nep-pol New Economics Papers
on Positive Political Economics
Issue of 2008‒06‒21
seventeen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Are Voters Sensitive to Terrorism?: Direct Evidence from the Israeli Electorate By Claude Berrebi; Esteban F. Klor
  2. On the Benefits of Costly Voting By Vijay Krishna; John Morgan
  3. Endogenous Political Economy: On the Inevitability of Inefficiency under the Natural Resource Curse By Ana Fernandes
  4. Delayed privatization By Bernardo Bortolotti; Paolo Pinotti
  5. Condorcet Methods - When, Why and How? By Stensholt, Eivind
  6. Political Economy of Ramsey Taxation By Daron Acemoglu; Michael Golosov; Aleh Tsyvinski
  7. Studying the role of political competition in the evolution of government size over long horizons By Ferris, J. Stephen; Park, Soo-Bin; Winer, Stanley L.
  8. A farewell to critical junctures: Sorting out long-run causality of income and democracy By Erich Gundlach; Martin Paldam
  9. The Retrenchment Hypothesis and the Extension of the Franchise in England and Wales By Aidt, T.S.; Daunton, M.; Dutta, J.
  10. Political Economy Origins of Financial Markets in Europe and Asia By Svetlana Andrianova; Panicaos Demetriades; Chenggang Xu
  11. Predicting elections from politicians’ faces By Armstrong, J. Scott; Green, Kesten C.; Jones, Randall J.; Wright, Malcolm
  12. Decade of dissent: explaining the dissent voting behavior of Bank of England MPC members By Harris, Mark; Spencer, Christopher
  13. Gibbard-Satterthwaite and an Arrovian Connection By Stensholt, Eivind
  14. The Problem of Maintaining Compliance within Stable Coalitions: Experimental Evidence By David M. McEvoy; James J. Murphy; John M. Spraggon; John K. Stranlund
  15. The perception of corruption By Natalia Melgar; Máximo Rossi; Tom W. Smith
  16. Law, Finance, and Politics: The Case of India By John Armour; Priya Lele
  17. Causes of Corruption:History, Geography, and Government By Goel, Rajeev K.; Nelson, Michael A.

  1. By: Claude Berrebi; Esteban F. Klor
    Abstract: This paper relies on the variation of terror attacks across time and space as an instrument to identify the causal effects of terrorism on the preferences of the Israeli electorate. The authors find that the occurrence of a terror attack within three months of the elections is associated with a 1.35 percentage points increase on the local support for the right bloc of political parties out of the two blocs vote. This effect is of a significant political magnitude given the level of terrorism in Israel and the fact that its electorate is closely split between the right and left blocs. Moreover, a terror fatality has important electoral effects beyond the locality where the attack is perpetrated, and their electoral impact is stronger the closer to the elections they occur. Interestingly, the observed political effects are not affected by the identity of the party holding office. These results provide empirical support for the hypothesis that the electorate shows a highly sensitive reaction to terrorism, and substantiate the claim that terror organizations especially target democratic regimes because these regimes are more prone to make territorial concessions.
    Keywords: terrorism, democracy, voters' preferences
    JEL: D7 N4
    Date: 2008–04
  2. By: Vijay Krishna (Department of Economics, Pennsylvania State University); John Morgan (Department of Economics, University of California, Berkeley)
    Abstract: We study strategic voting in a Condorcet type model in which voters have identical preferences but differential information. Voters incur private costs of going to the polls and may abstain if they wish; hence voting is voluntary. We show that under majority rule with voluntary voting, it is an equilibrium to vote sincerely. Thus, in contrast to situations with compulsory voting, there is no conflict between strategic and sincere behavior. In large elections, the equilibrium is shown to be unique. Furthermore, participation rates are such that, in the limit, the correct candidate is elected with probability one. Finally, we show that in large elections, voluntary voting is welfare superior to compulsory voting.
    Date: 2008–05
  3. By: Ana Fernandes
    Keywords: Endogenous political economy; conflict; deterrence; natural resource curse; inefficiency; general equilibrium
    JEL: H11 O11 P16
    Date: 2008–06
  4. By: Bernardo Bortolotti (University of Turin and FEEM); Paolo Pinotti
    Abstract: This paper studies the timing of privatization in 21 major developed economies in the 1977-2002 period. Duration analysis shows that political fragmentation plays a significant role in explaining government's decision to privatize: privatization is delayed longer in democracies characterized by a larger number of parties and operating under proportional electoral rules, as predicted by war of attrition models of economic reform. Results are robust to various assumptions on the underlying statistical model and to controlling for other economic and political factors.
    Keywords: Privatization, Political Economy, War of Attrition
    JEL: D72 D78 L33
    Date: 2008–04
  5. By: Stensholt, Eivind (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: Geometric representations of 3-candidate profiles are used to investigate properties of preferential election methods. The representation visualizes both the possibility to win by agenda manipulation, i.e. introducing a third and chanceless candidate in a 2-candidate race, and the possibility to win a 3-candidate election through different kinds of strategic voting. Here the focus is on the "burying" strategy in single-winner elections, where the win is obtained by ranking a main competitor artificially low. Condorcet methods are compared with the major alternatives (Borda Count, Approval Voting, Instant Runoff Voting). Various Condorcet methods are studied, and one method is proposed that minimizes the number of noncyclic profiles where burying is possible.
    Keywords: Preferential election methods; agenda manipulation; strategic voting
    JEL: D72
    Date: 2008–06–12
  6. By: Daron Acemoglu; Michael Golosov; Aleh Tsyvinski
    Date: 2008–06–09
  7. By: Ferris, J. Stephen; Park, Soo-Bin; Winer, Stanley L.
    Abstract: We argue for the use of cointegration and error correction analysis as a method to combine economic factors that are nonstationary with political factors that are stationary into a dynamic, empirical model of the evolution of public policy over long periods. The approach we develop is applied to disentangle the contributions of economics and politics to the evolution of public expenditure by the Government of Canada over 130 years, from the origin of the modern state to the end of the 20th century. Political competition emerges robustly as the primary political factor affecting government size in the long run as well as over shorter horizons.
    Keywords: political competition, conditional convergence, cointegration, public expenditure, size of government, politics versus economics
    JEL: D7 H1 H3 H5
    Date: 2008–06
  8. By: Erich Gundlach; Martin Paldam (School of Economics and Management, University of Aarhus, Denmark)
    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: B25 O1
    Date: 2008–02–18
  9. By: Aidt, T.S.; Daunton, M.; Dutta, J.
    Abstract: Does local democracy help or hinder the solution of collective action problems? We study this question in the context of public spending on health-related urban amenities in a panel of 75 municipal boroughs in England and Wales in 1868, 1871 and 1886. We .nd evidence of a U-shaped relationship between spending on urban amenities and the extension of the local voting franchise. We argue that this retrenchment e¤ect arose because middle class taxpayers were unwilling to pay the cost of poor sanitation and the urban elites, elected on a narrow franchise, were instrumental for sanitary improvements. Our model of taxpayer democracy suggests that the retrenchment e¤ect is related to forced enfranchisement of the middle class through nation-wide reforms.
    Keywords: Voting franchise, retrenchment, local public goods, sanitation.
    JEL: D62 D78 H71 N93
    Date: 2008–04
  10. By: Svetlana Andrianova (University of Leicester); Panicaos Demetriades (University of Leicester); Chenggang Xu (London School of Economics)
    Abstract: This paper contributes to the finance-growth literature by examining the political economy origins of some of the most successful financial markets in Europe and Asia. It provides historical evidence from London, Amsterdam and Hong Kong that highlights the essential role played by the government sector in kick-starting financial development. We show that the emergence of financial systems did not occur through laissez-faire approaches and that secure property rights alone were not sufficient for financial development. In the cases of London and Amsterdam, governments created large trade monopolies which were responsible for all the major financial innovations of the time. In the case of Hong Kong, where the financial developmentmodel was bank-based, large banking monopolies with close links to the state were created. We argue that the three examples are not special cases and the role of government in the early stages of financial development has been widespread world-wide.
    Keywords: Monopoly, politics, institutions, finance
    JEL: G18 N20 O16
    Date: 2008–01
  11. By: Armstrong, J. Scott; Green, Kesten C.; Jones, Randall J.; Wright, Malcolm
    Abstract: Prior research found that people’s assessments of relative competence predicted the outcome of Senate and Congressional races. We hypothesized that snap judgments of "facial competence" would provide useful forecasts of the popular vote in presidential primaries before the candidates become well known to the voters. We obtained facial competence ratings of 11 potential candidates for the Democratic Party nomination and of 13 for the Republican Party nomination for the 2008 U.S. Presidential election. To ensure that raters did not recognize the candidates, we relied heavily on young subjects from Australia and New Zealand. We obtained between 139 and 348 usable ratings per candidate between May and August 2007. The top-rated candidates were Clinton and Obama for the Democrats and McCain, Hunter, and Hagel for the Republicans; Giuliani was 9th and Thompson was 10th. At the time, the leading candidates in the Democratic polls were Clinton at 38% and Obama at 20%, while Giuliani was first among the Republicans at 28% followed by Thompson at 22%. McCain trailed at 15%. Voters had already linked Hillary Clinton’s competent appearance with her name, so her high standing in the polls met our expectations. As voters learned the appearance of the other candidates, poll rankings moved towards facial competence rankings. At the time that Obama clinched the nomination, Clinton was ahead in the popular vote in the primaries and McCain had secured the Republican nomination with a popular vote that was twice that of Romney, the next highest vote-getter.
    Keywords: accuracy; appearance; forecasting methods; snap judgments
    JEL: C53 D81 D72 C42
    Date: 2008–06–16
  12. By: Harris, Mark; Spencer, Christopher
    Abstract: We examine the dissent voting record of the Bank of England Monetary Policy Committee (MPC) in its first decade. Probit estimates indicate the impact of career experience on dissent voting is negligible, whereas the impact of forecast inflation is pronounced. In addition to finding a role for dynamics, we also find a role for unobserved heterogeneity in the form of member-specific fixed-effects, suggesting previous literature characterizing voting behavior as largely determined by whether members are appointed from within or outside the ranks of Bank of England staff (internal and external members respectively) is overly simplistic.
    Keywords: Bank of England; Monetary Policy Committee; career background effects; dissent voting; unobserved heterogeneity
    JEL: D7 E5 C35
    Date: 2008–06
  13. By: Stensholt, Eivind (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: A very close link of G-S, the Gibbard-Satterthwaite theorem to Arrow’s "impossibility" theorem is shown. G-S is derived as a corollary: from a strategy-proof singleseat election method F is constructed an election method G that contradicts Arrow’s theorem.
    Keywords: Preferential election methods; impossibility theorem
    JEL: D72
    Date: 2008–06–12
  14. By: David M. McEvoy; James J. Murphy; John M. Spraggon; John K. Stranlund
    Abstract: This study examines the performance of stable cooperative coalitions that form to provide a public good when coalition members have the opportunity to not comply with their commitments. A stable coalition is one in which no member wishes to leave and no non-member wishes to join. To counteract the incentive to violate their commitments, coalition members fund a third-party enforcer. This leads to the theoretical conclusion that stable coalitions are larger (and provide more of a public good) when their members must finance enforcement relative to when compliance is ensured without the need for costly enforcement. However, our experiments reveal that giving coalition members the opportunity to violate their commitments while requiring them to finance enforcement to maintain compliance reduces the overall provision of the public good. The decrease in the provision of the public good is attributed to an increase in the participation threshold for a theoretically stable coalition to form and to significant levels of noncompliance. When we abandon the strict stability conditions and require all subjects to join a coalition for it to form, the average provision of the public good increases significantly. Key Words: stable coalitions, self-enforcing agreements, compliance, enforcement, public goods
    JEL: H41 C92
    Date: 2008
  15. By: Natalia Melgar (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Máximo Rossi (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Tom W. Smith (NORC/University of Chicago)
    Abstract: In this paper we analyze the foundations of corruption perception. Even when we employ the concept of corruption in several areas and its connotations vary widely depending on societies and people, it is possibly to find some elements in common which are connected with the misuse of public office with the purpose of making private gains. This paper focuses on this wide concept of corruption. We use data from the module on Citizenship of the 2004 International Social Survey Program (ISSP). Ordered probit models were estimated in order to study the impact of independent variables on the perception of corruption. We conclude that there are significant socio-demographic variables: gender, marital status, religiosity, education and sector of employment, among others. Additionally, we find that country of residence matters and that there are similar results among countries with common characteristics.
    Keywords: corruption, microeconomic behavior, comparative research, public opinion, ISSP
    JEL: D73 K42 O57
    Date: 2008–03
  16. By: John Armour; Priya Lele
    Abstract: The process of liberalisation of India's economy since 1991 has brought with it considerable development both of its financial markets and the legal institutions which support these. An influential body of recent economic work asserts that a country's 'legal origin'-as a civilian or common law jurisdiction-plays an important part in determining the development of its investor protection regulations, and consequently its financial development. An alternative theory claims that the determinants of investor protection are political, rather than legal. We use the case of India to test these theories. We find little support for the idea that India's legal heritage as a common law country has been influential in speeding the path of regulatory reforms and financial development. There is a complementarity between (i) India's relative success in services and software, (ii) the relative strength of its financial markets for outside equity, as opposed to outside debt, and (iii) the relative success of stock market regulation, as opposed to reforms of creditor rights. We conclude that political explanations have more traction in explaining the case of India than do theories based on 'legal origins'.
    Keywords: India, Law and Finance, Investor Protection, Economic structure and financial structure
    JEL: G28 G38 K22 K40 O16 P37
    Date: 2008–03
  17. By: Goel, Rajeev K. (BOFIT); Nelson, Michael A. (BOFIT)
    Abstract: Corruption, which remains a serious problem in many countries, has prompted considerable research in recent years. This paper adds to the extant literature with insights on factors influencing corrupt activity. Using cross-country data for about 100 nations, the roles of national history, geography, and government are examined to see how they affect conditions for corruption, both qualitatively and quantitatively. The innovative aspects of this research include use of a wide set of historical, geographical, and governmental determinants of corruption, as well as detailed assessment of several previously considered determinants. The main issues addressed are the effects of the size and scope of government on the incidence of corruption across countries, and the significance of historical and geographic factors in corruption. Regarding the first question, the authors find the size and scope of government can significantly affect corruption. On the second, it is shown that historical institutional inertia in older countries and new rent-seeking opportunities in younger nations can encourage corruption, while certain geographic factors can mitigate corruption. The paper ends with discussion aimed at the policymaker.
    Keywords: corruption; bribery; government size; government scope; rent-seeking; history; geography
    JEL: H00 P00
    Date: 2008–06–06

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