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on Positive Political Economics |
| By: | Torsten Persson; Gerard Roland; Guido Tabellini |
| Date: | 2006–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:321307000000000706&r=pol |
| By: | Kevin O'Rourke |
| Abstract: | Does democracy encourage free trade? It depends. Broadening the franchise involves transferring power from non-elected elites to the wider population, most of whom will be workers. The Hecksher- Ohlin-Stolper-Samuelson logic says that democratization should lead to more liberal trade policies in countries where workers stand to gain from free trade; and to more protectionist policies in countries where workers will benefit from the imposition of tariffs and quotas. We test and confirm these political economy implications of trade theory hypothesis using data on democracy, factor endowments, and protection in the late nineteenth century. |
| Keywords: | factor endowments, Heckscher-Ohlin trade theory, Stolper- Samuelson theorem and tariffs |
| Date: | 2007–01–05 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp191&r=pol |
| By: | Marco Bassetto (Research Department Federal Reserve Bank of Chicago); Jess Benhabib |
| Abstract: | We study a simple model of production, accumulation, and redistribution, where agents are heterogeneous in their initial wealth, and a sequence of redistributive tax rates is voted upon. Though the policy is infinite-dimensional, we prove that a median voter theorem holds if households have identical, Gorman aggregable preferences; furthermore, the tax policy preferred by the median voter has the "bang-bang" property |
| Keywords: | Median voter, gorman aggregation, capital income taxes |
| JEL: | H21 H23 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:78&r=pol |
| By: | Edith Sand; Assaf Razin |
| Abstract: | In the political debate people express the idea that immigrants are good because they can help pay for the old. The paper explores this idea in a dynamic political-economy setup. For this purpose we develop an OLG political economy model of social security and migration. We characterize sub-game perfect Markov equilibria where immigration policy and pay-as-you-go (PAYG) social security system are jointly determined through a majority voting process. The main feature of the model is that immigrants are desirable for the sustainability of the social security system because the political system is able to manipulate the ratio of old to young and thereby the coalition which supports future high social security benefits. We demonstrate that the older is the native born population the more likely is that the immigration policy is liberalized and the social security system survives. |
| JEL: | F22 H55 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12800&r=pol |
| By: | Daron Acemoglu; Davide Ticchi; Andrea Vindigni |
| Abstract: | Inefficiencies in the bureaucratic organization of the state are often viewed as important factors in retarding economic development. Why certain societies choose or end up with such inefficient organizations has received very little attention, however. In this paper, we present a simple theory of the emergence and persistence of inefficient states. The society consists of rich and poor individuals. The rich are initially in power, but expect to transition to democracy, which will choose redistributive policies. Taxation requires the employment of bureaucrats. We show that, under certain circumstances, by choosing an inefficient state structure, the rich may be able to use patronage and capture democratic politics. This enables them to reduce the amount of redistribution and public good provision in democracy. Moreover, the inefficient state creates its own constituency and tends to persist over time. Intuitively, an inefficient state structure creates more rents for bureaucrats than would an efficient state structure. When the poor come to power in democracy, they will reform the structure of the state to make it more efficient so that higher taxes can be collected at lower cost and with lower rents for bureaucrats. Anticipating this, when the society starts out with an inefficient organization of the state, bureaucrats support the rich, who set lower taxes but also provide rents to bureaucrats. We show that in order to generate enough political support, the coalition of the rich and the bureaucrats may not only choose an inefficient organization of the state, but they may further expand the size of bureaucracy so as to gain additional votes. The model shows that an equilibrium with an inefficient state is more likely to arise when there is greater inequality between the rich and the poor, when bureaucratic rents take intermediate values and when individuals are sufficiently forward-looking. |
| Keywords: | bureaucracy, corruption, democracy, patronage politics, political economy, public goods, redistributive politics. |
| JEL: | P16 H11 H26 H41 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:34&r=pol |
| By: | Martin Gonzalez-Eiras (Universidad de San Andres); Dirk Niepelt |
| Abstract: | In this paper we analyze tax and transfer choices in an OLG economy with capital accumulation and endogenous growth coming from public investment, such as education. We solve for a Markov perfect equilibrium when electoral competition targets the votes of young and old households. We find that when calibrating the model to match US data, it predicts levels of intergenerational transfers and of public investments that are similar to the observed ones. Furthermore the Ramsey policy for the same parameters would call for both generations to be taxed to finance public investment. If the political process internalized the benefits that public investment has on future generations, growth would be twice as high as currently observed |
| Keywords: | endogenous growth; intergenerational transfers; education; probabilistic voting; Markov perfect equilibrium |
| JEL: | E62 H55 O41 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:712&r=pol |
| By: | Juan Pineiro Chousa (University of Santiago de Compostila); Haider A. Khan (Graduate School of International Studies, University of Denver); Davit N. Melikyan (GSIS, University of Denver); Artur Tamazian (University of Santiago de Compostila) |
| Abstract: | The paper tests the hypothesis of a positive impact of democratization on growth and economic development in the sense of capabilities and improvements in well-being. We employ a probit model to estimate the probabilistic indicator for democracy for a large sample of countries. Panel regressions are applied to explain the impact on growth of political institutions (democracy), economic institutions and efficiency of financial management, along with more "traditional" factors. The empirical findings support the hypothesis of decisive role of democratic political and efficient economic institutions in stimulating economic growth. The main results also highlight the importance of effective allocation of financial resources. In addition to the growth regression results, it is argued, consistently with the capabilities approach to development by Sen, that many of the explanatory variables in the growth regression are positively related to development as capabilities enhancement. This is particularly true for democratic freedoms. Finally the problem of 'optimal' institutional development is discussed within the context of resource allocation, migration flows and political decisions. |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2006cf458&r=pol |
| By: | Douhan, Robin (Department of Economics); Henrekson, Magnus (Research Institute of Industrial Economics) |
| Abstract: | In this introductory chapter to a collective volume dealing with the political economy of entrepreneurship,* we argue, based on a suggested unifying framework, that political economy is a fruitful approach to entrepreneurship. The importance of institutions in structuring such an analysis is also emphasized. The introduction also introduces the selected articles and puts them in context. Vital functions of the capitalist economy are ascribed to the productive entrepreneur, but the selected articles also show that the social value of entrepreneurship must be evaluated as it is realized. Three facets of entrepreneurship are claimed to be of particular importance from a political economy perspective: (i) Entrepreneurship is dynamic in the sense that it adapts to the politically determined institutional framework within which it acts. Under propitious circumstances, it can be a powerful engine of growth, but it can also be channelled in unproductive and destructive directions. (ii) Entrepreneurship enters directly into the political system. The close connection to property rights constitutes a link between entrepreneurship and private versus public ownership and redistribution. Under unfavourable institutional circumstances, rent-seeking and predatory entrepreneurship, via the political system, offer greater profit opportunities than the market. (iii) A political economy approach is necessary in order to understand how the political system shapes the institutional setup. Here, it is emphasized that the distribution of political power is partly determined by economic wealth. Hence, it is relevant to broaden the analysis to the effects on wealth creation and wealth redistribution stemming from entrepreneurial activity. |
| Keywords: | Entrepreneurship; Industrial Policy; Innovation; Property Rights; Regulation; Self-employment |
| JEL: | H32 L25 L50 M13 O31 P14 |
| Date: | 2007–01–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0688&r=pol |
| By: | Tasos Kalandrakis (W. Allen Wallis Institute of Political Economy, 107 Harkness Hall, University of Rochester, Rochester, NY 14627-0158) |
| Abstract: | We establish that, except for a finite set of common costs of participation, all equilibria of a class of complete information voting games (as in Palfrey and Rosenthal (1983)) are regular. Thus, all the equilibria of these games (including those exhibiting high turnout rates) are robust to small but arbitrary payoff perturbations, and survive in nearby games with incomplete information about voting costs and/or about the fraction of supporters of the two candidates. We also show that all the equilibria of these complete information games exhibit minimal heterogeneity of behavior, so that the strategies of indifferent players are characterized by at most two probabilities. |
| Keywords: | Turnout, Regular Equilibrium. |
| JEL: | C72 D72 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:roc:wallis:wp44&r=pol |
| By: | Alessandro Riboni; Francisco Ruge-Murcia (Economics University of Montreal) |
| Abstract: | This paper develops a model where the value of the monetary policy instrument is selected by a heterogenous committee engaged in a dynamic voting game. Committee members differ in their institutional power and, in certain states of nature, they also differ in their preferred instrument value. Preference heterogeneity and concern for the future interact to generate decisions that are dynamically inefficient and inertial around the previously-agreed instrument value. This model endogenously generates autocorrelation in the policy variable and provides an explanation for the empirical observation that the nominal interest rate under the central bank's control is infrequently adjusted |
| Keywords: | Committees, status-quo bias, interest-rate smoothing, dynamic voting |
| JEL: | E58 D02 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:206&r=pol |
| By: | Ruben Segura-Cayuela |
| Abstract: | Despite the general belief among economists on the growth-enhancing role of international trade and significant trade opening over the past 25 years, the growth performance of many developing economies, especially of those in Latin America and Africa, has been disappointing. While this poor growth performance has many potential causes, in this paper I argue that part of the reason may be related to the interaction between weak institutions and trade. In particular, I construct a model in which trade opening in societies with weak institutions (in particular autocratic and elite-controlled political systems) may lead to worse economic policies. The reason is that general equilibrium price effects of taxation and expropriation in closed economies also hurt the elites, and this puts a natural barrier against inefficient policies. Trade openness removes this barrier and enables groups with political power to exercise this power in more inefficient ways |
| Keywords: | Trade, Institutions, Expropriation |
| JEL: | F10 O10 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:502&r=pol |
| By: | Emanuel Kohlscheen (University of Warwick) |
| Abstract: | This paper models the executive's choice of whether to reschedule external debt as the outcome of an intra-governmental negotiation process. The executive's necessity of a confidence vote from the legislature is found to provide the rationale for why some democracies may not renegotiate their foreign obligations. Empirically, parliamentary democracies are indeed less prone to reschedule their foreign liabilities or accumulate arrears on them. Most of the democracies that have been able to significantly reduce their debt/GNP ratio without a 'credit incident' were parliamentary. Moreover, countries with stronger political checks on the executive and lower executive turnover have a lower rescheduling propensity. These results suggest that North and Weingast's account of the evolution of institutions in 17th century England gives substantial mileage in understanding the international debt markets in the contemporary developing world |
| Keywords: | debt, crises, political institution, commitment, constitution, parliamentary, presidential |
| JEL: | F30 F34 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:25&r=pol |
| By: | Zvika Neeman; Daniele Paserman; Avi Simhon (The Hebrew University of Jerusalem) |
| Abstract: | We report an intriguing empirical observation. The relationship between corruption and output depends on the economy's degree of openness: in open economies, corruption and GNP per capita are strongly negatively correlated, but in closed economies there is no relationship at all. This stylized fact is robust to a variety of different empirical specifications. In particular, the same basic pattern persists if we use alternative measures of openness, if we focus on different time periods, if we restrict the sample to nclude only highly corrupt countries, if we restrict attention to specific geographic areas or to poor countries, and if we allow for the possible endogeneity of the corruption measure. We find that the extent to which corruption affects output is determined primarily by the degree of financial openness. The difference between closed and open economies is mainly due to the different effect of corruption on capital accumulation. We present a model, consistent with these findings, in which the main channel through which corruption affects output is capital drain. |
| Keywords: | corruption openness growth |
| JEL: | F2 H0 O1 O4 |
| Date: | 2006–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed006:164&r=pol |