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.     

Would letting people vote for multiple candidates yield policy moderation?

We investigate whether letting people vote for multiple candidates would yield policy moderation. We do so in a setting that takes three key features of elections into account, namely, strategic voting, endogenous candidacy and policy motivation on the part of the candidates. We consider two classes of voting rules. One class consists of the voting rules where each voter casts several equally-weighed votes for the different candidates. The other class consists of the voting rules where each voter rank-orders the candidates. We identify conditions under which these voting rules yield policy moderation. We also show that these voting rules may yield policy extremism instead of policy moderation if one (or several) of the conditions is not satisfied! Finally, we find that amongst these voting rules the extent of policy moderation is maximal under the Borda Count if we consider only equilibria where all candidates are serious contenders. However, this result does not carry over to spoiler equilibria, where Approval Voting can yield more moderate policy outcomes than the Borda Count.     

Voting on public goods in multi-jurisdictional systems

This paper studies an economy with multiple jurisdictions, each producing a (pure) public good. Decisions are taken by means of a centralized voting procedure, to which individual agents participate and whose rules are defined with respect to the jurisdictional structure. In particular, a winning alternative must gain the support of a given number of jurisdictions. A well-known example is qualified majority rules. We establish condition on voting rules for the set of voting equilibria to coincide with the set of ratio equilibria of the economy, under alternative assumptions on the possibility of transfers across jurisdictions. We employ the obtained results to characterize the equilibria of two-stage voting situations, in which jurisdictional delegates vote instructed by internal committees.     

Production subsidies and redistribution

Who gains from stimulating output? We explore a dynamic model with production subsidies where the population is heterogeneous in one dimension: wealth. There are two channels through which production subsidies redistribute resources across the population. First, poorer agents gain from a rise in wages, since—to the extent there is an operative wealth effect in labor supply—they work harder. Second, because a current output boost will raise consumption today relative to the future, thus lowering real interest rates, poor agents gain in relative terms since their income is based less on interest income. We examine optimal redistribution from the perspective of an arbitrary consumer in the population. We show that, if this consumer has commitment at time zero to set all present and future subsidy rates, and for a class of preferences that admits aggregation in wealth, then output stimulation, and hence redistribution, will only occur at time zero; after that, subsidies are zero. A byproduct of our analysis of this environment is a median-voter theorem: with direct voting over subsidy sequences at time zero, the sequence preferred by the median-wealth consumer is the unique outcome. We also study lack of commitment, since interest-rate manipulation is associated with time inconsistency. We analyze this case formally by looking at the Markov-perfect (time-consistent) equilibrium in a game between successive identical decision makers (e.g., the median agent). Here, subsidies persist—they are constant over time—and are more distortionary than under commitment. Moreover, whereas under commitment asset inequality changes initially—in favor of the consumer who decides on policy—it does not under lack of commitment.     

Deliberative voting

We analyze a model of jury decision making in which jurors deliberate before casting their votes. We consider a wide range of voting institutions and show that deliberations render these equivalent with respect to the sequential equilibrium outcomes they generate. In particular, in the context of a jury setup, all voting rules excluding the two types of unanimity rules (one requiring a unanimous consensus to acquit, one requiring a unanimous consensus to convict) induce the same set of equilibria outcomes. We show the robustness of our results with respect to several restrictions on communication protocols and jurors’ strategies. Furthermore, we demonstrate that our observations extend to practically all of the voting structures commonly studied in the voting literature. The paper suggests the importance of accounting for communication in models of collective choice.     

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.     

Monetary Policy,Expectations and Commitment*

Commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. A number of interest‐rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy. We assess these rules in terms of whether they lead to a rational expectations equilibrium that is both locally determinate and stable under adaptive learning by private agents. A reaction function that appropriately depends explicitly on private sector expectations performs particularly well on both counts.     

Dynamic legislative policy making

We prove existence of stationary Markov perfect equilibria in an infinite-horizon model of legislative policy making in which the policy outcome in one period determines the status quo for the next. We allow for a multidimensional policy space and arbitrary smooth stage utilities, and we assume preferences and the status quo are subject to arbitrarily small shocks. We prove that equilibrium continuation values are differentiable and that proposal strategies are continuous almost everywhere. We establish upper hemicontinuity of the equilibrium correspondence, and we provide weak conditions under which each equilibrium of our model determines an aperiodic transition probability over policies. We establish a convergence theorem giving conditions under which the invariant distributions generated by stationary equilibria must be close to the core in a canonical spatial model. Finally, we extend the analysis to sequential move stochastic games and to a version of the model in which the proposer and voting rule are determined by play of a finite, perfect information game.     

Mixed equilibria in runoff elections

We demonstrate that the Hotelling–Downs model with runoff voting always admits symmetric mixed strategy equilibria for any (even or odd) number of office-motivated candidates (provided they are at least four). In specific, (a) we show that the game does not admit any symmetric atomless equilibrium, (b) we fully characterize a class of symmetric atomic mixed equilibria which exist for any distribution of the voters' ideal policies and (c) we argue that these equilibria are more robust than pure strategy equilibria to introduction of uncertainty about the voters' preferences.     

Comparison of Scoring Rules in Poisson Voting Games

Scoring rules are compared by their equilibria in simple voting games with Poisson population uncertainty, using new techniques for computing pivot probabilities. Best-rewarding rules like plurality voting can generate discriminatory equilibria where the voters disregard some candidate as not a serious contender, although he may be universally liked, or may be symmetric to other candidates as in the Condorcet cycle. Such discriminatory equilibria are eliminated by worst-punishing rules like negative voting, but then even a universally disliked candidate may have to be taken seriously. In simple bipolar elections, equilibria are always majoritarian and efficient under approval voting, but not other scoring rules. Journal of Economic Literature Classification: D72.     

ON BUYING LEGISLATURES*

This paper analyzes a simple spatial voting model that includes lobbyists who are able to buy votes on bills to change the status quo. The key results are: (i) if lobbyists can discriminate across legislators when buying votes, then they will pay the largest bribes to legislators who are slightly opposed to the proposed change, rather than to legislators who strongly support or strongly oppose the change; (ii) equilibrium policies exist, and with quadratic preferences these equilibria always lie between the average of the lobbyists' ideal points and the median of the legislators' ideal points; and (iii) “moderate” lobbyists, whose positions on a policy issue are close to the median of the legislators' ideal points, will prefer the issue to be salient, while more extreme lobbyists will generally prefer the issue to be obscure.     

The political economy of corruption and the role of economic opportunities1

In many developing and transition countries, we observe rather high levels of corruption. We argue that the missing political support for anti‐corruption policies is due to a lack of economic and financial reforms. Our model is based on the fact that corrupt officials have to pay entry fees to get lucrative positions. In a probabilistic voting model, we show that this, together with the lack of economic opportunities, makes anti‐corruption policies less likely. Compared to a reformed economy, more voters are part of the corrupt system and, more importantly, rents from corruption are distributed differently. Economic liberalization increases the support for anti‐corruption measures. The additional effect of financial liberalization is ambiguous.     

Optimal Protection of Property Rights in a General Equilibrium Model of Growth*

We incorporate weak property rights into an otherwise standard general equilibrium model of growth and second‐best optimal policy. In this setup, the state plays two of its key roles: it protects property rights and provides public services. The government chooses policy (the income tax rate, as well as the allocation of collected tax revenues between law enforcement and public services) to maximize the growth rate of the economy. The focus of our analysis is on how weak property rights generate multiple decentralized competitive equilibria, the different properties of these equilibria, and the implications of second‐best optimal policies.     

Complete information pivotal-voter model with asymmetric group size and asymmetric benefits

We analyze a standard pivotal-voter model under majority rule, with two rival groups of players, each preferring one of two public policies and simultaneously deciding whether to cast a costly vote, as in Palfrey and Rosenthal (1983). We allow the benefit of the favorite public policy to differ across groups and impose an intuitive refinement, namely that voting probabilities are continuous in the cost of voting to pin down a unique equilibrium. The unique cost-continuous equilibrium depends on a key threshold that compares the sizes of the two groups.     

Simple Markovian equilibria in dynamic spatial legislative bargaining

The paper proves, by construction, the existence of Markovian equilibria in a dynamic spatial legislative bargaining model. Players bargain over policies in an infinite horizon. In each period, a sequential protocol of proposal-making and voting, with random proposer recognitions and a simple majority, produces a policy that becomes the next period's status-quo; the status-quo is endogenous. The construction relies on simple strategies determined by strategic bliss points computed by the algorithm we provide. A strategic bliss point, the dynamic utility ideal, is a moderate policy relative to a bliss point, the static utility ideal. Moderation is strategic and germane to the dynamic environment; players moderate in order to constrain the future proposals of opponents. Moderation is a strategic substitute; when a player's opponents do moderate, she does not, and when they do not moderate, she does. We provide conditions under which the simple strategies induced by the strategic bliss points computed by the algorithm deliver a Stationary Markov Perfect equilibrium, and we prove its existence in generic games with impatient players and in symmetric games. Because the algorithm constructs all equilibria in simple strategies, we provide their general characterization, and we show their generic uniqueness.     

Majority Voting in Multidimensional Policy Spaces: Kramer–Shepsle versus Stackelberg

We study majority voting over a bidimensional policy space when the voters’ type space is either uni‐ or bidimensional. We study two voting procedures widely used in the literature. The Stackelberg (ST) procedure assumes that votes are taken one dimension at a time according to an exogenously specified sequence. The Kramer–Shepsle (KS) procedure also assumes that votes are taken separately on each dimension, but not in a sequential way. A vector of policies is a Kramer–Shepsle equilibrium if each component coincides with the majority choice on this dimension given the other components of the vector. We study the existence and uniqueness of the ST and KS equilibria, and we compare them, looking for example at the impact of the ordering of votes for ST and identifying circumstances under which ST and KS equilibria coincide. In the process, we state explicitly the assumptions on the utility function that are needed for these equilibria to be well‐behaved. We especially stress the importance of single‐crossing conditions, and we identify two variants of these assumptions: a marginal version that is imposed on all policy dimensions separately, and a joint version whose definition involves both policy dimensions.     

Evaluating the median voter model’s explanatory power

We match individual senators’ voting behavior on legislative proposals with 24 real referendum decisions on exactly the same issues with identical wording. This setting allows us to evaluate the median voter model’s quality with revealed constituents’ preferences. Results indicate a limited explanatory power of the median voter model: It explains 17.6% points more than random voting and that a senator’s probability to accept a proposal in parliament increases on average by 8.4% points when the district median voter accepts the proposal.     

Composition of Government Budget, Non-Single Peakedness, and Majority Voting

In this paper we study whether majority voting equilibria exist when preferences over public policies are not single peaked. The government levies a proportional income tax. Tax revenue is used to finance a uniform lump-sum transfer and public education. Individuals vote on the composition of the government budget. We show that the single-crossing property cannot be invoked to establish existence of a majority voting equilibrium. In a simple parametric example we find that cycles are pervasive.     

Approval voting with endogenous candidates

We present a formal model of political competition under approval voting which allows for endogenous candidate entry. Our analysis yields a number of novel insights. First, we develop a notion of sincere voting behavior under approval voting, called relative sincerity. We then show that the relatively sincere voting behavior is consistent with the strategic calculus of voting. Second, we show that in a one-dimensional model with distance preferences, equilibria in relatively sincere strategies and without spoiler candidates always generate outcomes close to the median voter. Moreover, approval voting satisfies Duverger's Law in the sense that there are at most two winning positions! Finally, we extend our analysis to arbitrary policy spaces. In the general setting, approval voting is shown to be susceptible to the same kinds of problems as the plurality rule, such as the possibility of non-majoritarian outcomes, failure to elect the Condorcet winner and existence of spoiler candidates.     

The swing voter's curse with adversarial preferences

We analyze voting behavior in a large electorate in which voters have adversarial state-contingent preferences with incomplete information about the state of the world. We show that one type of voter can suffer from the swing voter's curse à la Feddersen and Pesendorfer [The swing voter's curse, Amer. Econ. Rev. 86 (1996) 408-424], and go on to characterize the symmetric Nash equilibria of this model under different parameter values. We prove that unlike settings with nonadversarial preferences, there are equilibria in which in one state of the world, a minority-preferred candidate almost surely wins the election and thus the election may fail to correctly aggregate information. Indeed, we show that the fraction of the electorate dissatisfied with the result can be as large as .