nep-pol New Economics Papers
on Positive Political Economics
Issue of 2006‒08‒05
sixteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Electoral Rules and Government Spending in Parliamentary Democracies By Torsten Persson; Gerard Roland; Guido Tabellini
  2. Trade, Inequality, and the Political Economy of Institutions By Andrei A. Levchenko; Quý Toàn Ðo
  3. Project Aid or Budget Aid? The Interests of Governments and Financial Institutions By Hefeker, Carsten
  4. Protests and Reputation By Lucia Buenrostro; Amrita Dhillon; Myrna H. Wooders
  5. The Political Economy of Corruption and and the Role of Financial Institutions By Boerner, Kira; Hainz, Christa
  6. Can Budget Institutions Counteract Political Indiscipline? By Ashoka Mody; Stefania Fabrizio
  7. Fifty Million Voters Can't Be Wrong: Economic Self-Interest and Redistributive Politics By Jacob L. Vigdor
  8. Does US Aid Buy UN General Assembly Votes? A Disaggregated Analysis By Axel Dreher; Peter Nunnenkamp; Rainer Thiele
  9. Selling Favors in the Lab: Experiments on Campaign Finance Reform By Daniel Houser; Thomas Stratmann
  10. The Impact of Postal Voting on Participation, Evidence for Switzerland By Simon Luechinger, Myra Rosinger and Alois Stutzer
  11. Corruption and the shadow economy: An empirical analysis By Axel Dreher; Friedrich G. Schneider
  12. Crises, What Crises? By Nauro F. Campos; Cheng Hsiao; Jeffrey B. Nugent
  13. Inflation, Inequality, and Social Conflict By Christopher Crowe
  14. Tax Avoidance, Endogenous Social Norms, and the Comparison Income Effect By Alessandro Balestrino
  15. Biased Contests By Matthias Dahm; Nicolás Porteiro
  16. The impact of local and national economic conditions on legislative election results By Linda Gonçalves Veiga; Francisco José Veiga

  1. By: Torsten Persson; Gerard Roland; Guido Tabellini
    Date: 2006–07–31
  2. By: Andrei A. Levchenko; Quý Toàn Ðo
    Abstract: We analyze the relationship between international trade and the quality of economic institutions, such as contract enforcement, rule of law, and property rights. In our model, firms differ in their preferences for institutional quality, which is determined endogenously in a political economy framework. We show that trade opening can worsen institutions when it increases the political power of a small elite of large exporters who prefer to maintain bad institutions. The detrimental effect of trade on institutions is most likely to occur when a small country captures a sufficiently large share of world exports in sectors characterized by economic profits.
    Date: 2006–03–14
  3. By: Hefeker, Carsten
    Abstract: The paper compares different aid policy instruments and their effect on the target group. Starting from a situation where interest groups compete for the resources of the government, international financial institutions aim to change the policy outcome. They can either directly support one group or condition their financial help to the government on its policy. Apart from a normative analysis which policy is more adequate to help one group, the paper also asks what happens if the IFI is driven by bureaucratic self-interest, and whether this distort policies.
    Keywords: aid policy, conditionality, international financial institutions, interest groups
    JEL: D73 F35 O23
    Date: 2005
  4. By: Lucia Buenrostro; Amrita Dhillon (Department of Economics, University of Warwick); Myrna H. Wooders (Department of Economics, Vanderbilt University)
    Abstract: Protests take place for a variety of reasons. In this paper we focus on protests that have a well defined objective, that is in conflict with the objectives of the government. Hence the success or failure of a protest movement depends crucially on how the government responds. We assume that government types are private information so that governments have an interest in building a reputation to deter protestors. We extend the standard reputation framework to one where potential protesters in the domestic jurisdiction are competing in a common market with protestors of a foreign jurisdiction, resulting in a situation where domestic governments care about the decisions of foreign governments. We derive conditions under which an equilibrium with "contagion" in protests might exist: protests that start in one jurisdiction spread to others. Finally we use our results to interpret the Fuel tax protests in France and England that took place in 2000 as well as the three successive pro-democracy revolutions in Georgia, Ukraine and Kyrgyzstan in 2003-05.
    Keywords: Protest, social movements, contagion, reputation equilibrium, Fuel tax protests, pro-democracy revolutions
    JEL: F50 C72 D72 D82
    Date: 2006–07
  5. By: Boerner, Kira; Hainz, Christa
    Abstract: In transition and developing countries, we observe rather high levels of corruption even they have democratic political systems. This is surprising from a political economy perspective, as a majority of the people generally suffers from high corruption levels. Our model based on the fact that corrupt officials have to pay an entry fee to get lucrative positions. In a probabilistic voting model, we show that a lack of financial institutions can lead more corruption as more voters are part of the corrupt system. Well-functioning financial institutions, in turn, can increase the political support for anti-corruption measures.
    Keywords: Corruption, Financial Markets, Institutions, Development, Voting
    JEL: D72 D73 O17
    Date: 2005
  6. By: Ashoka Mody; Stefania Fabrizio
    Abstract: The budget is an expression of political rather than economic priorities. We confirm this proposition for a group of new and potential members of the European Union, finding that politics dominates. The contemporary practice of democracy can increase budget deficits through not only ideological preferences but also more fragmented government coalitions and higher voter participation. Long-term structural forces, triggered by societal divisions and representative electoral rules, have more ambiguous implications but also appear to increase budget pressures, as others have also found. However, our most robust, and hopeful, finding is that budget institutions-mechanisms and rules of the budget process-that create checks and balances have significant value even when the politics is representative but undisciplined, and when long-term structural forces are unfavorable.
    Keywords: Fiscal policy , Budgets , Budget deficits , Government expenditures , Political economy , Public finance , National budgets ,
    Date: 2006–05–19
  7. By: Jacob L. Vigdor
    Abstract: Why do voters at the lower end of the socioeconomic spectrum support political candidates who generally disfavor redistributive policies? Existing explanations often presume that voters are explicitly acting in opposition to their economic self-interest, or that they hold persistently optimistic expectations regarding the probability of moving into the upper ranks of the income distribution. This paper provides an alternative economic explanation. When voters evaluate their well-being by making relative utility comparisons, support for redistribution depends not only on absolute income but on one's status relative to a reference group. When reference groups are defined geographically, support depends on exposure to higher-income neighbors. The predictions of the model are supported by empirical evidence drawn from county-level election returns in 1980 and 2000, and by individual-level polling data following the 2000 election.
    JEL: D31 D72 H31
    Date: 2006–07
  8. By: Axel Dreher (Center of Economic Research at ETH Zurich); Peter Nunnenkamp (Kiel Institute for the World Economy); Rainer Thiele (Kiel Institute for the World Economy)
    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
  9. By: Daniel Houser; Thomas Stratmann
    Abstract: Substantial academic interest and public policy debate centers on campaign finance reform. Campaign resources can provide benefits to constituencies if candidates use them to fund the distribution of useful information. On the other hand, voters can potentially be harmed if candidates trade policy favors to special interests in exchange for contributions. Unfortunately, because informative field data on this topic are very difficult to obtain, the effects of different campaign finance strategies on election outcomes and economic welfare remain largely uninformed by empirical analyses. This paper reports data from novel laboratory experiments designed to shed light on the campaign finance debate. Our experiment is based on a model where power-hungry candidates are motivated to trade favors for campaign contributions. Our data is consistent with the model’s predictions. We find that voters’ revise their beliefs in response to candidate advertising in a way that is consistent with theory. Moreover, in relation to privately financed electoral competitions, in publicly financed campaigns (i) high-quality candidates are elected more frequently, and (ii) margins of victory are larger. Both of these outcomes are predicted by theory. We conduct policy experiments on various campaign finance strategies, including the widely suggested caps on private fundraising. Our results suggest that caps can improve voter welfare but do not increase the likelihood that high-quality candidates will be elected.
    JEL: C90 D72
    Date: 2006
  10. By: Simon Luechinger, Myra Rosinger and Alois Stutzer
    Abstract: Many countries are forging ahead with convenient balloting methods, in particular electronic and postal voting, in order to re-engage voters. In this paper, we test whether the cost reductions with postal voting increase turnout. The empirical analysis is based on a newly collected data set on the introduction of postal voting in Swiss cantons. We take advantage of the unique fact that voting by mail was introduced at different times across cantons. This allows identifying the impact of postal voting on turnout, independent of time, issue and canton specific effects. The estimated average effect on turnout is roughly 4.1 percentage points for an average turnout of 43 percent between 1970 and 2005.
    Keywords: postal voting, voting costs, voting participation, turnout
    JEL: D72
    Date: 2006–07
  11. By: Axel Dreher (Department of Management, Technology, and Economics, KOF, ETH Zürich (Swiss Federal Institute of Technology Zurich), CH-8092 Zürich, Switzerland); Friedrich G. Schneider (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: This paper analyzes the influence of the shadow economy on corruption and vice versa. We hypothesize that corruption and shadow economy are substitutes in high income countries while they are complements in low income countries. The hypotheses are tested for a crosssection of 120 countries and a panel of 70 countries for the period 1994-2002. Our results show that the shadow economy reduces corruption in high income countries, but increases corruption in low income countries. We also find that stricter regulations increase both corruption and the shadow economy.
    Keywords: corruption; shadow economy; regulation; tax burden
    JEL: D73 H26 O17 O5
    Date: 2006–01
  12. By: Nauro F. Campos (Brunel University, CEPR and IZA Bonn); Cheng Hsiao (University of Southern California); Jeffrey B. Nugent (University of Southern California)
    Abstract: Recent research convincingly shows that crises beget reform. Although the consensus is that economic crises foster macroeconomic stabilization, it is silent on which types of crises cause which types of reform. Is it economic or political crises that are the most important drivers of structural reforms? To answer this question we put forward evidence on trade and labour market liberalization from panel data on more than 100 developed and developing countries from 1950 to 2000. We find important differences in the effects of the two types of crises on the two reforms across regions and even from one measure of crisis to another. Yet, in general, we consistently find that political considerations (political crises as well as political institutions) are more important determinants of these reforms than economic crises. This finding is robust to the inclusion of interdependencies between the two types of crises, feedbacks between the two types of reform, the use of alternative measures of political and economic crises and whether or not the data are pooled across all countries or only across regions.
    Keywords: economic reform, economic crisis, political crisis, trade liberalisation, labour market reform
    JEL: H11 K20 E32
    Date: 2006–07
  13. By: Christopher Crowe
    Abstract: This paper presents and then tests a political economy model to analyze the observed positive relationship between income inequality and inflation. The model's key features are unequal access to both inflation-hedging opportunities and the political process. The model predicts that inequality and 'elite bias' in the political system interact to create incentives for inflation. The paper's empirical section focuses on this predicted interaction effect. The identification strategy involves using the end of the Cold War as a source of exogenous variation in the political environment. It finds robust evidence in support of the model.
    Date: 2006–07–07
  14. By: Alessandro Balestrino
    Abstract: We present a model of income tax avoidance with heterogeneous agents, assuming the presence of a comparison income effect and of a psychic cost (disutility) of tax dodging. We analyse the policy preferences of the agents, and identify a median-voter political equilibrium. Paralleling previous results in the optimal taxation literature, we show that the comparison income effect calls for a high degree of progressivity of the income tax; additionally, we find that this tendence is strengthened by the psychic cost of avoidance. We then model the endogenous formation of the stigma attached to the act of avoidance as a "conformism game". We argue that such stigma is motivated by the desire to make redistribution more effective, and that it is enhanced by the income comparison effect.
    Keywords: tax avoidance, social norms, conformism, comparison income, median voter
    JEL: D72 H26 H31
    Date: 2006
  15. By: Matthias Dahm (Universidad Carlos III de Madrid); Nicolás Porteiro (Department of Economics, Universidad Pablo de Olavide)
    Abstract: We examine the effects of providing more accurate information to a political decision-maker who is lobbied by competing interests. Conventional wisdom holds that such a bias in the direction of the correct decision improves the efficiency of government. We provide a formal definition of bias which is derived from the same fundamentals that give rise to a contest model of lobbying. Efficiency of government is measured by both the probability of taking the correct decision and the amount of social waste associated to lobbying activities. We present a benchmark model in which increasing the bias always improves the efficiency of government under both criteria. However, this result is fragile in the sense that reasonable alternative assumptions in the micro-foundations lead to slightly different models in which -due to different strategic effects of bias- under either criterion there is no guarantee that more accurate information improves government.
    Keywords: Endogenous Contests, Contest Success Function, Information provision
    JEL: C72 D72 D74
    Date: 2006–07
  16. By: Linda Gonçalves Veiga (Universidade do Minho - NIPE); Francisco José Veiga (Universidade do Minho - NIPE)
    Abstract: Using data for 278 Portuguese mainland municipalities, we estimate the impact of national and local economic conditions on legislative electoral outcomes over the period from the reestablishment of democracy in 1974 to the present. Empirical results indicate that the performance of the national economy is important but that the municipal situation also conditions electoral outcomes.
    Keywords: Voting functions, opportunism, local governments, elections, Portugal.
    JEL: H72 D72 D78
    Date: 2006

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