nep-pol New Economics Papers
on Positive Political Economics
Issue of 2012‒12‒15
fifteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Can European Bank Bailouts work? By Dirk Schoenmaker; Arjen Siegmann
  2. The role of direct taxes in fiscal decentralization By Luca Gandullia
  3. Asymmetric Information and Inefficient Regulation of Firms Under the Threat of Revolution By Paul Maarek; Michael Dorsch; Karl Dunz
  4. The Effect of Political and Economic Factors on Corporate Tax Rates By Hansson, Åsa; Porter, Susan; Perry Williams, Susan
  5. Generation and distribution of productivity gains in French agriculture. Who are the winners and the losers over the last fifty years? By Jean-Philippe Boussemart; Jean-Pierre Butault; Oluwaseun Ojo
  6. Democracy Undone. Systematic Minority Advantage in Competitive Vote Markets By Alessandra Casella; Sébastien Turban
  7. Economic Science and Political Influence By Gilles Saint-Paul
  8. Financial Intermediation and Costly Technology Adoption under Uncertainty: A Political Economy Perspective By Ziv Chinzara; Radhika Lahiri
  9. The triangle of democratic interdependence and the media's role in contemporary society By Skouras, Thanos
  10. Macro Shocks, Regulatory Quality and Costly Political Action By Paul Maarek; Michael Dorsch; Karl Dunz
  11. What determines public expenditure allocations?: A review of theories, and implications for agricultural public investments By Mogues, Tewodaj
  12. What to put on and what to keep off the Table? A Politician's Choice of which Issues to address By Rei S. Sayag; Otto H. Swank
  13. Job Loss Fears and (Extremist) Party Identification: First Evidence from Panel Data By Ingo Geishecker; Thomas Siedler
  14. Local politics and economic geography By Berliant, Marcus; Tabuchi, Takatoshi
  15. Voting chances instead of voting weights By Di Giannatale, Paolo; Passarelli, Francesco

  1. By: Dirk Schoenmaker (Duisenberg School of Finance, VU University Amsterdam); Arjen Siegmann (VU University Amsterdam)
    Abstract: Cross‐border banking needs cross‐border recapitalisation mechanisms. Each mechanism, however, suffers from the financial trilemma, which is that cross‐border banking, national financial autonomy and financial stability are incompatible. In this paper, we study the efficiency of different burdensharing agreements for the recapitalisation of the 30 largest banks in Europe. We consider bank bailouts for these banks in a simulation framework with stochastic country‐specific bailout benefits. Among the burden sharing rules, we find that the majority and qualified‐majority voting rules come close to the efficiency of a bailout mechanism with a supranational authority. Even a unanimous voting rule works better than home‐country bailouts, which are very inefficient.
    Keywords: Financial Stability; Public Good; International Monetary Arrangements; International
    JEL: F33 G28 H41
    Date: 2012–10–24
  2. By: Luca Gandullia (University of Genoa, Italy)
    Abstract: The aim of the paper is to review the economic theory of tax assignment across levels of government and the international experience in the use of direct taxes – personal income taxes and taxes on profits and on business value added – for fiscal decentralization. We highlight that as for other options of local taxation there are merits but also drawbacks in the use of direct taxes as a source of financing for sub-central governments and so the final choice about their use or not is a matter of judgment and depends on the political priority to be attached to different objectives, such as efficiency, equity, accountability, tax competition, administrative feasibility and revenue adequacy.
    Keywords: direct taxes, fiscal decentralization, tax assignment
    JEL: H24 H25 H71 H73
    Date: 2012–09
  3. By: Paul Maarek; Michael Dorsch; Karl Dunz (THEMA, Universite de Cergy-Pontoise and THEMA; The American University of Paris; The American University of Paris)
    Abstract: This paper considers the role of asymmetric information in a political agency theory of autocratic economic policy-making. Within the context of a static game, we analyze the strategic interaction between a self-interested elite ruling class, who may extract rent ineciently through hidden regulations, and an imperfectly informed disenfranchised class, who may choose to revolt. In various models, we identify the Perfect Bayesian Equilibrium (PBE), which we describe in terms of the economy's level of development potential. One model has two-sided uncertainty and a cost of regulation. This model has a PBE such below a threshold development level the elite chose inecient regulation and above the threshold development level the elite chose the ecient policy. A further extension where the elite own assets allows for a voluntarily transition to democracy.
    Keywords: Political transition, Revolution, Asymmetric information, Perfect Bayesian equilibrium
    Date: 2012
  4. By: Hansson, Åsa (Research Institute of Industrial Economics (IFN)); Porter, Susan (McIntire School of Commerce); Perry Williams, Susan (McIntire School of Commerce)
    Abstract: Economists and political scientists have long been interested in factors that affect the statutory tax rate on businesses set by federal governments. In this study, we examine the impact of political and economic factors on several measures of tax rates and tax incentives offered across 19 developed countries for the years 1979 through 2005. Our results indicate that while economic conditions such as openness, strategic interaction, budget constraints, economic downturns and an aging population all influence the rate of tax set by governments, the political structure of the federal government has a significant impact in the form of economic stimulus given. Importantly, our results suggest that different economic and political structures affect the level of incentives offered beyond those factors that affect the level of tax rates. These results are relevant to the current tax debate facing many governments as they consider implementing new policies to attract foreign direct investment and retain and grow domestic business. <p> The impact of the political structure on the ability to enact legislation is significant after controlling for economic factors. This indicates that as the marketplace continues to become more international, it will become increasingly important for governments to find opportunities to work within their systems to enact legislation that enables their business community to compete internationally.
    Keywords: Corporate tax rates; Tax competition; Political structure
    JEL: D72 H25 H73
    Date: 2012–11–22
  5. By: Jean-Philippe Boussemart (University of Lille 3 and IESEG School of Management (LEM-CNRS)); Jean-Pierre Butault (INRA Paris and INRA Nancy); Oluwaseun Ojo (IESEG School of Management (LEM-CNRS))
    Keywords: Index numbers, Total Factor Productivity, Factor income distribution, Agricultural and food policy
    JEL: C43 D24 D33 Q18
    Date: 2012–09
  6. By: Alessandra Casella; Sébastien Turban
    Abstract: We study the competitive equilibrium of a market for votes where voters can trade votes for a numeraire before making a decision via majority rule. The choice is binary and the number of supporters of either alternative is known. We identify a sufficient condition guaranteeing the existence of an ex ante equilibrium. In equilibrium, only the most intense voter on each side demands votes and each demands enough votes to alone control a majority. The probability of a minority victory is independent of the size of the minority and converges to one half, for any minority size, when the electorate is arbitrarily large. In a large electorate, the numerical advantage of the majority becomes irrelevant: democracy is undone by the market.
    JEL: C62 D70 D72 P16
    Date: 2012–11
  7. By: Gilles Saint-Paul (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, TSE - Toulouse School of Economics - Toulouse School of Economics, New York University Abu Dhabi - New York University Abu Dhabi)
    Abstract: When policymakers and private agents use models, the economists who design the model have an incentive to alter it in order infuence outcomes in a fashion consistent with their own preferences. I discuss some consequences of the existence of such ideological bias. In particular, I analyze the role of measurement infrastructures such as national statisticall institutes, the extent to which intellectual competition between di¤erent schools of thought may lead to polarization of views over some parameters and at the same time to consensus over other parameters, and .nally how the attempt to preserve in.uence can lead to degenerative research programs.
    Keywords: Ideology ; Macroeconomic Modelling ; Self-con.rming equilibria ; Polarization ; Autocoherent Models ; Intellectual Competition ; Degenerative Research Programs ; Identification
    Date: 2012–11
  8. By: Ziv Chinzara (QUT); Radhika Lahiri (QUT)
    Abstract: We develop a stochastic political economy model to explain the trade-off between growth and inequality during the process of technology adoption. In the model endogenous growth occurs through physical and human capital deepening. Agents can adopt either of the two risky high-return technologies, one of which is only available to those who can afford the entry cost associated with financial intermediation. We assume that this entry cost depends on the proportion of government revenue that is allocated towards cost-reducing financial development expenditure, and that agents decide on this proportion through a voting mechanism. The results show that certain interest groups comprising of both the poorest and the richest agents block the policies that are aimed at allocating resources towards costreducing financial development expenditure in the early stages of the economy’s development. However, as redistribution continues from generation to generation, the middle of the distribution successively becomes thicker and consequently the majority of agents start supporting reallocation in the form of cost-reducing financial development expenditure. In the transition to the steady state, inequality patterns show recurring ‘Kuznets-like curves’. Furthermore, high initial inequality tends to hasten the pace at which growth and inequality converge towards the steady state paths, while low inequality result in more fluctuations in transitional growth and inequality. Finally, our results show that although the political outcomes do not coincide with the welfare maximisation outcomes in the early and the transitional stages of the economy, the two outcomes eventually converge in the long-run.
    Keywords: political economy, overlapping generations model, growth and inequality, technology adoption, redistribution
    JEL: O1 O3
    Date: 2012–11–26
  9. By: Skouras, Thanos
    Abstract: The aim of this paper is to present a basic framework which takes into account the importance of political governance and the media in influencing the economy and determining its actual course. In particular, this framework may be of help in elucidating the complex role of the media in contemporary democratic societies. For this purpose, a simple diagrammatic model is constructed and used for explanation. Its basis is a distinction among four main elements with potentially different interests: The political governance personnel, the business class, the wider public as consumers and voters, and the media. The first three form the three corners of a triangle while the media play an intermediating role among them. The presentation of the model is illustrated with examples from Greece.
    Keywords: media; democracy; government; business; consumers; voters
    JEL: Z13 P59 P16
    Date: 2012–12–02
  10. By: Paul Maarek; Michael Dorsch; Karl Dunz (THEMA, Universite de Cergy-Pontoise and THEMA; The American University of Paris; The American University of Paris)
    Abstract: We build a theory of political turnover in autocracies where citizens can only express their political preferences to remove the autocrat through costly mass protest. The disenfranchised are imperfectly informed about the autocrat's choice of economic institution. Workers only observe economic outcomes that could result from rent-extracting economic regulations or adverse economic shocks. The disenfranchised have priors about the autocrat's type and, by extension, policy choices. We propose that macro shocks can aect the cost-benet calculus of costly political action through an informational channel. For an autocrat that has implemented hidden rent-seeking regulation, negative shocks reduce the perceived probability that the autocrat is benevolent, and increase the probability of opposition. We then empirically investigate this idea for a panel of autocratic countries. Using simple linear probability and logit models with xed eects and using weather variables as instruments for macro shocks, we demonstrate that adverse economic shocks increase the probability of mass protest episodes only in countries with bad regulations.
    JEL: D74 D81 P48
    Date: 2012
  11. By: Mogues, Tewodaj
    Abstract: This paper addresses the determinants of public expenditure policies, by reviewing theories and empirical investigations of what features explain the budget process and how the various attributes of actors—including politicians, bureaucrats, interest groups, and donors—and of institutions and political and economic governance environments affect the prioritization of public investments. It draws conclusions with regard to the determinants of agricultural public investments.
    Keywords: Political economy, Agricultural Investment, Public investment, Governance, budget process,
    Date: 2012
  12. By: Rei S. Sayag (Erasmus University Rotterdam); Otto H. Swank (Erasmus University Rotterdam)
    Abstract: At the start of their term, politicians often announce which issue they intend to address. To shed light on this agenda setting, we develop a model in which a politician has to decide whether or not to address a public issue. Addressing an issue means that the politician investigates the issue and next chooses for either a major reform or a minor reform. Not addressing an issue means that the status quo is maintained. Politicians differ in their ability to make correct decisions. They want to make good decisions and want to come across as able decision makers. An important characteristic of the model is that politicians and voters have different priors concerning the desirability of a major reform. We show that electoral concerns may lead to anti-pandering. Politicians tend to put issues on their political agenda when voters are relatively pessimistic about a major reform, and keep issues off the table when voters are optimistic about major reform.
    Keywords: Agenda Setting; Career concerns; Pandering
    JEL: D72 D78 D82 P16
    Date: 2012–11–27
  13. By: Ingo Geishecker; Thomas Siedler
    Abstract: There is a large body of literature analyzing the relationship between objective economic conditions and voting behavior, but there is very little evidence of how perceived economic insecurity impacts on political preferences. Using seventeen years of household panel data from the German Socio-Economic Panel, we examine whether job loss fears impact on individuals' party identification. Consistent with the deprivation theory, we find strong and robust evidence that subjective job loss fears foster affinity for parties at the far right-wing of the political spectrum. The effects are broadly comparable in direction and magnitude with the ones from objective unemployment and being out of the labor force. However, our empirical estimates do not suggest that job loss fears result in people withdrawing their support from political parties altogether or increasingly identify with extremist left-wing parties.
    Keywords: job insecurity, party identification, prospective voting, economic worries
    JEL: J01 J63 P16
    Date: 2012
  14. By: Berliant, Marcus; Tabuchi, Takatoshi
    Abstract: We consider information aggregation in national and local elections when voters are mobile and might sort themselves into local districts. Using a standard model of private information for voters in elections in combination with a New Economic Geography model, agglomeration occurs for economic reasons whereas voter stratification occurs due to political preferences. We compare a national election, where full information equivalence is attained, with local elections in a three-district model. We show that full information equivalence holds at a stable equilibrium in only one of the three districts when transportation cost is low. The important comparative static is that full information equivalence is a casualty of free trade. When trade is more costly, people tend to agglomerate for economic reasons, resulting in full information equivalence in the political sector. Under free trade, people sort themselves into districts, most of which are polarized, resulting in no full information equivalence in these districts. We examine the implications of the model using data on corruption in the legislature of the state of Alabama and in the Japanese Diet.
    Keywords: information aggregation in elections; informative voting; new economic geography; local politics
    JEL: D82 D72 R12
    Date: 2012–12–04
  15. By: Di Giannatale, Paolo; Passarelli, Francesco
    Abstract: We study political distortions that emerge in situations where agents’ political power is disproportionate with respect to their economic power. We use the Shapley value to evaluate both the economic and the political power. We show that usual weighted majority voting cannot prevent political distortions from emerging in a huge mass of situations. Distortions are less severe if partners can leave the union at low cost. We propose an alternative voting method based on random assignments of voting rights. Agents are given chances to vote instead of weights. If chances are computed according to a specific formula, no political distortion occurs. As an application, we analyze the rotation voting system recently adopted by the European Central Bank. We find that this system yields an enormous amount of political distortion. Then we compute the voting chances that should be assigned to Eurozone countries in order to eliminate it.
    Keywords: Political distortions; Voting rules; Shapley value; Weighted votes; European Central Bank
    JEL: D71 C71 D72
    Date: 2012–12

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