nep-pol New Economics Papers
on Positive Political Economics
Issue of 2007‒08‒27
eleven papers chosen by
Eugene Beaulieu
University of Calgary

  1. Endogenous Political Instability By Ryo Arawatari; Kazuo Mino
  2. The Impact of Growth Performance and Political Regime Type on Economic Policy Liberalization By Hans Pitlik
  3. Inefficient Policies and Incumbency Advantage By Hodler, R.; Loertscher , S.; Rohner, D.
  4. The Dynamics of Distributive Politics By Marco Battaglini; Thomas Palfrey
  5. To Segregate or to Integrate: Education Politics and Democracy By David de la Croix; Matthias Doepke
  6. Markov Perfect Political Equilibria with Public Policy: The Role of Education Cost By Ryo Arawatari; Tetsuo Ono
  7. The Transition to Democracy : Collective Action and Intra-elite Confict By Ghosal, Sayantan; Proto, Eugenio
  8. Reevaluating the Modernization Hypothesis By Daron Acemoglu; Simon Johnson; James A. Robinson; Pierre Yared
  9. Why Is Law Enforcement Decentralized? By Guillaume Cheikbossian; Nicolas Marceau
  10. Two Views on Institutional Development: The Grand Transition vs the Primacy of Institutions By Martin Paldam; Erich Gundlach
  11. Social Identity and Preferences over Redistribution By Klor, Esteban F; Shayo, Moses

  1. By: Ryo Arawatari (Graduate School of Economics, Osaka University); Kazuo Mino (Graduate School of Economics, Osaka University)
    Abstract: In this paper, we construct a simple dynamic two-party electoral competition model in which the degree of political instability is endogenously determined: which has never been studied so far. We consider the campaign contributions as stock variable which is gradually accumulated by both partyfs direct investment and induced the Markov-perfect Nash equilibrium. We then examine the stability of the symmetric steady state and find that it may be either totally stable or unstable depending on the parameter values involved in the model. We also found that under certain conditions, at least near the symmetric steady state, there exists indeterminancy of equilibrium path: there exist both stable and unstable paths, that is, under given levels of political assets, both high instability political system and low instability political system can emerge depending on expectations of political parties.
    Keywords: Political assets; Dynamic political economy; Differential game; Markovperfect Nash equilibrium; Two-party model
    JEL: C73 D72 D78
    Date: 2007–08
  2. By: Hans Pitlik (WIFO)
    Abstract: The paper investigates empirically the interaction between economic growth performance and political institutions in producing free-market reform. In particular, we explore whether political regime types shape systematically government policy responses to good or bad growth performance, employing panel econometric techniques and using recently updated data for economic reform and political institutions. Contrary to conventional wisdom we find that a bad growth performance is conducive to reforms only in democracies, but not in autocracies. Democratic rule seems to be favorable for policy liberalization in general, but a very good growth performance weakens liberalization incentives considerably.
    Keywords: democracy, crisis hypothesis, market-oriented reform, political credibility
    Date: 2007–08–16
  3. By: Hodler, R.; Loertscher , S.; Rohner, D.
    Abstract: We study incumbency advantage in a dynamic game with incomplete information between an incumbent and a voter. The incumbent knows the true state of the world, e.g., the severity of an economic recession or the level of criminal activities, and can choose the quality of his policy. This quality and the state of the world determine the policy outcome, i.e., the economic growth rate or the number of crimes committed. The voter only observes the policy outcome and then decides whether to reelect the incumbent or not. Her preferences are such that she would reelect the incumbent under full information if and only if the state of the world is above a given threshold level. In equilibrium, the incumbent is reelected in more states of the world than he would be under full information. In particular, he chooses ine±cient policies and generates mediocre policy outcomes whenever the voter's induced belief distribution will be such that her expected utility of reelecting the incumbent exceeds her expected utility of electing the opposition candidate. Hence, there is an incumbency advantage through ineficient policies. We provide empirical evidence consistent with the prediction that reelection concerns may induce incumbents to generate mediocre outcomes. Key words: Elections, Incumbency Advantage, Political Economics.
    JEL: D72 C73
    Date: 2007–05
  4. By: Marco Battaglini; Thomas Palfrey
    Abstract: We study dynamic committee bargaining over an infinite horizon with discounting. In each period a committee proposal is generated by a random recognition rule, the committee chooses between the proposal and a status quo by majority rule, and the voting outcome in period t becomes the status quo in period t+1. We study symmetric Markov equilibria of the resulting game and conduct an experiment to test hypotheses generated by the theory for pure distributional (divide-the-dollar) environments. In particular, we investigate the effects of concavity in the utility functions, the existence of a Condorcet winning alternative, and the discount factor (committee "impatience"). We report several new findings. Voting behavior is selfish and myopic. Status quo outcomes have great inertia. There are strong treatment effects, that are in the direction predicted by the Markov equilibrium. We find significant evidence of concave utility functions.
    Keywords: Dynamic bargaining, voting, experiments, divide-the-dollar,committees
    JEL: D71 D72 C78 C92
    Date: 2007–07
  5. By: David de la Croix; Matthias Doepke
    Abstract: The governments of nearly all countries are major providers of primary and secondary education to their 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. More private education, in turn, results in an improved quality of public education, because public spending can be concentrated on fewer students. Comparing across political systems, we find that concentration of political power can lead to multiple equilibria in the determination of public education spending. The main predictions of the theory are consistent with state-level and micro data from the United States as well as cross-country evidence from the PISA study.
    JEL: H42 H52 I22 O10
    Date: 2007–08
  6. By: Ryo Arawatari (Graduate School of Economics, Osaka University); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This paper focuses on how education costs affect the political determination of public policy via individual decision-making. The paper extends the model in Hassler, Storesletten, and Zilibotti (2007, Journal of Economic Theory; henceforth HSZ) by generalizing the cost function of education and considers several cases, along with HSZ as a special case. In cases where education cost is high, the characterization of political equilibrium is similar to HSZ. In cases where education cost is low, the characterization is entirely different from HSZ: namely, a political equilibrium exists where (i) the rich are always politically decisive and (ii) the equilibrium outcome is unique.
    Keywords: Markov perfect equilibrium; Dynamic political economy; Public policy; Education cost
    JEL: D72 D78 E62
    Date: 2007–08
  7. By: Ghosal, Sayantan (Department of Economics, University of Warwick); Proto, Eugenio (Department of Economics, University of Warwick)
    Abstract: This paper studies how intra-elite confict results in transition to democracy, characterized as both franchise extension to, and lowering the individual cost of collective political action for, an initially disorganized non-elite. Two risk averse elites compete for the appropriation of a unit of social surplus with initial uncertainty about their future relative bargaining power. Both elements of a democracy are necessary to ensure that the two elites credibly commit to a mutually fairer share of the surplus and we derive sufficient conditions for democracy to emerge in equilibrium. Our formal analysis accounts for stylized facts that emerge from an analysis of Indian and West European democracies.
    Date: 2007
  8. By: Daron Acemoglu; Simon Johnson; James A. Robinson; Pierre Yared
    Abstract: This paper revisits and critically reevaluates the widely-accepted modernization hypothesis which claims that per capita income causes the creation and the consolidation of democracy. We argue that existing studies find support for this hypothesis because they fail to control for the presence of omitted variables. There are many underlying historical factors that affect both the level of income per capita and the likelihood of democracy in a country, and failing to control for these factors may introduce a spurious relationship between income and democracy. We show that controlling for these historical factors by including fixed country effects removes the correlation between income and democracy, as well as the correlation between income and the likelihood of transitions to and from democratic regimes. We argue that this evidence is consistent with another well-established approach in political science, which emphasizes how events during critical historical junctures can lead to divergent political-economic development paths, some leading to prosperity and democracy, others to relative poverty and non-democracy. We present evidence in favor of this interpretation by documenting that the fixed effects we estimate in the post-war sample are strongly associated with historical variables that have previously been used to explain diverging development paths within the former colonial world.
    JEL: O10 P16
    Date: 2007–08
  9. By: Guillaume Cheikbossian; Nicolas Marceau
    Abstract: Law enforcement is decentralized. It is so despite documented interjurisdictional externalities which would justify its centralization. To explain this fact, we construct a political economy model of law enforcement. Under decentralization, law enforcement in each region is in accord with the preferences of regional citizens, but interjurisdictional externalities are neglected. Under centralization, law enforcement for all regions is chosen by a legislature of regional representatives which may take externalities into account. However, the majority rule applies for decisions made by the central legislature and this implies that the allocation of enforcement resources may be skewed in favour of those who belong to the required majority. We show that the choice between centralization and decentralization depends on the technology of law enforcement and the nature of the interjurisdictional externalities.
    Keywords: Crime, Law enforcement, Decentralization, Externalities
    JEL: K42
    Date: 2007
  10. By: Martin Paldam; Erich Gundlach
    Abstract: The Grand Transition (GT) view claims that economic development is causal to institutional development, and that many institutional changes can be understood as transitions occurring at roughly the same level (zones) of development. The Primacy of Institutions (PoI) view claims that economic development is a consequence of an exogenous selection of institutions. Our survey of the empirical evidence and our own estimates reveal that it is easy to find convincing evidence supporting either of the two views. Property rights do affect development as suggested by the PoI. However, democracy is mainly an effect of development as suggested by the GT. We conclude that the empirical results are far too mixed to allow for a robust assessment that one of the two views is true and the other false. This finding implies that focusing on institutional development is unlikely to be successful as the key strategy for the economic development of poor countries.
    Keywords: Grand transition, primacy of institutions, democracy, corruption, development
    Date: 2007–06
  11. By: Klor, Esteban F; Shayo, Moses
    Abstract: We design an experiment to study the effects of social identity on preferences over redistribution. The experiment highlights the trade-off between social identity concerns and maximization of monetary payoffs. Subjects belonging to two distinct natural groups are randomly assigned gross incomes and vote over alternative redistributive tax regimes, where the regime is chosen by majority rule. We find that a significant subset of the subjects systematically deviate from monetary payoff maximization towards the tax rate that benefits their group when the monetary cost of doing so is not significantly high. These deviations cannot be explained by efficiency concerns, inequality aversion, reciprocity, social learning or conformity. Finally, we show that behaviour in the lab helps explain the relationship between reported income and stated preferences over redistribution observed in surveys.
    Keywords: Experimental Economics; Income Redistribution; Social Identity; Social Preferences
    JEL: C92 D63 D72
    Date: 2007–07

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