nep-pol New Economics Papers
on Positive Political Economics
Issue of 2007‒02‒24
sixteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Preferences for Protectionism: Do economic factors really matter? By Natalia Melgar; Juliette Milgram; Máximo Rossi
  2. The Political Origin of Pension Funding By Perotti, Enrico C; Schwienbacher, Armin
  3. Do Voters Vote Sincerely? By Arianna Degan; Antonio Merlo
  4. Electoral bias and policy choice: theory and evidence By Tim Besley; Ian Preston
  5. Economics and Politics of Alternative Institutional Reforms By Caselli, Francesco; Gennaioli, Nicola
  6. Public Action for Public Goods By Abhijit Banerjee; Lakshmi Iyer; Rohini Somanathan
  7. Power and Plenty: Trade, War and the World Economy in the Second Millennium (Preface) By Ronald Findlay; Kevin H. O'Rourke
  8. The Farm, the City and the Emergence of Social Security By Caucutt, Elizabeth; Cooley, Thomas F; Guner, Nezih
  9. Informational Lobbying and Competition for Access By Cotton, Christopher
  10. "Deep Democracy ; A Political and Social Economy Approach" By Mariko Frame; Haider A. Khan
  11. Inefficient policies, inefficient institutions and trade By Rubén Segura-Cayuela
  12. The Political Economy of Public Investment By Beetsma, Roel; van der Ploeg, Frederick
  13. Taxation and Democracy in the EU By Ganghof, Steffen,; Philipp Genschel
  14. The Vanishing Bequest Tax: The Comparative Evolution of Bequest Taxation in Historical Perspective By Bertocchi, Graziella
  15. Reflections on the Impact of Corruption on Economic Development: a literature review in the Brazilian Economy By Iquiapaza, Robert; Amaral, Hudson
  16. Overruling and the Instability of Law By Nicola Gennaioli; Andrei Shleifer

  1. By: Natalia Melgar (Facultad de Ciencias Económicas, Universidad de la República); Juliette Milgram (Universidad de Granada); Máximo Rossi (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: A common scenario for international commerce is the existence of restrictions on free trade,even when the majority of economists agree on the benefits of it, whatever the country’s size or whatever the country’s economic development. In contexts where politicians offer different policy options and voters demand them based on their individual preferences, one may ask what determines individuals preferences on trade policy; which economic, cultural, social and elements shape them. Our goal in this paper is to address this issue for an heterogeneous sample of 34 countries which includes developed and developing countries and small and big ones. In this paper we use data from the 2003 International Social Survey Program (ISSP). Based on an ordered probit model, we conclude that elements such as religion, political preferences, and nationalism, as well as demographic characteristics and country performance, have a significant impact on trade policy preferences.
    Keywords: Preferences, protectionism, religion, nationalism, ISSP
    JEL: D01 F13
    Date: 2006–10
  2. By: Perotti, Enrico C; Schwienbacher, Armin
    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 20th 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: inflationary shocks; pension; political economy; redistribution; retirement finance
    JEL: G21 G28 G32 J26
    Date: 2007–02
  3. By: Arianna Degan; Antonio Merlo
    Abstract: In this paper we address the following question: To what extent is the hypothesis that voters vote sincerely testable or falsifiable? We show that using data only on how individuals vote in a single election, the hypothesis that voters vote sincerely is irrefutable, regardless of the number of candidates competing in the election. On the other hand, using data on how the same individuals vote in multiple elections, the hypothesis that voters vote sincerely is potentially falsifiable, and we provide general conditions under which the hypothesis can be tested. We then consider an application of our theoretical framework and assess whether the behavior of voters is consistent with sincere voting in U.S. national elections in the post-war period. We find that by and large sincere voting can explain virtually all of the individual-level observations on voting behavior in presidential and congressional U.S. elections in the data.
    JEL: C12 C63 D72
    Date: 2007–02
  4. By: Tim Besley (Institute for Fiscal Studies and London School of Economics and Bank of England); Ian Preston (Institute for Fiscal Studies and University College London)
    Abstract: <p>This paper develops an approach to studying how bias in favor of one party due to the pattern of electoral districting affects policy choice. We tie a commonly used measure of electoral bias to the theory of party competition and show how this affects party strategy in theory. The usefulness of the approach is illustrated using data on local government in England. The results suggest that reducing electoral bias leads parties to moderate their policies.</p>
    Date: 2007–02
  5. By: Caselli, Francesco; Gennaioli, Nicola
    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.
    Keywords: deregulation; entry; legal reform
    JEL: G34 O11 O16
    Date: 2007–02
  6. By: Abhijit Banerjee; Lakshmi Iyer; Rohini Somanathan
    Abstract: This paper focuses on the relationship between public action and access to public goods. It begins by developing a simple model of collective action which is intended to capture the various mechanisms that are discussed in the theoretical literature on collective action. We argue that several of these intuitive theoretical arguments rely on special additional assumptions that are often not made clear. We then review the empirical work based on the predictions of these models of collective action. While the available evidence is generally consistent with these theories, there is a dearth of quality evidence. Moreover, a large part of the variation in access to public goods seems to have nothing to do with the "bottom-up" forces highlighted in these models and instead reflect more "top-down" interventions. We conclude with a discussion of some of the historical evidence on top-down interventions.
    JEL: H41 O12
    Date: 2007–02
  7. By: Ronald Findlay; Kevin H. O'Rourke
    Abstract: This book provides the first systematic, integrated, analytical account of the evolution of the international economy during the last millennium. It emphasizes the two-way interaction between trade and geopolitics, and the importance of such interactions for world economic development.
    Date: 2007–02–19
  8. By: Caucutt, Elizabeth; Cooley, Thomas F; Guner, Nezih
    Abstract: During the period from 1880 to 1950 publicly managed retirement security programs became an important part of the social fabric in most advanced economies. In this paper we study the social, demographic and economic origins of social security. We describe a model economy in which demographics, technology, and social security are linked together. We study an economy with two locations (sectors), the farm (agricultural) and the city (industrial). The decision to migrate from rural to urban locations is endogenous and linked to productivity differences between the two locations and survival probabilities. Furthermore, the level of social security is determined by majority voting. We show that a calibrated version of this economy is consistent with the historical transformation in the United States. Initially a majority of voters live on the farm and do not want to implement social security. Once a majority of the voters move to the city, the median voter prefers a positive social security tax, and social security emerges.
    Keywords: migration; political economy; social security
    JEL: D72 H3 H55
    Date: 2007–02
  9. By: Cotton, Christopher
    Abstract: In competition for access, interest groups provide contributions to a politician and those that provide the highest contributions win access. Groups with access present information that may influence the politician's beliefs about the socially optimal policy. Because equilibrium contributions are chosen endogenously, the politician learns about the information quality of all interest groups, even when he grants access to only some of the groups. Contribution limits reduce the signaling power of the equilibrium contributions, resulting in a less informed politician, and strictly reducing expected social welfare.
    Keywords: All-pay auction; political access; lobbying; campaign contributions; contribution limits
    JEL: D72 D44 D78
    Date: 2007–02–19
  10. By: Mariko Frame (GSIS , University of Denver); Haider A. Khan (GSIS , University of Denver)
    Abstract: The main purpose of this paper is to offer a somewhat novel theory of deep democracy from a political and social economy perspective. The theory of deep democracy presented here makes a distinction between formal aspects of democracy and the deeper structural aspects. In order for democracy to be deep, democratic practices have to become institutionalized in such a way that they become part of normal life in a democratic society. In this sense, ontologically, deep democracy overlaps with Barber's (1984) idea of "strong" democracy. There are, however, epistemological differences as well as differences of emphasis, particularly in the economic sphere. Cluster conditions for deep democracy include both cultural-political and socio-economic conditions.
    Date: 2007–02
  11. By: Rubén Segura-Cayuela (Banco de España)
    Abstract: Despite the general belief among economists on the growth-enhancing role of international trade and significant trade opening over the past 25 years, the growth performance of many developing economies, especially of those in Latin America and Africa, has been disappointing. While this poor growth performance has many potential causes, in this paper I argue that part of the reason may be related to the interaction between weak institutions and trade. In particular, I construct a model in which trade opening in societies with weak institutions (in particular autocratic and elite-controlled political systems) may lead to worse economic policies. The reason is that general equilibrium price effects of taxation and expropriation in closed economies also hurt the elites, and this puts a natural barrier against inefficient policies. Trade openness removes this barrier and enables groups with political power to exercise this power in more inefficient ways.
    Keywords: institutions, political economy, expropriation, property rights, international trade
    JEL: O10 P16 F10
    Date: 2006–12
  12. By: Beetsma, Roel; van der Ploeg, Frederick
    Abstract: The political distortions in public investment projects are investigated within the context of a bipartisan political economy framework. The role of scrapping and modifying projects of previous governments receives special attention. The party in government has an incentive to overspend on large ideological public investment projects in order to bind the hands of its successor. This leads to a bias for excessive debt, especially if the probability of being removed from office is large. These political distortions have implications for the appropriate format of a fiscal rule. A deficit rule, like the Stability and Growth Pact, mitigates the overspending bias in ideological investment projects and improves social welfare. The optimal second-best restriction on public debt exceeds the level of public debt that would prevail under the socially optimal outcome. Social welfare may be boosted even more by appropriate investment restrictions: with a restriction on (future) investment in ideological projects, the current government perceives a large benefit of a debt reduction. However, debt and investment restrictions are not needed if investment projects only have a financial return.
    Keywords: bipartisan; deficit rule; golden rule; ideological projects; investment restriction; market projects; political economy; public investment; scrapping public investment
    JEL: E6 H6 H7
    Date: 2007–02
  13. By: Ganghof, Steffen,; Philipp Genschel
    Abstract: Abstract Is corporate tax competition a threat to democracy in the EU? The answer dependscrucially on a positive analysis of the effects of tax competition on national policy autonomy.Most analyses focus on direct effects on corporate tax rates and revenues. Wecontend that this focus is too narrow. It overlooks the fact that corporate tax competitionalso has important indirect effects on the progressivity and revenue-raising potentialof personal income taxation. We elaborate on these indirect effects theoreticallyand empirically, and explore the implications for the normative debate on the EU'sdemocratic defi cit. Our fi ndings show that European integration can constrain nationalredistribution in a major way: the democratic defi cit is real. Greater political contestationover the EU's policy agenda is desirable in order to mitigate this defi cit.
    Keywords: tax policy; tax competition; democracy; harmonisation; harmonisation; normative political theory; majority voting; European Commission
    Date: 2007–02–13
  14. By: Bertocchi, Graziella
    Abstract: Several countries have recently abolished or significantly reduced their taxes on bequests. Bequest taxes, on the other hand, were among the first to be introduced when modern systems of taxation were developed at the end of the nineteenth century. We propose an explanation for these facts which is based on a dynamic political economy model where redistribution is determined not only by wealth inequality but also by sectoral reallocation from agriculture to manufacturing. The model shows that the dynamics of capital accumulation induce a reduction of wealth inequality, which is further accelerated by the redistributive impact of the bequest tax. Through a standard politico-economic mechanism, wealth equalization pushes toward a reduced role of the bequest tax. At the same time, however, a second mechanism is at work, with structural reallocation from agriculture to manufacturing shifting the tax base from hard-to-avoid taxes on land toward easy-to-avoid taxes on capital. The differential treatment of land and capital introduces a source of asymmetry in the tax system which interferes with the determination of the dynamic political equilibrium of the model. Its effect is to compress bequest taxation but also to delay its gradual reduction due to declining wealth inequality. A number of extensions to the basic model allow to match our theory with the long-term evolution of bequest taxation in modern democracies and with the drastic discrepancies currently observed between tax systems in developed and underdeveloped countries.
    Keywords: bequest tax; redistribution; structural reallocation; voting; wealth inequality
    JEL: H20 N40 P16
    Date: 2007–02
  15. By: Iquiapaza, Robert; Amaral, Hudson
    Abstract: The corruption is a phenomenon present in different degrees in all countries around the world. In this revision article the objective was to identify the theoretical explanations of corruption and their consequences on the economic development. First, it is verified the difficulty of measurement given its illegal and secret nature. The causes can be multiple, but the literature reveals the inexistence of a solid theoretical approach. However, behavioral models and the principal-agent relationship approaches stand out in economics and political science. There is no doubt in associating the corruption to the lower economic development, that results as a consequence of the introduction of inefficiencies on investments fall in the potential product and increases the interest rate. These characteristics seem to coincide with the reality observed during the actual millennium in the Brazilian economy; without misunderstanding it results in a pernicious combination and generating of social inequalities.
    Keywords: Keywords: Economic development; corruption; Economic; Brazil.
    JEL: D73 O1
    Date: 2007–01
  16. By: Nicola Gennaioli; Andrei Shleifer
    Abstract: We investigate the evolution of common law under overruling, a system of precedent change in which appellate courts replace existing legal rules with new ones. We use a legal realist model, in which judges change the law to reflect their own preferences or attitudes, but changing the law is costly to them. The model's predictions are consistent with the empirical evidence on the overruling behavior of the U.S. Supreme Court and appellate courts. We find that overruling leads to unstable legal rules that rarely converge to efficiency. The selection of disputes for litigation does not change this conclusion. Our findings provide a rationale for the value of precedent, as well as for the general preference of appellate courts for distinguishing rather than overruling as a law-making strategy.
    JEL: K13 K4
    Date: 2007–02

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