nep-pol New Economics Papers
on Positive Political Economics
Issue of 2006‒04‒22
eleven papers chosen by
Eugene Beaulieu
University of Calgary

  1. Democratic capital: The nexus of political and economic change By Torsten Persson; Guido Tabellini
  2. Why Does Democracy Need Education? By Edward Glaeser; Giacomo Ponzetto; Andrei Shleifer
  3. Putting the Lid on Lobbying: Tariff Structure and Long-Term Growth when Protection is for Sale By Nathan Nunn; Daniel Trefler
  4. Electoral bias and policy choice: theory and evidence By Tim Besley; Ian Preston
  5. Majority Rule, Legitimacy and Political Equality By Wojciech Sadurski
  6. Did Political Constraints Bind during Transition? Evidence from Czech Elections 1990-2002 By Orla Doyle; Paul Patrick Walsh
  7. A Political Economy Theory of the Soft Budget Constraint By James A. Robinson; Ragnar Torvik
  8. Political Budget Cycles and Fiscal Decentralization By Paula González; Jean Hindriks; Ben Lockwood; Nicolás Porteiro
  9. Institutions and Deep Integration By Alberto Amurgo Pacheco
  10. The Demand for Power Diffusion: A Case Study of the 2005 Constitutional Referendum Voting in Kenya By Mwangi S. Kimenyi
  11. Political Risk Versus Market Risk in Social Security By John B. Shoven; Sita N. Slavov

  1. By: Torsten Persson; Guido Tabellini
    Abstract: We study the joint dynamics of economic and political change. Predictions of the simple model that we formulate in the paper get considerable support in a panel of data on political regimes and GDP per capita for about 150 countries over 150 years. Democratic capital — measured by a nation’s historical experience with democracy and by the incidence of democracy in its neighborhood — reduces the exit rate from democracy and raises the exit rate from autocracy. In democracies, a higher stock of democratic capital stimulates growth in an indirect way by decreasing the probability of a sucessful coup. Our results suggest a virtuous circle, where the accumulation of physical and democratic capital reinforce each other, promoting economic development jointly with the consolidation of democracy.
  2. By: Edward Glaeser; Giacomo Ponzetto; Andrei Shleifer
    Abstract: Across countries, education and democracy are highly correlated. We motivate empirically and then model a causal mechanism explaining this correlation. In our model, schooling teaches people to interact with others and raises the benefits of civic participation, including voting and organizing. In the battle between democracy and dictatorship, democracy has a wide potential base of support but offers weak incentives to its defenders. Dictatorship provides stronger incentives to a narrower base. As education raises the benefits of civic participation, it raises the support for more democratic regimes relative to dictatorships. This increases the likelihood of democratic revolutions against dictatorships, and reduces that of successful anti-democratic coups.
    JEL: D72 D74 H11
    Date: 2006–04
  3. By: Nathan Nunn; Daniel Trefler
    Abstract: It has long been recognized that a country's tariffs are the endogenous outcome of a rent-seeking game whose equilibrium reflects national institutions. Thus, the structure of tariffs across industries provides insights into how institutions, as reflected in tariff policies, affect long-term growth. We start with the commonplace perception among politicians that protection of skill-intensive industries generates a growth-enhancing externality. Modifying the Grossman-Helpman protection for sale model to allow for this, we make two predictions. First, a country with good institutions will tolerate high average tariffs provided tariffs are biased towards skill-intensive industries. Second, there need not be any relationship between average tariffs and good institutions. Using data for 17 manufacturing industries in 59 countries over approximately 25 years, we find that average tariffs are uncorrelated with output growth and that the skill-bias of tariff structure is positively correlated with output growth. We interpret this to mean that countries grow faster if they are able and willing to put a lid on the rent-seeking behaviour of special interest lobby groups. We show that our results are not compatible with explanations that appeal to (1) externalities per se, (2) initial industrial structure that is skewed towards skill-intensive industries, or (3) the effects of broader institutions such as rule of law and control of corruption.
    JEL: F10 F14 O24 O40
    Date: 2006–04
  4. By: Tim Besley (Institute for Fiscal Studies and London School of Economics); Ian Preston (Institute for Fiscal Studies and University College London)
    Abstract: This paper develops a new approach to study how electoral bias in favor of one party due to the pattern of districting affects policy choice. We tie a commonly used measure of districting bias to the theory of party competition and show how this affects policy choice in theory. The utility of the approach is illustrated using data on local government in the U.K. The results suggest that reducing electoral bias leads parties to moderate their policies.
    Date: 2006–01
  5. By: Wojciech Sadurski
    Abstract: This paper claims that the intuitive and widespread legitimating power of majority rule (MR) arises from the link between majority rule and the principle of equality of political opportunity. The egalitarian character of MR is established by exploring “puzzles” in democratic theory, such as the insensitivity of democratic voting procedures to unequal intensity of citizens’ preferences, the inalienability of voting rights, and the relationship between the principle of unanimity (sometimes thought better to respect citizens’ equality) and MR. Special attention is directed to the relationship between political equality, and equality in the outcomes of political decisions: the claim is made that the language of equal political opportunity captures well the idea of equal political influence, in the circumstance of disagreement about what is required to achieve equal treatment through the outcomes of political decisions.
    Date: 2005–12–01
  6. By: Orla Doyle; Paul Patrick Walsh
    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 “not afraid” and “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.
    Keywords: Political Constraints, Prospective Economic Voting, Initial Conditions.
    JEL: D72 E24 E61
    Date: 2006–04–05
  7. By: James A. Robinson; Ragnar Torvik
    Abstract: Why do soft budget constraints exist and persist? In this paper we argue that the prevalence of soft budget constraints can be best explained by the political desirability of softness. We develop a political economy model where politicians cannot commit to policies that are not ex post optimal. We show that because of the dynamic commitment problem inherent in the soft budget constraint, politicians can in essence commit to make transfers to entrepreneurs which otherwise they would not be able to do. This encourages such entrepreneurs to vote for them. Though the soft budget constraint may induce economic inefficiency, it may be politically rational because it influences the outcomes of elections. In consequence, even when information is complete, politicians may fund bad projects which they anticipate they will have to bail out in the future.
    JEL: H20 H50 O20
    Date: 2006–04
  8. By: Paula González (Department of Economics, Universidad Pablo de Olavide); Jean Hindriks (Université Catholique de Louvain, CORE.); Ben Lockwood (University of Warwick.); Nicolás Porteiro (Department of Economics, Universidad Pablo de Olavide)
    Abstract: In this paper, we study a model à la Rogoff (1990) where politicians distort fiscal policy to signal their competency, but where fiscal policy can be centralized or decentralized. Our main focus is on how the equilibrium probability that fiscal policy is distorted in any region (the political budget cycle, PBC) differs across fiscal regimes. With centralization, there are generally two effects that change the incentive for pooling behavior and thus the probability of a PBC. One is the possibility of selective distortion: the incumbent can be re-elected with the support of just a majority of regions. The other is a cost distribution effect, which is present unless the random cost of producing the public goods is perfectly correlated across regions. Both these effects work in the same direction, with the general result that overall, the PBC probability is larger under centralization (decentralization) when the rents to office are low (high). Voter welfare under the two regimes is also compared: voters tend to be better off when the PBC probability is lower, so voters may either gain or lose from centralization. Our results are robust to a number of changes in the specification of the model.
    Keywords: Political Agency Models, decentralization, incentives, selection, fiscal distortion.
    JEL: D72 H11 P16
    Date: 2006–04
  9. By: Alberto Amurgo Pacheco (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: The paper explains why institutions matter for a deep integration process, as illustrated by the liberalization of Non-Tariff Barriers (NTBs) in Europe. We argue that deep trade liberalization requires supranational institutions of deeper integration that permit enforcement, surveillance, and adjudication. To support the claim, we develop a simple model showing why mutual recognition of norms and testing procedures, coupled with a supranational institution can shape the equilibrium level of NTBs in every member state. Member states host special-interest groups that make political contributions to influence their respective government's choice of NTBs. Politicians maximize a realistic welfare function that favours contributions over consumer's social welfare. The supranational institution drains the incentive to lobby for NTBs. The paper discusses the structure of protection that emerges in the equilibrium, stressing how the lobbies' contributions vary with the effectiveness of the supranational institution in reducing NTBs in the final policy outcome. We then use the model to explain the liberalization of NTBs in the EU.
    Keywords: economic integration; endogenous protection; International Economics; Trade; European Union;
    Date: 2006–03
  10. By: Mwangi S. Kimenyi (University of Connecticut)
    Abstract: Recent studies on the history of economic development demonstrate that concentration of power on a monarch or a ruling coalition impedes economic growth and that institutional changes that diffuse power, though beneficial to the society in general, are opposed by some social groups. In November 2005, Kenyans rejected a proposed constitution primarily because it did not reduce the powers of the executive to any significant degree. Using data of voting patterns in the constitutional referendum and following the rational choice framework, I estimate a model of the demand for power diffusion and demonstrate that groups voting decisions depend on expected gains and likelihood of monopolizing power. The results also reveal the importance of ethnic divisions in hindering the power diffusion process, and therefore the study establishes a channel through which ethnic fragmentation impacts on economic development.
    JEL: D72
    Date: 2006–04
  11. By: John B. Shoven; Sita N. Slavov
    Abstract: Pay-as-you-go Social Security is typically characterized as a universal defined benefit pension program. Implicit in this characterization is a sense that the participant’s investment in future benefits is somehow guaranteed, or safe from risk. This study develops the concept of “political risk” as the possibility that some future legislature will be forced to change the tax and benefit provisions of pay-as-you-go social security programs, when there are changes in the demographic and macroeconomic variables that support it. Thus there is a “political risk” to participants that might be compared to the “market risk” in a personal accounts retirement scheme. In this paper, we carry out a detailed quantitative analysis of political risk in the U.S. Social Security system, as well as an overview of policy reforms in several European countries that demonstrate political risk more broadly across social security systems. For the U.S., we compute the internal rates of return (IRRs) from Social Security for various age groups and income levels, using the existing law in effect each year since 1939. We find considerable variation in IRRs through time for any birth cohort. Participants experienced significant declines in IRRs as a result of adjustments made to restore the system’s solvency in 1983 and 1994. If the system were brought into actuarial balance in 2005, younger cohorts would experience another significant decline in their lifetime IRR. Our review of other countries demonstrates political risk in other social security systems as well. Law changes necessitated by actuarial imbalances pass demographic risk on to participants. The debate over personal accounts, therefore, is not one of “safe” versus “risky” benefits, but one of portfolio choice.
    Date: 2006–04

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