SHADES OF BROWN AND GREEN: PARTY EFFECTS IN PROPORTIONAL ELECTION SYSTEMS

In proportional representation (PR) systems, political power is typically shared across several political parties. Many parties are small and focused on specific policies, such as environmental policy and immigration. Do these small parties matter for policy? I provide the first systematic evidence for this by developing the first regression discontinuity design tailored specifically for PR systems. With this method, which can be applied in all countries with PR systems, I estimate the causal effect of party representation on immigration policy, environmental policy and tax policy using data on Swedish municipalities. The results show that party representation has a large effect on the first two policies, but not on the tax policy.     

The Democratic Political Economy of Progressive Income Taxation

Why do both left and right political parties typically propose progressive income taxation schemes in political competition? Analysis of this problem has been hindered by the two-dimensionality of the issue space. To give parties a choice over a domain that contains both progressive and regressive income tax policies requires an issue space that is at least two-dimensional. Nash equilibrium in pure strategies of the standard two-party game, whose players have complete preferences over a two-dimensional policy space, generically fails to exist. I introduce a new equilibrium concept for political games, based on the fact of factional conflict within parties. Each party is supposed to consist of reformists, militants, and opportunists: each faction has a complete preference order on policy space, but together they can only agree on a partial order. Nash equilibria of the two-party game, where the policy space consists of all quadratic income tax functions, and each party is represented by its partial order, exist, and it is shown that, in such equilibria, both parties propose progressive income taxation.     

DO PARTIES MATTER FOR ECONOMIC OUTCOMES? A REGRESSION‐DISCONTINUITY APPROACH

A long‐standing issue in political economics is to what extent party control makes a difference in determining fiscal and economics policies. This question is very difficult to answer empirically because parties are not randomly selected to govern political entities. This article uses a regression‐discontinuity design, namely, party control changes discontinuously at 50% of the vote share, which can produce “near” experimental causal estimates of the effect of party control on economic outcomes. The method is applied to a large panel data set from Swedish local governments with a number of attractive features. The results show that there is an economically significant party effect: Left‐wing governments spend and tax 2–3% more than right‐wing governments. Left‐wing governments also have 7%lower unemployment rates, which is partly due to that left‐wing governments employ 4% more workers than right‐wing governments. (JEL: C21, D72, D78, H71, H72)     

POLITICAL COMPETITION WITH CAMPAIGN CONTRIBUTIONS AND INFORMATIVE ADVERTISING

This paper presents a theory of political competition with campaign contributions and informative political advertising. Policy‐motivated parties compete by selecting candidates and interest groups provide contributions to enhance the electoral prospects of like‐minded candidates. Contributions are used to finance advertising campaigns that provide voters with information about candidates' ideologies. Voters update their beliefs rationally given the information they have received. The paper uses the theory to analyze the welfare economics of contribution limits. Such limits are shown to redistribute welfare from ordinary citizens to members of interest groups. (JEL: D72, H40)     

REDISTRIBUTION,PORK, AND ELECTIONS

Why might citizens vote against redistributive policies from which they would seem to benefit? Many scholars focus on ‘wedge’ issues such as religion or race, but another explanation might be geographically‐based patronage—or pork. We examine the tension between redistribution and patronage with a model that combines partisan elections across multiple districts with legislation in spatial and divide‐the‐dollar environments. The model yields a unique equilibrium that describes the circumstances under which poor voters support right‐wing parties that favor low taxes and redistribution, and under which rich voters support left‐wing parties that favor high taxes and redistribution. The model suggests that one reason standard tax and transfer models of redistribution often do not capture empirical reality is that redistributive transfers are a less efficient tool for attracting votes than are more targeted policy programs. The model also underlines the central importance of party discipline during legislative bargaining in shaping the importance of redistribution in voter behavior, and it describes why right‐wing parties should have an advantage over left‐wing ones in majoritarian systems.     

PORK‐BARREL POLITICS,TARGETABLE POLICIES,AND FISCAL FEDERALISM

This article utilizes a simple model of redistributive politics with jurisdictional specific local projects to analyze the inefficiencies that arise under differing levels of targetability in both taxes/transfers and local projects. The ability to tactically target taxes/transfers and/or local projects leads political parties to engage in pandering to favored groups. However, in equilibrium, we find that greater targetability in the set of available policies actually intensifies the competition between the political parties and so increases efficiency in the provision of local projects. (JEL: D72, H41)     

NORM ENFORCEMENT: ANGER,INDIGNATION, OR RECIPROCITY?

The enforcement of social norms often requires that unaffected third parties sanction offenders. Given the renewed interest of economists in norms, the literature on third‐party punishment is surprisingly thin. In this paper, we report the results of an experiment designed to replicate the anger‐based punishment of directly affected second parties and evaluate two distinct explanations for third‐party punishment: indignation and group reciprocity. We find evidence in favor of both, with the caveat that the incidence of indignation‐driven sanctions is perhaps smaller than earlier studies have hinted. Furthermore, our results suggest that second parties use sanctions to promote conformism while third parties intervene primarily to promote efficiency.     

The impact of related party transactions on earnings management: some insights from the Italian context

Related party transactions have become a key issue as a result of recent financial scandals. This study examines whether firms use related party transactions for earnings management, and then, whether they try to minimize detection through the format of related party transactions disclosure. Firstly, we analyze the association between related party transactions structure (types and parties involved) and the probability of reporting small earnings increase. Related party transactions may have significant impact on, and implications for, earnings management. According to the agency theory, related party transactions are used opportunistically, while the efficient transaction hypothesis argues that related party transactions meet the economic needs of the business. We next investigate the association between the probability of reporting small earnings increases through related party transactions and disclosure quality. Disclosure quality should be studied in relation to impression management and investor attention; this approach takes account of the idea that earnings management behavior may influence the quality of disclosure as a possible way of lowering conflict of interest. In line with the agency theory, our findings show that revenue related party transactions are more likely to be used to manage earnings than other types of transaction; related party transactions with ultimate parents are associated with lower probability of reporting small earnings increases compared to operations with other related parties. Lastly, our results confirm that the decision to engage in earnings management is related to lower disclosure quality.     

CONTROL RIGHTS IN COMPLEX PARTNERSHIPS

This paper develops a theory of the allocation of authority between two players who are in a complex partnership, that is, a partnership which produces impure public goods. We show that the optimal allocation depends on technological factors, the parties’ valuations of the goods produced, and the degree of impurity of these goods. When the degree of impurity is large, control rights should be given to the main investor, irrespective of preference considerations. There are some situations in which this allocation is optimal even if the degree of impurity is very low as long as one party’s investment is more important than the other party’s. If the parties’ investments are of similar importance and the degree of impurity is large, shared authority is optimal with a greater share going to the low‐valuation party. If the importance of the parties’ investments is similar but the degree of impurity is neither large nor small, the low‐valuation party should receive sole authority. We analyze an extension in which side payments are infeasible. We check for robustness of our results in several dimensions, such as allowing for multiple parties or for joint authority, and apply our results to interpret a number of complex partnerships, including those involving schools and child custody.     

On the Role of Outside Options in Bargaining with Obstinate Parties

The presence of obstinate types in bargaining has been shown to alter dramatically the bargaining equilibrium strategies and outcomes. This paper shows that outside options may cancel out the effect of obstinacy in bargaining. When parties have access to stationary outside options, we show that when opting out is preferable to accepting the inflexible demand of the other party, there is a unique Perfect Bayesian Equilibrium in which each party reveals himself as rational as soon as possible. A similar conclusion holds when outside options may only be available at a later date or when only one party has access to an outside option.     

AMBIVALENT INVESTMENT AND THE HOLD‐UP PROBLEM

In this paper we add to the foundations of incomplete contracting literature. We study the hold‐up problem with ambivalent investment, where investment benefits the investing party if ex post the right decision is undertaken but harms the investing party if the wrong decision is made. In this context, we show that the power of contracts to provide investment incentives depends on three factors: the commitment value of contracts, the amount of quasirents that the investing party can expect in the case of out‐of‐contract renegotiation, and the degree of ambivalence of investment. First, contracts provide first‐best investment incentives when parties can commit to a contract regardless of the type of investment. Second, with sufficiently ambivalent investment, if parties cannot commit not to renegotiate a contract and if the investing party's bargaining power is intermediate, contracts cannot improve investment incentives above those provided by no contract. In contrast, a simple buyer or seller option contract is optimal when the investing party's bargaining power is extreme. (JEL: D23, K12, L22)     

ELECTORAL RULES AND CORRUPTION

Is corruption systematically related to electoral rules? Recent theoretical work suggests a positive answer. But little is known about the data. We try to address this lacuna by relating corruption to different features of the electoral system in a sample of about eighty democracies in the 1990s. We exploit the cross‐country variation in the data, as well as the time variation arising from recent episodes of electoral reform. The evidence is consistent with the theoretical priors. Larger voting districts—and thus lower barriers to entry—are associated with less corruption, whereas larger shares of candidates elected from party lists—and thus less individual accountability—are associated with more corruption. Individual accountability appears to be most strongly tied to personal ballots in plurality‐rule elections, even though open party lists also seem to have some effect. Because different aspects roughly offset each other, a switch from strictly proportional to strictly majoritarian elections only has a small negative effect on corruption. (JEL: E62, H3)     

Relational Contracts and the Nature of Market Interactions

We provide evidence that long‐term relationships between trading parties emerge endogenously in the absence of third party enforcement of contracts and are associated with a fundamental change in the nature of market interactions. Without third party enforcement, the vast majority of trades are initiated with private offers and the parties share the gains from trade equally. Low effort or bad quality is penalized by the termination of the relationship, wielding a powerful effect on contract enforcement. Successful long‐term relations exhibit generous rent sharing and high effort (quality) from the very beginning of the relationship. In the absence of third‐party enforcement, markets resemble a collection of bilateral trading islands rather than a competitive market. If contracts are third party enforceable, rent sharing and long‐term relations are absent and the vast majority of trades are initiated with public offers. Most trades take place in one‐shot transactions and the contracting parties are indifferent with regard to the identity of their trading partner.     

THIRD-PARTY REACTIONS TO EMPLOYEE (MIS)TREATMENT: A JUSTICE PERSPECTIVE

To date, theory and research on organizational justice has tended to focus on the victim’s (i.e. the employee’s) perspective; the third party’s perspective has received relatively little systematic attention. In this chapter we develop a model describing how third parties make fairness judgments about an employee’s (mis)treatment by an organization or its agents (including supervisors and peers). Our model also identifies factors that can predict whether third parties will act on their unfairness perceptions. We identify several distinctions between the victim’s and third party’s perspectives. We conclude by explaining how the third party’s perspective offers numerous opportunities and challenges for research.     

Information systems outsourcing projects as a double moral hazard problem

In the past two decades many organizations have turned to other organizations to satisfy their information systems needs. Information systems outsourcing arrangements cover the spectrum from agreements involving the delivery of all information services to those providing specific services such as systems development, communications management, desktop computing provision and maintenance, and so on.In this paper we model information systems outsourcing arrangements as a non-cooperative game with two players: a company and an outsourcing vendor. The game between the two players has an inherent double moral hazard problem as the success of the information system outsourcing project depends on the actions of both players, which are costly for them and are not directly contractible. Both parties make their decisions taking into account the effects that these decisions have on the other player's actions. In our analysis, we compare the solution obtained without a moral hazard problem (the first-best solution) to the one obtained under a double moral hazard setting (the second-best solution). We demonstrate some results based on the assumption that increases in the productivity of the vendor lead to increases in the productivity of the company. Further we establish that outsourcing contracts should provide no separate payment for failure to the outsourcing vendor although effectively many of them do. We also provide a sharing rule for providing appropriate incentives for the vendor and examine the dynamics associated with this sharing rule. Finally, we further provide for the characterization of response functions and the ensuing Nash solution including the optimal outsourcing fee. This allows for the nuanced consideration of the degree of interaction between the effort of one party and the productivity of the effort of the other party. This particular interaction has not been explored formally in the extant research literature.     

Potential for Flexibility in EC Countries

Abstract. There are two economic reasons for supporting the Internal Market Programme of the EC by social policies: the fust argument refers to welfare theory, the second to policies of distribution. First, it could be possible that an economic integration without social completion will lead to welfare losses. Therefore, it could be necessary to correct market forces or to support them respectively because, due to market imperfections, they do not provide the best possible use of productive facilities. Second, it cannot be excluded that level and structure of social provisions will not be accepted because of superior aspects of policies of distribution. Market results could miss the aim of adjusting life and working conditions within the EC and developing them further. These two arguments mentioned above should be followed up in the discussion of the pros and cons of a harmonization of social systems in the EC. For the purposes of this paper these. rather fundamental considerations are applied to the following concrete items: dismissal protection, non-standard forms of employment, and working hours. These regulations influence numerical flexibility of enterprises, i.e. the possibilities of quantitative adjustments in staff use. The steadily growing competition in Europe will also increase the importance of flexibility potentials of enterprises in the different countries as a relevant factor for enterprise location. Extensive flexibility restrictions could prove to be competitive disadvantage in view of countries with more possibilities of flexibilization.Therefore, after the comparison of flexibility potentials in the EC-countries the implications for European laws (key-word: Social Charter) are to be discussed.     

PARTY FORMATION IN SINGLE‐ISSUE POLITICS

We study the implications of economies of party size in a model of party formation. We show that when the policy space is one‐dimensional, candidates form at most two parties. This result does not depend on the magnitude of the economies of party size or sensitively on the nature of the individuals' preferences. It does depend on our assumptions that the policy space is one‐dimensional and that uncertainty is absent; we study how modifications of these assumptions affect our conclusions. (JEL: D70, D72)     

On the Advantage of Quantity Leadership When Outsourcing Production to a Competitive Contract Manufacturer

This study investigates a supply chain comprising an original equipment manufacturer (OEM) and a contract manufacturer (CM), in which the CM acts as both upstream partner and downstream competitor to the OEM. The two parties can engage in one of three Cournot competition games: a simultaneous game, a sequential game with the OEM as the Stackelberg leader, and a sequential game with the CM as the Stackelberg leader. On the basis of these three basic games, this study investigates the two parties' Stackelberg leadership/followership decisions. When the outsourcing quantity and wholesale price are exogenously given, either party may prefer Stackelberg leadership or followership. For example, when the wholesale price or the proportion of production outsourced to the CM is lower than a threshold value, both parties prefer Stackelberg leadership and, consequently, play a simultaneous game in the consumer market. When the outsourcing quantity and wholesale price are decision variables, the competitive CM sets a wholesale price sufficiently low to allow both parties to coexist in the market, and the OEM outsources its entire production to this CM. This study also examines the impact of the supply chain parties' bargaining power on contract outcomes by considering a wholesale price that is determined via the generalized Nash bargaining scheme, finding a Stackelberg equilibrium to be sustained when the CM's degree of bargaining power is great and the non‐competitive CM's wholesale price is high.     

ELECTED VERSUS APPOINTED REGULATORS: THEORY AND EVIDENCE

This paper contrasts direct election with political appointment of regulators. When regulators are appointed, regulatory policy becomes bundled with other policy issues the appointing politicians are responsible for. Because voters have only one vote to cast and regulatory issues are not salient for most voters, there are electoral incentives to respond to stakeholder interests. If regulators are elected, their stance on regulation is the only salient issue so that the electoral incentive is to run a pro‐consumer candidate. Using panel data on regulatory outcomes from U.S. states, we find new evidence in favor of the idea that elected states are more pro‐consumer in their regulatory policies. (JEL: H1, K2)     

Political Organizations,Interest Groups and Citizens Engagement: An Integrated Model of Democracy

The paper starts with a theoretical reinterpretation of some classical topics in the public choice literature, where specific elements of contract theory and the theory of the firm are introduced. By putting into contact these completely different fields of economics, it defines a general theoretical framework for political behaviors whose implications go beyond those determined by the standard self-interest assumption. Political organizations, as suppliers of public policies, are supposed to maximize a residual quantum consisting in the public authority that can actually be exercised after all the electoral commitments, with voters and interests groups, have been fulfilled. This residual right—which can be seen also as a degree of discretion necessary for ruling parties to deal with unforeseen contingencies—is based on the reputational capital (goodwill) accumulated over time by political organizations and represents the intangible asset that secures voters’ loyalty and, consequently, the legitimacy to exercise public authority in the long run. When a deficit of goodwill occurs, a chain of “exit” strategies by voters can lead to undesirable results unless an effective “voice” option for citizens exists.