nep-pol New Economics Papers
on Positive Political Economics
Issue of 2008‒05‒31
fifteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Corruption and Power in Democracies By Francesco Giovannoni; Daniel J. Seidmann
  2. From individual attitudes towards migrants to migration policy outcomes: Theory and evidence By Facchini, Giovanni; Mayda, Anna Maria
  3. Growth, public investment and corruption with failing institutions By David De La Croix; Clara Delavallade
  4. The Fiscal Consequences of Electoral Institutions By Christopher R. Berry; Jacob E. Gersen
  5. Corruption and Growth: Exploring the Investment Channel By Léonce Ndikumana; Mina Baliamoune-Lutz
  6. Local privatization, intermunicipal cooperation,transaction costs and political interests: Evidence from Spain By Xavier Fageda; Germa Bel
  7. Determinants of the Distribution of Congressional Earmarks Across States By Melissa Boyle; Victor Matheson
  8. Do External Political Pressures Affect the Renminbi Exchange Rate? By Li-gang Liu; Laurent Pauwels; Jun-yu Chan
  9. Institutions, taxation, and market relationships in ancient Athens By Lyttkens, Carl Hampus
  10. Insiders versus Outsiders in Monetary Policy-Making By Besley, Timothy; Meads, Neil; Surico, Paolo
  11. Live or let die : intra-sectoral lobbying on entry By Vincent Rebeyrol; Julien Vauday
  12. The Premises of Condorcet's Jury Theorem Are Not Simultaneously Justified By Dietrich Franz
  13. The Jackie (and Jill) Robinson Effect: Congresswomen and the Distribution of Federal Spending By Sarah Anzia; Christopher R. Berry
  14. The behaviour of the MPC: Gradualism, inaction and individual voting patterns By Groth, Charlotta; Wheeler, Tracy
  15. The Politics of Economic Adjustment in a Liberal Market Economy: the Social Compensation Hypothesis Revisited By Niamh Hardiman; Patrick Murphy; Orlaith Burke

  1. By: Francesco Giovannoni; Daniel J. Seidmann
    Abstract: According to Acton: “Power corrupts and absolute power corrupts absolutely”. We study the implications of Acton’s dictum in models where citizens vote (for three parties) and governments then form in a series of elections. In each election, parties have fixed tastes for graft, which affect negotiations to form a government if parliament hangs; but incumbency changes tastes across elections. We argue that combinations of Acton’s dictum with various assumptions about citizen sophistication and inter-party commitments generate tight and testable predictions which cover plausible dynamics of government formation in an otherwise stationary environment.
    Keywords: Corruption, government dynamics
    JEL: H11 D72
    Date: 2008–02
  2. By: Facchini, Giovanni; Mayda, Anna Maria
    Abstract: In democratic societies individual attitudes of voters represent the foundations of policy making. We start by analyzing patterns in public opinion on migration and find that, across countries of different income levels, only a small minority of voters favour more open migration policies. Next we investigate the determinants of voters' preferences towards immigration from a theoretical and empirical point of view. Our analysis supports the role played by economic channels (labour market, welfare state, efficiency gains) using both the 1995 and 2003 rounds of the ISSP survey. The second part of the paper examines how attitudes translate into a migration policy outcome. We consider two alternative political-economy frameworks: the median voter and the interest groups model. On the one hand, the restrictive policies in place across destination countries and the very low fractions of voters favouring immigration are consistent with the median voter framework. At the same time, given the extent of individual-level opposition to immigration that appears in the data, it is somewhat puzzling, in a median-voter perspective, that migration flows take place at all. Interest-groups dynamics have the potential to explain this puzzle. We find evidence from regression analysis supporting both political-economy frameworks.
    Keywords: Immigration; Immigration Policy; Interest Groups; Median Voter; Political Economy
    JEL: F22 J61
    Date: 2008–05
  3. By: David De La Croix (CORE - Department of Economics - Université Catholique de Louvain); Clara Delavallade (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: Corruption is thought to prevent poor countries from catching up with richer ones. We analyze one channel through which corruption hampers growth : public investment can be distorted in favor of specific types of spending for which rent-seeking is easier and better concealed. To study this distorsion, we propose a dynamic model where households vote for the composition of public spending, subject to an incentive constraint reflecting individuals' choice between productive activity and rent-seeking. In equilibrium, the structure of public investment is determined by the predatory technology and the distribution of political power. Among different regimes, the model shows a possible scenario of distortion without corruption in which there is no effective corruption but the possibility of corruption still distorts the allocation of public investment. We test the implications of the model on a set of countries using a two-stage least squares estimation. We find that developing countries with high predatory technology invest more in housing and physical capital in comparison with health and education. The reverse is true for developed countries.
    Keywords: Public investment, optimal growth, corruption, political power.
    Date: 2008–05
  4. By: Christopher R. Berry; Jacob E. Gersen
    Abstract: There are more than 500,000 elected officials in the United States, 96 percent of whom serve in local governments. Electoral density—the number of elected officials per capita or per governmental unit—varies greatly from place to place. The most electorally dense county has more than 20 times the average number of elected officials per capita. In this paper, we offer the first systematic investigation of the link between electoral density and fiscal policy. Drawing on principal-agent theories of representation, we argue that electoral density presents a tradeoff between accountability and monitoring costs. Increasing the number of specialized elected offices promotes issue unbundling, reducing slack between citizen preferences and government policy; but the costs of monitoring a larger number of officials may offset these benefits, producing greater latitude for politicians to pursue their own goals at the expense of citizen interests. Thus, we predict diminishing returns to electoral density, suggesting a U-shaped relationship between the number of local officials and government fidelity to citizen preferences. Using a county-level dataset of all elected officials in the United States, we evaluate this theory along with competing theories from the existing literature. Empirically, we find evidence that public sector size decreases with electoral density up to a point, beyond which budgets grow as more officials are added within a community.
    Keywords: local government, elected officials, efficiency, funding
    Date: 2007–05
  5. By: Léonce Ndikumana (University of Massachusetts, Amherst, and UNECA, Addis Ababa); Mina Baliamoune-Lutz (University of North Florida)
    Abstract: This study investigates the impact of corruption on public and private investment in African countries as a way of exploring one channel through which corruption undermines growth. The empirical results indicate that corruption affects economic growth directly and through its impact on investment. We find that corruption has a negative and significant effect on domestic investment and that corruption affects public and private investment differently. The results indicate that corruption has a positive effect on public investment while it has a negative effect on private investment. The positive association between public investment and corruption supports the view that corrupt bureaucrats seek to increase capital expenditure (over maintenance expenditures) to maximize private gains (rent-seeking). In contrast, the results confirm that corruption discourages private investment, suggesting that corruption increases the costs of doing business while raising uncertainty over expected returns to capital. The results support the view that corruption hampers growth and call for institutional reforms to improve the quality of governance as a prerequisite for achieving investment-led growth. JEL Categories:
    Date: 2008–05
  6. By: Xavier Fageda (Faculty of Economics, University of Barcelona); Germa Bel (Faculty of Economics, University of Barcelona)
    Abstract: Several empirical studies have analyzed the factors that influence local privatization. Variables related to fiscal stress, cost reduction, political processes and ideological attitudes are the most common explanatory variables used in these studies. In this paper, we add to this literature by examining the influence of transaction costs and political factors on local governments’ choices through new variables. In addition to this, we consider the role of additional aspects, such as intermunicipal cooperation as a potential alternative to privatization in order to exploit scale economies or scope economies. We consider two relevant services: solid waste collection and water distribution. Results from our estimates show that privatization (that is, contracting out to a private firm) is less common for water distribution than for solid waste collection. Higher transaction costs in water distribution are consistent with this finding. Furthermore, we find that municipalities with a conservative ruling party privatize more often regardless of the ideological orientation of the constituency. This shows that those political interests able to influence local elections are more important in determining the form of delivery than is the basic ideological stance of the constituency. Finally, we find that intermunicipal cooperation is an alternative to local privatization.
    Keywords: Privatization, contracting-out, local governments
    JEL: L33 R51 H72
    Date: 2008–04
  7. By: Melissa Boyle (Department of Economics, College of the Holy Cross); Victor Matheson (Department of Economics, College of the Holy Cross)
    Abstract: Congressional earmarks have been the subject of significant political debate in recent years. Also known as “pork barrel spending,” earmarks are budgetary requests made by a single legislator that typically circumvent the traditional competitive bidding process designed to ensure the efficient use of public dollars. Utilizing annual state-level estimates of pork barrel spending, we briefly examine the factors influencing states’ receipt of earmarked funds from Congress. Results indicate that on average smaller states receive the largest amount of per capita earmarked funding, most likely as a result of their disproportionate influence in the Senate. In addition, the presence of a Republican Congressional delegation increases pork spending in the state. Finally, the tenure of a state’s senior Senator has a large effect on the state’s receipt of earmarked funds. Each additional year of Senate experience by a state’s senior Senator results in a $4.48 increase in earmarked dollars per capita for that state’s residents.
    Keywords: pork barrel spending, pork, earmarks, government spending
    JEL: D72 H50 H61
    Date: 2008–05
  8. By: Li-gang Liu (Research Department, Hong Kong Monetary Authority); Laurent Pauwels (Research Department, Hong Kong Monetary Authority); Jun-yu Chan (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper investigates whether external political pressures calling for faster renminbi (RMB) appreciation have any statistically significant effect on both the daily returns and the conditional volatility of the RMB central parity rate. We construct various external pressure indicators according to the sources of foreign political pressures pertaining to the RMB exchange rate, with a special emphasis on the pressures originated in the United States. After controlling for the underlying domestic factors, we find that neither the overall foreign pressure indicator nor the US-specific pressure indicator has any significant influence on RMB¡¦s daily returns. However, there is strong evidence to suggest that external pressures, and especially those from US sources, have a statistically significant impact on the conditional volatility of the RMB exchange rate. In other words, even though external pressures do not seem to have systematic influence on the speed of the RMB appreciation, they do seem to influence the uncertainty in the daily changes of the RMB exchange rate.
    Keywords: Renminbi exchange rate, Conditional volatility, Event studies, Macroeconomic news or surprises
    JEL: F31 G10
    Date: 2008–05
  9. By: Lyttkens, Carl Hampus (Department of Economics, Lund University)
    Abstract: This paper explores the mutual influence between the institutional development in Athens in the archaic and classical periods and the contemporary changes in economic life. This enhances our understanding of the causes and consequences of institutional change. It is also worth exploring in view of the suggested connections between economic development, markets and democracy. Between 600 and 322 B.C., Athenian society underwent significant institutional change. Rule by a birth aristocracy gave way to (changing) democratic institutions. Political pay was introduced for magistrates, jurors, and assemblymen. Legislation and execution was transferred to the Assembly and to the courts. The nature and extent of taxation changed. In the same period, economic life changed both qualitatively and quantitatively. Trade and specialisation increased, coinage was introduced and self-sufficient farming gradually gave way to reliance on imports and on the market for necessary goods. These changes not only influenced institutional change, they also affected people’s perception of the world. The influence of institutions on the presence and nature of economic transactions is obvious. The influence on institutional change from changes in economic behaviours and outlook seems however potentially equally important.
    Keywords: institutional change; democracy; market; Athens; antiquity
    JEL: D72 H30 N43 O17 P16
    Date: 2008–02–28
  10. By: Besley, Timothy (Monetary Policy Committee Unit, Bank of England); Meads, Neil (Monetary Policy Committee Unit, Bank of England); Surico, Paolo (Monetary Policy Committee Unit, Bank of England)
    Abstract: This paper looks at the voting patterns of internal and external members of the MPC to investigate how far there are differences between insiders and outsiders. We make three contributions. First, we assess the extent to which the Bank of England internally generated forecasts explain the MPC members' voting decisions. This is important as generating forecasts on a quarterly basis is a key part of the process used by the Bank of England. The forecast for inflation is made public in the Inflation Report while the output gap forecast is not. Second, we use a random coefficient method of estimation in which the parameters of the interest rate rule are allowed, but not required, to be different across members. Third, we find evidence of some heterogeneity in the intercept, a measure of experience on the MPC and the interest rate smoothing parameter, but no significant differences in the members' reaction to the forecasts of inflation and the output gap.
    Keywords: Monetary Policy; Voting Patterns
    JEL: D78 E52
    Date: 2007–12
  11. By: Vincent Rebeyrol (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Ecole d'économie de Paris - Paris School of Economics - Université Panthéon-Sorbonne - Paris I); Julien Vauday (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Ecole d'économie de Paris - Paris School of Economics - Université Panthéon-Sorbonne - Paris I)
    Abstract: Since the GATT/WTO hinders tariffs manipulation, the Technical Barriers to Trade (TBT's) are a growing and appealing protection tool. The endogenous protection literature has shown that a government's taste for protection creates an incentive for lobbying. Since regulations at the origin of such barriers have to be borne also by domestic sectors, due to the National Treatment WTO's principle, this creates conflicts of interests within a sector enhancing an intra-sectoral competition. This paper develops a political economy framework based on common agency under complete information that highlights this issue. The political competition opposes productive versus non productive firms in this context rather than domestic versus foreign ones, contrasting with the literature. Some apparently unorganized sectors, i.e. that are not protected, may actually be sectors where lobbies are biased towards non productive firms. Therefore, we should be cautious when empirically studying the relationship between the levels of protection and contributions.
    Keywords: Endogenous protection, Truthful equilibrium, firm heterogeneity.
    Date: 2008–05
  12. By: Dietrich Franz (METEOR)
    Abstract: Condorcet''s famous jury theorem reaches an optimistic conclusion on the correctness of majority decisions, based on two controversial premises about voters: they are competent and vote independently, in a technical sense. I carefully analyse these premises and show that: (i) whether a premise is justified depends on the notion of probability considered; (ii) none of the notions renders both premises simultaneously justified. Under the perhaps most interesting notions, the independence assumption should be weakened.
    Keywords: mathematical economics;
    Date: 2008
  13. By: Sarah Anzia; Christopher R. Berry
    Abstract: Much of the literature on women in politics seeks to answer two questions: Why are there so few women in elective office? What do women in elective office do differently from men? We connect these two strands of the literature by showing that the process by which women are selected into office has important consequences for their performance once elected. We argue that when there is sex discrimination by voters, female candidates must be better than their male counterparts in order to get elected. Therefore, the women we observe in Congress should be of higher average quality than the men. We test this theory by examining congresswomen’s success in delivering federal spending to their home districts. We find that districts represented by women receive 12 to 19 percent more spending from federal discretionary programs than those represented by men. The female spending advantage cannot be explained by observable district or legislator characteristics. Finally, we use two natural experiments to produce evidence that the relationship between legislator sex and federal spending is causal and that legislator quality is the most likely explanation for it.
    Keywords: women, politics, Congress, federal spending
    Date: 2007–07
  14. By: Groth, Charlotta (Monetary Policy Committee Unit, Bank of England); Wheeler, Tracy (Monetary Policy Committee Unit, Bank of England)
    Abstract: We evaluate the degree of gradualism and inaction in UK monetary policy over the Monetary Policy Committee (MPC) period (1997-2007) at the quarterly and the monthly frequency. After accounting for misspecification in standard Taylor rules, we find little evidence for gradualism. A measure of optimal policy is calculated. Comparing this with actual policy suggests that there is less inaction in monetary policy decisions than previous work suggested for the period prior to the formation of the MPC. In an analysis of the MPC's monthly voting decisions, we find that the activity rate, defined as the probability that the MPC vote to change interest rates in a given month, has fallen over time. This reflects the increased stability of inflation and output growth, rather than changes in the degree of gradualism and/or inaction. There is some evidence for inaction at the monthly frequency however, demonstrated by the fact that the MPC is more active in the forecast month than in the non-forecast month. The MPC also tends to wait longer before reversing the direction of interest rate changes than continuing them. This difference appears not to be driven by gradualism, and so provides further evidence for inaction at the monthly frequency. A panel data analysis suggests that the MPC as a whole is equally active as its individual members, so inaction appears not to be driven by the use of a committee to set monetary policy. There is no evidence that activity rates fall with the length of time that a member has served on the committee, suggesting that learning about the transmission mechanism has no impact on the tendency for gradualism and inaction.
    Keywords: Monetary Policy; Taylor Rules; Voting Patterns
    JEL: D78 E43 E52
    Date: 2008–01
  15. By: Niamh Hardiman (School of Politics & International Relations, University College Dublin); Patrick Murphy (School of Mathematical Sciences, University College Dublin); Orlaith Burke (PhD Candidate, School of Mathematical Sciences, University College Dublin)
    Date: 2008–02–04

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