Term limits and pork barrel politics

We develop a dynamic model of democratic politics in which both potential office holders and the electorate have heterogeneous ideologies. Voters have incomplete information about candidate ideologies, so they must use information from previous positions taken in office to make informed re-election decisions. We characterize the effects of term limits on the evolution over time of the ideological positions taken by office holders and derive the implications for voter choice and welfare. Contributions of our paper include:

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We detail how pork provision by more senior incumbents interacts with term limits to affect electoral outcomes. Pork provision—transfers of resources from districts with junior legislators to districts with more senior legislators—induces voters to be more forgiving of extreme location by incumbents, especially incumbents in small or poor districts. Pork provision can explain why re-election probabilities in Congress exceed those for governors.

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Term limits reduce voter welfare when all that matters are the ideological positions taken by the office holder.

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Term limits may be advantageous when senior incumbents can extract benefits for their constituencies at the expense of districts with more junior representatives. Large or rich districts especially value term limits when there is substantial pork provision.

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We characterize the welfare of all voters, not just the median voter.

     

Do German Welfare‐to‐Work Programmes Reduce Welfare Dependency and Increase Employment?

Abstract. During the last decade, many Western economies reformed their welfare systems with the aim of activating welfare recipients by increasing welfare‐to‐work programmes (WTWP) and job‐search enforcement. We evaluate the short‐term effects of three important German WTWP implemented after a major reform in January 2005 (‘Hartz IV’), namely short training, further training with a planned duration of up to three months and public workfare programmes (‘One‐Euro‐Jobs’). Our analysis is based on a combination of a large‐scale survey and administrative data that is rich with respect to individual, household, agency level and regional information. We use this richness of the data to base the econometric evaluation on a selection‐on‐observables approach. We find that short‐term training programmes, on average, increase their participants' employment perspectives. There is also considerable effect heterogeneity across different subgroups of participants that could be exploited to improve the allocation of welfare recipients to the specific programmes and thus increase overall programme effectiveness.     

PARTY CUES,POLITICAL TRENDS,AND FISCAL INTERACTIONS IN THE UNITED STATES

Recent theoretical and empirical research has suggested that similarities in party affiliations across space will alter voters' comparisons, thus influencing fiscal policy mimicking. We employ a two‐regime spatial panel data model applied to U.S. state governors from 1970 to 2012, and find rather weak empirical evidence of influence of political party affiliations in fiscal yardstick competition. Our observed cross‐state interdependence in fiscal policies suggests voters may not weigh party affiliation heavily in their measure of comparative quality, treating each incumbent individually and independently. Incumbents strategically choose policy accordingly. This provides indirect support for the median voter theorem, in which incumbents' objective function is to maximize votes, independent of political affiliation. (JEL D72, H2, H7)     

Redistributive innovation policy,inequality, and efficiency

We examine the efficiency and distributional effects of regressive and progressive public R&D policies that target high‐tech and low‐tech sectors using a heterogenous‐agent growth model with in‐house R&D and incomplete capital markets. We find that such policies have important implications for efficiency and inequality. A regressive public R&D investment financed by income tax could boost growth and welfare via a positive effect on individual savings and effort. It could, however, also lower growth and welfare via its effect on the efficiency–inequality trade‐off. Thus, the relationship between public R&D spending and welfare is hump‐shaped, admitting an optimal degree of regressivity in public R&D spending. Using our baseline model, and the US state‐level GDP data, we derive the degree of regressiveness of public R&D investment in US states. We find that US states are more regressive in their R&D investment than the optimal regressiveness implied by our growth model.     

A political foundation of public investment and welfare spending

This paper develops a political economy model to examine the implications of political selection under an authoritarian regime. We formalize the fiscal policy choice of local governments, focusing on two political selection mechanisms and their implications for public investment and welfare spending. A growth-oriented promotion system induces local officials to increase public investment, which may increase output but crowd out welfare transfers. This mimics the recent investment-driven growth in China and relatively low effort to tackle high inequality. Under a broader incentive structure, we show that it is possible for an authoritarian regime to attain the social welfare of a democracy.     

The Welfare Effects of Incentive Schemes

This paper computes the change in welfare associated with the introduction of incentives. We calculate by how much the welfare gains of increased output due to incentives outweigh workers' disutility from increased effort. We accomplish this by studying the use of incentives by a firm in the check-clearing industry. Using this firm's production records, we model and estimate the worker's dynamic effort decision problem. We find that the firm's incentive scheme has a large effect on productivity, raising it by 12% over the sample period for the average worker. Using our parameter estimates, we show that the cost of increased effort due to incentives is equal to the dollar value of a 5% rise in productivity. Welfare is measured as the output produced minus the cost of effort; hence, the net increase in the average worker's welfare due to the introduction of the firm's bonus plan is 7%. Under a first-best scheme, we find that the net increase in welfare is 9%.     

Welfare‐improving adverse selection in credit markets*

A model of simultaneous adverse selection and moral hazard in a competitive credit market is developed and used to show that aggregate borrower welfare may be higher in the combined case than in the moral‐hazard‐only case. Adverse selection can be welfare improving because in the pooling equilibrium of the combined model, high‐quality borrowers cross subsidize low‐quality borrowers. The cross subsidization reduces the overall moral hazard effort effects, and the resulting gain in welfare may more than offset the welfare loss stemming from distorted investment choices. The analysis focuses on pooling equilibria because model structure precludes separating equilibria.     

A dynamic Nelson-Siegel yield curve model with Markov switching

This paper proposes a model to better capture persistent regime changes in the interest rates of the US term structure. While the previous literature on this matter proposes that regime changes in the term structure are due to persistent changes in the conditional mean and volatility of interest rates we find that changes in a single parameter that determines the factor loadings of the model better captures regime changes. We show that this model gives superior in-sample forecasting performance as compared to a baseline model and a volatility-switching model. In general, we find compelling evidence that the extracted factors from our term structure models are closely related with various economic variables. Furthermore, we investigate and find evidence that the effects of macroeconomic phenomena such as monetary policy, inflation expectations, and real economic activity differ according to the particular regime realized for the term structure. In particular, we identify the periods where monetary policy appears to have a greater effect on the yield curve, and the periods where inflation expectations seem to have a greater effect in yield determination. We also find convincing evidence of a relationship between the regimes estimated by the various switching models with economic activity and monetary policy.     

Bottom‐up world climate policies: Preserving fossil fuel deposits vs. capping fuel consumption

The policy of purchasing fossil fuel deposits for preservation is an alternative to the demand‐side climate policies that predominate in practice and in professional studies. This paper analyzes the deposit purchase approach and compares it to the standard demand‐side policy in a model with international trade and non‐cooperative governments that account for the effects of their policies on equilibrium prices. We investigate how the two regimes differ with respect to their equilibrium allocations and, in particular, with respect to the countries’ mitigation effort and welfare. If countries are symmetric, mitigation is stronger in the demand‐side than in the supply‐side regime and the transition from the latter to the former is welfare enhancing for all countries. If countries have different endowments of deposits in a two‐country economy, the country with higher extraction costs does not purchase deposits for preservation, and the country with lower extraction costs is better off with the supply‐side than with the demand‐side policy. Finally, we consider the case of combined policies and find surprisingly that no equilibrium in pure strategies exists, when heterogeneous countries apply both policy instruments.     

Playing for Your Own Audience: Extremism in Two‐Party Elections

This paper considers a two‐party election with a single‐dimensional policy space. We assume that each voter has a higher probability of observing the position of the party he is affiliated with than the position of the other party, an assumption that is consistent with the National Election Studies (NES) electoral data set. In equilibrium, the two parties locate away from the median, because the voters who dislike a party's platform observe its policy choice with a lower probability, and its own audience like policy choices that cater to its taste. As the asymmetry in voter information or the cost of voting increases, the parties adopt more extreme platforms, while if there are fewer extreme voters the opposite effect occurs. Making voters more symmetrically informed about the two parties' platforms increases the welfare of society, while asymmetric information acquisition by the voters is worse than no information acquisition at all.     

ELECTORAL MALDISTRICTING

We introduce a framework to theoretically and empirically examine electoral maldistricting—the intentional drawing of electoral districts to advance partisan objectives, compromising voter welfare. We identify the legislatures that maximize voter welfare and those that maximize partisan goals, and incorporate them into a maldistricting index. This index measures the intent to maldistrict by comparing distances from the actual legislature to the nearest partisan and welfare-maximizing legislatures. Using 2008 presidential election data and 2010 census-based district maps, we find a Republican-leaning bias in district maps. Our index tracks court rulings in intuitive ways.     

Taxes or Fees? The Political Economy of Providing Excludable Public Goods

This paper provides a positive analysis of public provision of excludable public goods financed by uniform taxes or fees. Individuals differing in preferences decide, using majority rule, the provision level and financing instrument. The decisive voter has median preferences in a tax regime, but generally has above median preferences in a fee regime. Numerical solutions indicate that populations with uniform or left‐skewed distributions of preferences choose taxes, while a majority coalition of high‐ and low‐preference individuals prefer fees when preferences are sufficiently right skewed. Public good provision and welfare under fees exceeds that under taxes in the latter case.     

Politics and entrepreneurship in the US

There is a strong belief that Republicans are more pro‐business than Democrats. In this paper, we investigate the causal impact of partisan allegiance of governors (Republican or Democratic) on entrepreneurial activity by exploiting random variation in close gubernatorial elections in 50 states over the last three decades in a regression discontinuity design. We find that Republican governors are no different than Democratic governors in their effects on entrepreneurship. Our findings are robust to several sensitivity checks.     

Welfare Magnet Hypothesis,Fiscal Burden,and Immigration Skill Selectivity

In this paper, we investigate the effect of welfare state generosity on the difference between skilled and unskilled migration rates, and the role of mobility restriction in shaping this effect. We utilize the free labor movement within the European Union plus Norway and Switzerland (EUR) and the restricted movement from outside the EUR in order to compare the free‐migration regime to the restricted‐migration regime. We find strong support for the magnet hypothesis under the free‐migration regime, and the fiscal burden hypothesis under the restricted‐migration regime, even after controlling for differences in educational quality and returns to skills in source and host countries.     

Does trade weaken product standards?

We investigate the effects of trade on national minimum quality standards for a product whose quality is unobservable to consumers prior to purchase. Two standard‐setting regimes are considered: (1) where the regulatory authority takes the trade share as given; and (2) where the regulatory authority takes full account of its ability to influence the trade share. We find that standards are not a protectionist instrument in this model, the usual gains from trade apply if standards are maintained at their autarky values, trade can cause private standards to be adjusted in a welfare reducing way, and the welfare of a country is higher if its regulatory authority adopts regime (2) rather than (1).     

Why do education vouchers fail at the ballot box?

We compare a uniform voucher regime against the status quo mix of public and private education, focusing on the distribution of welfare gains and losses across households by income. We argue that the topping-up option available under uniform vouchers is not sufficiently valuable for the poorer households, so the voucher regime is defeated at the polls. Our result is robust to partial voter turnout and efficiency differences between public and private schools, but depends critically on the opting-out feature in the current system.     

Patent term extensions and commercialization lags in the pharmaceutical industry: A growth-theoretic analysis

Due to the lags in commercialization, the effective life of a patent is generally less than its statutory term. We introduce commercialization lags into the Schumpeterian growth model and explore the effects of patent term extensions on pharmaceutical R&D and social welfare. Our results show that extending patent terms stimulates the consumption of homogeneous goods but generates an ambiguous effect on the consumption of pharmaceuticals. When patent extensions have an inverted-U effect on social welfare, the optimal patent extension increases with the length of commercialization lags but decreases with the input intensity of commercialization lags. Finally, we calibrate the model and find that increasing patent breadth reduces the optimal patent extension.     

Trade Liberalization with Heterogeneous Firms

This paper examines the various aspects of trade liberalization with heterogeneous firms using the Melitz (2003 ) model. We find a number of novel results and effects including a Stolper–Samuelson‐like result and several results related to the volume of trade, which are empirically testable. We also analyze what might be called an anti‐variety effect as the result of trade liberalization. We show that this effect is most pronounced for small countries. This resonates with the often voiced criticism from antiglobalists that globalization leads the world to become more homogeneous by eliminating local specialties. Nevertheless, we find that trade liberalization always leads to welfare gains in the model.     

International Trade and Unemployment—the Worker‐selection Effect

This paper investigates the labor market effects of trade liberalization. We incorporate trade unions and heterogeneous workers into the Melitz framework. Workers differ with respect to their abilities. Our main findings are: (i) trade liberalization harms low‐ability workers, they lose their job and switch to long‐term unemployment (worker‐selection effect); (ii) high‐ability workers are better off in terms of both higher wages and higher employment; (iii) if a country is endowed with a large fraction of low‐ability workers, trade liberalization leads to a rise in aggregate unemployment—in this case, trade liberalization may harm a country's welfare; (iv) the overall employment and welfare effect crucially hinges on the characteristics of the wage bargain.     

The Impact of Social Comparisons on Reciprocity*

In this paper, we investigate how social comparison information about referent others (i.e., learning what similar others do, and how they are treated) affects reciprocal relationships. Using three‐person gift‐exchange games, we study how employees’ reciprocity towards an employer is affected by pay comparison information (what co‐workers earn) and effort comparison information (how co‐workers perform). We find strong evidence of the effects of effort comparison: employees are more willing to reciprocate by choosing high effort in response to a high wage if they observe others doing so. In our setting, we find somewhat weaker evidence of the effects of pay comparison.