nep-pol New Economics Papers
on Positive Political Economics
Issue of 2017‒09‒17
ten papers chosen by
Eugene Beaulieu
University of Calgary

  1. Politics, Hospital Behavior, and Health Care Spending Effect Methods to Examine Treatment Effect Heterogeneity in Experiments for the Young and Privately Insured? By Zack Cooper; Amanda E. Kowalski; Eleanor Neff Powell; Jennifer Wu
  2. Fundamental Errors in the Voting Booth By Edward L. Glaeser; Giacomo A.M. Ponzetto
  3. Interim Self-Stable Decision Rules By Daeyoung Jeong; Semin Kim
  4. Engineering Crises: Favoritism and Strategic Fiscal Indiscipline By Gilles Saint-Paul; Davide Ticchi; Andrea Vindigni
  5. Dynamics of the Economics of Special Interest Politics. By Manjhi, Ganesh; Mehra, Meeta Keswani
  6. The Political Economy of Diagnosis-Related Groups By Paola Bertoli; Veronica Grembi
  7. Democracy and Credit “Democracy Doesn`t Come Cheap” But At Least Credit to Its Corporations Will Be By Manthos D. DELIS; Iftekhar HASAN; Steven ONGENA
  8. To Bribe or not to Bribe? Corruption Uncertainty and Corporate Practices By Jan Hanousek; Anastasiya Shamshur; Jiri Tresl
  9. Electoral Contests with Dynamic Campaign Contributions By Andrea Mattozzi; Fabio Michelucci
  10. The Politics of Repatriation: Rwandan Refugees in Uganda, 2003-2017 By Ahimbisibwe, Frank

  1. By: Zack Cooper (School of Public Health, Yale University); Amanda E. Kowalski (Cowles Foundation, Yale University); Eleanor Neff Powell (University of Wisconsin-Madison); Jennifer Wu (Department of Political Science, Yale University)
    Abstract: This paper examines the link between legislative politics, hospital behavior, and health care spending. When trying to pass sweeping legislation, congressional leaders can attract votes by adding targeted provisions that steer money toward the districts of reluctant legislators. This targeted spending provides tangible local benefits that legislators can highlight when fundraising or running for reelection. We study a provision - Section 508 – that was added to the 2003 Medicare Modernization Act (MMA). Section 508 created a pathway for hospitals to apply to get their Medicare payment rates increased. We find that hospitals represented by members of the House of Representatives who voted ‘Yea’ on the MMA were significantly more likely to receive a 508 waiver than hospitals represented by members who voted ‘Nay.’ Following the payment increase generated by the 508 program, recipient hospitals treated more patients, increased payroll, hired nurses, added new technology, raised CEO pay, and ultimately increased their spending by over $100 million annually. Section 508 recipient hospitals formed the Section 508 Hospital Coalition, which spent millions of dollars lobbying Congress to extend the program. After the vote on the MMA and before the vote to reauthorize the 508 program, members of Congress with a 508 hospital in their district received a 22% increase in total campaign contributions and a 65% increase in contributions from individuals working in the health care industry in the members’ home states. Our work demonstrates a pathway through which the link between politics and Medicare policy can dramatically affect US health spending.
    JEL: I10 I18 H51 D72 P16
    Date: 2017–08
  2. By: Edward L. Glaeser; Giacomo A.M. Ponzetto
    Abstract: Psychologists have long documented that we over-attribute people's actions to innate characteristics, rather than to luck or circumstances. Similarly, economists have found that both politicians and businessmen are rewarded for luck. In this paper, we introduce this "Fundamental Attribution Error" into two benchmark political economy models. In both models, voter irrationality can improve politicians' behavior, because voters attribute good behavior to fixed attributes that merit reelection. This upside or irrationality is countered by suboptimal leader selection, including electing leaders who emphasize objectives that are beyond their control. The error has particularly adverse consequences for institutional choice, where it generates too little demand for a free press, too much demand for dictatorship, and responding to endemic corruption by electing new supposedly honest leaders, instead of investing in institutional reform.
    Keywords: fundamental attribution error, political economy
    JEL: D72
    Date: 2017–08
  3. By: Daeyoung Jeong (The Bank of Korea); Semin Kim (Yonsei University)
    Abstract: This study identi es a set of interim self-stable decision rules. In our model, individual voters encounter two separate decisions sequentially: (1) a decision on the change of a voting rule they are going to use later and (2) a decision on the nal voting outcome under the voting rule which has been decided from the prior procedure. A given decision rule is self-stable if any other possible rule does not get enough votes to replace the given rule under the given rule itself. We fully characterize the set of interim self-stable decision rules among weighted majority rules with given weights.
    Keywords: Weighted majority rules, decision rules, self-stability
    JEL: C72 D02 D72 D82
    Date: 2017–09
  4. By: Gilles Saint-Paul (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, New York University Abu Dhabi); Davide Ticchi (Marche Polytechnic University); Andrea Vindigni (University of Genova)
    Abstract: If people understand that some macroeconomic policies are unsustainable, why would they vote for them in the .first place? We develop a political economy theory of the endogenous emergence of fiscal crises, based on the idea that the adjustment mechanism to a crisis favors some social groups, that may be induced ex-ante to vote in favor of policies that are more likely to lead to a crisis. People are entitled to a certain level of a publicly provided good, which may be rationed in times of crises. After voting on that level, society votes on the extend to which it will be financed by debt. Under bad enough macro shocks, a crisis arises: taxes are set at their maximum but despite that some agents do not get their entitlement. Some social groups do better in this rationing process than others. We show that public debt .which makes crises more likely .is higher, as is the probability of a crisis, the greater the level of favoritism. If the favored group is important enough to be pivotal when society votes on the entitlement level, favoritism also leads to greater public expenditure. We show that the favored group may strategically favor a weaker state in order to make crises more frequent. Finally, the decisive voter when choosing expenditure may be different from the one when voting on debt. In such a case, constitutional limits on debt may raise the utility of all the poor, relative to the equilibrium outcome absent such limits.
    Keywords: Political Economy,Fiscal Crises,Favoritism,Entitlements,Public Debt,In- equality,State Capacity
    Date: 2017–09
  5. By: Manjhi, Ganesh (Gargi College, Delhi University); Mehra, Meeta Keswani (Jawaharlal, Nehru University)
    Abstract: This paper derives the solution to differential games, when there are four sets of players, namely - two political parties (politicians), voters and a special interest group. The basic results are similar as Lambertini (2001, 2014). We find that, an open-loop equilibrium collapses to a closed-loop equilibrium. Therefore, the open-loop equilibrium is a sub-game perfect. Further, the private optimum is always higher than the social optimum in terms of the provision of the expenditure on public good. That is, if both the parties have access to public expenditure for the provision of the expenditure on public good they have the tendency to overspend and can incur higher deficits. Consequently, voters vote retrospectively to the party which overspend and results in higher fiscal deficits. Similarly, a larger private optimal regulatory benefit helps the political parties to receive higher financial contribution. Overall, the fiscal deficit in excess of certain level of threshold can create higher cost to the voters and hence the economy as the future tax and this is more so in the presence of special interest group.
    Keywords: Special Interest Group ; Public Good ; Fiscal Deficit ; Regulatory Benefit ; Financial Contribution ; Differential Games
    JEL: C73 E6 H3
    Date: 2017–08
  6. By: Paola Bertoli; Veronica Grembi
    Abstract: We provide a political economy interpretation of the variations in the prices of 6 obstetric diagnosis-related groups (DRGs) using Italy as a case study. Italy provides a unique institutional setting since its 21 regional governments can decide to adopt the national DRG system or to adjust/waive it. Using a panel fixed effects model, we exploit the results of 66 electoral ballots between 2000 and 2013 to estimate how obstetric DRGs are affected by the composition and characteristics of regional governments. We find that the incidence of physicians among regional politicians explains variations in DRGs with low technological intensity, such as normal newborns, but not of those with high technological intensity, as severely premature newborns. We further investigate these results by exploiting the implementation of a budget constraint policy. Applying a difference-in-difference strategy, we observe a decrease in the average levels of DRGs after the implementation of the policy, but the magnitude of this decrease depends on the presence of physicians among politicians and the political alignment between the regional and the national government. Finally, we rely on patient data (6,500,000 infant deliveries) to assess whether any of the political economy variables have a positive impact on the quality of regional obstetric systems. We find no effect.
    Keywords: diagnosis-related groups; regional governments; difference in differences;
    JEL: H51 H70 I1
    Date: 2017–06
  7. By: Manthos D. DELIS (University of Surrey); Iftekhar HASAN (Fordham University and Bank of Finland); Steven ONGENA (University of Zurich, Swiss Finance Institute, KU Leuven, and CEPR)
    Abstract: Does democratization reduce the cost of credit? Using global syndicated loan data from 1984 to 2014, we show that democratization has a sizeable negative effect on loan spreads: a one point increase in the zero-to-ten Polity IV index of democracy shaves on average 21 basis points off spreads. Reversals to autocracy hike spreads more strongly. Our results are robust to the comprehensive inclusion of relevant controls, to the instrumentation with regional waves of democratization, and to a battery of sensitivity tests. We thus highlight the lower cost of loans as one relevant mechanism through which democratization may affect economic development.
    Keywords: Loan pricing; Loan spreads; Democratic institutions; Reversals
    JEL: G21 G30 P16 P26 P27 P47
    Date: 2017–05
  8. By: Jan Hanousek; Anastasiya Shamshur; Jiri Tresl
    Abstract: Using a large sample of private firms over the period from 2001 to 2013, we study the effect of corruption uncertainty on corporate investments and cash holdings. We find that a higher uncertainty about the level of corruption is associated with lower corporate investments and lower cash holdings. These results are sensitive to the ownership structure of a firm. Firms with no foreign majority ownership appear to be more sensitive to corruption-induced uncertainty than majority-controlled foreign firms. They significantly decrease their investments and cash holdings. We hypothesize that they move their cash off-balance-sheet to create cash reserves as the uncertainty of when, whom, and how much to bribe increases.
    Keywords: corporate investment; corruption; uncertainty; cash holdings; firms; panel data; Europe
    JEL: C33 D24 G32 L60 L80 M21
    Date: 2017–06
  9. By: Andrea Mattozzi; Fabio Michelucci
    Abstract: We study a two-period dynamic principal agent model in which two agents with different unobservable abilities compete in a contest for a single prize. A risk-neutral principal can affect the outcome of the contest by dividing a given budget between agents in each period and her net payoff depends on the rela- tive share of the budget given to the winner of the contest. We analyze two settings that differ by the presence/absence of moral hazard. The results we derive are consistent with stylized facts regarding the dynamics of US campaign contributions.
    Keywords: dynamic games; contests; experimentation; lobbies; campaign contributions
    JEL: D72 D78 C72 C73
    Date: 2017–08
  10. By: Ahimbisibwe, Frank
    Abstract: Uganda hosts refugees from neighboring countries including Rwanda. According toUNHCR, by the end of 2016, Uganda was the 5th and 1st top refugee hosting country in the world and Africa respectively. It hosted over 900,000 refugees. This number had increased to over 1.2 million by May 2017. In 2003, a tripartite agreement was signed to repatriate 25,000 Rwandan refugees. Only 850 of them accepted to return and many of them came back almost immediately to Uganda claiming insecurity and human rights violations in Rwanda. The Rwandan repatriation was not devoid of politics. It was influenced by political interests of various actors: the international community, regional geo-politics, Uganda and Rwanda. This article analyzes the politics of repatriation of Rwandan refugees by focusing on politics at international and regional levels as well as in Uganda and Rwanda.
    Keywords: Rwandan refugees; repatriation; politics; Uganda; Rwanda
    Date: 2017–08

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