nep-pol New Economics Papers
on Positive Political Economics
Issue of 2011‒10‒22
eleven papers chosen by
Eugene Beaulieu
University of Calgary

  1. The Democratic Transition By Murtin, Fabrice; Wacziarg, Romain
  2. Political competition and leadership in tax competition By Rupayan Pal; Ajay Sharma
  3. Political Origins of Financial Structure By Sambit Bhattacharyya
  4. Political Uncertainty and Risk Premia By Pástor, Luboš; Veronesi, Pietro
  5. The Political Economy of Infrastructure Investment: Competition, Collusion and Uncertainty By Arghya Ghosh; Kieron Meagher
  6. When does approval voting make the "right choices"? By Brams, Steven J.; Kilgour, D. Marc
  7. Can islands of effectiveness thrive in difficult governance settings ? the political economy of local-level collaborative governance By Levy, Brian
  8. Legislative turnover, fiscal policy, and economic growth: evidence from U.S. state legislatures By Uppal, Yogesh; Glazer, Amihai
  9. The Twoâ€Tiered Politics of Financial Reform in the United States By Wooley, John T.; Ziegler, J. Nicholas
  10. Weak Governments and Trade Agreements By Arcand, Jean-Louis; Olarreaga, Marcelo; Zoratto, Laura
  11. Public Attitudes Towards Surveillance and Privacy in Croatia By Jelena Budak; Ivan-Damir Anic; Edo Rajh

  1. By: Murtin, Fabrice; Wacziarg, Romain
    Abstract: Over the last two centuries, many countries experienced regime transitions toward democracy. We document this democratic transition over a long time horizon. We use historical time series of income, education and democracy levels from 1870 to 2000 to explore the economic factors associated with rising levels of democracy. We find that primary schooling, and to a weaker extent per capita income levels, are strong determinants of the quality of political institutions. We find little evidence of causality running the other way, from democracy to income or education.
    Keywords: democracy; GMM; human capital; modernization
    JEL: N30 N40 O43
    Date: 2011–10
  2. By: Rupayan Pal (Indira Gandhi Institute of Development Research); Ajay Sharma (Indira Gandhi Institute of Development Research)
    Abstract: In this paper, we introduce political competition in a sequential move tax competition game between two regions for foreign owned mobile capital. It shows that in case of sequential move, political delegation takes place only in the follower region, not in the leader region. Moreover, political competition need not necessarily lead to higher tax rate in equilibrium. These results are in the sharp contrast to the existing results.
    Keywords: Mobile capital, Tax competition, Political competition, Leadership, Public good
    JEL: F21 H25 D70 H42 D40 R50
    Date: 2011–10
  3. By: Sambit Bhattacharyya
    Abstract: There is a growing policy interest in the role of financial structure in promoting development. However, very little is known about how different financial structures emerge and evolve. In this paper we empirically assess the political origins of financial structure. Using difference-in difference estimation and annual data, we study the effects of democratization on financial structure in a sample of 96 countries covering the period 1970 to 2005. Democratization here corresponds to the event of becoming a democracy. We find that democratization leads to a more market-based financial system. Democratic change could also be incremental rather than a one off. To identify the causal effect of incremental democratic change on financial structure we estimate a separate model and find that democracy matters. We also find that countries with substantial democratic capital are more likely to have a market-based financial structure. Our main results are robust to a variety of controls, instrumental variable estimation using commodity price and rainfall as instruments, Arellano-Bond GMM estimation, alternative measures of democracy and financial structure, and across different samples.
    Keywords: Democratization; Democracy; Financial Structure
    JEL: G20 O10 P16
    Date: 2011
  4. By: Pástor, Luboš; Veronesi, Pietro
    Abstract: We study the pricing of political uncertainty in a general equilibrium model of government policy choice. We find that political uncertainty commands a risk premium whose magnitude is larger in poorer economic conditions. Political uncertainty reduces the value of the implicit put protection that the government provides to the market. It also makes stocks more volatile and more correlated when the economy is weak. In addition, we find that government policies cannot be judged by the stock market response to their announcement. Announcements of deeper reforms tend to elicit less favorable stock market reactions.
    Keywords: Bayesian; government; learning; political; put; risk premium; uncertainty
    JEL: G12 G18
    Date: 2011–10
  5. By: Arghya Ghosh; Kieron Meagher
    Abstract: Infrastructure, as it impacts transport costs, is crucial in determining equilibrium outcomes in spatial competition; however, infrastructure investment is typically exogenous. Our political economy analysis of infrastructure choice is based upon consumer preferences derived from Salop’s circular city model. In this setting, infrastructure investment has two effects: it directly lowers costs to consumers and indirectly affects market power. We show how political support for infrastructure investments depends crucially on the details of the market. Competition boosts popular support for infrastructure — often excessively so — while collusion leads to underinvestment. The uncertainty produced by infrastructure induced entry leads to traps and thresholds.
    JEL: D43 L13 H4
    Date: 2011–10
  6. By: Brams, Steven J.; Kilgour, D. Marc
    Abstract: We assume that a voter’s judgment about a proposal depends on (i) the proposal’s probability of being right (or good or just) and (ii) the voter’s probability of making a correct judgment about its rightness (or wrongness). Initially, the state of a proposal (right or wrong), and the correctness of a voter’s judgment about it, are assumed to be independent. If the average probability that voters are correct in their judgments is greater than ½, then the proposal with the greatest probability of being right will, in expectation, receive the greatest number of approval votes. This result holds, as well, when the voters’ probabilities of being correct depend on the state of the proposal; when the average probability that voters judge a proposal correctly is functionally related to the probability that it is right, provided that the function satisfies certain conditions; and when all voters follow a leader with an above-average probability of correctly judging proposals. However, it is possible that voters may more frequently select the proposal with the greatest probability of being right by reporting their independent judgments—as assumed by the Condorcet Jury Theorem—rather than by following any leader. Applications of these results to different kinds of voting situations are discussed.
    Keywords: Approval voting; election systems; referendums; Condorcet jury theorem
    JEL: D71 C61 D72 C72
    Date: 2011–10–22
  7. By: Levy, Brian
    Abstract: Many low-income countries contend with a governance syndrome characterized by a difficult combination of seeming openness, weak institutions, and strong inter-elite contestation for power and resources. In such countries, neither broad-based policy nor public management reforms are likely to be feasible. But are broad-based approaches necessary? Theory and evidence suggest that in such settings progress could be driven by"islands of effectiveness"-- narrowly-focused initiatives that combine high-quality institutional arrangements at the micro-level, plus supportive, narrowly-targeted policy reforms. This paper explores whether and how local-level collaborative governance can provide a platform for these islands of effectiveness. Drawing on the analytical framework developed by the Nobel-prize winning social scientist Elinor Ostrom, the paper reviews the underpinnings of successful collaborative governance. It introduces a simple model for exploring the interactions between collaborative governance and political economy. The model highlights the conditions under which coordination is capable of countering threats from predators seeking to capture the returns from collaborative governance for themselves. The relative strength in the broader environment of two opposing networks emerges as key --"threat networks"to which predators have access, and countervailing"trumping networks"on which protagonists of effective collaborative governance can draw. The paper illustrates the potential practical relevance of the approach with three heuristic examples: the governance of schools, fisheries, and road construction and maintenance. It concludes by laying out an agenda for further empirical research, and suggesting what might be the implications of the approach for future operational practice.
    Keywords: Governance Indicators,National Governance,Public Sector Corruption&Anticorruption Measures,Environmental Economics&Policies,Economic Policy, Institutions and Governance
    Date: 2011–10–01
  8. By: Uppal, Yogesh; Glazer, Amihai
    Abstract: An examination of how increased turnover among legislators in the fifty U.S. states affects fiscal policy and economic growth finds that it makes legislators short-sighted. Turnover increases the size of government by increasing the shares of both total spending and taxes in income. In particular, turnover increases capital expenditure and income taxes, both of which may cause long-run distortions in the economy. Further, increased turnover, by resulting in inefficient fiscal policy, reduces long-term economic growth.
    Keywords: Government size; State finances; Political competition; Legislative turnover; Composition of spending; short-sighted behavior
    JEL: H54 H20 H72 H30 H24 H71 H53 H40 H11 H51 H52
    Date: 2011–10
  9. By: Wooley, John T.; Ziegler, J. Nicholas
    Abstract: The literature on regulation has typically emphasized the ability of concentrated interest groups to secure the rules they prefer. One view argues that concentrated interests are consistently able to impose diffuse costs across large and unorganized interests. A second, largely compatible, view emphasizes the ability of powerful interest groups to mobilize expertise and to provide informational goods to politicians who adjust their legislative proposals accordingly. This paper shows that the Dodd†Frank legislation for financial reregulation in 2010 departs from both versions of this now conventional wisdom. Instead, this paper shows that both political parties adopted what we call a twoâ€tier political strategy of (1) maintaining good relations with the established financial elite and (2) simultaneously responding to the demands of grassâ€roots advocacy groups for more stringent regulation. As a result, Doddâ€Frank Act falls far short of a thoroughâ€going redesign of the regulatory landscape, but also amounted to considerably more than business as usual. While the Doddâ€Frank Act creates new regulatory instruments and powers that hold the potential for farâ€reaching changes, most of the existing agencies and market participants remain intact. This pattern of twoâ€tier politics is evident through the four primary policy domains treated in the legislation: macroprudential regulation, consumer protection, reestablishment of the partition between deposit banking versus proprietary trading (the Volcker Rule), and the regulation of derivatives trading.
    Keywords: Finance and Financial Management
    Date: 2011–10–17
  10. By: Arcand, Jean-Louis; Olarreaga, Marcelo; Zoratto, Laura
    Abstract: The recent theoretical literature on the determinants of trade agreements has stressed the importance of political gains, such as credibility, as a rationale for trade agreements. The empirical literature, however, has lagged behind in the estimation of the economic gains or losses associated with these politically motivated trade agreements. This paper fills that gap by providing estimates of the economic impact of politically and economically motivated trade agreements. We find that credibility gains play a role in increasing the probability of two countries signing an agreement. Moreover, agreements with a stronger political motivation are more trade creating than agreements that are signed for pure market access / economic reasons, and the value for the government of solving its time inconsistency problems through trade agreements is estimated at an average of 1.8% of GDP, which compares quite well with the traditional estimates of the economic gains from trade.
    Keywords: Credibility; Political economy; Trade agreements
    JEL: D72 F13 F15
    Date: 2011–10
  11. By: Jelena Budak (The Institute of Economics, Zagreb); Ivan-Damir Anic (The Institute of Economics, Zagreb); Edo Rajh (The Institute of Economics, Zagreb)
    Abstract: This paper investigates public attitudes towards surveillance and privacy in Croatia. It segments the respondents based on their views on surveillance and privacy, and examines differences between them with regard to their demographic characteristics. The empirical analysis is based on data obtained from a public opinion survey. The data were analyzed using descriptive statistics, exploratory and confirmatory factor analysis, Cronbach alpha calculation, chi-square test, and cluster analysis. The factor analysis showed six distinct factors: (1) perceived surveillance effectiveness, (2) concern about being surveilled, (3) trust in privacy protection procedures, (4) concern about CCTV privacy intrusion, (5) concern about personal data manipulation, and (6) a need for surveillance enforcement. K-means cluster analysis indicated the following three groups of citizens: pro-surveillance oriented citizens, citizens concerned about being surveilled, and citizens concerned about data and privacy protection. Significant differences between the groups were found in age and education, while no significant differences exist in gender, employment status, and household income. The findings of this study support the existence of different groups of citizens regarding their attitudes towards surveillance and privacy.
    Keywords: surveillance, privacy concern, public opinion, segmentation, demographic characteristics, Croatia
    JEL: D18 K49
    Date: 2011–09

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