Social Conflict and Gradual Political Succession: An Illustrative Model*

This paper studies the evolution of political institutions in the face of conflict. We examine institutional reform in a class of pivotal mechanisms—institutions that behave as if the resulting policy were determined by a “pivotal” decision maker drawn from the potential population of citizens and who holds full policy‐making authority at the time. A rule‐of‐succession describes the process by which pivotal decision makers in period t + 1 are, themselves, chosen by pivotal decision makers in period t. Two sources of conflict—class conflict, arising from differences in wealth, and ideological conflict, arising from differences in preferences—are examined. In each case, we characterize the unique Markov‐perfect equilibrium of the associated dynamic political game, and show that public decision‐making authority evolves monotonically downward in wealth and upward in ideological predisposition toward the public good. We then examine rules‐of‐succession when ideology and wealth exhibit correlation.     

Public Sector Rationing and Private Sector Selection

We study the interaction between nonprice public rationing and prices in the private market. Under a limited budget, the public supplier uses a rationing policy. A private firm may supply the good to those consumers who are rationed by the public system. Consumers have different amounts of wealth, and costs of providing the good to them vary. We consider two regimes. First, the public supplier observes consumers’ wealth information; second, the public supplier observes both wealth and cost information. The public supplier chooses a rationing policy, and, simultaneously, the private firm, observing only cost but not wealth information, chooses a pricing policy. In the first regime, there is a continuum of equilibria. The Pareto dominant equilibrium is a means‐test equilibrium: poor consumers are supplied while rich consumers are rationed. Prices in the private market increase with the budget. In the second regime, there is a unique equilibrium. This exhibits a cost‐effectiveness rationing rule; consumers are supplied if and only if their cost–benefit ratios are low. Prices in the private market do not change with the budget. Equilibrium consumer utility is higher in the cost‐effectiveness equilibrium than the means‐test equilibrium.     

Marx and Resource Scarcity: An Institutionalist Approach

Turkey has recently reshaped its own institutional structure by establishing Independent Regulatory Agencies (IRAs). However, the political authority has not desired to delegate the political property rights to IRAs. Although IRAs is de jure established, the political conflicts occuring during the evolution of the traditional-patrimonial state to the regulatory state de facto impede IRAs to institutionalize. This paper observes recent policy changes during the transition and lessons from the energy regulation in Turkey. So, the paper reveals whether the change in the regulatory institutional structure of Turkey is an effective policy in terms of transition to the institutions of capitalism.     

HOUSING WEALTH AND U.S. MONEY DEMAND: A PANEL ESTIMATION

This article estimates a panel model for U.S. money demand using annual state‐level data for the period from 1977 to 2008. We incorporate housing wealth in the demand‐for‐money function and find strong evidence of a relationship between a broad monetary aggregate and housing wealth. This finding is robust to the inclusion of variables measuring financial heterogeneity across U.S. regions. Breaking up the sample in two subperiods shows that panel estimates including housing wealth yield more stable coefficients than both time‐series estimates and panel estimates excluding housing wealth. We also show that the link between money and housing wealth predates the recent boom‐and‐bust cycle. (JEL E41, E52)     

AN ANALYSIS OF POLITICAL AND INSTITUTIONAL POWER DISPERSION: THE CASE OF TURKEY

This study examines the effects of fragmented governments and fiscal authorities on budget deficits in Turkey along with political business cycle effects. For econometric analysis we will use annual data from the period 1960 to 2009. This article sheds light on various dispersion indices and their use in the field of political power and fiscal performance. The results show that the power dispersion indices of governments and fiscal institutions significantly explain the increases in the ratio of budget deficit to gross national product. The article draws attention to the unification and better coordination of fiscal authorities in Turkey. The analysis has important policy implications for Turkey and other developing countries from the viewpoint of fragmented political and administrative dispersion of power and poor budget performances. (JEL P16, H72, C22, C43)     

Choice of currency basket weights and its implications on trade balance

This paper seeks to find an optimal choice of currency basket weights for emerging economies that peg their currencies to a currency basket, and to examine the long-run relationship between the real exchange rates of a group of trading partners. A general equilibrium model is set up to establish an optimal set of currency basket weights, coupled with the choice of fiscal policy, to simultaneously stabilize trade balance and aggregate price level of an economy. This optimal set of weights is a weighted average of two sets of weights; each targets at one policy goal (stabilizing either balance of trade or aggregate price level) at a time. Empirical studies including vector autoregression (VAR) analysis and cointegration analysis on the long-run relationship between the Thai baht and the real exchange rates of its major trading partners are presented.     

Capital,the State,and the Monetary Mode of Power: A Review of Nitzan and Bichler's Capital as Power

In their recent book Capital as Power, Jonathan Nitzan & Shimshon Bichler depict capitalism as a mode of power rather than a mode of production, in which political and economic power are no longer distinct. In addition, they argue, contrary to neoclassical theory, that capital has nothing to do with productivity but instead represents power. I make three broad criticisms: first, their elimination of the distinction between economics and politics renders any empirical test of their ostensible integration impossible; second, they do not adequately define their main concepts, including capital, capitalization, capitalism, and power; and third, they do not acknowledge the possibility that the patterns they attribute to power may in fact be self-organized. This paper argues that money is a claim to wealth, not wealth itself, that it measures and distributes the power of payment, and that payments redistribute the power of ownership, including the ownership of money. Finally, I suggest that, in light of the global debt crisis, a theory of capital-as-power should examine the power of finance, which entails the privatization and concentration of the power to create money as debt.     

TESTING THE QUANTAL RESPONSE HYPOTHESIS

We develop a nonparametric test for consistency of player behavior with the quantal response equilibrium (QRE). The test exploits a characterization of the equilibrium choice probabilities in any structural QRE as the gradient of a convex function; thereby, QRE‐consistent choices satisfy the cyclic monotonicity inequalities. Our testing procedure utilizes recent econometric results for moment inequality models. We assess our test using lab experimental data from a series of generalized matching pennies games. We reject the QRE hypothesis in the pooled data but cannot reject individual‐level quantal response behavior for over half of the subjects.     

MEASURING POVERTY USING BOTH INCOME AND WEALTH: A CROSS‐COUNTRY COMPARISON BETWEEN THE U.S. AND SPAIN

We study the correspondence between a household's income and its vulnerability to income shocks in two developed countries: the U.S. and Spain. Vulnerability is measured by the availability of wealth to smooth consumption in a multidimensional approach to poverty, which allows us to identify three groups of households: the twice‐poor group, which includes income‐poor households who lack an adequate stock of wealth; the group of protected‐poor households, which are all those income‐poor families with a buffer stock of wealth they can rely on; and the vulnerable‐non‐poor group, including households above the income‐poverty line that do not hold any stock of wealth. Interestingly, the risk of belonging to these groups changes over the life‐cycle in both countries while the size of the groups differs significantly between Spain and the U.S., although this result is quite sensitive to whether the housing wealth component is included in the wealth measure or not.     

Social Security Reform with Heterogeneous Agents

This paper analyzes the quantitative role of idiosyncratic uncertainty in an economy in which rational agents vote on hypothetical social security reforms. We find that the role of a pay-as-you-go social security system as a partial insurance and redistribution device significantly reduces political support for a transition to an economy with a fully funded system. We conclude that the status quo bias in favor of an unfunded social security system is stronger in economies in which agents of similar age differ significantly with respect to labor earnings and wealth because of idiosyncratic income uncertainty. Journal of Economic Literature Classification Numbers: H55, E62, H3     

RESOURCE CURSE,POLITICAL ENTRY,AND DEADWEIGHT COSTS

A simple model of political entry in a two‐sector economy is developed to analyze the effects of natural resource wealth on economic policy, political development, and civil insurrection. The model emphasizes the role of political entry and deadweight costs of taxation on the joint determination of these economic and political outcomes. Contrary to popular belief, my model shows that natural resource abundance is an economic blessing even in a rent‐seeking society, although resource dependence can be negatively associated with economic performance. In a contested political market, dictators care about popular support and hence resource wealth can help reduce the deadweight cost of taxation (and hence the cost of public good provision). On the other hand, natural resource wealth can be a political curse, because it encourages political entry and hence it induces incumbent dictators to run more repressive regimes. With constant returns counterinsurgent technology, however, the equilibrium number of insurgents is independent of the size of resource wealth. The onset of civil war, therefore, depends on the counterinsurgent technology and whether the costs of entry deterrence are affected by resource wealth. This helps clarify the two seemingly contradictory hypotheses that “resource wealth enhances regime durability” and “resource wealth fuels conflict.”     

With whom do you trade? Defensive innovation and the skill‐bias

Abstract We examine whether increased trade with countries with ineffective protection of intellectual property has contributed to the skill‐deepening of the 1980s. We construct an index of effective protection of intellectual property at the country level, combining data on protection of patents and rule of law. Next, we construct an industry‐specific version of this index, using as weights each country's trade share in the total trade of the industry. We find a decline in this trade‐weighted index, owing to a rise in trade with countries with low effective protection of intellectual property, which explains 29% of the rise in within‐industry skill‐intensity.     

Uncovered Interest Parity at Long Horizons: Evidence on Emerging Economies*

This paper estimates uncovered interest parity (UIP) at long horizons using bilateral US dollar rates vis‐à‐vis mature economy and emerging market currencies. The paper finds support in favor of UIP for dollar rates vis‐à‐vis major mature economy currencies, but far less against emerging market currencies. There are also signs that political risk and the exchange risk premium help explain the empirical failure of UIP for these latter currencies. This suggests that whether UIP holds depends more on the currency than on the horizon.     

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)     

Private Wealth in a Developing Country:Evidence from South Africa

The point of departure of Piketty's influential Capital in the Twenty‐First Century (2014) was the dramatic growth of private wealth‐income ratios in advanced economies between 1970 and 2010. Using official balance sheet data for South Africa—the first country to publish such data in the developing world—, this paper examines to what extent this re‐emergence of private wealth was also experienced in the developing‐country context. First, we find that the South African current wealth‐income ratio is very close to its 1975 level, and much lower than those of Piketty's sample of advanced economies. Second, we show that the discrepancy is explained not only by South Africa's relatively low savings rates, but also by the reduction of wealth before and during the transition to democracy in the 1990s. Since then, private wealth recovered significantly, but the U‐shaped relationship does not support the argument that there is a clear correlation between the capital‐income ratio and capital share.     

Consumption,Income, and Wealth: Evidence from Age,Cohort, and Period Elasticities

This paper examines the relationship between non‐durable consumption, income, and wealth (housing and financial) allowing explicitly for generational heterogeneity. A framework is proposed to disentangle cohort, age, and period effects and the empirical analysis is based on the U.S. Consumer Expenditure Survey data. We find that there are significant generational differences and the results highlight the range of elasticities implicit in results presented, thus far, by age groups. Moreover, we find supporting evidence of humped shaped age profiles for the elasticity of consumption with respect to income and the importance of financial wealth for those aged 60+. The framework also allows us to generate cohort profiles which draw attention to the negative role of housing wealth for generation X, and period profiles which reinforce the role of financial wealth for the baby‐boom generation.     

The political economy of public health expenditure and wait times in a public‐private mixed health care system

Abstract This paper investigates the determinants of public health expenditure in a public‐private mixed health care system, where a longer wait time for public care is the major difference between public and private sectors. Voter preferences for health care vary according to their age and by income, and public policy choices are part of a multi‐dimensional, competitive political equilibrium. We show how equilibrium public health expenditure and wait times depend on demographics and explain why they are independent of the distributions of income and political influence. We also show that population aging may not always lead to more public health expenditure.     

A Political‐Economic Account of Global Tariffs

The objective of this paper is to evaluate the relative importance of three distinct factors that motivate redistributive government policy: tariff revenues, consumer welfare, and producer profits. We generalize Grossman and Helpman's (1994, American Economic Review 84: 833–850). protection‐for‐sale model by positing that government places different weights on these components of the welfare of its polity when it decides which industries to protect and to what extent. Employing tariff data from 40 countries, the predictions from this model are used to estimate these weights. The results are surprising in their range and variety. Developing countries with weak tax systems often weigh tariff revenue heavily, while more developed countries weigh producer interests the most. Very few hold consumer welfare dear.     

Correcting for the Missing Rich: An Application to Wealth Survey Data

It is a well‐known criticism that if the distribution of wealth is highly concentrated, survey data are hardly reliable when it comes to analyzing the richest parts of society. This paper addresses this criticism by providing a general rationale of the underlying methodological problem as well as by proposing a specific methodological approach tailored to correcting the arising bias. We illustrate the latter approach by using Austrian data from the Household Finance and Consumption Survey. Specifically, we identify suitable parameter combinations by using a series of maximum‐likelihood estimates and appropriate goodness‐of‐fit tests to avoid arbitrariness with respect to the fitting of the Pareto distribution. Our results suggest that the alleged non‐observation bias is considerable, accounting for about one quarter of total net wealth in the case of Austria. The method developed in this paper can easily be applied to other countries where survey data on wealth are available.     

Policy Uncertainty about Australia's Carbon Price: Expert Survey Results and Implications for Investment

Australia's carbon‐pricing policy remains in doubt due to a lack of bipartisan political support. A survey of Australian‐based carbon‐pricing experts demonstrates profound policy uncertainty: 40 per cent of respondents expect the current carbon‐pricing mechanism to be repealed, but 80 per cent expect that there will be a carbon price in 2020. The forward price curve is U‐shaped and has great variance, with the 60 per cent confidence interval spanning from zero to A$25/t in 2020. Carbon policy uncertainty causes large excess costs in Australia's energy sector and may result in delay and diversion of investment.