nep-pol New Economics Papers
on Positive Political Economics
Issue of 2014‒12‒19
twelve papers chosen by
Eugene Beaulieu
University of Calgary

  1. Federal Governments Should Subsidize State Expenditure that Voters do not Consider when Voting By Aronsson, Thomas; Granlund, David
  2. A Theory of Minimalist Democracy By Chris Bidner; Patrick Francois; Francesco Trebbi
  3. Redistribution and the political support of free entry policy in the Schumpeterian model with heterogenous agents By Dmitry A. Veselov
  4. The Productivity Consequences of Political Turnover: Firm-Level Evidence from Ukraine's Orange Revolution By Earle, John S.; Gehlbach, Scott
  5. Who turned their back on the SPD? Electoral disaffection with the German Social Democratic Party and the Hartz reforms By Baptiste Françon
  6. Last minute policies and the incumbency advantage By Manzoni, Elena; Penczynski, Stefan
  7. Preferential versus Multilateral Trade Liberalization and the Role of Political Economy By Stoyanov, Andrey; Yildiz, Halis Murat
  8. Political competition, power allocation and welfare in unitary and federal systems By Marco Alderighi; Christophe Feder
  9. Governing by Panic: The Politics of the Eurozone Crisis By David M. Woodruff
  10. Judicial Presence and Rent Extraction By Stephan Litschig; Yves Zamboni
  11. Income Inequality, Political Polarization and Fiscal Policy Gridlock By Yanlei Ma
  12. Economic and Political Equilibrium for a Renewable Natural Resource with International Trade By Kong, Wen; Knapp, Keith C.

  1. By: Aronsson, Thomas (Department of Economics, Umeå School of Business and Economics); Granlund, David (Department of Economics, Umeå School of Business and Economics)
    Abstract: This short paper analyzes whether a federal transfer system can be designed to increase welfare, when state governments create political budget cycles to increase the likelihood of reelection. The results show how the federal government may announce a transfer scheme in advance for the post-election year that counteracts the welfare costs of political budget cycles.
    Keywords: Political economy; intergovernmental transfer; budget cycle
    JEL: D61 D72 H71
    Date: 2014–11–13
  2. By: Chris Bidner; Patrick Francois; Francesco Trebbi
    Abstract: A majority of the world democracies are far from the benchmark of representative democracy. This paper presents a model of political transitions based on a minimalist conception of the democratic state, i.e. a form of government solely characterized by competitive elections. We show that the model can produce dynamics of transition into democracy without requiring any role for redistribution or representation of voters, but solely based on interactions among the ruling elites. This allows the model to match several relevant stylized facts concerning the organization of new and consolidating democracies, weakly institutionalized countries, and hybrid regimes.
    JEL: H11 P16 P48
    Date: 2014–10
  3. By: Dmitry A. Veselov (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, National Research University Higher School of Economics - Laboratory of Macroeconomic Analysis)
    Abstract: We consider the problem of finding sufficient conditions for political support of liberal, growth-enhancing policy in a quality-ladders model with heterogeneous agents differing in their endowment of wealth and skills. The policy set is two-dimensional: Agents vote for the level of redistribution as well as for the level of entry barriers preventing the creation of more efficient firms. We show that under the majority voting rule there are three possible stable political outcomes: full redistribution and low barriers to entry ("liberal" order), high redistribution and high barriers to entry ("corporatism"). We show that key variables determining the political outcome are the expected gain from technological adoption, the ratio of total profits to total wages, and the skewness of human capital distribution.
    Keywords: Barriers to entry; majority voting; quality-ladders model; wealth inequality; talent inequality; economic growth
    Date: 2013–05
  4. By: Earle, John S. (George Mason University); Gehlbach, Scott (University of Wisconsin-Madison)
    Abstract: We examine the impact of political turnover on economic performance in a setting of largely unanticipated political change and profoundly weak institutions: the 2004 Orange Revolution in Ukraine. Exploiting census-type panel data on over 7,000 manufacturing enterprises, we find that the productivity of firms in the regions most supportive of Viktor Yushchenko increased by more than 15 percentage points in the three years following his election, relative to that in the most anti-Yushchenko regions. We conclude that this effect is driven primarily by particularistic rather than general economic policies that disproportionately increased output among large enterprises, government suppliers, and private enterprises – three types of firms that had much to gain or lose from turnover at the national level. Our results demonstrate that political turnover in the context of weak institutions can have substantial distributional effects that are reflected in economic productivity.
    Keywords: political connections, firm behavior, voting, transition
    JEL: H32 D72 P26
    Date: 2014–09
  5. By: Baptiste Françon (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: This paper proposes an empirical analysis of the declining support for the German Social Democratic Party (SPD) during Schröder government's second term of office, which was marked by major reforms in the fields of unemployment insurance and labour market policy (Hartz reforms). Drawing on a panel of West Germans, we provide evidence that this disaffection was strongly related to a worker's occupation and that it involved electoral backlash from core blue-collar constituencies of the SPD. In comparison, the impact of other socio-economic characteristics such as the labour market status or the income was less pronounced. We further show that discontent grew stronger among occupations where the risk of unemployment was more prevalent. This suggests that opposition to specific measures that weakened status-securing principles of the unemployment insurance substantially drove electoral disaffection with the SPD during this period.
    Keywords: Political economy; economics of voting; social policy preferences; unemployment insurance; social-democracy; Germany
    Date: 2013–03
  6. By: Manzoni, Elena; Penczynski, Stefan
    Abstract: This paper models a purely informational mechanism behind the incumbency advantage. In a two-period electoral campaign with two policy issues, a specialized incumbent and an unspecialized, but possibly more competent challenger compete for election by voters who are heterogeneously informed about the state of the world. Due to the asymmetries in government responsibility between candidates, the incumbent's statement may convey information on the relevance of the issues to voters. In equilibrium, the incumbent sometimes strategically releases his statement early and thus signals the importance of his signature issue to the voters. We find that, since the incumbent's positioning on the issue reveals private information which the challenger can use in later statements, the incumbent's incentives to distort the campaign are decreasing in his quality, as previously documented by the empirical literature. The distortions arising in equilibrium are decreasing in the incumbent's effective ability; however, the distortions may be increasing in the incumbent's reputation of expertise on his signature issue.
    Keywords: Incumbency advantage , electoral competition , information revelation , agenda setting
    JEL: D72 D82 D60
    Date: 2014
  7. By: Stoyanov, Andrey; Yildiz, Halis Murat
    Abstract: In this paper we analyze the effect of the freedom to pursue preferential trade liberalization, permitted by Article XXIV of the GATT, on country's incentives to participate in multilateral negotiations and on the feasibility of the global free trade. We present a model in which countries choose whether to participate in preferential or multilateral trade agreements under political pressures from domestic special interest groups. We show that heterogeneity in political preferences across countries plays an important role for the relative merits of preferential and multilateral approaches to trade liberalization. On one hand, the opportunity to liberalize preferentially may be necessary to induce countries with strong political motivations to participate in multilateral free trade negotiations. On the other hand, when countries share similar political preferences, multilateral free trade that would have been politically supported otherwise becomes unattainable if countries can pursue preferential liberalization.
    Keywords: Free Trade Agreements, Multilateralism, Political Economy, Coalition-proof Nash Equilibrium
    JEL: C72 F12 F13
    Date: 2014–11–11
  8. By: Marco Alderighi (Università della Valle d'Aosta, Università Bocconi, The Rimini Centre for Economic Analysis, Italy); Christophe Feder (Università degli Studi di Torino, Italy)
    Abstract: The paper studies how political competition among self-interested parties affects welfare and power allocation between government levels. We find that the unitary and the federal systems of government are not welfare-maximizing, leading to a higher and a lower than optimal centralization level, respectively. Second best is achieved under the system which induces larger potential welfare losses in response to similar deviations from the first best: the risk of large losses force parties to stay closer to the optimum in order to keep the likelihood of winning the elections high. The federal system yields to the second-best solution when inter-jurisdictional spillovers are weak; vice versa a unitary system is better when such spillovers are strong.
    Date: 2014–11
  9. By: David M. Woodruff
    Abstract: The Eurozone’s reaction to the economic crisis beginning in late 2008 involved both efforts to mitigate the arbitrarily destructive effects of markets and vigorous pursuit of policies aimed at austerity and deflation. To explain this paradoxical outcome, this paper builds on Karl Polanyi’s account of how politics reached a similar deadlock in the 1930s. Polanyi argued that democratic impulses pushed for the protective response to malfunctioning markets. However, under the gold standard the prospect of currency panic afforded great political influence to bankers, who used it to push for austerity, deflationary policies, and the political marginalization of labor. Only with the achievement of this last would bankers and their political allies countenance surrendering the gold standard. The paper reconstructs Polanyi’s theory of governing by panic and uses it to explain the course of the Eurozone policy over three key episodes in the course of 2010-2012. The prospect of panic on sovereign debt markets served as a political weapon capable of limiting a protective response, wielded in this case by the European Central Bank (ECB). Committed to the neoliberal Brussels-Frankfurt consensus, the ECB used the threat of staying idle during panic episodes to push policies and institutional changes promoting austerity and deflation. Germany’s Ordoliberalism, and its weight in European affairs, contributed to the credibility of this threat. While in September 2012 the ECB did accept a lender-of-last-resort role for sovereign debt, it did so only after successfully promoting institutional changes that severely complicated any deviation from its preferred policies.
    Keywords: Euro; European Central Bank; European Central Bank; fiscal policy
    Date: 2014–10–24
  10. By: Stephan Litschig; Yves Zamboni
    Abstract: We estimate the effect of state judiciary presence on rent extraction in Brazilian local governments. We measure rents as irregularities related to waste or corruption uncovered by auditors. Our unique dataset at the level of individual inspections allows us to separately examine extensive and intensive margins of rent extraction. The identification strategy is based on an institutional rule of state judiciary branches according to which prosecutors and judges tend to be assigned to the most populous among contiguous counties forming a judiciary district. Our research design exploits this rule by comparing counties that are largest in their district to counties with identical population size from other districts in the same state, where they are not the most populous. IV estimates suggest that state judiciary presence reduces the share of inspections with irregularities related to waste or corruption by about 10 percent or 0.3 standard deviations.
    Keywords: institutions, corruption, rents, local governments
    JEL: D02 D72 D78 H41 H83
    Date: 2014–11
  11. By: Yanlei Ma (Cornell University)
    Abstract: Over the past few decades, high income inequality and low output fluctuations have coincided with the rising domestic political polarization and policy gridlock in the United States. Motivated by the above fact, this paper analyzes the rigidity of tax policy in an economy with dynamic legislative bargaining and exogenous output fluctuations. First, by adopting the setup of bargaining with endogenous status quo, I account for the co-movement of economic inequality and policy gridlock. Second, by incorporating an economy-wide productivity shock, this model generates the feature that legislative stalemate occurs more frequently in times of reduced output volatility. Third, perhaps surprisingly, the model uncovers the property that equilibrium policy can be either 'present-oriented' or 'far-sighted'. In the 'far-sighted' equilibrium, the policy maker is willing to sacrifice present well-being for the sake of achieving increased bargaining power in the future. Finally, I also find policy gridlock could be alleviated by introducing additional flexibility into the tax system.
    Date: 2014
  12. By: Kong, Wen; Knapp, Keith C.
    Abstract: International natural resources are typically subject to intense conflict, something likely to increase with population and economic growth. International cooperation over natural resources and the environment is the subject of a substantial literature (Kolstad), and is normally formulated as a game with given payoff functions for the individual countries. Within the literature on international rivers (the motivation here), Ambec and Sprumont (2002) assume a strictly increasing and strictly concave water benefit function, while Ambec and Ehlers (2007) assume that the benefit function exhibits satiation. Both of the papers are cooperative games. Ansink (2009) analyzes self-enforcing agreements on water allocation in a bargaining game. Fundamentally, the resource conflict might stem from the self-perception that an individual country will gain with additional resource allocation. This is reflected in the associated economic literature which is typically sector-level models with monotonic welfare functions. The overall objective of this work is to consider a broader setting such that cooperation over the natural resource might be joint self-interest for the political entities. The analytical framework is economic and political equilibrium when countries with joint resource access also trade produced goods/services. General equilibrium prices are functions of the water allocation, and these in turn identify country welfare as affected by water allocation. Political equilibrium is formulated as a game-theoretic problem. Here the welfare functions from the economic model are the payoff functions for individual countries, and standard solution concepts identify negotiated water allocations. A complete analytical solution is derived with this setup. Autarchic country welfare is increasing in water allocation as expected. However, with free trade the welfare functions can be non-monotone in some instances: starting from some initial allocation, it can be self-interest for one country to give up water to another country. Furthermore, there can be instances in which the highest level of welfare for one country is achieved with joint use of the resource as opposed to having a full allocation of the resource. At a minimum, where productivity coefficients imply a comparative advantage such that trade occurs, then the level of conflict as measured by the gains from an additional allocation of the resource will be reduced.
    Keywords: Natural resource allocation, welfare functions, international trade, game-theory., International Relations/Trade, Public Economics, Resource /Energy Economics and Policy,
    Date: 2014

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