Showing papers in "Public Choice in 2009"
TL;DR: The authors examined the effect of formal and informal institutional arrangements on economic progress and found that formal institutions are only successful when embedded in informal constraints, and codifying informal rules can lead to negative unintended consequences.
Abstract: Institutions are widely believed to be important for economic development. This paper attempts to contribute to our understanding of how institutions matter by examining the effect of formal and informal institutional arrangements on economic progress. Formal institutions represent government defined and enforced constraints while informal institu- tions capture private constraints. The findings suggest that the presence of informal insti- tutions is a strong determinant of development. In contrast, formal institutions are only successful when embedded in informal constraints, and codifying informal rules can lead to negative unintended consequences. This suggests that institutions cannot be easily trans- planted in order to spur economic development.
387 citations
TL;DR: In this article, the authors use the LSA to assess the social costs of terrorism in utility and monetary terms, and find large negative effects of terrorism on life satisfaction that translate into considerable compensating surpluses for a hypothetical reduction in terrorism, in particular for the serious conflict in Northern Ireland.
Abstract: Terrorism has large social costs that are difficult to quantify for the well-known problems of eliciting people’s preferences for public goods. We use the LSA to assess these costs in utility and monetary terms. Based on combined cross-section time-series data, we estimate the costs of terrorism for France and the British Isles. We find large negative effects of terrorism on life satisfaction that translate into considerable compensating surpluses for a hypothetical reduction in terrorism, in particular for the serious conflict in Northern Ireland. The effects of terrorism are robust and differ across groups in accordance with prior expectations.
270 citations
TL;DR: The authors evaluate empirically how, in the course of globalization, partisan politics affected social expenditures in a panel of OECD countries, and investigate its interaction with the KOF index of globalization.
Abstract: This paper evaluates empirically how, in the course of globalization, partisan politics affected social expenditures in a panel of OECD countries. I introduce an updated indicator of government ideology and investigate its interaction with the KOF index of globalization. Two basic results emerge: First, at times when globalization proceeded at an average pace, partisan politics had no effect on social expenditures, but leftist governments increased social expenditures when globalization was proceeding rapidly. Second, policies differed in the 1980s and 1990s: Leftist governments pursued expansionary policies in the 1980s. Yet partisan politics disappeared in the 1990s, but not because of globalization.
249 citations
TL;DR: In this article, the allocation of a government budget between a public good and transfers is modeled under different systems of government and empirical indicators of political regime are examined using cross-country data on public good provision.
Abstract: The allocation of a government budget between a public good and transfers is modeled under different systems of government. The relatively even distribution of political power among groups in a democracy favors spending on nonexclusive public goods. The more concentrated pattern of political power in a dictatorship favors spending on transfers targeted to powerful groups. The hypothesis on public good provision is examined using cross-country data on public good provision and empirical indicators of political regime. Dictatorial governments are found to provide public schooling, roads, safe water, public sanitation, and pollution control at levels far below democracies.
205 citations
TL;DR: The authors analyzes whether and to what extent reliance on conditionality is appropriate to guarantee the revolving character of the resources of the International Monetary Fund (IMF), and presents theoretical arguments in favor of conditionality, and those against the use of conditions.
Abstract: This article analyzes whether and to what extent reliance on conditionality is appropriate to guarantee the revolving character of the resources of the International Monetary Fund (IMF). The paper presents theoretical arguments in favor of conditionality, and those against the use of conditions. It summarizes the track record of program implementation and discusses the evidence of factors determining implementation. Whether proponents or critics of conditionality can be supported by existing data analysis is also investigated, as is the success of conditionality in terms of outcomes. The final section draws policy implications.
180 citations
TL;DR: In this paper, the authors used a regression discontinuity design to estimate the causal effect of incumbency by comparing candidates in closely-fought elections and found that there is a significant disadvantage to incumbency in Indian State legislative elections, and the adverse effect has increased after 1991, especially in states with lower availability of public goods such as health centers and lower employment, poverty and per capita income.
Abstract: This paper estimates the incumbency effects using a large dataset on state legislative elections in India during 1975–2003. I use a Regression Discontinuity Design (RDD) that estimates the causal effect of incumbency by comparing candidates in closely fought elections. I find that there is a significant disadvantage to incumbency in Indian State legislative elections, and the adverse effect of incumbency has increased after 1991. Also, the incumbency disadvantage is higher in states that have lower availability of public goods such as health centers, and lower employment, poverty and per capita income.
164 citations
TL;DR: In this paper, a meta-regression analysis of the factors explaining the decision to privatize local services is presented. And the results indicate that significant relationships are very dependent upon the characteristics of the studies.
Abstract: Privatization of local public services has been implemented worldwide in the last decades. Why local governments privatize has been the subject of much discussion, and many empirical works have been devoted to analyzing the factors that explain local privatization. Such works have found a great diversity of motivations, and the variation among reported empirical results is large. To investigate this diversity we undertake a meta-regression analysis of the factors explaining the decision to privatize local services. Overall, our results indicate that significant relationships are very dependent upon the characteristics of the studies. Indeed, fiscal stress and political considerations have been found to contribute to local privatization specially in the studies of US cases published in the eighties that consider a broad range of services. Studies that focus on one service capture more accurately the influence of scale economies on privatization. Finally, governments of small towns are more affected by fiscal stress, political considerations and economic efficiency, while ideology seems to play a major role for large cities.
164 citations
TL;DR: This article examined the effect of foreign aid on income inequality and poverty reduction for the period 1971-2002 and found weak evidence that foreign aid is conducive to the improvement of the distribution of income when the quality of institutions is taken into account.
Abstract: This paper’s goal is to examine the effect of foreign aid on income inequality and poverty reduction for the period 1971–2002. Since simple cross-country regressions cannot be taken as ‘true’ time series findings we focus on dynamic panel data techniques, which allow accounting for potential simultaneity and heterogeneity problems. We find some weak evidence that foreign aid is conducive to the improvement of the distribution of income when the quality of institutions is taken into account; however, this result is not robust. This finding is consistent with recent empirical research on aid ineffectiveness in achieving economic growth or promoting democratic institutions.
136 citations
TL;DR: A survey of public choice contributions to the economics of anarchy can be found in this article, where the authors present a survey of the most important contributions to public choice economics in anarchy.
Abstract: Public choice economists began studying anarchy in the 1970s. Since then, the amount of research on anarchy has burgeoned. This article surveys the important public choice contributions to the economics of anarchy. Following early public choice economists, many economists are researching how individuals interact without government. From non-public-interested explanations of the creation of government to historical studies of internalizing externalities under anarchy, public choice scholars are arriving at a more realistic perspective of human interaction with and without government. Although the economics of politics receives more attention, the economics of anarchy is an important area of research in public choice.
123 citations
TL;DR: This article showed that there is a deficit both of democracy and of freedom in Muslim-majority countries by comparison with the rest of the world, and further demonstrated that these deficits are not fully explained by poverty or by oil but seem to have something to do with Islam itself.
Abstract: In this brush-clearing paper, we demonstrate that there is a deficit both of democracy and of freedom in Muslim-majority countries by comparison with the rest of the world. We further demonstrate that these deficits are not fully explained by poverty or by oil but seem to have something to do with Islam itself. We further demonstrate that the democracy and freedom deficits are larger in the Islamic heartland than elsewhere in Muslim-majority countries. We show that the democracy deficit is not driven by demands for autocracy in Muslim-majority countries, and indeed, that individual Muslims value democracy more than non-Muslims. We suggest that the lack of religious freedom in Muslim-majority countries (the supreme power concept) may be a significant variable in explaining the democracy deficit.
109 citations
TL;DR: The authors uncovers the exogenous component of EFW using IV methods and finds a robust channel from economic freedom to prosperity, supporting the importance of policies and institutions for development and warrants policy advice aimed at increasing economic freedom in order to foster prosperity.
Abstract: A positive, statistical and economic significant relation between growth, income level and the Economic Freedom of the World (EFW) index has been amply documented. Most analyses, however, use OLS methods which, in the presence of endogenous variables do not establish causality and produce biased and inconsistent estimates. This paper uncovers the exogenous component of EFW using IV methods and finds a robust channel from economic freedom to prosperity. The findings, including instrument validity tests, support the importance of policies and institutions for development and warrants policy advice aimed at increasing economic freedom to foster prosperity.
TL;DR: In this article, the authors extend Colonel Blotto to a class of General Blotto games that allow for more general payoffs and externalities between fronts, and find that these extensions make Blotto applicable to a variety of real-world problems.
Abstract: The Colonel Blotto game captures strategic situations in which players attempt to mismatch an opponent’s action. We extend Colonel Blotto to a class of General Blotto games that allow for more general payoffs and externalities between fronts. These extensions make Blotto applicable to a variety of real-world problems. We find that like Colonel Blotto, most General Blotto games do not have pure strategy equilibria. Using a replicator dynamics learning model, we show that General Blotto may have more predictable dynamics than the original Blotto game. Thus, adding realistic structure to Colonel Blotto may, paradoxically, make it less complex.
TL;DR: In this article, the authors explore a large number of political and macroeconomic variables using a nonparametric technique to predict safety from default, and find that political factors matter in different ways for democratic and non-democratic regimes, and for domestic and external debt.
Abstract: This paper shows that political institutions matter in explaining defaults on external and domestic debt obligations. We explore a large number of political and macroeconomic variables using a non-parametric technique to predict safety from default. The advantage of this technique is that it is able to identify patterns in the data that are not captured in standard probit analysis. We find that political factors matter, and do so in different ways for democratic and non-democratic regimes, and for domestic and external debt. In democracies, a parliamentary system or sufficient checks and balances almost guarantee the absence of default on external debt when economic fundamentals or liquidity are sufficiently strong. In dictatorships, high stability and tenure play a similar role for default on domestic debt.
TL;DR: This article showed that candidates in different districts face widely different advertising prices and that differences in advertising costs are one source of the apparent ineffectiveness of campaign spending, and that campaign spending is productive for both incumbents and challengers.
Abstract: The apparent ineffectiveness of incumbent campaign spending in congressional elections is one of the enduring puzzles in the political economy literature. Previous work in this area has assumed that advertising prices are uniform across congressional districts, and therefore that campaign spending alone is a good proxy for campaign advertising. However, candidates in different districts face widely different advertising prices and this paper shows that differences in advertising costs are one source of the apparent ineffectiveness of campaign spending. Accounting for the price of advertising, this paper shows that campaign spending is productive for both incumbents and challengers.
TL;DR: In this article, the authors investigated if and how fundraising from this source is related to the ideological positions of candidates and found that the amount of contributions depends on the extremity of candidate ideology and the level of candidate divergence in the same race.
Abstract: Individual citizens are the largest source of contributions for congressional candidates in the United States. This paper investigates if and how fundraising from this source is related to the ideological positions of candidates. Specifically, we ask whether the amount of contributions depends on: (1) the extremity of candidate ideology; and (2) the level of candidate divergence in the same race. These results have important implications for candidate positioning strategies, as well as for evaluating the effects of recent campaign finance reforms.
TL;DR: In this article, the authors assess the economic effects of direct democratic institutions on a cross-country basis and find that total spending as well as spending on welfare is lower in countries with mandatory referendums.
Abstract: This is the first study that assesses the economic effects of direct democratic institutions on a cross-country basis. We find that total spending as well as spending on welfare is lower in countries with mandatory referendums, consistent with the previous literature. But we also find that countries with national initiatives appear to spend more and be more corrupt. Finally, budget deficits, government effectiveness, productivity and “happiness” appear unrelated to direct democracy. Institutional detail thus matters a great deal. In general, the effects of direct-democratic institutions become stronger if the frequency of their actual use is taken into account. Effects are usually stronger in countries with weak democracies.
TL;DR: In this article, the effect of presidential regimes and majoritarian election systems on economic performance was investigated in a number of countries and more recent data was used to find that the effect vanishes almost entirely.
Abstract: Persson and Tabellini (The Economic Effects of Constitutions, The MIT Press, Cambridge, 2003) show that presidential regimes and majoritarian election systems have important economic effects. Here, the number of countries is expanded and more recent data is used. In replicating and extending their analyses, we find that the effect of presidential regimes vanishes almost entirely. With regard to electoral systems, the original results are largely confirmed: majoritarian (as opposed to proportional) electoral systems lead to lower government expenditure, lower levels of rent seeking but also lower output per worker. The institutional details, such as the proportion of candidates that are not elected on party lists and district size, are particularly important.
TL;DR: In this paper, the authors deal with two questions: (1) what are the origins of the current financial crisis, and (2) what did economists contribute, or why did economists fail to pro- vide a convincing answer for the origins, and possible solutions to overcome it.
Abstract: In this paper we deal with two questions, (1) what are the origins of the current financial crisis, and (2) what did economists contribute, or why did economists fail to pro- vide a convincing answer for the origins of the crisis, and possible solutions to overcome it? The economics profession apparently was unaware of the looming worldwide financial and economic crisis, and significantly underestimated its global dimensions and consequences. A first and preliminary analysis is undertaken to explore reasons for these failures. We con- clude by pointing to some consequences for economics as well as for economic policy.
TL;DR: This paper showed that pre-electoral commitments have a significant impact on government formation after controlling for endogeneity problems and showed that diversity in economic issues determines the partisan composition of governments, and that policy areas matter when parties agree to build a coalition.
Abstract: Recent studies show that pre-electoral commitments and the ideological distance between parties influence government formation. But do pre-electoral pacts or rejections of party combinations really have an independent impact on the outcome of the government formation game? Which policy areas matter when parties agree to build a coalition? This paper addresses these questions by applying a dataset that includes information on preferred/rejected coalition partners and the policy-area specific programmatic heterogeneity of all potential coalitions. The results show that pre-electoral commitments have a significant impact on government formation after controlling for endogeneity problems. There is also evidence that not only diversity in economic issues determines the partisan composition of governments.
TL;DR: For example, this paper argued that people tend to cooperate if they expect others to be cooperating, which implies that people holding generalized social trust more readily cooperate in large-N dilemmas because they expect that most people will cooperate.
Abstract: Does generalized social trust help solve large-N collective action problems? This paper argues so, offering a novel explanation for the relationship: People tend to cooperate if they expect others to be cooperating, which implies that people holding generalized social trust more readily cooperate in large-N dilemmas because they expect that most people will cooperate. The paper tests the explanation in a rigorous design. The analyses show a positive, robust effect of generalized social trust on public good provision, but no effect is found in a joint product situation. This supports the hypothesis, indicating that trust specifically enhances cooperation in collective action dilemmas.
TL;DR: In this paper, the impact of electoral competition on politicians' outside earnings is investigated. But the authors focus on the German federal assembly and find that politicians facing low competition have substantially higher outside earnings than those facing high competition.
Abstract: This paper deals with the impact of electoral competition on politicians’ outside earnings. In our framework, politicians face a tradeoff between allocating their time to political effort or to an alternative use generating outside earnings. The main hypothesis is that the amount of time spent on outside work is negatively related to the degree of electoral competition. We test this hypothesis using a new dataset on outside earnings of members of the German federal assembly and find that politicians facing low competition have substantially higher outside earnings.
TL;DR: In this paper, the authors show that if the father is a public employee, the probability of his child working in the same sector is increased by a huge 44% and this advantage is larger for low-ability individuals, "stayers" and Southern Italian residents.
Abstract: The attractiveness of public sector jobs in Italy may induce parents working in this sector to use their positions and the network of relationships to favor their sons/daughters in gaining access to public sector jobs. We verify whether children of public employees effectively enjoy an advantage, estimating a model of the probability of working in the public sector controlling for individual characteristics and labor market conditions. We show that if the father is a public employee the probability of his child working in the same sector is increased by a huge 44%. This advantage is larger for low-ability individuals, “stayers” and Southern Italian residents. We interpret these findings as evidence of nepotism in public employment.
TL;DR: In this paper, the authors argue that pirates created genuine social contracts that established a system of constitutional democracy based on the same decision-making calculus and with the same effects that Buchanan and Tullock's contractarian theory of government describes in The Calculus of Consent.
Abstract: Is a genuine social contract mythical? I argue that pirates created genuine social contracts that established a system of constitutional democracy based on the same decision-making calculus and with the same effects that Buchanan and Tullock’s contractarian theory of government describes in The Calculus of Consent. Pirates’ constitutional democracy is the “holy grail” of social contract theory. It demonstrates that the contractarian basis of constitutional democracy is more than a mere analytic device or hypothetical explanation of how such a government could emerge. In pirates’ case, Buchanan and Tullock’s social contract theory describes how constitutional democracy actually did emerge.
TL;DR: This article used large cross-country samples and several measures of happiness, income, and government spending to revisit the relation between government spending and the population's happiness and found that increased government spending does not lower happiness in broad cross country contexts.
Abstract: This study uses large cross-country samples and several measures of happiness, income, and government spending to revisit the relation between government spending and the population’s happiness. The main finding is that increased government spending does not lower happiness in broad cross-country contexts. Much caution is, therefore, urged in interpreting the negative association between government spending and happiness reported in some earlier studies and the suggested policy implications. Three additional points are noted. First, the weight of the evidence suggests a significant positive association between income and happiness. Second, estimates based on income and government-share data from Penn World Table and the new International Comparison Program show similar patterns. Third, the parameter for generalized trust seems fragile.
TL;DR: The political response to the financial crisis has been rapid and large as discussed by the authors, and differ- ences in the effectiveness of government policies show the advantage of standing institutions at crisis management relative to innovative legislation.
Abstract: U.S. policies to promote home ownership and other banking regulatory deci- sions helped to create a highly leveraged international market for mortgage-based securities. Declines in the price of housing, consequently, had major effects on the balance sheets and portfolios of financial institutions throughout the world. The political response to the financial crisis has been rapid and large. In general, differ- ences in the effectiveness of government policies show the advantage of standing institutions at crisis management relative to innovative legislation.
TL;DR: In this paper, the effects of the number of interest groups on the German lobby list and macroeconomic performance, gauged in terms of economic growth and inflation, were investigated. And they showed that interest group activity significantly leads to a decline in the growth rate and a rise in the inflation rate.
Abstract: Mancur Olson’s theory of the decline of nations is path-breaking in political economics. It has been tested cross-sectionally in numerous empirical studies. We survey the existing results briefly, with a special focus on studies using the number of lobbies as an exogenous variable. Using data from the period 1973–2006, we then present the field’s first time-series analysis of the effects of the number of interest groups on the German lobby list and macroeconomic performance, gauged in terms of economic growth and inflation. The number of interest groups (as a proxy for their influence) is shown to have an important impact on macro-variables: Interest group activity significantly leads to a decline in the growth rate and a rise in the inflation rate.
TL;DR: In this article, the authors verify the predictions of the theoretical literature on the relationship between political competition and economic performance, holding that, when the predominance of an ideological dimension creates a political rent, the party exploiting it selects lower quality politicians whose policy choices worsen economic performance.
Abstract: We verify the predictions of the theoretical literature on the relationship between political competition and economic performance, holding that, when the predominance of an ideological dimension creates a political rent, the party exploiting it selects lower quality politicians whose policy choices worsen economic performance. We examine the sample of 15 Italian Regions from 1980 to 2002 that exploits the institutional reforms of 1995 as an exogenous shock to pre-existing rents. We find evidence that higher political competition improves economic performance, through the choice of more efficiency-oriented policies.
TL;DR: In this article, the authors consider a situation in which two groups contest group-specific public goods and show that the level of free-riding depends on the return of the investment.
Abstract: We consider a situation in which two groups contest group-specific public goods. Each member of the group may have a different valuation of the prize. Our model can be interpreted as the contestants’ cost of lobbying efforts being non-linear, or the returns to their efforts being decreasing. We show that the level of free-riding depends on the return of the investment. We consider the situation under which one group initiates a contest to which different individuals and/or groups can be added. The question we pose is what is the optimal structure of additional groups?
TL;DR: In this paper, the authors give a theoretical explanation for the increase in campaign spending and party polarization in U.S. politics, and assume that the effectiveness of persuasive advertising and of costly valence campaigning in general positively depends on the share of nonpartisan voters.
Abstract: This work gives a theoretical explanation for the increase in campaign spending and party polarization in U.S. politics. I assume that the effectiveness of persuasive advertising, and of costly valence campaigning in general, positively depends on the share of nonpartisan voters. A decline in the number of partisan voters in a constituency results in greater campaign spending by the candidates. If the voters are risk-averse, the candidates who maximize their expected office rents minus the cost of campaigning will choose divergent policy platforms strategically in order to reduce the costs of subsequent campaign spending. The degree of policy divergence positively depends on the share of nonpartisan voters for a broad class of voter disutility and candidate cost of valence functions.
TL;DR: In this article, the authors present evidence on the impact of labor regulations on income inequality using a recently published database on labor institutions and outcomes as well as different panel data analysis techniques for a large sample of countries for 1970-2000.
Abstract: This paper presents evidence on the impact of labor regulations on income inequality using a recently published database on labor institutions and outcomes as well as different panel data analysis techniques for a large sample of countries for 1970–2000. When applying our preferred technique we find that both de jure and de facto regulations improve the distribution of income although the former appear to be non-robustly associated with improving income inequality. This result partly reflects the fact that regulations are endogenous and, more interestingly, that different regulation yield distinct effects.