A POLITICAL ECONOMY THEORY OF PARTIAL DECENTRALIZATION

We revisit the classic problem of tax competition in the context of federal nations, and derive a positive theory of partial decentralization. A capital poor median voter chooses to use redistributive capital taxes to provide public goods. The expectation of high capital taxes, however, results in a small capital stock which lowers returns to redistribution. The median voter therefore wants to commit to a lower level of capital taxes. She does so by setting a partial degree of decentralization in the Constitution. The equilibrium degree of decentralization balances the positive effect of tax competition on capital taxes with the loss in redistribution that results. We show that the degree of decentralization is nonmonotonic in inequality, increasing in the redistributive efficiency of public good provision, and decreasing in capital productivity. When public goods are heterogeneous in their capacity to transfer funds, all voters agree that goods with high redistributive capacity should be decentralized.     

EMERGENCE AND PERSISTENCE OF INEFFICIENT STATES

We present a theory of the emergence and persistence of inefficient states based on patronage politics. The society consists of rich and poor. The rich are initially in power, but expect to transition to democracy, which will choose redistributive policies. Taxation requires the employment of bureaucrats. By choosing an inefficient state structure, the rich may be able to use patronage and capture democratic politics, so reducing the amount of redistribution in democracy. Moreover, the inefficient state creates its own constituency and tends to persist over time. Intuitively, an inefficient state structure creates more rents for bureaucrats than would an efficient one. When the poor come to power in democracy, they will reform the structure of the state to make it more efficient so that higher taxes can be collected at lower cost and with lower rents for bureaucrats. Anticipating this, when the society starts out with an inefficient organization of the state, bureaucrats support the rich, who set lower taxes but also provide rents to bureaucrats. We obtain that the rich–bureaucrats coalition may also expand the size of bureaucracy excessively so as to generate enough political support. The model shows that an equilibrium with an inefficient state is more likely to arise when there is greater income inequality, when bureaucratic rents take intermediate values, and when individuals are sufficiently forward‐looking.     

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)     

POVERTY AND THE POLITICAL ECONOMY OF PUBLIC EDUCATION SPENDING: EVIDENCE FROM BRAZIL

A large body of literature has emphasized the elite capture of democratic institutions as the explanation for the low levels of spending on public education in many low‐income democracies. This paper provides an alternative to that longstanding hypothesis. Motivated by new cross‐country facts and evidence from Brazilian municipalities, we hypothesize that many democratic developing countries might invest less in public education spending because poor decisive voters prefer the government to allocate resources elsewhere. One possible explanation is that low‐income voters could instead favor redistributive programs that increase their incomes in the short run, such as cash transfers. To test for this possibility, we design and implement an experimental survey and an incentivized choice experiment in Brazil. The findings from both interventions support our hypothesis.     

Political leaders in the SYMLOG space: Perceptions of right and left wing leaders by right and left wing constituencies

Systematic Multiple Level Observation of Groups (SYMLOG) was applied to studying images of political leaders. Three left wing and three right wing Israeli leaders were evaluated by left and right wing voters along the SYMLOG's three dimensions—friendliness, task orientation, and dominance. It was found that right wing voters rated right wing leaders higher on friendliness and task orientation than left wing leaders. In a similar fashion, left wing voters viewed left wing leaders as more friendly and task-oriented than right wing leaders. Leaders of the right were viewed as more dominant than leaders of the left by left and right wing voters alike. Right and left wing voters assigned different SYMLOG types to right and left wing leaders. The dimension that distinguished between the various images was the dimension of friendliness. Whereas for right wing voters, all images of right wing leaders included a component of friendliness, none of these three images included an accented component of friendliness when rated by left wing voters. In a similar fashion, left wing voters saw two out of the three left wing leaders as including a component of friendliness, whereas none of the three left wing images included this component for right wing voters. Respondents from the right and the left rated their “ideal leader” as reflecting values of “dominance”, “friendliness,” and “task-orientation”. However, respondents saw leaders affiliated with their own political camp as closer to their image of the ideal leader on friendliness and task-orientation than leaders of the opposite political camp. Both right and left wing voters saw all political leaders as equally similar to their image of “ideal leader” on the “dominance” dimension regardless of that leader's political affiliation.     

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)     

Cross‐Milieu Terrorist Collaboration: Using Game Theory to Assess the Risk of a Novel Threat

This article uses a game‐theoretic approach to analyze the risk of cross‐milieu terrorist collaboration—the possibility that, despite marked ideological differences, extremist groups from very different milieus might align to a degree where operational collaboration against Western societies becomes possible. Based upon theoretical insights drawn from a variety of literatures, a bargaining model is constructed that reflects the various benefits and costs for terrorists’ collaboration across ideological milieus. Analyzed in both sequential and simultaneous decision‐making contexts and through numerical simulations, the model confirms several theoretical arguments. The most important of these is that although likely to be quite rare, successful collaboration across terrorist milieus is indeed feasible in certain circumstances. The model also highlights several structural elements that might play a larger role than previously recognized in the collaboration decision, including that the prospect of nonmaterial gains (amplification of terror and reputational boost) plays at least as important a role in the decision to collaborate as potential increased capabilities does. Numerical simulation further suggests that prospects for successful collaboration over most scenarios (including operational) increase when a large, effective Islamist terrorist organization initiates collaboration with a smaller right‐wing group, as compared with the other scenarios considered. Although the small number of historical cases precludes robust statistical validation, the simulation results are supported by existing empirical evidence of collaboration between Islamists and right‐ or left‐wing extremists. The game‐theoretic approach, therefore, provides guidance regarding the circumstances under which such an unholy alliance of violent actors is likely to succeed.     

Tax and Education Policy in a Heterogeneous‐Agent Economy: What Levels of Redistribution Maximize Growth and Efficiency?

This paper studies the effects of progressive income taxes and education finance in a dynamic heterogeneous‐agent economy. Such redistributive policies entail distortions to labor supply and savings, but also serve as partial substitutes for missing credit and insurance markets. The resulting tradeoffs for growth and efficiency are explored, both theoretically and quantitatively, in a model that yields complete analytical solutions. Progressive education finance always leads to higher income growth than taxes and transfers, but at the cost of lower insurance. Overall efficiency is assessed using a new measure that properly reflects aggregate resources and idiosyncratic risks but, unlike a standard social welfare function, does not reward equality per se. Simulations using empirical parameter estimates show that the efficiency costs and benefits of redistribution are generally of the same order of magnitude, resulting in plausible values for the optimal rates. Aggregate income and aggregate welfare provide only crude lower and upper bounds around the true efficiency tradeoff.     

A DRAWBACK OF ELECTORAL COMPETITION

In most major democracies there are very few parties compared to the number of possible policy positions held by voters. We provide an efficiency rationale for why it might be appropriate to limit the proliferation of parties. In our model, the larger the number of parties, the greater the inefficiency of the outcome of electoral competition. The reason is that, when the number of parties increases, electoral incentives push each party to focus its electoral promises on a narrower constituency, and then special interest policies replace more efficient policies that have diffuse benefits. The analysis provides a possible explanation for the existence of institutional features that limit the extent of electoral competition: thresholds of exclusion, runoff electoral systems, and majoritarian two‐party political systems. (JEL: D82, L15)     

OLIGARCHIC VERSUS DEMOCRATIC SOCIETIES

This paper develops a model to analyze economic performance under different political regimes. An “oligarchic” society, where political power is in the hands of major producers, protects their property rights but also tends to erect significant entry barriers against new entrepreneurs. Democracy, where political power is more widely diffused, imposes redistributive taxes on producers, but tends to avoid entry barriers. When taxes in democracy are high and the distortions caused by entry barriers are low, an oligarchic society achieves greater efficiency. Because comparative advantage in entrepreneurship shifts away from the incumbents, the inefficiency created by entry barriers in oligarchy deteriorates over time. The typical pattern is one of rise and decline of oligarchic societies: An oligarchic society may first become richer, but later fall behind a similar democratic society. I also discuss how democracies may be better able to take advantage of new technologies, how within‐elite conflict in oligarchies might cause a transition to democracy, and how the unequal distribution of income may keep inefficient oligarchic institutions in place. (JEL: P16, O10)     

Rotten Parents and Disciplined Children: A Politico‐Economic Theory of Public Expenditure and Debt

This paper proposes a dynamic politico‐economic theory of fiscal policy in a world comprising a set of small open economies, whose driving force is the intergenerational conflict over debt, taxes, and public goods. Subsequent generations of voters choose fiscal policy through repeated elections. The presence of young voters induces fiscal discipline, that is, low taxes and low debt accumulation. The paper characterizes the Markov‐perfect equilibrium of the voting game in each economy, as well as the stationary equilibrium debt distribution and interest rate of the world economy. The equilibrium can reproduce some salient features of fiscal policy in modern economies.     

PARTISAN CONTROL,MEDIA BIAS,AND VIEWER RESPONSES: EVIDENCE FROM BERLUSCONI'S ITALY

This paper examines whether and how viewers respond to changes in partisan bias in media news. We use data from Italy, where the main private television network is owned by Silvio Berlusconi, the leader of the center‐right coalition, and the public television corporation is largely controlled by the ruling coalition. We first document that after the 2001 national elections, when the control of the government moved from the center‐left to the center‐right, news content on public television shifted to the right. Using individual survey data, we find robust evidence that viewers responded to these changes by modifying their choice of favorite news programs. On the one hand, right‐leaning viewers increased their propensity to watch public channels which, even after the change, remained to the left of private channels. On the other hand, left‐wing viewers reacted by switching from the main public channel to another public channel that was controlled by the left during both periods. We show that this behavioral response, which tended to shift ideological exposure to the left, significantly, though only partially, offset the movement of public news content to the right.     

THE BALANCED US PRESS

We measure the relative ideological positions of newspapers, voters, interest groups, and political parties, using data on ballot propositions. We exploit the fact that newspapers, parties, and interest groups take positions on these propositions, and the fact that citizens ultimately vote on them. We find that, on average, newspapers in the United States are located almost exactly at the median voter in their states—that is, they are balanced around the median voter. Still, there is a significant amount of ideological heterogeneity across newspapers, which is smaller than the one found for interest groups. However, when we group propositions by issue area, we find a sizable amount of ideological imbalance: broadly speaking, newspapers are to the left of the state‐level median voter on many social issues, and to the right on many economic issues. To complete the picture, we use two existing methods of measuring bias and show that the news and editorial sections of newspapers have almost identical partisan positions.     

THE POLITICAL COLOR OF FISCAL RESPONSIBILITY

We propose a dynamic general equilibrium model that yields testable implications about the fiscal policy run by governments of different political color. Successive generations of voters choose taxation, expenditure, and government debt through repeated elections. Voters are heterogeneous by age and by the intensity of their preferences for public good provision. The political equilibrium switches stochastically between left‐ (pro‐public goods) and right‐leaning (pro‐private consumption) governments. A shift to the left (right) is associated with a fall (increase) in government debt, an increase (fall) in taxation, and an increase (fall) in government expenditures. However, left‐leaning governments engage in more debt accumulation during recessions. These predictions are shown to be consistent with the time‐series evidence for the United States in the postwar period, and also with the evidence for a panel of OECD countries. (JEL: D72, E62, H41, H62, H63)     

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.     

UNMARRIED PARENTHOOD AND REDISTRIBUTIVE POLITICS

Political survey data for nine West European countries show that women have become increasingly left‐wing compared to men, and that this trend is positively correlated with the rise of nonmarriage in these countries. This pattern is mirrored in German longitudinal data (GSOEP), where transitions out of marriage make women, but not men, significantly more left‐leaning. Analysis of public spending data for high‐income OECD countries (1980–1998) suggests that the political impact of nonmarriage extends to the allocation of State resources with increases in nonmarriage first reducing, and then increasing, State redistribution towards children. (JEL: H31, H42, J12, J13)     

DISTRIBUTIONAL INCENTIVES IN AN EQUILIBRIUM MODEL OF DOMESTIC SOVEREIGN DEFAULT

Europe's debt crisis resembles historical episodes of outright default on domestic public debt about which little research exists. This paper proposes a theory of domestic sovereign default based on distributional incentives affecting the welfare of risk‐averse debt and nondebtholders. A utilitarian government cannot sustain debt if default is costless. If default is costly, debt with default risk is sustainable, and debt falls as the concentration of debt ownership rises. A government favoring bond holders can also sustain debt, with debt rising as ownership becomes more concentrated. These results are robust to adding foreign investors, redistributive taxes, or a second asset.     

IMMIGRATION,WAGES, AND COMPOSITIONAL AMENITIES

There is strong public opposition to increased immigration throughout Europe. Given the modest economic impacts of immigration estimated in most studies, the depth of anti‐immigrant sentiment is puzzling. Immigration, however, does not just affect wages and taxes. It also changes the composition of the local population, threatening the compositional amenities that natives derive from their neighborhoods, schools, and workplaces. In this paper we use a simple latent‐factor model, combined with data for 21 countries from the 2002 European Social Survey (ESS), to measure the relative importance of economic and compositional concerns in driving opinions about immigration policy. The ESS included a unique battery of questions on the labor market and social impacts of immigration, as well as on the desirability of increasing or reducing immigrant inflows. We find that compositional concerns are 2–5 times more important in explaining variation in individual attitudes toward immigration policy than concerns over wages and taxes. Likewise, most of the difference in opinion between more‐ and less‐educated respondents is attributable to heightened compositional concerns among people with lower education.     

Big business vs big government—A new social contract?

The author describes how the conflict between the two ideologies of liberalism and conservatism may be resolved to produce an economic system that increases both social welfare and entrepreneurial freedom. After summarizing the limitations of the left and right wing positions, he describes research studies on a ‘Return on Resources Model’ that suggest a third perspective called the ‘social contract’ which reconciles both views to create a more powerful synthesis. An intriguing possibility is that the social contract could produce a ‘decentralization strategy’ in which control of the economy would shift downward from government to a self-regulating and more productive private sector. Some speculations are offered on how these possibilities seem likely to unfold during the next decade or so, as well as suggestions on how politicians and corporate executives could foster this ‘New Capitalism’.     

The Redistributive Effects of the Tax Wedge in Italy

Abstract. This paper presents an original data set of microdata on the tax wedge in Italy, obtained by using the microsimulation model ITAXMOD, developed at ISPE (Institute for Studies on Economic Planning). These data are used to measure the components of the tax wedge and their burden on the total cost of labour at the individual level. The results have been aggregated across income brackets, socio-economic groups and sectors of employment. These data are the necessary preliminary input for any redistributive analysis and in addition they make the available data for Italy comparable with those of other countries. Scant attention has been paid up to now to the redistributive aspects of the tax wedge, since most analyses are based on the income of the “average production worker” which is far from an ideal standard for comparison. The computation of the tax wedge for different brackets of total labour cost has been explored in two ways. The first is related to the differing weights of the components of the tax wedge on cost of labour and no particular hypothesis has been made about the incidence of these components. The results show that the burden of personal income taxation and of social security contributions is very high even for wage-earners in the lowest brackets (in 1992, the estimated tax wedge is more than 44% of total labour cost even in the second decile of the labour cost). That might discourage both labour supply and labour demand across the entire spectrum of deciles of cost of labour. The second line of research studies the incidence of personal income taxes and employees' social security contributions on gross earnings, under the maintained hypothesis that these two components of the tax wedge are shouldered by the employees.