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on Positive Political Economics |
| By: | Philippe, DE DONDER; Jean, HINDRIKS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics) |
| Abstract: | We study the political economy of social insurance with double heterogeneity of voters (i.e., different income and risk levels). Social insurance is financed through distortionary taxation and redistributes across income and risks. Individuals vote over the extent of social insurance, which they can complement on the private market. Private insurance suffers from adverse selection which results into insurance rationing. We model political competition a la Wittman, with two parties maximizing the utility of their members. Party membership is endogenously determined. We show that although individuals differ in two dimensions, their preference for social insurance can be aggregated into a single dimensional type function. We then resort to numerical simulations to solve the political equilibrium resort to numerical simulations to solve the political equilibrium outcome as a function of the distribution of income and risk. We obtain equilibrium policy differentiation with the Left party proposing more social insurance than the Right party. The Left party’s equilibrium membership is made of low risk and high income individuals, with high risk and low income individuals forming the Right party’s constituency. In equilibrium, each party is tying for winning. Unlike the median voter outcome, our equilibrium outcome depends on the whole income and risks distribution, and increasing income polarization leads both parties to propose less social insurance. We also compare the political equilibrium outcome with the Rawlsian and utilitarian outcomes. |
| Keywords: | electoral competition, endogenous parties, Wittman equilibrium, social insurance, adverse selection |
| JEL: | H23 H50 |
| Date: | 2006–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2006018&r=pol |
| By: | Hendriks, Jean (Department of Economics, CORE, Universite Catholique de Louvain,); Lockwood, Ben (CEPR and Department of Economics, University of Warwick,) |
| Abstract: | This paper studies the relationship between fiscal decentralization and electoral accountability, by analyzing how decentralization impacts upon incentive and selection effects, and thus on voter welfare. The model abstracts from features such as public good spillovers or economies of scale, so that absent elections, voters are indifferent about the fiscal regime. The effect of fiscal centralization on voter welfare works through two channels : (i) via its effect on the probability of pooling by the bad incumbent; (ii) conditional on the probability of pooling, the extent to which, with centralization, the incumbent can divert rents in some regions without this being detected by voters in other regions (selective rent diversion). Both these effects depend on the information structure ; whether voters only observe fiscal policy in their own region, in all regions, or an intermediate case with a uniform tax across all regions. More voter information does not necessarily raise voter welfare, and under some conditions, voter would choose uniform over differentiated taxes ex ante to constrain selective rent diversion |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:729&r=pol |
| By: | Paula, GONZALEZ; Jean HINDRIKS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Ben, LOCKWOOD |
| 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. |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2006016&r=pol |
| By: | Lockwood, Ben (University of Warwick and CEPR) |
| Abstract: | This paper surveys recent contributions to the study of fiscal decentralization which adopt a political economy approach. It is argued that this approach can capture, in a variety of formal models, the plausible and influential ideas (increasingly, supported by empirical evidence) that fiscal decentralization can lead to improved preference-matching and accountability of government. In particular, recent work on centralized provision of public good provision via bargaining in a legislature shows how centralization reduces preference-matching, and recent work using "electoral agency" models formalizes the accountability argument. These models also provide insights into when decentralization may fail to deliver these benefits. |
| Keywords: | Fiscal decentralization ; political economy ; local public goods |
| JEL: | H41 H70 H72 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:721&r=pol |
| By: | Susumu Imai; Hajime Katayama; Kala Krishna |
| Abstract: | This paper asks whether the results obtained from using the standard approach to testing the influential Grossman and Helpman “protection for sale (PFS)” model of political economy might arise from a simpler setting. A model of imports and quotas with protection occurring in response to import surges, but only for organized industries, is simulated and shown to provide parameter estimates consistent with the protection for sale framework. This suggests that the standard approach may be less of a test than previously thought. |
| JEL: | F13 D72 B41 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12258&r=pol |
| By: | Ruthira Naraidoo (Keele University, Centre for Economic Research and School of Economic and Management Studies); Patrick Minford (Cardiff Business School, Aberconway Building, Cardiff University); Kent Matthews (Cardiff Business School, Aberconway Building, Cardiff University) |
| Abstract: | This paper develops a political economy model of multiple unemployment equilibria to provide a theory of an endogenous natural rate of unemployment. This model is applied to the UK and the US interwar period which is remembered as the decade of mass unemployment. The theory here sees the natural rate and the associated equilibrium path of unemployment as a reaction to shocks (mainly demand in nature) and the institutional structure of the economy. The channel through which these two forces feed on each other is a political economy process whereby voters with limited information on the natural rate react to shocks by demanding more or less social protection. The reduced form results obtained confirm a pattern of unemployment behaviour in which unemployment moves between high and low equilibria in response to shocks. |
| Keywords: | Equilibrium unemployment, political economy, ‘‘vicious’’ and ‘‘virtuous’’ circles, bootstrapping, forecasting. |
| JEL: | E24 E27 P16 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:kee:kerpuk:2006/08&r=pol |
| By: | Timothy J. Hatton (University of Essex, Australian National University and IZA Bonn); Jeffrey G. Williamson (Harvard University, NBER and IZA Bonn) |
| Abstract: | Today's labor-scarce economies have open trade and closed immigration policies, while a century ago they had just the opposite, open immigration and closed trade policies. Why the inverse policy correlation, and why has it persisted for almost two centuries? This paper seeks answers to this dual policy paradox by exploring the fundamentals which have influenced the evolution of policy: the decline in the costs of migration and its impact on immigrant selectivity, a secular switch in the net fiscal impact of trade relative to immigration, and changes in the median voter. The paper also offers explanations for the between-country variance in voter anti-trade and anti-migration attitude, and links this to the fundamentals pushing policy. |
| Keywords: | tariffs, immigration restriction, international policy, economic history |
| JEL: | F22 J1 O1 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2146&r=pol |