nep-pol New Economics Papers
on Positive Political Economics
Issue of 2008‒08‒31
fifteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. War and Endogenous Democracy By Ticchi, Davide; Vindigni, Andrea
  2. Recognizing a Single-Issue Spatial Election By Vicki Knoblauch
  4. Big Business Owners in Politics By Pramuan Bunkanwanicha; Yupana Wiwattanakantang
  5. Culture, Context, and the Taste for Redistribution By Erzo F.P. Luttmer; Monica Singhal
  6. Creating Space for Effective Political Engagement in Development By Andrews, Matthew
  7. Foreign Direct Investment, Financial Development and Political Risks By Dutta, Nabamita; Roy, Sanjukta
  8. Inequality and Corruption: Evidence from US States By James E. Alt; David Dreyer Lassen
  9. Productive and Destructive Entrepreneurship in a Political Economy Framework By Douhan, Robin; Henrekson, Magnus
  10. Corruption and the Institutional Environment for Growth By Heckelman, Jac C.; Powell, Benjamin
  11. Uncertainty and the Politics of Employment Protection By Vindigni, Andrea
  13. A "Selection Model" of Political Representation By Mansbridge, Jane
  14. A Strategy of Conservation: American Power and the International System By Sewall, Sarah
  15. Individual Attitudes Towards Others, Misanthropy Analysis in a Cross-Country Perspective By Natalia Melgar; Máximo Rossi; Tom W. Smith

  1. By: Ticchi, Davide (U of Urbino); Vindigni, Andrea (Princeton U)
    Abstract: Many episodes of extension of franchise in the 19th and especially in the 20th century occurred during or in the aftermath of major wars. Motivated by this fact, we offer a theory of political transitions which focuses on the impact of international conflicts on domestic political institutions. We argue that mass-armies, which appeared in Europe after the French Revolution, are an effective military organization only if the conscripted citizens are willing to put effort into fighting wars, which in turn depends on the economic incentives that are provided to them. The need to provide such incentives implies that an oligarchy adopting a mass-army may voluntarily decide to promise some amount of income redistribution to its citizens, conditionally on satisfactory performance as soldiers. When the elite cannot credibly commit to provide an incentive-compatible redistribution, they may cope with the moral hazard problem of the citizen-soldiers only by relinquishing political power to them through the extension of franchise. This is because democracy always implements a highly redistributive fiscal policy, which makes fighting hard incentive-compatible for the citizen-soldiers. We show that a transition to democracy is more likely to occur when the external threat faced by an incumbent oligarchy is in some sense intermediate. A very high external threat allows the elite to make credible commitments of future income redistribution in favor of the citizens, while a limited external threat makes it optimal for the elite not to make any (economic or political) concession to the masses. Some historical evidence consistent with our theory is also provided.
    JEL: D72
    Date: 2007–12
  2. By: Vicki Knoblauch (University of Connecticut)
    Abstract: A single-issue spatial election is a voter preference profile derived from an arrangement of candidates and voters on a line, with each voter preferring the nearer of each pair of candidates. We provide a polynomial-time algorithm that determines whether a given preference profile is a single-issue spatial election and, if so, constructs such an election. This result also has preference representation and mechanism design applications.
    Keywords: spatial elections, preference representation, mechanism design
    JEL: D11 D72
    Date: 2008–08
  3. By: Vadlamannati, Krishna Chaitanya
    Abstract: I investigate whether timing of the elections impact economic globalization process or not in India. In other words, do elections slowdown economic globalization process? The theoretical underpinning is that, policies of economic globalization lead to economic and social hardships in short run but benefit the economy in the long run. The motto behind slowing down the economic globalization process before elections is that it leads to polarization of voters and thus negatively affects the incumbent government. I make use of Axel Dreher’s economic globalization index and construct ‘instrumental electoral cycle’ to capture the scheduled and midterm election cycle. Using time series data for India for the period 1970 – 2006, I find that scheduled elections are associated with slow down in economic globalization, whereas midterm elections are not. Replacing Dreher’s economic globalization index with our modified globalization index does not alter the results. I also find that slow down in economic globalization process is responsive to the propinquity to a schedule election year. Meaning, as incumbent government nears the schedule elections, economic globalization process keeps slowing down, while this is exactly opposite during the early years of incumbent government in office. These results suggest that elections generate “electoral globalization cycle” in developing democratic country like India.
    Keywords: Economic globalization; Election cycles; India
    JEL: D72
    Date: 2008–08–23
  4. By: Pramuan Bunkanwanicha; Yupana Wiwattanakantang
    Abstract: This paper investigates a little studied but common mechanism that firms use to obtain state favors: business owners themselves seeking election to top office. Using Thailand as a research setting, we find that the more business owners rely on government concessions or the wealthier they are, the more likely they are to run for top office. Once in power, the market valuation of their firms increases dramatically. Surprisingly, the political power does not influence the financing strategies of their firms. Instead, business owners in top office use their policy-decision powers to implement regulations and public policies favorable to their firms. Such policies hinder not only domestic competitors but also foreign investors. As a result, these politically connected firms are able to capture more market share.
    Date: 2008–08
  5. By: Erzo F.P. Luttmer; Monica Singhal
    Abstract: Is culture an important determinant of preferences for redistribution? To separate the effect of culture from the effect of the economic and institutional environment ("context"), we relate immigrants' preferences for redistribution to the average preference in their birth countries, controlling extensively for individual characteristics and country-of-residence fixed effects. We find a strong positive relationship. This cultural effect is larger for non-voters, those with shorter tenure in the country of residence, and those who move to countries with a large number of immigrants from their own birth countries. Immigrants from countries with a higher preference for redistribution are also more likely to vote for a more pro-redistribution political party. The effect of culture persists strongly into the second generation.
    JEL: D72 H23 Z10
    Date: 2008–08
  6. By: Andrews, Matthew (Harvard U)
    Abstract: Most members of the development community, and especially those in multilateral and bilateral organizations, agree that politicians are centrally important to development. Fewer agree, however, on how to ensure effective political engagement in development programs and reforms. It is questionable whether many practitioners or theoreticians even have clear ideas about what effective political engagement looks like. Terms like political will and political commitment lack clarity and operational import; it is unclear what they are and even more unclear how to foster them. This chapter attempts to shed light on why such a key issue is poorly understood and to suggest ideas for thinking about it.
    Date: 2008–03
  7. By: Dutta, Nabamita; Roy, Sanjukta
    Abstract: Financial development is definitely a determinant of the extent of foreign direct investment (FDI) inflow into an economy. Yet, the contribution of financial development (FD) can be dependent on the political situation of the recipient nation. Higher political stability aids financial institutions to reap the benefits of FDI efficiently. Our paper empirically investigates the role of political risk in the association of FDI and FD. Using a panel of 97 countries, we show the relationship to be strictly non-linear. The impact of FD on FDI becomes negative beyond a threshold level of FD. However, we do find political risk factors to be affecting the relationship by altering the threshold level of financial development.
    Keywords: Foreign Direct Investment; Financial Development; Political Risks
    JEL: F23 C23 O16
    Date: 2008–05–10
  8. By: James E. Alt (Department of Government, Harvard University); David Dreyer Lassen (Department of Economics, University of Copenhagen)
    Abstract: High-quality data on state-level inequality and incomes, panel data on corruption convictions, and careful attention to the consequences of including or excluding fixed effects in the panel specification allow us to estimate the impact of income considerations on the decision to undertake corrupt acts. Following efficiency wage arguments, for a given institutional environment the corruptible employee’s or official’s decision to engage in corruption is affected by relative wages and expected tenure in the public sector, the probability of detection, the cost of fines and jail terms, and the degree of inequality, which indicate diminished prospects facing those convicted of corruption. In US states over 25 years we show that inequality and higher government relative wages significantly and robustly produce less corruption. This reverses other findings of a positive association between inequality and corruption, which we show arises from long-run joint causation by unobserved factors.
    Keywords: corruption; rent seeking; inequality; Gini coefficient; efficiency wage; public sector wages
    JEL: D72 D73 P48
    Date: 2008–08
  9. By: Douhan, Robin (Research Institute of Industrial Economics (IFN)); Henrekson, Magnus (Research Institute of Industrial Economics (IFN))
    Abstract: Recent research has highlighted the role of institutions in channeling entrepreneurs into activities with positive or negative effects on overall productivity. Embedding central elements from these theories into a political economy framework reveals the bilateral causal relation between entrepreneurs and institutions. Core features of the entrepreneur force us to view its effects on institutions as more than mechanic general equilibrium adjustments. Three analytically separate channels of influence are isolated, analyzed and exemplified. Entrepreneurs influence formal economic institutions through direct involvement in politics, by using their entrepreneurial talent to wield de facto political power and by altering the effect of formal institutions. We propose a parsimonious framework that incorporates these effects as well as the role of institutions in channeling entrepreneurial talent. We use examples from modern history as a real-world context to illustrate our framework.
    Keywords: Entrepreneurship; Innovation; Institutions; Regulation; Self-employment
    JEL: L50 M13 O31 P14
    Date: 2008–08–26
  10. By: Heckelman, Jac C. (Wake Forest University); Powell, Benjamin (Suffolk University, Department of Economics)
    Abstract: Several cross-country studies have found that corruption is detrimental to economic growth, but the findings are not universally robust. We utilize the economic freedom index to examine if corruption can facilitate growth by allowing entrepreneurs to avoid inefficient policies and regulations when economic freedom is limited. Using regression analysis, we find that corruption is growth enhancing when economic freedom is most limited but the beneficial impact of corruption decreases as economic freedom increases. Not all areas of economic freedom affect the corruption-growth relationship equally. In particular, we find that when we analyze individual areas of economic freedom the beneficial effect of corruption disappears most quickly when the size of government and the extent of regulation decrease.
    Keywords: Corruption; Economic Freedom; Growth
    JEL: D73 H10 O43 O57
    Date: 2008–08–19
  11. By: Vindigni, Andrea (Princeton U)
    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 mo- tion. 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 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-rent economies, because "good times" cut down the support for flexibility among the least productive employed workers. The model 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.
    JEL: D71
    Date: 2008–06
  12. By: Vadlamannati, Krishna Chaitanya
    Abstract: We conduct an econometric analysis of socioeconomic, institutional and political factors determining government respect for human rights within India. Using time series cross-sectional data for 28 Indian states for the period 1993 – 2002, we find that internal threat poised by number of social violence events, presence of civil war and riot hit disturbed areas are strongly associated with human rights abuses. Amongst socioeconomic factors, ‘exclusive’ economic growth, ‘uneven’ development, poor social development spending, youth bulges and differential growth rates between minority religious groups explain the likelihood of human rights violations. Capturing power at the state and central level by Hindu national parties’ viz., Bharatiya Janata Party (BJP) and Shiv Sena, further help understand the incidence of human rights violations within India.
    JEL: R59 P59
    Date: 2008–08–23
  13. By: Mansbridge, Jane (Harvard U)
    Abstract: Citizen demands for more accountability and transparency are implicitly grounded in a model of political representation based primarily on sanctions, in which the interests of the representative (in economic terms, the agent) are presumed to conflict with those of the constituent (in economic terms, the principal). A selection model of political representation, as with a selection model of principal-agent relations more generally, is possible when the principal and agent have similar objectives and the agent is already internally motivated to pursue those objectives. If a potential representative’s intrinsic goals (overall direction and specific policies) are those the constituent desires and if the representative also has a verifiable reputation of being both competent and honest, a constituent can select that representative for office and subsequently spend relatively little effort on monitoring and sanctioning. The higher the probability that the objectives of principal and agent may be aligned, the more efficient it is for the principal to invest resources ex ante, in selecting the required type, rather than ex post, in monitoring and sanctioning. A selection model is efficient when agents face unpredictable future decisions, are hard to monitor, and must act flexibly. Accountability through monitoring and sanctioning is appropriate to the sanctions model, narrative accountability and deliberative accountability to the selection model. Normatively, the selection model tends to focus the attention of both citizens and representatives on the common interest. In political science the selection model was advanced in the early 1960s as one of the two paths to constituency control, but after the 1970s was eclipsed by the sanctions model in spite of data seeming to indicate that in many circumstances it has greater predictive power. Economists have only recently begun to apply the selection model significantly to politics.
    Date: 2008–02
  14. By: Sewall, Sarah (Harvard U)
    Abstract: The overarching strategic challenge facing the United States is revitalizing the international system so that the nation might conserve its strength and power even as the global environment shifts. The United States, which has been the primary beneficiary of a stable international system and remains its preeminent power, must lead and shape a process of adapting the international system to provide greater stability and security in the 21st century. The interstate system of international rules and institutions related to politics, economics, and security is under stress as many sub-state and transnational actors and processes undermine the wellbeing and security of states and persons. This erosion of state and interstate capacity is a broad phenomenon that directly and indirectly undermines U.S. security and the American way of life. This paper focuses on two new complementary components of U.S. grand strategy: strategic flexibility and an indirect method. Strategic flexibility encompasses a host of policies designed to allow the United States to maintain its power and to shape the emerging security environment. The policies that enable strategic flexibility reflect a long-overdue update of the political, economic, and security assumptions that once buttressed U.S. foreign policy. America’s unipolar moment is already en route to being eclipsed by an increasingly diverse cast of global characters with the capacity to degrade or enhance U.S. security. The United States retains predominance in many arenas, but longer-term demographic and economic trends in key states and the diffusion of power from states to other entities suggest an emerging, if still largely invisible, shift of global power.
    Date: 2008–05
  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 general, misanthropy has been analyzed taking into account residents of one country and just comparing results. Instead of doing that, we employ 2004 International Social Survey Program and analyze its determinants in a cross-country model taking into account both individual characteristics and country effects. Our model shows, as expected, that misanthropy could be explained by some sociodemographic and economic individual characteristics. For instance, being a woman, having a university degree, being married lowers misanthropy while being young; having a low income, having no political preferences, being self-employed makes people more misanthropic. Moreover, in order to capture fix effects, we included (dummies) variables per country of residence and almost all of them result significant in determining misanthropy. This last result indicates that not only individual characteristics matters but also some factors regarding context also play a significant role. Finally, we show that there is a strong relationship among our misanthropy ranking of countries and two corruption perception rankings.
    Keywords: misanthropy, trust, cross-country research, individual attitudes
    JEL: Z13
    Date: 2008–07

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