nep-pol New Economics Papers
on Positive Political Economics
Issue of 2009‒11‒27
fourteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Competing on Good Politicians By Galasso, Vincenzo; Nannicini, Tommaso
  2. Pre-electoral Coalitions and Post-election Bargaining By Siddhartha Bandyopadhyay; Kalyan Chatterjee; Tomas Sjostrom
  3. Domestic Political Survival and International Conflict: Is Democracy Good for Peace? By Sandeep Baliga; David Lucca; Tomas Sjostrom
  4. Rational Choice and Voter Turnout: Evidence from Union Representation Elections By Henry S. Farber
  5. Redistributive Politics and Market Efficiency: An Experimental Study By Jens Großer; Ernesto Reuben
  6. Financial liberalization and democracy: The role of reform reversals By Campos, Nauro F.; Coricelli, Fabrizio
  7. The Political Economy of Redistribution in the U.S. in the Aftermath of World War II and the Delayed Impacts of the Great Depression - Evidence and Theory By Beetsma, Roel; Cukierman, Alex; Giuliodori, Massimo
  8. Strong Firms Lobby, Weak Firms Bribe: A survey-based analysis of the demand for influence and corruption By Morten Bennedsen; Sven E. Feldmann; David Dreyer Lassen
  9. Political Support and Tax Compliance: A Social Interaction Approach By Fershtman, Chaim; Lipatov, Vilen
  10. The Political Economy of Ethnolinguistic Cleavages By Desmet, Klaus; Ortuño-Ortín, Ignacio; Wacziarg, Romain
  11. Growing Up in a Recession: Beliefs and the Macroeconomy By Giuliano, Paola; Spilimbergo, Antonio
  12. Political Constraints on Monetary Policy During the U.S. Great Inflation By Weise, Charles L.
  13. Exchange Rate and Political Risks, Again By Gregory Clare; Ira N. Gang
  14. How Good is Trust?: Measuring Trust and its Role for the Progress of Societies By Adolfo Morrone; Noemi Tontoranelli; Giulia Ranuzzi

  1. By: Galasso, Vincenzo; Nannicini, Tommaso
    Abstract: Is electoral competition good for political selection? To address this issue, we introduce a theoretical model in which ideological parties select candidates between party loyalists and experts, and allocate them into the electoral districts. Non-ideological voters, who care about national and local policies, strongly prefer experts. We show that parties compete on good politicians by allocating them to the most contestable districts. Empirical evidence on Italian members of parliament confirms this prediction. We find that politicians with higher ex-ante quality - as measured by years of schooling, previous market income, and local government experience - are more likely to run in a contestable district. Indeed, despite being different on average, the characteristics of politicians belonging to opposite parties converge to high-quality levels in close races. Furthermore, politicians elected in contestable districts make fewer absences in parliament; this is shown to be driven more by a selection effect than by reelection incentives.
    Keywords: political competition; political selection; probabilistic voting
    JEL: D72 H00
    Date: 2009–07
  2. By: Siddhartha Bandyopadhyay (Birmingham); Kalyan Chatterjee (Penn State); Tomas Sjostrom (Rutgers)
    Abstract: Pre-electoral coalitions occur frequently in parliamentary democracies. They influence post election coalition formation and surplus division. We study a game theoretic model where political parties can form coalitions both before (ex ante) and after (ex post) the elections. Ex ante coalitions can commit to a seat-sharing arrangement, but neither to a policy nor to a division of rents from office; coalition members are even free to break up and join other coalitions after the election. Equilibrium ex ante coalitions are not necessarily made up of the most ideologically similar parties, and they form under (national list) proportional representation as well as plurality rule. They do not form just to avoid "splitting the vote", but also because seat-sharing arrangements will influence the ex post bargaining and coalition formation. The ex post bargaining protocol matters greatly: there is more scope for coalition formation, both ex ante and ex post, under an Austen-Smith and Banks protocol than under "random recognition".
    Keywords: NA
    Date: 2009–09–15
  3. By: Sandeep Baliga (Northwestern); David Lucca (Federal Reserve Board); Tomas Sjostrom (Rutgers)
    Abstract: We build a game-theoretic model where aggression can be triggered by domestic political concerns as well as the fear of being attacked. In the model, leaders of full and limited democracies risk losing power if they do not stand up to threats from abroad. In addition, the leader of a fully democratic country loses the support of the median voter if he attacks a non-hostile country. The result is a non-monotonic relationship between democracy and peace. Using the Polity IV dataset, we classify countries as full democracies, limited democracies, and dictatorships. For the period 1816-200, Correlates of War data suggest that limited democracies are more aggressive than other regime types, including dictatorships, and not only during periods when the political regime is changing. In particular, a dyad of limited democracies is more likely to be involved in a militarized dispute than any other dyad (including "mixed" dyads, where the two countries have different regime types). Thus, while full democratization might advance the cause of peace, limited democratization might advance the cause of war. We also find that as the environment becomes more hostile, fully democratic countries become more aggressive faster than other regime types.
    Keywords: democracy, peace
    JEL: C7
    Date: 2009–08–28
  4. By: Henry S. Farber (Princeton University)
    Abstract: It is a common observation that many individuals vote despite the fact that, in elections with even a moderate number of voters, the probability their vote will be pivotal is quite small. The theoretical solution of positing that individuals receive utility from the act of voting itself explains why individuals vote, but it leaves open the question of whether or not there is a significant margin of individuals who consider the effect of their vote on the outcome in deciding whether or not to vote. I develop a rational choice model of voting in union representation elections (government supervised secret ballot elections, generally held at the workplace, on the question of whether the workers would like to be represented by a union). These elections provide a particularly good laboratory to study voter behavior because many of the elections have sufficiently few eligible voters that individuals can have a substantial probability of being pivotal. I implement this model empirically using data on over 75,000 of these elections held from 1972-2009. The results suggest that most individuals (over 80 percent) vote in these elections independent of consideration of the likelihood that they will be pivotal. Among the remainder, it appears that 1) the likelihood of voting falls with election size, 2) the likelihood of voting increases with the expected closeness of the election outcome, and 3) the marginal eect of closeness on the likelihood off voting increases in magnitude with election size. While the first two findings are consistent with the standard rational choice model, the third is not. The results suggest that, while these individuals consider first-order variation in the probability that they will be pivotal, they do not carry out a complete calculation of the probability of being pivotal.
    Keywords: Voting behavior, secret ballots, unions, rational choice
    JEL: J21 J45 D63 D10
    Date: 2009–10
  5. By: Jens Großer; Ernesto Reuben
    Abstract: We study the interaction between competitive markets that produce large but unequally distributed welfare gains and elections through which the poor majority can redistribute income away from the rich minority. In our simple laboratory democracy, subjects first earn their income by trading in a double auction market and thereafter vote on redistributive policies in two-candidate elections. In addition, in one of the treatments subjects can attempt to influence the candidates’ policy choices by transferring money to them. We observe very high levels of redistribution - even when transfers to candidates are possible - with little effect on market efficiency. Overall, the experimental results are explained by our equilibrium predictions.
    Date: 2009–11–12
  6. By: Campos, Nauro F.; Coricelli, Fabrizio
    Abstract: The relationship between economic and political liberalization has received a great deal of attention lately, yet the possibility of a non-linear relationship and the role of reversals remain largely neglected. Focusing on democratization and financial reform, this paper offers evidence for a U-shaped relationship across countries, over time as well as in a panel setting using a wide range of estimators for various reform measures. We link this non-linear relationship to the notion of partial or captured democracy. We provide as well econometric support showing that even when de facto is modelled as a function of de jure financial liberalization, this non-linearity obtains.
    Keywords: economic liberalization; financial reform; political liberalization; reform reversals
    JEL: C23 D72 O38 P16
    Date: 2009–08
  7. By: Beetsma, Roel; Cukierman, Alex; Giuliodori, Massimo
    Abstract: The paper presents evidence of an upward ratchet in transfers and taxes in the U.S. around World-War II. This finding is explained within a political-economy framework involving an executive who sets defense spending and the median voter in the population who interacts with a (richer) agenda setter in Congress in setting redistribution. While the setter managed to cap redistribution in the pre-war period, the War itself pushed up the status-quo tax burden, raising the bargaining power of the median voter as defense spending receded. This raised the equilibrium level of redistribution. The higher share of post-War transfers may thus be interpreted as a delayed fulfilment of a, not fully satisfied, popular demand for redistribution inherited from the Great Depression.
    Keywords: agenda setter; ratchets; redistribution; taxes; transfers; World-War II
    JEL: E62 E65 N11 N12
    Date: 2009–10
  8. By: Morten Bennedsen (INSEAD); Sven E. Feldmann (University of Melbourne); David Dreyer Lassen (Department of Economics, University of Copenhagen)
    Abstract: We use survey responses by firms to examine the firm-level determinants and effects of political influence, their perception of corruption and prevalence of bribe paying. We find that: (a) measures of political influence and corruption/bribes are uncorrelated at the firm level; (b) firms that are larger, older, exporting, government-owned, are widely held and/or have fewer competitors, have more political influence, perceive corruption to be less of a problem and pay bribes less often; (c) influence increases sales and government subsidies and in general makes the firm have a more positive view on the government. In sum, we show that strong firms use their influence to bend laws and regulations, whereas weak firms pay bribes to mitigate the costs of government intervention.
    Date: 2009–11
  9. By: Fershtman, Chaim; Lipatov, Vilen
    Abstract: People may express their political opinion by adopting different measures of civil disobedience. Tax compliance is an example of an economic decision that may be affected by anti-goverment sentiment. We consider a model in which political opinion as well as tax compliance decisions are both formed as part of a social interaction process in which individuals interact, exchange ideas and observe behavior. Tax compliance is affected by the level of government support and political opinion may be affected by government's auditing policy. The government's role is to set a social spending program which is viewed differently by rich and poor individuals. The paper focuses on the interdependence between tax compliance, government's social policies and political support, embedding this interdependence in a dynamic social interaction process.
    Keywords: political opinion; social interaction; tax evasion
    JEL: H26 H50 P16
    Date: 2009–11
  10. By: Desmet, Klaus; Ortuño-Ortín, Ignacio; Wacziarg, Romain
    Abstract: This paper proposes a new method to measure ethnolinguistic diversity and offers new results linking such diversity with a range of political economy outcomes -- civil conflict, redistribution, economic growth and the provision of public goods. We use linguistic trees, describing the genealogical relationship between the entire set of 6,912 world languages, to compute measures of fractionalization and polarization at different levels of linguistic aggregation. By doing so, we let the data inform us on which linguistic cleavages are most relevant, rather than making ad hoc choices of linguistic classifications. We find drastically different effects of linguistic diversity at different levels of aggregation: deep cleavages, originating thousands of years ago, lead to measures of diversity that are better predictors of civil conflict and redistribution than those that account for more recent and superficial divisions. The opposite pattern holds when it comes to the impact of linguistic diversity on growth and public goods provision, where finer distinctions between languages matter.
    Keywords: civil conflict; economic growth; ethnolinguistic cleavages; ethnolinguistic diversity; language trees; public goods; redistribution
    JEL: H1 N4 O4 O5
    Date: 2009–09
  11. By: Giuliano, Paola; Spilimbergo, Antonio
    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.
    Keywords: belief formation; macroeconomic shocks; recession; role of the governement
    JEL: E60 P16 Z13
    Date: 2009–08
  12. By: Weise, Charles L.
    Abstract: This paper argues that the Federal Reserve’s failure to control inflation during the 1970s was due to constraints imposed by the political environment. Members of the Fed understood that a serious attempt to tackle inflation would be unpopular with the public and would generate opposition from Congress and the Executive branch. The result was a commitment to the policy of gradualism, under which the Fed would attempt to reduce inflation with mild policies that would not trigger an outright recession, and premature abandonment of anti-inflation policies at the first sign of recession. Alternative explanations, in particular misperceptions of the natural rate of unemployment and misunderstandings of the nature of inflation, do not provide a complete explanation for Fed policy at key turning points during the Great Inflation. Evidence for this explanation of Fed behavior is found in Minutes and Transcripts of FOMC meetings and speeches of Fed chairmen. Empirical analysis verifies that references to the political environment at FOMC meetings are correlated with the stance of monetary policy during this period.
    Keywords: Great Inflation; Federal Reserve; monetary policy
    JEL: N1 E5 E6
    Date: 2009–10–10
  13. By: Gregory Clare (Rutgers University); Ira N. Gang (Rutgers University)
    Abstract: We examine the effects of exchange rate and political risks on foreign direct investment (FDI) for multinationals. Our strategy is to examine FDI by U.S. firms at two levels: in all industries and on the subset of only firms in manufacturing industries. When investing in developed economies the firms appear to take past and present variation in exchange rates into consideration. When investing in less developed nations the past and present variation does not appear to weigh as heavily as the present and future variation. Decreasing political risk increases FDI.
    Keywords: Exchange Rates, Foreign Direct Investment, Uncertainty
    JEL: F21 F31
    Date: 2009–04–27
  14. By: Adolfo Morrone; Noemi Tontoranelli; Giulia Ranuzzi
    Abstract: This paper investigates the notion and role of trust in modern societies as a first step towards the construction of indicators that could better inform our understanding of societal progress. Trust is commonly viewed as a proxy indicator of social capital, and a high level of trust is considered a factor that can enhance economic growth and social well-being. Indicators of trust inform about the quality of people’s interactions with others, hence on their assessment of the extent to which other people in the community are perceived as potential partners rather than as rivals. The paper, starting from the various notions and theories of trust provided in literature, discusses different definitions of trust, its various dimensions (i.e. interpersonal and institutional trust), their relation to the broader notion of social capital, and the different factors that affect it. It then overviews the measures currently used to assess trust, discussing their advantages and disadvantages. Questions assessing the degree of trust of respondents towards other people and institutions have been asked in dozens of large-scale surveys worldwide, and these data highlight systematic relations between trust and various dimensions of economic and social well-being. The paper concludes by noting the limits of available evidence and the scope for improvements through better survey design and more comparable survey questions.
    Date: 2009–10–23

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.