argument, its proper object of study. The notion of fitness extraction is thus defined. A lateral exposition differentiates between political action, thus understood, and economic action, defined more generally as fitness transfer. The distinction is to be eventually furthered in a separate study.
    Keywords: Biology; Evolution; Fitness; Foundational Theory; Foundations of Economics; Political Science
    JEL: A19 B52 C73 P00
    Date: 2005–06
  13. By: Frederick van der Ploeg
    Abstract: No good comparable data on sizes of cultural sectors of the countries of Europe exist. Still, local and national governments of Europe spend substantial resources on culture and cultural sectors contribute significantly to employment and national income. After briefly describing special features of cultural goods and clarifying some misconceptions about the value of culture, valid and invalid arguments for subsidising culture are discussed. Although it is easy to justify government support for preservation of heritage, this is more difficult for the performing arts. Due to changing technologies and advent of E-culture classic public-good arguments for government intervention in broadcasting and other cultural activities become less relevant. Different institutions varying from selection by arts councils, bureaucrats or politicians to less directed tax incentives lead to different cultural landscapes. Theories of delegation suggest delegating the judgement on artistic qualities and execution of cultural policy to an independent Arts Fund. The Minister of Culture should concentrate on formulating a mission for cultural policy and make sure it is implemented properly. The insights of the theories of local public goods and federalism are applied to the making of cultural policy in Europe. Different approaches to international cultural policy in Europe are discussed. The overview concludes with lessons for the making of cultural policy in Europe.
    Keywords: cultural policy, heritage, performing arts, museums, quality, participation, vouchers, tax incentives, quality, politicians, bureaucrats, delegation
    JEL: H20 H40 P51 Z11
    Date: 2005
  14. By: Kirsten Wandschneider
    Abstract: The collapse of the inter-war gold standard has frequently been studied in economic his-tory. This paper proposes a discrete time duration model to analyze how economic and polit-ical indicators affected the length of time a country remained on the gold standard. We rely on a panel data set of 24 countries over the years 1922-1938, and incorporate new measures of political and institutional variables. The results of this study identify high per capita income growth, large foreign currency and gold reserves, trade with other countries on gold, interna-tional creditor status, and the prior experience of hyperinflation as factors that increased the probability that a country would remain on gold. In contrast, democratic regimes that were exposed to a relatively high percentage of left-wing representation in parliament left the gold standard early. We also offer predicted survival probabilities for selected key countries on the gold standard. These survival rates show that Britain abandoned the gold exchange standard at a much higher survival probability, compared with other countries in the system.
    Date: 2005
  15. By: Orla Doyle; Patrick Paul Walsh (Department of Economics, Trinity College)
    Abstract: Many theoretical models of transition are driven by the assumption that economic decision making is subject to political constraints. In this paper we empirically test whether the winners and losers of economic reform determined voting behaviour in the first five national elections in the Czech Republic. We propose that voters, taking stock of endowments from the planning era, could predict whether they would become “winners” or “losers” of transition. Using survey data we measure the percentage of individuals by region who were “afraid” and “not afraid” of economic reform in 1990. We define the former as potential “winners” who should vote for pro-reform parties, while latter are potential “losers” who should support left-wing parties. Using national election results and regional economic indicators, we demonstrate that there is persistence in support for pro-reform and communist parties driven by prospective voting based on initial conditions in 1990. As a result, we show that regional unemployment rates in 2002 are good predictors of regional voting patterns in 1990.
    Date: 2005–09
  16. By: Léonce Ndikumana (University of Massachusetts Amherst)
    Abstract: This paper examines the causes of conflict in Burundi and discusses strategies for building peace. The analysis of the complex relationships between distribution and group dynamics reveals that these relationships are reciprocal, implying that distribution and group dynamics are endogenous. The nature of endogenously generated group dynamics determines the type of preferences (altruistic or exclusionist), which in turn determines the type of allocative institutions and policies that prevail in the political and economic system. While unequal distribution of resources may be socially inefficient, it nonetheless can be rational from the perspective of the ruling elite, especially because inequality perpetuates dominance. However, because unequal distribution of resources generates conflict, maintaining a system based on inequality is difficult because it requires ever increasing investments in repression. It is therefore clear that if the new Burundian leadership is serious about building peace, it must engineer institutions that uproot the legacy of discrimination and promote equal opportunity for social mobility for all members of ethnic groups and regions. JEL Categories: 00
    Keywords: Burundi; conflict; Africa; distribution; institutions.
    Date: 2005–08
  17. By: Woojin Lee (University of Massachusetts Amherst); John Roemer (Yale University); Karine van der Straeten (CNRS and Ecole Polytechnique Paris)
    Abstract: We report here a summary of our recent research on the effect that the race issue, in the United States, and the immigration issue in European countries, is having on the degree of redistribution and the size of the public sector that is implemented through political competition. We model political competition as taking place on a two dimensional policy space, where the first issue is the tax rate, or the size of the public sector, and the second issue is the race or immigration issue. Our substantive conclusion is that the conservative economic agenda has been given new life in many countries because of racist and xenophobic views of polities. JEL Categories: D3, D7, H2
    Keywords: Racism, xenophobia, redistribution, anti-solidarity effect, policy bundle effect, party unanimity Nash equilibrium
    Date: 2005
  18. By: Josep M. Colomer
    Abstract: This article presents, discusses and tests the hypothesis that it is the number of parties what can explain the choice of electoral systems, rather than the other way round. Already existing political parties tend to choose electoral systems that, rather than generate new party systems by themselves, will crystallize, consolidate or reinforce previously existing party configurations. A general model develops the argument and presents the concept of 'behavioral-institutional equilibrium' to account for the relation between electoral systems and party systems. The most comprehensive dataset and test of these notions to date, encompassing 219 elections in 87 countries since the 19th century, are presented. The analysis gives strong support to the hypotheses that political party configurations dominated by a few parties tend to establish majority rule electoral systems, while multiparty systems already existed before the introduction of proportional representation. It also offers the new theoretical proposition that strategic party choice of electoral systems leads to a general trend toward proportional representation over time.
    Keywords: Elections, electoral systems, political parties, institutional equilibrium
    JEL: H10 H79
    Date: 2005–03
  19. By: Josep M. Colomer
    Abstract: The old, understudied electoral system composed of multi-member districts, open ballot and plurality rule is presented as the most remote scene of the origin of both political parties and new electoral systems. A survey of the uses of this set of electoral rules in different parts of the world during remote and recent periods shows its wide spread. A model of voting by this electoral system demonstrates that, while it can produce varied and pluralistic representation, it also provides incentives to form factional or partisan candidacies. Famous negative reactions to the emergence of factions and political parties during the 18th and 19th centuries are reinterpreted in this context. Many electoral rules and procedures invented since the second half of the 19th century, including the Australian ballot, single-member districts, limited and cumulative ballots, and proportional representation rules, derived from the search to reduce the effects of the ‘originating’ multi-member district system in favor of a single party sweep. The general relations between political parties and electoral systems are restated to account for the foundational stage here discussed.
    Keywords: Political parties, electoral systems, multimember districts
    JEL: H10 H41 H79
    Date: 2005–03
  20. By: Francesc Ortega
    Abstract: This paper analyzes the political sustainability of the welfare state in a model where immigration policy is also endogenous. In the model, the skills of the native population are affected by immigration and skill accumulation. Moreover, immigrants affect future policies, once they gain the right to vote. The main finding is that the long-run survival of redistributive policies is linked to an immigration policy specifying both skill and quantity restrictions. In particular, in steady state the unskilled majority admits a limited inflow of unskilled immigrants in order to offset growth in the fraction of skilled voters and maintain a high degree of income redistribution. Interestingly, equilibrium immigration policy shifts from unrestricted skilled immigration, when the country is skill-scarce, to restricted unskilled immigration, as the fraction of native skilled workers increases. The analysis also suggests a new set of variables that may help explain international differences in immigration restrictions.
    Keywords: Repeated voting, Markov equilibrium, political economy, immigration policy, welfare state, redistribution, skill premium, education
    JEL: F22 I2 J62
    Date: 2004–12
  21. By: Josep M. Colomer
    Abstract: This article presents a formal model of policy decision-making in an institutional framework of separation of powers in which the main actors are pivotal political parties with voting discipline. The basic model previously developed from pivotal politics theory for the analysis of the United States lawmaking is here modified to account for policy outcomes and institutional performances in other presidential regimes, especially in Latin America. Legislators' party indiscipline at voting and multi-partism appear as favorable conditions to reduce the size of the equilibrium set containing collectively inefficient outcomes, while a two-party system with strong party discipline is most prone to produce 'gridlock', that is, stability of socially inefficient policies. The article provides a framework for analysis which can induce significant revisions of empirical data, especially regarding the effects of situations of (newly defined) unified and divided government, different decision rules, the number of parties and their discipline. These implications should be testable and may inspire future analytical and empirical work.
    Keywords: Macroeconomic policy-making, Divided government, Political parties
    JEL: E60 E66 H70 H73 H77
    Date: 2005–03
  22. By: Pekka Sinko (Prime Minister's Office, Economic Council)
    Abstract: This paper studies implications of centralised wage setting for the level of taxation and public expenditures in an analytical model with unionised labour markets. We extend the previous studies by allowing both demand and supply effects of labour. Also, in addition to the standard social planner approach, we consider a political economy set up, where the tax rate is chosen to maximise welfare of a median voter. Our results suggest that when working hours are endogenous, the relationship between the degree of centralisation and the labour tax rate is ambiguous. In particular, if the marginal utility from public provision is sufficiently low, centralised wage setting implies lower optimal tax rate on labour. This is due to a 'budgetary discipline effect', which reduces the optimal tax rate preferred by the median voter under centralised wage setting.
    Keywords: Taxation, wage setting, public expenditure
    JEL: J
    Date: 2005–09–16

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