nep-pol New Economics Papers
on Positive Political Economics
Issue of 2008‒05‒10
twelve papers chosen by
Eugene Beaulieu
University of Calgary

  1. The Political Economy of Occupational Mobility and Redistribution Policy By Ryo Arawatari; Tetsuo Ono
  2. Aging, Inequality and Social Security By Ryo Arawatari; Tetsuo Ono
  3. Is the 50-State Strategy Optimal? By Dan Kovenock; Brian Roberson
  4. Politics and Volatility By Maria Boutchkova; Hitesh Doshi; Art Durnev; Alexander Molchanov
  5. Democracy, Income, and Environmental Quality By Kevin Gallagher; Strom Thacker
  6. Inefficient Redistribution and Inefficient Redistributive Politics By Dan Kovenock; Brian Roberson
  7. How Can Voters Classify an Incumbent under Output Persistence By Caleiro, António
  8. When Should Political Scientists Use the Self-Confirming Equilibrium Concept? Benefits, Costs, and an Application to Jury Theorems By Lupia, Arthur; Levine, Adam Seth; Zharinova, Natasha
  9. Regionalism or Multilateralism? A Political Economy Choice By Giorgia Albertin
  10. Estimation of the Incumbency Effects in the US State Legislatures: A Quasi-Experimental Approach By Uppal, Yogesh
  11. The Disadvantaged Incumbents: Estimating Incumbency Effects in Indian State Legislatures By Uppal, Yogesh
  12. Political Economy of Multi - Level Tax Assignments in Latin American Countries:Earmarked Revenue Versus Tax Autonomy By Giorgio Brosio; Ehtisham Ahmad

  1. By: Ryo Arawatari (Graduate School of Economics, Osaka University); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: In this study, we ask why countries with similar labor market characteristics experience different occupational mobility levels and redistribution policies. We develop a politico-economic model that integrates occupational mobility affected by individual educational investments with voting on redistribution policies. It is shown that a rigid labor market will tend to produce multiple equilibria: a poor-majority equilibrium with lower mobility and higher redistribution and a rich-majority equilibrium with higher mobility and lower redistribution. However, a flexible labor market will tend to produce a unique, poor-majority equilibrium with high mobility and low redistribution, which supports the POUM (prospect of upward mobility) hypothesis. Deregulation in the labor market enhances mobility but may degrade social welfare.
    Keywords: Occupational mobility; Political economy; Stationary Markov perfect equilibrium; Redistribution
    JEL: D72 H55 I38
    Date: 2008–04
  2. By: Ryo Arawatari (Graduate School of Economics, Osaka University); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This paper develops an overlapping-generations model including wage inequality within a generation and intra- and intergenerational resource reallocation via social security. Based on the concept of a stationary Markov perfect equilibrium, the paper focuses on the feedback mechanism between current individualsf decisions on saving and future voting on social security. The paper demonstrates the determination of social security via probabilistic voting and its consequence for consumption inequality within a generation. It is shown that when the elderly are politically powerful, (i) the economy attains an oscillatory path of inequality and social security, and (ii) aging may reduce consumption inequality.
    Keywords: Aging; Inequality; Social security; Political Economy; Stationary Markov Perfect Equilibrium
    JEL: D72 H55 J10
    Date: 2008–04
  3. By: Dan Kovenock; Brian Roberson
    Abstract: In 2005, the Democratic National Committee adopted the 50-state strategy in lieu of the strategy of focusing solely on battleground states. The rationale given for this move is that campaign expenditures are durable outlays that impact both current and future campaigns. This paper investigates the optimality of the 50-state strategy in a simple dynamic game of campaign resource allocation in which expenditures act as a form of investment. Neither the 50-state nor the battleground-states strategy is likely to arise in equilibrium. Instead, parties employ a modified battleground-states strategy in which they stochastically target non-battleground states.
    Keywords: Political Campaigns, Dynamic Contests, Elections, All-Pay Auction,War of Attrition
    JEL: D72 C7
    Date: 2008–04
  4. By: Maria Boutchkova; Hitesh Doshi; Art Durnev; Alexander Molchanov
    Abstract: We investigate how politics (party orientation, national elections, and strength of democratic institutions) affect stock market volatility. We hypothesize that labor-intensive industries, industries with larger exposure to foreign trade, industries whose operations require efficient contracts, and industries susceptible to government expropriation are more sensitive to changes in political environment. Using a large panel of industry-country-year observations, we show that politically-sensitive industries exhibit higher volatilities during national elections. Volatility is also higher for labor-intensive industries under leftist governments. Moreover, governance-sensitive industries and industries under a higher risk of expropriation are more volatile when democratic institutions are weak. The rise in volatility is driven largely by systematic risk rather than firm-specific risk. The results are consistent with the ‘peso problem’ hypothesis that uncertainty about future government policies can increase stock market volatility.
    Date: 2007–11
  5. By: Kevin Gallagher; Strom Thacker
    Abstract: This Working Paper considers the role of democracy in environmental quality and the Environmental Kuznets Curve (EKC). Some studies in the EKC literature have examined the extent to which democratic nations are more or less apt to have improving environmental conditions, but they have drawn from static measures of a nation’s current regime. In this paper the authors examine panel data from 1960 to 2001 and analyze the extent to which both the current level and the stock of a country’s democracy have significant and independent effects on a nation’s sulfur and carbon dioxide emissions.While they find no evidence for the short-run effect of the current level of democracy, they do find strong evidence that long-term democracy stock helps lower sulfur and carbon dioxide emissions.
    Keywords: Environmental Kuznets Curve; political economy of environment; sulfur emissions; carbon dioxide emissions; democracy; democracy stock; democracy and environment
    Date: 2008
  6. By: Dan Kovenock; Brian Roberson
    Abstract: This paper examines the effect of inefficient redistribution in Myerson’s (1993) model of redistributive politics. Regardless of the absolute levels of the efficiency of political parties’ transfers to different voter segments, parties have incentive to (stochastically) shift resources away from voter segments with large relative efficiency gaps between the two parties’ transfers towards voter segments with smaller relative efficiency gaps. Because of this dependence on relative, and not absolute, levels of efficiency, the parties’ optimal strategies may lead to large discrepancies between the sum of the budgetary transfers and the sum of the effective transfers. At the extreme, in the spirit of Magee, Brock, and Young (1989), we obtain “black hole” inefficiency. When the model is extended to allow for loyal voter segments and loyalty to a party is positively related to the efficiency of that party’s transfers to the segment, the incentives leading to black hole inefficiency become even stronger.
    Date: 2007–11
  7. By: Caleiro, António
    Abstract: The literature on electoral cycles has developed in two distinct phases. The first one considered the existence of non-rational (naive) voters whereas the second one considered fully rational voters. In our perspective, an intermediate approach is more interesting, i.e. one that considers learning voters, which are boundedly rational. In this sense, neural networks may be considered as learning mechanisms used by voters to perform a classification of the incumbent in order to distinguish opportunistic (electorally motivated) from benevolent (non-electorally motivated) behaviour. The paper shows in which circumstances a neural network, namely a perceptron, can resolve that problem of classification. This is done by considering a model allowing for output persistence, which is a feature of aggregate supply that, indeed, may make it impossible to correctly classify the incumbent.
    Keywords: Classification, elections, incumbent, neural networks, output, persistence, perceptrons
    JEL: C45 D72 E32
    Date: 2008
  8. By: Lupia, Arthur; Levine, Adam Seth; Zharinova, Natasha
    Abstract: Many claims about political behavior are based on implicit assumptions about how people think. One such assumption, that political actors use identical conjectures when assessing others’ strategies, is nested within applications of widely-used game theoretic equilibrium concepts. When empirical research calls this assumption into question, the self-confirming equilibrium (SCE) concept is an alternate criterion for deriving theoretical claims. Using a series of examples, we examine opportunities and challenges inherent in applying the SCE concept. Our main example focuses on Feddersen and Pesendorfer’s (1998) claim that unanimity rules can lead juries to convict innocent defendants. Using SCE, we show that the claim depends on the assumption that jurors have identical beliefs about one another’s strategies. When juror beliefs vary in ways that follow from empirical jury research, we show that fewer false convictions can occur in equilibrium. Generally, the SCE confers advantages when actors have different conjectures about one another’s strategies.
    Keywords: jury decision making; self-confirming equilibrium; jury theorem; game theory; political science
    JEL: K0 D83 D72
    Date: 2008–05–07
  9. By: Giorgia Albertin
    Abstract: This paper provides a political economy analysis of the incentives underpinning a country's decision to enter a regional trade agreement when a multilateral free trade agreement is available, and of how entering a regional trade agreement affects the incentives to pursue multilateral trade liberalization. Taking into account the influence exerted by organized interest groups in the formation of trade agreements, we derive a formal condition under which a regional trade agreement is preferred to a multilateral one. Furthermore, we show that a country's decision to enter a regional trade agreement unambiguously undermines the incentives towards multilateral trade liberalization.
    Keywords: International trade agreements , Multilateral trade negotiations , Trade liberalization ,
    Date: 2008–03–20
  10. By: Uppal, Yogesh
    Abstract: This paper estimates the incumbency effects in the legislative elections of 45 states in the US during the period 1968-89. I improve upon the existing measures of incumbency by using a quasi-experimental research design that isolates the effect due to incumbency from other contemporaneous factors such as candidate quality. I find that incumbency bestows a significant advantage on incumbents compared with their challengers. The incumbent candidates are about 30 percentage points more likely to win the next election and win 5.3 percentage point more votes than the challengers. However, the advantage is not as large as estimated from the previous methods.
    Keywords: Incumbency; Elections; Regression Discontinuity
    JEL: C23 H7 C2
    Date: 2008–02
  11. By: Uppal, Yogesh
    Abstract: This paper estimates the effect of a candidate’s incumbency status on his or her chances of winning using a large dataset on state legislative elections in India during 1975-2003. I use an innovative research design, called Regression Discontinuity Design (RDD), that provides unbiased estimate of the effect due to incumbency by comparing the candidates in closely fought elections, and find that incumbency has a significant negative effect on the fortunes of incumbent candidates in India and the incumbency effect has decreased further in the last decade. Also, the variation in the incumbency effects across Indian states depends on the differences in levels of public good provision such as the health facilities, rates of employment and poverty, and state per capita income.
    Keywords: Anti-incumbency; Indian elections; regression discontinuity design (RDD)
    JEL: H41 D72
    Date: 2007–12–15
  12. By: Giorgio Brosio; Ehtisham Ahmad
    Abstract: A weakness of decentralization and overall tax reforms in Latin America is the lack of attention to adequate taxation at the subnational government. A reliance on shared taxes with extensive earmarking leads to weak subnational accountability and soft budget constraints. The paper explores the options for expanding subnational taxation in Latin America. A range of subnational tax instruments might be considered, but interactions between new tax assignments and the system of transfers is important from a political economy perspective.
    Keywords: Intergovernmental fiscal relations , Latin America , Tax reforms ,
    Date: 2008–03–25

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