nep-pol New Economics Papers
on Positive Political Economics
Issue of 2006‒10‒28
24 papers chosen by
Eugene Beaulieu
University of Calgary

  1. Democratic Capital: The Nexus of Political and Economic Change By Persson, Torsten; Tabellini, Guido
  2. On Public Opinion Polls and Voters' Turnout By Klor, Esteban F; Winter, Eyal
  3. To Segregate or to Integrate: Education Politics and Democracy By de la Croix, David; Doepke, Matthias
  4. Separation of Powers and the Budget Process By Grossman, Gene; Helpman, Elhanan
  5. Political Budget Cycles and Fiscal Decentralization By Gonzalez, Paula; Hindriks, Jean J.G.; Lockwood, Ben; Porteiro, Nicolas
  6. When is Democracy an Equilibrium? Theory and Evidence from Colombia's La Violencia By Chacón, Mario; Robinson, James A; Torvik, Ragnar
  7. Are all crowds equally wise? A comparison of political election forecasts by experts and the public By Sjöberg, Lennart
  8. Elections, Contracts and Markets By Gersbach, Hans; Muller, Markus
  9. Does Democratization Benefit the Environment in the Long-Run in the Presence of Inequality? By Drosdowski, Thomas
  10. Media Freedom, Bureaucratic Incentives and the Resource Curse By Egorov, Georgy; Guriev, Sergei; Sonin, Konstantin
  11. Postponing Retirement: the Political Push of Aging By Galasso, Vincenzo
  12. Democracy and Protectionism By O'Rourke, Kevin H; Taylor, Alan M
  13. Crises, What Crises? By Campos, Nauro F; Hsiao, Cheng; Nugent, Jeffrey B
  14. Individual Attitudes Towards Immigrants: Welfare-State Determinants Across Countries By Facchini, Giovanni; Mayda, Anna Maria
  15. Institution Building and Growth in Transition Economies By Beck, Thorsten; Laeven, Luc
  16. Ex Interim Voting in Public Good Provision By Sven Fischer; Andreas Nicklisch
  17. Reform Redux: Measurement, Determinants and Reversals By Campos, Nauro F; Horváth, Roman
  18. Multilateralising Regionalism: Spaghetti Bowls as Building Blocs on the Path to Global Free Trade By Baldwin, Richard
  19. Attack politics: Who goes negative and why? By Mattes, Kyle
  20. Bribes, Lobbying and Development By Harstad, Bård; Svensson, Jakob
  21. Do Credible Domestic Institutions Promote Credible International Agreements? By Conconi, Paola; Perroni, Carlo
  22. From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules By Buti, Marco; Martins, Joao Nogueira; Turrini, Alessandro Antonio
  23. Challenges and Opportunities for Resource Rich Economies By van der Ploeg, Frederick
  24. Development, Democracy and Mass Killings By Easterly, William; Gatti, Roberta; Kurlat, Sergio

  1. By: Persson, Torsten; Tabellini, Guido
    Abstract: We study the joint dynamics of economic and political change. Predictions of the simple model that we formulate in the paper get considerable support in a panel of data on political regimes and GDP per capita for about 150 countries over 150 years. Democratic capital - measured by a nation's historical experience with democracy and by the incidence of democracy in its neighborhood - reduces the exit rate from democracy and raises the exit rate from autocracy. In democracies, a higher stock of democratic capital stimulates growth in an indirect way by decreasing the probability of a sucessful coup. Our results suggest a virtuous circle, where the accumulation of physical and democratic capital reinforce each other, promoting economic development jointly with the consolidation of democracy.
    Keywords: economic growth; hazard rates; political regimes
    JEL: D70 H11 N10 O11
    Date: 2006–05
  2. By: Klor, Esteban F; Winter, Eyal
    Abstract: This paper studies the effects that the revelation of information on the electorate's preferences has on voters' turnout decisions. The experimental data show that closeness in the division of preferences induces a significant increase in turnout. Moreover, for closely divided electorates (and only for these electorates) the provision of information significantly raises the participation of subjects supporting the slightly larger team relative to the smaller team. This behaviour contradicts the qualitative predictions of the unique quasi-symmetric Nash equilibrium of the theoretical model. We show that the heterogeneous effect of information on the participation of subjects in different teams is driven by the subjects' (incorrect) beliefs of casting a pivotal vote. Simply put, subjects overestimate the probability of casting a pivotal vote when they belong to the team with a slight majority, and choose the strategy that maximizes their utility based on their inflated probability assessment. Empirical evidence on gubernatorial elections in the U.S. between 1990 and 2005 is consistent with our main experimental result. Namely, we observe that the difference in the actual vote tally between the party leading according to the polls and the other party is larger than the one predicted by the polls only in closely divided electorates. We provide a behavioural model that explains the main findings of our experimental and empirical analyses.
    Keywords: experimental economics; public opinion polls; voter turnout
    JEL: C72 C92 D72 H41
    Date: 2006–05
  3. By: de la Croix, David; Doepke, Matthias
    Abstract: The governments of nearly all countries are major providers of primary and secondary education to its citizens. In some countries, however, public schools coexist with private schools, while in others the government is the sole provider of education. In this study, we ask why different societies make different choices regarding the mix of private and public schooling. We develop a theory which integrates private education and fertility decisions with voting on public schooling expenditures. In a given political environment, high income inequality leads to more private education, as rich people opt out of the public system. Comparing across political systems, we find that concentration of political power can lead to multiple equilibria in the determination of public education spending.
    Keywords: democracy; private education; probabilistic voting; public education
    JEL: D72 H42 I21 O10
    Date: 2006–08
  4. By: Grossman, Gene; Helpman, Elhanan
    Abstract: We study budget formation in a model featuring separation of powers. In our model, the legislature designs a budget bill that can include a cap on total spending and earmarked allocations to designated public projects. Each project provides random benefits to one of many interest groups. The legislature can delegate spending decisions to the executive, who can observe the productivity of all projects before choosing which to fund. However, the ruling coalition in the legislature and the executive serve different constituencies, so their interests are not perfectly aligned. We consider settings that differ in terms of the breadth and overlap in the constituencies of the two branches, and associate these with the political systems and circumstances under which they most naturally arise. Earmarks are more likely to occur when the executive serves broad interests, while a binding budget cap arises when the executive's constituency is more narrow than that of the powerful legislators.
    Keywords: comparative political economics; fiscal policy; government spending; pork-barrel politics
    JEL: D78 H41 H61
    Date: 2006–07
  5. By: Gonzalez, Paula; Hindriks, Jean J.G.; Lockwood, Ben; Porteiro, Nicolas
    Abstract: In this paper, we study a model a 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.
    Keywords: fiscal decentralization; local public goods; political budget cycle
    JEL: D72 E32 E62 H41
    Date: 2006–04
  6. By: Chacón, Mario; Robinson, James A; Torvik, Ragnar
    Abstract: The conventional wisdom in political science is that for a democracy to be consoliated, all groups must have a chance to attain power. If they do not then they will subvert democracy and choose to fight for power. In this paper we show that this wisdom is, if not totally incorrect, seriously incomplete. This is so because although the probability of winning an election increases with the size of a group, so does the probability of winning a fight. Thus in a situation where all groups have a high chance of winning an election, they may also have a high chance of winning a fight. Indeed, in a natural model, we show that democracy may never be consolidated in such a situation. Rather, democracy may only be stable when one group is dominant. We provide a test of a key aspect of our model using data from La Violencia, a political conflict in Colombia during the years 1946-1950 between the Liberal and Conservative parties. Consistent with our results, and contrary to the conventional wisdom, we show that fighting between the parties was more intense in municipalities where the support of the parties was more evenly balanced.
    Keywords: conflict; democracy
    JEL: D72 D74
    Date: 2006–05
  7. By: Sjöberg, Lennart (Center for Risk Research)
    Abstract: In this study, 4 groups of people made prognostic judgments of the outcome of the Swedish Parliamentary election in the fall of 2006, about one week before the election. The groups consisted of members of the public (N=123), political scientists (N=53), journalists writing about domestic politics in Swedish daily newspapers (N=32), and journalists who were editing sections of readers’ letters in daily newspapers (N=10). They rated, for each of seven political parties, which percentage of the votes that they believed they would get in the election. They also marked which party they themselves preferred, and answered to a few questions about interest and competence. Data were then obtained on the outcome of the election, and on the two opinions polls closest in time to it. It was found that all four groups did reasonably well, when average prognostic judgments were compared to the outcome of the election, and better than the opinion polls. The two last polls overestimated the span between the incumbent government and the victorious opposition by a factor of 2. Wishful thinking was assessed by comparing prognostic judgments for each respondent’s preferred party with his or her judgments of other parties. All groups showed some wishful thinking; the political scientists least and the public most. There were large and consistent individual differences in prognostic ability. Men performed better than women, as did those who expressed more interest and knowledge in politics, but neither level of education nor confidence in making the judgments correlated significantly with performance.
    Keywords: prognostic judgments; experts; poltical elections
    Date: 2006–10–03
  8. By: Gersbach, Hans; Muller, Markus
    Abstract: As the performance of long-term projects is not observable in the short run politicians may pander to public opinion. To solve this problem, we propose a triple mechanism involving political information markets, reelection threshold contracts, and democratic elections. An information market is used to predict the long-term performance of a policy, while threshold contracts stipulate a price level on the political information market that a politician must reach to have the right to stand for reelection. Reelection thresholds are offered by politicians during campaigns. We show that, on balance, the triple mechanism increases social welfare.
    Keywords: democracy; elections; information markets; threshold contracts; triple mechanism
    JEL: D72 D82
    Date: 2006–06
  9. By: Drosdowski, Thomas
    Abstract: Political economy may provide an important link between inequality and pollution. This paper studies the dynamic relationship between inequality and redistributive policy leading to differing transitional paths of pollution to the steady state, using a pollution-augmented framework developed by Benabou and employing numerical simulations. The results indicate that democratization can be beneficial for the environment in the long run if the share of redistributive transfers devoted to abatement is relatively high. Otherwise, less wealth-biased and more democratic regimes display highest income and pollution levels, differing in transitional paths contingent on initial inequality levels. Sustainable development, defined as non-declining level of utility over time, is achieved for a high degree of democracy when initial inequality is low. The representative agent with average wealth does not provide sustainability, which emphasizes the importance of heterogeneity in power and income for sustainability debates.
    Keywords: pollution, political economy, sustainability
    JEL: D31 D72 Q53
    Date: 2006–10
  10. By: Egorov, Georgy; Guriev, Sergei; Sonin, Konstantin
    Abstract: How can a non-democratic ruler provide proper incentives for state bureaucracy? In the absence of competitive elections and separation of powers, the ruler has to be well-informed himself, and to gather information he may use either a secret service or the media. The danger of using a secret service is that it can collude with bureaucrats; overcoming collusion is costly. Free media aggregate information and thus constrain bureaucrats, but also help citizens to coordinate on actions against the incumbent. We endogenize the ruler's choice in a dynamic model to argue that free media are less likely to emerge in resource-rich economies where the ruler is less interested in providing incentives to his subordinates. We show that this prediction is consistent with both cross-section and panel data.
    Keywords: bureaucracy; media freedom; non-democratic politics; resource curse
    JEL: D72 D80 P16 Q4
    Date: 2006–07
  11. By: Galasso, Vincenzo
    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.
    Keywords: aging; political equilibria; postponing retirement
    JEL: D72 H5 H53
    Date: 2006–08
  12. By: O'Rourke, Kevin H; Taylor, Alan M
    Abstract: Does democracy encourage free trade? It depends. Broadening the franchise involves transferring power from non-elected elites to the wider population, most of whom will be workers. The Hecksher-Ohlin-Stolper-Samuelson logic says that democratization should lead to more liberal trade policies in countries where workers stand to gain from free trade; and to more protectionist policies in countries where workers will benefit from the imposition of tariffs and quotas. We test and confirm these political economy implications of trade theory hypothesis using data on democracy, factor endowments, and protection in the late nineteenth century.
    Keywords: factor endowments; Heckscher-Ohlin trade theory; Stolper-Samuelson theorem; tariffs
    JEL: F11 F13 N70
    Date: 2006–05
  13. By: Campos, Nauro F; Hsiao, Cheng; Nugent, Jeffrey B
    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 crisis; economic reform; labour market reform; political crisis; trade liberalisation
    JEL: E32 H11 K20 O40
    Date: 2006–08
  14. By: Facchini, Giovanni; Mayda, Anna Maria
    Abstract: This paper analyzes welfare-state determinants of individual attitudes towards immigrants - within and across countries - and their interaction with labor-market drivers of preferences. We consider two different mechanisms through which a redistributive welfare system might adjust as a result of immigration. Under the first scenario, immigration has a larger impact on individuals at the top of the income distribution, while under the second one it is low-income individuals who are most affected through this channel. Individual attitudes are consistent with the first welfare-state scenario and with labor-market determinants of immigration attitudes. In countries where natives are on average more skilled than immigrants, individual income is negatively correlated with pro immigration preferences, while individual skill is positively correlated with them. These relationships have the opposite signs in economies characterized by skilled migration (relative to the native population). Such results are confirmed when we exploit international differences in the characteristics of destination countries' welfare state.
    Keywords: immigration attitudes; political economy; welfare state
    JEL: F1 F22 J61
    Date: 2006–05
  15. By: Beck, Thorsten; Laeven, Luc
    Abstract: Drawing on the recent literature on economic institutions and the origins of economic development, we offer a political economy explanation of why institution building has varied so much across transition economies. We identify dependence on natural resources and the historical experience of these countries during socialism as major determinants of institution building during transition. Using natural resource reliance and the years under socialism to extract the exogenous component of institution building, we also show the importance of institutions in explaining the variation in economic development and growth across transition economies during the first decade of transition.
    Keywords: economic development; institutions; transition economies
    JEL: O10 P20
    Date: 2006–06
  16. By: Sven Fischer; Andreas Nicklisch
    Abstract: We report the results of an experimental study that compares voting mechanisms in the provision of public goods. Subjects can freely decide how much they want to contribute. Whether the public good is finally provided is decided by a referendum under full information about all contributions. If provision is rejected, contributions are reduced by a fee and reimbursed. We compare unanimity with majority voting and both to the baseline of cheap talk. Contributions are highest under unanimity. Yet, results concerning overall efficiency are mixed. When provision occurs, only unanimity enhances efficiency. Overall, however, unanimity leads to too many rejections.
    Keywords: competition, collusion, auction, bidding, public procurement
    JEL: C72 C91 H41
    Date: 2006–10
  17. By: Campos, Nauro F; Horváth, Roman
    Abstract: We construct objective measures of privatization, internal and external liberalization reform efforts, across countries over time, and investigate their determinants, reversals and macroeconomic impacts. We find that GDP growth determines external liberalization and privatization, concentration of political power drives internal liberalization, and democracy underpins all three. We find that FDI inflows reduce the probability of privatization reversals, labour strikes increase that of internal liberalization reversals, and OECD growth increase that of external liberalization reversals. We replicate previous studies and find that the macroeconomic effects of reform (when measured objectively) tend to be larger and more precisely estimated.
    Keywords: political economy; privatization; reform; transition
    JEL: D72 E23 H26 O17
    Date: 2006–05
  18. By: Baldwin, Richard
    Abstract: This paper addresses the final steps to global free trade – what they might look like, what sort of political economy forces might drive them, and what the WTO might do to guide them. Two facts form the point of departure: 1) Regionalism is here to stay; world trade is regulated by a motley assortment of unilateral, bilateral and multilateral trade agreements; 2) this motley assortment is not the best way to organise world trade. Moving to global duty-free trade will require a multilateralisation of regionalism. The paper presents the political economy logic of trade liberalisation and uses it to structure a narrative of world trade liberalisation since 1947. The logic is then used to project the world tariff map in 2010, arguing that the pattern will be marked by fractals – fuzzy, leaky trade blocs made up of fuzzy, leaky sub-blocs (fuzzy since the proliferation of FTAs makes it impossible to draw sharp lines around the big-3 trade blocs, and leaky since some FTAs create free trade ’canals’ linking the big-3 blocs). The paper then presents a novel political economy mechanism – spaghetti bowls as building blocs – whereby offshoring creates a force that encourages the multilateralisation of regionalism. Finally, the paper suggests three things the WTO could do to help.
    Keywords: domino effect; juggernaut effect; multilateralism; regionalism; RTB unilateralism; trade
    JEL: F10 F13 F15 F2
    Date: 2006–08
  19. By: Mattes, Kyle
    Date: 2006–10
  20. By: Harstad, Bård; Svensson, Jakob
    Abstract: Why are firms more likely to pay bribes to bureaucrats to bend the rules in developing countries while they instead lobby the government to change the rules in more developed ones? Should we expect an evolution from bribing to lobbying, or can countries get trapped in a bribing equilibrium forever? Corruption and lobbying are to some extent substitutes. By bribing, a firm may persuade a bureaucrat to "bend the rules" and thus avoid the cost of compliance. Alternatively, firms may lobby the government to "change the rules". But there are important differences. While a change in the rules is more permanent, the bureaucrat can hardly commit not to ask for bribes also in the future. Based on this assumption, we show that (i) an equilibrium with corruption discourages firms to invest, (ii) firms bribe if the level of development is low, but (iii) they switch to lobbying if the level of development is sufficiently high. Combined, the economy might evolve from a bribing to a lobbying equilibrium, but too large bribes may discourage the necessary investments for lobbying eventually to become an equilibrium. The outcome is a poverty trap with pervasive corruption. This poverty trap is more likely if penalties on corruption are large and the regulatory costs are high.
    Keywords: corruption; development; lobbying
    JEL: D72 D92 O16 O17
    Date: 2006–07
  21. By: Conconi, Paola; Perroni, Carlo
    Abstract: We examine the relationship between international policy coordination and domestic policy reputation when both are self-sustaining. We show that domestic policy commitment does not necessarily facilitate international cooperation; rather, efficient polices may be most easily sustained when countries are unable to pre-commit to policy domestically. Moreover, lack of domestic commitment is more likely to facilitate international cooperation the larger are the international spillovers of domestic policies.
    Keywords: domestic policy commitment; international agreements
    JEL: F02 F10
    Date: 2006–07
  22. By: Buti, Marco; Martins, Joao Nogueira; Turrini, Alessandro Antonio
    Abstract: Under numerical fiscal rules, such as those underpinning EMU, governments have strong temptations to use accounting tricks to meet the fiscal constraints. Given these political incentives, fiscal variables that in the past were regarded as a mere residual acquire a strategic role. This is the case of the so-called stock-flow adjustment (SFA) which reconciles deficit and debt developments. We develop a simple theoretical model where deficits and two distinct SFA components (one that could be used to reduce the deficit figures and the other to impact debt figures instead) are determined as a result of a constrained optimization by fiscal authorities. Econometric evidence provides results consistent with the model findings. The SFA component related to the purpose to hide deficits rises with the recorded deficit, while the sales of financial assets designed to keep the debt under control rise with debt and deficit. Such practices have greatly contributed to the loss of credibility of EMU’s fiscal rules. If properly implemented, the reformed Pact, which stresses durable adjustment and long-run sustainability, should help curb such perverse incentives.
    Keywords: fiscal gimmicks; government accounting; Stability and Growth Pact; stock-flow adjustment
    JEL: E61 H62 H87
    Date: 2006–08
  23. By: van der Ploeg, Frederick
    Abstract: The political economy of resource rich countries is surveyed. The empirical evidence suggests that countries with a large share of primary exports in GNP have bad growth records and high inequality, especially if the quality of institutions and the rule of law are bad. The economic argument that a resource bonanza induces appreciation of the real exchange rate and a decline of non-resource export sectors may have some relevance. More important, a resource boom reinforces rent grabbing, especially if institutions are bad, and keeps in place bad policies. Optimal resource management may make use of the Hotelling rule and the Hartwick rule. However, a recent World Bank study suggests that resource rich economies squander their natural resource wealth and more often have negative genuine saving rates. Still, countries such as Botswana, Canada, Australia and Norway suggest it is possible to escape the resource curse. Some practical suggestions for a better management of natural resources are offered.
    Keywords: corruption; cross-country and panel evidence; debt overhang; dependent economy; Dutch Disease; genuine saving; growth record; Hartwick Rule; Hotelling Rule; institutions; natural resource wealth management; optimal resource depletion; real exchange rate; resource curse; resource dividend; resource fund; rule of law; sustainable development; transparency
    JEL: C12 C13 E1 F43 K42 O41 Q3
    Date: 2006–05
  24. By: Easterly, William; Gatti, Roberta; Kurlat, Sergio
    Abstract: Using a newly assembled dataset spanning from 1820 to 1998, we study the relationship between the occurrence and magnitude of episodes of mass killing and the levels of development and democracy across countries and over time. Mass killings appear to be more likely at intermediate levels of income and less likely at very high levels of democracy. However, the estimated relationship between democracy and probability of mass killings is not linear in the full sample. In the 20th century, discrete improvements in democracy are systematically associated with episodes involving fewer victims.
    Keywords: democracy; growth; mass killings
    JEL: N40 O10
    Date: 2006–06

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