nep-pol New Economics Papers
on Positive Political Economics
Issue of 2007‒03‒31
eighteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Social Expenditures as a Political Cue Ball? : OECD Countries under Examination By Niklas Potrafke
  2. Ethnicity, Voter Alignment and Political Party Affiliation – an African Case: Zambia By Gero Erdmann
  3. Term Limits and Electoral Accountability By Michael Smart; Daniel M. Sturm
  4. Growth, public investment and corruption with failing institutions By David, DE LA CROIX; Clara, DELAVALLADE
  5. Politics, political competition and the political budget cycle in Canada, 1870 - 2000: a search across alternative fiscal instruments By J. Stephen Ferris and Stanley L. Winer
  6. Framing Effects in Political Decision Making: Evidence From a Natural Voting Experiment By Bütler, Monika; Maréchal, Michel André
  7. Economics and Politics of Alternative Institutional Reforms By Francesco Caselli; Nicola Gennaioli
  8. Why Central Banks Smooth Interest Rates? A Political Economy Explanation By Carlos Montoro
  9. On Rent-Seeking Cost Under Democracy And Under Dictatorship By R. Carson
  10. Banking on Democracy: The Political Economy of International Private Bank Lending in Emerging Markets By Javier Rodríguez; Javier Santiso
  11. The Political Economy of Delaying Fiscal Consolidation By Boris Cournède
  12. Crafting Political Institutions in Africa. Electoral Systems and Systems of Government in Rwanda and Zambia Compared By Alexander Stroh
  13. Political Competition and Convergence to Fundamentals: With Application to the Politcal Business Cycle and the Size of the Public Sector By J. Stephen Ferris, Soo-Bin Park, and Stanley L. Winer
  14. Good Governance, Trade and Agglomeration By Candau, Fabien
  15. The Political Economy of Private Roads By David Levinson
  16. Problems of Categorizing and Explaining Party Systems in Africa By Gero Erdmann; Matthias Basedau
  17. Paradoxes and Puzzles in Our Globalized World Public Support of Trade Policy, International Outsourcing Trade Liberalization, Globalization By James W. Dean and G. Robert Ross
  18. A Lobbying Approach to Evaluating the Sarbanes-Oxley Act of 2002 By Hochberg, Yael; Sapienza, Paola; Vissing-Jorgensen, Annette

  1. By: Niklas Potrafke
    Abstract: This paper examines how policy affects social expenditures. Analyzing an OECD panel from 1980 to 2003, five political variables are tested: Election- and pre-election years, the ideological party composition of the governments, the number of coalition partners and the fact, if the ruling government has a majority in parliament or not (minority government). I find that neither of these variables have an impact on social expenditures using different model set-ups. The influence of national governments seems to be limited by the globalization, which indeed impairs social expenditures.
    Keywords: social expenditures, electoral cycles, partisan politics, globalisation
    JEL: D72 H50
    Date: 2007
  2. By: Gero Erdmann (GIGA Institute of African Affairs)
    Abstract: Conventional wisdom holds that ethnicity provides the social cleavage for voting behav-iour and party affiliation in Africa. Because this is usually inferred from aggregate data of national election results, it might prove to be an ecological fallacy. The evidence based on individual data from an opinion survey in Zambia suggests that ethnicity matters for voter alignment and even more so for party affiliation, but it is certainly not the only factor. The analysis also points to a number of qualifications which are partly methodology-related. One is that the degree of ethnic voting can differ from one ethno-political group to the other depending on various degrees of ethnic mobilisation. Another is that if smaller eth-nic groups or subgroups do not identify with one particular party, it is difficult to find a significant statistical correlation between party affiliation and ethnicity – but that does not prove that they do not affiliate along ethnic lines.
    Keywords: Social cleavages, ethnicity, voting behaviour, political party identification, political party affiliation, Zambia
  3. By: Michael Smart; Daniel M. Sturm
    Abstract: Periodic elections are the main instrument through which voters can hold politiciansaccountable. From this perspective term limits, which restrict voters' ability to rewardpoliticians with re-election, appear counterproductive. We show that despite the discipliningeffect of elections, term limits can be ex ante welfare improving from the perspective ofvoters. By reducing the value of holding office term limits can induce politicians toimplement policies that are closer to their private preferences. Such "truthful" behavior byincumbents in turn results in better screening of incumbents. We show that the combinationof these two effects can strictly increase the utility of voters.
    Keywords: Political Agency, Accountability, Term Limits
    JEL: D72 H11
    Date: 2006–12
    Abstract: Corruption is thought to prevent poor countries from catching-up. We analyze one channel through which corruption hampers growth : public investment can be distorted in favor of specific types of spending for which rent-seeking is easier and better concealed. To study this distortion, we propose an optimal growth model where households vote for the composition of public spending subject to an incentive constraint reflecting individualsÕ choice between productive activity and rent-seeking. At equilibrium, the intensity of corruption and the structure of public investment are determined by the predatory technology and the distribution of political power. Among different regimes, the model shows a possible scenario of distortion without corruption in which there is no effective corruption yet still the possibility of corruption distorts the allocation of public investment, thus hampering growth. We test the implications of the model on a panel of countries estimating a system of equations which instrumental variables. We find that countries with a high predatory technology invest more in housing and physical capital in comparison with health and education. For equal initial conditions, such countries grow slower and have higher corruption, in particular when political power is concentrated
    Keywords: Public investment, Optimal growth, Corruption, Political power
    JEL: H50 D73
    Date: 2006–10–26
  5. By: J. Stephen Ferris and Stanley L. Winer (Department of Economics, Carleton University)
    Abstract: In this paper Engel-Granger time series methodology is used to combine trending economic variables with stationary political factors to search for well-defined political influences on central government budgets in Canada over the entire post-Confederation time period from 1870 to 2000. To motivate such an inquiry we first investigate and find evidence of partisan political influence on Canada’s macro aggregates. However, because politics can influence economic outcomes only if there is a transmission mechanism through actual public policy choices, our finding of cycles in real output growth begs the question of whether such cycles arise through fiscal policy. Our analysis of three main fiscal policy instruments - public non-interest expenditure, taxation and the deficit net of interest - gives little support to any current political theory of public budgets, but does support the hypothesis that the degree of political competition matters for policy choices in both the long and short run. This new channel for the influence of politics on economic policy has not previously been isolated empirically in Canada and poses new questions in trying to reconcile the previous mixed results with respect to the influence of politics on economic aggregates.
    Keywords: expenditure size of government, tax-share, government deficits, political competition, political business cycles, political budget cycles, monetary policy, cointegration and error correction analysis.
    JEL: H1 H3 H5
    Date: 2006–08–08
  6. By: Bütler, Monika; Maréchal, Michel André
    Abstract: This paper analyzes a recent ballot in which two virtually identical popular initiatives, both demanding a decrease in the legal age of retirement in Switzerland, led to differences in approval rates of nearly seven percentage points. Based on this unique natural experiment, the existence of emphasis framing effects is tested for and their determinants are identified outside of the controlled settings of laboratories. Nonetheless, the analyzed setting allows for considerably more control than usually available in the field: All party, government and interest group recommendations were symmetric for both initiatives, and the simultaneous vote rules out potential variation of individual preferences and compositional changes of the electorate over time. Using community and individual level data it is shown that the difference in approval rates is largely due to the different emphases in the initiatives' titles.
    Keywords: bounded rationality; direct democracy; framing effect; natural experiment; pension reform; voting
    JEL: D1 D72 H55
    Date: 2007–03
  7. By: Francesco Caselli; Nicola Gennaioli
    Abstract: We compare the economic consequences and political feasibility of reforms aimed at reducingbarriers to entry (deregulation) and improving contractual enforcement (legal reform). Deregulationfosters entry, thereby increasing the number of firms (entrepreneurship) and the average quality ofmanagement (meritocracy). Legal reform also reduces financial constraints on entry, but in addition itfacilitates transfers of control of incumbent firms, from untalented to talented managers. Since whenincumbent firms are better run entry by new firms is less profitable, in general equilibrium legalreform may improve meritocracy at the expense of entrepreneurship. As a result, legal reformencounters less political opposition than deregulation, as it preserves incumbents' rents, while at thesame time allowing the less efficient among them to transfer control and capture (part of) the resultingefficiency gains. Using this insight, we show that there may be dynamic complementarities in thereform path, whereby reformers can skillfully use legal reform in the short run to create a constituencysupporting future deregulations. Generally speaking, our model suggests that "Coasian" reformsimproving 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 oflosers. Some preliminary empirical evidence supports the view that the market for control ofincumbent firms plays an important role in an industry's response to legal reform.
    Keywords: financial economics, deregulation, meritocracy
    JEL: G34 O11 O16
    Date: 2007–01
  8. By: Carlos Montoro (Central Bank of Peru, LSE)
    Abstract: We extend the New Keynesian Monetary Policy literature relaxing the assumption that the decisions are taken by a single policymaker, considering instead that monetary policy decisions are taken collectively in a committee. We introduce a Monetary Policy Committee (MPC), whose members have different preferences between output and inflation variability and have to vote on the level of the interest rate. This paper helps to explain interest rate smoothing from a political economy point of view, in which MPC members face a bargaining problem on the level of the interest rate. In this framework, the interest rate is a non-linear reaction function on the lagged interest rate and the expected inflation. This result comes from a political equilibrium in which there is a strategic behaviour of the agenda setter with respect to the rest MPC’s members. Our approach can also reproduce both features documented by the empirical evidence on interest rate smoothing: a) the modest response of the interest rate to inflation. and output gap; and. b) the dependence on lagged interest rate. Features that are difficult to reproduce alltogether in standard New Keynesian models. It also provides a theoretical framework on how disagreement among policymakers can slow down the adjustment on interest rates and on “menu costs” in interest rate decisions. Furthermore, a numerical excercise shows that this inertial behaviour of the interest rate is internalised by the economic agents through an increase in expected inflation.
    Keywords: Monetary Policy Committees , Interest Rate Smoothing, New Keynesian Economics, Political Economy
    JEL: E43 E52 D72
    Date: 2007–03
  9. By: R. Carson (Department of Economics, Carleton University)
    Abstract: This note argues that, broadly speaking, democracies have a comparative advantage over dictatorships in keeping rent-seeking costs down by imposing penalties that reduce returns to scale in rent-seeking. Dictatorships have a comparative advantage in restricting the number of rent-seekers through higher entry barriers into rent-seeking, although not to the point of eliminating rent-seeking altogether. Of the two, the former is potentially a more effective way to control rent-seeking costs. For this reason, a democracy has the potential to achieve lower rent-seeking losses, as a share of total rent available, than does a dictatorship, although this may require the democracy to achieve a high degree of transparency of government, along with freedom of the press, the judiciary, and public and private watchdog agencies to criticize politicians and public officials.
    JEL: D72 H00 H19
    Date: 2007–03–15
  10. By: Javier Rodríguez; Javier Santiso
    Abstract: Private capital movements have risen in recent decades, and bank flows have been part of this story. Some empirical studies have analysed the political drivers of private international liquidity, but paradoxically very few have looked at the political economy of bank flows. Even less research exists on the role of politics in explaining cross-border banking movements towards emerging democracies. The present study links compiled indicators on democracy, policy uncertainty and political stability to international bank lending flows from data developed by the BIS. It provides an empirical investigation of the political economy of cross-border bank flows to emerging markets and tries to answer two questions. Do bankers tend to prefer emerging democracies? Do they reward democratic transitions as well as policy and political stability? One of the major findings is that politics do matter, and international banks tend to have political preferences; annual growth in bank flows usually booms in the three years following a democratic transition, especially in Latin America. <BR>Les flux de capitaux privés ont connu un essor sans précédents au cours des dernières années. Les flux bancaires ont pris part à cette dynamique. Néanmoins, excepté quelques rare travaux empiriques, peu de travaux ont été consacrés aux facteurs politiques expliquant cet essor, et encore moins de recherche a été dédiée à l’économie politique des flux bancaires privés. Le travail présenté aborde cette question en croisant une série d’indicateurs sur la démocratie, l’incertitude et la stabilité politique, avec les séries de flux bancaires développés par la Banque des Règlements Internationaux (BRI). Il propose une économie politique des flux privés bancaires internationaux en abordant deux questions : les banques préfèrent-elles la démocratie ? Tendent-elles à primer les transitions démocratiques, la stabilité des politiques publiques et la stabilité politique ? Un des résultats les plus intéressants du travail présenté est de corroborer que les facteurs politiques importent pour les banques internationales. Celles-ci tendent en particulier à augmenter leurs prêts internationaux dans les trois années qui suivent une transition démocratique. Cette tendance est particulièrement prégnante en Amérique latine où, pays vers lesquels les opérations de crédit bancaire internationale ont augmenté avec l’essor de la démocratie.
    Keywords: capital flows, bank, democracy & emerging markets
    JEL: F21 F34 G21 K00
    Date: 2007–03
  11. By: Boris Cournède
    Abstract: Over the next decades, many OECD countries are anticipating large increases in public spending as a result of population ageing and other long-term structural trends. The need to put public finances on a sustainable footing is widely recognised, but progress has been uneven and slow. Some policy makers may feel that action can be deferred for a few years at little cost because of the long-term nature of the problem. This paper questions this perception by proposing a model of the political costs of consolidating public finances. The main finding is that even a short delay increases political cost of consolidation quite markedly when ultimately policy makers are facing a deadline by which sustainability must be restored. The conclusion is very robust to changes in assumptions and specification. A variant of the model shows that with an infinite horizon the incentive to consolidate is weaker, which highlights the importance of setting a deadline. This paper relates to the 2007 Economic Survey of the Euro area ( <P>L’économie politique du retard à consolider les finances publiques <BR>De nombreux pays de l'OCDE s'attendent à enregistrer de forte hausses de leurs dépenses publiques en raison du vieillissement démographique et d'autres tendances structurelles lourdes. Presque tout le monde s'accorde à reconnaître qu'il est nécessaire de rétablir la viabilité des finances publiques, mais peu de progrès ont été enregistrés. Il se pourrait que certains décideurs considèrent que la mise en oeuvre de mesures puisse être reportée pour quelques années sans qu'il n'en coûte beaucoup. Cette étude met en cause ce jugement en proposant un modèle du coût politique de la consolidation budgétaire. Le résultat principal est que même un court délai augmente le coût politique de la consolidation de manière importante lorsqu'au final les décideurs sont confrontés à une date limite à laquelle la viabilité budgétaire doit être rétablie. Ce résultat est très robuste à des changements d'hypothèses ou de spécification. Une variante du modèle montre qu'avec un horizon temporel infini l'incitation à consolider est plus faible, ce qui souligne combien il importe de fixer une date limite. Ce document se rapporte à l'Étude économique de zone euro 2007 (
    Keywords: public finances, finances publiques, population ageing, vieillissement démographique, fiscal consolidation, political economy, économie politique, structural adjustment, ajustement structurel, consolidation budgétaire
    JEL: D72 E62
    Date: 2007–03–09
  12. By: Alexander Stroh (GIGA Institute of African Affairs)
    Abstract: Scholars of institutional design attribute large importance to the choice of new institutions. The comparative analysis of how Rwanda and Zambia crafted their new electoral systems and the systems of government regards procedural, structural and rational choice variables which may influence the option for particular solutions. External influences and the type of transition are determinants that can decide which actors make their interests prevail. The degree of innovation or conservatism of new institutions is mainly a result of the speed of the process and the kind of actors involved. However, rational reflections on how to produce legitimacy and minimize personal risks which take into consideration the state of conflict in the country decide on the speed and on innovative outcomes. The structured analysis of only two cases uncovers already that it is rather difficult to realise the transfer of design recommendations into reality.
    Keywords: institutions, institutional design, transition, electoral system, Rwanda, Zambia
  13. By: J. Stephen Ferris, Soo-Bin Park, and Stanley L. Winer (Department of Economics, Carleton University; Department of Economics, Carleton University; Department of Economics, Carleton University)
    Keywords: public expenditure, size of government, long run versus short run, opportunism, partisanship, political competition, cointegration.
    Date: 2005–10
  14. By: Candau, Fabien
    Abstract: We develop a model for developing countries that investigates the factors behind agglomeration of activities in urban giants. Firstly we show that relatively easier market access to external demand provided by the urban giant tends to attract entrepreneurs to this place. Secondly we find that the attractive power of the urban giant can be linked to a lack of democracy. Indeed we demonstrate that democracy acts as a dispersive force in the sense that by reversing the cost of living effect, it allows to reduce the spatial inequality and then the tendency of agglomeration. Lastly we analyse how the funds embezzled by a bad government vary according to internal and external trade liberalisation. We show that a decrease in the disadvantage of the periphery to trade with the external market can limit the funds embezzled by a Leviathan.
    Keywords: Economic geography; Cities; Trade; Corruption.
    JEL: R12 H25
    Date: 2006–05–31
  15. By: David Levinson (Nexus (Networks, Economics, and Urban Systems) Research Group, Department of Civil Engineering, University of Minnesota)
    Abstract: This paper first briefly reviews the history of private roads. Then the functional and economic classification of roadways is presented. Three different classes of roads (local, linking, and limited access) need to be treated in very different ways. The ideology of private roads is then presented. The political factors constraining this ideology from taking root are then presented. Distributional effects associated with privatization are described, and means for using the proceeds from the sale of roads to compensate losers are presented. Prospects for the future of private roads are discussed in the conclusions.
    Keywords: Network economics, Modeling network dynamics, Road pricing, Transportation financing, Privatization.
    JEL: R41 R42 R48 D21 D24 D81 D83 C72
    Date: 2006
  16. By: Gero Erdmann (GIGA Institute of African Affairs); Matthias Basedau (GIGA Institute of African Affairs)
    Abstract: Starting from controversial findings about the relationship between party systems and the prospects of democratic consolidation, this article argues that problems can only be properly addressed on the basis of a differentiated typology of party systems. Contradictory research results do not pose an ‘African puzzle’ but can be explained by different and inadequate approaches. We argue that a modified version of Sartori's typology of party systems provides an appropriate method for classifying African party systems. Based on Sartori's framework, a preponderance of predominant and dominant party systems is identified. This can partly be explained by the prevailing authoritarian nature of many multiparty regimes in Africa as well as by the ethnic plurality of African societies. High ethnic fragmentation is not transformed into highly fragmented party systems. This phenomenon can be attributed to the most frequent ‘ethnic congress party’ which is based on an ethnic elite coalition.
    Keywords: Africa, South of Sahara, party systems, conceptual analysis, democratisation,electoral system, social cleavage, ethnicity
  17. By: James W. Dean and G. Robert Ross (Simon Fraser University)
    Date: 2006–10–13
  18. By: Hochberg, Yael; Sapienza, Paola; Vissing-Jorgensen, Annette
    Abstract: We evaluate the net benefits of the Sarbanes-Oxley Act (SOX) for shareholders by studying the lobbying behaviour of investors and corporate insiders to affect the final implemented rules under the Act. Investors lobbied overwhelmingly in favour of strict implementation of SOX, while corporate insiders and business groups lobbied against strict implementation. We identify the firms most affected by the law as those whose insiders lobbied against strict implementation, and compare their returns to the returns of less affected firms. Cumulative returns during the four and a half months leading up to passage of SOX were approximately 10 percent higher for corporations whose insiders lobbied against one or more of the SOX disclosure-related provisions than for similar non-lobbying firms. Analysis of returns in the post-passage implementation period indicates that investors’ positive expectations with regards to the effects of the law were warranted for the enhanced disclosure provisions of SOX.
    Keywords: Corporate Governance; Sarbanes Oxley Act
    JEL: G34 K22
    Date: 2007–03

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