nep-pol New Economics Papers
on Positive Political Economics
Issue of 2009‒09‒11
ten papers chosen by
Eugene Beaulieu
University of Calgary

  1. Electoral Competition when Candidates are Better Informed than Voters By Thomas Jensen
  2. Do Re-election Probabilities Influence Public Investment? By Fiva, Jon H.; Natvik, Gisle James
  3. Inequality in developing economies: The role of institutional development By Joshy Easaw; Antonio Savoia
  4. Voters hold the key: lock-in, mobility, and the portability of property tax exemptions By Ron Cheung; Chris Cunningham
  5. Cross-border lobbying in preferential trading agreements: implications for external tariffs By Subhayu Bandyopadhyay; Sajal Lahiri; Howard J. Wall
  6. How quorum rules distort referendum outcomes: evidence from a pivotal voter model By Luís Francisco Aguiar; Pedro C. Magalhães
  7. Positive Constitutional Economics II—A Survey of Recent Developments By Stefan Voigt
  8. Club-in-the-Club: Reform under Unanimity By Erik Berglöf; Mike Burkart; Guido Friebel; Elena Paltseva
  9. Growing Up in a Recession: Beliefs and the Macroeconomy By Paola Giuliano; Antonio Spilimbergo
  10. How to Measure the Rule of Law By Stefan Voigt

  1. By: Thomas Jensen (Department of Economics, University of Copenhagen)
    Abstract: In this paper we study the functioning of representative democracy when politicians are better informed than the electorate about conditions relevant for policy choice. We consider a model with two states of the world. The distribution of voters' preferred policies shifts with the state. The two candidates are both completely office-motivated but differ in state-dependent quality. Voters have some information about the state but candidates are better informed. If voters' information is unknown to the candidates when they take positions and sufficiently accurate then candidates will, in refined equilibrium, reveal their information by converging to the most likely median. If voters' information is not sufficiently accurate then there is polarization and the candidates'information is not revealed to the voters. We also show that if voters'information is known to the candidates then they will never reveal their information to the voters. The candidates will either pander by converging on the median that is most likely given only the voters'information or be polarized. With respect to welfare, if voters are well informed then they all prefer that their information is unknown to the candidates. However, if voters are not well informed then it is the other way around, all voters prefer that their information is known by the candidates.
    Keywords: electoral competition; uncertainty; information; candidate quality
    JEL: D72 D82
    Date: 2009–07
  2. By: Fiva, Jon H. (Dept. of Economics, University of Oslo); Natvik, Gisle James (Norges Bank)
    Abstract: We identify exogenous variation in incumbent policymakers’ re-election probabilities and explore empirically how this variation affects the incumbents’ investment in physical capital. Our results indicate that a higher re-election probability leads to higher investments, particularly in the purposes preferred more strongly by the incumbents. This aligns with a theoretical framework where political parties disagree about which public goods to produce using labor and predetermined public capital. Key for the consistency between data and theory is to account for complementarity between physical capital and flow variables in government production.
    Keywords: Political Economics; Strategic Capital Accumulation; Identifying Popularity Shocks
    JEL: E62 H40 H72
    Date: 2009–08–15
  3. By: Joshy Easaw (University of Bath); Antonio Savoia (University of Reading and Universitá di Salerno)
    Abstract: In the present paper we study the distributive impact of institutional change in developing countries. In such economies, economic institutions, such as property rights systems, may act to preserve the interests of a rich minority, but this depends crucially on the level of political equality. For example, dominant classes can control key-markets, access to assets and investment opportunities, especially if they enjoy disproportionate political power. We test this hypothesis using cross-section and panel data methods on a sample of low- and middle-income economies from Africa, Asia and Latin America. Results suggest that: (a) increasing the protection of property rights increases income inequality; (b) such an effect is larger in low-democracy environments; (c) a minority of countries have developed a set political institutions capable of counterbalancing this effect.
    Keywords: Inequality, developing economies, institutions, property rights, democracy
    JEL: O15 O17 D70
    Date: 2009
  4. By: Ron Cheung; Chris Cunningham
    Abstract: Since California voters approved Proposition 13 in 1978, fifteen states have enacted caps on the annual growth in assessed property values. These laws often impose a great burden on municipal finances and create horizontal inequity among homeowners. Why do voters choose to limit local government in this way? Reasons may include controlling the power of special interests, addressing agency failures of government officials (the "Leviathan" hypothesis), or preserving the impact of a current but fleeting antitax political alignment. Yet research has found that voters' perception of a limitation's fiscal consequences do not match reality, questioning the rationality of voter behavior. To counter this position, another strand of literature argues that support for tax limitations is driven not by perceptions of government inefficiency but by reasonable expectations of who will ultimately bear the tax limitation's burden. We explore this view by exploiting the differential tax treatment generated by assessment caps in the context of a recent, novel referendum in Florida. We examine voter support for a 2008 constitutional amendment that included a unique provision making the existing assessment cap portable within the state. We test the hypothesis that voters understood the mobility consequences of tax limitations and the net burden of the cap. We find that high potential tax savings and high expected mobility rates result in higher support for portability. We also find that the degree of racial segregation, the presence of nonresidential tax bases, and the share of migrants from out of state all contribute to support for the amendment. Results suggest that voters were as concerned with reducing their own tax share at the expense of other property owners as they were with curtailing local expenditures.
    Date: 2009
  5. By: Subhayu Bandyopadhyay; Sajal Lahiri; Howard J. Wall
    Abstract: This paper examines the effect of cross-border lobbying on domestic lobbying and on external tariffs in both Customs Union (CU) and Free Trade Area (FTA). We do so by developing a two-stage game which endogenizes the tariff formation function in a political economic model of the directly unproductive rent-seeking activities type. We find that cross-border lobbying unambiguously increases both domestic lobbying and the equilibrium common external tariffs in a CU. The same result also holds for FTA provided tariffs for the member governments are strategic complements. We also develop a specific oligopolistic model of FTA and show that tariffs are indeed strategic complements in such a model.
    Keywords: Free trade ; Tariff
    Date: 2009
  6. By: Luís Francisco Aguiar (Universidade do Minho - NIPE); Pedro C. Magalhães (University of Lisbon, Social Sciences Institute)
    Abstract: In many jurisdictions, whether referendum results are binding depend on certain legally defined quorum requirements. With a pivotal-voter model, we examine how quorum requirements affect voter’s behavior. We conclude that quorums can be the cause of lower turnout and that they can deliver outcomes that are an inadequate basis to make inferences about collective preferences. We further conclude that quorums may help minorities to impose their will on majorities and that they may create a bias against the status quo. Finally, they generate situations under which the secrecy of the vote is called into question.
    Date: 2009
  7. By: Stefan Voigt (MACIE (Philipps University Marburg), Barfüßertor 2, 35032 Marburg, Germany; CESifo; ICER, Torino)
    Abstract: Analysis of the economic effects of constitutional rules has made substantial progress over the last decade. This survey provides an overview of this rapidly growing research area and also discusses a number of methodological issues and identifies underresearched areas. It argues that the next logical step of Positive Constitutional Economics is to endogenize constitutional rules.
    Keywords: Positive Constitutional Economics, Constitutional Political Economy, Economic Effects of Constitutions, New Institutional Economics, Endogenous Constitutions
    JEL: H11 K10 O17 O43 P51
    Date: 2009
  8. By: Erik Berglöf (European Bank for Reconstruction and Development); Mike Burkart (Stockholm School of Economics); Guido Friebel (Goethe-Universität Frankfurt); Elena Paltseva (Department of Economics, University of Copenhagen)
    Abstract: In many organizations, decisions are taken by unanimity giving each member veto power. We analyze a model of an organization in which members with heterogenous productivity privately contribute to a common good. Under unanimity, the least efficient member imposes her preferred effort choice on the entire organization. In the presence of externalities and an incomplete charter, the threat of forming an "inner organization" can undermine the veto power of the less efficient members and coerce them to exert more effort. We also identify the conditions under which the threat of forming an inner organization is executed. Finally, we show that majority rules effectively prevent the emergence of inner organizations.
    Keywords: organizations; club good; voting rules; EU integration
    JEL: D2 D7 P4
    Date: 2009–07
  9. By: Paola Giuliano; Antonio Spilimbergo
    Abstract: Do generations growing up during recessions have different socio-economic beliefs than generations growing up in good times? We study the relationship between recessions and beliefs by matching macroeconomic shocks during early adulthood with self-reported answers from the General Social Survey. Using time and regional variations in macroeconomic conditions to identify the effect of recessions on beliefs, we show that individuals growing up during recessions tend to believe that success in life depends more on luck than on effort, support more government redistribution, but are less confident in public institutions. Moreover, we find that recessions have a long-lasting effect on individuals’ beliefs.
    JEL: E60 P16 Z13
    Date: 2009–09
  10. By: Stefan Voigt (MACIE (Philipps University Marburg), Barfüßertor 2, 35032 Marburg, Germany; CESifo; ICER, Torino)
    Abstract: I argue that the rule of law consists of many dimensions and that much information is lost when variables proxying for these dimensions are simply aggregated. I draw on the most important innovations from various legal traditions to propose a concept of the rule of law likely to find general support. To make the concept measurable, an ideal approach is contrasted with a pragmatic one. The pragmatic approach consists of eight different dimensions. I show that the bivariate correlations between them are usually very low, evidence that more fine-grained indicators of the rule of law, rather than a single hard-to-interpret one, are necessary for its measurement. The paper presents a list of desirable variables that could improve the measurement of various aspects of the rule of law.
    Keywords: Rule of Law, Institutions, Governance, Measurement, Formal vs. Informal Institutions
    JEL: B41 H11 K00 O17 O43 O57
    Date: 2009

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