Quotes I like.

Corruption:

This is like the racehorses can be put in charge of building the racetracks. (The White Man's Burden)

Well-executed policies that are 30 degrees off are much more effective than poorly-executed that spot on. (Summers 2004)

Note on “New political economy”

Origianl paper see: http://econ.lse.ac.uk/staff/tbesley/papers/keyneslecturetext.pdf

Note on “New political economy” by Tim Besley

In the mid 1980s, a stream of literatures was generated by policy economies. Using the notion of social welfare function, the approach captured the efficiency-equity trade-offs in a rigorous way. The focus on optimal policies with little attention paid to institution design and policy implementation.

Two consensuses were achieved in 1990s after the experiment of planned economies versus mixed economies. First, the role of market is widely accepted as an appropriate system for the production of private goods. Second, the policy making is favoured under a representative democratic regime.

However, the organization of collective good provision, such as health, education, and elderly support, were left out. The regulatory and legal systems were also ignored, ex. difference in the electoral systems, the structure of checks and balances; and the scope for direct democracy.

Along with the following issues:

-Problems of rent-seeking and corruption

-Some policies where success is only learned over long time horizon and government have difficulty committing to a long-term strategy may fail due to the existence of periodic election in representative democracies.

-issues that whether the state actions can benefit the needy groups: decentralization in the developing world where the aim is to improve the access to public resources among traditionally disadvantaged group

New political economy responds to these challenges by finding a way of thinking about how policy design is affected by choice between institutions.

Public choice theory: (The Virginia School)

- Implication of rational self-interest for political interaction (but marginalize the possibility of curbing their self interest in the pursuit of public service)

- Importance of constitutions as constraints on self-interest

o Procedural constitution whereby the rules for political engagement are determined.

o Fiscal constitution which puts direct constraints on policy choices.

- In the normative framework, comparing to the conventional framework of utilitarian, public choice theory has the idea that the legitimate domain of the state is related to what freely contracting individuals would be willing to agree to, but only that.

- There is no guarantee that a system of representative government based on majority rule would be immune to the political failure--- the allocation of resources in democratic process which does not meet certain tests.

The Chicago School associated with reduced form models of the political process where policies balance political support from those for and against the policy.

New political economy is an outgrowth based on the public choice theory.

The Downsian Model

Politics would converge to the preferences of the median voters if all they care is about winning. (Importance of preference restrictions (single-peakedness) to the prediction)

Problems with Downsian model:

1. Condocet winner: the majority rule could lead to cycles where alternative A could be beaten by B which could be beaten by c, while the latter is beaten by A.

2. Strong assumption: citizens care about policies while politicians are infinitely pliable- adopting any position to get elected. However, we need to consider whether the political pledges of politician are credible after election.

3. Not useful in examining the institutional difference. If politics is about seeking out the median preferences among the electorates, there would be little scope for institutional structure in shaping preference aggregation. However, it is not true in practice.

New Political Economy:

- Theoretical eclecticism:

o Part of the difficulty in the Downsian model is the fact that there is little institutional restriction on policy proposals. By adding more structure, the degree of freedom open to politic actors is diminishing and it may be easier to understand policy formation.

o Restrictions improve the odds of developing a model that predicts equilibrium in a particular policy context, providing a basis for empirical analysis.

o Probabilistic voting: it recognizes that there are random shocks to voters’ intentions which make the mapping from policy choices in political outcome very different for policy maker to predict. This approach often assumes that there are some fixed and some pliable with competition taking place on the latter.

o Politician: in a representative democracy, it is politicians who are elected and are charged with making policy. Some formalized models suppose that citizens elect politician who then implement their preferred outcomes. An implication of these models is that the candidate centred view of political competition is that the identity of candidates matter to policy outcomes.

o Models of extra-electoral policy making: Grossman and Helpman (1994) who formulated the problem of lobbying using an approach in which policy favours are auctioned to the highest bidder. Policy outcomes then reflect the willingness to pay of organized lobbies.

- Theory meets data:

o Three main sources of data:

§ Cross-country variation: exploiting the many differences in institutions that we see between national governments. The downside is that such institutions tend to be fixed over time and there are many sources of heterogeneity across countries which it is difficult to control for in a convincing manner.

§ Variation within countries: where there are differences in politics across sub-jurisdictions.

§ There is scope for increasing collection of bespoke data sets to examine specific policy issues.

- Comparative institutional analysis:

o In which proceeds by describing an institution in terms of the way it structures interactions in the political sphere or between economic political actors.

o Complexity and subtlety could be brought in to capture the ways in which institutions work; e.g. the possibility of multi equilibria which implies that there is no unique prediction associated with a particular institutional arrangement. Moreover, norms or conventions may also have force over and above purely institutional rules.

- Information:

o Information is important in thinking about the role of electoral accountability.

o Formal VS. Real accountability:

§ A politician is formally accountable if there is some institutional structure that allows the possibility of some action to be taken against him or her in the event that he/she does a poor job.

§ Real accountability requires that those who holding politicians to account have sufficient information to make the system work.

§ Principal agent problems (moral hazard and adverse selection) can be applied to analyse the issue when there is a conflict of interest between the governors and governed. In the event of a conflict of interest, voters need to find ways of exercising control over politicians and of selecting those with desirable characteristics. The more information that voters have, the more likely it is that they can do this job effectively.

o When information is dispersed and imperfect then elections serve a role in aggregating information. To work effectively, this requires that the informed voters play a dominant role in elections. As long as this is the case, one might be less concerned about declining turnout.

§ Fedderson and Pesendorfer (1996) look at how elections work when some voters are rational but uninformed and they show that it is optimal for them to abstain. They draw analogy between auction and voting, where the decisive voter suffers something akin to winner’s curse in an auction.

o In this informational perspective on politics, the study of information providers such as media and civil society was drawn attention to improve politics.

- Dynamics:

o Public resource allocation has booth short and long run effects on the economy. A key aspect of democratic political life is that governments are typically short-lived while the consequences of many policies are not.

o A variety issues have been studied in models that emphasises this feature of political life. A key example is the incentive to incur public debt as a strategic measure to constrain future governments.

- Specificity: three examples

o Majoritarian VS. Proportional Electoral System

§ One theoretical difference between a majoritarian and proportional system concerns the incentive to target particular groups of voters.

· Majoritarian systems encourage targeting on swing districts.

· Proportional system encourages broader targeting.

§ Proportional representation tends to be correlated with larger government (measured in either expenditure or revenue terms).

o Political reservation: If candidate of certain types cannot or will not run, and reservation changes this, then we would expect to see a shift in policy outcomes in favour of the reserved groups. That said, if political power is really in the hands of traditional elites whose influence extends beyond the electoral system, then we would not expect to find any effect. Some empirical works show that focusing on who is elected to office is important and a narrow focus on political competition as purely competition between policy is likely misleading.

o Term limits: Relationships between politicians and voters are not contractual but close to fiduciary relationship.

§ Incentive effect VS. selection effect

· Incentive effect: politicians face a short-term horizon and are less obliged to please the voters. The effect on the quality of policies is moot.

· Selection effect: politicians have to be elected to a lame duck term and rational voters should anticipate this when deciding whether to elect them. This effect may lead to the elected candidate better than average.

§ The effect of a term limit from the difference between the first and the second term in office for incumbents who face term limits. What was found is that state taxes and spending are higher in the second term when term limits bind in states that have them. Such limits tend to induce a fiscal cycle with states having lower taxes and spending in the first gubernatorial term compares to the second.

§ Another finds that the term effects varies according to the margin of victory in the gubernatorial race – with term limit effects being attenuated when the margin of victory is larger.