nep-pol New Economics Papers
on Positive Political Economics
Issue of 2008‒06‒07
thirteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. The Political Economy of Corruption & the Role of Financial Institutions By Kira Boerner; Christa Hainz
  2. A Swing-State Theory of Trade Protection in the Electoral College By Mirabelle Muûls; Dimitra Petropoulou
  3. Growth, Volatility & Political Instability: Non Linear Time Series Evidence for Argentina 1896-2000 By Nauro Campos; Menelaos Karanasos
  4. Protecting Minorities in Binary Elections: A Test of Storable Votes Using Field Data By Alessandra Casella; Shuky Ehrenberg; Andrew Gelman; jie shen
  5. Coalition formation: the role of procedure and policy flexibility By Annelies de Ridder; Agnieszka Rusinowska; Elena Saiz; Eligius K.M. Hendrix
  6. Vicious and Virtuous Circles - The Political Economy of Unemployment in Interwar UK and USA By Matthews, Kent; Minford, Patrick; Naraidoo, Ruthira
  7. Coalition Governments and Policy Reform with Asymmetric Information By Carsten Helm; Michael Neugart
  8. Budgetary Separation of Powers in the American States and the Tax Level: A Regression Discontinuity Analysis By Lucas Ferrero; Leandro M. de Magalhaes
  9. Delayed Doves: MPC Voting Behaviour of Externals By Stephen Hansen; Michael F. McMahon
  10. When Does Policy Reform Work? The Case of Central Bank Independence By Daron Acemoglu; Simon Johnson; Pablo Querubin; James A. Robinson
  11. Autocratic rule in ethnically-diverse societies By Amegashie, J. Atsu
  12. A Simple Model of the Juggernaut Effect of Trade Liberalisation By Richard E. Baldwin; Frédéric Robert-Nicoud
  13. Uncertainty and the politics of employment protection By Vindigni, Andrea

  1. By: Kira Boerner; Christa Hainz
    Abstract: In many developing and transition countries, we observe rather high levels of corruption. This is surprising from a political economy perspective, as the majority of people in a corrupt country suffer from high corruption levels. Our model is based on the fact that corrupt offcials have to pay entry fees to get lucrative positions. In a probabilistic voting model, we show that a lack of financial institutions can lead to more corruption as more voters are part of the corrupt system and, more importantly, as the rents from corruption are distributed differently. Thus, the economic system has an effect on political outcomes. Well-functioning financial institutions, in turn, increase the political support for anti-corruption measures.
    Keywords: Corruption, Financial Markets, Institutions, Development, Voting
    JEL: D72 D73 H11 O17
    Date: 2007–10–01
  2. By: Mirabelle Muûls; Dimitra Petropoulou
    Abstract: This paper develops an infinite-horizon, political agency model with a continuum of politicaldistricts, in which incumbent politicians can improve their re-election probability byattracting swing voters in key states through strategic trade protection. A unique equilibriumis shown to exist where incumbents build a reputation of protectionism through their policydecisions. We show that strategic trade protection is more likely when protectionist swingvoters have a lead over free-trade supporters in states with relatively strong electoralcompetition that represent a larger proportion of Electoral College votes. US data is used totest the hypothesis that industrial concentration in swing and decisive states is an importantdeterminant of trade protection of that industry. The empirical findings provide support forthe theory and highlight an important, and previously overlooked, determinant of tradeprotection in the US Electoral College.
    Keywords: Political Economy, Elections, Electoral College, Swing States, Trade Policy
    JEL: D72 D78 F13 R12
    Date: 2008–02
  3. By: Nauro Campos; Menelaos Karanasos
    Abstract: What is the relationship between economic growth and its volatility? Does political instability affect growth directly or indirectly, through volatility? This paper tries to answer such questions using a power-ARCH framework with annual time series data for Argentina from 1896 to 2000. We show that while assassinations and strikes (what we call “informal” political instability) have a direct negative effect on economic growth, “formal” political instability (constitutional and legislative changes) has an indirect (through volatility) negative impact. We also find preliminary support for the idea that while the effects of “formal” instability are stronger in the long-run, those of “informal” instability are stronger in the short-run.
    Keywords: economic growth, volatility, political instability, power-ARCH
    JEL: C14 D72 E23 O40
    Date: 2007–09–01
  4. By: Alessandra Casella (Columbia University - Department of Economics); Shuky Ehrenberg (Columbia University - Department of Economics); Andrew Gelman (Columbia University - Department of Statistics and Department of Political Science); jie shen
    Abstract: Democratic systems are built, with good reason, on majoritarian principles, but their legitimacy requires the protection of strongly held minority preferences. The challenge is to do so while treating every voter equally and preserving aggregate welfare. One possible solution is storable votes: granting each voter a budget of votes to cast as desired over multiple decisions. During the 2006 student elections at Columbia University, we tested a simple version of this idea: voters were asked to rank the importance of the different contests and to choose where to cast a single extra bonus vote, had one been available. We used these responses to construct distributions of intensities and electoral outcomes, both without and with the bonus vote. Bootstrapping techniques provided estimates of the probable impact of the bonus vote. The bonus vote performs well: when minority preferences are particularly intense, the minority wins at least one of the contests with 15-30 percent probability; and, when the minority wins, aggregate welfare increases with 85-95 percent probability. When majority and minority preferences are equally intense, the effect of the bonus vote is smaller and more variable but on balance still positive.
    Date: 2008
  5. By: Annelies de Ridder (Radboud University Nijmegen); Agnieszka Rusinowska (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France); Elena Saiz (Radboud University Nijmegen); Eligius K.M. Hendrix (University of Wageningen,)
    Abstract: In this paper, we analyze a spatial model of coalition formation with data from Dutch elections and with theoretical results. First, we study different procedures of coalition formation. The model shows that procedure plays an important role in reaching a coalition agreement and that political parties do not necessarily benefit from being a firstmover. Moreover, it is shown that a decrease in a party’s flexibility can be beneficial in coalition negotiations. Furthermore, we find that certain power sharing tactics do not always lead to an agreement that is in a party’s advantage. The main message put forward is that the process of coalition formation plays a more important role than is usually acknowledged in literature and practice.
    Keywords: coalition formation, elections, simultaneous procedure, step-by-step procedure
    JEL: C7 D72
    Date: 2008
  6. By: Matthews, Kent; Minford, Patrick; Naraidoo, Ruthira
    Abstract: This paper develops a political economy model of multiple unemployment equilibria to provide a theory of an endogenous natural rate of unemployment. This model is applied to the UK and the US interwar period which is remembered as the decade of mass unemployment. The theory here sees the natural rate and the associated path of unemployment as a reaction to shocks (mainly demand in nature) and the institutional structure of the economy. The channel through which these two forces feed on each other is a political economy process whereby voters with limited information on the natural rate react to shocks by demanding more or less social protection. The reduced form results obtained confirm a pattern of unemployment behaviour in which unemployment moves between high and low equilibria in response to shocks.
    Keywords: "vicious" and "virtuous" circles; bootstrapping; Equilibrium unemployment; forecasting; Political economy
    JEL: E24 E27 P16
    Date: 2008–05
  7. By: Carsten Helm (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)); Michael Neugart (Free University of Bozen/Bolzano, School of Management and Economics)
    Abstract: With ideological parties being better informed about the state of the world than voters, the true motivation of policy proposals is hard to judge for the electorate. However, if reform proposals have to be agreed upon by coalition parties, it may become possible for the government to signal to the voters its private information about the necessity of reforms. Therefore, in coalition governments reforms will be more in line with policy requirements than in single-party governments. This is usually beneficial for the coalition parties as well as for the voter.
    Keywords: Asymmetric information, coalition governments, policy reform
    JEL: D72 D78 D82
    Date: 2008–05
  8. By: Lucas Ferrero; Leandro M. de Magalhaes
    Abstract: A political regime has budgetary separation of powers if the power with the prerogative to raise taxes is not the full residual claimant of a tax increase. In the American states two conditions are needed: the governor must have the line item veto, and the political interests of the legislative majority and the governor must not be perfectly aligned. Political alignment between the executive and the legislative depends on the numbers of seats the governor's party controls in the state legislature; it changes discontinuously as we move from a unifed to a divided government. We use regression discontinuity design to establish a causal relation between a divided government and lower tax rates in states with line item veto. In states with block veto such relation is not present. We estimate the jump in the tax level at the discontinuity semiparametrically.
    Keywords: Separation of powers, line item veto, tax level, regression discontinuity, semiparametric.
    JEL: H00 H11 H20 H30 H71
  9. By: Stephen Hansen; Michael F. McMahon
    Abstract: The use of independent committees for the setting of interest rates, such as the MonetaryPolicy Committee (MPC) at the Bank of England, is quickly becoming the norm in developedeconomies. In this paper we examine the issue of appointing external members (memberswho are outside the staff of the central bank) to these committees. We construct a model ofMPC voting behaviour, and show that members who begin voting for similar interest ratesshould not systematically diverge from each other at any future point. However, econometricresults in fact show that external members initially vote in line with internal members, butafter a year, begin voting for substantially lower interest rates. The robustness of this effect toincluding member fixed effects provides strong evidence that externals behave differentlyfrom internals because of institutional differences between the groups, and not someunobserved heterogeneity. We then examine whether career concerns can explain thesefindings, and conclude that they cannot.
    Keywords: Monetary Policy Committee (MPC), Bank of England, Committee Voting,Signalling
    JEL: E58 D71
    Date: 2008–04
  10. By: Daron Acemoglu; Simon Johnson; Pablo Querubin; James A. Robinson
    Abstract: We argue that the question of whether and when policy reform works should be investigated together with the political economy factors responsible for distortionary policies in the first place. These not only determine the initial distortions, but also often shape policy in the post-reform environment. Distortionary policies are more likely to be adopted when politicians are unconstrained and unaccountable to citizens. This reasoning implies that policy reform should have modest effects in societies where the political system already places constraints on politicians. It also implies, however, that in societies with weak political constraints, which are often those adopting the most distortionary policies, policy reforms may be ineffective because the underlying political economy problems are not typically altered by these reforms. Policy reform should therefore have its largest effect in societies with intermediate levels of constraints. In addition, when policy reform is (partly) effective, it may lead to a deterioration in other (unreformed) components of policy in order to satisfy the underlying demands on politicians – a phenomenon we call the seesaw effect. We provide reduced-form evidence consistent with these ideas by looking at the effect of central bank independence on inflation. The evidence is consistent with the notion that central bank reforms have reduced inflation in societies with intermediate constraints and have had no or little effects in countries with the high and low levels of constraints. We also present some evidence suggesting that, consistent with the seesaw effect, in countries where central bank reforms reduce inflation, government expenditure tends to increase.
    JEL: E31 P16
    Date: 2008–05
  11. By: Amegashie, J. Atsu
    Abstract: Richer and more educated citizens demand better governance than poorer citizens. They participate more in the political process, are more difficult to buy off, and tend to have the financial resources to support a revolt. An autocrat who is politically insecure may therefore not invest in income-enhancing goods like education, roads, the rule of law, etc. This argument is not new. The novelty of this paper is to argue that ethnic diversity and discrimination exacerbate an autocrat’s fear of the negative effect of high income or income-enhancing investments like public education on his political survival. The combination of ethnic diversity and the fear of survival results in low economic performance in ethnically-diverse autocracies. I show that under such circumstances, the proportion of national income that the autocrat appropriates to himself is increasing in the degree of ethnic diversity. An implication is that in such ethnically-diverse societies, kleptocrats may be better off with a bigger share of a smaller national income than they are with a smaller share of a bigger national income. Previous empirical work provides some support for my theory. I discuss applications and limitations of my results.
    Keywords: autocracy; ethnic diversity; kleptocracy; public capital; selectorate
    JEL: H11 P16
    Date: 2008–06–02
  12. By: Richard E. Baldwin; Frédéric Robert-Nicoud
    Abstract: This paper posits a formal political economy model where the principle of reciprocity inmultilateral trade talks results in the gradual elimination of tariffs. Reciprocity trade talks turneach nation's exporters into anti-protectionists at home; they lower foreign tariffs byconvincing their own government to lower home tariffs. Due to the new array of politicalforces, each government finds it politically optimal to remove tariffs that it previously foundpolitically optimal to impose. The one-off global tariff cut then reshapes the politicaleconomy landscape via entry and exit - reducing the size/influence of import-competingsectors and increasing that of exporters. In the next round of trade talks governmentstherefore find it politically optimal to cut tariffs again. The process may continue until tariffsare eliminated.
    Keywords: Trade policy, Economic integration
    JEL: F13 F15
    Date: 2008–01
  13. By: Vindigni, Andrea
    Abstract: This paper investigates the role that idiosyncratic uncertainty plays in shaping social preferences over the degree of labor market flexibility, in a general equilibrium model of dynamic labor demand where the productivity of firms evolves over time as a Geometric Brownian motion. A key result demonstrated is that how the economy responds to shocks, i.e. unexpected changes in the drift and standard deviation of the stochastic process describing the dynamics of productivity, depends on the power of labor to extract rents and on the status quo level of firing costs. In particular, we show that when firing costs are relatively low to begin with, a transition to a rigid labor market is favored by all and only the employed workers with idiosyncratic productivity below some threshold value. A more volatile environment, and a lower rate of productivity growth, i.e. "bad times", increase the political support for more labor market rigidity only where labor appropriates of relatively large rents. Moreover, we demonstrate that when the status quo level of firing costs is relatively high, the preservation of a rigid labor market is favored by the employed with intermediate productivity, whereas all other workers favor more flexibility. The coming of better economic conditions need not favor the demise of high firing costs in rigid high-rents economies, because "good times" cut down the support for flexibility among the least productive employed workers. The model described provides some new insights on the comparative dynamics of labor market institutions in the U.S. and in Europe over the last few decades, shedding some new light both on the reasons for the original build-up of "Eurosclerosis", and for its the persistence up to the present day.
    Keywords: employment protection, firing costs, productivity, political economy, rents, volatility, growth, institutional divergence.
    JEL: D71 D72 E24 J41 J63 J65
    Date: 2008–05

This nep-pol issue is ©2008 by Eugene Beaulieu. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.