Quantities,qualities and multiple public services in the Tiebout model

This paper introduces a new, more realistic characterization of local public services. This characterization fits education, parks, and streets, none of which are a pure Samuelsonian good. It is shown that Tiebout's hypothesis holds for this new type of services, provided correct user charges are adopted. Introducing several local services considerably affects the results. The paper emphasizes the difference in tastes with regard to quality as opposed to quantity. Earlier literature is shown to apply to the role of quality and ignores the role of quantity. The effect of the latter makes mixed communities more efficient than segregated ones. It is shown that efficient allocation with mixed communities is an equilibrium in a costless mobility, Tiebout-type setting.     

The political economy of redistribution under democracy

We ask what redistributions of income and assets are feasible in a democracy, given the initial assets and their distribution. The question is motivated by the possibility that if redistribution is insufficient for the poor or excessive for the rich, they may turn against democracy. In turn, if no redistribution simultaneously satisfies the poor and the wealthy, democracy cannot be sustained. Hence, the corollary question concerns the conditions under which democracy is sustainable. We find that democracies survive in wealthy societies. Conditional on the initial income distribution and the capacity of the poor and the wealthy to overthrow democracy, each country has a threshold of capital stock above which democracy survives. This threshold is lower when the distribution of initial endowments is more equal and when the revolutionary prowess of these groups is lower. Yet in poor unequal countries there exist no redistribution scheme which would be accepted both by the poor and the wealthy. Hence, democracy cannot survive. As endowments increase, redistribution schemes that satisfy both the poor and the wealthy emerge. Moreover, as capital stock grows the wealthy tolerate more and the poor less redistribution, so that the set of feasible redistributions becomes larger. Since the median voter prefers one such scheme to the dictatorship of either group, democracy survives.We would like to thank, Daron Acemoglu, Marco Basetto, Alberto Bisin, V.V. Chari, Pat Kehoe, Onur Ozgur for very useful comments.     

Investment and technological choice in a right-to-manage model

We analyze the interactions between investment and local wage bargaining in a putty-clay model where the investment decision commits the firm to a particular capital intensity. This technological precommitment is used strategically in order to manipulate the bargaining outcome. We show that this strategic behavior induces a nonmonotonic relationship between the capital and labor demands of the firm and most of its environmental parameters (e.g., the bargaining power of the union, its minimum wage requirement, the capital cost). The results we obtain in our putty-clay framework thus contradict several conclusions of the standard literature on wage bargaining and investment.     

The political economy of urban transport-system choice

This paper analyzes the political economy of transport-system choice, with the goal of gaining an understanding of the forces involved in this important urban public policy decision. Transport systems pose a continuous trade-off between time and money cost, so that a city can choose a fast system with a high money cost per mile or a slower, cheaper system. The paper compares the socially optimal transport system to the one chosen under the voting process, focusing on both homogeneous and heterogeneous cities, while considering different landownership arrangements. The analysis identifies a bias toward underinvestment in transport quality in heterogeneous cities.     

A political economy perspective on persistent inequality,inflation, and redistribution

In this paper we examine the dynamics of the link between inequality and inflation from a political economy perspective. We consider a simple dynamic general equilibrium model in which agents vote over the desired inflation rate in each period, and inequality is persistent. Inflation in our model is a mechanism of redistribution, and we find that the link between inequality and inflation within any period or over time depends on institutional and preference related parameters. Furthermore, we find that differences in the initial distributions of wealth can yield a diverse set of patterns for the evolution of the inflation and inequality link. Relative to existing literature, our model leads to more precise predictions about the inflation–inequality correlation. To that end, results in the extant empirical literature on the inflation and inequality link need to be interpreted with caution.     

Modeling political change with a regime-switching model

The purpose of this paper is to investigate whether legislators vote in two distinct regimes as suggested by the U.S. political system and whether these voting patterns can be explained by economic variables. The paper exploits U.S. Roll-Call votes from a rich unbalanced panel data set of 540 legislative positions over 104 Congressional sessions and Presidents since the Korean War. The paper employs a variant of the Hamilton Regime-Switching Model (1989) to uncover three major patterns in the data. There appear to be two distinct regimes closely related though not identical to the two-party system. Shifts in these regimes are most frequent in Presidential elections and are less frequent in the Senate and the House. Finally, since World War II, economic variables do not seem to influence the shifts implying that these political shocks are exogenous. However, over longer horizons, recessions do tend to force political change in the legislature.     

Credit crunch in a model of financial intermediation and occupational choice

In this paper, we introduce a dynamic general equilibrium model with numerous and heterogeneous investment projects and endogenous occupational choice to study a credit crunch. Asset accumulation of assets by households as they face various employment and return risks over a long lifetime determines whether they are entrepreneurs or workers. The origin of a credit crunch may be found in the conservative lending by banks during periods of financial duress and reduced profitability because of capital requirements. Using an example from Canada, monetary policy is shown to be largely ineffective in alleviating the credit crunch, while flexible loan regulation can erase it.     

The political economy of constitutional choice: a study of the 2005 Kenyan constitutional referendum

Recent studies of the linkages between the wealth of nations and the institutions of governance suggest that concentrating political power in a monarchy or a ruling coalition impedes economic growth and, moreover, that while power-diffusing reforms can enhance the wellbeing of society in general, opposition by groups benefiting from the status quo is predictable. In November 2005, Kenyans rejected a proposed constitution that, despite promises made by their new chief executive, would not have lessened the powers of the presidency. Using a unique, constituency-level dataset on the referendum vote, we estimate a model of the demand for power diffusion and find that ethnic groups’ voting decisions are influenced by their expected gains and losses from constitutional change. The results also highlight the importance of ethnic divisions in hindering the power-diffusion process, and thus establish a channel through which ethnic fragmentation adversely impacts economic development.     

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.     

Tourism revenues and residential foreign investment flows in Spain: a simultaneous model

The aim of this work is to analyse the determinants of the tourism revenues and the residential foreign investment, in Spain, during the period 1967–1998. To do so, a two equation simultaneous model is proposed to be estimated. The specification highlights the simultaneous and direct interdependence of the tourism revenues and the residential foreign investment flows. This result contrasts with the traditional standard specification of the international tourism demands in Spain. Nonlinear simultaneous estimations, cointegration techniques and a battery of specification tests are the econometric tools applied in the work.     

TV viewing: application of a formal choice model

Choices of television programs is viewed as a process of deciding among a set of alternative goods with zero prices. A choice model can thus be based purely on individuals' preferences for various characteristics of a set of shows available, incorporating the option of not watching if all shows are too dissimilar to these desires. The shows are first grouped according to salient characteristics and a preferred value for each characteristic is estimated for each potential viewer. A perceived position of each show is similarly estimated and watching is shown to decline as similarity between preferred show and available alternatives declines. The choice model predicts show choice better than simpler models based on aggregate audience measures or on network loyalty, but the explanatory power is weak; some suggestions for improvement are made.     

Property tax and inter-municipal migration in canada: a multivariate test of the Tiebout hypothesis

This paper tests the causal ordering between property taxes and inter-municipal migration, using both bivariate and multivariate methods. Empirical results, based on annual data for post-war Canada (1940–84), support the Tiebout–Tullock hypothesis, which implies that differential local tax system and public services induce inter-comunity migration, inter alia. Local spending and taxation are not therefore fully capitalized in property values. The bivariate tests, based on the Granger–Sims test and Hsiao's procedure, indicate an instantaneous bidirectional causality between property taxes and migration but the multivariate Granger test supports only a unidirectional causality from property taxes to migration.     

Public choice and the development of modern laboratory experimental methods in economics and political science

The paper is an account of the development of laboratory experimental methods in the early 1970s as influenced by the fields of Public Choice and Social Choice. Just a few key experiments conducted during a period when no experimental markets research was taking place, provide a bridge with the subsequent, rapid, growth of experimental economics. A new focus on public goods and externalities, as opposed to private goods traditionally used in economics experiments, required new representations of the commodity space and preference inducement methods. The importance of voting and collective decision making processes dictated the testing of equilibrium concepts from political science and cooperative game theory as opposed to the competitive equilibrium and Nash equilibria found in economics. The existence of many theories from multiple disciplines required new experimental designs and experimental tests. The Public Choice and Social Choice emphasis on comparing the performance of different types of collective decision processes induced early experiments related to institutional design and testing.     

Cooperative choice of corporate social responsibility in a bilateral monopoly model

This article presents an examination of a linear bilateral monopoly model with endogenous and cooperative choice of corporate social responsibility (CSR) level. This article also describes an investigation of the effects of cooperative choice of CSR on the market and welfare. New findings are explicit derivation of the necessary and sufficient condition for solving a double marginalization problem in the bilateral monopoly model with CSR. In addition, this report is the first demonstrating that cooperative CSR with Nash bargaining improves consumer surplus, social welfare and each firm’s profit to a level higher than that achieved through noncooperative CSR. Furthermore, cooperative CSR with Nash bargaining is shown to be capable of completely solving the double marginalization problem generated by a bilateral monopoly, although the manufacturer and the retailer are not vertically integrated.     

Consumer valuation of energy-saving features of residential air conditioners with hedonic and choice models

The promotion of energy-efficient appliances is necessary to reduce the energetic and environmental burden of the household sector. However, many studies have reported that a typical consumer underestimates the benefits of energy-saving investment on the purchase of household electric appliances. To analyze this energy-efficiency-gap problem, many scholars have estimated implicit discount rates that consumers use for energy-consuming durables. Although both hedonic and choice models have been used in previous studies, a comparison between the two models has not yet been made. This study uses point-of-sale data about Japanese residential air conditioners and estimates implicit discount rates with both hedonic and choice models. Both models demonstrate that a typical consumer underinvests in energy efficiency. Although choice models generally estimate a lower implicit discount rate than hedonic models, the latter models estimate the values of other product characteristics more consistently than choice models.     

Equilibrium among local jurisdictions: toward an integrated treatment of voting and residential choice

In models of local public goods with mobile consumers, existence of equilibrium is problematic. Difficulties with existence of equilibrium that arise in models with discrete locations and in models with voting are compounded when both features are introduced into the same model. We present conditions under which equilibrium exists in a model where freely mobile households choose community of residence and amount of housing consumption, and vote on the level of public goods provision. These conditions involve restrictions on preferences and the technology of public goods supply. At least some of these conditions appear consistent with empirical observations. We discuss the implications of the conditions, and their role in assuring existence of equilibrium. A series of computational examples provide illustrations of the way these conditions interact, and the difficulties that must be confronted if they are to be relaxed.     

Taste-homogeneity of optimal jurisdictions in a Tiebout economy with crowding types and endogenous educational investment choices

We examine a local public goods economy with differentiated crowding. The main innovation is that we assume that the crowding effects of agents are a result of choices that agents make. For example, agents may be crowded (positively or negatively) by the skills that other members of their jurisdiction possess and these skills may be acquired through utility maximizing educational investment choices made in response to equilibrium wages and educational costs. In such an environment, we show that taste-homogeneous jurisdictions are optimal. This contrasts with results for both the standard differentiated crowding model and the crowding types model. We also show that the core and equilibrium are equivalent, and that decentralization is possible through anonymous prices having a structure similar to cost–share equilibrium prices.