nep-pol New Economics Papers
on Positive Political Economics
Issue of 2008‒02‒09
sixteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. A Positive Theory of Income Taxation Where Politicians Focus upon Swing and Core Voters By John E. Roemer
  2. Investment and Expropriation under Oligarchy and Democracy in a Heckscher-Ohlin World By Facundo Albornoz; Sebastian Galiani; Daniel Heymann
  3. Good institutions and fair trade: a road map to local and global social harmony. By Dawood Mamoon
  4. Rotten parents and disciplined children: a politico-economic theory of public expenditure and debt By Zheng Song; Kjetil Storesletten; Fabrizio Zilibotti
  5. Incumbents' interests and gender quotas By Guillaume R. Fréchette; François Maniquet; Massimo Morelli
  6. World on Fire? Democracy, Globalization and Ethnic Violence By Bezemer, Dirk; Jong-A-Pin, Richard
  7. Rain and the Democratic Window of Opportunity By Antonio Ciccone; Markus Brückner
  8. Inflating the Beast: Political Incentives Under Uncertainty By Ricardo J. Caballero; Pierre Yared
  9. Determining Constituency Marginality in the UK Using the Expense Claims of MPs By Tim Bale; Barry Reilly; Robert Witt
  10. The Informational Effects of Competition and Collusion in Legislative Politics By Martimort, David; Semenov, Aggey
  11. Red Cities, Blue Cities: Creativity, Growth and Politics By Thomas Tiemann; Cassandra DiRienzo; Jayoti Das
  12. Why is Corruption Less Harmful in Some Countries Than in Others? By Keith Blackburn; Gonzalo F. Forgues-Puccio
  13. On state autonomy : pressure groups and public policy in Britain and Spain in a comparative perspective, 1830s-1930s By Juan Carlos Rojo Cagigal
  14. Ideological Uncertainty and Lobbying Competition By Martimort, David; Semenov, Aggey
  15. A Wave of Protectionism? An Analysis of Economic and Political Considerations By Philipp Maier
  16. What is Globalisation and What is Not?: A Political Economy Perspective By Turan Subasat

  1. By: John E. Roemer (Dept. of Political Science, Yale University)
    Abstract: We construct an equilibrium model of party competition, in which parties are especially concerned with their core and swing voters, concerns which American political scientists have focused upon in their attempts to understand party behavior in general elections. Parties compete on a large policy space of possible income-tax policies. An element in this infinite-dimensional space is a function which maps pre-fisc income into post-fisc income. The only restrictions are that the function be continuous, and satisfy exogenously specified upper and lower bounds on its derivative, where it is differentiable. Only a fraction of each voter type will vote for each party, perhaps because of issues not modeled here or voter misperceptions of policies. Each party's policy makers comprise two factions, one concerned with maximizing the welfare of its constituency, or its core, the other with winning over swing voters. An equilibrium is a pair of parties (endogenously determined), and a pair of policies, one for each party, in which neither party can deviate to another policy which will be assented to by both its core and swing factions. Formally, this is a Nash equilibrium where each party possesses only a quasi-order over the policy space. We fully characterize the equilibria. There are many. In a specially important case, each party proposes a piece-wise linear tax schedule, and these schedules coincide for a possibly large interval of middle-income voters, while the left' party gives more to the poor and the ‘right’ party more to the rich. An empirical section uses the data of Piketty and Saez on taxation in the US during the twentieth century to assess the model's predictions. We argue that the model is roughly confirmed.
    Keywords: Political economy, Income taxation, Political equilibrium
    JEL: D72 D31
    Date: 2008–02
  2. By: Facundo Albornoz; Sebastian Galiani; Daniel Heymann
    Abstract: We study the incentives to expropriate foreign capital under democracy and obligarchy. We model a two-sector small open economy where foreign investment triggers Stolper-Samuelson effects through reducing exporting costs. We show how incentives to expropriate depend on the distributional effects of the investment and how these affect the interests of the group in power. How investment affects the incomes of the different groups in society depends on the sectors where these investments are undertaken and the structural features of the economy such as factor intensity. We characterize expropriation equilibria and show that if investment is undertaken in the sector that uses labor less intensively, democracies are generally more prone to expropriate. This result provides one possible rationalization for the wave of expropriation equilibria and show that if investment is undertaken in the sector that uses labor less intensively, democracies are generally more prone to expropriate. This result provides one possible rationalization for the wave of expropriations in Latin America under governments with a broad popular base during the 20th Century.
    Keywords: Expropriation, political regimes, democracy, oligarchy, foreign investments, Stolper-Samuelson
    JEL: D72 D74 H71 O15 P16
    Date: 2008–01
  3. By: Dawood Mamoon
    Abstract: The paper examines how legal, economic, political and social institutions fare with different measures of inequality in a cross section framework. We differentiate between institutions based on four categories which are legal, economic, political and social. Among legal institutions, rule of law and control for corruption have a stronger impact on inequality than voice and accountability. We find that countries which practice democracy are less prone to unequal outcomes especially when it comes to wage inequality and income inequality whereas autocracy is associated with higher level of wage inequalities but its impact on income inequalities are insignificant. Though under good economic management, autocracies may redistribute incomes from the richest to the poorest, more generally an autocratic set up violates the median voter hypothesis. The results also show that political stability is more sensitive to inequalities than democracy and autocracy which is to say that the countries which are politically stable also form more equal societies. Though in a cross section analysis, our results indicate average sample characteristics of countries chosen which neutralise the single country case sensitivities and thus may have captured the simple observational analogy that most democracies in the world are also the ones which are politically stable and economically efficient whereas most autocracies, unless they are lead by enlightened leadership eventually suffer from unstable or repressed political systems. Economic institutions also play an important role in alleviating global inequalities. Whether the government is functioning effectively and whether it has a robust fiscal and monetary policy seems to have stronger impact on inequality than regulatory quality. Education for all, a proxy for social institutions, has a strong redistributive power. Overall, political stability, control for corruption and rule of law trumps any other institutional proxy in reducing inequalities in a country. On the other hand, middle income group is most likely to benefit from good functioning institutions than any other income group. Once controlling for institutions, openness is associated with increased wage inequalities across nations. However the results for trade policy are mixed. Decrease in import taxes increase wage inequality, whereas decrease in export taxes has an egalitarian effect. The results are applicable only to a larger sample of developed and developing countries and highlight the bottle neck faced by both developing and developed countries in WTO talks which have not been successful as yet in further decrease in trade taxes. In case the situation prevails, the paper calls for more South-South trade which would enable developing countries to decrease the relative wage gaps among labour force.
    Keywords: redistribution, inequality, cross section models
    JEL: O1 N40
    Date: 2007
  4. By: Zheng Song; Kjetil Storesletten; Fabrizio Zilibotti
    Abstract: This paper proposes a dynamic politico-economic theory of debt, government finance and expenditure. Agents have preferences over a private and a government-provided public good, financed through labor taxation. Subsequent generations of voters choose taxation, government expenditure and debt accumulation through repeated elections. Debt introduces a conflict of interest between young and old voters: the young want more fiscal discipline. We characterize the Markov Perfect Equilibrium of the dynamic voting game. If taxes do not distort labor supply, the economy progressively depletes its resources through debt accumulation, leaving future generations “enslaved”. However, if tax distortions are sufficiently large, the economy converges to a stationary debt level which is bounded away from the endogenous debt limit. The current fiscal policy is disciplined by the concern of young voters for the ability of future government to provide public goods. The steady-state and dynamics of debt depend on the voters’ taste for public consumption. The stronger the preference for public consumption, the less debt is accumulates. We extend the analysis to redistributive policies and political shocks. The theory predicts government debt to be mean reverting and debt growth to be larger under right-wing than under left-wing governments. Data from the US and from a panel of 21 OECD countries confirm these theoretical predictions.
    Keywords: Fiscal discipline, Fiscal policy, Government debt, Intergenerational conflict, Left- and right-wing governments, Markov equilibrium, Political economy, Public finance, Repeated voting.
    JEL: D72 E62 H41 H62 H63
    Date: 2007–06
  5. By: Guillaume R. Fréchette (New York University - Department of Economics); François Maniquet; Massimo Morelli (Columbia University - Department of Economics)
    Abstract: The adoption of mandatory gender quotas in party lists has been a subject of discussion in many countries. Since any reform obviously requires the approval of a (sometimes qualified) majority of incumbent legislators' votes, keeping an eye on incumbents' interests and incentives in different systems seems a natural thing to do if we want to understand different prospects for reforms in different countries. Such differences in the cost-benefit analysis of incumbents may well depend on the electoral system. We argue that if male candidates have a higher probability of being elected when running against a female candidate than when running against a male of similar characteristics (male advantage), then single member district majority rule and closed list proportional representation are opposite extremes in terms of incentives for incumbents to pass parity laws. We validate the above argument using a formal model of constitutional design as well as an empirical analysis of the legislative elections in France, since France offers a natural experiment for both electoral systems. Given the male advantage, increasing the number of female new candidates made the incumbents' probability of reelection higher and thus male incumbent members of the Assembly have actually benefited from the parity law. We also show that parity may have Assembly composition effects and policy effects that vary with the electoral system.
    Date: 2007
  6. By: Bezemer, Dirk; Jong-A-Pin, Richard
    Abstract: Recent studies suggest that democracy and globalization lead to ethnic hatred and violence in countries with a rich ethnic minority. We examine the thesis by Chua (2003) that democratization and globalization lead to ethnic violence in the presence of a market-dominant minority. We use different data sets to measure market dominant minorities and employ panel fixed effects regressions for a sample of 107 countries over the period 1984-2003. Our model contains two-way and three-way interactions to examine under which conditions democracy and globalization increase violence. We find no evidence for a worldwide Chua effect, but we do find support for Chua’s thesis for Sub-Saharan Africa.
    Keywords: Globalization; Democracy; Ethnic Violence; Market-dominant minorities
    JEL: D74 J15
    Date: 2008–01
  7. By: Antonio Ciccone; Markus Brückner
    Abstract: According to the economic approach to political transitions, negative transitory economic shocks can give rise to a window of opportunity for democratic change. We examine this hypothesis using yearly rainfall variation over the 1980-2004 period in 41 Sub-Saharan African countries. We find that a 25% drop in rainfall increases the probability of a transition to democracy during the following two years by around 3 percentage points. A 5% fall in income due to low rainfall raises the probability of democratization by 7 percentage points. We also find that rainfall does not affect transitions from democracy to autocracy.
    Keywords: Democratization, transitory economic shocks
    JEL: O0 P0
    Date: 2008–01
  8. By: Ricardo J. Caballero; Pierre Yared
    Abstract: High commodity prices and a sustained global expansion have brought about a new policy dilemma for many economies: Why are governments accumulating so much wealth and what should be the fiscal response to this abundance? In this paper we characterize how politicians' rent-seeking incentives and their interaction with political and economic uncertainty affect the management of abundance. In the standard political economy model of debt, the presence of political risk leads current governments to over-borrow in order to starve the beast. However, when economic risk is significant, we show that the presence of rent-seeking politicians gives rise to an option value of rent-seeking. In this case, if economic risk is large relative to political risk, the standard result is overturned and politicians have an incentive to over-save or inflate the beast. In the latter scenario, the government also hedges less than is socially optimal. Finally, we show that incentive compatible rules that weaken political risk and the option value of rent-seeking can improve social welfare.
    JEL: E6 H2 H6
    Date: 2008–02
  9. By: Tim Bale (University of Sussex); Barry Reilly (University of Sussex); Robert Witt (University of Surrey)
    Abstract: A United Kingdom (UK) parliamentary seat is commonly referred to as ‘marginal’ if the majority is less than 10% of votes cast thus rendering the seat vulnerable on a swing of 5%. This paper investigates whether the spending behaviour of MPs on selected constituency service expenditure categories can offer insights on what constitutes a ‘marginal’ seat within the UK ‘first-past-the-post’ electoral system. The possible existence of a non-linear relationship between the expense claims of MPs and the size of the constituency majority provides the basis for such an insight. This paper thus investigates the empirical nature of this non-linear relationship using separate specifications based on quadratic and piece-wise linear splines in constituency majority size. The empirical analysis reported for the behavior of MPs appears broadly consistent with the conventional definition used to classify a ‘marginal’ constituency in the UK.
    Keywords: marginality, expense claims, postage, stationery, Members of Parliament
    JEL: D72 P16
    Date: 2008–01
  10. By: Martimort, David; Semenov, Aggey
    Abstract: We use a mechanism design approach to study the organization of interest groups in an informational model of lobbying. Interest groups influence the legislature only by communicating private information on their preferences and not by means of monetary transfers. Interest groups have private information on their ideal points in a one-dimensional policy space and may either compete or adopt more collusive behaviors. Optimal policies result from a trade-off between imposing rules which are non-responsive to the groups' preferences and flexibility that pleases groups better. Within a strong coalition, interest groups credibly share information which facilitates communication of their joint interests, helps screening by the legislature and induces flexible policies responsive to the groups' joint interests (an informativeness effect). Competing interest groups better transmit information on their individual preferences (a screening effect). The socially and privately optimal organization of lobbying favors competition between groups only when their preferences are not too congruent with those of the legislature. With more congruence, a strong coalition is preferred. Finally, within a weak coalition, interest groups must design incentive compatible collusive mechanisms to share information. Such weak coalitions are always inefficient.
    Keywords: Communication Mechanisms; Lobbying; Competition; Coalition; Legislative Politics.
    JEL: D72 D8
    Date: 2008–02–01
  11. By: Thomas Tiemann (Department of Economics, Elon University); Cassandra DiRienzo (Department of Economics, Elon University); Jayoti Das (Department of Economics, Elon University)
    Abstract: The 2006 Congressional elections seemed to be about change, as well as the war in Iraq. The 2008 Presidential election, though only at the primary stage, seems to be about change as well as the war in Iraq and the faltering economy. What is the force behind Americans wanting “change?” Is it simply frustration or is it because of important changes in the economy and the demography of the United States? In his 2002 book, Richard Florida looked at one of those changes and developed a “creativity index” measuring the existence of creative people, economic activity, and cultural tolerance for Metropolitan Statistical Areas in the U.S. This study looks at the connection between the rise of the creative class, economic growth and voting patterns. We find that more creative metropolitan areas grow faster on average and creative areas are more likely to have voted Democratic in the past. Even after controlling for union membership, the presence of creative people explains how metropolitan areas voted in the 2004 Presidential election, hinting at one force behind Americans’ desire for political change.
    Date: 2008–02
  12. By: Keith Blackburn; Gonzalo F. Forgues-Puccio
    Abstract: Empirical evidence shows that not all countries with high levels of corruption have su¤ered poor growth performance. Bad quality governance has clearly been much less damaging (if at all) in some economies than in others. Why this is so is a question that has largely been ignored, and the intention of this paper is to provide an answer. We develop a dynamic general equilibrium model in which growth occurs endogenously through the invention of new goods based on research and development activity. For such activity to be undertaken, ?rms must acquire complementary licenses from public officials who are able to exploit their monopoly power by demanding bribes in exchange for these (otherwise free) permits. We show that the effects of corruption depend on the extent to which bureaucrats coordinate their rent-seeking behaviour. Speci?cally, our analysis predicts that countries with organised corruption networks are likely to display lower levels of bribes, higher levels of research activity and higher rates of growth than countries with disorganised corruption arrangements..
    Date: 2007
  13. By: Juan Carlos Rojo Cagigal
    Abstract: The paper looks into the relationship between industrial pressure groups and the state, comparing the experiences of Britain and Spain during the 19th and the first third of the 20th century. By analysing the decision-making processes, the collective action of economic groups and the adoption of public policy, I argue that they shared a common pattern: both states were basically autonomous facing the pressure of organized economic interests. I explore some of the causes that could explain such a similar pattern in countries with a very different model of development and also examine the tensions provoked by the strong autonomy of the state, mainly in the Spanish case. From this work it follows that the role of the state should be re-considered and reevaluated in explaining institutional change in western countries during the nineteenth and twentieth centuries.
    Keywords: Pressure groups, Economic elites, Public policy, Big business and government, State, Political economy, Britain, Spain
    JEL: N40 N43
    Date: 2008–01
  14. By: Martimort, David; Semenov, Aggey
    Abstract: Polarized interest groups (principals) compete to influence a decision-maker (agent) through monetary contributions. This decision-maker chooses a one-dimensional policy and has private information about his ideal point. Competition between interest groups under asymmetric information yields a rich pattern of equilibrium strategies and payoffs. Policies are systematically biased towards the decision-maker's ideal point and it may sometimes lead to a "laissez-faire" equilibrium. Either the most extreme decision-makers or the most moderate ones may get information rent depending on the importance of their ideological bias. The market for influence may exhibit segmentation with interest groups keeping an unchallenged influence on ideologically close-by decision-makers. Indeed, interest groups stop contributing when there is too much uncertainty on the decision-maker's ideology and when the latter is ideologically too far away.
    Keywords: Lobbying Competition; Common Agency; Asymmetric Information; Contributions.
    JEL: D7 D8
    Date: 2008–02–02
  15. By: Philipp Maier
    Abstract: In light of the U.S. current account deficit, pressure is high on Asian countries to revalue their currencies. The calls from some U.S. policymakers for tariffs on imports from China has sparked fears that this could trigger a world-wide surge in protectionism. This study evaluates the risk of protectionism, considering two dimensions: first, the economic effects of tariffs; second, the incentives for policymakers to adopt tariffs. Following the political economy literature, we distinguish 'benevolent' policymakers - who care about long-term GDP - and 'myopic' policymakers, for whom short-term considerations are important. An analysis of the economic effects using the Bank of Canada's <em>Global Economy Model</em> shows that the gains from import tariffs are small: in the short-term, tariffs raise the price of imports and shift consumption toward domestically-produced goods; but they also lead to a real appreciation. This improves the terms of trade, but falling export volumes lead to a reduction in GDP in the long-run. As regards the political dimension, we conclude that a 'benevolent' policymaker would not adopt tariffs, because of negative long-term economic consequences, but 'myopic' policymakers might be tempted to exploit short-term political gains. Given the potentially high costs of protectionist trade policies, protectionism is therefore rightly viewed as an important risk.
    Keywords: International topics; Recent economic and financial developments; Regional economic developments
    JEL: E66 F32 F47
    Date: 2008
  16. By: Turan Subasat (Department of Economics, Izmir University of Economics)
    Abstract: Despite the widespread use of the concept there is neither a consistent theoretical construction nor a clear definition of globalisation. Although the debate between pro and anti globalisation scholars and activists is interesting, it largely fails to address globalisation as a fundamental structural transformation of modern capitalism from a historical perspective and tends to reduce it to a re-articulation of the old debate on states versus markets. The first aim of this paper is to provide a clearer definition of globalisation which will be helpful in assessing the validity of various arguments surrounding the concept of globalisation, including whether such a process exists. Then an alternative interpretation of globalisation viewed from a political economy perspective will be introduced. It will be argued that internationalisation in the form of increased trade and foreign direct investment is the nature of capitalist accumulation process, thus, cannot be impeded. This accumulation process necessarily creates its own ideological climate to facilitate acceptance of the doctrine and to justify the economic and social problems it creates. Finally it will argue that there is a globalisation tendency since increased internationalisation inevitably weakens the role of nation states by transferring some of their functions to newly created supranational states that are created by the dynamics of this internationalisation process.
    Keywords: Globalisation; Political Economy; International Trade Organizations
    JEL: B5 B51 F13 F15 F21 F23 F36 P12 P16
    Date: 2008–02

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