nep-pol New Economics Papers
on Positive Political Economics
Issue of 2018‒05‒14
seventeen papers chosen by
Eugene Beaulieu
University of Calgary

  1. Why an EU Referendum? Why in 2016? By Becker, Sascha O.; Fetzer, Thiemo
  2. With a Little Help from My Friends: Ministerial Alignment and Public Spending Composition in Parliamentary Democracies By Abel Bojar
  3. Political Ideology and the Intragenerational Prospect of Upward Mobility By Maite D. Laméris; Harry Garretsen; Richard Jong-A-Pin
  4. Political shocks and financial markets : regression-discontinuity evidence from national elections. By Daniele Girardi
  5. Structural Power in Comparative Political Economy: Perspectives from Policy Formulation in Latin America By Fairfield, Tasha
  6. Law and political economy By Wilkinson, Michael; Lokdam, Hjalte
  7. Dynamic Tax Externalities and the U.S. Fiscal Transformation in the 1930s By Dirk Niepelt
  8. The Political Economy of Ideas By Mukand, Sharun W.; Rodrik, Dani
  10. Building support for taxation in developing countries: Experimental evidence from Mexico By Flores-Macías, Gustavo A.
  11. Political Contributions and the Price of Credit Risk: Evidence from Credit Default Swaps By Ovtchinnikov, Alexei V.; Fang, Shunlan; Hanouna, Paul; Prabhat, Saumya
  12. The Politics of Disinflation By Robert Hancké; Tim Vlandas
  13. The Political Economy of European Populism: Labour Market Dualisation and Protest Voting in Germany and Spain By Dustin Voss
  14. The Road Not Taken: Gender Gaps along Paths to Political Power By Iyer, Lakshmi; Mani, Anandi
  15. Can public and private sanctions discipline politicians? Evidence from the French Parliament By Maxime Le Bihan; Benjamin Monnery
  16. Square peg, round hole: Why the EU can’t fix identity politics By Turkuler Isiksel
  17. The role of political patronage on risk-taking behavior of banks in Middle East and North Africa region By Rihem Braham; Lotfi Belkacem; Christian De Peretti

  1. By: Becker, Sascha O. (University of Warwick); Fetzer, Thiemo (University of Warwick)
    Abstract: The outcome of the UK’s Brexit Referendum has been blamed on political factors, such as concerns about sovereignty, and economic factors such as migration, and trade integration. Analyses of the cross-sectional referendum voting pattern cannot explain how anti-EU sentiment built up over time. Since UKIP votes in the 2014 EU Parliament elections are the single most important predictor of the Vote Leave share, understanding the rise of UKIP might help to explain the role of political and economic factors in the build-up of Brexit. This paper presents new stylized facts suggesting that UKIP votes in local, national and European elections picked up dramatically in areas with weak socio-economic fundamentals, but only after 2010, at the expense of the Conservatives, and partly also Labour. The timing suggests that the Government’s austerity measures might have been a crucial trigger that helped to convert economic grievances into UKIP votes, putting increasing pressure on the Conservatives to hold the EU Referendum.
    Keywords: : Political Economy, Austerity, Globalization, Voting, EU JEL Classification: R23, D72, N44, Z13
    Date: 2018
  2. By: Abel Bojar
    Abstract: The determinants of public spending composition have been studied from three broad perspectives in the scholarly literature: functional economic pressures, institutional constraints and party-political determinants. This paper engages with the third perspective by placing intra-governmental dynamics in the center of the analysis. Building on the portfolio allocation approach in the coalition formation literature and the common pool perspective in public budgeting, I argue that spending ministers with party-political backing from the Finance Minister or the Prime Minister are in a privileged positon to obtain extra funding for their policy jurisdictions compared to their colleagues without such support or without any partisan affiliation (non-partisan ministers). I test these propositions via a system of equations on six spending categories using seemingly unrelated regressions on a panel of 32 parliamentary democracies over two decades and offer largely supportive empirical evidence. With the exception of education, I provide evidence that budget shares accruing to key spending departments reflect this party-political logic of spending outcomes. In addition to the econometric results, I also illustrate the impact of ministerial alignment by short qualitative accounts from selected country cases.
    Keywords: Public spending, budget composition, cabinet, ministers, coalition
    Date: 2018–04
  3. By: Maite D. Laméris; Harry Garretsen; Richard Jong-A-Pin
    Abstract: We examine the effect of prospects of upward mobility (POUM) on the support for redistribution in an intragenerational context. In this context, existing literature so far fails to consider the potential indirect channel via political ideology through which mobility expectations affect redistributive preferences. We address this by including an interaction between income mobility and political ideology, such that the POUM-effect is allowed to vary with political beliefs. We find a robust POUM-effect that is conditional on political preferences. Only for right-wing individuals expected upward income mobility negatively affects support for redistribution. Left-wing individuals on the other hand prefer redistribution, regardless of expected upward income movements.
    Keywords: the POUM-effect, political ideology, income mobility, redistribution, preferences
    JEL: D30 D72 J69
    Date: 2018
  4. By: Daniele Girardi (Department of Economics, University of Massachusetts, Amherst)
    Abstract: Despite growing interest in the effect of political-institutional factors on the economy, causally identified evidence on the reaction of financial markets to electoral outcomes is still relatively scarce, due to the difficulty of isolating causal effects. This paper fills this gap: we estimate the ‘average treatment effect’ of left-wing (as opposed to conservative) electoral victories on share prices, exchange rates, and sovereign bond yields and spreads. Using a new dataset of worldwide national (parliamentary and presidential) elections in the post-WWII period, we obtain a sample of 954 elections in which main parties/candidates can be classified on the left-right scale based on existing sources and monthly financial data are available. To achieve causal identification, we employ a dynamic regression-discontinuity design, thus focusing on close elections. We find that left-wing electoral victories cause significant and substantial short-term decreases in stock market valuations and in the US dollar value of the domestic currency, while the response of sovereign bond markets is muted. Effects at longer time horizons (6 to 12 months) are very dispersed, signaling large heterogeneity in medium-run outcomes. Stock market and exchange rate effects are stronger and more persistent in elections in which the Left’s proposed economic policy is more radical, in developing economies, and in the post-1990 period.
    Keywords: political shocks, elections, financial markets, regression discontinuity, stock market, exchange rate, bond yields
    JEL: P16 N2 E02 D72 G1 H0
    Date: 2018
  5. By: Fairfield, Tasha
    Abstract: Structural power is a critical variable that merits more extensive and more explicit attention in Latin American political economy and in comparative politics more broadly. Assessing structural power in conjunction with its counterpart, instrumental power, can provide strong leverage for explaining variation in policy outcomes that affect business interests. However, structural power must be carefully defined and operationalized in order to capture its core attributes and nuances. This task requires wedding the concept's “structural†underpinnings with policymakers’ perceptions and anticipated reactions. Moreover, the relationship between structural power and instrumental power must be carefully theorized. While these concepts encompass distinct channels through which business exerts influence, the two types of power may be mutually reinforcing. I argue that business interests shape policy outcomes when either their structural power or their instrumental power is strong, yet business influence will be more extensive and more consistent when structural power and instrumental power are both strong. However, electoral incentives, and more importantly, popular mobilization, can counteract business power. I illustrate these theoretical points with a case study of Chile's 2014 tax reform proposal, a major policy initiative with important distributive consequences that received international press attention.
    Keywords: Governance,
    Date: 2017
  6. By: Wilkinson, Michael; Lokdam, Hjalte
    Abstract: ‘Law and Political Economy’ surveys recent approaches to the study of phenomena at the intersection of law, politics and the economy. These take an interdisciplinary perspective, viewing markets as fields of social power that are not spontaneous but created and reproduced in the meeting of legal norms, political action and economic activity. Through regulating economic relationships, the politico-legal order constitutes and reconstitutes the power relations that make up society. This, in turn, is driven by the formation of class, sectoral and geopolitical interests, as well as ideological convictions, which harness political and legal authority. We present these inter-related processes through exploring contemporary debates on inequality, inter-personal market relations, the relation between the state and market, and the effects of economic integration and globalisation on democracy and political self- determination.
    JEL: J1
    Date: 2018–04–06
  7. By: Dirk Niepelt
    Abstract: We propose a theory of tax centralization in politico-economic equilibrium. Taxation has dynamic general equilibrium implications which are rationally internalized at the federal, but not at the regional level. The political support for taxation therefore differs across levels of government. Complementarities on the spending side decouple the equilibrium composition of spending and taxation and create a role for inter governmental grants. The model provides an explanation for the centralization of revenue, introduction of grants, and expansion of federal income taxation in the U.S. around the time of the New Deal. Quantitatively, it accounts for between 30% and 100% of the federal revenue share’s doubling in the 1930s, and for the long-term increase in federal grants.
    Keywords: Fiscal policy, Federalism, Politico-economic equilibrium, Markov equilibrium, Public goods, Grants, Political Economy
    JEL: D72 E62 H41 H77
    Date: 2018–03
  8. By: Mukand, Sharun W. (University of Warwick); Rodrik, Dani (Harvard University)
    Abstract: We develop a conceptual framework to highlight the role of ideas as a catalyst for policy and institutional change. We make an explicit distinction between ideas and vested interests and show how they feed into each other. In doing so the paper integrates the Keynes-Hayek perspective on the importance of ideas with the currently more fashionable Stigler-Becker (interests only) approach to political economy. We distinguish between two kinds of ideational politics – the battle among different worldviews on the efficacy of policy (worldview politics) versus the politics of victimhood, pride and identity (identity politics). Political entrepreneurs discover identity and policy ‘memes’ (narratives, cues, framing) that shift beliefs about how the world works or a person’s belief of who he is (i.e. identity). Our framework identifies a complementarity between worldview politics and identity politics and illustrates how they may reinforce each other. In particular, an increase in identity polarization may be associated with a shift in views about how the world works. Furthermore, an increase in income inequality is likely to result in a greater incidence of ideational politics. Finally, we show how ideas may not just constrain, but also ‘bite’ the interests that helped propagate them in the first instance.
    Keywords: JEL Classification:
    Date: 2018
  9. By: Federico Quaresima (Universita' Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali); Fabio Fiorillo (Universita' Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali); Raffaella Santolini (Universita' Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali)
    Abstract: Research on post-parliamentary careers has so far neglected the effect of political affiliation on the appointment of ex-members of Parliament to public firms boards of director. This article intends to fill this gap by conducting an empirical analysis on a sample of 1,419 deputies of Italian Parliament elected over the period 1994-2001. The regression discontinuity estimates show that the probability of being appointed to the board of public enterprises of center-left ex-deputies is about 15 percentage points higher than that of center-right ex-deputies. This result brings to light the politicization of Italian public firms, put in place through the appointment of ex-deputies in managerial positions.
    Keywords: party affiliation, political appointment, public enterprises, regression discontinuity design, Italy
    JEL: D70 H82 J45 L32
    Date: 2018–05
  10. By: Flores-Macías, Gustavo A.
    Abstract: Drawing on insights from the literature on institutional design—how rules shape behavior to achieve desired outcomes—this article examines how certain design features of taxes—such as allowing for civil society oversight, earmark mechanisms that direct tax revenue for a specific purpose, and sunset provisions that make the duration of taxes finite—affect political support for tax reforms. It also evaluates how three important aspects of the fiscal exchange—trust in government, perceptions of the public good, and level of income—shape the effect of these design features. Based on an original survey experiment focusing on the provision of public safety in Mexico, I find that these design features increase political support for taxation, especially among those with low trust in government and low income. These findings have important implications not just for Mexico but also a number of other countries across Latin America that have both low levels of extraction and increased public spending imperatives.
    Keywords: Governance,
    Date: 2017
  11. By: Ovtchinnikov, Alexei V.; Fang, Shunlan; Hanouna, Paul; Prabhat, Saumya
    Abstract: Firm political contributions are associated with lower credit default swap spreads for contributing firms. To address endogeneity, we employ novel instruments and use a set of exogenous events on campaign contribution restrictions: (a) the passage of the Bipartisan Campaign Reform Act (BCRA) that banned soft money contributions, (b) the Federal Election Commission decision to interpret the BCRA less strictly, (c) the partial reversal of the BCRA and, (d) the McConnell v. FEC Supreme Court decision, which upheld the BCRA. Overall, the evidence suggests that political contributions are valued by credit market participants.
    Keywords: Political Contributions; Credit Risk; CDS; Moral Hazard; Financial Crisis
    JEL: D72 G18 G20 G24 G28 G32
    Date: 2017–08–01
  12. By: Robert Hancké; Tim Vlandas
    Abstract: What explains the shift from the moderate to high inflation rates of the Golden Age of post-war capitalism to the low inflation regime of monetarism in the 1970s and 1980s? Conventional views emphasise the rise of monetarism as a new economic paradigm that convinced policy makers to delegate monetary policy to conservative and independent central banks – a view that comes in many variants, from constructivist to orthodox economics. In contrast to these arguments, we introduce electoral and party politics into the debate. This paper models and examines the shifts in the inflationary preferences of the median voter and their translation into party politics and economic policies. As the median voter accumulates nominal assets against a background of de facto and de jure increasing job security and rising wages, her preferences on macro-economic policies shift from concerns about employment-friendly to inflation-averse policies. Social democratic parties, who are pivotal players in this regard because of their ‘natural’ preference for high employment over low inflation, are thus forced to adopt antiinflation policies as well to remain electorally viable. We show that the employment situation of the average worker improved in every respect during the 1960s and 1970s, that most of the population became inflation averse during the 1970s and 1980s, and that social democratic parties were forced to adopt more economically orthodox party manifestos. We then analyse the shift to a low inflation regime in a series of country case studies.
    Keywords: inflation, Western Europe, Monetarism, Keynesianism, electoral politics
    Date: 2017–12
  13. By: Dustin Voss
    Abstract: Many advanced economies around the world have recently witnessed a notable rise in populism stirring severe political unrest and social instability. This paper addresses the apparent academic confusion regarding the origins of this phenomenon and combines politico-economic analysis with electoral data to derive a new theory of populist demand. I conceptualise populism as a problem of political alienation stemming from the incapacity of social democratic parties to comprehensively represent the working class in the context of increased labour market dualisation. If the group of underrepresented workers is not sufficiently numerous to be electorally-relevant, right-wing populist protest parties can make use of the representational vacuum by reframing class-distributional issues along cultural conflict lines. If, however, the group of marginalised workers is large enough to mobilise political attention, left-wing populist parties will address socio-economic issues more directly. I thus assume an inverted hyperbolic causal relationship between labour market segmentation and the demand for populism. This hypothesis is tested in a critical case study on the electoral effects of labour market reforms in Germany and Spain.
    Keywords: populism, right-wing parties, dualisation, labour market reform, political representation
    Date: 2018–03
  14. By: Iyer, Lakshmi (University of Notre Dame); Mani, Anandi (Blavatnik School of Government, Oxford University)
    Abstract: Using an original survey conducted in India’s largest state, we offer systematic evidence on the gender gaps in a rich set of electoral and non-electoral participation metrics. We find that gender gaps in non-electoral forms of participation (such as involvement in public petitions, interactions with public officials and attendance of village meetings) are larger than those in election-related activities, including political candidacy. The gender gaps in political participation persist even after we account for women’s poorer knowledge of political institutions, self-assessment of leadership skills, literacy rates and asset ownership, as well as constraints on their mobility and voice in household decisions. Using an Oaxaca-Blinder decomposition approach, we find that bringing women’s attributes on par with men would bridge less than half the gender gap. This suggests that external factors, such as the role played by voters, parties or societal groups, may constitute important barriers to women’s political participation. The presence of a woman leader in the village increases women’s propensity to meet with government officials, but is not enough to close the gender gap. Our evidence points to the need to consider a wider set of policy tools beyond quotas to encourage women’s civic and political engagement.
    Keywords: political participation, civic engagement, gender gap, India, women leaders, gender quotas JEL Classification:
    Date: 2018
  15. By: Maxime Le Bihan (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Benjamin Monnery (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper investigates the effects of sanctions on the behavior of deputies in the French National Assembly. In 2009, the Assembly introduced small monetary sanctions to prevent absenteeism in weekly standing committee meetings (held on wednesday mornings). Using a rich monthly panel dataset of parliamentary activity for the full 2007-2012 legislature, we study the reactions of deputies to (i) the mere eligibility to new sanctions, (ii) the actual experience of a salary cut, and (iii) the public exposure of sanctioned deputies in the media. First, our diff-in-diff estimates show very large disciplining effects of the policy in terms of committee attendance, and positive or null effects on other dimensions of parliamentary work. Second, exploiting the timing of exposure to actual sanctions (monthly salary cuts versus staggered media exposure), we find that deputies strongly increase their committee attendance both after the private experience of sanctions and after their public exposure. These results suggest that monetary and reputational incentives can effectively discipline politicians without crowding out intrinsic motivation. Abstract This paper investigates the effects of sanctions on the behavior of deputies in the French
    Keywords: political economy,political accountability,sanctions,reputation
    Date: 2018–04–30
  16. By: Turkuler Isiksel
    Abstract: European societies are once more in the grip of the kind of identity politics that decades of carefully constructed economic relationships were supposed to obviate. This paper argues that if the EU is ill-equipped to meet this challenge, it is not so much because of its bias in favor of deregulation, as leftist critics contend, but because the only tools at its disposal for doing so are of an economic nature. For this reason, it is unclear whether an alternative, social democratic model of supranationalism would do much resolve the discontents of identity politics. In fact, since such a project would require vesting the EU with even greater power and fiscal capacity, it is likely to have the opposite effect, at least in the near term.
    Date: 2018–01
  17. By: Rihem Braham (LAREMFIQ - Laboratory Research for Economy, Management and Quantitative Finance - Institut des Hautes Etudes Commerciales (Université de Sousse), SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon); Lotfi Belkacem (LAREMFIQ - Laboratory Research for Economy, Management and Quantitative Finance - Institut des Hautes Etudes Commerciales (Université de Sousse)); Christian De Peretti (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon, LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In the view of the growing interest in the role of political patronage in banking, several issues are highlighted with regards to performance and behavior of politically connected banks that may differ from their non-connected peers. In this article, the effect of political patronage on bank risk taking is examined by considering the ratio of loan loss reserves as measure of credit risk for a sample of 32 banks in some Middle Eastern and North African MENA countries. In general, we find that the presence of political patronage impact significantly bank risk, both directly and indirectly, consistent with our hypothesis that politically backed banks tend to exploit the moral hazard which, will cause them behave less prudently.
    Keywords: political patronage,banks,risk taking,moral hazard,MENA
    Date: 2018–04–10

This nep-pol issue is ©2018 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.