nep-pol New Economics Papers
on Positive Political Economics
Issue of 2012‒04‒23
nineteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. A Theory of Political Entrenchment By Saint-Paul, Gilles; Ticchi, Davide; Vindigni, Andrea
  2. Political Instability and Labor Market Institutions By Lucifora, Claudio; Moriconi, Simone
  3. Optimal Districting with Endogenous Party Platforms By E Bracco
  4. Deep Pockets, Extreme Preferences: Interest Groups and Campaign Finance Contributions By Thomas Bassetti; Filippo Pavesi
  5. Political Competition in Hard Times By Zudenkova, Galina
  6. Democracy and Stock Market Performance in African Countries By Simplice A , Asongu
  7. Compulsory and Voluntary Voting Mechanisms: An Experimental Study By Sourav Bhattacharya
  8. Quota Manipulation and Fair Voting Rules in Committees By František Turnovec
  9. Oil Revenues, Ethnic Fragmentation and Political Transition of Authoritarian Regimes By Alessandro Cologni; Matteo Manera
  10. Dissent Voting Behavior of Central Bankers: What Do We Really Know? By Roman Horváth; Kateøina Šmídková; Jan Zápal; Marek Rusnák
  11. Do Unions Promote Members' Electoral Office Holding? Evidence from Correlates of State Legislatures' Occupational Shares By Sojourner, Aaron J.
  12. On The Political Economy Of Educational Vouchers By Dennis N. Epple; Richard Romano
  13. Government spending, corruption and economic growth By d'Agostino, Giorgio; Dunne, Paul J.; Pieroni, Luca
  14. Institutional Transformations, Polity and Economic Outcomes: Testing the North-Wallis-Weingast Doorsteps Framework By Sophia Gollwitzer; Marc Quintyn
  15. Institutional Quality Database By Aljaz Kuncic
  16. Ideology and the growth of US state government By Andrew C. Pickering; James Rockey
  17. Crises and Policy Responses within the Political Trilemma: Europe, 1929-1936 and 2008-2011 By Nikolaus Wolf
  18. Legislative Term Limits and State Aid to Local Governments By Yakovlev, Pavel; Tosun, Mehmet S.; Lewis, William P.
  19. Small is Different Size, Political Representation and Governance By Nicholas Charron; José Fernández-Albertos; Victor Lapuente

  1. By: Saint-Paul, Gilles (University of Toulouse I); Ticchi, Davide (IMT Lucca); Vindigni, Andrea (IMT Lucca)
    Abstract: We develop a theory of endogenous political entrenchment in a simple two-party dynamic model of income redistribution with probabilistic voting. A partially self-interested left-wing party may implement (entrenchment) policies reducing the income of its own constituency, the lower class, in order to consolidate its future political power. Such policies increase the net gain that low-skill agents obtain from income redistribution, which only the Left (but not the Right) can credibly commit to provide, and therefore may help offsetting a potential future aggregate ideological shock averse to the left-wing party. We demonstrate that political entrenchment by the Left occurs only if incumbency rents are sufficiently high and that low-skill citizens may vote for this party even though they ratio-ally expect the adoption of these policies. We also discuss the case where the left-wing party may have the incentive to ex-ante commit to not pursue entrenchment policies once in power. Finally, we show that, in a more general framework, the entrenchment policies can be implemented also by the right-wing party. The comparative statics analyzes the effects of state capacity, a positive bias of voters for one party and income inequality on the incentives of the incumbent party to pursue entrenchment policies. The importance of our theory for constitutionally legislated term limits is also discussed. The theory sheds light on why left-wing parties or politicians often support liberal immigration policies of unskilled workers, are sometime in favor of free trade with less developed economies and of globalization more generally, or fail to reform plainly "dysfunctional" public educational systems damaging the lower classes.
    Keywords: political entrenchment, constituencies, inequality, inefficient redistribution, checks and balances, political rents, state fiscal capacity
    JEL: D72 P16
    Date: 2012–04
  2. By: Lucifora, Claudio (Università Cattolica del Sacro Cuore); Moriconi, Simone (Università Cattolica del Sacro Cuore)
    Abstract: This paper investigates the relationship between political instability and labor market institutions. We develop a theoretical model in which some features of the political process, by reducing the future yields of policy interventions, induce an incumbent government to choose labor market institutions that create wage rents and divert resources from public good provision and social insurance. We test these predictions empirically using panel data for 21 OECD countries for the period 1985-2006. We find strong evidence that political turnover and political polarization – our measures of political instability – are associated with a more regulated labor market, lower unemployment benefit replacement rates, and a smaller tax wedge on labor. We show also that there are strong complementarities between different dimensions of political instability, and evaluate their impact on labour market institutions across countries.
    Keywords: political instability, labor market institutions, unemployment
    JEL: J64 J88 H11
    Date: 2012–03
  3. By: E Bracco
    Abstract: This paper proposes a theory of socially optimal districting in a legislative-election model with endogenous party platforms. We generalize the model of Coate and Knight (2007), allowing parties to strategically condition their platforms on the districting. The socially optimal districting re ects the ideological leaning of the population, so that parties internalize voters' preferences in their policy platforms. The optimal seat-vote curve is unbiased when voters are risk-neutral, and -contrary to previous findings-biased against the largest partisan group when voters are risk-averse. The model is then calibrated by an econometric analysis of the elections of U.S. State legislators during the 1990s.
    Date: 2011
  4. By: Thomas Bassetti; Filippo Pavesi
    Abstract: In electoral competitions, interest groups will be willing to finance politicians that require funding for campaign advertising, in exchange for policy favors. Our model predicts that interest groups with more extreme preferences will devote more resources to campaign financing. This occurs because lobbies demand policy favors that are costly to candidates since they reduce voter consent. Extreme interest groups must therefore adequately reward politicians by providing higher contributions, so that candidates may recover popularity through campaign advertising. Our unique data set on U.S. House elections provides empirical evidence that is consistent with these findings.
    Keywords: Campaign Finance, Interest Groups, Elections, Extreme Preferences
    JEL: D72 P16
    Date: 2012–04
  5. By: Zudenkova, Galina
    Abstract: This paper analyzes a spatial model of political competition between two policy- motivated parties in hard times of crisis. Hard times are modeled in terms of policy- making costs carried by a newly elected party. The results predict policy divergence in equilibrium. If the ideological preferences of parties are quite diverse and extreme, there is a unique equilibrium in which the parties announce symmetric platforms and each party wins with probability one half. If one party is extreme while the other is more moderate, there is a unique equilibrium in which the parties announce asymmetric platforms. If the preferred policies of the parties are not very distinct, there are two equilibria with asymmetric platforms. An important property of equilibrium with asymmetric platforms is that a winning party necessarily announces its most preferred policy as a platform. JEL classification: D72. Keywords: Spatial model; Political competition; Two-party system; Policy-motivated parties; Hard times; Crisis.
    Keywords: Partits polítics, 32 - Política,
    Date: 2012
  6. By: Simplice A , Asongu
    Abstract: Purpose – This paper assesses the incidence of political institutions on stock market performance dynamics in Africa. Design/methodology/approach – The estimation technique used is a Two-Stage-Least Squares Instrumental Variable methodology. Channels of democracy, polity and autocracy are instrumented with legal-origins, religious-legacies, income-levels and press-freedom qualities to account for stock market performance dynamics of capitalization, value traded, turnover and number of listed companies. To ensure robustness of the analysis, the following checks are carried out: (1) usage of alternative indicators of political institutions; (2) employment of two distinct interchangeable sets of moment conditions that engender every category of the instruments; (3) usage of alternative indicators of stock market performance; (4) account for the concern of endogeneity; (5) usage of Principal Component Analysis(PCA) to reduce the dimensions of stock market dynamics and political indicators and then check for further robustness of findings in the regressions from resulting indexes. Findings – Findings broadly demonstrate that democracy improves investigated stock market performance dynamics. Practical implications – As a policy recommendation, the role of sound political institutions is crucial for financial development in Africa. Democracies have important effects on both the degree of competition for public office and the quality of public offices that favor stock market development in the African continent. Originality/value – To the best of our knowledge this is the first paper to assess the incidence of democracy on stock market performance in an exclusive African context. Political strife has plagued many African countries and continue to pose a significant threat to financial market development.
    Keywords: Financial Markets; Government Policy; Political Economy; Development
    JEL: P43 G18 G28 G10 P16
    Date: 2012–04–17
  7. By: Sourav Bhattacharya
    Abstract: We report on an experiment comparing compulsory and voluntary voting mechanisms. Theory predicts that these different mechanisms have different implications both for the sincerity of the voting decisions and for the participation decisions of voters, and we find strong support for these theoretical predictions in our experimental data. Voters are able to adapt the sincerity of their votes or their participation decisions to the different voting mechanisms in such a way as to make the welfare differences between these mechanisms negligible. We argue that this finding may account for the co-existence of these two voting mechanisms in nature.
    Date: 2011–12
  8. By: František Turnovec (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: The concept of fairness is being discussed related to the distribution of voting power among different actors of voting. We are using the following, intuitively natural principle of fairness: each unit of resources (shares, seats) should yield the same voting power (influence). Voting power is not directly observable: as a proxy for it voting weights are used. Therefore, fairness is usually defined in terms of voting weights (e.g. voting weights are proportional to the results of an election). Assuming that a principle of fair distribution of voting weights is selected, we are addressing the question of how to achieve equality of relative voting power (at least approximately) to relative voting weights.
    Keywords: Fairness, optimal quota, simple weighted committee, strict proportional power, voting and power indices.
    JEL: C71 D72 H77
    Date: 2012–03
  9. By: Alessandro Cologni (Edison Trading, Edison S.p.A., Italy); Matteo Manera (Department of Statistics, University of Milan-Bicocca and Fondazione Eni Enrico Mattei, Italy)
    Abstract: Natural resources are generally associated to negative effects on the political environment of a country. This paper explores the impact that oil revenues have on the establishment of a given political system. Based on previous literature, a political economy perspective is employed. A simple game theoretical approach in order to explain the relationships between oil revenues, political instability (conflicts) and emergence of different political systems is presented. The implementation of particular redistributive fiscal policies together with the possibility that paternalistic or “predatory" autocracies emerge are considered. Under certain circumstances, a process of full democratization is argued not to represent an optimal choice for the oil-rich authoritarian nations. Since governments prefer to remain nondemocratic, in order to prevent internal conflicts from occurring, authoritarian countries have to undertake redistributive activities. Under other assumptions, governments of oil-rich nations prefer to introduce large military sectors. The present analysis determines how the emergence of redistributive of predatory policies depends on relevant parameters related to initial income, oil revenues and social inequality. Finally, we study the importance of socio-ethnical fragmentation in determining the political transition of oil producing nations.
    Keywords: Natural Resources, Rentier States, Conflict and Endogenous Political Regimes
    JEL: C72 D74 O13 P16
    Date: 2012–04
  10. By: Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Kateøina Šmídková (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Jan Zápal (London School of Economics); Marek Rusnák (Czech National Bank)
    Abstract: We examine the determinants of the dissent in central bank boards’ voting records about monetary policy rates in the Czech Republic, Hungary, Sweden, the U.K. and the U.S. In contrast to previous studies, we consider about 25 different macroeconomic, financial, institutional, psychological or preference-related factors jointly and deal formally with the attendant model uncertainty using Bayesian model averaging. We find that the rate of dissent is between 5% and 20% in these central banks. Our results suggest that most regressors, including those capturing the effect of inflation and output, are not robust determinants of voting dissent. The difference in central bankers’ preferences is likely to drive the dissent in the U.S. Fed and the Bank of England. For the Czech and Hungarian central banks, average dissent tends to be larger when policy rates are changed. Some evidence is also found that food price volatility tends to increase the voting dissent in the U.S. Fed and in Riksbank.
    Keywords: monetary policy, voting record, dissent
    JEL: E52 E58
    Date: 2012–02
  11. By: Sojourner, Aaron J. (University of Minnesota)
    Abstract: Controversies over the promise and perils of union political influence have erupted around the U.S. This study develops the first evidence on the degree to which labor unions develop members' political leadership in the broader community by studying the relationship between state legislators' occupations and the unionization rates of occupations across U.S. states. The fraction of legislators of a given occupation in a state increases with the occupation's rate of unionization in that state compared to the fraction of legislators of the same occupation in other states with lower unionization rates. This pattern shows up to varying degrees among the three public-sector and one private-sector occupations considered: K-12 teachers, police officers, fire fighters, and construction workers. It holds conditional on differences in observable state characteristics and when using state fixed effects. While much research has described the role of unions in influencing economic outcomes and in politics through lobbying, campaign contributions, and voter mobilization, this work adds a new perspective on the role of unions in society. They promote elected political leadership by individuals from working- and middle-class jobs. Arguments over the social value of this role of unions are explored.
    Keywords: union, elected office, teachers, police, construction, public-sector
    JEL: D7 H7 J5
    Date: 2012–04
  12. By: Dennis N. Epple; Richard Romano
    Abstract: Two significant challenges hamper analyses of collective choice of educational vouchers. One is the multi-dimensional choice set arising from the interdependence of the voucher, public education spending, and taxation. The other is that household preferences between public and private schooling vary with the policy chosen. Even absent a voucher, preferences over public spending are not single-peaked; a middling level of public school spending may be less attractive to a household than either high public school spending or private education coupled with low public spending. We show that Besley and Coate’s (1997) representative democracy provides a viable approach to overcome these hurdles. We provide a complete characterization of equilibrium with an endogenous voucher. We undertake a parallel quantitative analysis. For income distributions exhibiting substantial heterogeneity, such as the U.S. distribution, we find that no voucher arises in equilibrium. For tighter income distributions, however, a voucher arises. For example, with the income distribution of Douglas County, Colorado, where a voucher was recently adopted, our model predicts a positive voucher. Public support for a not-to-large voucher arises because the cross subsidy to public school expenditure from those switching to private schools outweighs the subsidy to those that attend private school without a voucher.
    JEL: D72 H44 I22
    Date: 2012–04
  13. By: d'Agostino, Giorgio; Dunne, Paul J.; Pieroni, Luca
    Abstract: This paper considers the effects of corruption and government spending on economic growth. It starts from an endogenous growth model and extends it to account for the detrimental effects of corruption on the potentially productive components of government spending, namely military and investment spending. The resulting model is estimated on a sample of African countries and the results show, first, that the growth rate is strongly influenced by the interaction between corruption and military burden, with the interaction between corruption and government investment expenditure having a weaker effect. Second, allowing for the cyclical economic fluctuations in specific countries leaves the estimated elasticities close to those of the full sample. Third, there are significant conditioning variables that need to be taken into account, namely the form of government, political instability and natural resource endowment. These illustrate the cross country heterogeneity when accounting for quantitative direct and indirect effects of key variables on economic growth. Overall, these findings suggest important policy implications.
    Keywords: corruption; military spending; development economics; panel data; Africa
    JEL: D73 H5 O57
    Date: 2012–04–15
  14. By: Sophia Gollwitzer; Marc Quintyn
    Abstract: This paper tests the theoretical framework developed by North, Wallis and Weingast (2009) on the transition from closed to open access societies. They posit that societies need to go through three doorsteps: (i) the establishment of rule of law among elites; (ii) the adoption of perpetually existing organizations; and (iii) the political control of the military. We identify indicators reflecting these doorsteps and graphically test the correlation between them and a set of political and economic variables. Finally, through Identification through Heteroskedasticity we test these relationships econometrically. The paper broadly confirms the logic behind the doorsteps as necessary steps in the transition to open access societies. The doorsteps influence economic and political processes, as well as each other, with varying intensity. We also identify income inequality as a potentially important force leading to social change.
    Keywords: Governance , Political economy , Transition economies ,
    Date: 2012–03–23
  15. By: Aljaz Kuncic
    Abstract: In this paper we emphasize the role of institutions in economic analysis. We describe and compare different institutional classifications systems, which is rarely done in the literature, and show how to operationalize institutional classification based on the subject category, as the most appropriate one. More than thirty established institutional indicators can be clustered into three homogenous groups of formal institutions: legal, political and economic, which capture to a large extent the complete formal institutional environment of a country. We compute the latent quality of legal, political and economic institutions with factor analysis for every country in the world and for every year, relative to the values of others. We propose aWorld Institutional Quality Ranking, through which we can follow whether a country is improving or worsening its relative institutional environment. The calculated latent institutional qualities can be especially useful in further panel data applications, and add to the usual practice of using simply one or another index of institutional quality to capture the institutional environment, so we make the Institutional Quality Database freely available online
    Date: 2012–03
  16. By: Andrew C. Pickering (University of York); James Rockey (University of Leicester)
    Abstract: This paper analyzes the impact of ideology on the size of US state governments. Following Pickering and Rockey (2011) this impact is hypothesized to increase with mean state income. This idea is tested using state-level ideology data derived from the voting behavior of state congressional representatives. Empirically the interaction of ideology and mean income is a key determinant of state government size. At 1960s levels of income the impact of ideology is negligible. At 1997 levels of income a one standard-deviation move towards the left of the ideology spectrum increases state government size by about half a standard deviation. Estimated income elasticities differentiated by state and time are found to be increasing with ideology and diminishing with income, as predicted by the theory.
    Keywords: Ideology, Wagner's law, size of government
    JEL: D72 H10
    Date: 2012
  17. By: Nikolaus Wolf (Humboldt-Universität zu Berlin, CEPR and CESifo)
    Abstract: The recent debate on the Eurozone failed to appreciate a particular characteristic of European crisis experiences, namely their fundamentally political character. To make my argument, I borrow from Dani Rodrik (2000) the framework of a “political trilemma” between cross-border economic integration, national institutions and democracy (in the sense of mass politics) and discuss its relation to the more commonly known “macroeconomic trilemma” as well as some limitations of the framework. The recent experience of a European debt crisis and the experience of Europe’s Great Depression can be interpreted as a “political trilemma”: both reflect the problem of designing effective policy responses to major economic shocks within the environment of deep economic integration across political boundaries and the regime choices that this involves. Within this framework I highlight some aspects of the 1930s that are informative to the policy choices in Europe today. Once we accept that some policy choices should be avoided, attention should be shifted to the remaining options and the obstacles that prevent their implementation, notably the challenge to transform democracy beyond national borders.
    Keywords: political trilemma, great depression, euro-crisis
    JEL: F42 F50 N14
    Date: 2012–04
  18. By: Yakovlev, Pavel (Duquesne University); Tosun, Mehmet S. (University of Nevada, Reno); Lewis, William P. (Duquesne University)
    Abstract: We estimate the effect of legislative term limits on various categories of state government spending using the most recent panel of 47 states from 1972 to 2005. Besides the usual economic, political, fiscal and demographic factors, we also control for the state tax and expenditure limitations. We find that term limits have a significant positive effect on total state government spending, but no significant positive effect on state education, health, transportation or welfare expenditures. This dichotomy in the estimates raises a very important and previously overlooked question: what budget category is responsible for higher state spending in term-limited states? Our analysis reveals that legislative term limits increase pork-barrel spending, which takes the form of higher transfers from state to local governments. This finding might also imply that legislative term limits lead to more fiscal decentralization.
    Keywords: term limits, pork-barrel spending, rent-seeking, transportation, welfare, education, health, intergovernmental aid and transfers
    JEL: H7 H3
    Date: 2012–03
  19. By: Nicholas Charron (Quality of Government Institute University of Gothenburg); José Fernández-Albertos (Institute for Public Goods and Policies, CSIC); Victor Lapuente (Quality of Government Institute University of Gothenburg)
    Abstract: In the theoretical literature on government design, few variables have received more attention than the size of the polity. Since Plato’s famous prediction that the optimal size of a political unit should be 5040 free citizens, the list of thinkers concerned about state size would include Aristotle, Montesquieu, Rousseau, and many of the founding fathers, among many others. One of the fathers of modern political science, Robert Dahl, devoted great attention to what he called the “elemental question of what is appropriate unit for a democratic political system … Among the vast number of theoretically possible ways of dividing up the inhabitants of this globe into more or less separate political systems, … are there any principles that instruct us as to how one ought to bound some particular collection of people, in order that they may rule themselves?” (Dahl 1967: 953). Economists have not neglected these issues, as they conform the core of the fiscal federalism literature (Oates 1972). A more recent literature, pioneered by Alesina and Spolaore’s work (1997, 2003), provides an elegant formal theoretical framework incorporating both political and economic elements in order to highlight the fundamental trade-off that the choice of the size of the policy inevitably faces: Large polities find it easier to provide more public goods, but confront the costly political problem of greater heterogeneity of preferences among the population.
    Date: 2012–04–15

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