nep-pol New Economics Papers
on Positive Political Economics
Issue of 2006‒08‒12
eight papers chosen by
Eugene Beaulieu
University of Calgary

  1. Roll Call Data and Ideal Points By Tasos Kalandrakis
  2. The Politics and Economics of Offshore Outsourcing By N. Gregory Mankiw; Phillip Swagel
  3. Renegotiation Without Holdup: Anticipating Spending and Infrastructure Concessions By Eduardo Engel; Ronald Fischer; Alexander Galetovic
  4. A Reputational Theory of Two Party Competition By Tasos Kalandrakis
  5. Development, Democracy, and Mass Killings By William Easterly
  6. Factor Returns, Institutions, and Geography: A View From Trade By Scott L. Baier; Gerald P. Dwyer; Robert Tamura
  7. Demographics and the politics of capital taxation in a life-cycle economy By Mateos-Planas, Xavier
  8. Consensual and Conflictual Democratization By Matteo Cervellati; Piergiuseppe Fortunato; Uwe Sunde

  1. By: Tasos Kalandrakis (W. Allen Wallis Institute of Political Economy, 107 Harkness Hall, University of Rochester, Rochester, NY 14627-0158)
    Abstract: We show that, in the absence of symmetry or other parametric restrictions on legislators’ utility functions, roll call voting records cannot be used to estimate legislators’ ideal points unless we complement these data with information on the location of the alternatives being voted upon by the legislature. Without such additional information, the roll-call data cannot differentiate between distinct, arbitrary, sets of ideal points for the legislators no matter how large the roll call record or how low the number of policy dimensions. On the other hand, when the location of voting alternatives is known, we derive simple testable restrictions on the location of legislators’ ideal points from the roll call data.
    Keywords: Ideal Point Estimation, Rationalizable Choice, Roll Call Voting Record.
    JEL: D7 D11
    Date: 2006–08
  2. By: N. Gregory Mankiw; Phillip Swagel
    Abstract: This paper reviews the political uproar over offshore outsourcing connected with the release of the Economic Report of the President (ERP) in February 2004, examines the differing ways in which economists and non-economists talk about offshore outsourcing, and assesses the empirical evidence on the importance of offshore outsourcing in accounting for the weak labor market from 2001 to 2004. Even with important gaps in the data, the empirical literature is able to conclude that offshore outsourcing is unlikely to have accounted for a meaningful part of the job losses in the recent downturn or contributed much to the slow labor market rebound. The empirical evidence to date, while still tentative, actually suggests that increased employment in the overseas affiliates of U.S. multinationals is associated with more employment in the U.S. parent rather than less.
    Date: 2006–07
  3. By: Eduardo Engel; Ronald Fischer; Alexander Galetovic
    Abstract: Infrastructure concessions are frequently renegotiated after investments are sunk, resulting in better contractual terms for the franchise holders. This paper offers a political economy explanation for renegotiations that occur with no apparent holdup. We argue that they are used by political incumbents to anticipate infrastructure spending and thereby increase the probability of winning an upcoming election. Contract renegotiations allow administrations to replicate the effects of issuing debt. Yet debt issues are incorporated in the budget, must be approved by Congress and are therefore subject to the opposition’s review. By contrast, under current accounting standards the obligations created by renegotiations circumvent the budgetary process in most countries. Hence, renegotiations allow incumbents to spend more without being subject to Congressional oversight.
    JEL: H21 L51 L91
    Date: 2006–07
  4. By: Tasos Kalandrakis (W. Allen Wallis Institute of Political Economy, 107 Harkness Hall, University of Rochester, Rochester, NY 14627-0158)
    Abstract: We propose a reputational theory of two-party competition. We model the interaction of parties and the electorate as a stochastic game of incomplete information. The parties’ preferred policies (moderate or extreme) are possibly revealed to the electorate only via their policy choices while in government, and partisan preferences change with positive probability following defeat in elections. Due to inertia within party organizations, party preferences display positive serial correlation. When partisans care sufficiently about office, extreme policies are pursued with positive probability by the government only when the ruling party is perceived relatively more extreme than the opposition. In equilibrium such policies occur when (a) both parties are perceived to be more extreme than a long-run benchmark level, and (b) neither party holds a significant advantage regarding its perceived extremism by the electorate. Equilibrium dynamics produce two qualitatively different adjustment paths: one exhibits polarized politics such that there is positive probability of non-moderate policies in the future for a protracted period of time; the other possible adjustment path produces moderation with probability one in all periods. Both adjustment paths are such that one of the two parties (possibly different over time) may win successive elections with high probability in equilibrium.
    Keywords: Parliamentary Dynamics, Reputation, Westminster.
    Date: 2006–08
  5. By: William Easterly
    Abstract: Using a newly assembled dataset spanning from 1820 to 1998, we study the relationship between the occurrence and cruelty of episodes of mass killing and the levels of development and democracy across countries and over time. We find that massacres are more likely at intermediate levels of income and less likely at very high levels of democracy, but we do not find evidence of a linear relationship between democracy and probability of mass killings. In the 20th century, discrete improvements in democracy are systematically associated with less cruel massacre episodes. Episodes at the highest levels of democracy and income involve relatively fewer victims.
    Keywords: Economic development, mass killings, genocide, democracy
    JEL: O15
    Date: 2006–07
  6. By: Scott L. Baier; Gerald P. Dwyer; Robert Tamura
    Abstract: We examine the importance of institutions and geography for determining workers' wages and the return to capital. These returns to labor and capital are examined through the lens of labor and capital's productivities, which are directly related to the factors' returns. We estimate productivities of labor and capital based on trade flows across countries and present statistical evidence that these productivities are related to total factor productivities which rationalize output differences across countries. We examine whether these labor and capital productivities are related to countries' political institutions and geography. Protection of property rights is the dominant influence on both labor and capital productivity. There is some evidence that a democratic government affects productivity, but once property rights are included in the analysis, the overall democracy index has little influence on factor productivity.. Geography is only important in terms of distance to a large market. Factors such as the incidence of malaria are relatively unimportant. The unimportance of geography is not only statistical. For example, if the Philippines kept its geography but had the United Kingdom 's institutions, the Philippines ' labor productivity would increase from seven percent to 75 percent of the U.S. 's and capital productivity would increase from 25 percent to 58 percent of the U.S. 's. On the other hand, if the Philippines were to keep its institutions and were magically more to the United Kingdom 's geographic location, labor productivity would increase only from seven percent to 28 percent and capital productivity would increase from 25 percent to 26 percent.
    Date: 2006–08–02
  7. By: Mateos-Planas, Xavier
    Abstract: This paper investigates the consequences of changes in the age composition of the population for the mix of tax rates on labour and capital income when these policies are decided through democratic institutions. The analysis is conducted within a general equilibrium, overlapping-generations model where agents live for many periods, and tax rates are determined through voting by forward looking agents. A version of the model calibrated to the US economic conditions and 1990 age structure is used to study quantitatively the effects of past and projected demographic shifts in the US. The younger voting-age population in 1990 relative to 1965 can account for the large decline in the relative capital tax rate observed between these two years. The older voting-age population expected in 2025 is shown to lead to a sharp increase in capital taxation. These results reflect the tension between the induced changes in the decisive voter's age and in macroeconomic conditions.
  8. By: Matteo Cervellati (University of Bologna, IAE Barcelona and IZA Bonn); Piergiuseppe Fortunato (University of Bologna); Uwe Sunde (IZA Bonn and University of Bonn)
    Abstract: We study the process of endogenous democratization from inefficient oligarchic systems in an economy where heterogeneous individuals can get involved in predation activities. The features of democracies are shown to be crucially related to the conditions under which democratization initially takes place. The political regime and the extent of redistribution implemented under it depend on the allocation of de facto political power across the different social groups. The cost of public enforcement of property rights depends on the extent of predation activities in the economy. The theory highlights the importance of inequality in natural resources and availability of human capital for endogenous democratic transitions. Multiple politico-economic equilibria can be sustained conditional on expectations about property rights enforcement. This generates history dependence. Democratic transitions supported by a large consensus serve as coordination device and lead to better protection of property and more stable political systems than democratic transitions imposed in conflictual environments. We test the novel predictions using available cross-country data. The link between the type of democratic transition and the outcomes under democracy is also investigated using novel data on constitutional principles. The findings support the theoretical predictions.
    Keywords: democratization, oligarchy, conflict, consensual democracy, inequality, commitment, constitutional principles
    JEL: H10 O20 N10
    Date: 2006–07

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