Political Economics Dr. Marc Gronwald Dr. Silke Uebelmesser Ludwig-Maximilians University Munich Summer term 2010
Motivation Total government spending as fraction of GDP in the late 1990s: Sweden: 60%; Continental Europe: 50%; Japan, Switzerland, United States: 35% Spending on the unemployed as fraction of total public spending: ranges from 2% to 17% within the EU-15 Unemployment insurance replacement rate: ranges from 20% to 90% in the EU-15 Public debt as fraction of GDP: Norway: 40%; Italy and Belgium: 120% Inflation: UK: 8%; Germany: 3%
Motivation Growth of government took off in many industrial countries in the mid 1930s as well as in the late 1960s Slowdown after World War II and in the late 1980s
Motivation Economic policy varies greatly across time and place But there are also common patterns
Motivation Why is policy the way it is? What is policy ought to be?
Keywords Social Choice / Voting rules / Preferences Median voter / Condorcet winner Electoral competition / Motivation of politicians Rational voters / Probabilistic voting
Table of contents 1 Introduction(DR) 2 Preferences and voting (DR) 3 Voter turnout (DR) 4 Electoral competition (SÜ) 5 Agency problems (SÜ) 6 General-interest politics (SÜ) 7 Special-interest politics (DR) 8 Applications
Textbook literature Grossman, G.M. and E. Helpman (2001), Special Interest Politics, Cambridge, Mass: MIT Press. Mueller, D. (2003), Public Choice III, Cambridge University Press, Cambridge. Persson, T. and G. Tabellini (2000), Political Economics Explaining Economic Policy, MIT Press, Cambridge.
2. Preferences and voting
2.1 Voting rules Consider 7 voters and 4 alternative policies (A, B, C, D). The voters preferences over the alternatives are defined in the following Table: 1 2 3 4 5 6 7 1st A A A B B C C. B B B C C D D. C C C A D A A 4th D D D D A B B Table 1: Preferences I How should we aggregate these individual preferences into social preferences?
2.1 Voting rules At least 4 different voting rules can be distinguished: Majority/Plurality rule: All alternatives are voted on simultaneously. The alternative which receives the maximum number of votes is selected in the political process. A:3; B:2; C:2 A wins
2.1 Voting rules Pairwise voting without agenda setting (open agenda): Multiple voting rounds - in each round voting takes place over two alternatives (pairwise voting). The winning alternative is opposed against another option. The winning option in this round is opposed against another untested option and so on. The alternative which beats all other alternatives in a pairwise vote is the winner (Condorcet winner). A vs B 5:2; A vs C 3:4; C vs D 7:0; C vs B 2:5; B vs D 5:2; B vs A 2:5 No Condorcet winner exists
2.1 Voting rules Pairwise voting with agenda setting (closed agenda): The agenda setter determines the order of pairwise voting. The alternative which survives the last round is the winner. For instance, A vs B 5:2; A vs C 3:4; C vs D 7:0; C wins A vs C 3:4; C vs B 2: 5; B vs D 5:2; B wins D vs C 0:7; C vs B 2: 5; B vs A 2:5; A wins
2.1 Voting rules Borda rule: All alternatives are voted on simultaneously. Each voter receives k+(k-1)+(k-2)+..+(k-k) points which he/she can allocate to the alternatives. The most preferred alternative gets k points, the next most preferred one k-1 points... The winning alternative is the one with the maximum number of points. For k=1 the Borda rule and the Majority/Plurality rule coincide. k=1 A: 3; B: 2; C: 2 A wins k=2 A: 6; B: 7; C: 6; D: 2 B wins k=3 A: 12; B: 12; C: 13; D: 5 C wins
2.1 Voting rules Punchline: Even in this subset of possible political mechanisms the choice of the aggregation rule is decisive for the political outcome: The will of society is highly sensitive to the specifics of the political process and is thereby ambiguous.
2.1 Voting rules What are desirable voting rules? If voting rules lead to different outcomes how should society decide among them? Frequently mentioned desirable properties of voting rules comprise: Anonymity: This is one of the fundamental principles of democracy. The political outcome should not depend on the identity of the voters - only individual preferences should matter, i.e. a rich voter or a member e.g. of the political elite/aristocracy matters as much as any other voter. This principle rules out dictatorships.
2.1 Voting rules Neutrality: The voting rule should not introduce a bias in favor of one option. All options should be treated alike. Decisiveness: The voting rule must pick a winner. Positive responsiveness: Increasing the vote for the winning option should not lead to declare another option a winner.
2.1 Voting rules With only two alternatives we have a powerful result: Theorem (May s Theorem) With only two options the majority rule is the only voting rule which satisfies the requirements of anonymity, neutrality, decisiveness and positive responsiveness. Proof: See Mueller, 2003, p. 135. What happens if there are more than two alternatives?
2.1 Voting rules In the remaining part of this chapter, we study preference aggregation by pure majority rule which we define by means of the following assumptions: A1 Direct democracy. Voters do not elect political agents (as in a representative democracy) but rather decide on policy issues themselves. A2 Sincere voting. Every citizen votes for the alternative that delivers the highest level of utility according to his/her preferences. In other words, there is no strategic voting. A3 Open agenda. Voters decide among pairs of policy options such that the winner of one round is posed against a further alternative in the next round. The set of policies among one has to decide includes all feasible options.
2.2 Preferences: One-dimensional voting Example 2.1: Consider pairwise voting without an agenda setter. The preferences of three voters over three alternatives are as described in Table 2: 1 2 3 1st A B C. B C A 3rd C A B Table 2: Preferences II A vs. B: 2:1; A vs. C: 1:2; C vs. B: 1:2; B vs A: 1:2 and so on. Voting is cyclical.
2.2 Preferences: One-dimensional voting Fig 2.1 1 2 3 A B C Figure 1: Preferences II
2.2 Preferences: One-dimensional voting Voting cycles are closely linked to the concept of transitivity: Definition (Transitivity) If A is weakly preferred to B and B is weakly preferred to C, then A must be weakly preferred to C, i.e. if A B and B C, then A C. Discuss transitivity in example 2.1. We will derive in the following sections sufficient conditions for the existence of a well-defined majority winner in elections. In particular, we will introduce the single-peakedness and the single-crossing condition, respectively.
Median voter theorem with single-peakedness The concept of transitivity (and thus the existence of voting cycles) is related to the notion of single-peakedness. Definition (Single-peakedness) Let qi denote voter i s most preferred alternative. Then, if q q qi or q q qi, it follows that u i(q ) u i (q ). Are preferences in example 2.1 and the introductory example single-peaked?
Median voter theorem with single-peakedness Fig. 2.2 1,2,3 6,7 4 5 A B C D Figure 2: Preferences I
Median voter theorem with single-peakedness A condition for voting cycles not to arise is that individual preferences are single-peaked. More explicitly, Theorem (Median voter theorem (single-peakedness version)) If there is an odd number of voters, individual preferences are singled-peaked and the policy space is one-dimensional, then the median of the distribution of the voters most preferred alternatives wins in a pairwise vote. This policy alternative is referred to as the Condorcet winner. The voter whose most preferred alternative is the median of the distribution is called the median voter.