Policy biases with voters’ uncertainty about the economy and the government

We model policy choices where parties competing for election are better informed than voters about the state of the economy. In addition voters are uncertain about the incumbent's preferences and the median voter's vote potentially depends on the state of the economy. The incumbent may bias his policy in order to convey information to the voters and raise his chance of reelection. The bias depends crucially on which kind of uncertainty is the most important. Uncertainty about preferences leads to moderate policies, while uncertainty about the state of the economy leads to extreme policies.     

Factor Endowments,Democracy, and Trade Policy Divergence

We develop a stochastic model of electoral competition in order to study the economic and political determinants of trade policy. We model a small open economy with two tradable goods, each of which is produced using a sector‐specific factor (e.g., land and capital) and another factor that is mobile between these tradable sectors (labor); one nontradable good, which is also produced using a specific factor (skilled labor), and an elected government with the mandate to tax trade flows. The tax revenue is used to provide local public goods that increase the economic agents’ utility. We use this general equilibrium model to explicitly derive the ideal policies of the different socioeconomic groups in society (landlords, industrialists, labor, and skilled workers). We then use those ideal policies to model the individual probabilistic voting behavior of the members of each of these socioeconomic groups. We use this model to shed light on how differences in the comparative advantages of countries explain trade policy divergence between countries as well as trade policy instability within countries. We regard trade policy instability to mean that, in equilibrium, political parties diverge in terms of the political platforms they adopt. We show that in natural resource (land)–abundant economies with very little capital, or in economies that specializes in the production of manufactures, parties tend to converge to the same policy platform, and trade policy is likely to be stable and relatively close to free trade. In contrast, in a natural resource–abundant economy with an important domestic industry that competes with the imports, parties tend to diverge, and trade policy is likely to be more protectionist and unstable.     

Extremism, campaigning and ambiguity

This paper studies a model of how political parties use resources for campaigning to inform voters. Each party has a predetermined ideology drawn from some distribution. Parties choose a platform and campaign to inform voters about the platform. We find that, the farther away parties are from each other (on average), the less resources are spent on campaigning (on average). Thus, if parties are extreme, less information is supplied than if parties are moderate. We also show that if a public subsidy is introduced, we have policy convergence, given some mild technical restrictions on the public subsidy.     

Reciprocity and voting

In this paper we present a two-period model where a left-wing and a right-wing political party are solely interested in the policies they pursue. We assume that voters display reciprocal behavior. By contrast, political parties are not motivated by reciprocity. We show that reciprocity may have dramatic consequences for models of voting behavior. The incentive to be kind to the median voter may ensure that a position closer to the median voter's position is adopted even if political parties are not directly interested in being elected and cannot commit to a political stance during an election campaign. Moreover, reciprocity increases incumbency advantages.     

Media as watchdogs: The role of news media in electoral competition

We develop an equilibrium model to analyze the role of the media in electoral competition. When policy payoffs are state-dependent, party policies do not converge to the median voter's ideal policy if the media report only party policies. News analysis about the state, though possibly biased, can discipline off-equilibrium deviations and make the parties adopt more centrist policies. Since voters are rational, the party favored by the media need not win with a higher probability. Instead, media bias may reduce the effectiveness of electoral competition and lead to more polarized policies.     

The pro-competitive effect of campaign limits in non-majoritarian elections

We study a model of elections in non-majoritarian systems that captures the link between competition in policies and competition in campaign spending. We argue that the overall competitiveness of the political arena depends on both the endogenous number of parties contesting the election and the endogenous level of campaign spending. These two dimensions are linked together through their combined effect on the total equilibrium level of political rents. We illustrate the key insights of the model with an analysis of the competitive effects of campaign spending limits. We show that under some conditions spending caps can be pro-competitive, leading to an increase in the number of parties contesting the elections.     

The Politics of Inequality as Organised Spectacle: Why the Swiss Do Not Want to Tax the Rich

In 2015, Swiss voters had the opportunity to impose a tax on the super rich in a popular vote and thereby fund a redistributive policy. However, a large majority voted against its seemingly obvious self-interest and rejected the tax. We propose an explanation for this puzzling outcome, bridging the usually separate behavioralist and institutionalist perspectives on the politics of inequality. We start from the observation that political economy tends to neglect processes of preference formation. Theorising preferences as socially constructed, we show that interest groups played a major role in shaping the outcome of the vote. Business frames were multiplied through allied parties and the media and had a major impact on individual voting behaviour. In addition, we demonstrate that interest groups representing business interests derive the content of their communication from business’s structurally privileged position in the capitalist economy. Specifically, creating uncertainty about possible perverse effects of government policies on jobs and growth is a powerful tool to undermine popular support. Frames based on this structural power ultimately explain why the Swiss refrained from ‘soaking the rich.’     

When do simple policies win?

We present a simple model of a debate between two interested parties which takes into account the complexity of their policy positions. The two debaters engage in all-pay-auctions to win slots of time/attention to present their positions to a decision-maker. Complexity of a policy is modelled through the number of slots of attention needed to get the policy across. We show that when the number of attention slots is scarce, but still large enough to allow for both sides to fully present their policies, simple policies have an advantage over more complex ones. We show that this advantage of simple policies is diminished only when the number of attention slots is fairly large and when the decision-maker is strongly persuaded by more complex policies.     

Tactical Redistribution Between Regions When Parties and Voters Care About Ideology

In this paper, redistributive transfers between regions are examined in a political economy model where both parties and voters are led by selfish as well as ideological motives, the latter taking the form of egalitarian objectives. Parties announce election platforms about how to distribute funds between regions and different income types, and voters react to these platforms when casting their vote. It is found that regional transfers are completely tactical; it is the political power of a region that decides if it will be a receiver or a contributor. Ideological goals are reached by redistributive transfers between different income types.     

Reciprocity and voting

In this paper we present a two-period model where a left-wing and a right-wing political party are solely interested in the policies they pursue. We assume that voters display reciprocal behavior. By contrast, political parties are not motivated by reciprocity. We show that reciprocity may have dramatic consequences for models of voting behavior. The incentive to be kind to the median voter may ensure that a position closer to the median voter's position is adopted even if political parties are not directly interested in being elected and cannot commit to a political stance during an election campaign. Moreover, reciprocity increases incumbency advantages.     

Is there any scope for corporatism in macroeconomic policies?

This paper studies corporatism as the outcome of bargaining between the government and a representative labor union. We show that if negotiations between these two parties only relate to macroeconomic policies and unions are not assumed to be inflation-averse, corporatism can never be beneficial to both parties. As corporatist policies are nevertheless commonly observed in this context, we discuss possible explanations that reconcile the theory with actual observations. The policy implications of these explanations are also discussed.     

Capital controls,macroprudential regulation,and the bank balance sheet channel

We incorporate a banking sector with balance sheet frictions into a model of a small open economy and compare the effectiveness of capital controls and macroprudential regulation. We show that the welfare-improving effect of capital controls is larger than that of macroprudential regulation if the degree of financial friction between domestic banks and foreign investors is high, while the welfare-improving effect of macroprudential regulation is larger than that of capital controls if the degree of financial friction is low. We also show that the welfare ranking of the two policies depends on whether an economy suffers from liability dollarization.     

A model of political parties

This paper presents a new model of political parties. I assume that the role of parties is to increase the commitment ability of politicians vis-à-vis the voters. Whereas a politician running alone can only offer his ideal policy, the set of policies that a party can commit to is the Pareto set of its members. I show that the commitment mechanisms provided by the institution of parties has no effect when the policy space is unidimensional; the policies parties can induce in equilibrium arise also when politicians are running independently. However, when the policy space is multidimensional, politicians use the vehicle of parties to offer equilibrium policies that they cannot offer in their absence.     

RETROSPECTIVE VOTING AND PARTY POLARIZATION

We provide a new and favorable perspective on voter naiveté and party polarization. We contrast sophisticated (Nash) versus retrospective voting in a model where two parties commit to policies. Retrospective voters do not understand the mapping between states and outcomes induced by a policy; instead, they simply vote for the party that delivers the highest observed performance, as determined in equilibrium. We show that parties have an incentive to polarize under retrospective, compared to Nash, voting. Moreover, this polarization often results in higher welfare due to a better match between policies and fundamentals.     

Opportunist politicians and the evolution of electoral competition

This paper studies a uni-dimensional model of electoral competition between two parties with two types of politicians. ‘Opportunist’ ones care only about the spoils of the office, and ‘militant’ ones have ideological preferences on the policy space. Opportunist politicians review their affiliations and may switch parties, seeking better election prospects. In this framework, we compare a winner-take-all system, where all the spoils of office go to the winner, to a proportional system, where the spoils of office are split among the two parties in proportion to their vote shares. We study the existence of short term political equilibria and the dynamics and stability of policies and of party membership decisions. In the long run, it is possible that proportional systems see opportunist politicians spread over all parties, but this situation is unstable in winner-take-all systems.     

Monetary and macroprudential policy with foreign currency loans

In a number of countries a substantial proportion of mortgage loans is denominated in foreign currency. In this paper we demonstrate how their presence affects economic policy and agents’ welfare. To this end we construct a small open economy model with financial frictions, where housing loans can be denominated in domestic or foreign currency. The model is calibrated for Poland - a typical small open economy with a large share of foreign currency loans (FCL). We show that the presence of FCLs negatively affects the transmission of monetary policy and deteriorates the output-inflation volatility trade-off it faces. The trade-off can be improved with macroprudential policy but the outcomes are still worse than under this same policy mix applied to an economy with domestic currency debt. We also demonstrate that a high share of FCLs is harmful for social welfare, even if financial stability considerations are not taken into account. Finally, we show that regulatory policies that discriminate against FCLs may have a negative impact on economic activity and discuss the redistributive consequences of forced currency conversion of household debt.     

Pawns Take Queen: The Destabilizing Effects of Regional Parties in Europe

Regional parties encourage government instability in Europe because they make extreme demands on governments for regional autonomy. These demands are different from the demands other parties make and are also more difficult to accommodate, because they require national governments to relinquish decision-making authority over certain issues, whereas the demands of other parties only require government to adjust their policies in some direction. Regional parties are also unlikely to compromise their demands because they do not have the tools available to them that other types of parties have. I support this argument through a statistical analysis of twenty-four democracies in Europe, showing that the presence of regional parties in government increases government instability and that the saliency of autonomy issues affects stability only if it is mediated through regional parties. JEL classification: A, C Regions are defined as the political regions of a country – that is, the level of government directly below the national level of government in a country.     

WHY DOES A TWO-PARTY SYSTEM EXIST?: A NEW ECONOMIC EXPLANATION*

The purpose of this paper is to present a new economic explanation for why a multiple-party system can endogenously arise as a result of the electoral process. The traditional view on the electoral process (i.e., the median voter theorem) is that political parties that pursue policies in the interest of the median voter are led to a convergence of policies. However, this view cannot explain why either conservative or liberal parties win election in many democratic countries. In order to explain this paradox, the following model considers an economy with three types of parties: conservative, middle, and liberal parties. In the model, the policy of each party is assumed to be time-consistent, so that the policy of the middle party generally leads to suboptimal outcomes for the majority voters. Thus, the “rational” majority voters try to elect the political party whose objective is biased. As a result, the electoral process may lead to a two-party system where both conservative and liberal parties have a chance to win election.     

Formation of Nations in a Welfare-State Minded World

We model the endogenous formation of nations in a world economy where nations apply redistributive policies. We show that people's preference for stronger redistributive policies may lead to greater inequality in the world's distribution of income as a result of rich individuals tending to form their own nations. By the same token, stable economic integration occurs only when redistributive policies are not too strong.     

Growth and optimal policies in an R&D-growth model with imperfect international capital mobility

In this paper, we examine the effects of international capital mobility on innovation, growth, and optimal growth policies in a small open economy with R&D-driven growth. Households can borrow funds from an imperfect international capital market to finance their investment in R&D firms. We show that the economy can reach a higher growth rate if international capital is more mobile. This result is consistent with recent empirical findings. Moreover, we show that the common growth-enhancing policies, such as patent protection and the R&D subsidies, have an additional negative welfare effect when households can access the international capital market. Accordingly, the optimal patent protection and R&D subsidy should be smaller when the degree of international capital mobility is higher.