nep-pol New Economics Papers
on Positive Political Economics
Issue of 2007‒11‒03
fifteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Voting as a Rational Choice: Why and How People Vote to Improve the Well-Being of Others By Aaron Edlin; Andrew Gelman; Noah Kaplan
  2. Development Aid and International Politics: Does membership on the UN Security Council influence World Bank decisions? By Axel Dreher; Jan-Egbert Sturm; James Raymond Vreeland
  3. Election Results and Opportunistic Policies: An Integrated Approach By Toke S. Aidt; Francisco José Veiga; Linda Gonçalves Veiga
  4. Business Cycles, Political Incentives and the Macroeconomy: Comparison of Models By Reichenvater, Arno
  5. Political Economic Pressures in Financial Crisis Resolution By Lim, Jamus Jerome
  6. The Politics of IMF Forecasts By Axel Dreher; Silvia Marchesi; James Raymond Vreeland
  7. Special Interests, Regime Choice, and Currency Collapse By Lim, Jamus Jerome
  8. Ethnic Diversity, Democracy, and Corruption By Etienne B. Yehoue
  9. A Positive Theory of Income Taxation By Oriol Carbonell-Nicolau
  10. Educational Quality, Communities, and Public School Choice: a Theoretical Analysis. By Tarek Mostafa; Saïd Hanchane
  11. Regime Shift in Antitrust By Ghosal, Vivek
  12. Do Autocratic States Trade Less? By Toke S. Aidt; Martin Gassebner
  13. Political Budget Cycles in Papua New Guinea By Ebrima Faal
  14. Bargaining over a New Welfare State By Bonatti , Alessandro; Thomsson, Kaj
  15. Still the Economy, Stupid: Economic Voting in the 2004 Presidential Election By Jeffrey S. DeSimone; Courtney LaFountain

  1. By: Aaron Edlin; Andrew Gelman; Noah Kaplan
    Abstract: For voters with "social" preferences, the expected utility of voting is approximately independent of the size of the electorate, suggesting that rational voter turnouts can be substantial even in large elections. Less important elections are predicted to have lower turnout, but a feedback mechanism keeps turnout at a reasonable level under a wide range of conditions. The main contributions of this paper are: (1) to show how, for an individual with both selfish and social preferences, the social preferences will dominate and make it rational for a typical person to vote even in large elections;(2) to show that rational socially-motivated voting has a feedback mechanism that stabilizes turnout at reasonable levels (e.g., 50% of the electorate); (3) to link the rational social-utility model of voter turnout with survey findings on socially-motivated vote choice.
    JEL: H0 K21
    Date: 2007–10
  2. By: Axel Dreher (KOF Swiss Economic Institute, ETH Zurich); Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich); James Raymond Vreeland (Yale University, Department of Political Science, USA)
    Abstract: We investigate whether temporary members of the UN Security Council receive favorable treatment from the World Bank, using panel data for 157 countries over the period 1970-2004. Our results indicate a robust positive relationship between temporary UN Security Council membership and the number of World Bank projects a country receives, even after accounting for economic and political factors, as well as regional and country effects. The size of World Bank loans, however, is not affected by UN Security Council membership.
    Keywords: World Bank, UN Security Council, Voting, Aid
    JEL: O19 O11 F35
    Date: 2007–07
  3. By: Toke S. Aidt (University of Cambridge); Francisco José Veiga (Universidade do Minho - NIPE); Linda Gonçalves Veiga (Universidade do Minho - NIPE)
    Abstract: The literature on political business cycles suggests that politicians systematically manipulate economic and fiscal conditions before elections. The literature on vote and popularity functions suggests that economic conditions systematically affect election outcomes. This paper integrates these two strands of literature. We use Rogo? (1990)’s model of the rational political business cycle to derive the two-way relationship between the win-margin of the incumbent politician and the size of the opportunistic distortion of fiscal policy. This relationship is estimated, for a panel of 275 Portuguese municipalities (from 1979 to 2001), as a system of simultaneous equations (by GMM). The results clearly support the theoretical predictions: (1) opportunism pays o?, leading to a larger win-margin for the incumbent; (2) incumbents behave more opportunistically when they expect a close election race.
    Keywords: Voting and popularity functions, opportunism, rational political business cycles, local government, system estimation, Portugal.
    JEL: D72 E32 H72
    Date: 2007
  4. By: Reichenvater, Arno
    Abstract: Politicians and political parties are faced with the problem of being elected into power, and later, of being re-elected. These political ambitions are often fuelled by policies that affect the entire economy and business cycles. The purpose of this paper is to compare the various models used to describe how political decision-making may affect business cycles. Both opportunistic and partisan models, and exchange rate manipulation are examined, and empirical evidence is used to view the validity of the models.
    Keywords: business cycles; partisan models; opportunistic models; politics
    JEL: E32 C73
    Date: 2007–05
  5. By: Lim, Jamus Jerome
    Abstract: The free flow of global capital has resulted in destabilizing financial crises, coupled with significant redistributive effects. However, the existing literature has not adequately addressed the channels for this redistribution, nor the different factors that influence the formation of post-crisis redistributive policy. This paper develops a microfounded theoretical model that applies the modeling framework of special interest lobbying together with bilateral bargaining to the formation of equilibrium lending, bailout, and reallocation decisions. The paper then takes the theoretical model to the data, testing two key predictions of the model using both micro- and macro-level datasets. Finally, implications for international financial reform are then examined in light of the model's findings.
    Keywords: Financial crisis; redistribution; special interest politics; IMF
    JEL: F34 D72 F41
    Date: 2007
  6. By: Axel Dreher (KOF Swiss Economic Institute, ETH Zurich); Silvia Marchesi (University of Milano-Bicocca, Department of Economics); James Raymond Vreeland (Yale University, Department of Political Science, USA)
    Abstract: Using panel data for 157 countries over the period 1999-2005 we empirically investigate the politics involved in IMF economic forecasts. We find a systematic bias in growth and inflation forecasts. Our results indicate that countries voting in line with the US in the UN General Assembly receive lower inflation forecasts. As the US is the Fund’s major shareholder, this result supports the hypothesis that the Fund’s forecasts are not purely based on economic considerations. We further find inflation forecasts are systematically biased downwards for countries with greater IMF loans outstanding relative to GDP, indicating that the IMF engages in “defensive forecasting.” Countries with a fixed exchange rate regime also receive low inflation forecasts. Considering the detrimental effects that inflation can have under such an exchange rate regime, we consider this evidence consistent with the Fund’s desire to preserve economic stability.
    Keywords: IMF, Economic Forecasts, Political Influence
    JEL: C23 D72 F33 F34
    Date: 2007–10
  7. By: Lim, Jamus Jerome
    Abstract: With heterogeneous productivity and sticky prices in the short run, exchange rate changes can generate real effects on agents in the economy; the result is that the currency regime becomes a policy variable amenable to political competition. This paper discusses how special interests and government policymakers interact in the decisionmaking processes concerning the optimal level of the exchange rate, and how these interactions may lead to a disconnect between the exchange rate and economic fundamentals which---under appropriate conditions---may affect the timing, and possibility, of a currency crisis. The model is also tested empirically with exchange rate data from 25 countries.
    Keywords: Currency crisis; exchange rate policy; special interest politics; new open-economy macroeconomics
    JEL: F34 D72 F41
    Date: 2006
  8. By: Etienne B. Yehoue
    Abstract: I study the link between ethnic diversity, democracy, and corruption. In a static model, I show that contrary to conventional wisdom, corruption might emerge as a negative externality of democracy. This occurs through ethnicity, which appears as a rent-extracting technology in a democratic society. Extending the model into a dynamic framework, I find that this technology of extraction operates only at the early stage of democracy. Its impact tends to phase out as democracy matures. In other words, the model predicts that democracy exhibits a threshold effect on corruption.
    Keywords: Working Paper , Corruption , Governance , Economic models ,
    Date: 2007–09–17
  9. By: Oriol Carbonell-Nicolau (Rutgers University)
    Abstract: We propose a dynamic version of the standard two-party electoral competition model adapted to nonlinear income taxation. The theory has a number of desirable features. First, equilibria always exist, even though the set of admissible tax policies is multidimensional. Second, the Nash set can be characterized generically, and its components give sharp predictions. Third, the features of equilibrium tax policies depend only on empirically meaningful fundamentals. Equilibrium tax schedules benefit the more numerous income groups and place the burden of taxation on income groups with fewer voters. For empirical income distributions, the features of an equilibrium tax schedule are reminiscent of Director's law of public income redistribution (Stigler [36]).
    Keywords: nonlinear income taxation, electoral competitionh, Director's law, extensive zero-sum game
    JEL: H23 H31 D7
    Date: 2007–10–26
  10. By: Tarek Mostafa (LEST - Laboratoire d'économie et de sociologie du travail - CNRS : UMR6123 - Université de Provence - Aix-Marseille I - Université de la Méditerranée - Aix-Marseille II); Saïd Hanchane (LEST - Laboratoire d'économie et de sociologie du travail - CNRS : UMR6123 - Université de Provence - Aix-Marseille I - Université de la Méditerranée - Aix-Marseille II)
    Abstract: In this paper, we develop a multicommunity model where public mixed finance and private schools coexist. Students are differentiated by income, ability and social capital. Schools maximize their profits under a quality constraint; the pricing function is dependent on the cost of producing education and on the position of an individual relatively to mean ability and mean social capital. Income plays an indirect role since it determines the type of schools and communities that can be afforded by a student given his ability and social capital.<br /><br />Three dimensional stratification results from schools’ profit maximization and individuals’ utility maximization. We study majority voting over tax rates; property tax is used to finance education not only in pure public schools but also in mixed finance schools. We provide the necessary conditions for the existence of a majority voting equilibrium determined by the median voter. Finally, we analyze the consequences of introducing public school choice.
    Keywords: Education market; Majority voting equilibrium; Peer group effects; Social Capital; Students; Formation of communities; School choice
    Date: 2007–10–08
  11. By: Ghosal, Vivek
    Abstract: This paper empirically models the longer-run deep-seated shift in intellectual thinking that followed the Chicago School’s criticism of the older antitrust doctrine, the shorter-run driving forces related to switches of the political party in power, merger waves, changes in economic activity and the level of funding and quantifies their impact on enforcement by the Antitrust Division of the U.S. Department of Justice over the period 1958-2002. The key findings are: (1) a distinct regime-shift in antitrust enforcement during the 1970s and, post-regime-shift, there has been a marked compositional change with a quantitatively large increase (decrease) in criminal (civil) antitrust court cases initiated; (2) post-regime-shift, there appears to be a change in the role played by politics with Republicans initiating more (less) criminal (civil) court cases than Democrats and the estimated quantitative effects are large; (3) disaggregating the total number of court cases into the main categories under which they are initiated (price-fixing, mergers, monopolization and restraints-of-trade) shows that individual types of cases have widely differing responses to changes in the driving forces; and (4) in a horse-race between the regime-shift and political effect on one side and the remaining variables on the other, the former forces win hands-down in explaining broad shifts in enforcement. Modeling the longer-run shift and disaggregating the court cases emerge as crucial to gaining insights into the intertemporal shifts in enforcement. The paper elaborates on the causes for the shift in enforcement and on the effectiveness of antitrust.
    Keywords: Antitrust enforcement; regime-shift; politics; supreme court; effectiveness.
    JEL: L40 B00 K00 M20
    Date: 2007–02
  12. By: Toke S. Aidt (Faculty of Economics, University of Cambridge, Cambridge U.K); Martin Gassebner (Department of Management, Technology, and Economics, ETH Zurich)
    Abstract: The paper analyzes whether the political regime of a country influences its involvement in international trade. Firstly, we develop a theoretical model that predicts that autocracies trade less than democracies. Secondly, we test the predictions of the model empirically using a panel of more than 130 countries for the years 1962 to 2000. In contrast to the existing literature, we use data on individual importing and exporting countries, rather than a dyadic set-up. In line with the model, we find that autocracies import substantially less than democ- racies, even after controlling for ocial trade policies. This finding is very stable and does not depend on a particular set-up or estimation technique
    Keywords: international trade, democracy, autocracy, gravity model
    JEL: F13 F14 O24 P45 P51
    Date: 2007–09
  13. By: Ebrima Faal
    Abstract: This paper assesses the presence of opportunistic electoral budget cycles in Papua New Guinea. Using quarterly time series data, a clear pattern emerges of pre-election manipulations of fiscal policy by incumbent governments, mainly in the form of increased development spending and overall primary expenditure, followed in some cases by retrenchment in post-election periods. These findings are consistent with the predictions of rational opportunistic political business cycle theory. It is noteworthy that revenue was not statistically significantly related to elections, either in the pre- or post-election period. In this regard, electoral swings in fiscal deficits reflect a preference for influencing expenditures rather than taxation.
    Keywords: Working Paper , Government expenditures , Papua New Guinea , Budget deficits , Business cycles , Political economy ,
    Date: 2007–09–17
  14. By: Bonatti , Alessandro (Yale University); Thomsson, Kaj (Yale University)
    Abstract: The goal of this paper is twofold: First, to develop an estimable model of legislative politics in the US Congress, second, to provide a greater understanding of the objectives behind the New Deal. In the theoretical model, the distribution of federal funds across regions of the country is the outcome of bargaining game in which the President acts as the agenda-setter and Congress bargains over the final shape of the spending bill. For any given preferences (of the President) and distribution of seats in Congress, the model delivers a unique predicted allocation. Combined with data on New Deal programs, this is used to estimate the objectives of the Roosevelt administration. The results indicate that economic concerns for relief and recovery, though not necessarily for fundamental reform and development, largely drove New Deal spending. Political concerns also mattered, but more on the margin.
    Keywords: Political Economy; LegislativeBargaining; New Deal; US Congress; Public Spending
    JEL: C78 D72 H11 H50 N42 P48
    Date: 2007–10–16
  15. By: Jeffrey S. DeSimone; Courtney LaFountain
    Abstract: Given President Bush's popularity among relatively poor rural residents and lack thereof among wealthier urban dwellers in the 2004 presidential election, analysts have suggested that voters contradicted their economic self-interests. We investigate whether this conventional wisdom implied an absence of economic voting. Using exit poll data, we estimate whether a change in previous four-year financial status affected the propensity to vote for Bush. The main econometric concern is that underlying preferences for Bush might dictate financial status change responses. Beyond income and several other demographic variables, therefore, the regressions hold constant indicators for state and congressional district, religious affiliation, political philosophy and party, and Iraq war support. Even further controlling for approval of Bush's job performance, economic voting is statistically and quantitatively significant. Effects are asymmetric, with status worsening hurting Bush more than status improvement helped, and persist even among subgroups that provided particularly strong or weak support for Bush.
    JEL: H0
    Date: 2007–10

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