nep-pol New Economics Papers
on Positive Political Economics
Issue of 2009‒03‒14
eleven papers chosen by
Eugene Beaulieu
University of Calgary

  1. Political support for the private system to finance political parties By Jenny De Freitas
  2. A Probabilistic Voting Model of Progressive Taxation with Incentive Effects By Jenny De Freitas
  3. Political Intergenerational Risk Sharing By Marcello D'Amato; Vincenzo Galasso
  4. Conditional political budget cycles in Argentine provinces By Daniel Lema
  5. Democracy and Reforms By Giuliano, Paola; Mishra, Prachi; Spilimbergo, Antonio
  6. Assessing the impact of political economy factors on rules of origin under NAFTA By Portugal-Perez, Alberto
  7. Corruption: Measuring the Unmeasurable By Zaman, Asas; Rahim, Faizur
  8. A Theory of Voting Patterns and Performance in Private and Public Committees By Daniel J. Seidmann
  9. Migration and the welfare state: Dynamic Political-Economy Theory By Assaf Razin; Efraim Sadka; Benjarong Suwankiri
  10. Trust and Trade By Oskar Nupia
  11. Volunteering and the State By Franz Hackl; Martin Halla; Gerald J. Pruckner

  1. By: Jenny De Freitas (Universitat de les Illes Balears)
    Abstract: In a Downsian model of political competition we compare the equilibrium tax and redistribution level obtained from two systems to finance parties' political campaigns: the public and the private system. In the private system ideological voters make campaign contributions to increase the chances of winning of their preferred party. In the public system parties receive funds from the government. If voters are sufficiently ideological the private system induces high aggregate spending. Nevertheless, it may be supported by a majority of voters given the indirect effect contributions have on the equilibrium redistribution level and parties' probability of winning.
    Keywords: Political economy, redistribution, campaign finance.
    JEL: D70 D72 P16
    Date: 2009
  2. By: Jenny De Freitas (Universitat de les Illes Balears)
    Abstract: This paper shows conditions under which a marginally progressive income tax emerges as the outcome of political competition between two parties, when labor is elastically supplied and candidates are uncertain about voters' choice at election day. Assuming the elasticity of labor is decreasing on marginal wage; following Coughlin and Nitzan (1981) only marginal progressive taxes are played by both candidates in equilibrium. If; instead, we adopt Lindbeck and Weibull (1989) probabilistic voting model, the equilibrium tax schedule will be progressive as long as the political power of the rich voter is sufficiently small. The degree of progressivity decreases with population polarization.
    Keywords: Political economy, progressive taxation, elastic labor supply.
    JEL: D3 D63 D72 H24
    Date: 2009
  3. By: Marcello D'Amato (Università di Salerno, CSEF and CELPE); Vincenzo Galasso (Università Bocconi, IGIER and CSEF)
    Abstract: TIn a stochastic two-period OLG model, featuring an aggregate shock to the economy, ex-ante optimality requires intergenerational risk sharing. We compare the level of time-consistent intergenerational risk sharing chosen by a benevolent government and by an office-seeking politician. In our political system, the transfer of resources across generations is determined as a Markov equilibrium of a probabilistic voting game. Low realized returns on the risky asset induce politicians to compensate the old through a PAYG system. This political system typically generates an intergenerational risk sharing scheme that is (i) larger, (ii) more persistent, and (iii) less responsive to the realization of the shock than the (time consistent) social optimum. This is because the current politician anticipates her transfers to the elderly to be compensated by future politicians through offsetting transfers, and hence overspends. Aging increases the optimal transfer, but surprisingly makes office-seeking politicians more conservative, by increasing the cost for future politicians to compensate the current young.
    Keywords: Pension Systems, Markov equilibria, social optimum
    JEL: H55 D72
    Date: 2009–03–06
  4. By: Daniel Lema
    Abstract: This paper presents evidence of electoraly-motivated changes in the budget balance, public expenditures, composition of public expenditures and provincial revenues in Argentine provinces. The empirical study is made using panel data analysis for 22 provinces during the period 1985-2001. Unconditional results show that conditioning on the alignment of provincial and federal executives (same political party in power) there is evidence of systematic changes in fiscal policies around elections. The observed changes support the predictions of rational opportunistic models of PBC. In election years, total provincial expenditures increase in aligned provinces, without affecting the fiscal balance, because to the increased discretional transfers from the federal government supporting the provincial incumbent federal revenues. By contrast, deficit increases for unaligned provinces. In addition, expenditure shifts toward current spending and away from capital spending for unaligned provinces in electoral years.
    JEL: D72 E62
    Date: 2008–12
  5. By: Giuliano, Paola; Mishra, Prachi; Spilimbergo, Antonio
    Abstract: Empirical evidence on the relationship between democracy and economic reforms is scarce, limited to few reforms and countries and for few years. This paper studies the impact of democracy on the adoption of economic reforms using a new dataset on reforms in the financial, capital, public, and banking sectors, product and labor markets, agriculture, and trade for 150 countries over the period 1960-2004. Democracy has a positive and significant impact on the adoption of economic reforms but there is no evidence that economic reforms foster democracy. Our results are robust to the inclusion of a large variety of controls and estimation strategies.
    Keywords: economic liberalization; financial markets; institutions; political economy; product markets; transition
    JEL: E6 O57
    Date: 2009–03
  6. By: Portugal-Perez, Alberto
    Abstract: Rules of origin are legitimate policy instruments to prevent trade deflection in a preferential trade agreement short of a customs union. Trade deflection takes place when a product imported into the preferential trade agreement through the member with the lowest external tariff is transhipped to a higher-tariff member, while yielding a benefit for the re-exporter. Yet, when captured by special interest groups, rules of origin can restrict trade beyond what is needed to prevent trade deflection. By how much do political economy factors account for the stringency of rules of origin? This study quantifies the impact of both determinants - those considered"justifiable"because they prevent trade deflection and those deemed to arise from"political economy"forces - on the restrictiveness of rules of origin under the North American Free Trade Agreement, approximated by a restrictiveness index. The main finding is that political economy forces, especially from the United States, raised significantly the restrictiveness of the rules of origin. Indeed, in industries where political-economy forces were strong prior to the North American Free Trade Agreement, as when the U.S. Most Favored Nation tariff was high or the revealed comparative advantage of Mexico (the United States) was strong (weak), more stringent rules of origin were introduced. Thus, stricter rules of origin are associated with higher production costs reducing the potential benefits of enhanced market access that is initially pursued by this type of agreement.
    Keywords: Free Trade,Economic Theory&Research,Trade Policy,Trade Law,Debt Markets
    Date: 2009–02–01
  7. By: Zaman, Asas; Rahim, Faizur
    Abstract: While the strategy of measuring and quantifying has been extremely successful, and valuable in the progress of science, it does not follow that it is universally useful. We argue that attempts to measure corruption can be counterproductive in several different ways. Qualitative and action oriented approaches may prove more valuable. A political economy explanation of why extremely distorted and biased measures of corruption continue to be used is also offered.
    Keywords: Corruption; measurement; quantitative imperative; corruption perception index
    JEL: B40 A14
    Date: 2008–12
  8. By: Daniel J. Seidmann (School of Economics, University of Nottingham)
    Abstract: We analyze voting in private and public committees whose members care about the selected decision and the rewards which outsiders pay for representing their interests. If the agenda is binary or outsiders are symmetric then a private committee reaches decisions which better serve organizational goals than either a public committee or a randomly chosen committee member; whereas symmetric outsiders are best served by a public committee. The voting patterns of both private and public committees may fail Duverger’s Law, but they both satisfy a weaker condition: Dissidents in private [resp. public] committees all vote decisions which better [resp. worse] serve organizational goals than the plurality decision; so single-peakedness implies that all dissents lie on one side of the plurality decision.
    Date: 2009–03
  9. By: Assaf Razin; Efraim Sadka; Benjarong Suwankiri
    Abstract: Milton Friedman, the Nobel-prize laureate economist, had it right: "It's just obvious that you can't have free immigration and a welfare state." That is, national welfare states can almost never coexist with the free movement of labor. This fact underscores the relevance of the analysis in this paper, which is a part of a forthcoming book on migration and the welfare state. It focuses on the demographic, and economic, fundamentals behind policy-restricted migration, and the policy-restricted generosity of the welfare state.
    JEL: E0 F2 H11
    Date: 2009–03
  10. By: Oskar Nupia
    Abstract: This paper presents a model demonstrating how trust affects the volume of trade in a society. There are two ways in which this happens. First, at minimum, societies need a certain level of trust in order to observe trading activity. Second, once this minimum condition is satisfied, the probability of observing a larger volume of trade is high only if the level of trust is sufficiently high. Our results help explain empirical findings that demonstrate a positive relationship between trust and the volume of sales, or the value added of trade. The model also shows that institutions can compensate for low levels of trust—that is, societies with low levels of trust can achieve volumes of trade comparable to those of societies with high levels of trust by spending more resources on increasing the quality of the relevant institutions.
    Date: 2009–02–04
  11. By: Franz Hackl; Martin Halla; Gerald J. Pruckner
    Abstract: This paper explores the capability of the state to affect the individual’s decision to work for free. For this purpose we combine individual-level data from the European and World Values Survey with macroeconomic and political variables for OECD member countries. Empirically we identify three channels for crowding out of voluntary labor. Firstly, an increase in public social expenditure decreases the probability that the individual will volunteer (fiscal crowding out). Secondly, a political consensus between individuals and the government also induces volunteers to reduce their unsalaried activities (consensual crowding out). And finally, the more a government supports democratization, the lower is the individual’s engagement (participatory crowding out). Religiosity and a more unequal income distribution in a country increase individuals’ willingness to volunteer.
    Keywords: Volunteering, voluntary labor supply, private provision of public goods, public social expenditure, political consensus, democratization
    JEL: H41 H44 H31 J22 I38 H11 D30 D64
    Date: 2009–02

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