nep-pol New Economics Papers
on Positive Political Economics
Issue of 2015‒04‒19
sixteen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Electoral competition and endogenous political institutions: Quasi-experimental evidence from Germany By Baskaran, Thushyanthan; da Fonseca, Mariana Lopes
  2. Is Happiness a Predictor of Election Results? By George Ward
  3. Local Electoral Rewards from Centralized Social Programs: Are Mayors Getting the Credit? By Lourdes Rodríguez-Chamussy
  4. Party Age and Party Color: New Results on the Political Economy of Redistribution and Inequality By Philip Keefer; Branko Milanovic
  5. The Fed-Induced Political Business Cycle By Funashima, Yoshito
  6. Identifying the source of incumbency advantage through an electoral reform By da Fonseca, Mariana Lopes
  7. Participative political institutions and city development 800-1800 By Wahl, Fabian
  8. Corporate Governance amd Its Political Economy By Mark J. Roe; Massimiliano Vatiero
  9. The citizen-candidate model with imperfect policy control By Aytimur, R. Emre; Boukouras, Aristotelis; Schwager, Robert
  10. Citizen Candidates and Voting Over Incentive-Compatible Nonlinear Income Tax Schedules By Craig Brett; John A Weymark
  11. From revenues to democracy? By Fahad Hassan Khan
  12. Political determinants of municipal accounts: Quasi-experimental evidence from Portugal By da Fonseca, Mariana Lopes
  13. Loss Aversion in Politics By Alberto Alesina; Francesco Passarelli
  14. Youth bulges, insurrections, and politico-economic institutions: Theory and empirical evidence By Apolte, Thomas; Gerling, Lena
  15. Political Instability, Institutions and Private Capital Markets in Lima, Peru By Luis Felipe Zegarra
  16. Do We Need More Women in Power? Gender, Public Policy, and Development in Bolivia By Patricia Yáñez-Pagans

  1. By: Baskaran, Thushyanthan; da Fonseca, Mariana Lopes
    Abstract: Do established parties change political institutions to disadvantage smaller, nonmainstream parties if the latters´ electoral prospects improve? We study this question with a natural experiment from the German federal state of Hesse. The experiment is the abolishment of an explicit electoral threshold (the so called "five percent hurdle") for local elections in 2001 by the Hessian state parliament. The abolishment improved the electoral prospects of smaller parties at local elections, but local politicians from large mainstream parties had the ability to adjust municipal political institutions in such a way as to counteract the increased competitiveness of smaller parties. One such institutional adjustment is to reduce the size of the local council and thereby raise implicit electoral thresholds. Using a dataset that covers all 426 Hessian municipalities over the period 1989-2011, we document with a difference-indiscontinuity design that municipalities where the electoral competitiveness of smaller parties improved more because of the abolishment of the explicit threshold, reduced their council size more. Hence, established parties appear to erect barriers to entry by adjusting political institutions once new political formations become viable electoral alternatives.
    Keywords: electoral rules,electoral thresholds,political competition
    JEL: D70 D72 D78
    Date: 2015
  2. By: George Ward
    Abstract: Is it in politicians' interest to focus policy on subjective well-being (SWB)? Many governments and international organisations have recently begun to measure progress at least partly in terms of the population's SWB or "happiness". This paper investigates the extent to which citizens themselves judge national success in such terms. Using cross-country panel data, the analysis shows that the electoral fate of governing parties is associated not only with the state of the macroeconomy—as a substantial literature on 'economic voting' suggests—but also with the electorate's wider well-being. A country's aggregate level of SWB is able to account for more of the variance in government vote share than standard macroeconomic variables. This is consistent with a simple political agency model, and has implications for the incentives faced by politicians to act in the interests of voters.
    Keywords: Subjective well-being, political agency, elections
    JEL: I31 D72
    Date: 2015–04
  3. By: Lourdes Rodríguez-Chamussy
    Abstract: This paper uses variation in the timing of the Mexican antipoverty program's introduction across municipalities to identify its impact on the share of votes for the local incumbent party. Evidence is found that voters reward the mayor's party for the central benefit to their constituencies, accounting on average for 2.8 additional percentage points in the share of votes for the mayor's party. The analysis of party alignment shows that this electoral effect cannot be explained as a reward for the federal incumbent in local elections. Alternative explanations are examined, and it is shown that the effect for the local incumbent is heterogeneous for the different political parties and varies with characteristics of the municipalities, being stronger where the mayor faced more contestable elections, in capital cities of the states and in predominantly urban, more educated and relatively wealthier municipalities. Findings are consistent with the hypothesis that politicians have incentives to engage in signaling strategies to link themselves to the transfer program.
    Keywords: Municipal management, Elections, Municipal elections, Municipal elections, Voting, Government transfers
    Date: 2015–01
  4. By: Philip Keefer; Branko Milanovic
    Abstract: This working paper advances research on inequality with unique, new data on income distribution in 61 countries, including 20 Latin American countries, to explore the effects of political parties on redistribution. First, consistent with a central, but still contested, assumption of the political economy literature, left-wing governments redistribute more. In addition, consistent with recent research on the importance of party organization and the organizational differences between younger and older parties, older left-wing parties are more likely to internalize the long-run costs of redistribution and to be more credible in their commitment to redistribution, leading them to redistribute less. With entirely different data, the paper also provides evidence on mechanisms: left-wing governments not only redistribute more; they also tax more. Older left-wing parties, though, tax less than younger ones.
    Keywords: Economic Development & Growth, Governance, Taxation, Fiscal Policy, Redistribution, Inequality, Political parties, Democracy
    Date: 2014–12
  5. By: Funashima, Yoshito
    Abstract: Given that Nordhaus' political business cycle theory is relevant at election cycle frequency and that its validity can change over time, we consider wavelet analysis especially suited to test the theory. For the postwar U.S. economy, we exploit wavelet methods to demonstrate whether there actually exists an opportunistic political business cycle in monetary policy by allowing for time-varying behavior and by introducing the frequency-domain perspective. Our results indicate an inclination of the Federal Reserve to cut the Funds rate prior to presidential elections except for the 1990s. Moreover, such political manipulation is shown to significantly affect output in not only the famous Burns-Nixon era but also the Volcker-Reagan era. The outcomes are robust even when the effects of government spending are controlled for.
    Keywords: Monetary policy; Political business cycle; Wavelet
    JEL: E52 E58
    Date: 2015–04
  6. By: da Fonseca, Mariana Lopes
    Abstract: This study relies on a constitutional reform introducing term limits at the local elections level in Portugal as a natural experiment to estimate incumbency advantage in mayoral elections. It stresses the distinction between partisan and personal incumbency advantage using data on six local elections in 278 homogenous municipalities from 1993 to 2013. The analysis is based on two quasi-experimental methods, the RD and diff-in-disc designs, that allow for credible inference upon the source and magnitude of the incumbency advantage. Main contributions include one of the first estimates of partisan incumbency advantage in the literature and the use of a novel method in its estimation. Results show that whilst the returns to incumbency accruing to the candidate are positive and significant, there is no evidence of a significant partisan incumbency advantage. In addition, robustness test point to a potential role of term limits in causing political turnover.
    Keywords: incumbency advantage,local politics,electoral reform
    JEL: D70 D72 D78
    Date: 2015
  7. By: Wahl, Fabian
    Abstract: This study investigates the effect of participative political institutions (PPIs) that emerged in many central European cities from the late 13th century. The empirical analysis of the paper is based on newly compiled long-run data for the existence of different types of PPIs in 104 cities in the Holy Roman Empire. The effect of both an overall index of participativeness of political institutions as well as of the individual PPIs is tested empirically. When pooled over all periods and observations, there seems to be a significant positive overall effect of PPIs in the German-speaking area but not in the Low Countries. The study founds considerable spatial and temporal heterogeneity in the effect of PPIs. Furthermore, the effect of different types of PPIs differs substantially and in general seems to be short-lived. That is, the results show that the positive initial effect of some PPIs declined the longer they existed and over time.
    Keywords: Medieval Period,Early-Modern Period,Central Europe,City Development,Political Institutions,Early Democracy,Guilds
    JEL: N44 N94 O10 R11 H11 D72
    Date: 2015
  8. By: Mark J. Roe (Harvard Law School, USA); Massimiliano Vatiero ("Brenno Galli" Chair of Law and Economics, Institute of Law (IDUSI) & Institute of Economics (IdEP), Università della Svizzera italiana, Switzerland)
    Abstract: To fully understand governance and authority in the large corporation, one must attend to politics. Because basic dimensions of corporate organization can affect the interests of voters, because powerful concentrated interest groups seek particular outcomes that deeply affect large corporations, because those deploying corporate and financial resources from within the corporation to buttress their own interests can affect policy outcomes, and because the structure of some democratic governments fits better with some corporate ownership structures than with others, politics can and does determine core structures of the large corporation. In this review piece for the Oxford Handbook on Corporate Governance, we analyze the generalities and then look at core aspects of corporate governance that have been, and continue to be, politically influenced and sometimes politically driven: first, the historically fragmented ownership of capital in the United States; second, the postwar power of labor in Europe and its corporate impact; and, third, the ongoing power of the American executive and the American board as due in part to their influence on political and legal outcomes.
    Keywords: corporate governance, ownership separation, politics and public choice, securities markets, social democracy
    JEL: G30 J50 K22 P16
    Date: 2015–04–02
  9. By: Aytimur, R. Emre; Boukouras, Aristotelis; Schwager, Robert
    Abstract: We present a modified citizen-candidate model where the implemented policy arises from a compromise between the government and an unelected external power. We show that the two-candidate equilibria of this model differ significantly from the original: however small the cost of candidacy, the distance between the candidates´ policies, both ideal and implemented, remains strictly above a threshold. Moreover, there may be one-candidate equilibria in which the only candidate is not the one most preferred by the median voter. Both results point out that, even with negligible cost of entry, there are limits to strategic delegation.
    Keywords: elections,polarization,strategic delegation,bureaucracy,foreign influence
    JEL: D72 D78
    Date: 2015
  10. By: Craig Brett (Mount Allison University); John A Weymark (Vanderbilt University)
    Abstract: Majority voting over the nonlinear tax schedules proposed by a continuum of citizen candidates is considered. The analysis extends the finite-individual model of Röell (unpublished manuscript, 2012). Each candidate proposes the tax schedule that is utility maximal for him subject to budget and incentive constraints. Each of these schedules is a combination of the maxi-min and maxi-max schedules along with a region of bunching in a neighborhood of the proposer's type. Techniques introduced by Vincent and Mason (1967, NASA Contractor Report CR-744) are used to identify the bunching region. As in Röell's model, it is shown that individual preferences over these schedules are single-peaked, so the median voter theorem applies. In the majority rule equilibrium, marginal tax rates are negative for low-skilled individuals and positive for high-skilled individuals except at the endpoints of the skill distribution where they are typically zero.
    Keywords: bunching, citizen candidates, ironing, majority voting, nonlinear income taxation
    JEL: H2 D7
    Date: 2014–09–26
  11. By: Fahad Hassan Khan
    Abstract: This paper contributes to the historical political economy literature, which considers the fiscal imperatives of the state to be amongst the driving forces behind the emergence of representative systems of government, by examining the impact on democracy of a government’s reliance on alternative sources of revenue. ‘Taxation’ and ‘natural resource rent extraction’ are considered as alternative sources of revenue within a unified framework. I develop a simple game-theoretic model which postulates that an increase in tax revenues, or a decrease in natural resource rents, enhances democracy. The predictions of the model are empirically tested using a cross-national panel dataset, covering 132 countries over the time period 1990-2009. The evidence is in line with the theoretical model.
    Keywords: taxation, natural resource rents, democratisation
    JEL: B5 C1 C7 H2 O1
    Date: 2014
  12. By: da Fonseca, Mariana Lopes
    Abstract: This study investigates the impact of electing a majority in a municipality´s legislative body on different items of the local current and capital accounts. Inference is based on a RDD approach and a dataset containing electoral and financial information for a sample of 278 homogeneous municipalities over 32 years. Results provide evidence of a significant causal impact of treatment on the most relevant items of the current and capital revenue and expenditure accounts. In particular, municipalities ruled by a legislative majority raise more revenues through current and capital transfers, but also have higher expenditures with personnel and investment goods.
    Keywords: public finance,absolute majority
    Date: 2015
  13. By: Alberto Alesina; Francesco Passarelli
    Abstract: We study loss aversion in majority voting. First, we show a status quo bias. Second, loss aversion implies a moderating effect. Third, in a dynamic setting, the effect of loss aversion diminishes with the length of the planning horizon of voters; however, in the presence of a projection bias, majorities are partially unable to understand how fast they will adapt. Fourth, in a stochastic environment, loss aversion yields a significant distaste for risk, but also a smaller attachment to the status quo. The application of these results to a model of redistribution leads to empirically plausible implications.
    JEL: H0
    Date: 2015–04
  14. By: Apolte, Thomas; Gerling, Lena
    Abstract: We develop a model of insurrection markets and integrate the youth bulge as measured by the relative youth cohort size. As youth-specific characteristics we define the young person's attitude toward revolutionary groups and the government, the degree of risk aversion and the relative productivity of young people on the insurrection market as compared to the official labor market. We find that, apart from certain spontaneous outbreaks of violence or riots, youth bulges alone are not a good predictor for political violence. Nevertheless, deliberate insurrection activities that aim at changing political and economic power positions are indeed affected by youth bulges, but indirectly so, and their intensity is driven by the characteristics of the respective underlying set of politico-economic institutions. We test our implications in an empirical model based on cross-country panel data and find that the effect of the relative youth cohort size on insurrection outbreaks is moderated by changes in the underlying istitutional setting, and more precisely changes in the labor-market conditions as approximaed by unemployment rates.
    JEL: H56 J10 J22 P16
    Date: 2015
  15. By: Luis Felipe Zegarra (CENTRUM Católica Graduate Business School)
    Abstract: This article analyzes the evolution of the private credit market of Lima between 1835 and 1865. In particular, it explores the effects of political instability and institutional change on the allocation of medium-term and long-term credit. By relying on a sample of more than 1,200 notarized records, the article shows that institutions had an important effect on the cost of credit. Political instability and institutional uncertainties led to high interest rates. As Peru became more stable after the mid-1840s and the risk of lending declined, interest rates declined.
    Keywords: Mortgage credit, legislation, institutions, political instability
    JEL: N2 N26 N46 K1
    Date: 2015–04
  16. By: Patricia Yáñez-Pagans
    Abstract: This paper evaluates the impacts of increasing female representation in Bolivian municipal councils on public policy choices and welfare outcomes. By combining detailed administrative panel data on municipal expenditures and revenues together with electoral data, an innovative regression discontinuity design (RDD) is applied. As opposed to previous studies, the RDD approach proposed is unique since it is implemented to systems of proportional representation. Findings indicate that municipalities with women councilors devote more resources to social investments. In particular, women politicians prioritize education, health, and environmental protection expenditures giving less attention to infrastructure investments. The impacts of higher female representation appear only some years after the elections, highlighting the importance of training and experience. Despite changes in public policy choices there is weak evidence on the links with final welfare outcomes.
    Keywords: Gender Equality, Women, Elections, Public expenditure, Public policy choices, Female representation, Municipal councils, Public policy choices, Gender equality, Bolivia
    Date: 2014–12

This nep-pol issue is ©2015 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.