nep-pol New Economics Papers
on Positive Political Economics
Issue of 2007‒01‒28
fifteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Vote buying and the education of a society By Felix Mühe
  2. Why Do European Governments Favor Religion? By Pablo Brañas-Garza; Angel Solano
  3. Protection for Sale or Surge Protection? By Susumu Imai; Hajime Katayama; Kala Krishna
  4. The Political Origins of Pension Funding By Enrico Perotti; Armin Schwienbacher
  5. Elections, Contracts and Markets By Hans Gersbach; Markus Müller
  6. Investor Protection and Entry By Enrico Perotti; Paolo Volpin
  7. Political Connections and Preferential Access to Finance: The Role of Campaign Contributions By Claessens, Stijn; Feijen, Erik; Laeven, Luc
  8. Sincere Voting with Cardinal Preferences: Approval Voting By Miguel �gel Ballester; Pedro Rey-Biel
  9. Crowding-out in Productive and Redistributive Rent-Seeking. By Giuseppe Dari-Mattiacci; Eric Langlais; Bruno Lovat; Francesco Parisi
  10. The Age of Mass Migration: Economic and Institutional Determinants By Bertocchi, Graziella; Strozzi, Chiara
  11. The Evolution of Citizenship: Economic and Institutional Determinants By Bertocchi, Graziella; Strozzi, Chiara
  12. The Swing Voter’s Curse in the Laboratory By Marco Battaglini; Rebecca Morton; Thomas Palfrey
  13. Local Economies and General Elections By Elinder, Mikael
  14. Economics and Politics of Alternative Institutional Reforms By Francesco Caselli; Nicola Gennaioli
  15. Do childless households support local public provision of education By Berardino Cesi

  1. By: Felix Mühe (Center of Economic Research (CER-ETH), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: Various studies provide evidence that buying of votes is a widespread instrument of parties in developing countries to influence the outcome of elections. In this paper we examine whether democratic societies which hold votes on educational enhancing redistribution proposals can escape poverty traps if vote buying is possible. We show that if agents can buy or sell votes, then the education of a society is impossible because educational enhancing redistribution will not occur. Hence, society will remain in the poverty trap. We then show that the negative effects of vote buying can be eliminated, for example, by means of a repeated voting constitution in combination with a threshold flexible majority voting rule.
    Keywords: vote buying, political economy, poverty traps, economic development, voting rules, repeated voting
    JEL: C72 D72 O10 P16
    Date: 2006–10
  2. By: Pablo Brañas-Garza (Department of Economic Theory and Economic History, University of Granada); Angel Solano (Department of Economic Theory and Economic History, University of Granada)
    Abstract: This paper explores a highly controversial issue: while most European countries are undergoing a clear and well-documented process of secularization, the governments of these countries widely support religious institutions. The arguments put forward by the median voter seem insufficient to explain the data. We show that if political parties are allowed to take an ideological position with respect to religion, the observed deviations from the most preferred policy by the median voter could be explained. The assumptions of our model are tested using European data. We observe that citizens are concerned about secularization, but that there are differences between religious and non-religious citizens as we assume. In addition, and in consonance with our assumptions, the percentage of religious-averse inhabitants is very small.
    Keywords: religiosity, favoritism, voting, political economics.
    JEL: Z12 D72 H59
    Date: 2007–01–19
  3. By: Susumu Imai (Queen's University); Hajime Katayama (University of Sydney); Kala Krishna (Pennsylvania State University and NBER)
    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 occuring 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.
    Keywords: Common agency, Political economy, Protection for sale, Quotas, Non tariff barriers
    JEL: F13 D72 F17
    Date: 2006–12
  4. By: Enrico Perotti (Universiteit van Amsterdam); Armin Schwienbacher (Universiteit van Amsterdam)
    Abstract: This paper argues that historical political preferences on the role of capital markets shaped national choices on pension reliance on private funding. Under democratic voting, a majority will support investor protection and a privately funded pension system when the middle class has significant financial participation, while high wealth concentration favors a state-funded retirement system and weak investor rights. We present evidence that pension funding is well explained by wealth distribution shocks in the first half of the XX century. The effect is very significant: a large shock reduces the stock of private retirement assets by 58% of GDP. The results stand after controlling for complementary explanations, such as legal origin, past and current demographics, religion, electoral voting rules, national experiences with financial market performance, or other major financial shocks that were not specifically redistributive.
    Keywords: Pension system; political economy; wealth distribution; investor protection; retirement finance
    JEL: J26 G23 G34 G38
    Date: 2007–01–11
  5. By: Hans Gersbach (Center of Economic Research (CER-ETH), Swiss Federal Institute of Technology Zurich (ETH)); Markus Müller (Center of Economic Research (CER-ETH), Swiss Federal Institute of Technology Zurich (ETH))
    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: elections, threshold contracts, democracy, information markets, triple mechanism
    JEL: D72 D82
    Date: 2006–05
  6. By: Enrico Perotti (Universiteit van Amsterdam); Paolo Volpin (London Business School)
    Abstract: Entry requires external finance, especially for less wealthy entrepreneurs, so poor investor protection limits competition. We model how incumbents lobby harder to block access to finance to entrants when politicians are less accountable to voters. In a broad cross-section of countries and industries, we find that (i) entry rates and the total number of producers are positively correlated with investor protection in financially dependent sectors and (ii) countries with more accountable political institutions have better investor protection and lower entry costs. We also find that investor protection is more critical to entry than financial market development. We measure political accountability as access to information. Newspaper readership has much more explanatory power than formal measures of democracies. The effect of diffusion of the press is not due to differences in education or in state ownership of the press. Thus newspaper readership appears to proxy for the degree of informed private scrutiny on political decisions.
    Keywords: Financial Development; Investor protection; Entry; Cost of Entry; Political Economy
    JEL: G21 G28 G32
    Date: 2007–01–12
  7. By: Claessens, Stijn; Feijen, Erik; Laeven, Luc
    Abstract: Using novel indicators of political connections constructed from campaign contribution data, we show that Brazilian firms that provided contributions to (elected) federal deputies experienced higher stock returns than firms that don’t around the 1998 and 2002 elections. This suggests contributions help shape policy on a firm-specific basis. Using a firm fixed effects framework to mitigate the risk that unobserved firm characteristics distort the results, we find that contributing firms substantially increased their bank financing relative to a control group after each election, indicating that access to bank finance is an important channel through which political connections operate. We estimate the economic costs of this rent seeking over the two election cycles to be at least 0.2% of GDP per annum.
    Keywords: Campaign Contributions; Elections; Preferential Lending; Rent-seeking
    JEL: D7 G1 G2 G3 P48
    Date: 2007–01
  8. By: Miguel �gel Ballester; Pedro Rey-Biel
    Abstract: We discuss sincere voting when voters have cardinal preferences over alter- natives. We interpret sincerity as opposed to strategic voting, and thus define sincerity as the optimal behaviour when conditions to vote strategically vanish. When voting mechanisms allow for only one message type we show that this op- timal behaviour coincides with an intuitive and common definition of sincerity. For voting mechanisms allowing for multiple message types, such as approval vot- ing (AV), there exists no conclusive definition of sincerity in the literature. We show that for AV, voters' optimal strategy tends to one of the existent definitions of sincerity, consisting in voting for those alternatives that yield more than the average of cardinal utilities.
    Keywords: sincere and strategic voting, approval voting
    JEL: D63 D71 D72 D80
    Date: 2007–01–15
  9. By: Giuseppe Dari-Mattiacci; Eric Langlais; Bruno Lovat; Francesco Parisi
    Abstract: TThis paper presents a general rent-seeking model in which participants decide on entry before choosing their levels of efforts. The conventional wisdom in the rent-seeking literature suggests that the rent dissipation increases with the number of potential participants and with their pro- ductivity of effort. In this paper, we show that this result of the rent- seeking literature is far from general and applies only when participants are relatively weak and enter the game with certainty. In the presence of strong competitors, the expected total dissipation actually decreases, since participation in the game is less frequent. We further consider the impact of competitors' exit option, distinguishing between "redistributive rent-seeking"and "productive rent-seeking" situations. In redistributive rent-seeking, no social loss results from the fact that all competitors exit the race. In productive rent-seeking, instead, lack of participation creates a social loss (the "lost treasure" effect), since valuable rents are left unex- ploited. We show that the lost-treasure effect perfectly counterbalances the reduction in rent dissipation due to competitors' exit. Hence, unlike redistributive rent-seeking, in productive rent-seeking the total social loss remains equal to the entire rent even when parties grow stronger or the number of players increases.
    Keywords: Rent-seeking, rent dissipation, Tullock' s paradox.
    JEL: C72 D72 K00
    Date: 2007
  10. By: Bertocchi, Graziella; Strozzi, Chiara
    Abstract: We study the determinants of 19th century mass migration with special attention to the role of institutional factors beside standard economic fundamentals. We find that economic forces associated with income and demographic differentials had a major role in the determination of this historical event, but that the quality of institutions also mattered. We evaluate separately the impact of political institutions linked to democracy and suffrage and of those institutions more specifically targeted at attracting migrants, i.e., citizenship acquisition, land distribution, and public education policies. We find that both sets of institutions contributed to this event, even after controlling for their potential endogeneity through a set of instruments exploiting colonial history and the quality of institutions inherited from the past.
    Keywords: 19th century international migration; colonial history; democracy; institutions; migration policy
    JEL: F22 F54 K40 N33 O15 P16
    Date: 2007–01
  11. By: Bertocchi, Graziella; Strozzi, Chiara
    Abstract: We investigate the origin and evolution of the legal institution of citizenship from a political economy perspective. We compile a new data set on citizenship laws across countries of the world which documents how these institutions have evolved in the postwar period. We show that, despite a persistent impact of the original legislation, they have responded endogenously and systematically to a number of economic determinants, such as migration, the size of government, and the demographic structure of the population. Overall, a large stock of migrants decreases the probability of adoption of a mix of jus soli and jus sanguinis provisions, while it pushes jus sanguinis countries toward the adoption of jus soli elements. The welfare burden proves not to be an obstacle for a jus soli legislation, while demographic stagnation encourages the adoption of mixed and jus soli regimes. We also gauge the potential role of legal, political and cultural determinants, and find that a jus sanguinis origin is a factor of resistance to change, that a high degree of democracy promotes the adoption of jus soli elements while the instability of state borders associated with decolonization impedes it, and that cultural factors have no impact.
    Keywords: borders; citizenship laws; democracy; international migration; legal origins
    JEL: F22 K40 O15 P16
    Date: 2007–01
  12. By: Marco Battaglini; Rebecca Morton; Thomas Palfrey
    Date: 2007–01–12
  13. By: Elinder, Mikael (Department of Economics)
    Abstract: This paper estimates voters’ response to municipality and regional level unemployment and economic growth, in Swedish general elections from 1985 to 2002, using data on 284 municipalities and 9 regions. An increase in regional growth or a reduction in regional unemployment by one percentage point is associated with an increase in the support for the national government by about 0.8 and 1.1 percentage points. Changes in unemployment and growth at the municipality level seem to have much smaller effects on government support.
    Keywords: elections; voting; local economic conditions
    JEL: H11 R11 R12 R58
    Date: 2006–11–23
  14. By: Francesco Caselli; Nicola Gennaioli
    Abstract: We compare the economic consequences and political feasibility of reforms aimed at reducing barriers to entry (deregulation) and improving contractual enforcement (legal reform). Deregulation fosters entry, thereby increasing the number of firms (entrepreneurship) and the average quality of management (meritocracy). Legal reform also reduces financial constraints on entry, but in addition it facilitates transfers of control of incumbent firms, from untalented to talented managers. Since when incumbent firms are better run entry by new firms is less profitable, in general equilibrium legal reform may improve meritocracy at the expense of entrepreneurship. As a result, legal reform encounters less political opposition than deregulation, as it preserves incumbents' rents, while at the same time allowing the less efficient among them to transfer control and capture (part of) the resulting efficiency gains. Using this insight, we show that there may be dynamic complementarities in the reform path, whereby reformers can skillfully use legal reform in the short run to create a constituency supporting future deregulations. Generally speaking, our model suggests that "Coasian" reforms improving the scope of private contracting are likely to mobilize greater political support because -- rather than undermining the rents of incumbents -- they allow for an endogenous compensation of losers. Some preliminary empirical evidence supports the view that the market for control of incumbent firms plays an important role in an industry's response to legal reform.
    JEL: G34 O11 O16
    Date: 2007–01
  15. By: Berardino Cesi
    Abstract: Empirical and theoretical studies show that the local provision of public education affects the well being of individuals through two channels: the first reflects the direct use of the good, whereas the second runs through the value of the housing. The second effect leans on the idea that the quality of public education is capitalized into the value of the own housing. Empirical evidence finds that in a multi-community model childless households support local public spending in education because of the capitalization effect. I study the behavior of childless households, not necessarily elderly, in a two community model and show that the capitalization effect may not be a sufficient condition for middle aged households without children to support local public spending in education by a majority voting.
    JEL: H52 H72 I22 R2
    Date: 2007–02

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