nep-pol New Economics Papers
on Positive Political Economics
Issue of 2014‒09‒25
six papers chosen by
Eugene Beaulieu
University of Calgary

  1. The Price of Political Uncertainty: Theory and Evidence from the Option Market By Bryan T. Kelly; Lubos Pastor; Pietro Veronesi
  2. The Political Economy of Sovereign Borrowing: Explaining the Policy Choices of Highly Indebted Governments By Stephen B. Kaplan; Kaj Thomsson
  3. Asymptotic utilitarianism in scoring rules By Marcus Pivato
  4. Growth, Unemployment, and Fiscal Policy: A Political Economy Analysis By Tetsuo Ono
  5. Political Violence and Greenfield Foreign Direct Investment in Natural Resources By Caroline Witte; Martijn Burger; Elena Ianchovichina; Enrico Pennings
  6. Boycott or buycott?: Internal politics and consumer choices By Xavier Cuadras Morató; Josep M. Raya

  1. By: Bryan T. Kelly (University of Chicago Booth School of Business); Lubos Pastor (University of Chicago Booth School of Business); Pietro Veronesi (University of Chicago Booth School of Business)
    Abstract: We empirically analyze the pricing of political uncertainty, guided by a theo- retical 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. 
    Date: 2014
  2. By: Stephen B. Kaplan (Department of Economics/Institute for International Economic Policy, George Washington University); Kaj Thomsson (Maastricht University)
    Abstract: In newly democratized and developing countries, political economy theory expects politicians to use budget defcits to engineer an election-timed boom, known as the political business cycle. In this paper, we challenge this view by incorporating the Önancial constraints faced by government into an electoral political framework. Debtor governments must often borrow from foreign creditors to fund their domestic spending. Employing a formal model, we show theoretically that the extent of ownership dispersion among these creditors has an important effect on governments' economic policy autonomy. Based on our theoretical results, we argue when highly-indebted governments become more reliant on international bond markets - as opposed to traditional bank lending - politicians alter the way they respond to domestic constituents. These theoretical results Önd support in both quantitative and qualitative empirical findings. In an econometric test of 16 Latin American countries from 1961 to 2011, we show that the 1990ís financial decentralization breeds austerity through its disciplining effect on fiscal policy. These results are consistent with case studies of recent elections in Southern European countries; there too we and that politicians exhibit greater fiscal discipline when they fund a greater share of their spending through decentralized bond markets. These findings have important scholarly implications, suggesting that governmentsísocial responsiveness may in part reflect the structure of their international borrowing.
    Date: 2014–10
  3. By: Marcus Pivato (Université de Cergy-Pontoise, THEMA and Department of Mathematics, Trent University)
    Abstract: Given a large enough population of voters whose utility functions satisfy certain statistical regularities, we show that voting rules such as the Borda rule, approval voting, and evaluative voting have a very high probability of selecting the social alternative which maximizes the utilitarian social welfare function. We also characterize the speed with which this probability approaches one as the population grows.
    Keywords: utilitarian; relative utilitarian; approval voting; Borda; scoring rule.
    JEL: D63 D71
    Date: 2014
  4. By: Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This study presents an overlapping-generations model featuring endogenous growth, collective wage-bargaining, and probabilistic voting over fiscal policy. We charac- terize a Markov-perfect political equilibrium of the voting game within and across generations and show the following results. First, greater bargaining power of unions lowers the growth rate of capital and creates a positive correlation between unem- ployment and government debt. Second, greater political power of the old lowers the growth rate and shifts government expenditure from the unemployed to the old. Third, a balanced budget requirement increases the growth rate but may benefit the old at the expense of the unemployed.
    Keywords: Economic Growth; Fiscal Policy; Government Debt; Unemployment; Voting
    JEL: E24 E62 H60
    Date: 2014–08
  5. By: Caroline Witte (Erasmus University Rotterdam and Erasmus Research Institute of Management); Martijn Burger (Erasmus University Rotterdam, Tinbergen Institute); Elena Ianchovichina (Chief Economist Office, Middle East and North Africa Region, World Bank); Enrico Pennings (Erasmus University Rotterdam, Tinbergen Institute, Erasmus Research Institute of Management)
    Abstract: In this paper the heterogeneous effect of political violence on Greenfield Foreign Direct Investment is examined using the predictions from real options theory. We hypothesize that political violence reduces overall FDI inflows, as violence increases uncertainty and operating costs. Yet, this effect is expected to be smaller for secessionist conflicts than for conflict concerning national authority, as secessionist conflicts are more geographically concentrated. In addition, we hypothesize that FDI in the natural resource sector is less sensitive to political violence than FDI in manufacturing and services, since MNEs active in the natural resource sector are more restricted in their location choice and the economic rents associated with natural resource extraction can offset the negative effects of political violence on profits. We find evidence for these hypothesizes. In addition, we empirically show that the insensitivity of natural resource FDI to political violence is related to the existence of limited investment options and high resource rents.
    Date: 2014–09
  6. By: Xavier Cuadras Morató; Josep M. Raya
    Abstract: Do political tensions affect economic relations? In particular, does politics significantly affect consumer choices? Firms are often threatened by consumer boycotts that pretend to modify their business strategies and behavior. Sometimes these are caused by general political conflicts. The main objective of the paper is to study the consequences of political conflicts between Spain and Catalonia (a region of Spain) and the subsequent boycott calls on sales of Catalan sparkling wine (cava) in the aggregated Spanish market and also in different regions of the country. We use data from sales of sparkling wine in supermarkets and similar outlets. To determine with precision the boycott period we use data on the number of news about the issue that appeared in the main national Spanish daily newspapers. Although we present some preliminary evidence that the boycott calls affected the market share of Catalan cava in Spain, the results of our main econometric exercise indicate that, once we control for the time trends of the different varieties of sparkling wine, the boycott effects cease to be significant in the aggregate Spanish market. This does not necessarily mean that the boycott calls did not have any significant impact, because we actually find that the effects are very different in each regional market. As a matter of fact, our results indicate that the insignificant impact of the boycott calls at the Spanish aggregate level is a consequence of the combination of a negative impact of the boycott on sales of Catalan cava in some regions and the opposite effect in the Catalan market.
    Keywords: Consumer boycott, wine sales, Political Economy
    JEL: E40 D74 F14 J64
    Date: 2014–07

This nep-pol issue is ©2014 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.