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

  1. Institutional Inertia By Laura Valderrama
  2. The logic of party coalitions with political activism and public financing By Giuranno, Michele
  3. The Successful Ghana Election of 2008 – a Convenient Myth? Ethnicity in Ghana’s Elections Revisited By Heinz Jockers; Dirk Kohnert; Paul Nugent
  4. The Redistributive Effects of Political Reservation for Minorities: Evidence from India By Chin, Aimee; Prakash, Nishith
  5. Political Risk Aversion By Laura Valderrama
  6. Power Fluctuations and Political Economy By Daron Acemoglu; Mikhail Golosov; Aleh Tsyvinski
  7. Do Better Paid Politicians Perform Better? Disentangling Incentives from Selection By Gagliarducci, Stefano; Nannicini, Tommaso
  8. The Political Economy of Conscription By Poutvaara, Panu; Wagener, Andreas
  9. Expressive Political Behaviour: Foundations, Scope and Implications By Colin Jennings; Alan Hamlin
  10. Tobacco Politics and Electoral Accountability in the United States By Fredriksson, Per; Mamun, Khawaja
  11. Demand for Redistribution, Support for the Welfare State, and Party Identification in Austria By Kuhn, Andreas
  12. Persistence of civil wars By Acemoglu, Daron; Ticchi, Davide; Vindigni, Andrea
  13. Reforming IMF and World Bank governance : in search of simplicity, transparency and democratic legitimacy in the voting rules By Leech, Dennis; Leech, Robert
  14. The Right Amount of Trust By Butler, Jeffrey V.; Giuliano, Paola; Guiso, Luigi
  15. Gubernatorial Reputation and Vertical Tax Externalities: All Smoke, No Fire? By Fredriksson, Per; Mamun, Khawaja
  16. Fiscal Cycles in the Caribbean By Juliana Dutra Araujo

  1. By: Laura Valderrama
    Abstract: We study the relative efficiency of outside-owned versus employee-owned firms and analyze implications for institutional change in a context of technological innovation. When decisions are made through majority voting, the vote on technology choice is used to influence the later vote on the sharing rule. We show how this dynamic voting generates a systematic technological bias that is contingent on firm ownership. We provide conditions under which the pivotal voter's political leverage leads the firm to an institutional trap whereby majority voting and inefficient technology choice reinforce each other, leading to institutional inertia.
    Keywords: Corporate governance , Corporate sector , Economic models , Political economy , Productivity , Technology transfer , Voting power ,
    Date: 2009–09–14
  2. By: Giuranno, Michele
    Abstract: This paper presents a model of party coalition formation between policy- motivated activists and office-seeking opportunists. In this framework, I con- sider how changes in party valence and public financing of political parties shape the equilibrium inside coalitions. Results show that, in equilibrium, op- portunists and activists have the same marginal rate of substitution between policy position and activists'contribution. An asymmetric worsening of one party's valence leads to divergence of its policy platform and a higher degree of activism. Furthermore, public financing of political parties drives activism or idealism out of politics. As a consequence, public financing is an important policy instrument to regulate the trade-o¤ between the degree of activism in politics and the independence of political parties from lobbying.
    Keywords: activists, idealism, lobbyists, coalition formation, Nash bargaining, party valence, polarization.
    JEL: D70 D72 D78
    Date: 2009–09
  3. By: Heinz Jockers; Dirk Kohnert (GIGA Institute of African Affairs); Paul Nugent (Centre of African Studies at the University of Edingburgh)
    Abstract: Ghana’s 2008 elections have been hailed by national and international observers as a model for Africa. This perception has prevailed despite persistent concerns about “ethnic block voting” and electoral fraud. Electoral malpractice and vote rigging along ethnic lines in Ghana’s virtual two-party system could regain decisive importance as a “third force” that could tip the balance in future, possibly coming to represent an even more important factor than the smaller opposition parties. Unfortunate diplomatic and technocratic biases in election monitoring, combined with a reluctance on the part of the responsible authorities to investigate irregularities in what appears to be a long history of fraudulent “ethnic block voting”, amounts to a dangerous time bomb of unresolved conflict which could explode in future elections.
    Keywords: elections, ethnicity, election observation, informal institutions, impunity, Ghana
    Date: 2009–09
  4. By: Chin, Aimee (University of Houston); Prakash, Nishith (Dartmouth College)
    Abstract: We examine the impact of political reservation for disadvantaged minority groups on poverty. To address the concern that political reservation is endogenous in the relationship between poverty and reservation, we take advantage of the state-time variation in reservation in state legislative assemblies in India that arises from national policies that cause reservations to be revised and the time lags with which the revised reservations are implemented due to the timing of state elections. Using data on sixteen major Indian states for the period 1960-1992, we find that increasing the share of seats reserved for Scheduled Tribes significantly reduces poverty while increasing the share of seats reserved for Scheduled Castes has no impact on poverty. Political reservation for Scheduled Tribes has a greater effect on rural poverty than urban poverty, and appears to benefit people near the poverty line as well as those far below it.
    Keywords: affirmative action, poverty, minorities, India
    JEL: I38 J15 J78
    Date: 2009–09
  5. By: Laura Valderrama
    Abstract: This paper studies the effect of individual uncertainty on collective decision-making to implement innovation. We show how individual uncertainty creates a bias for the status quo even under irreversible voting decisions, in contrast with Fernandez and Rodrik (1991). Blocking innovation is rooted in the aversion to the potential loss of political clout in future voting decisions. Thus, risk neutral individuals exhibit what we call political risk aversion. Yet individual uncertainty is not all bad news as it may open the door to institutional reform. We endogenize institutional reform and show a non-monotonic relationship between institutional efficiency and the size of innovation.
    Keywords: Corporate governance , Corporate sector , Economic models , Labor mobility , Political economy , Productivity , Technology transfer , Voting power ,
    Date: 2009–09–14
  6. By: Daron Acemoglu; Mikhail Golosov; Aleh Tsyvinski
    Abstract: We study the constrained Pareto efficient allocations in a dynamic production economy in which the group that holds political power decides the allocation of resources. We show that Pareto efficient allocations take a quasi-Markovian structure and can be represented recursively as a function of the identity of the group in power and updated Pareto weights. For high discount factors, the economy converges to a first-best allocation in which labor supply decisions are not distorted and the levels of labor supply and consumption are constant over time (though there may be transfers from one group to another). For low discount factors, the economy converges to an invariant stochastic distribution in which distortions do not disappear and labor supply and consumption levels fluctuate over time. The labor supply of groups that are not in power are taxed in order to reduce the deviation payoff of the party in power and thus relax the political economy/sustainability constraints. We also show that the set of sustainable first-best allocations is larger when there is less persistence in the identity of the party in power. This result contradicts a common conjecture that there will be fewer distortions when the political system creates a “stable ruling groupâ€. In contrast, political economy distortions are less important when there are frequent changes in power (because this encourages compromise between social groups). Despite this result, it remains true that distortions decrease along sample paths where a particular group remains in power for a longer span of time.
    JEL: E61 H11 P16
    Date: 2009–10
  7. By: Gagliarducci, Stefano (University of Rome Tor Vergata); Nannicini, Tommaso (Bocconi University)
    Abstract: The wage paid to politicians affects both the choice of citizens to run for an elective office and the performance of those who are appointed. First, if skilled individuals shy away from politics because of higher opportunities in the private sector, an increase in politicians' pay may change their mind. Second, if the reelection prospects of incumbents depend on their in-office deeds, a higher wage may foster performance. We use data on all Italian municipal governments from 1993 to 2001 and test these hypotheses in a quasi-experimental framework. In Italy, the wage of the mayor depends on population size and sharply rises at different thresholds. We apply a regression discontinuity design to the only threshold that uniquely identifies a wage increase – 5,000 inhabitants – to control for unobservable town characteristics. Exploiting the existence of a two-term limit, we further disentangle the composition from the incentive component of the effect of the wage on performance. Our results show that a higher wage attracts more educated candidates, and that better paid politicians size down the government machinery by improving internal efficiency. Importantly, most of this performance effect is driven by the selection of competent politicians, rather than by the incentive to be reelected.
    Keywords: political selection, efficiency wage, term limit, local finance, regression discontinuity design
    JEL: M52 D72 J45 H70
    Date: 2009–09
  8. By: Poutvaara, Panu (University of Helsinki); Wagener, Andreas (University of Hannover)
    Abstract: Though in decline recently, military conscription is still a widely used mode of staffing armies. Since not many valid economic, social or military arguments in favor of the draft can be put forward, the question emerges why societies choose to rely on it. In this survey we explain the political allure of military conscription by its specific intra- and intergenerational incidence as a tax. From a public choice perspective, there is always a vast majority of people in favor of the introduction and maintenance of military draft, as compared to a professional army. Empirical evidence for this conclusion appears to be mixed, however. Political preferences with respect to conscription involve concerns about its unfairness and questionable record on social accounts. Special interests may also matter.
    Keywords: fairness, dynamic costs, military draft, public choice, taxation
    JEL: H56 D72
    Date: 2009–09
  9. By: Colin Jennings (Department of Economics, University of Strathclyde); Alan Hamlin (School of Social Sciences, University of Manchester)
    Abstract: A growing literature has focussed attention on ‘expressive’ rather than ‘instrumental' behaviour in political settings - particularly voting A common criticism of the expressive idea is that its myriad possibilities make it rather ad hoc and lacking in both predictive and normative bite. We agree that no single clear definition of expressive behaviour has emerged to date, and no detailed foundations of specific expressive motivations have been provided, so that there are rather few specific implications drawn from the analysis of expressive behaviour. In response, we provide a foundational discussion and definition of expressive behaviour that accounts for a range of factors. We also discuss the content of expressive choice distinguishing between moral, social and emotional cases, and relate this more general account to the specific theories of expressive choice in the literature. Finally, we discuss the normative and institutional implications of expressive behaviour.
    Keywords: expressive behaviour; identity; moral choice; populism; institutional design
    JEL: D70 D72
    Date: 2009–08
  10. By: Fredriksson, Per (University of Louisville); Mamun, Khawaja (John F. Welch College of Business, Sacred Heart University)
    Abstract: This paper investigates whether reputation-building strategies guide U.S. governors’ state cigarette tax choices, and whether the federal cigarette tax influences such behavior. Using 1975-2000 data, we find evidence that governors in states with relatively important agricultural tobacco production and tobacco manufacturing, and which are densely populated by smokers, appear prone to reputation-building. Moreover, lame ducks are more prone to raise the state cigarette tax the lower the federal tax.
    Keywords: Agricultural tobacco, cigarette taxation, lobbying, reputation-building; electoral accountability; term limits; federalism
    JEL: H71 H77 D72 D78
    Date: 2009–10
  11. By: Kuhn, Andreas (University of Zurich)
    Abstract: This paper describes subjective wage inequality and the demand for redistribution in Austria using individuals' estimates of occupational wages from the International Social Survey Program. Although these estimates differ widely across individuals, the data clearly show that most individuals would like to decrease wage inequality, relative to the level of inequality which they perceive to exist. The empirical analysis also shows that the demand for redistribution is strongly associated not only with variables describing self-interested motives for redistribution, but also with perceptions of and social norms with respect to inequality. Further, the demand for redistribution is a strong predictor for whether an individual is supportive of redistribution by the state. On the other hand, however, I find almost no evidence for an empirical association between the demand for redistribution and individuals' party identification.
    Keywords: subjective inequality measures, demand for redistribution, support for the welfare state, party identification
    JEL: D31 D63 H50
    Date: 2009–09
  12. By: Acemoglu, Daron; Ticchi, Davide; Vindigni, Andrea
    Abstract: A notable feature of post-World War II civil wars is their very long average duration. We provide a theory of the persistence of civil wars. The civilian government can successfully defeat rebellious factions only by creating a relatively strong army. In weakly-institutionalized polities this opens the way for excessive influence or coups by the military. Civilian governments whose rents are largely unaffected by civil wars then choose small and weak armies that are incapableof ending insurrections. Our framework also shows that when civilian governments need totake more decisive action against rebels, they may be forced to build over-sized armies, beyond the size necessary for fighting the insurrection, as a commitment to not reforming the military in the future.
    Keywords: civil wars, commitment, coups, military, political transitions, political economy.
    JEL: H2 N10 N40 P16
    Date: 2009–09
  13. By: Leech, Dennis (University of Warwick); Leech, Robert (Imperial College London)
    Abstract: We discuss the reform of the voting rules at the heart of the governance of the IMF and World Bank (the BWIs) in terms of three principles that we suggest ought to be fundamental: simplicity, transparency and democratic legitimacy. By simplicity we mean that the rules should make sense in terms of the purposes of the BWI and be easy to understand. By transparency we mean that the rules mean what they appear to mean in the sense of leading to the same distribution of voting power as the institution's designers intended. We show using voting power analysis that the inequality in the distribution of voting power among countries is greater than that of their voting weight. By democratic legitimacy, we consider whether we can reconcile weighted voting with democracy. Our conclusion is that the voting rules as they currently exist are far from satisfying any of these criteria and that recent reform proposals do not lead us to change this conclusion.
    Date: 2009
  14. By: Butler, Jeffrey V. (Einaudi Institute for Economics and Finance); Giuliano, Paola (University of California, Los Angeles); Guiso, Luigi (European University Institute)
    Abstract: A vast literature has investigated the relationship between trust and aggregate economic performance. We investigate the relationship between individual trust and individual economic performance. We find that individual income is hump-shaped in a measure of intensity of trust beliefs available in the European Social Survey. We show that heterogeneity of trust beliefs in the population, coupled with the tendency of individuals to extrapolate beliefs about others from their own level of trustworthiness, could generate the non-monotonic relationship between trust and income. Highly trustworthy individuals think others are like them and tend to form beliefs that are too optimistic, causing them to assume too much social risk, to be cheated more often and ultimately perform less well than those who happen to have a trustworthiness level close to the mean of the population. On the other hand, the low-trustworthiness types form beliefs that are too conservative and thereby avoid being cheated, but give up profitable opportunities too often and, consequently, underperform. Our estimates imply that the cost of either excessive or too little trust is comparable to the income lost by foregoing college. Furthermore, we find that people who trust more are cheated more often by banks as well as when purchasing goods second hand, when relying on the services of a plumber or a mechanic and when buying food. We complement the survey evidence with experimental evidence showing that own trustworthiness and expectations of others' trustworthiness in a trust game are strongly correlated and that performance in the game is hump-shaped.
    Keywords: economic performance, trustworthiness, trust, culture, false consensus
    JEL: A1 A12 D1 O15 Z1
    Date: 2009–09
  15. By: Fredriksson, Per (University of Louisville); Mamun, Khawaja (John F. Welch College of Business, Sacred Heart University)
    Abstract: This paper investigates whether reputation-building strategies guide U.S. governors’ responses to changes in federal cigarette taxes (i.e. vertical tax interactions). Using 1975-2000 state cigarette tax data, we find that reputation-building strategies affect the nature of vertical tax externalities. Lame duck governors exhibit a more negative response to changes in the federal cigarette tax. Thus, by reducing the state tax base and by causing a decline in the state tax, an increase in the federal tax rate reduces state tax revenues in states headed by lame ducks.
    Keywords: Vertical Tax Interactions; Fiscal Federalism; Reputation-building; Electoral Accountability; Political Institutions
    JEL: H71 H77 D72 D78
    Date: 2009–10
  16. By: Juliana Dutra Araujo
    Abstract: The sharp increase in debt in the Caribbean since the mid-1990s has focused attention on the conduct of fiscal policy in the region. This paper aims to diagnose how fiscal policy has behaved during this period by looking at three main cycles of the economy: the business, election, and natural disaster cycles. Our main findings suggest that fiscal policy has been mostly procyclical in the region, while disasters have been heavily "insured" by foreign transfers. The "when it rains, it pours" phenomena suggested by Kaminsky, Reinhart and Vegh (2004) seems to take place in the Caribbean.
    Keywords: Business cycles , Capital flows , Capital inflows , Caribbean , Climatic changes , Cross country analysis , Fiscal analysis , Fiscal policy , Political economy , Regional shocks ,
    Date: 2009–07–28

This nep-pol issue is ©2009 by Eugene Beaulieu. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.