nep-pol New Economics Papers
on Positive Political Economics
Issue of 2009‒06‒10
six papers chosen by
Eugene Beaulieu
University of Calgary

  1. Making rules credible: Divided government and political budget cycles By Jorge M. Streb; Gustavo F. Torrens
  2. Aging, Factor Returns, and Immigration Policy By Lena Calahorrano; Oliver Lorz
  3. Mass Media and Public Policy: Global Evidence from Agricultural Policies By Alessandro Olper
  4. Who is afraid of political risk? Multinational firms and their choice of capital structure By Kesternich, Iris; Schnitzer, Monika
  5. Noncooperative Foundations of Stable Sets in Voting Games. By Vincent Anesi
  6. Evolutionary Policy By Jeroen C.J.M. van den Bergh; Giorgos Kallis

  1. By: Jorge M. Streb; Gustavo F. Torrens
    Abstract: Political budget cycles (PBCs) result from the credibility problems that office-motivated incumbents face under asymmetric information, due to their temptation to manipulate fiscal policy to increase their electoral chances. We analyze the role of rules that limit debt, crucial for aggregate PBCs to take place. Since the budget process under separation of powers typically requires that the legislature authorize new debt, divided government can make these fisscal rules credible. Commitment is undermined either by unified government or by imperfect compliance with the budget law. When divided government affects efficiency, voters must trade off electoral distortions and government competence.
    Keywords: political budget cycles, discretion, uniffied government, rules, credibility, separation of powers, divided government
    Date: 2009–04
  2. By: Lena Calahorrano (RWTH Aachen University, Faculty of Business and Economics, Templergraben 64, 52062 Aachen, Germany); Oliver Lorz (RWTH Aachen University, Faculty of Business and Economics, Templergraben 64, 52062 Aachen, Germany)
    Abstract: In this note we analyze how aging affects immigration policy. We set up a dynamic political-economy model of representative democracy in which the government of the destination country sets the immigration level to maximize aggregate welfare of the constituency. Aging, i.e. a decline in the growth rate of the native population, has an expansionary effect on immigration. This immigration effect may even overcompensate the initial decline in population growth such that the total labor force grows more strongly and the capital stock per worker declines. We also compare our results to the social planner allocation and to the median-voter equilibrium.
    Keywords: Demographic change, political economy, immigration policy
    JEL: D78 F22
    Date: 2009
  3. By: Alessandro Olper
    Abstract: Mass media plays a crucial role in information distribution and thus in the political market and public policy making. Theory predicts that information provided by mass media reflects the media’s incentives to provide news to different types of groups in society, and affects these groups’ influence in policy-making. We use data on agricultural policy from 60 countries, spanning a wide range of development stages and media markets, to test these predictions. We find that, in line with theoretical predictions, public support to agriculture is strongly affected by the structure of the mass media. In particular, a greater role of the private mass media in society is associated with policies which benefit the majority more: it reduces taxation of agriculture in poor countries and reduces subsidization of agriculture in rich countries, ceteris paribus. The evidence is also consistent with the hypothesis that increased competition in commercial media reduces transfers to special interest groups and contributes to more efficient public policies.[LICOS D P NO 232/2009]
    Keywords: Mass Media; Media Structure; Information; Agricultural Protection; Political Economy
    Date: 2009
  4. By: Kesternich, Iris; Schnitzer, Monika
    Abstract: This paper investigates how multinational firms choose the capital structure of their foreign affiliates in response to political risk. We focus on two choice variables, the leverage and the ownership structure of the foreign affiliate, and we distinguish different types of political risk, such as expropriation, unreliable intellectual property rights and confiscatory taxation. In our theoretical analysis we find that, as political risk increases, the ownership share tends to decrease, whereas leverage can both increase or decrease, depending on the type of political risk. Using the Microdatabase Direct Investment of the Deutsche Bundesbank, we find supportive evidence for these different effects.
    Keywords: Multinational firms, political risk, capital structure, leverage, ownership structure, foreign affiliates
    JEL: F21 F23 G32
    Date: 2009
  5. By: Vincent Anesi (University of Nottingham)
    Abstract: This note investigates the noncooperative foundations of von Neumann-Morgenstern (vN-M) stable sets in voting games. To do so, we study subgame perfect equilibria of a noncooperative legislative bargaining game, based on underlying simple games. The following results emerge from such an exercise: Every stable set of the underlying simple game is the limit set of undominated pure-strategy Markov perfect equilibria, and of strategically stable sets of undominated subgame perfect equilibria of the bargaining game with farsighted voters.
    Keywords: Legislative bargaining, committee, strategic stability, stable set.
    JEL: C71 C78 D71
    Date: 2009–05
  6. By: Jeroen C.J.M. van den Bergh; Giorgos Kallis
    Abstract: We explore the idea of public policy from the perspective of evolutionary thinking. This involves paying attention to concepts like diversity, population, selection, innovation, coevolution, group selection, path-dependence and lock-in. We critically discuss the notion of evolutionary progress. The relevance of evolutionary dynamics is illustrated for policy and political change, technical change, sustainability transitions and regulation of consumer behaviour. A lack of attention for the development of evolutionary policy criteria and goals is identified and alternative choices are critically evaluated. Finally, evolutionary policy advice is compared with policy advice coming from neoclassical economics, public choice theory and theories of resilience and adaptive management. We argue that evolutionary thinking offers a distinct and useful perspective on public policy design and change.
    Keywords: Adaptive management, coevolution, escaping lock-in, evolutionary politics, evolutionary progress, innovation policy, optimal diversity, resilience, social-technical transition Length 43 pages
    Date: 2009–05

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