nep-pol New Economics Papers
on Positive Political Economics
Issue of 2007‒09‒02
seven papers chosen by
Eugene Beaulieu
University of Calgary

  1. To Segregate or to Integrate: Education Politics and Democracy By David de la Croix; Matthias Doepke
  2. Political Stasis or Protectionist Rut? Policy Mechanisms for Trade Reform in a Democracy By Blanchard, Emily; Willmann, Gerald
  3. Are All Democracies Equally Good? The Role of Interactions between Political Environment and Inequality for Rule of Law By Uwe Sunde; Matteo Cervellati; Piergiuseppe Fortunato
  4. Organized business, political regimes and property rights across the Russian Federation By Pyle, William
  5. Determinants of Interest Group Formation By Bonnie Wilson; Dennis Coates; Jac Heckelman
  6. Who is Afraid of Political Risk? Multinational Firms and their Choice of Capital Structure By Iris Kesternich; Monika Schnitzer
  7. Special-Interest Groups and Growth By Bonnie Wilson; Dennis Coates; Jac Heckelman

  1. By: David de la Croix (CORE, Catholic University of Louvain); Matthias Doepke (University of California, Los Angeles, CEPR, NBER and IZA)
    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.
    Keywords: public education, private education, voting, democracy
    JEL: D72 I21 H42 O10
    Date: 2007–08
  2. By: Blanchard, Emily; Willmann, Gerald
    Abstract: This paper analyzes the dynamics of trade policy reform under democracy. In an overlapping generations model, heterogeneous agents may acquire skills when young, thereby determining the skill composition of their cohort. Current and anticipated trade policies influence education decisions, and thus the identity of the median voter. We show that there may exist two political steady states: one protectionist and one liberal. Transition from the former to the latter can be achieved by government announcements, temporary educational subsidies, or (exogenous) tariff liberalization by trading partners, but not, in general, by transfer payments to adversely affected workers. We find additionally that reform is politically feasible only if the proposed liberalization is sufficiently large, suggesting that radical reform may be necessary for escaping a “protectionist rut.”
    Keywords: Political Economy, Trade Policy, Skill Acquisition, Politically Stable Policy Paths, Referenda
    JEL: D72 E60 F13 F16
    Date: 2007
  3. By: Uwe Sunde (IZA, University of Bonn and CEPR); Matteo Cervellati (University of Bologna, IAE Barcelona and IZA); Piergiuseppe Fortunato (University of Bologna and United Nations)
    Abstract: Using cross-country data, we find evidence for a significant negative interaction effect between democracy and inequality in determining the quality of growth-promoting institutions like rule of law. Democracy is associated with institutions of higher quality when inequality is lower.
    Keywords: inequality, democracy, institutions, rule of law, interactions
    JEL: O43 P48 P14
    Date: 2007–08
  4. By: Pyle, William (BOFIT)
    Abstract: Abstract: This article explores the inter-relationship of collective action within the business community, the nature of the political regime and the security of firms’ property rights. Drawing on a pair of surveys recently administered in Russia, we present evidence that post-communist business associations have begun to coordinate business influence over state actors in a manner that is sensitive to regional politics. A firm’s ability to defend itself from government predation and to shape its institutional environment as well as its propensity to invest in physical capital are strongly related to both its membership in a business association and the level of democratization in its region. Of particular note, the positive effect of association membership on securing property rights increases in less democratic regions. The evidence, that is, suggests that collective action in the business community substitutes for democratic pressure in constraining public officials.
    Keywords: collective action; property rights; political institutions; business associations
    JEL: D70 K40 P48
    Date: 2007–08–29
  5. By: Bonnie Wilson (Department of Economics, Saint Louis University); Dennis Coates (Department of Economics, University of Maryland Baltimore County); Jac Heckelman (Department of Economics, Wake Forest University)
    Abstract: It is widely recognized that interest groups affect both microeconomic and macroeconomic outcomes. However, few researchers have attempted to discern empirically the factors that contribute to interest group activity. This paper provides a test of several theories of group formation in a panel setting. A nation’s stability, socioeconomic development, political system, size, and diversity all appear to contribute to interest group formation, as predicted by theory.
    Keywords: special interest groups, institutional sclerosis, stock returns, volatility
    JEL: D7 G1 G2 L5 O16
    Date: 2007–06
  6. By: Iris Kesternich (University of Munich, Department of Economics, Ludwigstr. 28 Rg, D-80539 Munich, Germany. Phone: +49 89 2180 3955, Fax: +49 89 2180 3954,; Monika Schnitzer (University of Munich, Department of Economics and Centre for Economic Policy Research, Akademiestr. 1/III, D-80799 Munich, Germany. Phone: +49 89 2180 2217, Fax: +49 89 2180 2767,
    Abstract: This paper investigates how multinational firms choose their capital structure in response to political risk. We focus on two choice variables, the leverage and the ownership structure of the foreign affiliate, and we distinguish different types of political risk, like expropriation, corruption and confiscatory taxation, and In our theoretical analysis we find that as political risk increases the ownership share always decreases whereas leverage can both increase or decrease, depending on the type of political risk. Using the Microdatabase Direct Investment of the Deutsche Bundesbank, we find supportive evidence for these different effects.
    Keywords: multinational Terms, political risk, capital structure, leverage, ownership structure
    JEL: F23 F21 G32
    Date: 2007–08
  7. By: Bonnie Wilson (Department of Economics, Saint Louis University); Dennis Coates (Department of Economics, University of Maryland Baltimore County); Jac Heckelman (Department of Economics, Wake Forest University)
    Abstract: This paper explores the relationship between special-interest groups and economic growth, using newly assembled data on the number of groups observed across countries. In a sample of 86 countries at two points in time (for a total of 169 observations), we ¯nd support for Mancur Olson's theory that interest group activity reduces economic growth. We also ¯nd evidence that interest groups are negatively associated with both channels to growth - capital stock growth and productivity growth.
    Keywords: growth, institutional sclerosis, special-interest groups
    JEL: O1 O4 D7
    Date: 2007–07

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