Voting over income taxation

A major problem of the positive theory of income taxation is to explain why statutory income tax schedules in practice are marginal-rate progressive. While it is commonly believed that this is but a simple consequence of the fact that the number of relatively poor voters exceeds that of richer voters in general, putting this contention in a voting equilibrium context is not a trivial task. We do this here in the context of nonlinear taxation and attempt to provide a formal argument in support of this heuristic claim. We first establish the existence of mixed strategy equilibria and identify certain cases in which marginal-rate progressive taxes are chosen almost surely by the political parties. Unfortunately, we also find that if the tax policy space is not artificially constrained, the support of at least one equilibrium cannot be contained within the set of marginal-rate progressive taxes.     

Political bargaining in a federation: Buchanan meets Coase

In recent decades, the issues of federalism and political integration have gained prominence in public debate as well as in the academic realm. A frequently made point is that allowing free secession may protect the minority's interests, thus providing it with an incentive to enter the federation. This paper explicitly considers the political process in the federation arguing that the option to secede may distort the political choices made by the individual regions to improve their bargaining positions. As a result, the allocation of resources in the federation could well end up being inefficient and unattractive for the minority region. In contrast, limiting the secession possibilities by requiring the consent of a majority of voters through a regional referendum, rather than leaving it to the discretion of the legislature, restores efficiency.     

Political regimes and foreign intervention

We present a theory of endogenous political regimes that emphasizes foreign direct investment as a motive for foreign governments to either induce regime transitions or promote regime consolidations. We characterize different forms of foreign intervention and identify the conditions under which they occur. We highlight new channels through which economic factors affect political regime choices. Foreign intervention is most likely to originate from countries where the government has a substantial pro-investor bias and to be directed at destinations where FDI is highly profitable and where income inequality is high. Foreign-sponsored coups d'état are more likely to be directed at democratic governments of poor countries. In destinations where FDI is highly profitable but the domestic elite is weak, foreign intervention tends to be aimed at stabilizing dictatorships. We relate the analysis to evidence on foreign intervention from around the world.     

The Constitutional Political Economy of Public Deficits: The Spanish Case 1

This paper makes an argument for the reshaping of the current design of the Spanish budgetary system, pivoting around its legal submission to the balanced-budget rule. Based on a political economy approach to budgeting within the present context of the European Monetary Union, it is argued that such a rule is sorely needed in order to make the traditional Spanish model compatible with the new institutional technology presently developing in the European Community which deals with fiscal policy.     

A stylized model of overrepresentation and quality in the Congress

Traditionally, overrepresentation has been used to explain the distribution of benefits across jurisdictions, leaving aside quality components. We present a model that demonstrates that in the dispute of limited federal benefits, although quantity is important, at the margin quality matters.     

Inequality in democracies: Testing the classic democratic theory of redistribution

The classic democratic theory of redistribution claims that an increase in the mean-to-median (MM) income ratio causes a majority coalition in the electorate to collectively demand more redistribution. The functional dependence of redistribution on the MM income ratio is tested in parametric and nonparametric regression frameworks using an OECD panel dataset. While the parametric regression model is found to be misspecified rendering subsequent inference invalid, the robust nonparametric regression model fails to uncover evidence that the MM income ratio is relevant for predicting redistribution.     

Accountability and fiscal equalization

A common feature of multi-jurisdictional systems is equalization programs. The implementation of such programs, that is based on some measurement of sub-national fiscal capacity and effort, is particularly complex. Within a political economy model, this paper analyzes the impact of such systems on accountability, identifying a positive and a negative effect. The positive effect arises because with equalized fiscal resources, a consequence of equalization, citizens attach more importance to any remaining variation in public good supplies and so punish rent-taking more severely. This induces politicians to restrain themselves and so accountability improves. The negative effect arises because the complexity of such programs reduces the informational content of observed public good supplies. This introduces a perverse fiscal incentive that reduces accountability. Thus, the overall impact of equalization programs on accountability depends on the balance of these effects.     

On the determinants of local government performance: A two-stage nonparametric approach

This article analyzes the efficiency of local governments in the Comunitat Valenciana (Spain) and their main explanatory variables. The analysis is performed in two stages. Firstly, efficiency is measured via (nonparametric) activity analysis techniques. Specifically, we consider both Data Envelopment Analysis (DEA) and Free Disposable Hull (FDH) techniques. The second stage identifies some critical determinants of efficiency, focusing on both political and fiscal policy variables. In contrast to previous two-stage research studies, our approach performs the latter attempt via nonparametric smoothing techniques, rather than econometric methods such as OLS or Tobit related techniques. Results show that efficiency scores, especially under the nonconvexity assumption (FDH), are higher for large municipalities. Thus, there is empirical evidence to suggest that resources may be better allocated by large municipalities. However, the inefficiency found is not entirely attributable to poor management, as second-stage analysis reveals both fiscal and political variables to be explicably related to municipality performance. Moreover, the explanatory variables’ impact on efficiency is robust to the chosen technique—either convex DEA or nonconvex FDH.     

Voting blocs, party discipline and party formation

I study the strategic incentives to coordinate votes in an assembly. Coalitions form voting blocs, acting as single players and affecting the policy outcome. In an assembly with two exogenous parties I show how the incentives to accept party discipline depend on the types of the agents, the sizes of the parties, and the rules the blocs use to aggregate preferences. In a game of fully endogenous party formation, I find sufficient conditions for the existence of equilibria with one bloc, two blocs, and multiple blocs.     

Reshaping the schooling system: The role of immigration

This paper studies how the schooling system may be impacted by the number and skill type of immigrants. When the number of low-skilled immigrants is large, the education regime tends to become segregated. Wealthy locals are more likely to choose private schools and vote for a lower tax rate to finance public education. In contrast, high-skilled immigrants tend to reinforce the public system. The optimal immigration policy is highly skill-biased. The admission of high-skilled immigrants expedites redistribution toward the less-skilled local households through both a stronger fiscal support for public education and a reduction in the skill wage premium.     

Investment in the absence of property rights; the role of incumbency advantages

In many situations the individuals who can generate some output must enter a contest for appropriating this output. This paper analyses the investment incentives of such agents and the role of incumbency advantages in the contest. Depending on the advantages, an increase in the productivity of the investment can decrease or increase the amount of investment. The results are applied to autocrats’ investment behavior and job specific investment in organizations.     

On government centralization and fiscal referendums

Several authors have argued that a centralization of fiscal powers in a federation is less likely to occur if citizens have to approve a change in the assignments of responsibilities by a popular referendum. This outcome may be due to the fact that logrolling is more difficult under direct than under representative democracy. It may also be caused by citizens’ fear that a centralization of fiscal authority facilitates the extraction of rents by the government or the legislature. In this paper, we test the hypothesis that centralization is less likely under referendum decision-making in the unique institutional setting of Switzerland. Using a panel of Swiss cantons from 1980 to 1998, the empirical analysis provides evidence that referendums induce less centralization of fiscal activities.     

Terrorist backlash, terrorism mitigation, and policy delegation

This paper presents a three-stage proactive game involving terrorists, elected policymakers, and voters. In each of two targeted countries, a representative voter chooses an elected policymaker, charged with deciding proactive countermeasures to ameliorate a transnational terrorist threat. Two primary considerations drive the voters' strategic choice: free riding on the other countries' countermeasures and limiting a reprisal terrorist attack. The resulting low proactive countermeasures benefit the terrorists, whose attacks successfully exploit voters' strategic actions. This finding stems from a delegation problem where leadership by voters has a detrimental consequence on the well-being of targeted countries. Domestic politics add another layer of concern when addressing a common terrorist threat.     

Spending cuts or tax increases? The composition of fiscal adjustments as a signal

This paper shows that the composition of fiscal adjustments, spending cuts versus tax increases, serves as a signal of the government's degree of collusion with special interests. The politico-economic model of fiscal policies, combining retrospective voting with common-agency-type lobbying, presents undominated separating equilibria and intuitive pooling ones, in both of which fiscal adjustments with sufficiently large spending cuts lead to incumbent reappointment whereas those with only tax increases lead to incumbent defeat. These findings are consistent with the recent empirical evidence of voters behaving as fiscal conservatives. The efficiency-enhancing aspects of the signaling mechanism and the effects of imposing a deficit limit are also analyzed.     

Political foundations of the resource curse

In this paper we argue that the political incentives that resource endowments generate are the key to understanding whether or not they are a curse. We show: (1) politicians tend to over-extract natural resources relative to the efficient extraction path because they discount the future too much, and (2) resource booms improve the efficiency of the extraction path. However, (3) resource booms, by raising the value of being in power and by providing politicians with more resources which they can use to influence the outcome of elections, increase resource misallocation in the rest of the economy. (4) The overall impact of resource booms on the economy depends critically on institutions since these determine the extent to which political incentives map into policy outcomes. Countries with institutions that promote accountability and state competence will tend to benefit from resource booms since these institutions ameliorate the perverse political incentives that such booms create. Countries without such institutions however may suffer from a resource curse.     

Favoritism and reverse discrimination

We analyze the inefficiency that may arise in the form of reverse discrimination in the presence of favoritism or nepotism. Favoritism is typically associated with inefficient transfers to the core support of the incumbent government. But inefficiency that is opposite in nature may also arise through the electoral process in a political environment where favoritism is pervasive. We show that if the policy maker is sufficiently office seeking, a socially efficient action may never be taken if it yields benefits to his core support due to reputational concerns. Hence, the core support of the incumbent may fare worse than other groups. We also consider the implications of policies such as anti-nepotism laws or term limits in the presence of favoritism.     

Voting over type and generosity of a pension system when some individuals are myopic

This paper studies the determination through majority voting of a pension scheme when society consists of far-sighted and myopic individuals. All individuals have the same basic preferences but myopics tend to adopt a short-term view (instant gratification) when dealing with retirement saving and labor supply. Consequently, they will find themselves with low consumption after retirement and regret their insufficient savings decisions. Henceforth, when voting they tend to commit themselves into forced saving. We consider a pension scheme that is characterized by two parameters: the payroll tax rate (that determines the size or generosity of the system) and the “Bismarckian factor” that determines its redistributiveness. Individuals vote sequentially. We examine how the introduction of myopic agents affects the generosity and the redistributiveness of the pension system. Our main result is that a flat pension system is always chosen when all individuals are of one kind (all far-sighted or all myopic), while a less redistributive system may be chosen if society is composed of both myopic and far-sighted agents. Furthermore, while myopic individuals tend to prefer larger payroll taxes than their far-sighted counterparts, the generosity of the system does not always increase with the proportion of myopics.     

Political credibility and economic growth in less developed countries

While the mainstream of economic development theory focuses on the efficiency of policy measures, the role of the credibility of these measures is rarely analyzed. In this paper we argue that in less developed countries the problem of establishing the credibility of policy measures is at least as important as the problem of choosing the efficient policy solution. We claim that many of the difficulties less developed countries face can be understood in terms of lack of effective control on the discretionary power of governments, which ultimately leads to policies that are not credible. The private sector anticipates large swings in policies and reacts by withholding its resources. Symptoms of these credibility problems in less developed countries include the size of the informal sector, capital flight, and the reluctance of investors to commit capital. All of these reactions contribute to the slow economic growth in these countries. This paper concludes that establishing strategies for the control of state discretionary power is a crucial precondition for overcoming these problems and generating long term economic growth.     

The structure of strategy-proof social choice — Part I: General characterization and possibility results on median spaces

We define a general notion of single-peaked preferences based on abstract betweenness relations. Special cases are the classical example of single-peaked preferences on a line, the separable preferences on the hypercube, the “multi-dimensionally single-peaked” preferences on the product of lines, but also the unrestricted preference domain. Generalizing and unifying the existing literature, we show that a social choice function is strategy-proof on a sufficiently rich domain of generalized single-peaked preferences if and only if it takes the form of voting by issues (“voting by committees”) satisfying a simple condition called the “Intersection Property.”Based on the Intersection Property, we show that the class of preference domains associated with “median spaces” gives rise to the strongest possibility results; in particular, we show that the existence of strategy-proof social choice rules that are non-dictatorial and neutral requires an underlying median space. A space is a median space if, for every triple of elements, there is a fourth element that is between each pair of the triple; numerous examples are given (some well-known, some novel), and the structure of median spaces and the associated preference domains is analysed.