Dissertation abstract: Essays on veto bargaining games

This dissertation experimentally analyzes the outcomes of multilateral legislative bargaining games in the presence of a veto player. The first essay examines veto power—the right of an agent to unilaterally block decisions but without the ability to unilaterally secure his/her preferred outcome. Using Winter’s (1996) theoretical framework, I consider two cases: urgent committees where the total amount of money to be distributed shrinks by 50% if proposals do not pass and non-urgent committees where the total amount of money shrinks by 5% if proposals do not pass. Committees with a veto player take longer to reach decisions (are less efficient) than without a veto player and veto players proposals generate less consensus then non-veto players proposals, outcomes on which the theory is silent. In addition, veto power in conjunction with proposer power generates excessive power for the veto player. This suggests that limiting veto players’ proposer rights (e.g., limiting their ability to chair committees) would go a long way to curbing their power, a major concern in committees in which one or more players has veto power. Finally, non-veto players show substantially more willingness to compromise than veto players, with players in the control game somewhere in between. I relate the results to the theoretical literature on the impact of veto power as well as concerns about the impact of veto power in real-life committees. The second essay discusses in detail the voting patterns in the veto and control games reported in the first essay. The empirical cumulative density functions of shares veto players accepted first degree stochastically dominates that of shares for the controls and the empirical cdfs of shares the controls accepted first degree stochastically dominate that of shares for non-veto players. Random effect probits support this conclusion as well. In addition, regressions imply favorable treatment of voting and proposing between non-veto players which, however, does not result in larger shares in the end. Coalition partners consistently demand more than the stationary subgame perfect Nash equilibrium share except for veto players in non-urgent committees. JEL Classification C7, D7, C78, D72 Dissertation Committee: John H. Kagel, Advisor Massimo Morelli Alan Wiseman Stephen Cosslett     

Endogenous Pollution Havens: Does FDI Influence Environmental Regulations?*

We suggest a novel perspective on the relationship between the stringency of environmental policies and foreign direct investment (FDI). We develop a political economy model with imperfect product market competition where local and foreign firms jointly lobby the local government for a favorable pollution tax. FDI is found to affect environmental policy, and the effect is conditional on the local government's degree of corruptibility. If the degree of corruptibility is sufficiently high (low), FDI leads to less (more) stringent environmental policy, and FDI thus contributes to (mitigates) the creation of a pollution haven. Our empirical results using panel data from 33 countries support the predictions of the model.     

Veto players and foreign aid provision

This study investigates how the political institutions of developed economies influence their foreign assistance. Specifically, we argue that the number of effective veto players has a negative effect on the volume of aid provision. To provide foreign assistance, the incumbent government in a donor country must have unanimous support from all effective veto players in policy making. Thus, it has more barriers to overcome when the polity is characterized by many and preference-wise heterogeneous veto players. By examining the official development assistance outflows of 27 OECD countries for the period of 1977–2006, we find empirical patterns that corroborate our argument.     

Foreign Direct Investment and Environmental Taxes

Abstract. This paper studies the effect of foreign direct investment (FDI) on environmental policy stringency in a two-country model with trade costs, where FDI could be unilateral and bilateral and both governments address local pollution through environmental taxes. We show that FDI does not give rise to ecological dumping because the host country has an incentive to shift rents away from the source country toward the host country. Environmental policy strategies and welfare effects are studied under the assumption that parameter values support FDI to be profitable.     

The Virtue of Installing Veto Players

This paper shows that the wisdom of many Founding Fathers of installing separate legislation powers to prevent each other from corrupt practices is at most only partially justified. Given the same culture, a political institution with veto players to counterbalance its multi-party legislature enables its legislative coalitions to extract larger amounts of bribes from interest groups than the one without such counterbalance veto players . This finding explains the rampant scandals of colossal bribes in regimes where an authoritarian president, prime minister, or party leader of the chronical dominant party, or a bicameral system is prevalent. Technically, this paper extends the weighted value allocation under a preset coalitional structure of the players to an apex game.     

Legislative output and the Constitutional Court in Italy

This paper considers the impact of the Constitutional Court on legislative output in Italy. Following Tsebelis’ ((2002) Veto Players: Foundations of Institutional Analysis. Princeton: Princeton University Press) veto players model and the stylised facts as regards the Italian Constitutional Court’s activity, this paper presents a multi-stage game in the spirit of Gely and Spiller ((1990). A rational choice theory of supreme court statutory decisions with applications to the state farm and grove city cases. Journal of Law, Economics, and Organization 6, 263–300). In the first stage, the legislative veto players, namely the parties in government, choose whether to change or not the policy status quo by enacting new legislation. In the second stage, the Court makes a constitutional interpretation: it decides whether to alter or not the outcome of the first stage through a sentence of constitutional illegitimacy. The Court has both the power of annulling laws and a limited power of creating new legally binding norms. Moreover, in the third stage, a constitutional law voted by a parliamentary qualified majority can overturn the Court’s decisions. The model predicts that the presence of the Court lowers legislative policy change and tests this prediction with 1956–2001 annual time series data for Italy.

Veto power in committees: an experimental study

Veto power consists of the right of one or more players to unilaterally block decisions but without the ability to unilaterally secure their preferred outcome. Our experiment shows that (i) committees with a veto player take longer to reach decisions (are less efficient) and generate less consensus than without a veto player, (ii) veto power substantially enhances proposer’s power, and (iii) non-veto players are substantially more willing to compromise than veto players. We relate our results to the theoretical literature on the impact of veto power as well as to concerns about the impact of veto power in real-life committees.     

Social equilibrium and cycles on compact sets

One proof of existence of general equilibrium assumes convexity and continuity of a preference correspondence on a compact convex feasible set W. Here the existence of a local equilibrium for a preference field which satisfies, not convexity, but the weaker local acyclicity is shown. The theorem is then applied to a voting game, σ, without veto players. It is shown that if the dimension of the policy space is no greater than ν(σ) ? 2, where ν(σ) is the Nakamura number of the game, then no local cycles may occur and a local equilibrium must exist. With convex preferences, then, there will exist a choice of the game from W.     

The Role of Regime Type in the Political Economy of Foreign Reserve Accumulation

Authoritarian regimes have surpassed democracies in foreign reserve accumulation since the Asian Financial Crisis. Two prominent institutionalist theories could explain this diverging trend in reserves: First, the political business cycle theory, suggesting that reserves are reduced before an election. Second, the veto player theory, implying that a high number of veto players increases the de facto independence of central bankers, who are reluctant to invest in reserves. A time-series cross-sectional analysis for up to 182 countries over the period 1990–2013 shows that democratic governments tend to reduce their reserves before elections. While veto players do not affect reserves directly, a high number of veto players tends to limit a political business cycle before an election. Elections and veto players do not have an influence in authoritarian regimes. Election cycles tend to explain why democracies have relatively fallen behind in a period of massive reserve accumulation.     

Strategic Environmental Policy under Free Entry of Firms

With direct trade barriers banned, governments may be tempted to use indirect policy tools to interfere with trade, such as environmental taxes. The author uses a model of an endogenous market structure, where the number of firms is determined by a zero-profit condition in one country but is exogenously given in the other country, to show that a government harboring a fixed number of firms fails to affect aggregate supply, and therefore has little scope for improving domestic environmental quality (if pollution is transboundary). Moreover, owing to the absence of a terms-of-trade effect, it diverts from the classical strategic tax rule. The author argues that both governments arguably fix their equilibrium emission taxes "too low," meaning that tax competition plausibly leads to "ecological dumping."     

The influence of political fragmentation on public enterprises: Evidence from German municipalities

This study investigates the influence of politically fragmented municipal councils on the investment behaviour of municipally owned public enterprises. We argue that common public choice theories can also be applied to public enterprises. For our observation period (2002–2014), we use a data set encompassing 8,685 municipally owned enterprises subject to commercial accounting located in 3,237 municipalities drawn from all 13 German federal area states. On average, our results point to a negative effect of fragmentation on investment per capita, supporting a war of attrition or veto player approach. Effects are heterogeneous among different sectors, possibly due to higher visibility to voters. Thus, veto players might actively try to block prestigious and publicly perceivable investment projects to hinder their opponents. Political budget cycles additionally influence this effect for some sectors. However, testing non-linearities reveal that the common-pool hypothesis cannot be completely ruled out.     

Equilibrium conditions in corporate tax competition and Foreign Direct Investment flows

We consider a collection of countries which attempt to maximize their corporate tax revenue, the latter being viewed as a function of Foreign Direct Investment (FDI) inflow and the Effective Average Tax Rate (EATR) which each country sets for itself. Under a model that assumes a direct influence of tax differentials on the flow of FDI, each country's decisions are naturally ‘coupled’ to those of others, leading to a non-cooperative game in which countries–players compete for FDI inflows by sequentially altering their tax rates. Their decisions are made via a differential equation-based model used to predict the effect of tax rate changes on a player's share of FDI inflows. Our model, calibrated using empirical data from 12 OECD countries for the period 1982–2005, combines FDI inflow and tax-rate differentials to arrive at a “steady-state” FDI inflow share for each player, given its competitors' corporate tax rates. We explore the game's equilibrium, including the question of whether equilibrium necessarily implies a ‘race to bottom’, with low corporate tax rates for all players.     

Do Lax Environmental Regulations Attract Foreign Investment?

There has been considerable controversy over the empirical significance of the theoretically predicted pollution haven hypothesis. Generally, empirical papers have failed to find an effect on industrial location of weaker or stricter environmental regulations. In this paper we find confirmation of theoretical predictions. We present a statistical test of the impact of environmental regulations on the capital movement of polluting industries. The empirical study is conducted by examining foreign direct investment (FDI) of several US industries, representing industries with high pollution control costs (chemicals and primary metals) as well as industries with more modest pollution control costs (electrical and non-electrical machinery, transportation equipment, and food products). At issue is the effect of the laxity of environmental regulation on FDI. As laxity is not directly observed, we posit two equations, one for FDI determination and one for pollutant emissions, a variable positively correlated with the unobserved variable. We use aggregate national sulfur emissions as the pollutant. Using instruments for the unobserved variable, the statistical results show that the laxity of environmental regulations in a host country is a significant determinant of FDI from the US for heavily polluting industries and is insignificant for less polluting industries.     

环境规制约束下FDI对中国科技创新与经济高质量发展的影响——基于中介效应与门槛效应的机制检验

基于2003—2019年中国内地30个省份面板数据，运用中介效应、门槛效应模型实证检验FDI对我国技术创新与经济高质量发展的影响，并进行机制分析。研究发现：第一，在环境规制约束下，FDI技术溢出效应显著，FDI能够促进我国经济高质发展，现阶段环境规制具有“创新补偿”效应；FDI与环境规制的交互项能够显著促进经济高质量发展，环境规制对FDI发挥一定的正向筛选作用。第二，在考虑内生性后，FDI、环境规制及其交互项对经济高质量发展影响的核心结论依然成立，并且存在区域异质性。第三，两种中介效应检验结果显示，FDI通过技术创新机制作用于我国经济高质量发展。第四，整体而言，FDI通过技术创新水平这一中介路径对经济高质量发展产生负向影响，与理论预期不符。     

Welfare effects of competition for FDI between technologically asymmetric countries with varying trade costs

Given the traditional argument that host countries' excessive competition for FDI (foreign direct investment) deteriorates the host countries' welfare, this paper examines the impact of policy competition for FDI on social welfare considering varying trade costs. Based on a model where two technologically asymmetric countries compete for FDI, we determine an equilibrium where a multinational firm relocates to a less efficient country. Moreover, we demonstrate that the policy competition for FDI between less integrated economies might improve social welfare when the multinational firm relocates to a country with a lower technology and a less competitive market. Nonetheless, we show that the traditional argument can be true when the policy competition for FDI between highly integrated economies deteriorates host countries' welfare, as supported by the empirical evidences of moderated competition for FDI within EU member countries.     

环境规制对FDI影响的经验分析:基于中国的数据

环境规制对FDI会产生何种影响,对这一问题,理论界存在不同的观点.运用多元线性回归模型与Granger因果检验模型.对环境规制及其他相关变量对中国FDI影响作经验分析,得出的结论是:环境规制对FDI的负向影响是不显著的,且二者之间不存在因果关系;而GDP等宏观经济变量对FDI的影响更为显著.     

The spatial correlation and interaction between environmental regulation and foreign direct investment

This paper uses spatial simultaneous equation models to analyze the two-way mechanism between environmental regulation and foreign direct investment (FDI). The results, based on data from 285 cities in China from 2003 to 2014, show the following. (1) Not only does environmental regulation have a significant impact on the location choice of FDI, but FDI tends to flow to a city with more relaxed environmental regulation. Environmental regulation can also trigger the near transfer effect of FDI. (2) FDI has a significant spatial spillover effect and this spatial spillover effect has an important impact on FDI and environmental regulation in a particular city. (3) Although multinationals choose a city with more relaxed environmental regulations when they invest in China, FDI inflows have increased both the number and severity of local environmental regulations, indicating that the “pollution haven” hypothesis does not hold in China. (4) Environmental regulation has a significant spatial spillover effect, and this spatial spillover effect has an important impact on both environmental regulation and FDI in cities. In China, there is also a local competitive effect of environmental regulation, albeit with significant regional differences.     

外贸增长方式转变的环境效应实证研究——基于山东的数据分析

通过对山东省外贸出口、FDI与工业废水排放量关系的实证分析研究了外贸增长方式转变的环境效应,认为FDI对环境污染有抑制作用,但作用较小而且入世后较入世前作用降低;外贸出口加剧了环境污染,但入世后总体污染程度较入世前降低,最后提出相关政策建议。     

Contests with size effects through costs

Eggert and Kolmar [Eggert, W., Kolmar, M., in press. Contests with size effects. European Journal of Political Economy.] examine the effects of group size on individual and aggregate payoffs in contests where prizes increase in the number of players. In a reconsideration of their paper, this note examines contests in which the unit cost of effort decreases in the number of players. In contests for fixed prizes, an increase in the number of players decreases individual and aggregate payoffs. In contests in which players face a trade-off between appropriative and productive investments, an increase in the number of players decreases individual payoffs while increasing aggregate payoffs.