nep-pol New Economics Papers
on Positive Political Economics
Issue of 2014‒06‒02
nineteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Political Competition and the Limits of Political Compromise By Cunha, Alexandre B.; Ornelas, Emanuel
  2. Emergence and Persistence of Extreme Political Systems By Buchheim, Lukas; Ulbricht, Robert
  3. The Weather Effect: estimating the effect of voter turnout on electoral outcomes in Italy By Alessandro Sforza
  4. When Ideas Trump Interests: Preferences, World Views, and Policy Innovations By Rodrik, Dani
  5. The Price of Political Uncertainty: Theory and Evidence from the Option Market By Kelly, Bryan; Pástor, Luboš; Veronesi, Pietro
  6. Local Funds and Political Competition: Evidence from the National Rural Employment Guarantee Scheme in India By Gupta, Bhanu; Mukhopadhyay, Abhiroop
  7. Market-based Lobbying: Evidence from Advertising Spending in Italy By Della Vigna, Stefano; Durante, Ruben; Knight, Brian; La Ferrara, Eliana
  8. An allegory of the political influence of the top 1% By De Donder, Philippe; Roemer, John E
  9. Superstars in politics: the role of the media in the koizumi regime By Yamamura, Eiji; Sabatini, Fabio
  10. Geopolitics, Aid and Growth By Dreher, Axel; Eichenauer, Vera; Gehring, Kai
  11. Gender difference in support for democracy in Sub-Saharan Africa: Do social institutions matter? By Konte M.
  12. "The Political Economy of Shadow Banking: Debt, Finance, and Distributive Politics under a Kalecki-Goodwin-Minsky SFC Framework" By Eloy Fisher; Javier Lopez Bernardo
  13. Why are women less democratic than men? Evidence from Sub-Saharan African countries By García-Peñalosa C.; Konte M.
  14. Optimal Prudential Regulation of Banks and the Political Economy of Supervision By Tressel, Thierry; Verdier, Thierry
  15. Technological Foundations of Political Instability By Dagaev, Dmitry; Lamberova, Natalia; Sobolev, Anton; Sonin, Konstantin
  16. The Distributional Preferences of Americans By Raymond Fisman; Pamela Jakiela; Shachar Kariv
  17. The Politics of Compromise By Bonatti, Alessandro; Rantakari, Heikki
  18. A Revealed Preference Approach to the Elicitation of Political Attitudes: Experimental Evidence on Anti-Americanism in Pakistan By Leonardo Bursztyn; Michael Callen; Bruno Ferman; Ali Hasanain; Noam Yuchtman
  19. The Doha Round Impasse: A Graphical Account By Evenett, Simon J

  1. By: Cunha, Alexandre B.; Ornelas, Emanuel
    Abstract: We consider an economy where competing political parties alternate in office. Due to rent-seeking motives, incumbents have an incentive to set public expenditures above the socially optimum level. Parties cannot commit to future policies, but they can forge a political compromise where each party curbs excessive spending when in office if they expect future governments to do the same. We find that, if the government cannot manipulate state variables, more intense political competition fosters a compromise that yields better outcomes, potentially even the first best. By contrast, if the government can issue debt, vigorous political competition can render a compromise unsustainable and drive the economy to a low-welfare, high-debt, long-run trap. Our analysis thus suggests a legislative tradeoff between restricting political competition and constraining the ability of governments to issue debt.
    Keywords: efficient policies; political turnover; public debt
    JEL: E61 E62 H30 H63
    Date: 2014–03
  2. By: Buchheim, Lukas; Ulbricht, Robert
    Abstract: We investigate the dynamics of political systems in a framework where transitions are driven by reforms and revolts, and where political systems are a priori unconstrained, ranging continuously from single-man dictatorships to full-scale democracies. The dynamics are governed by the likelihood of transitions and their outcome, which are both determined endogenously. We find that reforms and revolts result in extreme political systems - reforms by enfranchising the majority of the population leading to democracies, and revolts by installing autocracies. Reinforcing this polarization, extreme political systems are persistent across time: Democracies are intrinsically stable, leading to long episodes without political change. Autocracies, in contrast, are subject to frequent regime changes. Nevertheless they are persistent, since ensuing revolts lead to autocracies comparable to their predecessors. Taken together, our results suggest that the long-run distribution of political systems is bimodal with mass concentrated on the extremes. The dynamics are consistent with cross-country data.
    Keywords: Endogenous dynamics of political systems; invariant distribution; persistence of regime types; polarization; transition paths; unrestricted polity space.
    JEL: D74 D78 P16
    Date: 2014–02–01
  3. By: Alessandro Sforza
    Abstract: This paper examines the effect of variation in voter turnout to electoral outcomes in Italy. I use data on spatial distribution of turnout for 2008 and 2013 to examine how it can affect differences in electoral outcomes. Exploiting the exogenous variation in weather conditions across municipalities I use rainfalls to instrument for turnout levels: if non-voters systematically differ from habitual voters in terms of their characteristics or preferences, the effect of turnout on the electoral outcome can generate "extreme" outcomes. I find that bad weather decreases turnout and that a higher turnout favours the Movimento 5 Stelle, while both the Democrats and the Centre are negatively affected.
    JEL: D72 P16
    Date: 2014
  4. By: Rodrik, Dani
    Abstract: The contemporary approach to political economy is built around vested interests -- elites, lobbies, and rent-seeking groups which get their way at the expense of the general public. The role of ideas in shaping those interests is typically ignored or downplayed. Yet each of the three components of the standard optimization problem in political economy – preferences, constraints, and choice variables – rely on an implicit set of ideas. Once the manner in which ideas enter these frameworks is made explicit, a much richer and more convincing set of results can be obtained. In particular, new ideas about policy—or policy entrepreneurship—can exert an independent effect on equilibrium outcomes even in the absence of changes in the configuration of political power.
    Keywords: Policy Innovations; Political Economy
    JEL: F5 P16
    Date: 2013–11
  5. By: Kelly, Bryan; Pástor, Luboš; Veronesi, Pietro
    Abstract: We empirically analyze the pricing of political uncertainty, guided by a theoretical model of government policy choice. After deriving the model's predictions for option prices, we test those predictions in an international sample of national elections and global summits. We find that political uncertainty is priced in the option market in ways predicted by the theory. Options whose lives span political events tend to be more expensive. Such options provide valuable protection against the risk associated with political events, including not only price risk but also variance and tail risks. This protection is more valuable in a weaker economy as well as amid higher political uncertainty.
    Keywords: options; political uncertainty
    JEL: G12 G15 G18
    Date: 2014–02
  6. By: Gupta, Bhanu (University of Michigan); Mukhopadhyay, Abhiroop (Indian Statistical Institute)
    Abstract: This paper examines how local politics affects public fund allocations. It uses the context of the National Rural Employment Guarantee Scheme (NREGS) in India which was introduced by the Indian National Congress (INC). Using longitudinal data on funds sanctioned and election results from three rounds of elections in Rajasthan, a state in India, we find an inverted U-shaped relationship between existing vote share of INC and subsequent fund allocations at the block level. To address the issue of endogeneity, we instrument vote shares by their lagged values. The results using only close elections are however distinct as higher funds are allocated to blocks where the INC has lower vote share. We give evidence of a mechanism which highlights the role of a political representative in the funds sanctioning process. Further, we show that the strategy by INC was beneficial in gaining vote share.
    Keywords: political economy, local elections, National Rural Employment Guarantee Scheme
    JEL: D72 J08 H53 H75
    Date: 2014–05
  7. By: Della Vigna, Stefano; Durante, Ruben; Knight, Brian; La Ferrara, Eliana
    Abstract: An extensive literature has studied lobbying by special interest groups. We analyze a novel lobbying channel: lobbying businessmen-politicians through business proxies. When a politician controls a business, firms attempting to curry favors shift their spending towards the politician's business. The politician benefits from increased revenues, and the firms hope for favorable regulation in return. We investigate this channel in Italy where government members, including the prime minister, are not required to divest business holdings. We examine the evolution of advertising spending by firms over the period 1994 to 2009, during which Silvio Berlusconi was prime minister on and off three times, while maintaining control of Italy's major private television network, Mediaset. We predict that firms attempting to curry favor with the government shift their advertising budget towards Berlusconi's channels when Berlusconi is in power. Indeed, we document a significant pro-Mediaset bias in the allocation of advertising spending during Berlusconi's political tenure. This pattern is especially pronounced for companies operating in more regulated sectors, as predicted. Using a model of supply and demand in the advertising market, we estimate one billion euros of extra revenue to Berlusconi's group. We also estimate the expected returns in regulation to politically motivated spenders of similar magnitude, stressing the economic importance of this lobbying channel. These findings provide an additional rationale for rules on conflict of interest.
    Keywords: advertising; conflict of interest; lobbying; media
    JEL: D22 D72
    Date: 2014–02
  8. By: De Donder, Philippe; Roemer, John E
    Abstract: We study how rich shareholders can use their economic power to deregulate firms that they own, thus skewing the income distribution towards themselves. Agents differ in productivity and choose how much labor to supply. High productivity agents also own shares in the productive sector and thus earn capital income. All vote over a linear tax rate on (labor and capital) income whose proceeds are redistributed lump sum. Capital owners also lobby in order to ease the price cap imposed on the private firm. We solve analytically for the Kantian equilibrium of this lobbying game together with the majority voting equilibrium over the tax rate, and we perform simulations. We obtain numerically that, as the capital income distribution becomes more concentrated among the top productivity individuals, their increased lobbying effort generates efficiency as well as equity costs, with lower labor supply and lower average utility levels in society.
    Keywords: Kantian equilibrium; lobbying; political economy; regulatory capture
    JEL: D72 H31
    Date: 2013–11
  9. By: Yamamura, Eiji; Sabatini, Fabio
    Abstract: This paper explores the role of mass media on people’s perceptions of charismatic leaders, focusing on Japan’s Koizumi regime. We conduct an empirical assessment, looking at the influence of television and newspapers on the support for Koizumi and his principal policy. This study uses individual-level data collected immediately after Koizumi’s 2005 landslide win. The major findings are: (1) frequency of exposure to mass media is positively related to support for Koizumi but not to support for his principal policy and (2) the effect of watching television is only observed for women and that of reading the newspaper only for men. Thus, a charismatic male leader on television has a greater influence than his policy on female voters. The psychological effect of an “attractive” male leader on female voters is amplified through television. Despite no support from special interest groups, Koizumi won the election because of a televised superstar effect.
    Keywords: Mass media, television, newspaper, election, Koizumi regime, superstar effect
    JEL: D72 L82 L88
    Date: 2014–05–06
  10. By: Dreher, Axel; Eichenauer, Vera; Gehring, Kai
    Abstract: We investigate the effects of short-term political motivations on the effectiveness of foreign aid. Donor countries’ political motives might reduce the effectiveness of conditionality, channel aid to inferior projects, reduce the aid bureaucracy’s effort, and change the power structure in the recipient country. We investigate whether geopolitical motives matter by testing whether the effect of aid on economic growth is reduced by the share of years a country has served on the United Nations Security Council (UNSC) in the period the aid has been committed, which provides quasi-random variation in commitments. Our results show that the effect of aid on growth is significantly lower when aid has been granted for political reasons. We derive two conclusions from this. First, short-term political favoritism reduces growth. Second, political interest variables are invalid instruments for aid, raising doubts about a large number of results in the aid effectiveness literature.
    Keywords: aid effectiveness; economic growth; political instruments; politics and aid; United Nations Security Council membership
    JEL: F35 F53 O11 O19
    Date: 2014–03
  11. By: Konte M. (UNU-MERIT)
    Abstract: Little investigation has been made to explain why women are less likely than are men to support democracy in Sub-Saharan Africa. This gender difference in politics has been found in numerous studies and may hinder the much needed legitimation of democracy in this region. This paper addresses the question of whether this observed gender gap is due to the omission of social institutions related to gender inequality, something that affects womens daily life and deprives them of autonomy at home. We hypothesize that women who live under autocracy at home are less likely to support democracy outside, because it does not affect their private life; this follows the idea that the way women are treated in a society might have major implications for the economic, social, and political functioning of that society. We find that the gender difference in support for democracy is no longer significant after we control for gender discrimination in the Family Code, in physical integrity or in civil liberties. This study also provides evidence that women living in countries with favorable laws toward women are more supportive of democracy than women who do not, suggesting that democratic regimes may be more willing than are authoritarian regimes to protect laws friendly to women. Key words Support for democracy, gender difference, social institutions
    Keywords: Economics of Gender; Non-labor Discrimination; Technological Change: Government Policy; Economywide Country Studies: Africa;
    JEL: J16 O38 O55
    Date: 2014
  12. By: Eloy Fisher; Javier Lopez Bernardo
    Abstract: This paper describes the political economy of shadow banking and how it relates to the dramatic institutional changes experienced by global capitalism over past 100 years. We suggest that the dynamics of shadow banking rest on the distributive tension between workers and firms. Politics wedge the operation of the shadow financial system as government policy internalizes, guides, and participates in dealings mediated by financial intermediaries. We propose a broad theoretical overview to formalize a stock-flow consistent (SFC) political economy model of shadow banking (stylized around the operation of money market mutual funds, or MMMFs). Preliminary simulations suggest that distributive dynamics indeed drive and provide a nest for the dynamics of shadow banking.
    Keywords: Political Cycles; Debt and Public Finance; Shadow Banking; Political Economy of Finance; Kaleckian Macrodynamics; Stock-Flow Consistent (SFC) Modeling; Political Macroeconomic Models
    JEL: E12 E62 E63 H5 H6 P16
    Date: 2014–05
  13. By: García-Peñalosa C.; Konte M. (UNU-MERIT)
    Abstract: A substantial literature has examined the determinants of support for democracy and although existing work has found a gender gap in democratic attitudes, there have been no attempts to explain it. In this paper we try to understand why females are less supportive of democracy than males in a number of countries. Using data for 20 Sub-Saharan African countries, we test whether the gap is due to individual differences in policy priorities or to country-wide characteristics. We find that controlling for individual policy priorities does not offset the gender gap, but those women who are interested in politics are more democratic than men. Furthermore, our results indicate that the gap disappears in countries with high levels of human development and political rights. Keywords Support for democracy, gender gap, policy priorities, institutions
    Keywords: Microeconomic Behavior: Underlying Principles; Economics of Gender; Non-labor Discrimination; Technological Change: Government Policy;
    JEL: D01 J16 O38
    Date: 2014
  14. By: Tressel, Thierry; Verdier, Thierry
    Abstract: We consider a moral hazard economy with the potential for collusion between bankers and borrowers to study how incentives for risk taking are affected by the quality of supervision. We show that low interest rates or a low return on investment may generate excessive risk taking. Because of a pecuniary externality, the market equilibrium is not optimal and there is a need for prudential regulation. We show that the optimal capital ratio depends on the state of the macro-financial cycle, and that,in presence of production externalities, the capital ratio should be complemented by a constraint on asset allocation. We study the political economy of supervision. We show that the political process tends to exacerbate excessive risk taking and credit cycles by weakening the quality of banking supervision when instead it should be strengthened.
    Keywords: banking regulation; political economy; regulatory forbearance
    JEL: D8 E44 G2
    Date: 2014–03
  15. By: Dagaev, Dmitry; Lamberova, Natalia; Sobolev, Anton; Sonin, Konstantin
    Abstract: There has been a wide-spread belief that elections with a wide franchise following removal of an oppressive dictator lead to establishment of a government that is not vulnerable to mass protest. At the same time, most of the post-World War II non-constitutional exits of recently-installed autocratic leaders were caused by elite coups, rather than popular protests. The recent experience of Egypt, where the democratic post-Mubarak government, a result of the Arab Spring, collapsed after having had almost uninterrupted protests since its first day in office, offers a striking counterexample to both of these patterns. We demonstrate that this is a general phenomenon: the same technological shock, arrival of social media, that makes the incumbent vulnerable, lays foundation for continuous instability of the subsequent democratic government. Our theoretical model, which incorporates protest into a Downsian framework, takes into account specific features of modern protests: the significant role of social media and the absence of the partisan or personalized leadership during popular unrest. Case studies of the Arab countries with and without large-scale protests corroborate our theoretical findings.
    Keywords: Arab Spring; autocracy; collective action; regime change; social media
    JEL: C42 D74 L96
    Date: 2013–12
  16. By: Raymond Fisman; Pamela Jakiela; Shachar Kariv
    Abstract: We measure the distributional preferences of a large, diverse sample of Americans by embedding modified dictator games that vary the relative price of redistribution in the American Life Panel. Subjects' choices are generally consistent with maximizing a (social) utility function. We decompose distributional preferences into two distinct components - fair-mindedness (tradeoffs between oneself and others) and equality-efficiency tradeoffs - by estimating constant elasticity of substitution utility functions at the individual level. Approximately equal numbers of Americans have equality-focused and efficiency-focused distributional preferences. After controlling for individual characteristics, our experimental measures of equality-efficiency tradeoffs predict the political decisions of our subjects.
    JEL: C91 D64
    Date: 2014–05
  17. By: Bonatti, Alessandro; Rantakari, Heikki
    Abstract: A team must select among competing projects that differ in their payoff consequences for its members. Each agent chooses a project and exerts costly effort affecting its random completion time. When one or more projects are complete, agents bargain over which one to implement. A consensus requirement can (but need not) induce the efficient balance between compromise in project selection and equilibrium effort. Imposing deadlines for presenting counteroffers is beneficial, while delegating decision-making to an impartial third party leads agents to select extreme projects. Finally, hiring agents with opposed interests can foster both effort and compromise in project selection.
    Keywords: bargaining; compromise; conflict; consensus; deadlines; free-riding
    JEL: C72 D71 D83
    Date: 2014–03
  18. By: Leonardo Bursztyn; Michael Callen; Bruno Ferman; Ali Hasanain; Noam Yuchtman
    Abstract: We develop an indirect, revealed preference method of eliciting attitudes and apply it in an experiment in Pakistan designed to understand the expression of anti-American views. Following the completion of a personality survey, we offer subjects a bonus payment for completing the survey. We find that around one-quarter of subjects forgo a 100 Rupee payment (roughly one-fifth of a day's wage) to avoid anonymously checking a box indicating gratitude toward the United States government for providing funds. We experimentally vary the identity of the funder, the payment size, and subjects' expectations of privacy, and find that rejection of the payment is responsive to all of these treatments. Rejection of the U.S. government bonus payment is an indirect measure of anti-American attitudes. This approach mitigates concerns with experimenter demand, social desirability, and other biases, which can distort reported attitudes. We discuss and present suggestive evidence of the advantages of our methodology.
    JEL: C90 P16
    Date: 2014–05
  19. By: Evenett, Simon J
    Abstract: Several factors potentially responsible for the failure to conclude the Doha Round of multilateral trade negotiations are analysed. A two-stage negotiation and ratification game between the “North” (industrialised countries) and the “South” (developing countries) is employed and collapses into a single diagram. The choice of negotiating agenda, principles, and currency of the Doha Round interact with domestic political factors in leading WTO members, the fast growth of exports prior to 2007, and pervasive unilateral trade reform to eliminate the “landing zone” for this particular multilateral negotiation. Recent emphasis on differences between developing countries and on Chinese WTO accession as independent causes of the impasse seems misplaced.
    Keywords: deadlock; Doha Round; impasse; two-level games; WTO
    JEL: F02 F13 F53
    Date: 2013–12

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