Showing papers in "Economics and Politics in 1990"

The role of institutions in the revival of trade: the law merchant, private judges, and the champagne fairs

Abstract: A good reputation can be an effective bond for honest behavior in a community of traders if members of the community know how others have behaved in the past – even if any particular pair of traders meets only infrequently. In a large community, it would be impossibly costly for traders to be perfectly informed about each other's behavior, but there exist institutions that can restore the effectiveness of a reputation system using much less extensive information. The system of judges used to enforce commercial law before the rise of the state was such an institution, and it successfully encouraged merchants (1) to behave honestly, (2) to impose sanctions on violators, (3) to become adequately informed about how others had behaved, (4) to provide evidence against violators of the code, and (5) to pay any judgments assessed against them, even though each of these behaviors might be personally costly.

Public goods, rent dissipation, and candidate competition*

Abstract: The early literature on rent seeking presumed that total expenditures in the rent-seeking process would equal the value of a contested prize. Subsequent analysis has shown, however, that a number of circumstances give rise to underdissipation of the contested rent—imperfectly discriminating contests, risk-aversion, or where individuals' valuations of the prize are not identical. This paper shows how underdissipation is associated with the public-good character of contested rents. In particular, total rent dissipation is demonstrated to be less than the average stake of the individual contenders. In addition to assessing rent dissipation in contests for public-good allocations, the paper also endogenizes the value of the prize by placing the rent-seeking contest in a setting of candidate competition.

THE NEW POLITICAL ECONOMY: ITS EXPLANATORY POWER FOR LDCs*

Abstract: This paper reviews the new political economy and its relevance to explaining policymaking in the developing countries.

A theory of kleptocracy with probabilistic survival and reputation

Abstract: We develop a positive theory of kleptocracy, in which the incumbent ruler's concern about his survival probability can induce him to pursue relatively benevolent policies. But, this effect can lower the equilibrium tax rate only until the time-consistency requirement becomes a binding constraint on the equilibrium tax rate. The minimum time-consistent tax rate in a reputational equilibrium is lower the more that the ruler values prospective future revenues, but the value of prospective future revenues itself depends on the ruler's survival probability. The analysis reveals that, if a relatively benevolent tax policy is both necessary and sufficient for a high survival probability, then equilibrium tax policy is relatively benevolent. Until two or three hundred years ago, it was characteristic almost

Are efficiency improvements in government transfer policies self‐defeating in political equilibrium?*

Abstract: This paper studies an election game between two politicians, in which each provides income transfers to special-interest groups in return for political contributions. It is shown that a move to a more inefficient form of transfers may lower the total excess burden created by these transfers, because the politicians are induced to reduce their provision of transfers. For the case in which the income transfers are indirectly provided as trade protection to import-competing industries, a switch from production subsidies to tariffs as the form of protection reduces the equilibrium level of excess burden and makes both politicians better off.

Uniformity versus selectivity in indirect taxation

Abstract: There are (at least) five groups of arguments which might suggest that indirect taxes should be at a uniform proportionate rate. The first is theoretical and concerns results which show that, under certain assumptions, uniform indirect taxation is an optimum solution in the sense of Pareto efficiency or a combination of equity and efficiency as reflected in a social welfare function. Related results characterise conditions under which movements towards or away from uniformity are welfare improving. The second concerns our ignorance of the information on which theory suggests differential rates of tax should be based. The third group is administrative where it is argued that uniform taxes are simpler to organise and collect, and provide less scope for evasion, than selective taxes. The fourth concerns the role of political and other influences, including unproductive or rent-seeking activities, where, it is suggested, the possibility of non-uniform taxes will lead to considerable opportunities for misuse of the tax system, including expenditure on lobbying by interested parties for special tax treatment. The fifth argues that it is wrong to discriminate between people (and thus goods) on the basis of their preferences. Most of the arguments in favour of uniformity have some serious content but, it will be argued, their proper evaluation requires an understanding of the assumptions underlying the theoretical results, an involvement with the empirical analysis of household behaviour and tax reform, and finally experience with how policy is formed and taxation administered. Any judgement of the case for uniformity will depend on the country concerned and, in particular, the range of policy instruments available and how they are set and function in practice. We shall suggest that for developed countries the case for uniformity is stronger than for developing countries although even in the former the arguments for

The care and handling of monetary authorities

Abstract: Sometimes a group of people want to hire some agent (a monetary authority, for instance) to force them to cooperate with one another. This can cause problems, not only of the standard principal-agent type, but also of inconsistency, which appears here as renegotiation. The group faces a conflict between controlling the agent – the agency problem – and controlling themselves – the inconsistency problem. Terms of office are a good way to resolve this problem, and in fact, for people patient enough, the renegotiation problem disappears. This model provides insights into why the public dislikes inflation, why the market for presidents does not clear in Walrasian fashion, and why the controversy about “rules versus discretion” provides no policy guidance.

Voter Preferences for Trade Policy Instruments

Abstract: We analyze voter preferences for tariffs and production subsidies. The distribution of tax revenues argument shows that voters with high direct tax burdens prefer tariffs to subsidies. The uncertainty argument demonstrates that if actual tariff and subsidy rates are chosen from the set of individually optimal rates then the range of tariff rates is smaller than the range of subsidy rates. Thus, tariffs might be preferred even though they are less efficient. Finally, the large country argument shows that if a country is large then voters whose income shares decline with more protection prefer tariffs to subsidies.

The economics of section 301: a game‐theoretic guide*

Abstract: Extrapolating from some simple game-theoretic models, this paper suggests that invoking Section 301 will tend to shift the terms of agreement in the US's favor. This shift will be larger (a) the greater the harm to the targeted country from having its access to the US market limited; (b) the smaller the targeted country's ability to harm the US in retaliation; (c) the smaller the costs within the targeted country of complying with the US demands; and (d) the greater the benefit to the US – in the US negotiators' perception – from the demanded liberalization. But these determinants of the success of a Section 301 action do not identify the areas where the social gains from freer trade are largest. Thus there is a tendency to direct Section 301 actions at the wrong targets. Section 301 increases bargaining frictions: attempts to exploit the bargaining power that comes from either private information or commitments can lead to costly delays to agreement or even the possibility of a complete breakdown in the negotiations. And the use of retaliatory strategies can upset an existing global equilibrium and lead to counter-retaliation.

Dimensions, transactions costs and coalitions in legislative voting*

Abstract: Dimensional studies of Congressional voting have found a single dominant “ideological” dimension, while regression estimates find that constituency variables and party are dominant. Koford (1989b) recalibrated the dimensional studies, and found that several dimensions are important. This study reviews those findings, and then considers additional reasons why dimensional studies might understate the number of dimensions. It then examines the regression estimates for biases that overstate the number of dimensions. Overall, fewer dimensions are found than seem consistent with the wide variety of constituents' preferences on issues. A model is developed in which the transactions costs of building coalitions reduces the number of dimensions visible on roll-call votes below the underlying dimensionality of preferences in the issue space. When legislative parties build internal coalitions to pass and defeat bills, voting on randomly drawn bills has a single party-oriented dimension. Natural ideological dimensions are reinforced when parties write bills and logroll along natural lines of cohesion. Numerical examples suggest that these effects could be important, and suggest lines for empirical investigation of the underlying issue space.

Altruism, egoism, and the role of social capital in the private provision of public goods*

Abstract: The economic approach to understanding human behavior has encountered serious difficulties when attempting to explain the private provision of public goods, such as voting and charitable contributions to large organizations To gain insights into these important issues, this study takes an interdisciplinary approach The individual is modeled formally in terms of dual egoistic/altruistic utilities, and the recursive relation between altruism and the existence and production of social capital is developed The model is analyzed as a non-cooperative game between the egoistic and altruistic selves The socialized rational actor that results from the combination of social capital, dual utilities, and non-cooperative behavior resolves a number of public goods paradoxes Comparative statics and the dynamics of social capital formation are explored

Why are there democracies? a principal agent answer*

Abstract: Many organizations operate by majority rule. Why? I consider elections as ways to aggregate information rather than ways to reconcile preferences. This is a principal-agent problem with many principals. Only mechanisms that minimize the weighted sum of type 1 errors (neglecting a deserving agent) and type 2 errors (rewarding an undeserving agent) can escape manipulation. Majority rule uniquely minimizes the sum of errors. Thus majority rule is a very good way to aggregate information.

How long do congressmen stay in office

Abstract: This paper develops a methodology for calculating the expected completed lengths of U.S. congressmen's stays in office. In addition, it demonstrates how this methodology can be used to forecast the seniority structure of future Congresses. One of the major empirical findings of this paper is that it demonstrates the deficiencies of using “mean term” to make inferences about the expected length of congressmen's stays.

Designing Policies to Open Trade

Abstract: In this paper we consider recent proposals to auction U.S. import quotas, using the funds so obtained to encourage relocation out of the protected industries. We first discuss the design of quota auctions so as to maximize revenue for the government. We then consider why quota auctions should be used at all, rather than simply using tariffs, or immediately opening trade and compensating people with income transfers. We argue that the information available to the government, or lack thereof, is a critical factor in understanding these policies.