nep-pol New Economics Papers
on Positive Political Economics
Issue of 2008‒04‒15
twenty papers chosen by
Eugene Beaulieu
University of Calgary

  1. The sustainable cooperative tariffs : a political economy perspective. By Racem Mehdi
  2. A Theory of Military Dictatorships By Daron Acemoglu; Davide Ticchi; Andrea Vindigni
  3. Ideology By Benabou, Roland
  4. Measuring Party Institutionalization in Developing Countries: A New Research Instrument Applied to 28 African Political Parties By Matthias Basedau; Alexander Stroh
  5. Who Is Punishing Corrupt Politicians – Voters or the Central Government? Evidence from the Brazilian Anti-Corruption Program By Fernanda Brollo
  6. Ethnic Coalitions of Convenience and Commitment: Political Parties and Party Systems in Kenya By Sebastian Elischer
  7. Impact of Political News on the Baltic State Stock Markets By Soultanaeva, Albina
  8. Keynesian hospitals? Public employment and political pressure By Andrew E. Clark; Carine Milcent
  9. Urban Inequality and Political Recruitment Networks By Strömblad, Per; Myrberg, Gunnar
  10. Proportional Payoffs in Majority Games By Maria Montero
  11. Is there an election cycle in public employment? Separating time effects from election year effects By Dahlberg, Matz; Mörk, Eva
  12. Protection of Property Rights and Growth as Political Equilibria By Asoni, Andrea
  13. A Farewell to Critical Junctures: Sorting Out Long-run Causality of Income and Democracy By Erich Gundlach; Martin Paldam
  14. The Transition of Corruption: From Poverty to Honesty By Erich Gundlach; Martin Paldam
  15. Women’s Liberation: What’s in It for Men? By Doepke, Matthias; Tertilt, Michèle
  16. America’s Rejection of Compulsory Government Health Insurance in the Progressive Era and its Legacy for National Insurance Today By Herbert Emery
  17. Framing and Free Riding: Emotional Responses and Punishment in Social Dilemma Games By Robin P. Cubitt; Michalis Drouvelis; Simon Gächter
  18. The impact of ballot access restrictions on electoral competition: Evidence from a natural experiment By Drometer, Marcus; Rincke, Johannes
  19. Predicting the Presidential Election Cycle in US Stock Prices: Guinea Pigs versus the Pros By Manfred Gärtner
  20. Political connections and minority-shareholder protection: Evidence from securities-market regulation in China By Berkman, Henk; Cole, Rebel; Fu, Lawrence

  1. By: Racem Mehdi (Centre d'Economie de la Sorbonne et ESSECT - Université de Tunis)
    Abstract: The purpose of this paper is to examine the international trade cooperation in order to determine the sustainable cooperative tariff rates in a political economy perspective. This paper establishes a tariff-setting game among two countries as a two-phase game : negotiation phase and implementation phase. Our results show the following points. First, the sustainable cooperative tariff rate depends on the political weight placed by government on domestic import-competing industry, on the political influence of the foreign export industry and on the economic stakes of domestic tariff policy in these two sectors. Second, international cooperation is sustainable when governments involved in tariff negotiation are patient enough. Third, difference in patience affects the relative bargaining power of governments.
    Keywords: Trade negotiation, political economy, repeated game.
    JEL: F13 D72
    Date: 2008–03
  2. By: Daron Acemoglu; Davide Ticchi; Andrea Vindigni
    Abstract: We investigate how nondemocratic regimes use the military and how this can lead to the emergence of military dictatorships. Nondemocratic regimes need the use of force in order to remain in power, but this creates a political moral hazard problem; a strong military may not simply work as an agent of the elite but may turn against them in order to create a regime more in line with their own objectives. The political moral hazard problem increases the cost of using repression in nondemocratic regimes and in particular, necessitates high wages and policy concessions to the military. When these concessions are not sufficient, the military can take action against a nondemocratic regime in order to create its own dictatorship. A more important consequence of the presence of a strong military is that once transition to democracy takes place, the military poses a coup threat against the nascent democratic regime until it is reformed. The anticipation that the military will be reformed in the future acts as an additional motivation for the military to undertake coups against democratic governments. We show that greater inequality makes the use of the military in nondemocratic regimes more likely and also makes it more difficult for democracies to prevent military coups. In addition, greater inequality also makes it more likely that nondemocratic regimes are unable to solve the political moral hazard problem and thus creates another channel for the emergence of military dictatorships. We also show that greater natural resource rents make military coups against democracies more likely, but have ambiguous effects on the political equilibrium in nondemocracies (because with abundant natural resources, repression becomes more valuable to the elite, but also more expensive to maintain because of the more severe political moral hazard that natural resources induce). Finally, we discuss how the national defense role of the military interacts with its involvement in domestic politics.
    JEL: H20 N10 N40 P16
    Date: 2008–04
  3. By: Benabou, Roland (Princeton University)
    Abstract: I develop a model of ideologies as collectively sustained (yet individually rational) distortions in beliefs concerning the proper scope of governments versus markets. In processing and interpreting signals of the efficacy of public and market provision of education, health insurance, pensions, etc., individuals optimally trade off the value of remaining hopeful about their future prospects (or their children’s) versus the costs of misinformed decisions. Because these future outcomes also depend on whether other citizens respond to unpleasant facts with realism or denial, endogenous social cognitions emerge. Thus, an equilibrium in which people acknowledge the limitations of interventionism coexists with one in which they remain obstinately blind to them, embracing a statist ideology and voting for an excessively large government. Conversely, an equilibrium associated with appropriate public responses to market failures coexists with one dominated by a laissez-faire ideology and blind faith in the invisible hand. With public-sector capital, this interplay of beliefs and institutions leads to history-dependent dynamics. The model also explains why societies find it desirable to set up constitutional protections for dissenting views, even when ex-post everyone would prefer to ignore unwelcome news.
    Keywords: ideology, statism, laissez-faire, cognitive dissonance, wishful thinking, institutions, political economy, psychology
    JEL: H11 D72 D83 P16 Z1
    Date: 2008–03
  4. By: Matthias Basedau (GIGA Institute of African Affairs); Alexander Stroh (GIGA Institute of African Affairs)
    Abstract: The institutionalization of political parties is said to be important for democratic development, but its measurement has remained a neglected area of research. We understand the institutionalization of political organizations as progress in four dimensions: roots in society, level of organization, autonomy, and coherence. On this basis we construct an Index of the Institutionalization of Parties (IIP), which we apply to 28 African political parties. The IIP uses extensive GIGA survey and fieldwork data. Initial results reveal a more differentiated degree of institutionalization than is commonly assumed. In addition to illustrating overall deficits in party institutionalization, the IIP highlights an astonishing variance between individual parties and—to a lesser extent—between national aggregates. Further research on party institutionalization remains necessary, particularly regarding its causes and consequences.
    Keywords: Political parties, sub-Saharan Africa, institutionalization, stability, legitimacy
    Date: 2008–02
  5. By: Fernanda Brollo (Institute for Economic Development, Boston University; Bocconi University, Via Sarfatti 25 - 20136)
    Abstract: Corruption at local levels poses an important obstacle to economic development. In 2003, Brazil implemented an anti-corruption program in which municipalities are chosen at random to have their allocation of federal transfers audited. This paper investigates the channels through which this anti-corruption program acts. The results show that the Brazilian central government reduces the amount of infrastructure transfers to those local administrations that are more corrupt. Exploring the exogenous timing of released audit reports, there is evidence that the actual reduction on federal transfers does not have an impact on corrupt mayors’ probability of re-election. Instead, the disclosure to voters of information about corruption is the channel for electoral punishment. Poorer municipalities tend to be associated with higher levels of corruption reported. Hence the reduction in transfers to municipalities with many violations reported might hurt poor communities disproportionately without any compensating beneficial effects on corruption reduction.
    Date: 2008–03
  6. By: Sebastian Elischer (Jacobs University Bremen)
    Abstract: This paper analyzes the role of ethnicity in shaping the character of Kenya’s political parties and its party system since 1992. Drawing on a constructivist conception of ethnicity, it uses a framework of comparison derived from Donald Horowitz and distinguishes between three party types: the mono-ethnic party, the multi-ethnic alliance type and the multi-ethnic integrative type. It shows that although Kenyan parties have increasingly incorporated diverse communities, they have consistently failed to bridge the country’s dominant ethnic cleavages. Consequently, all of Kenya’s significant parties represent ethnic coalitions of convenience and commitment and, thus, ethnic parties. The paper further states that the country’s post-2007 political environment is a by-product of the omnipresence of this party type.
    Keywords: Social cleavages, ethnicity, political party identification, Kenya
    Date: 2008–02
  7. By: Soultanaeva, Albina (Department of Economics, Umeå University)
    Abstract: This paper studies the link between political news releases, and the returns and volatilities in the stock markets of Riga, Tallinn and Vilnius. Political news releases are viewed as proxies for political risk. The results indicate that political news events regarding domestic and foreign, excluding Russia, political issues led, on average, to lower uncertainty in the stock markets of Riga and Tallinn in 2001-2003. At the same time, political risk from Russia increased the volatility of the stock market in Tallinn. We found that there is only a weak relationship between political risks of different origins and the stock market volatility in the Baltic states in 2004-2007. In addition, we found a significant Monday effect, consistent with the trading behavior of institutional investors.
    Keywords: Public information arrival; political risk; volatility; multivariate GARCH
    JEL: C32 G10 G14 G15
    Date: 2008–03–27
  8. By: Andrew E. Clark; Carine Milcent
    Abstract: This paper uses an unusual administrative dataset covering the universe of French hospitals to consider hospital employment: this is consistently higher in public hospitals than in Not-For-Profit or private hospitals, even controlling for many measures of hospital output (such as the type of operations and care provided, and the bed capacity rate). Public-hospital employment is positively correlated with the local unemployment rate, whereas no relationship is found in non-Public hospitals. This is consistent with public hospitals providing employment in depressed areas. We appeal to the Political Science literature and calculate local political allegiance, using expert evaluations on various parties political positions and local election results. The relationship between public hospital employment and local unemployment is stronger the more left-wing the local municipality. This latter result holds especially when electoral races are tight, consistent with a concern for re-election.
    Date: 2008
  9. By: Strömblad, Per (Institute for Futures Studies); Myrberg, Gunnar (Uppsala University)
    Abstract: This paper provides evidence of segregation-generated differences in political recruitment networks. By taking explicit account of social-geographical differentiation in the urban landscape, we evaluate—in prior work largely neglected—contextual effects on requests for participation. Consistent with previous research, we find that those activists who try to convince others to participate in political life systematically use a set of selection criteria when deciding whom to approach. However, using recent data based on a sample of inhabitants of Swedish cities and properties of their neighborhoods, we also show that the degree of (aggregate-level) social exclusion negatively influences (individual-level) recruitment efforts. This contextual effect stems both from the disproportional population composition as such in residential areas, and from recruiters’ rational avoidance of areas marked by high levels of social exclusion. We conclude that these logics jointly reinforce urban inequalities regarding the chances for ordinary citizens to be invited to political life.
    Keywords: political recruitment; political recruiters; contextual effects; Civic Voluntarism Model; statistical discrimination
    JEL: I39 J19
    Date: 2008–02
  10. By: Maria Montero (School of Economics, University of Nottingham)
    Abstract: This paper extends the Baron-Ferejohn model of legislative bargaining to general weighted majority games with two modifications: first, payoff division can only be agreed upon after the coalition has formed (two-stage bargaining); second, negotiations in the coalition can break down, in which case a new coalition may be formed (reversible coalitions). Under the most natural bargaining protocol, both expected payoffs and actual payoff division are proportional to the voting weights provided that the set of winning coalitions of minimum weight is weakly balanced and that the breakdown probability tends to 0. Homogeneity of the voting weights is neither necessary nor sufficient for proportional payoffs. Intermediate values of the breakdown probability produce predictions consistent with the empirical evidence on portfolio allocation in Europe: a moderate propoper advantage and a linear relationship between weights and ex post payoffs for all coalition members other than the proposer.
    Keywords: coalition formation, legislative bargaining, weighted majority games, proportional payoffs, reversible coalitions
    JEL: C71 C72 C78
    Date: 2008–03
  11. By: Dahlberg, Matz (Department of Economics); Mörk, Eva (Department of Economics)
    Abstract: Do governments increase public employment in election years? This paper investigates this question by using data from Sweden and Finland, two coun¬tries that are similar in many respects but in which local elections are held at different points in time. We can thereby separate an election effect from other time effects. Our results indicate that there is a statistically significant election year effect in local public employment, a production factor that is highly visi¬ble in the welfare services provided by the local governments in the Scandina¬vian countries. The effect also seems to be economically significant; the municipalities employ 0.6 more full-time employees per 1,000 capita in election years than in other years (which correspond to an increase by approximately 1 percent).
    Keywords: Election cycle; Public employment; Exogenous elections
    JEL: D72 H72 P16
    Date: 2008–03–28
  12. By: Asoni, Andrea (Research Institute of Industrial Economics (IFN))
    Abstract: This paper presents a survey of the literature on property rights and economic growth. It discusses different theoretical mechanisms that relate property rights to economic development. Lack of protection of property rights can result in slow economic growth through different channels: expropriation of private wealth, corruption of civil servants, excessive taxation and barriers to adoption of new technologies. The origins of property rights are also considered. Different theories are illustrated but more attention is paid to the “social conflict view” and its strengths and limitations. The second part of the paper illustrates relevant empirical works on property rights and growth.
    Keywords: Institutions; Economic Development; Property Rights; Social Conflict View
    JEL: O11 O12 O43 P14 P16
    Date: 2008–03–17
  13. By: Erich Gundlach; Martin Paldam
    Abstract: We consider the empirical relevance of two opposing hypotheses on the causality between income and democracy: The Democratic Transition claims that rising incomes cause a transi¬tion to democracy, whereas the Critical Junctures hypothesis denies this causal relation. Our empirical strategy is justified by Unified Growth Theory, which hypothe¬sizes that the present international income differences have roots in the prehistoric past. Thus, we use prehistoric measures of biogeography as instruments for modern income levels, and find a large long-run causal effect of income on the degree of democracy. This result rejects the Critical Junctures hypothesis, which is an important part of the Primacy of Institutions view.
    Keywords: Long-run growth, Democracy, Unified growth theory, biogeography
    JEL: B O1
    Date: 2008–03
  14. By: Erich Gundlach; Martin Paldam
    Abstract: Measures of corruption and income are highly correlated across countries. We use prehistoric measures of biogeography as instruments for modern income levels to identify an exogenous long-run income effect. We find that our corruption-free incomes explain the cross-country pattern of corruption just as well as actual incomes. This result suggests that the long-run causality is exclusively from income to corruption. As countries get rich, corruption vanishes and there is a transition of corruption from poverty to honesty.
    Keywords: Long-run growth, Corruption, Biogeography
    JEL: B O1
    Date: 2008–03
  15. By: Doepke, Matthias (University of California, Los Angeles); Tertilt, Michèle (Stanford University)
    Abstract: The nineteenth century witnessed dramatic improvements in the legal rights of married women. Given that these changes took place long before women gained the right to vote, they amounted to a voluntary renouncement of power by men. In this paper, we investigate men’s incentives for sharing power with women. In our model, women’s legal rights set the marital bargaining power of husbands and wives. We show that men face a tradeoff between the rights they want for their own wives (namely none) and the rights of other women in the economy. Men prefer other men’s wives to have rights because men care about their own daughters and because an expansion of women’s rights increases educational investments in children. We show that men may agree to relinquish some of their power once technological change increases the importance of human capital. We corroborate our argument with historical evidence on the expansion of women’s rights in England and the United States.
    Keywords: women's rights, political economy, human capital, return to education, economic growth
    JEL: D13 E13 J16 N30 O43
    Date: 2008–03
  16. By: Herbert Emery
    Abstract: Between 1915 and 1920, 18 U.S. states considered the introduction of compulsory health insurance. Given the alleged deficiencies of voluntary arrangements for insuring sickness, reformers expected social insurance to be welfare enhancing for American wage-workers since it would result in lower cost insurance and an extension of coverage to more of the population. Scholars commonly ascribe the inability of states to introduce government health insurance to American ideology and institutions that prevented the political mobilization of wage-workers. They view the lack of government insurance as a policy failure and significant for explaining why the U.S. does not have national health insurance today. The evidence presented in this paper casts doubt on this interpretation. Compulsory insurance would not have provided gains for wage-workers, and this explains the absence of broad political support for health insurance legislation in this early period.
    JEL: H51 H53 I11 I18 I38 N3 N4
    Date: 2008–01–01
  17. By: Robin P. Cubitt (University of Nottingham); Michalis Drouvelis (University of Nottingham); Simon Gächter (University of Nottingham)
    Abstract: In this paper, we report an experimental investigation of the effect of framing on social preferences, as revealed in a one-shot linear public goods game. We use two indicators to measure social preferences: self-reported emotional responses; and, as a behavioural indicator of disapproval, punishment. Our findings are that, for a given pattern of contributions, neither punishment nor emotion depends on the Give versus Take framing that we manipulate. To this extent, they suggest that the social preferences we observe are robust to framing effects.
    Keywords: framing effects, punishment, emotions, public goods experiments
    JEL: C92 D01 H41
    Date: 2008–03
  18. By: Drometer, Marcus; Rincke, Johannes
    Abstract: Measuring the effect of ballot access restrictions on electoral competition is complicated because the stringency of ballot access regulations cannot be treated as being exogenous to candidates' entry decisions. This paper exploits the 1968 U.S. Supreme Court decision to strike down Ohio's ballot access laws as a natural experiment to overcome the endogeneity problem. The evidence from difference-in-difference estimations suggests that the court decision and the accompanying sharp decrease in Ohio's petition requirements resulted in major parties facing a signifcant increase in competition from third party and independent candidates.
    Keywords: Ballot access; Petition requirements; Electoral competition; Natural experiment
    JEL: D D
    Date: 2008–04
  19. By: Manfred Gärtner
    Abstract: The notion that US stock prices follow a pattern that is synchronized with the rhythm of presidential elections has been a topic among financial investors for a long time. Academic work exists that supports this idea, quantifies the pattern, and has demonstrated its robustness over several decades and across parties in power. This paper takes the existence and robustness of this presidential election cycle for granted and asks whether individuals exploit it when asked to predict stock prices. It considers and contrasts two types of such forecasts: Those made by professionals included in the Livingston survey; and those made by students in a laboratory experiment. One key result is that neither group fares particularly well, though participants in the lab experiment clearly outperformed the professionals.
    Keywords: Livingston survey, experiment, expectations, forecast, presidential election cycle, stock prices
    JEL: C91 D84 G12 G14
    Date: 2008–03
  20. By: Berkman, Henk; Cole, Rebel; Fu, Lawrence
    Abstract: We examine the wealth effects of three regulatory changes designed to improve minorityshareholder protection in the Chinese stock markets. Using the value of a firm’s related-party transactions as an inverse proxy for the quality of corporate governance, we find that firms with weaker governance experienced significantly larger abnormal returns around announcements of the new regulations than did firms with stronger governance. This evidence indicates that securities-market regulation can be effective in protecting minority shareholders from expropriation in a country with weak judicial enforcement. We also find that firms with strong ties to the government did not benefit from the new regulations, suggesting that minority shareholders did not expect regulators to enforce the new rules on firms where block holders have strong political connections.
    Keywords: China; convergence; enforcement; expropriation; political connections; investor protection; minority shareholder; regulation; tunneling
    JEL: G38 G34 G32
    Date: 2008–03–31

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