nep-pol New Economics Papers
on Positive Political Economics
Issue of 2016‒10‒16
eleven papers chosen by
Eugene Beaulieu
University of Calgary

  1. The Politics of FDI Expropriation By Marina Azzimonti
  2. The Political Economy of Taxation: Power, Structure, Redistribution By Stanley L. Winer
  3. Persuading voters By Ricardo Alonso; Odilon Câmara
  4. Who Becomes a Politican? By Dal Bó, Ernesto; Finan, Frederico; Folke, Olle; Persson, Torsten; Rickne, Johanna
  5. Building connections: Political corruption and road construction in India By Jonathan Lehne; Jacob N. Shapiro; Oliver Vanden Eynde
  6. Voting to Tell Others By Gautam Rao; John List; Stefano DellaVigna; Ulrike Malmendier
  7. Political Connections and Insider Trading By Thomas Bourveau; Renaud Coulomb; Marc Sangnier
  8. Violence against Rich Ethnic Minorities: A Theory of Instrumental Scapegoating By Yann Bramoullé; Pauline Morault
  9. And Yet It Grows: Crisis, Ideology, and Interventionist Policy Ratchets By Bjørnskov, Christian; Rode, Martin
  10. Linkage between Rural Voters and Politicians: Effects on Rice Policies in the Philippines and Thailand By Arnold H. Fang
  11. Truth-revealing voting rules for large populations * By Matías Núñez; Marcus Pivato

  1. By: Marina Azzimonti
    Abstract: I examine the role of political instability as a potential explanation for the lack of capital flows from rich countries to poor countries (i.e. the `Lucas Paradox'). Using panel data from 1984 to 2014, I document the following: (i) developed countries exhibit larger inflows of foreign direct investment (FDI), (ii) countries subject to high investment risk are those that typically receive low FDI inflows, and (iii) investment risk is generally higher in fractionalized and politically unstable economies. These findings suggest a negative relationship between political instability and FDI through the investment risk channel. I then inspect the theoretical mechanism using a dynamic political-economy model of redistribution, wherein policymakers have access to an expropriation technology that can be used to extract resources from foreign investors. The proceeds are used to finance group-specific transfers to domestic workers, but hinder economic growth by discouraging FDI. Different social groups compete to gain control of this instrument, but face a probability of losing power at each point in time. The greater the degree of political turnover is, the stronger the incentives to expropriate when in power. A key force driving this result is redistributive uncertainty, since there is a possibility that no transfers will be received in the future. The mechanism is supported by the finding that investment risk (a measure that captures the degree to which the extraction technology is used) is negatively related to FDI and government stability. Finally, I show that the political equilibrium exhibits over-expropriation and under-investment even when there is no political uncertainty because fractionalized societies suffer from static inefficiencies due to the presence of a common pool problem.
    JEL: E6 F38 F43 H2 H21
    Date: 2016–09
  2. By: Stanley L. Winer (Department of Economics, Carleton University)
    Abstract: In this chapter I provide an overview of the political economy of taxation in democratic states by considering the three most important issues in the field: (1) the evolution of the power to tax in (what are now) the mature constitutional democracies; (2) the nature and determinants of modern tax structures; and (3) redistribution in pluralistic societies over various horizons and in the face of economic shocks. The discussion considers the ideas and models that have arisen as scholars have grappled with these related issues, and points to some of the outstanding problems that may be worth pursuing in future research.
    Keywords: Taxation, Oxford Handbook, political economy, public choice, power to tax, tax structure, fiscal redistribution
    JEL: D72 D78 H2 H24
    Date: 2016–10–01
  3. By: Ricardo Alonso; Odilon Câmara
    Abstract: In a symmetric information voting model, an individual (politician) can influence voters' choices by strategically designing a policy experiment (public signal). We characterize the politician's optimal experiment. With a non-unanimous voting rule, she exploits voters' heterogeneity by designing an experiment with realizations targeting different winning coalitions. Consequently, under a simple-majority rule, a majority of voters might be strictly worse off due to the politician's influence. We characterize voters' preferences over electoral rules and provide conditions for a majority of voters to prefer a supermajority (or unanimity) voting rule, in order to induce the politician to supply a more informative experiment.
    Keywords: strategic experimentation; persuasion; voting
    JEL: J1
    Date: 2016
  4. By: Dal Bó, Ernesto (University of California at Berkeley); Finan, Frederico (University of California at Berkeley); Folke, Olle (Research Institute of Industrial Economics (IFN)); Persson, Torsten (Institute for International Economic Studies); Rickne, Johanna (Research Institute of Industrial Economics (IFN))
    Abstract: Can a democracy attract competent leaders, while attaining broad representation? Economic models suggest that free-riding incentives and lower opportunity costs give the less competent a comparative advantage at entering political life. Also, if elites have more human capital, selecting on competence may lead to uneven representation. We examine patterns of political selection among the universe of municipal politicians in Sweden using extraordinarily rich data on competence traits and social background for the entire population. We document four new facts: First, politicians are on average signi cantly smarter and better leaders than the population they represent. Second, the representation of social background, whether measured by intergenerational earnings or social class, is remarkably even. Third, there is at best a weak tradeo in selection between competence and representation. Fourth, both material and intrinsic motives matter in selection, as does screening by political parties.
    Keywords: Political Selection; Political Representation; Family Background; Competence
    JEL: H10 H70
    Date: 2016–09–15
  5. By: Jonathan Lehne (PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), PSE - Paris School of Economics); Jacob N. Shapiro (WWSPIL - Woodrow Wilson School of Public and International Affairs - Princeton University [Pinceton]); Oliver Vanden Eynde (PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), PSE - Paris School of Economics)
    Abstract: Politically-driven corruption is a pervasive challenge for development, but evidence of its welfare effects is scarce. Using data from a major rural road construction programme in India we document political influence in a setting where politicians have no official role in contracting decisions. Exploiting close elections to identify the causal effect of coming to power, we show that the share of contractors whose name matches that of the winning politician increases by 63% (from 4% to 6.4%). Regression discontinuity estimates at the road level show that political interference raises costs, lowers quality, and increases the likelihood that roads go missing.
    Keywords: Elections,Corruption
    Date: 2016–07
  6. By: Gautam Rao; John List; Stefano DellaVigna; Ulrike Malmendier
    Abstract: Why do people vote? We design a field experiment to estimate a model of voting 'because others will ask'. The expectation of being asked motivates turnout if individuals derive pride from telling others that they voted, or feel shame from admitting that they did not vote, provided that lying is costly. In a door-to-door survey about election turnout, we experimentally vary (i) the informational content and use of a flyer pre-announcing the survey, (ii) the duration and payment for the survey, and (iii) the incentives to lie about past voting. The experimental results indicate significant social image concerns. For the 2010 Congressional election, we estimate a value of voting 'to tell others' of about $15, contributing 2 percentage points to turnout. Lastly, we evaluate a get-out-the-vote intervention in which we tell potential voters that we will ask if they voted.
    Date: 2016
  7. By: Thomas Bourveau (Hong Kong University of Science and Technology); Renaud Coulomb (University of Melbourne); Marc Sangnier (Aix-Marseille University (Aix-Marseille School of Economics), CNRS, & EHESS)
    Abstract: This paper investigates whether political connections affect individuals’ propensity to engage in illegal activities in financial markets. We use the 2007 French presidential election as marker of change in the value of political connections, in a difference-in-differences research design. We examine the behavior of directors of publicly listed companies who are connected to the future president through campaign donations or direct friendships, relative to that of other non-connected directors, before and after the election. We uncover indirect evidence that connected directors do more illegal insider trading after the election. More precisely, we find that purchases by connected directors trigger larger abnormal returns, and that connected directors are more likely not to comply with trading disclosure requirements and to trade closer to major corporate events.
    Keywords: political connections, white-collar crime, insider trading
    JEL: D72 G14 G18 G38 K22 K42
    Date: 2016–10
  8. By: Yann Bramoullé (AMSE - Aix-Marseille School of Economics - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - EHESS - École des hautes études en sciences sociales); Pauline Morault (AMSE - Aix-Marseille School of Economics - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - EHESS - École des hautes études en sciences sociales)
    Abstract: In many parts of the developing world, ethnic minorities play a central role in the economy. Examples include Chinese throughout Southeast Asia, Indians in East Africa and Lebanese in West Africa. These rich minorities are often subject to popular violence and extortion, and are treated ambiguously by local politicians. We develop a formal framework to analyze the interactions between a rent-seeking political elite, an economically dominant ethnic minority and a poor majority. We find that the local elite can always make use of the presence of the rich minority to maintain its hold on power. When the threat of violence is high, the government may change its economic policies strategically to sacrifice the minority to popular resentment. We analyze the conditions under which such instrumental scapegoating emerges, and the forms it takes. We then introduce some social integration between both elites capturing, for instance, mixed marriages and shared education. Social integration reduces violence and yields qualitative changes in economic policies. Overall, our results help explain documented patterns of violence and segregation.
    Keywords: elites,popular violence,ethnic minority,scapegoat
    Date: 2016–08
  9. By: Bjørnskov, Christian (Aarhus University); Rode, Martin (University of Navarra)
    Abstract: Previous studies of policy responses to economic crises argue that crises may lead to more interventionist policy but also cause deregulation. The empirical evidence in previous studies is equally mixed. The present paper argues that whether or not governments implement more or less interventions depend on their core political ideology. We thus expect ideologically heterogeneous policy reactions to crises yet also note that crisis responses theoretically may cause ‘policy ratchets’ where temporary crisis policies become permanent. Employing a panel of 68 countries with Western political institutions observed between 1975 and 2010, and exploring the evolution of indicators of government size and regulatory policy, we find that crises in general cause more interventionist policies when countries have centrist or left-wing governments. We also find clear evidence of policy ratchets in all policy areas. The ideological crisis policies mainly relate to government consumption and market regulations.
    Keywords: Economic crisis; Regulation; Government consumption; Government ideology
    JEL: D72 H11 H70
    Date: 2016–10–07
  10. By: Arnold H. Fang
    Abstract: This article explains how linkages between politicians and rural voters affected the design of agricultural policies, using rice in two countries as examples. In the Philippines, colonial history bolstered an oligarchy of landed elite politicians, whose power was restored after the dictatorship of Marcos ended in 1986. Their practice of patronage brought corruption that led to dwindling rice productivity and increasing import dependence while displacing the political necessity to offer price support to farmers. In Thailand, sociopolitical development was more centralized, with new electoral rules introduced in 1997 to weaken locally confined patronage arrangements. Mass parties competing on a policy platform were favoured instead, resulting in increasing, but eventually, excessive subsidies for rice farmers. Although voter–politician linkages resulted in different rice policies in the two countries, recent instability in the world rice market showed that strategies with greater sustainability considerations are needed in addressing domestic income disparities and global food insecurity.
    Keywords: food security, political institutions, patronage, Thailand, Philippines
    Date: 2016–10–11
  11. By: Matías Núñez (Université Paris-Dauphine); Marcus Pivato (THEMA - université de Cergy-Pontoise -)
    Abstract: Deterministic voting rules are notoriously susceptible to strategic voting. We propose a new solution to this problem for large electorates. For any deterministic voting rule, we can design a stochastic rule that asymptotically approximates it in the following sense: for a sufficiently large population of voters, the stochastic voting rule (i) incentivizes every voter to reveal her true preferences and (ii) produces the same outcome as the deterministic rule, with very high probability.
    Keywords: Large Elections,Truth-telling,Incentives
    Date: 2016–06–30

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