How elections affect fiscal policy and growth: revisiting the mechanism

This paper reconsiders the popular result that the lower is the probability of reelection, the greater is the incentive of incumbent politicians to choose short-sighted, inefficient policies. The set-up is a general equilibrium model of economic growth, in which fiscal policy is endogenously chosen under electoral uncertainty. Political parties can value possible economic benefits differently depending on whether they are in or out of power, and—by contrast with the literature—the relevant preference coefficient is a choice variable rather than an exogenous taste parameter. The main result is that, when political parties choose both economic policy instruments and preference coefficients, the fundamental reason for short-sighted policy is the extra rents from being in power per se.     

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.     

Candidate strategies in primaries and general elections with candidates of heterogeneous quality

I consider a model in which candidates of differing quality must win a primary election to compete in the general election. I show that there is an equilibrium in which Democrats choose liberal policies and Republicans choose conservative policies, but higher quality candidates choose more moderate policies than lower quality candidates. In this equilibrium, higher quality candidates choose more moderate policies if they have a larger quality advantage or there is less uncertainty about the median voterʼs ideal point in the general election, and the candidates in a given primary choose closer policies to one another when there is a smaller quality difference between the candidates in a primary. I further show that if the candidates have policy motivations, then a low quality candidate may strategically choose to enter a primary even if running for office is costly and the candidate will lose the primary election with certainty in equilibrium.     

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.     

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.     

Vox Populi,Vox Dei? Tacit collusion in politics

We study competition between political parties in repeated elections with probabilistic voting. This model entails multiple equilibria, and we focus on cases where political collusion occurs. When parties hold different opinions on some policy, they may take different policy positions that do not coincide with the median voter's preferred policy platform. In contrast, when parties have a mutual understanding on a particular policy, their policy positions may converge (on some dimension) but not to the median voter's preferred policy. That is to say, parties can tacitly collude with one another, despite political competition. Collusion may collapse, for instance, after the entry of a new political party. This model rationalizes patterns in survey data from Sweden, where politicians on different sides of the political spectrum take different positions on economic policy but similar positions on refugee intake—diverging from the average voter's position, but only until the entry of a populist party.     

Why not a political Coase theorem? Social conflict, commitment, and politics

Do societies choose inefficient policies and institutions? An extension of the Coase theorem to politics would suggest the answer is no. This paper discusses various approaches to political economy and develops the argument that there are strong empirical and theoretical grounds for believing that inefficient policies and institutions are prevalent. We conclude that these inefficient institutions and policies are chosen because they serve the interests of politicians or social groups that hold political power at the expense of the rest. The theoretical case depends on commitment problems inherent in politics; parties holding political power cannot make commitments to bind their future actions because there is no outside agency with the coercive capacity to enforce such arrangements. Journal of Comparative Economics 31 (4) (2003) 620–652.     

A quantitative theory of social security without commitment

This paper investigates the determination of social security within a general equilibrium, overlapping-generations model where agents live for many periods, and replacement rates are determined through voting in each period by forward looking agents. The distinctive feature is the study of Markov equilibrium policy outcomes which do not rest on a commitment mechanism. Versions of the model are calibrated to the US economic, policy, and demographic conditions. Even in the absence of commitment, the policy preferences of tax-paying working-age voters sustain a positive level of retirement benefits. This follows because the current choices about social security will have, at the time when the current voters will retire, a positive impact on the political support for social security and on the returns to savings. On the other hand, the projected decline in the U.S. population growth rate causes the replacement rate and the tax rate to decline. This quantitative response without commitment differs from that in the case when policies are committed at time zero.     

Lack of commitment to future privatization policies may lead to worst welfare outcome

We investigate the welfare consequences of a lack of commitment to future privatization policies. The government implements a privatization policy after the competition structure is determined by the entry of private firms. We find that in an equilibrium, the government fully privatizes (nationalizes) a public firm if private firms expect that the government fully privatizes (nationalizes) the public firm. This is because an increase in the number of firms entering a market increases the government's incentive to privatize the public firm, which mitigates future competition and stimulates entries. The full-privatization equilibrium is the worst privatization policy among all possible (either equilibrium or non-equilibrium) privatization policies for welfare because it causes excessive market entry of private firms. Partial commitment of a minimal public ownership share may mitigate this problem.     

Unobservable Contracts as Precommitments

It is well known that signing publicly observable contracts with third parties is a means of credibly committing to certain actions and hence may yield strategic advantages. Previous work on the commitment value of unobservable contracts has been limited to normal form games and extensive form games in which only one party has the option to sign a contract. In this paper, we extend the analysis to extensive form games in which both players can sign contracts, and characterize the set of sequential equilibria. We show that any Nash equilibrium outcome of the original game in which both players receive more than their individually rational payoffs can be supported as a sequential equilibrium outcome. Therefore, delegation acts not only as a commitment device to gain advantage over the opponent, but also as a cooperative device to attain Pareto improvements over the subgame perfect equilibrium outcome. I would like to thank Atila Abdulkadiroglu, Jean-Pierre Benoit, Alberto Bisin, Boyan Jovanovic, Ehud Kalai, Giuseppe Lopomo, George Mailath, Efe Ok, Ariel Rubinstein, Andy Schotter, seminar participants at various universities and conferences, and anonymous referees for helpful comments and suggestions. Support from the Alfred P. Sloan Foundation and Program for Economic Research at Columbia University is also gratefully acknowledged.     

Allies or commitment devices? A model of appointments to the Federal Reserve

We present a model of executive‐legislative bargaining over appointments to independent central banks in the face of an uncertain economy with strategic economic actors. The model highlights the contrast between two idealized views of Federal Reserve appointments. In one view, politicians prefer to appoint conservatively biased central bankers to overcome credible commitment problems that arise in monetary policy. In the other, politicians prefer to appoint allies, and appointments are well described by the spatial model used to describe appointments to other agencies. Both ideals are limiting cases of our model, which depend on the level of economic uncertainty. When economic uncertainty is extremely low, politicians prefer very conservative appointments. When economic uncertainty increases, politicians’ prefer central bank appointees closer to their own ideal points. In the typical case, the results are somewhere in between: equilibrium appointments move in the direction of politician's preferences but with a moderate conservative bias.     

Interest Group Lobbying and the Delegation of Policy Authority

In a signalling model of lobbying the politicians' decision whether to delegate policy authority and an interest group's choice between lobbying politicians or bureaucrats are investigated. Only bureaucrats are able to assess policy-relevant information coming from the interest group, but their interests may differ from those of politicians. In equilibrium politicians weigh the benefits of an informed policy decision against bureaucratic drift. We obtain that delegation occurs only when the bureaucracy is not too much biased and when the stakes of the interest group are not too high . Still, politicians sometimes prefer a biased bureaucracy and the interest group to have a larger stake. The model also predicts that interest groups typically lobby politicians to further delegation.     

Abstention and signaling in large repeated elections

I consider a two period model of repeated elections in which politicians update their beliefs about the preferences of the voters after the first period election and set second period policies accordingly. When voting is costless, a positive fraction of voters abstains for any finite population, but abstention vanishes in the limit of an arbitrarily large election. I demonstrate that in large elections, a single vote changes second period policies by an amount exponentially large compared to the probability of influencing the first period election if the probabilities with which voters vote for the two candidates differ. Using this, I prove that the limiting voting behavior in the first election is independent of the first period policy choices of the candidates. The incentive to vote to signal oneʼs preferences thus dominates the incentive to vote to increase the chances of electing oneʼs preferred candidate.     

Clientelism and aid

Using a model of probabilistic voting, we analyze the impact of aid on the political equilibrium in the recipient country or region. We consider politicians with mixed motives: they are interested in promoting social welfare but also value the benefit of holding office. We label as clientelistic the politician who most values the benefit of being in power. We find that the impact of aid on the political equilibrium and therefore on the quality of policy in the recipient country (using utilitarian social welfare as a benchmark) ultimately depends on the value of the elasticity of the marginal utility of consumption. When elasticity is low, the expected policy outcome gets further away from the socially desirable policy set. This substitution of policy quality for aid can help to explain the poor performance of aid in improving policy. Perhaps more surprising is the opposite case, which arises for high values of elasticity of marginal utility: an increase in aid tilts the equilibrium policy towards the welfare-maximizing policy set.     

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.     

A dynamic theory of parliamentary democracy

This paper presents a dynamic model of elections, government formation, and legislation in a parliamentary democracy with proportional representation in which the policy chosen in one period becomes the status quo for the next period. The electorate votes strategically by taking into account the likely governments that parties would form based on their representation and the policies they would choose as a function of the status quo. The status quo thus affects both the election outcomes and the bargaining power of the parties during government formation. A formateur party therefore has incentives to strategically position the current policy to gain an advantage in both the next election and the subsequent bargaining over government formation and policy choice. These incentives can give rise to centrifugal forces that result in policies that are outside the Pareto set of the parties.     

Collateral premia and risk sharing under limited commitment

A competitive general equilibrium model with complete collateralized contracts under limited commitment is proposed and analyzed. With limited aggregate collateral, risk sharing is imperfect. There exists a minimal spanning set of finite collateralized contracts that generates the feasible space and that contains more than the complete set of collateralized Arrow securities. Examples show that exogenously restricting feasible contracts has a significant impact on agents’ welfare. I prove that constrained optimal allocations can be decentralized as a general equilibrium with collateral constraints, and vice versa. Because a capital good serves as collateral, it has an additional value, called collateral premium. The collateral premium is zero if and only if risk sharing is perfect. This is a testable implication of the model.     

Information,polarization and term length in democracy

This paper considers term lengths in a representative democracy where the political issue divides the population on the left–right scale. Parties are ideologically different and better informed about the consequences of policies than voters are. A short term length makes the government more accountable, but the re-election incentive leads to policy distortion as the government seeks to manipulate swing voters' beliefs to make its ideology more popular. This creates a trade off: A short term length improves accountability but gives distortions. A short term length is best for swing voters when the uncertainty is large and parties are not very polarized. Partisan voters always prefer a long term length. When politicians learn while in office a long term length becomes more attractive for swing voters.     

Clientelism and aid

Using a model of probabilistic voting, we analyze the impact of aid on the political equilibrium in the recipient country or region. We consider politicians with mixed motives: they are interested in promoting social welfare but also value the benefit of holding office. We label as clientelistic the politician who most values the benefit of being in power. We find that the impact of aid on the political equilibrium and therefore on the quality of policy in the recipient country (using utilitarian social welfare as a benchmark) ultimately depends on the value of the elasticity of the marginal utility of consumption. When elasticity is low, the expected policy outcome gets further away from the socially desirable policy set. This substitution of policy quality for aid can help to explain the poor performance of aid in improving policy. Perhaps more surprising is the opposite case, which arises for high values of elasticity of marginal utility: an increase in aid tilts the equilibrium policy towards the welfare-maximizing policy set.     

INTEREST GROUPS,ELECTORAL COMPETITION,AND PROBABILISTIC VOTING FOR TRADE POLICIES*

Current models of trade policy formation in representative democracies lack the micro foundations from which the political actions of voters, interest groups, and policy makers can be deduced. This paper provides microfoundations for the most influential of representative democracy models, the Magee-Brock-Young (MBY) model. Probabilistic voting is formally introduced, the conditions for active lobbying are examined, uniqueness of lobbying equilibrium is established, and the responses of different groups' lobbying to exogenous changes are discussed. Finally, the existence of tariff equilibria is studied when, different from MBY, both parties share a common strategy space.