nep-pol New Economics Papers
on Positive Political Economics
Issue of 2017‒08‒06
twelve papers chosen by
Eugene Beaulieu
University of Calgary

  1. The Centre-State Political Transfer Cycles By Ganesh Manjhi; Meeta Keswani Mehra
  2. The political economy of fiscal transparency and independent fiscal councils By Beetsma, Roel; Debrun, Xavier; Sloof, Randolph
  3. Voting behavior and the economy: evidence from Greece By Eleftherios Goulas; Christos Kallandranis; Athina Zervoyianni
  4. US vs. European Apportionment Practices: The Conflict between Monotonicity and Proportionality By Laszlo A. Koczy; Peter Biro; Balazs Sziklai
  5. Human Capital, Public Debt, and Economic Growth: A Political Economy Analysis By Tetsuo Ono; Yuki Uchida
  6. Politically Induced Regulatory Risk and Independent Regulatory Agencies By Strausz, Roland
  7. The Rise of New Corruption: British MPs during the Railway Mania of 1845 By Esteves, Rui; Geisler Mesevage, Gabriel
  8. Equalization transfers and convergence between federal and unitary systems: a contribution to their historical analysis By Giorgio Brosio
  9. Empirical Analysis on the Effect of Preventive Care Programs in Japan Evidence from Municipality-level data By Fengming CHEN; Hiroshi YOSHIDA
  10. Political Distribution Risk and Aggregate Fluctuations By Drautzburg, Thorsten; Fernández-Villaverde, Jesús; Guerron-Quintana, Pablo A.
  11. The political economy of income distribution: industry level evidence from 14 OECD countries By Guschanski, Alexander; Onaran, Özlem
  12. Ethnolinguistic Favoritism in African Politics By Andrew Dickens

  1. By: Ganesh Manjhi (Jawaharlal Nehru University); Meeta Keswani Mehra (Jawaharlal Nehru University)
    Abstract: Using Arellano-Bond dynamic panel-data estimation methods (GMM) for a balanced panel data from 1980-2010 for 14 Indian states, we try to find whether the election affects the individual components of transfers from the centre to the states, namely, grants from the centre, loan from the centre, and tax devolution. We also attempt to examine, if different transfer variables and other politico-economic characteristics of the country are able to create the possibility of retaining the political power for the incumbent. We find that the generally right wing and coalition governments are relatively less likely to transfer resources to the states. However, the state level ruling party, which is either the same party at the centre or an ally, tends to get higher transfers from the centre than a non-allied one. Similar to the pre-election political budget cycles found in the existing literature (Drazen and Eslava, 2010, Aidt, Veiga and Veiga, 2011, Klomp and Hahn, 2013, Chortareas, Logothetis and Papandreou, 2016), the political transfer cycle (PTC) is visible one year before the parliamentary election, whereas cycles are visible in the year of assembly elections in case of grants from the centre and loan from the centre. The tax devolution does not show any clear pattern of cycles, either in parliamentary or in assembly elections. The paper is also extended to a binary Logit specification to test for the incumbent’s probability of winning the election. We find that grants and loans are likely to have varied impacts on an election win depending on the timing. Opportunistic grants in the year before the election are likely to help in winning whereas; a loan punishes the incumbent in parliamentary elections. Instead, opportunistic manipulations in grants and loan in the year of election help the incumbent retain political power in national elections whereas, only the opportunistic loan from the centre to the states in the year of election help to win the assembly elections. Further, it is found that a higher voters’ turnout in the state is more likely to win the election, inflation reduces the possibility of the win, and a more experienced government has a higher probability of a win. Moreover, our results also show that the right wing government is more likely to win the election. Length: 51 pages
  2. By: Beetsma, Roel; Debrun, Xavier; Sloof, Randolph
    Abstract: The global surge in independent fiscal councils (IFCs) raises three related questions: How can IFCs improve the conduct of fiscal policy? Are they simultaneously desirable for voters and elected policymakers? And are they resilient to changes in political conditions? We build a model in which voters cannot observe the true competence of elected policymakers. IFC's role is to mitigate this imperfection. Equilibrium public debt is excessive because policymakers are "partisan" and "opportunistic". If voters only care about policymakers' competence, both the incumbent and the voters would be better off with an IFC as the debt bias would fall. However, when other considerations eclipse competence and give the incumbent a strong electoral advantage or disadvantage, setting up an IFC may be counterproductive as the debt bias would increase. If the incumbent holds a moderate electoral advantage or disadvantage, voters would prefer an IFC, but an incumbent with a large advantage may prefer not to have an IFC. The main policy implications are that (i) establishing an IFC can only lower the debt bias if voters care sufficiently about policymakers' competence; (ii) not all political environments are conducive to the emergence of IFCs; and (iii) IFCs are vulnerable to shifts in political conditions.
    Keywords: competence; congruence; fiscal transparency; Independent fiscal councils; opportunistic bias; partisan bias; public debt
    JEL: E62 H6
    Date: 2017–07
  3. By: Eleftherios Goulas (Department of Law & Finance, Bedfordshire University, UK); Christos Kallandranis (Department of Accounting, Finance & Economics, Regent's University London, UK); Athina Zervoyianni (Department of Economics, University of Patras, Greece; The Rimini Centre for Economic Analysis)
    Abstract: This paper examines the relationship between Greek voters' behaviour and the economy, paying particular attention to the effect on two non-orthodox parties, Syriza and Golden Dawn. We use data based on actual vote-shares across 13 Greek peripheries from five general elections over the period 2000-2012. Our results are in accordance with the predictions of the punishment-sanctioning model, namely that incumbent parties are supported by voters in good times whereas voters deprecate them during bad times. In particular, we document that worsening economic conditions have led the Greek electorate to reduce support for traditional parties and move to non-traditional populist parties, like the left-wing Syriza and the ultra-nationalistic right-wing Golden Dawn. Yet we find an asymmetry between these two non-orthodox parties: while electorate support for Syriza is found to be strongly influenced by changes in GDP-growth and unemployment, this is not the case for Golden Dawn. Indeed, our estimates suggest that the increased electoral support for Golden Dawn has been mainly related to the forced fiscal-deficit cuts associated with Greece's bail-out program. This suggests that the Greek electorate does not believe that Golden Dawn can effectively address the country's major economic problems.
    Keywords: Economic Voting, Elections, Panel Data, System GMM
    JEL: D72 C23 E60
    Date: 2017–07
  4. By: Laszlo A. Koczy (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Keleti Faculty of Business and Management, Obuda University); Peter Biro (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Department of Operations Research and Actuarial Sciences, Corvinus University); Balazs Sziklai (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Department of Operations Research and Actuarial Sciences, Corvinus University)
    Abstract: To ensure equal representation, the voting districts of a country must be more or less of the same size. Designing such voting districts, however, is not an easy task due to the fact that voting districts are encompassed in administrative regions. Since the respective share of an administrative region, i.e.\ the number of seats its entitled to based on its population, is not necessarily an integer number, it is hard to distribute the seats in a fair way. The arising fair distribution problem is called the apportionment problem. Proportionality of the allocation is the most important, but not the only factor of a fair solution. Monotonicity related difficulties, administrative and demographic issues make the problem more complex. We provide an overview of the classical apportionment methods as well as the Leximin Method – a new apportionment technique designed to comply with the recommendation made by the Venice Commission. We discuss the properties of apportionments and test the most prominent methods on real data.
    Keywords: Apportionment problem, Largest remainder methods, Divisor methods, Venice Commission, Leximin method
    JEL: D72 D78
    Date: 2017–06
  5. By: Tetsuo Ono (Graduate School of Economics, Osaka University); Yuki Uchida (Faculty of Economics, Seikei University)
    Abstract: This study considers the politics of public education policy in an overlapping- generations model with physical and human capital accumulation. In particular, this study examines how debt and tax financing differ in terms of growth and welfare across generations, as well as which fiscal stance voters support. The analysis shows that the growth rate in debt financing is lower than that in tax financing, and that debt financing creates a tradeoff between the present and future generations. The analysis also shows that debt financing attains slower economic growth than that realized by the choice of a social planner who cares about the welfare of all generations.
    Keywords: Economic growth, Human capital, Public debt, Political equilib- rium
    JEL: D70 E24 H63
    Date: 2016–01
  6. By: Strausz, Roland (Humboldt Universität Berlin)
    Abstract: Uncertainty in election outcomes generates politically induced regulatory risk. For monopoly regulation, political parties\' risk attitudes towards such risk depend on a fluctuation effect that hurts both parties and an output--expansion effect that benefits at least one party. Irrespective of the parties\' risk attitudes, political parties have incentives to negotiate away regulatory risk by pre-electoral bargaining. Pareto-efficient bargaining outcomes fully eliminate regulatory risk and are attainable through institutionalizing independent regulatory agencies with a specific objective. Key aspects of the regulatory overhaul of the US Postal system in 1970 are argued to be consistent with these results.
    Keywords: regulation; independent regulatory agency; regulatory risk; electoral uncertainty;
    JEL: D82
    Date: 2017–07–31
  7. By: Esteves, Rui; Geisler Mesevage, Gabriel
    Abstract: In the 1840s, speculation in railway shares in the UK prompted the creation of hundreds of new railway companies. Each company needed to petition Parliament for the approval of new railway routes. In this paper, we investigate whether parliamentary regulation of the new railway network was distorted by politicians' vested interests. Drawing on methods from peer-effects analysis, we identify situations where MPs could have traded votes with specific colleagues in order to get their preferred projects approved (logrolling). We confirm that logrolling was both prevalent and significant. Our estimates suggest that at least a quarter of approved lines received their bills because of logrolling. Companies approved through logrolling also underperformed in the stock market during the railway bubble and after its final crash in 1847.
    Keywords: networks; railways; rent-seeking; voting
    JEL: D72 N44 N73
    Date: 2017–07
  8. By: Giorgio Brosio (Università di Torino)
    Abstract: Equalization transfers, or grants, are a crucial component of modern federal and unitary countries. They also shape the evolution of different political systems promoting convergence in their effective working. The literature does not provide studies with a long-term and comparative perspective despite the relevance of this approach to the study of intergovernmental relations. The paper provides a contribution aimed at filling this void. It considers a small set of countries, including two unitary systems, Italy and the UK with a focus on English local government and three federal countries, Australia, Canada, and the United States. Federal systems are paying now more attention than initially to uniformity of policies and equality of access to the benefits of public policies, while unitary systems show now much more attention than in the past to reaching equality of access and benefits from policies through local autonomy and use of transparent intergovernmental grants, rather than with hierarchical command. Another way of illustrating this process is stressing the growing recognition of common citizenship in both federal and unitary states.
    Keywords: Evolution of intergovernmental relations; equalization transfers, political institutions
    JEL: H7 H77
    Date: 2017–07
  9. By: Fengming CHEN; Hiroshi YOSHIDA
    Abstract: This study examines the effects of the number of preventive care programs on the number of certified less disabled recipients for long-term care insurance. By constituting a municipality-level two-period panel data, we find that the total number of preventive care programs significantly decreases the number of certified less disabled recipients. When looking at the details of preventive care programs, we find the number of physical activities and dining party activities has a negative effect. And we also examine the combination of preventive care activities and find the effects of physical activities and dining party activities are relatively robust. We conclude that the design of preventive care programs should be considered the characteristics of objects, especially the elderly.
    Date: 2017–05
  10. By: Drautzburg, Thorsten; Fernández-Villaverde, Jesús; Guerron-Quintana, Pablo A.
    Abstract: We argue that political distribution risk is an important driver of aggregate fluctuations. To that end, we document significant changes in the capital share after large political events, such as political realignments, modifications in collective bargaining rules, or the end of dictatorships, in a sample of developed and emerging economies. These policy changes are associated with significant fluctuations in output and asset prices. Using a Bayesian proxy-VAR estimated with U.S. data, we show how distribution shocks cause movements in output, unemployment, and sectoral asset prices. To quantify the importance of these political shocks for the U.S. as a whole, we extend an otherwise standard neoclassical growth model. We model political shocks as exogenous changes in the bargaining power of workers in a labor market with search and matching. We calibrate the model to the U.S. corporate non-financial business sector and we back up the evolution of the bargaining power of workers over time using a new methodological approach, the partial filter. We show how the estimated shocks agree with the historical narrative evidence. We document that bargaining shocks account for 34% of aggregate fluctuations.
    Keywords: Aggregate fluctuations; bargaining shocks; historical narrative.; partial filter; Political redistribution risk
    JEL: E32 E37 E44 J20
    Date: 2017–07
  11. By: Guschanski, Alexander; Onaran, Özlem
    Abstract: This article presents an econometric estimation of the determinants of the wage share, using sectoral data for 14 OECD countries for the period 1970- 2014. We present estimations for the wage share of high- and low-skilled workers and within manufacturing and service industries. We augment sectoral data with input-output tables and union density data to obtain detailed estimations of the effect of technological change, globalisation and bargaining power on the wage share. We find a significant negative effect of globalisation and we discover offshoring to emerging markets to be a robust driver of this process. Technological change had an impact which differs by skill group, but theoretical issues and lack of robustness of the results cast doubt on the hypothesis of skill-biased technological change as a key factor in the overall decline in the wage share. Furthermore, we find a robust effect of institutional factors such as union density and minimum wages on the wage share, lending strong support to the political economy approach to functional income distribution.
    Keywords: wage share; income distribution; union density; technology; offshoring
    JEL: E25 J50
    Date: 2017–07–31
  12. By: Andrew Dickens (Department of Economics, Brock University)
    Abstract: I document evidence of ethnic favoritism in a panel of 163 ethnolinguistic groups partitioned across 35 African countries. In contrast to previous studies, I construct a computerized lexicostatistical measure of linguistic similarity between each ethnic group and the national leader as a novel measure of ethnic proximity. I exploit the arbitrary placement of African political borders as a source of exogenous within-group variation, where the similarity of the same partitioned group varies over time according to the ethnolinguistic identity of the national leader on each side of the border. To quantify patronage at the group level, I isolate time variation in night light luminosity resulting from changes in the ethnolinguistic identity of a leader. Using a triple-difference estimator I find that a one standard deviation increase in linguistic similarity yields a 7.0 percent increase in luminosity, which corresponds to a 2.1 percent increase in group-level GDP per capita. I then use the continuity of linguistic similarity to show that favoritism exists among groups that are not coethnic to the leader, where the mean effect of non-coethnic similarity is one quarter the size of the coethnic effect. I corroborate this evidence using individual-level data and establish that it's where an individual lives and the attached ethnolinguistic identity that predicts favoritism, not the identity of the individual respondent. I relate these results to the literature on coalition building, and provide evidence that ethnicity is one of the guiding principles behind high-level government appointments.
    Date: 2017–07

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