Electoral competition with environmental policy as a second best transfer

This paper explains why some governments fail to adopt policies that are sufficiently strong, while others adopt policies that are too stringent. Constructing a political economy model in which voters face uncertainty due to the types of politicians and the risk of environmental damage, we show that there is an equilibrium in which a politician uses a weaker environmental policy rather than efficient direct transfers for redistribution. We also show that there is an equilibrium in which a stricter environmental policy can be implemented by a politician who has no incentive to make transfers. Then, we discuss which equilibrium should be more plausible. We conclude that the latter equilibrium in which a too stringent environmental policy emerges can dominate the former unless the citizen’s estimate of environmental risk is sufficiently low.     

从一些实际现象探讨经济与政治的关系

经济发展有其不以人们意志为转移的客观轨迹,但从实际发生的一些现象上看,政治是经济发展的开关。经济学家研究发展经济的学说,政治家则掌管实行哪些经济学说的钥匙。政治家的责任重啊!在中国,政治体制改革和经济体制改革基本上是同步的和政治体制改革落后于经济体制改革两种情况都存在。     

Why a clean politician supports dirty politics: A game-theoretical explanation for the persistence of political corruption

Using a theoretical model of repeated political competition among two career politicians, I study the incentives of both the corrupt and clean politicians not to adopt a fully effective reform targeting political corruption. In the setup I study, each politician can credibly adopt the reform as part of his policy platform in the elections. Yet, when the level of political corruption is high, neither politician does so in a Nash Equilibrium. Intuitively, political corruption changes the zero-sum nature of political competition: the reform eliminates the illegal rents of the corrupt candidate and the competitive advantage of the clean candidate.     

Substituting Distribution for Growth: The Political Logic of Intergovernmental Transfers in the Russian Federation

Given limited resources and economic realities, how do politicians distribute monetary transfers in order to retain office? Previous work has largely focused on two models – a core model of rewarding loyal supporters and a swing model of purchasing the support of easily swayed voters. Empirical results have proven mixed, however. In this article, we argue that these mixed results are due to economic factors, which condition politicians' distributive strategies. In our model, we consider that politician and voters are involved in a repeated game, where past expectations condition future strategy. Current (core) supporters who receive few benefits and perceive themselves worse off than other, less loyal, groups are likely to be less loyal themselves tomorrow. In our model, politicians avoid this by providing their supporters consumption benefits directly, in the form of transfers, or indirectly, via strong economic growth. Where economic growth is good, politicians can distribute less to core supporters, who benefit from the rising economy. Where economic growth is weak, however, politicians make transfers to their core supporters to ensure future loyalty. We test our theory using data on federal transfers from the Russian Federal government to 78 Russian Regions from 2000–2008.     

ARE EFFICIENCY IMPROVEMENTS IN GOVERNMENT TRANSFER POLICIES SELF-DEFEATING IN POLITICAL EQUILIBRIUM?*

This paper studies an election game between two politicians, in which each provides income transfers to special-interest groups in return for political contributions. It is shown that a move to a more inefficient form of transfers may lower the total excess burden created by these transfers, because the politicians are induced to reduce their provision of transfers. For the case in which the income transfers are indirectly provided as trade protection to import-competing industries, a switch from production subsidies to tariffs as the form of protection reduces the equilibrium level of excess burden and makes both politicians better off.     

Political determinants of intergovernmental transfers in a regionally decentralized authoritarian regime: evidence from China

This article examines the political determinants of the allocation of intergovernmental transfers in the context of China. In a regionally decentralized authoritarian regime, a government marked by political centralization and fiscal decentralization, intergovernmental transfers are employed by politicians as instruments to achieve political goals. Using China’s provincial data from 1994 to 2009, we find that the officials’ political power is an important factor in the distribution process. A party secretary’s replacement facilitates an increase in transfers, especially if the replacement comes from the central government. If a party secretary is a member of the Central Politburo, the province receives more conditional transfers than others. The central government allocates the transfers in such a way that the province with a high proportion of the minority population receives more transfers than others.     

Social Structure in Economic Theory

This paper investigates the factors that drive ruler decision making under democracy. By dividing politicians’ actions into two distinct domains and exploring their compositions, we construct a fuller and more realistic picture of politician decision making. In the non-discretionary domain, the politician’s actions are clearly limited by voter desires; in the discretionary domain the politician is free to make choices as he chooses without voter repercussions. Standard neoclassical models of political behavior suggest that when votes don’t matter, monetary income drives ruler behavior. While monetary pursuit may explain some ruler decisions, it leaves many other observed choices unexplained. Our non-discretionary/discretionary dichotomy highlights the up-to-now neglected role that psychic income plays in explaining otherwise unexplained ruler decisions. The case studies considered support this view.     

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.     

Phasing of deregulation: Normative versus positive objectives

Deregulation is traditionally endorsed by economists but meets either little reception by politicians or is substantially weakened within the political process. Many papers discuss this aspect, primarily from a rent-seeking aspect. This paper emphasizes the dynamics of deregulation when consumers have sunk costs on the basis of a past regulatory regime. The paper proves first that deregulation should be radical rather than transitory within a conventional, normative framework, even if the consumers act naively and have to bear substantial adjustment costs. As a contrast, a positive model of a vote maximizing politician is introduced that explains why and when actual deregulation proceeds gradually. However, a politician should deregulate at an excessively radical rate at the beginning, if voters have a short memory and/or if demand adjusts sufficiently fast.     

Happy partisans and extreme political views: The impact of national versus local representation on well-being

The political party of elected officials can affect the happiness of the voting public through several different channels. Partisan voters will be happier whenever a member of their party controls political office regardless of the policies implemented. It is hypothesized that congruence between individual party identity and state politician affiliations should have a greater impact on citizen happiness than congruence with politicians at the national level due to results from the literature on Tiebout sorting. It is further hypothesized that individuals with extreme ideological views may report greater happiness as their ideology fulfills basic psychological needs for certainty and structure. Using data from the Generalized Social Survey the effect of party congruence of individuals with national and state politicians on happiness is estimated. The effect of extreme ideological political views on happiness is also estimated. Results find that congruence with presidential party affiliation has a much greater impact on happiness than congruence with national legislative affiliation, gubernatorial, or state legislative affiliation contradicting the hypothesis. Those who possess extreme political views are also found to report higher levels of happiness.     

A political economy theory of the soft budget constraint

Why do soft budget constraints exist and persist? In this paper we argue that the prevalence of soft budget constraints can be best explained by the political desirability of softness. We develop an infinite horizon political economy model where neither democratic nor autocratic politicians can commit to policies that are not ex post optimal. We show that because of the dynamic commitment problem inherent in the soft budget constraint, politicians can in essence commit to make transfers to entrepreneurs which otherwise they would not be able to do. This encourages such entrepreneurs to support them politically. Though the soft budget constraint may induce economic inefficiency, it may be politically rational because it influences the probability of political survival. In consequence, even when information is complete, politicians may fund bad projects which they anticipate they will have to bail out in the future. We show that, maybe somewhat surprisingly, dictators who are less likely to lose power, are more likely to use the soft budget constraint as a strategy to gain political support.     

Public Employment and Regional Risk Sharing*

We provide an empirical analysis of regional risk sharing in Norway over the period 1977–90. The approach of Asdrubali, Sørensen and Yosha (1996) is extended to take public employment into account as a possible shock absorber. The other channels of risk sharing are capital markets and commuting, taxes and transfers, and credit markets. The estimated degree of regional consumption insurance is very high. We cannot reject the hypothesis that there is full interregional risk sharing in the short term. Public employment absorbs up to 25 percent of private sector output shocks in our analyses. Generally, central government insurance against regional shocks is relatively more important, the more permanent the shocks are, and vice versa for market‐based risk‐sharing channels.     

Efficiency and Lack of Commitment in an Overlapping Generations Model with Endowment Shocks

This paper considers a pure exchange stochastic overlapping generations model in which, on each date, an economy faces an aggregate endowment shock. On each date, a young agent and an old agent simultaneously decide how much of their respective endowments to transfer to the other agent; however, a young agent cannot make promises about how much he or she will give when old. In this sense, an economy faces a limited commitment constraint. This paper characterizes an efficient intergenerational risk sharing allocation that satisfies a limited commitment constraint, and also studies the role of money and history in a stochastic overlapping generations economy.     

The design of a consumption tax under capital risk

This paper focuses on the design of a consumption tax in a world of capital risk. The certainty literature discusses two standard options, namely the cash flow method and the pre-payment method (i.e., the wage tax), and finds the two approaches to be equivalent. Models that consider capital risk (via asset choice) reach different conclusions. This discrepancy arises in part due to a different choice of the social discount rate. In light of the failure of the discount-rate argument to resolve the issue at hand, we explore the market certainty equivalence of risky government revenue. We let revenue risks stay in the private sector, and examine the market value of the feasible transfer (e.g., in the form of a public good) back to households. We reach three broad conclusions. First, we find that if the state returns to each household its own tax-revenue risks, equivalence will be re-established as in certainty models. Next, we show that if the state engages in intergenerational risk sharing (e.g., through a system of stochastic tax transfers), the wage tax cannot be construed to be a valid pre-payment alternative to the cash flow or a modified wage-tax-ation system. Efficient risk allocation across generations under a cash flow tax (or, one that includes future capital gains as well as wages in the tax base) leads to a Pareto improvement over the simple wage tax. Finally, a major policy implication follows; in order to be practicable, a consumption tax would have to be implemented via registered savings accounts much in the fashion of the Canadian registered retirement savings plans program rather than through the pre-payment route.     

Voluntary participation and intergenerational risk sharing in a funded pension system

We explore the feasibility of a funded pension system with intergenerational risk sharing when participation in the system is voluntary. Typically, the willingness of the young to participate depends on their belief about the future young's willingness to do so. We characterise equilibria with voluntary participation and show that the likelihood of their existence increases with risk aversion and financial market uncertainty. We find that mandatory participation is often necessary to sustain a funded pension pillar and to let participants benefit from intergenerational risk sharing.     

Principles and politics: Like oil and water

In a democracy, public policies require majority support to be enacted, so politicians must enlist the support of others to further their political agendas. Successful politicians are those who can negotiate in the political marketplace to steer outcomes their way, and to succeed, politicians must be willing to set their principles aside and trade their votes away to get something better. In contrast with the principled politician whose support cannot be bought, the unprincipled politician’s support must be bought, so unprincipled politicians accumulate political IOUs that they cash in to advance their agendas. Democratic politics by design reinforces unprincipled behavior and punishes principled behavior.

Political viability of public pensions and education. An empirical application

Public intergenerational transfers (IGTs) may emerge from the failure of private arrangements to provide optimal economic resources for the young and old. We investigate the political sustainability of the public system of IGTs by seeking to determine the outcome if the decision to reallocate economic resources per se was put to the vote. Exploiting the particular nature of the data from the National Transfer Accounts data in a political economy application in which generations cooperate under certain conditions, we show that most of the developed countries would vote in favour of a joint public education and pension system.     

How much to share: Welfare effects of fiscal transfers

Recent sovereign debt crisis has challenged policy makers to explore the possibility of establishing a fiscal transfer system that could alleviate the negative impact of asymmetric shocks across countries. Using a simple labour production economy, we first derive an analytically tractable solution for optimal degree of fiscal transfers. In this economy, fiscal transfers can improve welfare by moving the competitive equilibrium with fiscal transfers closer to the social planner's solution. We then extend the model to a DSGE setting with capital, international bond and linear taxes, and we analyze how implementation of a simple revenue sharing rule affects welfare and macroeconomic variables over time. Simulation results show that risk sharing through fiscal transfers always improves welfare in the long run. However, under certain model specifications, short‐run transitional welfare loss can outweigh the long‐run benefits. These results suggest that, in designing fiscal transfers across countries, government should take into consideration the intertemporal nature of welfare gains.     

Risk sharing in the Middle East and North Africa

This study investigates welfare gains and channels of risk sharing among 14 Middle Eastern and North African (MENA) countries, including the oil‐rich Gulf region and the resource‐scarce economies such as Egypt, Morocco and Tunisia. The results show that for the 1992–2009 period, the overall welfare gains across MENA countries were higher than those documented for the Organization for Economic Cooperation and Development (OECD) nations. In the Gulf region, the amount of factor income smoothing does not differ considerably when output shocks are longer lasting rather than transitory, whereas the amount smoothed by savings increases remarkably when shocks are longer lasting. In contrast, both factor income flows and international transfers respond more to permanent shocks than to transitory shocks in the non‐oil MENA countries. The results also show that a significant portion of shocks is smoothed via remittance transfers in the economically less‐developed MENA countries, but not in the oil‐rich Gulf and OECD countries. Finally, for the overall MENA region, a large part of the shock remains unsmoothed, suggesting that more market integration is needed to remedy the weak link of incomplete risk sharing.     

The effect of regulating political connections: Evidence from China's board of directors ban

There is a great deal of variation in how countries regulate the relationships between politicians and public-traded firms, but little evidence about how such policies affect firm performance. In 2013, China passed a new regulation that banned politicians from serving on the boards of directors of companies. Using a novel data set that links board members, government officials, and forced resignations, I estimate the effect of the policy on firm performance and stock returns. I find that the loss of a high-level politician significantly reduces a firm’s cumulative stock return and future profits. The effect is driven by officials from government-controlled public sectors and is larger when the firm is in low-marketized areas. The analysis provides important evidence about the efficacy of a commonly used policy tool for reducing political influence in the private sector.