Electoral systems and the effects of political events on the stock market: The Belgian case

Efficient stock markets react to news. News about future economic policies can be derived from political events such as elections, the formation of new governments, changes in the composition of governments, etc. However, the news content of these events depends on the electoral system. In the American electoral system, characterized as it is by majority representation and single–party governments, elections generate news to the extent that the results are unexpected. In countries with proportional representation, governments are frequently multi–party coalitions whose composition is difficult to predict from the election results. These results therefore contain much less information about future policies. Our results, obtained for the Brussels stock market, support this distinction. Furthermore, the ideological composition of the government also matters; these effects support a rational partisan approach.     

The comparative political economy of the location of industry

This paper studies location decisions of firms in an economic geography model with endogenous regional policy. Policy is determined by probabilistic voting under proportional and majoritarian elections. Different electoral competition give rise to different location incentives. Under plausible assumptions, the smaller region has a higher fraction of ideologically independent swing voters than the larger region. Majoritarian voting, by focusing electoral competition into swing districts containing the most policy‐responsive voters, therefore allocates more subsidies to firms in the smaller region. Compared to proportional voting, this leads to more firms in the region with fewer consumers. Proportional voting thus welfare‐dominates majoritarian election.     

A PROTECTIONIST BIAS IN MAJORITARIAN POLITICS: AN EMPIRICAL INVESTIGATION

Do politics affect trade policy? Despite an extensive literature examining the relationship between trade policy and some political factors, relatively few studies have explored the role of a country's electoral system, arguably one of the most fundamental characteristics of a nation's political landscape. This paper examines the empirical relationship between tariffs and electoral systems across countries and over time. The broad theoretical framework is provided by Grossman and Helpman, which predicts a bias towards a non‐zero average tariff, i.e. a “protectionist bias”, in countries with majoritarian systems, since politicians in a majoritarian system aim to maximize the welfare of their home districts, as opposed to the welfare of the nation as a whole. I compare average tariffs of countries with majoritarian systems to those with proportional systems, using methods that address the omitted variables/sample selection problem inherent to this analysis. I find that countries with majoritarian systems do indeed appear to have higher average tariffs than do countries with proportional systems. This result holds after controlling for other country‐specific characteristics, such as a country's legal origins, colonial history, and geographic location.     

The size and scope of government:: Comparative politics with rational politicians

We try to demonstrate how economists may engage in research on comparative politics, relating the size and composition of government spending to the political system. A Downsian model of electoral competition and forward-looking voting indicates that majoritarian – as opposed to proportional – elections increase competition between parties by focusing it into some key marginal districts. This leads to less public goods, less rents for politicians, more redistribution and larger government. A model of legislative bargaining and backward-looking voting indicates that presidential – as opposed to parliamentary – regimes increase competition between both politicians and voters. This leads to less public goods, less rents for politicians, less redistribution, and smaller government. We confront these predictions with cross-country data from around 1990, controlling for economic and social determinants of government spending. We find strong and robust support for the prediction that the size of government is smaller under presidential regimes, and weaker support for the prediction that majoritarian elections are associated with less public goods.     

Political philosophy,executive constraint and electoral rules

This paper explains the choice of electoral rule by the difference in the ease of implementing targeted transfer. By modeling the choice of electoral rule as a decision by the ruling rich-elite party before universal suffrage is enacted, this paper predicts that a loose constitutional constraint on targeted transfers is conducive to the adoption of proportional representation. To complete the theory, this work argues that the British empiricism and the Continental rationalism have their own views concerning the role and the power of a state, leading to differential levels of constraints on redistribution. Thus the theory explains why Anglo-Saxon countries tend to maintain majoritarian electoral rule. Employing the event history analysis with the two-stage-residual-inclusion approach, this work shows that countries with poorer executive constraints are more likely to adopt proportional representation. Meanwhile, we find evidence supporting that countries with British origin have been associated with tighter constraint upon the executive.     

Unemployment insurance: The role of electoral systems and regional labour markets

Levels of insurance against unemployment vary considerably across countries. Replacement rates, the ratio relating income from unemployment to what people earned when they were employed, are higher in countries with proportional electoral systems than in countries with majoritarian systems. Also, replacement rates are positively correlated with per capita income and negatively correlated with the countries' unemployment rates. I develop an electoral competition model that replicates these stylized facts.     

Comparative politics and quasi-rational markets

This article synthesises psychology, economics and political science theories that can explain market reaction to elections. In order to test the theories, we conduct event studies of the impact of elections on the interest rates on government bonds for 122 elections in 19 countries. The efficient market hypothesis states that rational markets immediately incorporate all information relevant to asset prices. According to psychology, human decision-making is quasi-rational. Market actors should be slow to accept evidence that conflicts with previously held opinions, leading them to under-react to new information. We show that markets under-react to elections and that under-reaction is greater in majoritarian countries because they provide more information to the market. Assuming fully rational markets underestimates the impact of elections and variations in impact across political systems. Most of the literature on market constraint assumes rational markets and may thus be underestimating the extent of market pressure in the aftermath of elections and its distribution across different types of electoral systems. Our results suggest that markets can calculate risk around elections, but are slow to do so, thereby suggesting that the role of uncertainty and the resort to heuristics is relatively minor.     

Comparative Trade Policy

Current research has found ambiguous theoretical and empirical results with respect to the effects of the type of electoral regime on trade policy. The present paper aims to reconcile the different views within a theoretical model. It is shown that the equilibrium level of trade protection can be relatively higher, as well as lower, under a majoritarian electoral rule compared with proportional representation. Trade policy is more (less) protectionist under proportional electoral regimes, as compared with majoritarian institutions, if swing districts are populated by relatively more (less) factor owners with stakes in the exporting sector. It is also shown that politicians optimally apply a lower (higher) level of rent seeking under the majoritarian electoral rule if there are relatively more factor owners in the swing districts with stakes in the exporting (import‐competing) sector.     

Party Fragmentation and Presidential Elections in Post-Communist Democracies

Despite its controversial status as a stable governmental form, many of today's societies attempting to make the transition to democracy have or will, for a variety of reasons, choose presidentialism. Meanwhile, the evidence suggests that the combination of presidentialism and multipartism is especially dangerous for democratic stability (Mainwaring 1994). The question this essay addresses, though, is whether presidential elections themselves serve to encourage a fragmented party system, at least in the initial stages of democratization. In transitional political systems presidential elections encourage party fragmentation, but in a way different from that of highly proportional purely parliamentary mechanisms. Specifically, parties proliferate to support the presidential aspirations of political elites. Multivariate regression analysis on cross-sectional aggregate electoral data, supported by extensive outliers diagnostics and assessments of the role of country-specific effects is applied. A nested model is used to discriminate among the secondary hypotheses. Controls include: parliamentary election rules (district magnitude, threshold for representation, adjustment districts, ballot structure), relative timing of presidential and parliamentary elections, and basic societal cleavage structure. Using as our data source the recent elections in East and Central Europe and the European part of the former Soviet Union, we show that presidential elections consistently significantly increase party fragmentation. At the same time, the data are consistent with the hypothesis that presidentialism does encourage the overall consolidation in party systems through voters' abandonment of some parties, akin to Duverger's 'psychological effect'.     

Party Formation and Policy Outcomes under Different Electoral Systems

I introduce a model of representative democracy with strategic parties, strategic candidates, strategic voters and multiple districts. If policy preferences are similar across districts and not too concentrated within districts, then the number of effective parties is larger under proportional representation (PR) than under plurality, and both electoral systems determine the median voter's preferred policy. However, for more asymmetric distributions of preferences the Duvergerian predictions can be reversed , and the policy outcome with PR is more moderate than the one with plurality. Sincere voting induces more party formation, and strategic voting can be observed more often under PR.     

Election systems,the “beauty premium” in politics,and the beauty of dissent

We ask three questions. First, do election systems differ in how they translate physical attractiveness of candidates into electoral success? Second, do political parties strategically exploit the “beauty premium” when deciding on which candidates to nominate, and, third, do elected MPs use their beauty premium to reap some independence from their party? Using the German election system that combines first-past-the-post election with party-list proportional representation, our results show that plurality elections provide more scope for translating physical attractiveness into electoral success than proportional representation. Whether political parties strategically use the beauty premium to optimize their electoral objectives is less clear. Physically attractive MPs, however, allow themselves to dissent more often, i.e. they vote more often against the party line than their less attractive peers.     

Constitutions and the resource curse

Utilizing the fact that natural resources are randomly distributed among countries, we investigate how public income shocks have different long run economic effects dependent on constitutional arrangements. We find that (i) the so-called ‘resource curse’ is present in democratic presidential countries—but not in democratic parliamentary countries, (ii) being parliamentary or presidential matters more for the growth effects of natural resources than being democratic or autocratic, and (iii) natural resources are more likely to reduce growth when proportional electoral systems are in place than when the electoral systems are majoritarian. The two first effects appear very robust, the last effect less so.     

State politics,tuition, and the dynamics of a political budget cycle

This paper attempts to improve the understanding of political budget cycles by first identifying a previously undocumented cycle in tuition and required fees at public four-year institutions of higher education in the United States. I find that tuition and fees are 1.5 % lower during gubernatorial election years than in non-election years. No similar cycle is found in private tuition and fees. Using a newly constructed dataset, I then explore the variation in electoral competition in gubernatorial and state legislative elections within states over time to uncover the underlying electoral incentives creating the cycle. The results suggest that the tuition cycle is not designed to increase the reelection prospects of governors as standard theories would predict. I find that tuition decreases during gubernatorial election years as the reelection prospects of the incumbent governor increases. Instead, the evidence suggests that popular governors use lower tuition as political pork to expand party power in the state by capturing swing districts in concurrent state legislative elections. I find that the magnitude of the cycle increases with the level of competition in state house elections and that the effect is concentrated among those districts held by the opposition party, particularly if those opposition districts are populated with voters likely to be responsive to tuition as a policy lever. These results reveal important dynamics about party competition within states in the United States and suggest that the electoral incentives driving political budget cycles can be complex.     

Constitutions and the resource curse

Utilizing the fact that natural resources are randomly distributed among countries, we investigate how public income shocks have different long run economic effects dependent on constitutional arrangements. We find that (i) the so-called ‘resource curse’ is present in democratic presidential countries—but not in democratic parliamentary countries, (ii) being parliamentary or presidential matters more for the growth effects of natural resources than being democratic or autocratic, and (iii) natural resources are more likely to reduce growth when proportional electoral systems are in place than when the electoral systems are majoritarian. The two first effects appear very robust, the last effect less so.     

Coattails and the forces that drive them: Evidence from Mexico

Coattails and the forces behind them have important implications for the understanding of electoral processes and their outcomes. By focusing our attention on neighboring electoral sections that face the same local congressional election, but different municipal elections, and assuming that political preferences for local legislative candidates remain constant across neighboring electoral sections, we exploit variation in the strength of the municipal candidates in each of these electoral sections to estimate coattails from municipal to local congressional elections in Mexico. A one percentage increase in vote share for a municipal candidate translates, depending on his or her party, into an average of between 0.45 and 0.78 percentage point increase in vote share for the legislative candidates from the same party (though this effect may not have been sufficient to affect an outcome in any electoral district in our sample). In addition, we find that a large fraction of the effect is driven by individuals switching their vote decision in the legislative election, rather than by an increase in turnout.     

Mapping the theory of political representation to the empirics: An investigation for proportional and majoritarian rules

We combine roll call votes and referendum decisions on identically worded legislative proposals to identify the effect of electoral rules on the way Swiss Members of Parliament (MPs) represent their constituents’ preferences. We exploit the fact that MPs in both Houses of Parliament are elected in the same electoral districts (the cantons). Yet, in the Lower House, MPs are elected using a proportional rule, while in the Upper House they are elected employing a majoritarian rule. We find that electoral rules matter strongly for political representation. The voting patterns of MPs are fully in line with three theoretical predictions regarding the influence of electoral rules on representation of constituents’ preferences: 1) The probability that a proportional-elected MP accepts a legislative proposal closely follows the share of voters that accept the proposal in the referendum. 2) In contrast, for majority-elected MPs the probability of acceptance is strongly increasing in the share of voter acceptance if the latter is close to the 50% threshold. 3) The estimated probability that an Upper House MP votes “yes” as a function of the share of voters voting “yes” in the referendum has an S-shape form with an inflection point close to 50%.     

Campaign spending limits,incumbent spending,and election outcomes

Abstract. We study the impact of campaign spending limits for candidates in Canadian federal elections. We first demonstrate that spending limits are binding mostly for incumbent candidates. We then use this information to produce endogeneity‐corrected estimates for the impact of incumbent spending on electoral vote shares. Furthermore, we examine the impact of spending limits on broader measures of electoral outcomes, finding that larger limits lead to less close elections, fewer candidates, and lower voter turnout.     

Legislators' behaviour and electoral rules: Evidence from an Italian reform

We explore how electoral rules and the degree of civicness of the voters interact in shaping elected officials' behaviour. We examine the expenditure proposals sponsored by Italian Senators from 1994 to 2013 and exploit the 2005 electoral reform that transformed a mainly majoritarian system into a mainly proportional one. First, we find that legislators elected in first-past-the-post districts are more likely to sponsor pork-barrel bills and to put effort into legislative activity than those elected with a closed-list proportional system. Second, more importantly, we show that the effects of the electoral rules are muted in areas with high civicness.     

Party Control of State Government and the Distribution of Public Expenditures*

This paper examines the effects of party control of state governments on the distribution of intergovernmental transfers across counties from 1957 to 1997. We find that the governing parties skew the distribution of funds in favor of areas that provide them with the strongest electoral support. This is borne out in two ways. (i) Counties that traditionally give the highest vote share to the governing party receive larger shares of state transfers to local governments. (ii) When control of the state government changes, the distribution of funds shifts in the direction of the new governing party. We find only weak evidence that parties reward electorally pivotal counties or counties in electorally pivotal legislative districts. Finally, we find that increased spending in a county increases voter turnout in subsequent elections. This suggests that parties have an electoral incentive to skew the distribution of funds to influence future election results, and the mechanism through which this works is “mobilization” rather than “conversion” of voters in a fixed electorate.     

A few signatures matter: Barriers to entry in Italian local politics

Competition for public office is an essential feature of democracy but having many candidates competing for the same position might lead to voter confusion and be counterproductive. In current democracies, ballot access regulations limit citizens’ right to become candidates, seeking to balance this trade-off by discouraging frivolous contenders. This paper examines the causal effect of signature requirements – a widespread ballot access regulation – and finds that their impact goes beyond this goal. I use data on Italian local elections and apply a regression discontinuity design (RDD) to estimate the effects of these requirements on electoral competition, candidates’ selection, voter participation and administrative efficiency. I find that signature requirements reduce the number of candidates running for office, decrease electoral competition, lead to a more experienced pool of candidates, and reduce voter turnout. The positive effects of this policy are observed in municipalities with fragmented political systems, where signature requirements lead to fewer wasted votes and fewer spoiler candidates. The downside is observed in municipalities with concentrated political systems: signature requirements increase the frequency of uncontested races and reduce voter participation. Findings reveal how this barrier to entry impacts key dimensions of democracy and indicate that designing efficient electoral institutions requires a clear understanding of local political contexts.