nep-pol New Economics Papers
on Positive Political Economics
Issue of 2006‒09‒23
thirteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Windfall Gains, Political Economy, and Economic Development By Dalgaard, Carl-Johan; Olsson, Ola
  2. Governance matters V: aggregate and individual governance indicators for 1996 - 2005 By Kaufmann, Daniel; Kraay, Aart; Mastruzzi, Massimo
  3. Democratic Defenses and Destabilisations By Werner Güth; Hartmut Kliemt; Stefan Napel
  4. Voting over Taxes: The Case of Tax Evasion By Traxler, Christian
  5. Land and Power: Theory and Evidence from Chile By Jean-Marie Baland; James A. Robinson;
  6. Financing Agricultural Development: The Political Economy of Public Spending on Agriculture in Sub-Saharan Africa By Palaniswamy, Nethra; Birner, Regina
  7. Early Retirement and Social Security: A Long Term Perspective By J. Ignacio Conde-Ruiz; Vincenzo Galasso; Paola Profeta
  8. Does Employment Protection Create Its Own Political Support? By Björn Brügemann
  9. An experiment on corruption and gender By Fernanda Rivas
  10. Postponing Retirement: the Political Push of Aging By Vincenzo Galasso
  11. Industrial Policy in an Imperfect World By Hodler, Roland
  12. Employment Protection: Tough to Scrap or Tough to Get? By Björn Brügemann
  13. Financial Liberalisation, Bureaucratic Corruption and Economic By Blackburn, Keith; Forgues-Puccio, Gonzalo F.

  1. By: Dalgaard, Carl-Johan (University of Copenhagen, Department of Economics); Olsson, Ola (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: Natural resource rents and foreign aid have the character of windfall gains that affect economic outcomes both directly and indirectly. Several studies have shown that the indirect effect typically works via institutions like corruption. In this article, we offer a theoretical framework for a joint analysis of how natural resources and aid potentially affect total output in society through rent seeking activities. We survey the existing evidence on both direct and indirect effects of windfalls and provide some new empirical evidence of the association between aid/natural resources and institutions in a large cross-section of countries. Our results suggest that whereas more aid means less corruption, natural resource rents is positively correlated with corruption, although both relationships are nonlinear. <p>
    Keywords: institutions; aid; natural resources; windfall gains; economic growth; corruption; rule of law
    JEL: F35 O11
    Date: 2006–09–05
  2. By: Kaufmann, Daniel; Kraay, Aart; Mastruzzi, Massimo
    Abstract: The authors report on the latest version of the worldwide governance indicators, covering 213 countries and territories and measuring six dimensions of governance from 1996 until end-2005: voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption. The latest indicators are based on hundreds of variables and reflect the views of thousands of citizen and firm survey respondents and experts worldwide. Although global averages of governance display no marked trends during 1996-2005, nearly one-third of countries exhibit significant changes [for better or for worse] on at least one dimension of governance. Three new features distinguish this update. (1) The authors have moved to annual reporting of governance estimates. This update includes new governance estimates for 2003 and 2005, as well as minor backward revisions to biannual historical data for 1996-2004. (2) The authors are, for the first time, publishing the individual measures of governance from virtually every data source underlying the aggregate governance indicators. The ready availability of the individual data sources underlying the aggregate governance indicators is aimed at further enhancing the transparency of the methodology and of the resulting aggregate indicators, as well as helping data users and policymakers identify specific governance challenges in individual countries. (3) The authors present new evidence on the reliability of expert assessments of governance which, alongside survey responses, form part of the aggregate measures of governance.
    Keywords: Governance Indicators,National Governance,Economic Policy, Institutions and Governance,Statistical & Mathematical Sciences,Scientific Research & Science Parks
    Date: 2006–09–01
  3. By: Werner Güth; Hartmut Kliemt; Stefan Napel
    Abstract: The so-called paradox of democracy is approached as a variant of a more general class of so-called paradoxes of self-amendment. It is studied from a legal philosophy and a game theoretic point of view. Special attention is devoted to the risks and chances of inducing the foes of democracy to accept democratic rules by granting them a share in power. The upshot is that admitting democratic competition there are no foolproof defenses against democratic self-destabilisation.
    Date: 2006–09
  4. By: Traxler, Christian
    Abstract: This paper studies majority voting on taxes when tax evasion is possible. We characterize the voting equilibrium where the agent with median taxed income is pivotal. Since the ranking of true incomes does not necessarily correspond to the ranking of taxed incomes, the decisive voter can differ from the median income receiver. In this case, we find unconventional patterns of redistribution, e.g. from the middle class to the poor and the rich. Furthermore, we show that majority voting can lead to an inefficiently low level of taxation despite a right-skewed income distribution. Hence, the classical over-provision result might turn around, once tax evasion is taken into account.
    Keywords: Majority Voting; Tax Evasion; Welfare Analysis; Redistribution
    JEL: H26 H72 D6
    Date: 2006–09
  5. By: Jean-Marie Baland; James A. Robinson;
    Abstract: We study the connection between employment and political control. Many employment relationships concede rents to workers. For example, when worker effort is crucial for production, but only imperfectly observed. We show that, depending on the political institutions, the presence of such rents allows employers to use the threat of withdrawing them to control their workers' political behavior. We thus demonstrate that employment does not simply generate income, it also gives power to control the behavior of others. The analysis focuses on the salient example of political control, where landlords coerce the votes of their workers in the absence of a secret ballot. The model we develop generates predictions about electoral outcomes which can be tested by investigating the impact of the introduction of an effective secret ballot. Such an institutional reform reduces landlords' control, and in consequence, we should observe changes in voting behavior, since workers whose votes were previously controlled and sold can now vote freely. We test the predictions of the model by examining in detail the effects of the introduction of the secret ballot in Chile in 1958. We show that, consistent with our theory, the political reforms led to large changes in voting behavior. Before the reforms, localities with more pervasive patron-client relationships tend to exhibit a much stronger support for the right-wing parties, traditionally associated with the landed oligarchy. After the reform however, this difference across localities completely disappeared.
    JEL: D72 O54 Q15
    Date: 2006–09
  6. By: Palaniswamy, Nethra; Birner, Regina
    Abstract: Acknowledging that the agricultural sector can play an important role as an engine of pro-poor growth in Sub-Saharan Africa, the purpose of this paper is to identify the factors that influence the “political will” of governments to support this sector. The concept of “political resources” from the political science literature is used to guide the analysis, as it combines the insights from state-centered and society-centered approaches to explain agricultural policies. Drawing on panel data covering 14 Sub-Saharan African countries over the period 1980-2001, we present empirical evidence showing that political factors play an important role in determining government’s commitment to supporting agricultural development. We use a measure of democracy that varies both across countries and within countries over time. Estimates are presented for separate samples of democracies and non-democracies, and for a pooled sample of all countries and years irrespective of the democratic status. Our results suggest that the rural poor do exercise electoral leverage in democracies; larger rural population shares are associated with higher spending on agriculture in democracies but not in authoritarian regimes. We also find evidence consistent with the theoretical prior that larger farmers tend to be better organized in interest groups. Specifically, we find that the share of traditional agricultural exports such as coffee and cocoa in the total value of exports, which may be an indicator for the ability of farmers’ to organize themselves as interest groups, induces greater spending on agriculture. This result holds true for both democracies and nondemocracies.
    JEL: H3 H5 O13 Q18
    Date: 2006
  7. By: J. Ignacio Conde-Ruiz (Spanish Prime Minister's Economic Bureau and FEDEA); Vincenzo Galasso (IGIER, Università Bocconi, CSEF and CEPR); Paola Profeta (Università Bocconi)
    Abstract: We provide a long term perspective on the individual retirement behavior and on the future of retirement. In a Markovian political economic theoretical framework, in which incentives to retire early are embedded, we derive a political equilibrium with positive social security contribution rates and early retirement. While aging has opposite economic and political effects on social security contributions, it may lead to postponing retirement -- by reducing the generosity of pension benefits -- unless the political effect leads to a large increase in contribution and hence higher benefits. Economic slowdowns, captured by a reduction in wage income in youth, will also induce workers to postpone retirement and to vote for less social security
    Keywords: pensions, income effect, tax burden, politico-economic Markovian equilibrium
    JEL: H53 H55 D72
    Date: 2006–09–01
  8. By: Björn Brügemann (Yale University and IZA Bonn)
    Abstract: This paper investigates the ability of employment protection to generate its own political support. A version of the Mortensen-Pissarides model is used for this purpose. Under the standard assumption of Nash bargaining, workers value employment protection because it strengthens their hand in bargaining. Workers in high productivity matches benefit most from higher wages as they expect to stay employed for longer. By reducing turnover employment protection shifts the distribution of match-specific productivity toward lower values. Thus stringent protection in the past actually reduces support for employment protection today. Introducing involuntary separations is a way of reversing this result. Now workers value employment protection because it delays involuntary dismissals. Workers in low productivity matches gain most since they face the highest risk of dismissal. The downward shift in the productivity distribution is now a shift towards ardent supporters of employment protection. In a calibrated example this mechanism sustains both low and high employment protection as stationary political outcomes. A survey of German employees provides support for employment protection being more strongly favored by workers likely to be dismissed.
    Keywords: employment protection, wage determination, search and matching, political economy
    JEL: E24 J41 J65
    Date: 2006–09
  9. By: Fernanda Rivas (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: There exists evidence in the social science literature that women may be more relationshiporiented, may have higher standards of ethical behavior and may be more concerned with the common good than men are. This would imply that women are more willing to sacrifice private profit for the public good, and this would be especially important for political life. Many papers with field data have found deference’s in the corrupt activities of males and females, but given their different insertion in the labor market and in politics, it is not clear if the differences are due to differences in opportunities or real gender differences. The aim of this paper is to see if women and men, facing the same situation behave in a different way, as suggested in the field-data studies, or on the contrary, when women are in the same position as men they behave in the same way. The results found in the experiment show that women are indeed less corrupt than men. This suggests that increasing women’s participation in the labor force and politics would help to reduce corruption.
    Keywords: corruption, gender, experiment
    JEL: C91 D73 J16
    Date: 2006–08
  10. By: Vincenzo Galasso (IGIER, Università Bocconi, CSEF and CEPR)
    Abstract: Conventional economic wisdom suggests because of the aging process, social security systems will have to be retrenched. In particular, retirement age will have to be largely increased. Yet, is this policy measure feasible in OECD countries? Since the answer belongs mainly to the realm of politics, I evaluate the political feasibility of postponing retirement under aging in France, Italy, the UK, and the US. Simulations for the year 2050 steady state demographic, economic and political scenario suggest that retirement age will be postponed in all countries, while the social security contribution rate will rise in all countries, but Italy. The political support for increasing the retirement age stems mainly from the negative income effect induced by aging, which reduces the profitability of the existing social security system, and thus the individuals net social security wealth.
    Date: 2006–09–01
  11. By: Hodler, Roland
    Abstract: Theoretical analyses of industrial policy normally restrict the range of possible outcomes by abstracting from either market or government failures. This paper thus studies industrial policy and its effectiveness in a model that includes both market and government imperfections. We introduce a public agency responsible for industrial policy into the model of Hausmann and Rodrik (2003), and assume that this agency has limited information and is partly politically motivated. We further extend the model to allow the public agency to communicate with en- trepreneurs and the entrepreneurs to engage in rent seeking. We find that industrial policies are ineffective if the public agency is poorly informed, but that they are not necessarily ineffective if the public agency is highly politically motivated. Given a highly politically mo- tivated public agency, industrial policies are effective if and only if the institutional setting ensures that such policies are modest e.g. by re- stricting the public agency’s budget. Moreover, our model helps us to understand why the same industrial policies that have failed elsewhere have been relatively successful in South Korea and Taiwan.
    Keywords: Industrial Policy, Market and Government Failures, Political Economy
    JEL: H25 L52 L53 O20
    Date: 2006
  12. By: Björn Brügemann (Yale University and IZA Bonn)
    Abstract: Differences in employment protection across countries appear to be quite persistent over time. One mechanism that could explain this persistence is the so called constituency effect: high employment protection creates a mass of workers in favor of maintaining high protection because deregulation would mean that they would lose their jobs. To the extent that this mechanism is at work, employment protection would appear to be a policy that is difficult to deregulate once it has been introduced. In this paper I consider an alternative mechanism generating persistence that makes employment protection a policy that is difficult to introduce. If a legislative process is initiated to introduce employment protection, it is reasonable to assume that firms have an opportunity to lay off workers before employment protection becomes effective. Firms would have an incentive to do so in order to avoid the cost associated with stringent employment protection in the future. Anticipating this, workers whose situation is already precarious may not find it in their best interest to support the legislative process to introduce employment protection in the first place. The main result of the paper is that the ability of firms to adjust employment before an increase in employment protection becomes effective may give rise to situations in which both low and high employment protection are stationary political outcomes.
    Keywords: employment protection, job creation and destruction, political economy
    JEL: E24 J41 J65
    Date: 2006–09
  13. By: Blackburn, Keith; Forgues-Puccio, Gonzalo F.
    Abstract: We study the effect of international financial integration on economic development when the quality of governance may be compromised by corruption. Our analysis is based on a dynamic general equilibrium model of a small economy in which growth is driven by capital accumulation and public policy is administered by government- appointed bureaucrats. Corruption may arise due to the opportunity for bureaucrats to embezzle public funds, an opportunity that is made more attractive by financial liberalisation which, at the same time, raises efficiency in capital production. Our main results may be summarised as follows: (1) corruption is always bad for economic development, but its effect is worse if the economy is open than if it is closed; (2) the incidence of corruption may, itself, be affected by both the development and openness of the economy; (3) financial liberalisation is good for development when governance is good, but may be bad for development when governance is bad; and (4) corruption and poverty may co-exist as permanent, rather than just transitory, fixtures of an economy.
    Keywords: Corruption, development, financial liberalisation
    JEL: D73 F36 O11
    Date: 2006

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