Stock markets in turmoil: political institutions and the impact of elections

This paper explores how elections impact stock markets across diverse political institutions. I argue that electoral and party systems impact the fragmentation, credibility, and predictability of electoral information, influencing levels of uncertainty resolved by elections and leading to distinct stock market reactions. First, elections in majoritarian electoral systems produce larger cumulative abnormal returns (CARs) than elections in proportional representation systems. Second, the weaker institutionalized a party systems is, the larger are the CARs around elections. Third, these two institutional variables interact. Elections in majoritarian (proportional representation) systems with weak (strong) party system institutionalizations will have particularly large (small) CARs. I formally derive these propositions, conduct event studies of the impact of 87 elections on SMs in 21 countries from 1999 to 2016, and analyze four case studies.     

Party Control of State Government and the Distribution of Public Expenditures*

This paper examines the effects of party control of state governments on the distribution of intergovernmental transfers across counties from 1957 to 1997. We find that the governing parties skew the distribution of funds in favor of areas that provide them with the strongest electoral support. This is borne out in two ways. (i) Counties that traditionally give the highest vote share to the governing party receive larger shares of state transfers to local governments. (ii) When control of the state government changes, the distribution of funds shifts in the direction of the new governing party. We find only weak evidence that parties reward electorally pivotal counties or counties in electorally pivotal legislative districts. Finally, we find that increased spending in a county increases voter turnout in subsequent elections. This suggests that parties have an electoral incentive to skew the distribution of funds to influence future election results, and the mechanism through which this works is “mobilization” rather than “conversion” of voters in a fixed electorate.     

ENDOGENOUS ELECTION TIMING IN MAJORITARIAN PARLIAMENTARY SYSTEMS*

The election date is an endogenous choice in many parliamentary systems. This paper explores when governments call elections and how the timing of an election influences the electoral result. Governments have an incentive to behave opportunistically, calling elections at a time when they are performing well. However, the choice of election date reveals information about the government. Specifically, early elections indicate that a government has little faith in its ability to perform well in the future. The analysis is expanded to consider changes in government composition, political business cycles, informational asymmetries and the role of opposition campaigning.     

Pre-colonial ethnic institutions and party politics in Africa

We examine the role of ethnic institutions on party politics in African democracies. We combine geo-referenced data from 15 countries, 32 parliamentary elections and around 2700 electoral constituencies. First, we document a strong negative association between the degree of pre-colonial ethnic institutional centralization and the local level of competition between political parties in democratic elections today. Second, to address concerns about unobservable differences in geography or history, we show that results hold true when leveraging for identification the redrawing of constituency boundaries over time. Pre-colonial ethnic institutions shape local electoral outcomes and matter for the present and future of African democracies.     

Do voters demand responsive governments? Evidence from Indian disaster relief

Using rainfall, public relief, and election data from India, we examine how governments respond to adverse shocks and how voters react to these responses. The data show that voters punish the incumbent party for weather events beyond its control. However, fewer voters punish the ruling party when its government responds vigorously to the crisis, indicating that voters reward the government for responding to disasters. We also find evidence suggesting that voters only respond to rainfall and government relief efforts during the year immediately preceding the election. In accordance with these electoral incentives, governments appear to be more generous with disaster relief in election years. These results describe how failures in electoral accountability can lead to suboptimal policy outcomes.     

Party Fragmentation and Presidential Elections in Post-Communist Democracies

Despite its controversial status as a stable governmental form, many of today's societies attempting to make the transition to democracy have or will, for a variety of reasons, choose presidentialism. Meanwhile, the evidence suggests that the combination of presidentialism and multipartism is especially dangerous for democratic stability (Mainwaring 1994). The question this essay addresses, though, is whether presidential elections themselves serve to encourage a fragmented party system, at least in the initial stages of democratization. In transitional political systems presidential elections encourage party fragmentation, but in a way different from that of highly proportional purely parliamentary mechanisms. Specifically, parties proliferate to support the presidential aspirations of political elites. Multivariate regression analysis on cross-sectional aggregate electoral data, supported by extensive outliers diagnostics and assessments of the role of country-specific effects is applied. A nested model is used to discriminate among the secondary hypotheses. Controls include: parliamentary election rules (district magnitude, threshold for representation, adjustment districts, ballot structure), relative timing of presidential and parliamentary elections, and basic societal cleavage structure. Using as our data source the recent elections in East and Central Europe and the European part of the former Soviet Union, we show that presidential elections consistently significantly increase party fragmentation. At the same time, the data are consistent with the hypothesis that presidentialism does encourage the overall consolidation in party systems through voters' abandonment of some parties, akin to Duverger's 'psychological effect'.     

The Effects of Fiscal Consolidation and Welfare Composition of Spending on Electoral Outcomes: Evidence from US Gubernatorial Elections between 1978 and 2006

This study attempts to make a contribution to the field of spending aspects of fiscal policy and their impacts on electoral outcome. Due to varying degrees of financial responsibilities and commitments to provide public goods and services, US state governments serve as a perfectly natural laboratory to test the electoral significance of fiscal policies. We adopt a probit model, with several specifications, to determine significant impacts of fiscal consolidation and increases in welfare spending on US gubernatorial elections from 1978 to 2006. The analyses show that voters are more concerned about the increase in debt than current budget deficits. An increase in welfare spending is negatively associated with reelection. Moreover, the impact of taxation on gubernatorial elections turns out to be insignificant. In particular, findings suggest that the political business cycle model does not hold true in US gubernatorial elections. Expansionary fiscal policy right before the election may not have crucial impacts on the chances of an incumbent winning the election.     

Electoral Thresholds as Coordination Devices

In this paper, we study one‐person–one‐vote parliamentary elections where voters care both about the winner of elections and about the composition of the parliament. Parties enter the parliament if and only if their vote share exceeds some predetermined threshold. We show that equilibria generically exist in which all parties obtain a non‐degenerate vote‐share and, perhaps more importantly, we show that the size of the electoral threshold acts as a coordination device, which crucially affects the win prospects of the Condorcet winner party. In particular, we argue that the win prospects of the Condorcet winner party decrease with the size of the entry threshold.     

Coattails and the forces that drive them: Evidence from Mexico

Coattails and the forces behind them have important implications for the understanding of electoral processes and their outcomes. By focusing our attention on neighboring electoral sections that face the same local congressional election, but different municipal elections, and assuming that political preferences for local legislative candidates remain constant across neighboring electoral sections, we exploit variation in the strength of the municipal candidates in each of these electoral sections to estimate coattails from municipal to local congressional elections in Mexico. A one percentage increase in vote share for a municipal candidate translates, depending on his or her party, into an average of between 0.45 and 0.78 percentage point increase in vote share for the legislative candidates from the same party (though this effect may not have been sufficient to affect an outcome in any electoral district in our sample). In addition, we find that a large fraction of the effect is driven by individuals switching their vote decision in the legislative election, rather than by an increase in turnout.     

State politics,tuition, and the dynamics of a political budget cycle

This paper attempts to improve the understanding of political budget cycles by first identifying a previously undocumented cycle in tuition and required fees at public four-year institutions of higher education in the United States. I find that tuition and fees are 1.5 % lower during gubernatorial election years than in non-election years. No similar cycle is found in private tuition and fees. Using a newly constructed dataset, I then explore the variation in electoral competition in gubernatorial and state legislative elections within states over time to uncover the underlying electoral incentives creating the cycle. The results suggest that the tuition cycle is not designed to increase the reelection prospects of governors as standard theories would predict. I find that tuition decreases during gubernatorial election years as the reelection prospects of the incumbent governor increases. Instead, the evidence suggests that popular governors use lower tuition as political pork to expand party power in the state by capturing swing districts in concurrent state legislative elections. I find that the magnitude of the cycle increases with the level of competition in state house elections and that the effect is concentrated among those districts held by the opposition party, particularly if those opposition districts are populated with voters likely to be responsive to tuition as a policy lever. These results reveal important dynamics about party competition within states in the United States and suggest that the electoral incentives driving political budget cycles can be complex.     

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.     

Subsidizing power

This study explores whether the amount of fossil fuel subsidies paid by the government is subject to an election cycle. Theoretically, it is not a priori directly clear whether the provision of fossil fuel subsidies should go up or down when elections are upcoming. On the one hand, governments may reap electoral benefits from offering additional support in an election year since voters generally prefer candidates from whom they expect to receive greater material well-being by reducing the prices of basic goods. On the other hand, if the number of recipients is only small or when they are politically not well organized, reducing fossil fuel subsidies to finance a tax cut or an increase in other public spending areas that benefit and attract more voters might be a more successful re-election strategy. My main empirical findings clearly show a U-shaped election effect. It turns out that election cycles encourage fossil fuel support only in countries that have either a large or small fossil fuel demand. In these countries, governments are more inclined to provide additional fossil fuel support in an election year. In turn, I do not find any significant evidence for the notion that upcoming elections create a window of opportunity to reduce fossil fuel subsidies. Finally, the significant election effects are in particular visible during presidential elections.     

Electoral Balancing in Federal and Sub-national Elections: The Case of Canada

The major premise of this study is that in federal countries voters can balance and moderate national policy by dividing electoral support between different parties in federal and sub-national elections. We compare the non-concurrent federal and provincial elections in Canada to assess the balancing properties of sub-national elections. The balancing hypothesis implies that the federal incumbent party may suffer additional electoral losses in provincial elections. We use several statistical tests - ordinary OLS, fixed effect and unbalanced random effect cross-section time series - to analyze Canadian electoral data for the period of 1949-1997. All tests sustain that the incumbent party at the federal level loses votes in provincial elections.     

Making executive politics mutually productive and fair

Winner-take-all elections for executive offices create high-stakes electoral conflict that distorts policy-making and constitution-making behavior. When the stakes are high, so long as it increases the chances of victory, office-seekers seek to shift perceived benefits toward and burdens away from potentially pivotal participants. This can entail the strategic allocation of spoils, the strategic selection of public policies that mobilize one’s base or divide the opposition, the strategic shifting of benefits into the present and costs into the future, and the strategic deception of the uninformed. This paper proposes a “turn-taking institution,” an electoral system in which the whole term is only awarded to a sufficiently inclusive supermajority coalition; if no coalition qualifies, the plurality winner and the runner-up take alternating one-year turns for the length of the term. This institution lowers the stakes of electoral conflict by roughly an order of magnitude, and fosters the formation, enforcement and adaptation of mutually productive policy-making and constitution-making behaviors. Critically, these results hold up even when voters and policy-makers are impatient, and when only short-run commitments are possible.     

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.     

Investor sentiment and the prediction of stock returns: a quantile regression approach

We employ quantile regression to provide a detailed picture of the stock return forecasting ability of investor sentiment. We find that investor sentiment predicts aggregate stock returns at lower quantiles. However, the forecasting power is lost at upper quantiles. The results are robust after controlling for a comprehensive set of macroeconomic and financial predictors and for characteristic portfolios. We also show that investor sentiment consists mainly of cash flow news and contains little information about discount rate news. The ability to forecast cash flows increases gradually from the lower quantiles to upper quantiles. Our results do not support that the ability of investor sentiment to predict stock returns comes from a rational forecast of future cash flows.     

Partisan politics: The empirical evidence from OECD panel studies

This paper describes the empirical evidence on partisan politics in OECD panel studies. I elaborate on the research designs, the measurement of government ideology and why the empirical studies did not derive causal effects. Discussing about 100 panel data studies, the results indicate that leftwing and rightwing governments pursued different economic policies until the 1990s: the size and scope of government was larger when leftwing governments were in power. Partisan politics have not disappeared since the 1990s, but have certainly become less pronounced. In particular, government ideology still seems to influence policies such as privatization and market deregulation. I discuss the consequences of declining electoral cohesion and what future research needs to explore.     

Election systems,the “beauty premium” in politics,and the beauty of dissent

We ask three questions. First, do election systems differ in how they translate physical attractiveness of candidates into electoral success? Second, do political parties strategically exploit the “beauty premium” when deciding on which candidates to nominate, and, third, do elected MPs use their beauty premium to reap some independence from their party? Using the German election system that combines first-past-the-post election with party-list proportional representation, our results show that plurality elections provide more scope for translating physical attractiveness into electoral success than proportional representation. Whether political parties strategically use the beauty premium to optimize their electoral objectives is less clear. Physically attractive MPs, however, allow themselves to dissent more often, i.e. they vote more often against the party line than their less attractive peers.     

Variable rational partisan cycles and electoral uncertainty

Variable rational partisan theory of political business cycles suggests differences in inflation under left-wing and right-wing governments. Fluctuations of economic activity result from uncertainty about the electoral outcome and the exact timing of elections. However, the core hypothesis that post-electoral booms and recessions depend upon the degree of electoral uncertainty has rarely been tested. Using polling data, we provide empirical evidence in favor of the hypothesis of the existence of variable rational partisan cycles.     

The Effect of Political Alignment on Transfers to Portuguese Municipalities

I investigate if political alignment between central and local governments brings financial benefit to local governments, using financial data from Portuguese municipalities (1992–2005). I use regression discontinuity design to determine the effect of political alignment per se on transfers to municipalities. Municipalities aligned with the central government receive 19% more targetable transfers than unaligned municipalities. I test for electoral motivation of this transfer bias: extra transfers increase the vote share of incumbents in local elections for one of the two Portuguese major parties; however, municipal incumbency does not lead to better results in national elections.