SUB Hamburg A/570244 Political Power and Economic Policy Theory, Analysis, and Empirical Applications GORDON C. RAUSSER University of California, Berkeley JOHAN SWINNEN Catholic University of Leuven PINHAS ZUSMAN CAMBRIDGE UNIVERSITY PRESS
Contents List of Figures List of Tables Preface page xi xiv xv PART 1 POLITICAL POWER AND ECONOMIC ANALYSIS 1 Public Policy: The Lens of Political Economy 3 1.1 Introduction 3 1.2 The Lens of Political Economy 6 1.3 Literature Review 10 1.4 Structure and Major Themes of the Book 21 2 The Nash Solution to the Bargaining Problem 30 2.1 Introduction 30 2.2 The Nash Solution to the Bargaining Problem with Fixed Disagreement Payoffs 32 2.3 The Pivotal Axiom and Alternative Approaches 34 2.4 Conclusion 49 3 The Harsanyi Solution to the Bargaining Problem 50 3.1 Introduction 50 3.2 Endogenous Disagreement Payoffs 51 3.3 The n-person Bargaining Game 54 3.4 Reciprocal Power Relations 58 3.5 Conclusion 63 4 Political-Economic Analysis 64 4.1 Introduction 64 4.2 Organization of the Political System 65 4.3 The Political-Economic Structure 67
vi Contents 4.4 Conflict Resolution and the Equilibrium Relations 73 4.5 Conclusion 87 5 Normative Political-Economic Analysis 95 5.1 Introduction 95 5.2 Evaluation Criteria of Social Benefits and Costs 96 5.3 Political-Economic Efficiency Conditions 104 5.4 Evaluation of Structural Policies 108 5.5 Conclusion 110 6 Dynamic Political-Economic Analysis 113 6.1 Introduction 113 6.2 The General Structure of a Political Economy as a Dynamic System 114 6.3 The Dynamics of Political Power 116 6.4 Political "Traps" and Policy Reforms 120 6.5 Conclusion 122 PART 2 IDEOLOGY, PRESCRIPTION, AND POLITICAL POWER COEFFICIENTS 7 Political Power, Ideology, and Political Organizational Structures 125 7.1 Introduction 125 7.2 The Nature of Ideology 126 7.3 Ideological Commitment and Policy Formation 128 7.4 Implications for Empirical Analysis 130 7.5 The Organization of Interest Groups and Policy Formation 131 7.6 Interest Groups and the Organization for Collective Action 132 7.7 Political Entrepreneurs, Internal Group Organization, and Within-Group Equilibrium 135 7.8 Group Political Preferences and Political Power 138 7.9 Implications of the Organization of Interest Groups 140 7.10 Government Structure 141 7.11 Political Parties 144 7.12 Conclusion 145 8 Political Power, Influence, and Lobbying 147 8.1 Introduction 147 8.2 General Formulation of the Framework 148 8.3 Costs of Organization 150 8.4 Lobbying as a Common-Agency Problem 155
Contents vii 8.5 Lobbying under Asymmetric Information 164 8.6 Expanding the Framework: PERTs and PESTs 172 8.7 Conclusion - 175 9 Constitutional Prescription and Political Power Coefficients 177 9.1 Introduction 177 9.2 Constitutional Rules and Policy-Making Centers 180 9.3 Evaluation of Alternative Constitutional Rules 183 9.4 Constitutional Space Prescription 186 9.5 Conclusion 189 PART 3 ANALYSIS OF SPECIFIC STRUCTURES 10 The Political Economy of Commodity Market Intervention 193 10.1 Introduction 193 10.2 The Political Structure 195 10.3 Policy Formation: The Political-Economic Equilibrium 198 10.4 Welfare Implications 207 10.5 Conclusion 208 11 The Political Economy of Public Research and Development 209 11.1 Introduction 209 11.2 Market Relations and the Demand for Public R&D 211 11.3 Management and Organization of Public R&D 216 11.4 The Political Structure 217 11.5 The Political-Economic Equilibrium Policy 220 11.6 Efficiency of the Political-Economic Equilibrium Public Research Policy 221 11.7 Conclusion 222 12 Political-Economic Analysis of Redistributive Policies and Public Good Investments 224 12.1 Introduction 224 12.2 The Government's Policy Decisions 226 12.3 Price Subsidies and Research Expenditures: Are They Complements or Substitutes? 232 12.4 Conclusion 236 13 Interest Groups, Coalition Breaking, and Productive Policies 239 13.1 Introduction 239 13.2 Interest Group Structure 241 13.3 Targeting Payments under Heterogeneous Adoption 243
viii Contents 13.4 Non-coincidental Consumer and Taxpayer Interests and Output Constraints 248 13.5 Other Transfer Schemes 251 13.6 Conclusion 252 Appendix to Chapter 13 254 14 Policy Reform and Compensation 258 14.1 Introduction 258 14.2 The Model 260 14.3 The Political-Economic Equilibrium 268 14.4 Compensation, Ownership, and Mobility 275 14.5 Conclusions 278 14.6 Appendix to Chapter 14 279 15 Political-Economic Analysis of Land Reform 282 15.1 Introduction 282 15.2 The Economic Structure 283 15.3 The Political Structure 287 15.4 The Political-Economic Equilibrium 290 15.5 Evaluating the Economic Efficiency of Land Reform 296 15.6 Conclusion 304 16 Political-Economic Analysis of Water Resource Systems 306 16.1 Introduction 306 16.2 The Structure of a Water Resource Political Economy 307 16.3 The Physical Water Resource Sub-system 308 16.4 The Economic Structure 310 16.5 The Political Power Structure 315 16.6 The Hydrological-Political-Economic Equilibrium 318 16.7 Conjunctive Water Use with Short Water Supply 321 16.8 Conclusion 325 16.A The Effects of Districts' Narrow Rationality on Water Prices and the Stationary Groundwater Level (Ample Water Supply at the Northern Source) 326 16.B The Effects of Districts' Narrow Rationality on Groundwater Level When Groundwater Pumping Is Rationed (Short Water Supply) 327 17 The Political Economy Lens on Quality and Public Standard Regulations 329 17.1 Introduction 329 17.2 Interest Group Configuration 330 17.3 The Political Economy of Public Standards 333
Contents ix 17.4 Trade and Economic Development 335 17.5 A Dynamic and Strategic Political Economy Theory of Quality Regulation 338 17.6 Conclusion 346 18 Political-Economic Analysis in Transition Economies 348 18.1 Introduction 348 18.2 The Model 354 18.3 Restructuring the Inter-temporal Tradeoff 363 18.4 Open and Closed Economies 368 18.5 Vicious and Virtuous Circles 373 18.6 Structural Conditions, Communist Organization, and the "p - 5-Temporal Tradeoff" 375 18.7 Conclusion 377 18.A The Monotonicity Property 378 19 The Power of Bureaucracies: The European Commission and EU Policy Reforms 380 19.1 Introduction 380 19.2 The Decision-Making Process 382 19.3 Status Quo Bias: The Importance of External Changes for Policy Reform 387 19.4 The Power of the Commission 388 19.5 Conclusion 389 PART 4 EMPIRICAL APPLICATIONS OF POLITICAL POWER ESTIMATION 20 Political Econometrics 393 20.1 Introduction 393 20.2 Formulation 395 20.3 Estimation and Testing 397 20.4 Policy Instruments and the Negotiation Network 406 20.5 Conclusion 410 21 The Political Econometrics of the Israeli Dairy Industry 411 21.1 Introduction 411 21.2 The Israeli Dairy Program 411 21.3 The Economic Structure of the Israeli Dairy Market 412 21.4 The Political Structure of the Israeli Dairy Industry 414 21.5 The Political-Economic Equilibrium in the Israeli Dairy Market 416
x Contents 21.6 The Internal Structure of the Political Conflict 419 21.7 Conclusion 421 22 Flexible Policy Instruments Given a Political-Power Distribution 424 22.1 Introduction 424 22.2 Specification and Estimation of the Constraint Structure 426 22.3 Estimation of the Policy Governance Function 427 22.4 Estimation of the Automatic Adjustment Rules 432 22.5 Validation and Assessment of the Automatic Adjustment Rules 438 22.6 Toward a Simpler Set of Automatic Adjustment Rules 440 22.7 Conclusion 442 22.A Estimated Constraint Structure Equations 443 23 Estimating Statistical Properties of Power Weight Parameters and Their Temporal Shifts 451 23.1 Introduction 451 23.2 Empirical Formulation 451 23.3 Bootstrapped Standard Errors for Power Weight Parameters 453 23.4 An Empirical Application to Japanese Policy 457 23.5 Conclusion 465 24 The Role of Institutions in the Joint Determination of PERTs and PESTs 467 24.1 Introduction 467 24.2 PERTs and PESTs in Developing and Developed Countries 470 24.3.The Impact of Development: A Conceptual Model 475 24.4 The Impact of Institutions 478 24.5 Econometric Analysis 480 24.6 Regression Results 483 24.7 Conclusions and Implications 487 References 489 Index 515