nep-pol New Economics Papers
on Positive Political Economics
Issue of 2007‒11‒17
thirteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Fiscal Policy, Rent Seeking and Growth under Electoral Uncertainty Theory and Evidence from the OECD By Konstantinos Angelopoulos; George Economides
  2. Endogenous Political Instability By Ryo Arawatari; Kazuo Mino
  3. Political Business Cycles in the New Keynesian Model By Fabio Milani
  4. Emergence and Persistence of Inefficient States* By Daron Acemoglu; Davide Ticchi; Andrea Vindigni
  5. Segregation and Black Political Efficacy By Elizabeth Oltmans Ananat; Ebonya L. Washington
  6. An analysis of the Swiss vote on the use of genetically modified crops By Felix Schlaepfer
  7. Proximity and linkages among coalition participants: a new voting power measure applied to the International Monetary Fund. By Julien Reynaud; Christian Thimann; Lukasz Gatarek
  8. Dynamic Political Economy of Redistribution Policy: The Role of Education Costs By Ryo Arawatari; Tetsuo Ono
  9. Inequality, Democracy, Institutional Quality, and Fiscal Redistribution By Alberto Chong; Mark Gradstein
  10. Political economy of social security with endogenous preferences By Pascal Belan; Bertrand Wigniolle
  11. On the Determinants and Effects of Political Influece By Alberto Chong; Mark Gradstein
  12. The Political-Economy Positive Role of the Social Security System in Sustaining Immigration (But Not Vice Versa) By Edith Sand; Assaf Razin
  13. Political Risk and Irreversible Investment By Sumru G. Altuğ; Fanny S. Demers; Michel Demers

  1. By: Konstantinos Angelopoulos; George Economides
    Abstract: We construct a general equilibrium model of economic growth and optimally chosen fiscal policy, in which individuals compete with each other for a share of government spending and two political parties can alternate in power according to an exogenous reelection probability. The main prediction is that uncertainty about remaining in power results in increased fiscal spending, which in turn distorts incentives by pushing individuals away from productive work to rent-seeking activities; then distorted incentives hurt growth. This receives empirical support in a dataset of 25 OECD countries over the period 1982-1996. In particular, electoral uncertainty leads to larger government consumption shares in GDP, which in turn exert an adverse effect on the ICRG index measuring incentives and this is bad for growth. Actually, estimation by IV methods and confidence intervals that are robust to (potentially) weak instruments, reveal that OLS under-estimates the effects of government spending on rent extraction activities and of such activities on economic growth.
    Keywords: Fiscal policy; rent seeking; economic growth; elections.
    JEL: O43 E62 D72
    Date: 2007–09
  2. 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. 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 indeterminacy 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
  3. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: This paper tests various Political Business Cycle theories in a New Keynesian model with a monetary and fiscal policy mix. All the policy coefficients, the target levels of inflation and the budget deficit, the firms' frequency of price setting, and the standard deviations of the structural shocks are allowed to depend on 'political' regimes: a pre-election vs. post-election regime, a regime that depends on whether the President (or the Fed Chairman) is a Democrat or a Republican, and a regime under which the President and the Fed Chairman share party affiliation in pre-election quarters or not. The model is estimated using full-information Bayesian methods. The assumption of rational expectations is relaxed: economic agents can learn about the effect of political variables over time. The results provide evidence that several coefficients depend on political variables. The best-fitting specification is one that allows coefficients to depend on a pre-election vs. non-election regime. Monetary policy becomes considerably more inertial before elections and fiscal policy deviations from a simple rule are more common. The results overall support the view of an independent Fed that avoids taking policy decisions right before elections. There is some evidence, however, that policies become more expansionary before elections, but this evidence seems to disappear in the post-1985 sample. The estimates also indicate that firms similarly delay their price-setting decisions until after the upcoming Presidential election.
    Keywords: Political Business Cycles; Opportunistic Cycles; Partisan Cycles; Monetary and Fiscal Policy; Adaptive Learning; Bayesian Estimation
    JEL: C11 D72 E32 E52 E58 E63
    Date: 2007–11
  4. By: Daron Acemoglu; Davide Ticchi; Andrea Vindigni
    Abstract: Inefficiencies in the bureaucratic organization of the state are often viewed as important factors in retarding economic development. Why certain societies choose or end up with such inefficient organizations has received very little attention, however. In this paper, we present a simple theory of the emergence and persistence of inefficient states based on patronage politics. The society consists of rich and poor individuals. The rich are initially in power, but expect to transition to democracy, which will choose redistributive policies. Taxation requires the employment of bureaucrats. We show that, under certain circumstances, by choosing an inefficient state structure, the rich may be able to use patronage and capture democratic politics. This enables them to reduce the amount of redistribution and public good provision in democracy. Moreover, the inefficient state creates its own constituency and tends to persist over time. Intuitively, an inefficient state structure creates more rents for bureaucrats than would an efficient state structure. When the poor come to power in democracy, they will reform the structure of the state to make it more efficient so that higher taxes can be collected at lower cost and with lower rents for bureaucrats. Anticipating this, when the society starts out with an inefficient organization of the state, bureaucrats support the rich, who set lower taxes but also provide rents to bureaucrats. We show that in order to generate enough political support, the coalition of the rich and the bureaucrats may not only choose an inefficient organization of the state, but they may expand the size of bureaucracy “excessively” so as to gain additional votes. The model shows that an equilibrium with an inefficient state is more likely to arise when there is greater inequality between the rich and the poor, when bureaucratic rents take intermediate values and when individuals are sufficiently forward-looking.
    Keywords: bureaucracy, corruption, democracy, patronage politics, political economy, public goods, redistributive politics.
    JEL: P16 H11 H26 H41
    Date: 2007
  5. By: Elizabeth Oltmans Ananat; Ebonya L. Washington
    Abstract: The impact of segregation on Black political efficacy is theoretically ambiguous. On one hand, increased contact among Blacks in more segregated areas may mean that Blacks are better able to coordinate political behavior. On the other hand, lesser contact with non-Blacks may mean that Blacks have less political influence over voters of other races. We find that exogenous increases in segregation lead to decreases in Black civic efficacy, as measured by an ability to elect Representatives who vote liberally and more specifically in favor of legislation that is favored by Blacks. This tendency for Representatives from more segregated MSAs to vote more conservatively arises in spite of the fact that Blacks in more segregated areas hold more liberal political views than do Blacks in less segregated locales. We find evidence that this decrease in efficacy is driven by greater divergence between Black and non-Black political views in the most segregated areas. Because Blacks are a minority in every MSA, increased divergence by race implies that the mean Black voter viewpoint is farther away from the mean voter viewpoint. Thus, reduced Black political efficacy may be one reason that Blacks in exogenously more segregated areas experience worse economic outcomes.
    JEL: D72 J15
    Date: 2007–11
  6. By: Felix Schlaepfer (Socioeconomic Institute, University of Zurich)
    Abstract: In November 2005, 55.7 percent of 2 million Swiss voters approved a 5-year moratorium (ban) on the commercial cultivation of genetically modified (GM) plants within Switzerland. The present study examines how individual voting decisions were determined by (i) socioeconomic characteristics, (ii) political preference/ideology and (iii) agreement with a series of arguments in favour and against the use of GM plants in Swiss agriculture. The analysis is based on the data of the regular voter survey undertaken after national-level voting decisions in Switzerland. Among the socioeconomic characteristics, only the age group was clearly significant with individuals above 65 years less opposed to crop biotechnology. Several political preference/ideology variables were significant determinants of the vote, most notably the preferences about the role of the state in the economy. Perceived consequences of the use of GM plants for health, natural diversity of plants and animals were also strongly and significantly associated with approving and disapproving voter groups. The disapproving votes were not motivated by perceived benefits of GM-food production but mainly by perceived interests of Swiss science and industry. Our findings suggest that current concerns about the use of genetically engineered plants in agriculture may not automatically decrease with higher levels of education/knowledge and generational change. Furthermore, the analysis of the voter motives suggests that the public support for GM-free agricultural production would be even larger in other countries, where industrial interests in crop biotechnology are less pronounced.
    Keywords: Externalities, genetically modified organisms (GMO), public goods, voting
    JEL: D62 D72 Q26
    Date: 2007–11
  7. By: Julien Reynaud (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Christian Thimann (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Lukasz Gatarek (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.)
    Abstract: Voting power methodology offers insights to understand coalition building in collective decision making. Using cooperative game theory, Banzhaf (1965) developed an index to capture the numerical importance of voters in coalition building. This voting power index is still widely used today in applications to international politics. Yet, it assumes that voters are symmetric and focuses on particular voters only. This paper proposes a new measure of voting power which account for the numerical proximity between voters by capturing how often they appear in winning coalitions together. The index is also developed to account for the relative importance of coalitions and the relative linkages among coalition participants. We present an application to the governance structure of the International Monetary Fund, with linkages being represented by bilateral trade between voters. The results are able to explain several important features of the functioning of this particular voting body, and may be useful for other applications of international politics. JEL Classification: C71, F33.
    Keywords: Voting power, coalition building, International Monetary Fund.
    Date: 2007–10
  8. 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 redistribution policy via individual decision-making on education. For cases of high costs, there are multiple equilibria: the high-tax equilibrium featured by the minority of highly educated individuals and a large size of the government, and the low-tax equilibrium featured by the majority of highly educated individuals and a small size of the government. For cases of low costs, there is a unique equilibrium featured by the majority of highly educated individuals and a large size of the government.
    Keywords: Markov perfect equilibrium; Dynamic political economy; Redistribution policy; Education costs
    JEL: D72 D78 E62
    Date: 2007–08
  9. By: Alberto Chong (Inter-American Development Bank); Mark Gradstein (Ben Gurion University)
    Abstract: This paper studies the joint effect of economic and political inequalities on redistributive taxation and institutional quality. The theoretical model suggests that income inequality, coupled with political bias in favor of the rich, decreases redistribution and lowers institutional quality. The effect of the former is to increase productive investment, and the effect of the latter is to decrease it—with resulting ambiguous implications for economic growth. Testing these predictions empirically in a panel of countries, the paper finds that inequality has a negative effect on both institutional quality and redistribution, especially in non-democratic countries.
    Keywords: Inequality, institutions, redistribution
    JEL: D31 D90 E62 H11 O11
    Date: 2007–10
  10. By: Pascal Belan (LEN - Université de Nantes); Bertrand Wigniolle (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: In this paper we study the interaction between economic policy and preferences when both are endogenous. Economic policy results from a vote, whereas individual preferences are influenced by specific investment in training and education. The paper focuses on a particular economic policy: the financing of the social security system. Moreover, it considers a specific education investment: parents expect a gift from their children when old and devote resources in order to arouse the altruism of their children. Therefore, preferences of the children are trained in relation to the size of the social security system, which in turn results from the preferences of the median voter. The politico-equilibrium of this economy is compared to the social optimum.
    Keywords: social security, endogenous altruism.
    Date: 2007–07
  11. By: Alberto Chong (Inter-American Development Bank); Mark Gradstein (Ben Gurion University)
    Abstract: This paper uses a large cross-country survey of business firms to assess their influence on government policies. It is found that influence is associated with larger, government-owned firms that have a high degree of ownership concentration. In contrast, foreign ownership matters little. It is also found that the extent to which government policies and legislation are viewed as impeding firm growth decreases with political influence and, independently, with a country's level of institutional quality.
    Keywords: Politics, Institutions, Influence, Ownership, Government Policies, Firm Growth
    JEL: H00 D21 O10
    Date: 2007–10
  12. By: Edith Sand; Assaf Razin
    Abstract: In the political-economy debate people express the idea that immigrants are good because they can help pay for the old, thus help sustaining the social security system. In addition, the median voter whose income derives from wages will wish to keep out the immigrants who will depress his/her wage. Therefore the decisive voter will keep migrants out. The paper addresses these two accepted propositions. For this purpose we develop an OLG political economy model of social security and migration to explore how migration policy and a pay-as-you-go (PAYG) social security system are jointly determined. The sub-game perfect Markov , depends on the different patterns of fertility rates among native born and migrants. Our analysis demonstrates that a social security system may change the first proposition significantly because the median voter may opt to bring in migrants to help him/her during retirement. As for the second proposition we get a significantly nuanced version. Not always immigration helps sustain the social security.
    JEL: E6 H1
    Date: 2007–11
  13. By: Sumru G. Altuğ (Department of Economics, Koç University; Center for Economic Policy Research, London.); Fanny S. Demers; Michel Demers
    Abstract: The objective of this paper is twofold. First, we develop a theoretical model to investigate the impact of political risk on irreversible investment. Second, we apply our model to an analysis of the effects of risk of separation of the province of Quebec from the Canadian federation. We model the probability of a regime switch using the properties of the electoral process and examine the response of investment to changes in the risk of separation. We consider the impact of investors’ perception of the risk of separation and financial market volatility separately. We show that political risk has a depressing impact on investment even if the "bad" regime has never been observed in the sample.
    Keywords: Irreversible investment, political risk, regime shifts, Quebec investment, Canada
    JEL: E22 D92 O16 O11
    Date: 2007–05

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