nep-pol New Economics Papers
on Positive Political Economics
Issue of 2006‒04‒29
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. Lobbying and Agricultural Trade Policy in the United States By Gawande, Kishore; Hoekman, Bernard
  3. Age Bias in Fiscal Policy: Why Does the Political Process Favor the Elderly? By Sita Nataraj Slavov
  4. Human Capital and Political Business Cycles By Akhmedov Akhmed
  5. The Political Economy of Financial Fragility By Erik Feijen; Enrico Perotti
  6. Does US Aid Buy UN General Assembly Votes? A Disaggregated Analysis By Axel Dreher; Peter Nunnenkamp; Rainer Thiele
  7. Political institutions, inequality, and agricultural growth : the public expenditure connection By Lopez, Ramon; Lederman, Daniel; Allcott, Hunt
  8. Institutional Competition, Political Process and Holdup By Bruno Deffains; Dominique Demougin
  9. Endogenous Cost Lobbying: Theory and Evidence By John M. de Figueiredo and Charles M. Cameron
  10. Taxation with representation: intergovernmental grants in a plebiscite democracy By Byron F. Lutz
  11. Do interactions between political authorities and central banks influence FX interventions? Evidence from Japan By Oscar Bernal

  1. By: Torsten Persson; Guido Tabellini
    Date: 2006–04–20
  2. By: Gawande, Kishore; Hoekman, Bernard
    Abstract: This paper studies whether political campaign contributions influence agricultural protection in the United States in the manner suggested by the political economy model of Grossman and Helpman (1994), using a detailed cross-sectional data set of agricultural protection, subsidies, and contributions to Political Action Committees in the late 1990s. The data do not reject the qualitative predictions of the model: that policymakers will consider both the wishes of specific lobbies and the interests of society as a whole in their decisions. However, the estimated weight of lobbying contributions in decision-making (actual policy) is found to be very low. This is a puzzle as it seems to suggest irrational behavior on the part of the lobbies that make political contributions. It is also inconsistent with the large estimates of deadweight losses from distortionary policy in agriculture. We show that the puzzle can be resolved by extending the model to allow uncertainty about the ability of politicians to deliver policy combined with the fact that contributions are made before policy is decided. The results of the analysis illustrate that the underpinnings of the prevailing political economy equilibrium that supports restrictive agricultural trade policies will be difficult to dislodge in the absence of mobilizing strong counter-lobbying to induce a more liberal policy stance. This of course is one rationale for international trade negotiations - but it requires that other groups in society see enough of an incentive to engage in the political process, pointing to the importance of the design of the negotiating agenda.
    Keywords: agriculture; lobbying; political economy of protection
    JEL: F13
    Date: 2006–04
  3. By: Sita Nataraj Slavov (Department of Economics, Occidental College)
    Abstract: Across countries, government expenditures tend to favor the elderly. This paper provides a political economy explanation for this phenomenon. I consider the classic problem of dividing a fixed payoff in an overlapping generations setting. Any share of the payoff can be given to any generation. Using a new solution concept for majority rule in dynamic settings (Bernheim and Nataraj, 2004), I demonstrate that policies favoring the old are easier to sustain politically than any other policies. This result appears across a broad class of majoritarian institutions and thus reflects general forces at work in the political process. Age bias arises because it is easy to induce the young to support policies favoring the elderly by promising them large rewards later in their lives. On the other hand, there is little flexibility to reward older generations in a similar manner. This asymmetry helps to generate broad political support for large public transfers to older individuals.
    Keywords: majority rule, overlapping generations, age bias, Condorcet winner, intergenerational transfers, Social Security
    JEL: D72 H55
    Date: 2001–11
  4. By: Akhmedov Akhmed
    Abstract: Classical theory considers political business cycle as a result of either opportunistic behavior of government (opportunistic cycle) or aiming policy on certain constituency (partisan cycle). In this paper, we propose an alternative explanation of the phenomenon of political business cycle — experience of government. We propose an illustration that shows that elections infer cycles without any opportunism or ideology of incumbents. We also build a model with endogenous ego-rent. The model explains a channel to increase incentives, when none has commitment — governors need to develop skills to increase their value for public and increase probability to get re-elected. Using fiscal monthly data of Russian regions from 1996 to 2004, we got evidence both of positive effect of experience on performance and opportunistic component of the cycle. We also got evidence of diminishing return on experience.
    Keywords: Russia, elections, opportunistic business cycle, experience, sunk cost, Russian regions
    JEL: D72 E32 H72 P16
    Date: 2006–04–26
  5. By: Erik Feijen; Enrico Perotti
    Abstract: While financial liberalization has in general favorable effects, reforms in countries with poor regulation is often followed by financial crises. We explain this variation as the outcome of lobbying interests capturing the reform process. Even after liberalization, market investors must rely on enforcement of investor protection, which may be structured so as to block funding for new entrants, or limit their access to refinance after a shock. This forces inefficient default and exit by more leveraged entrepreneurs, protecting more established producers. As a result, lobbying may deliberately worsen financial fragility. After large external shocks, borrowers from the political elite in very corrupt countries may successfully lobby for weak enforcement, and retain control of collateral. We provide evidence that industry exit rates and profit margins after banking crises are higher in the most corrupt countries.
    Date: 2006–03
  6. By: Axel Dreher; Peter Nunnenkamp; Rainer Thiele
    Abstract: Using panel data for 143 countries over the period 1973-2002, this paper empirically analyzes the influence of US aid on voting patterns in the UN General Assembly. We use disaggregated aid data to account for the fact that various forms of aid may differ in their ability to induce political support by recipients. We obtain strong evidence that US aid buys voting compliance in the Assembly. More specifically, our results suggest that general budget support and untied grants are the major aid categories by which recipients have been induced to vote in line with the United States. When replicating the analysis for other G7 donors, no comparable patterns emerge.
    Keywords: Bilateral Aid, UN General Assembly, Voting
    JEL: F33
    Date: 2006–04
  7. By: Lopez, Ramon; Lederman, Daniel; Allcott, Hunt
    Abstract: This paper brings together the literatures on the political economy of public expenditures and the determinants of economic growth. Based on a new dataset of rural public expenditures in a panel of Latin American economies, the econometric evidence suggests that non-social subsidies reduce agricultural GDP. Furthermore, the evidence suggests that political and institutional factors as well as income inequality are determinants of the size and structure of rural public expenditures, through which they have large and significant effects on agricultural GDP.
    Keywords: Public Sector Expenditure Analysis & Management,Economic Theory & Research,Public Sector Economics & Finance,Political Economy,Pro-Poor Growth and Inequality
    Date: 2006–04–01
  8. By: Bruno Deffains; Dominique Demougin
    Abstract: We compare the effect of legal and institutional competition for the design of labor institutions in an environment characterized by holdup problems in human and physical capital. We compare autarky with the two country case, assuming that capital is perfectly mobile and labor immobile. We distinguish two cases. In the first, the political system is free from capture, while in the second, we examine the case where labor captures the institutional design problem. We find that in the former case, a competition of systems reduces welfare while in the latter it improves the overall outcome.
    Keywords: Institutional Competition, Political Process, Holdup, Labor, Human Capital
    JEL: D24
    Date: 2006–04
  9. By: John M. de Figueiredo and Charles M. Cameron
    Abstract: Special interests attempt to influence lawmakers through campaign contributions and through informational lobbying. Both avenues have been explored extensively in theoretical models. Only the former, however, has received much empirical scrutiny. We provide the first empirical tests of the major class of models of costly legislative lobbying, the Potters-van Winden-Grossman-Helpman (PWGH) model. To do so, we extend a simple PWGH model to encompass situations in which a legislature adjusts a pre-existing policy only periodically. We then test predictions of the model using data derived from over 50,000 observations of annual lobbying expenditures by special interest groups in the American states. We find that, as predicted, special interest groups 1) increase lobbying expenditures when the legislature is controlled by "enemies" rather than by "friends"; 2) increase lobbying expenditures in budget years in states with biennial budgeting, relative to budget years in states with annual budgeting; and, 3) increasingly exit the lobbying process as lobbying costs rise. Overall, the results provide substantial empirical support for the PWGH class of signaling models of interest group lobbying in legislative settings.
    Date: 2006–03
  10. By: Byron F. Lutz
    Abstract: Economic theory predicts that unconditional intergovernmental grant income and private income are perfectly fungible. Despite this prediction, the literature on fiscal federalism documents that grant and private income are empirically non-equivalent. A large scale school finance reform in New Hampshire--the typical school district experienced a 200 percent increase in grant income--provides an unusually compelling test of the equivalence prediction. Most theoretical explanations for non-equivalence focus on mechanisms which produce public good provision levels which differ from the decisive voter's preferences. New Hampshire determines local public goods provision via a form of direct democracy--a setting which rules out these explanations. In contrast to the general support in the literature for non-equivalence, the empirical estimates in this paper suggest that approximately 92 cents per grant dollar are spent on tax reduction. These results not only document that equivalence holds in a setting with a strong presumption that public good provision decisions reflect the preferences of voters, but also directly confirm the prediction of the seminal work of Bradford and Oates (1971) that lump-sum grant income is equivalent to a tax reduction. In addition, the paper presents theoretical arguments that grant income capitalization and heterogeneity in the marginal propensity to spend on public goods may generate spurious rejections of the equivalence prediction. The heterogeneity argument is confirmed empirically. Specifically, the results indicate that lower income communities spend more of the grant income on education than wealthier communities, a finding interpreted as revealing that the Engel curve for education is concave.
    Keywords: Taxation
    Date: 2006
  11. By: Oscar Bernal (DULBEA, Université libre de Bruxelles, Brussels)
    Abstract: In the United States, Japan and the Euro Zone, FX interventions are institutionally decided by specific political authorities and implemented by central banks on their behalf. Bearing in mind that these specific political authorities and central banks might not necessarily pursue the same exchange rates objectives, the model proposed in this paper takes account explicitly of this institutional organisation to examine its effects on FX intervention activity. The empirical relevance of our theoretical model is assessed by developing a friction model on the Japanese experience between 1991 and 2004 which reveals how the magnitude of that country’s FX interventions is the outcome of the Japanese Ministry of Finance’s trade-off between attaining its own exchange rate target and one of the Bank of Japan’s.
    Keywords: Central banks; Foreign exchange interventions; Interactions; Friction models.
    JEL: E58 E61 F31 G15
    Date: 2006–04

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