Econ 554: Political Economy, Institutions and Business: Solution to Final Exam

Transcription

1 Econ 554: Political Economy, Institutions and Business: Solution to Final Exam April 22, 2015 Question 1 (Persson and Tabellini) a) A winning candidate with income y i will implement a policy solving: { max c 1/2 τ i + g 1/2} s.t. c i = (1 τ)y i g = τȳ where ȳ = y i = 2. By replacing the constraints in the maximand we obtain the optimal tax policy for i: τ i = ȳ ȳ + y i. b) The median and mean incomes are both 1 in this polity. The implied preferred tax rate for the median voter is then 2/3. For the citizen with median income to be a candidate her benefit from running must exceed the cost of running or u m (τ m) u m (τ 0 ) > ε Replacing the appropriate values the expression becomes: (1 2/3) 1/2 + (4/3) 1/2 (1 τ 0 ) 1/2 (2τ 0 ) 1/2 > 2 1/2 (3/4) 1/2 (1/4) 1/2 or 1/3 > (1 τ 0 ) 1/2 + (2τ 0 ) 1/2 Thanks to Thomas Fujiwara for help in preparing the solution set. 1

2 If this holds the median voter will have an incentive to run and this will also imply that, since preferences of voters are single-peaked, she will also win the election if she runs. c) There can be multiple one-candidate equilibria. Suppose a candidate j runs and possibly sets τ j. If the candidate is sufficiently close to the median, then all other candidates that would beat him are so close to his own position that they do not find it worthwhile to run. For instance, consider the median voter, who can beat j but decides not to run because u m (τ m) u m (τ j ) < ε. Question 2: Lobbying The conventional idea of the revolving door is that public officials (elected or appointed) may go to work for private interests after their public career is over. The concern is that if public officials are dealing with potential future employers in their jobs, this may distort their decisions away from what is in the public interest and towards those private interests. There are three things we can learn from this graph related to the idea of the revolving door. First, this does seem to be a concern. On two occasions, Mr. Busching leaves a public sector job for the private sector, almost certainly for higher pay. He would not have been able to get those lobbying jobs without maintaining good relations with the lobbyists. Second, the revolving door goes both ways, something that is not always appreciated; Mr. Busching leaves a lobbying job for a job with Congressman Aderholt, probably coincident with Mr. Aderholt s elevation to the Appropriations Committee. This implies that while Mr. Busching was lobbying (at least for the first stint) he was probably also looking out for Mr. Aderholt s interests. This is partly because he wanted him to be successful in order to increase the value of the relationship, but also because holding Mr. Aderholt s importance constant, he was a potential future source of employment. Third, the revolving door is not just between Congress and its employees and lobbyists. Mr. Busching works for about 5 years in the Department of Transportation, indicating the revolving door extends to the administrative side of government as well. Together, these facts suggest that the revolving door is not simply a question of lobbyists and corporations exploiting the weak position of politicians, but is a complex symbiotic relationship between the two groups that extends to many parts of government. 2

3 Question 3 (Persson and Tabellini) a) In order to have an equilibrium in which the public good is provided at level g we must check that the budget agenda setter a g cares enough about reelection so that he will not appropriate all tax revenues (τ = g /3). The condition is: γ ( 3 g /3 r 0) γr + R (1) Assume that R is large enough so that this inequality is satisfied even with zero rents, so that g r 0 R/γ 0. Now set reservation utilities for all districts and for the national election of the president at k = y g /3 + H(g ). Now the tax czar a τ will want to set τ = g /3 since he knows all revenues will be used to finance the public good. Notice that any excess revenue above that will end up in a g s pockets in the form of rents. The inclusion of the president s veto is redundant here, as we already have a coalition supporting a g s proposal. Moreover the president will receive zero rents if R is large enough, as we have assumed in the text. b) In a) we have shown one equilibrium with g, the equilibrium most favorable to voters in districts j a g. However, any equilibrium supported by the following cutoffs can be sustained: k ag = y (g /3 + x) + H(g ) + 3x = y g /3 + H(g ) + 2x k j = y (g /3 + x) + H(g ) for j a g τ = g /3 + x with x > 0 f ag = 3x, f j = 0 The reason why these are equilibria is that if voters in the district represented by a g insist on getting this cutoff, the other groups will need to give in if they value to have the public good produced in equilibrium at all. If the transfer level f ag is not met, the politician a g knows is going to be kicked out of office and will steal everything. Group a g enjoys extra bargaining power, as it controls the decision of the most important player in the coalition. Notice that x has to be bounded from above as well as being nonnegative here, since it weakens condition (1). c) The reason why adding the president does not change the results is that the vote in congress on the policy already imposes to take into account 3

4 for the legislators a coalition of two groups of voters, which is also the majority the president needs for reelection. Decoupling the two majorities, say, by requiring different electoral majorities (supermajority for the president), will give bite to the veto. Question 4 The first thing to notice is that the ranking is based on form of government and electoral rules interacting to generate power concentration: parliamentarism is present in both the lowest and highest ranked regimes. How can we rationalize this? By noticing that parliamentarism, by making the executive the expression of the legislative, generates very strong executives when there is a majority in the legislature, but very weak ones when there is no majority (coalition governments). If we have an electoral rule that promotes party fragmentation (such as Proportional Representation), this will increase the odds of coalition governments or minority governments, weakening the executive. If instead we have an electoral rules that promotes a two party system (such as FPTP), this will increase the odds of one-party governments, reinforcing the executive. Under presidentialism the separation of powers is such that a president in a divided government is not powerless (the president can still veto legislative action, for example) and a president with majority in the legislature is not too powerful (the budget as to be passed by Congress). Now, we may agree or disagree with the ranking on the fact that presidentialismmajority concentrates less power than presidentialism-proportional. On the one hand, it is the case that in presidentialism-proportional regimes the president usually faces a much more divided legislative branch and usually he or she is able to pit the different parties against each other. On the other hand, given the examples (U.S. for the former and Latin American countries for the latter), the ranking seems to be capturing also features of these countries constitutional design that are not particularly related to form of government nor to the electoral rule per se. For example, several important policies that in the U.S. are in the hands of congressional committees would be under direct control of the executive in Latin American countries, and the midterm elections that generate divided governments in the U.S. are nor present in Latin America. These issues are not clear consequences of electoral rules. 4

5 Question 5: Democracy and Autocracy a) In the model, the poor may revolt and kill the elite if they are overtaxed by them. When the threat of revolution rises, the elite cannot just promise to not overtax the poor in future periods, since this is a time inconsistent plan to which they cannot credibly commit to. A way to solve this commitment problem is to extend the franchise (and hence the power to decide taxation levels) to the poor. Acemoglu and Robinson provide some historical evidence for different European countries in their 2000 QJE article and 2006 book. The more detailed one is for 19th Century Britain, where they show a combination of revolt dates, statements by politicians of the time that is particularly convincing. b) If the elite is not threatened by the poor, why would it extend the franchise? This is hard to answer if we think of the elite as one monolithic agent. If we think that the elite is made of different subgroups in conflict, it is easier to come up with different stories. The simplest one is that a particular group of the elite has political gains from extending the franchise to voters that will vote for them. For example, it was a Democratic party government that enacted the Voting Rights Act of 1965 that enfranchised African-Americans, a group strongly supports the Democrats until today (notice that cause and consequence is not so clear here). One can come up with more general and interesting stories. Lizzeri and Persico (2004) paper at the QJE, for example, builds a model where political parties under-provide public goods to a small elite by focusing their spending on transfers that pit voters against each other. Increasing the number of voters in this model makes public good provision a more attractive strategy for political parties, which makes franchise extensions desirable for the elite. 5