political support and tax reforms with an application to italy in 2001 the italian government introduced a personal income tax reform to be implemented in successive phases in 2004 taxes were reduced to all income levels with higher gains for low income and high income individuals than for middle income ones a large debate arised this paper explores the political economy reasons under this tax reform mainly the attempt of the government to attract the uncertain voters swing voters a probabilistic voting model is introduced to capture the importance of swing voters the model predicts that the average personal income tax rate tends to be lower for groups of lower income higher preference for leisure and containing more politically mobile voters swing voters however data from italian polls show that while the tax reform was a good strategy to attract swing voters the specific design of the reform which favored high income and low income individuals but not the middle class was not the more appropriate strategy

expectations about voter choices a comment the only essential differences in the examples analyzed above are in the assumptions that are used to derive or directly specify the choice behavior that the candidates expect from any given voter conditional on his utility function when the central behavioral assumption from the traditional models was used the equilibrium was a median outcome a conclusion directly analogous to what happens in the corresponding unidimensional traditional voting models when the central behavioral assumptions from the probabilistic voting model developed in coughlin and nitzan 1981 were used the equilibrium was at the maximum of the expected log utility function a conclusion directly analogous to what happens in the model in coughlin and nitzan 1981 indeed it was only when the corresponding assumptions from ledyard 1984 were used i e the particular assumptions that ledyard used to derive the choice behavior that the candidates expect from any given voter conditional on his utility function that the conclusions were substantially different from the conclusions derived from earlier models this reflects the important role these assumptions play in making ledyard s conclusions about candidate strategies substantially different from earlier results in the literature on spatial models of elections

political competition and voter mobility the existing model of political competition is extended to allow voters to live in different regions and to migrate between regions in response to an inter regional transfer policy we then show that regions have a different weight in the expected vote function of political parties this gives parties an incentive to bias the transfer policy in favour of relatively high weight regions with potentially adverse efficiency and equity effects however we then show that parties always propose efficient and equitable regional transfers regardless of whether regions have different weights if there is some mobility of citizens across regions mobility constrains parties to act efficiently and equitably even though they face an incentive to act otherwise however when voters are immobile political competition leads to inequitable though efficient outcomes

electoral outcomes with probabilistic voting and nash social welfare maxima abstract this paper provides unexpected support to nash s view of how bargaining determines the social choice we first present a spatial model of electoral competition with probabilistic voting and a very close relation between voters preferences and their choice probabilities the outcome of the electoral competition game is then shown to be precisely the social alternative that maximizes a nash type social welfare function theorem 1 this electoral outcome is also interpreted as a unanimity likelihood maximum corollary 1 within our framework existence and uniqueness of such an outcome are guaranteed corollaries 2 and 3

self fulfilling currency crises the role of interest rates abstract we develop a stylized currency crises model with heterogeneous information among investors andendogenous determination of interest rates in a noisy rational expectations equilibrium our modelcaptures three key features of interest rates the opportunity cost of attacking the currency respondsto the investors behavior the domestic interest rate may influence the central bank s preferences fora fixed exchange rate and the domestic interest rate serves as a public signal which aggregatesprivate information about fundamentals we explore the payoff and informational channels throughwhich interest rates determine devaluation outcomes and examine the implications for equilibriumselection by global games methods our main conclusion is that multiplicity is not an artifact ofcommon knowledge in particular we show that multiplicity emerges robustly either when adevaluation is triggered by the cost of high domestic interest rates as in obstfeld 1996 or when adevaluation is triggered by the central bank s loss of foreign reserves as in obstfeld 1986 providedthat the domestic asset supply is sufficiently elastic in the interest rate and shocks to the domesticbond supply are sufficiently small christian helliwigdepartment of economicsuniversity of california los angelesbox 951477los angeles ca 90095 1477arijit mukherjiuniversity of minnesotaaleh tsyvinskidepartment of economicsharvard universitylittauer centercambridge ma 02138 3001

securing the base electoral competition under variable turnout i evaluate the securing the base strategy which prescribes that candidates position themselves away from the political center in order to maximize turnout among their supporters and reduce defections of their supporters to third party candidates my results support the notion that voters abstain due to indifference and imply that candidate positioning has a large effect on voter turnout and third party voting nonetheless my results indicate that the candidates can best compete by adopting centrist positions while a candidate can increase turnout among his supporters by moving away from the center many moderate voters will defect to his opponent

insider trading outside search and resource allocation why firms and society may disagree on insider trading restrictions we show that entrepreneurs may prefer to allow insider trading even when it is not socially optimal we examine a model in which an insider manager allocates resources on the basis of his private information and outside information conveyed through the secondary market price of the firm s shares if the manager is allowed to trade he will compete with informed outsiders reducing the equilibrium quality of outside information while the benefits to production of outside information are the same for society and entrepreneurs we show that the social and private costs are different thus entrepreneurs and society may disagree on the conditions under which insider trading restrictions should be imposed article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the relationship between energy demand and real gdp growth rate the role of price asymmetries and spatial externalities within 34 countries across the globe abstract the aim of this paper is to empirically explore the relationship between energy demand and real gross domestic product gdp growth and to investigate the role of regional externalities on per capita final energy consumption fec in 34 countries during the period from 2005 to 2013 the paper utilizes a dynamic panel generalized method of moments dpggm approach and spatial econometric techniques in order to analyse the effect of real gdp growth rate on fec through an error correction model ecm and to examine clustered patterns of energy consumption the results show that a the demand is elastic both in the industrial and the household services sectors b electricity and natural gas are demand substitutes c the relationship between real gdp growth rate and per capita energy consumption exhibits an inverted u shape for all the sample countries under scrutiny 34 countries eurozone and eu28 but not for all the employed sectors of the economy d price electricity and gas and gdp growth asymmetries are supported from the employed parametric tests and e distance does not affect per capita fec but economic neighbours have a strong positive effect

a negative replication of the relationship between energy consumption energy prices and economic growth time series evidence from asian developing countries energy economics 2000 abstract this paper replicates asafu adjaye 2000 which employs unit root and cointegration tests together with error correction models to investigate the relationships between energy consumption and income for four energy dependent asian developing countries using data from 1971 through 1995 this paper finds not only that the results cannot be replicated but that the results are not robust to alternative estimation procedures that include the simulation of finite sample critical values and the extension to panel unit root stationarity and cointegration tests which are necessary to improve upon the power properties of the short time series employed by asafu adjaye 2000 the results from the extension of the analysis to more modern time series techniques disprove the original paper s results with panel cointegration tests finding that the trivariate system income energy consumption and prices does not follow a long run relationship for india indonesia thailand and the philippines

multiparty spatial competition with probabilistic voting i develop a general model of multiparty competition in which parties model voters choices by means of probabilistic choice rules the model is specified in terms of an issue salience coefficient which varies with the importance voters attach to issues as opposed to unmeasured nonissue motivations i show that when the policy salience coefficient is sufficiently low then both vote maximizing and rank maximizing parties have a dominant strategy to adopt the most popular platform which maximizes voter utilities over the entire electorate this most popular platform therefore represents a convergent equilibrium when all parties are vote or rank maximizing numerical estimates suggest that this equilibrium result holds for degrees of issue voting which exceed the parameters behavioral researchers have estimated for various historical elections

asymmetric price movements and borrowing constraints a rational expectations equilibrium model of crises contagion and confusion this study proposes a rational expectations equilibrium model of crises and contagion in an economy with information asymmetry and borrowing constraints consistent with empirical observations the model finds 1 crises can be caused by small shocks to fundamentals 2 market return distributions are asymmetric and 3 correlations among asset returns tend to increase during crashes the model also predicts 1 crises and contagion are likely to occur after small shocks in the intermediate price region 2 the skewness of asset price distributions increases with information asymmetry and borrowing constraints and 3 crises can spread through investor borrowing constraints

unidimensional median voter results in probabilistic voting models abstract this paper studies the policy outcomes that can be expected to occur when candidates are uncertain about voter behavior its analysis begins with an example that illustrates how the comaner hinich effect i e the possibility of non median outcomes can occur under such circumstances this example is then modified in ways which restore a median outcome after this is done the method of restoration is generalized to obtain a unidimensional median voter result for probabilistic voting models

probabilistic voting and equilibrium an impossibility result the introduction of voters uncertainty alone is in no way sufficient to guarantee an equilibrium outcome of a voting process what is needed in addition is the assumption that the voting probabilities depend strictly convex respectively concave of the utility losses caused by the proposed policies of the different parties this assumption is however not compatible with an unrestricted policy space and it has to be rejected for theoretical as well as empirical reasons thus using models of probabilistic voting we still have to accept that cycles can arise and electoral outcomes are prone to manipulation via agenda setting

the political economy of naturalization this paper presents a political economy model in which self interested natives decide when citizenship and or voting rights should be granted to foreign born workers native voters know that immigrants hold different political preferences and would thus tend to postpone their enfranchisement as much as possible they also consider however that a more restrictive naturalization policy may reduce the gains from immigration we find that the optimal timing of naturalization depends on the quantity quality productivity and preferences of potential immigrants the political composition and the age structure of the native population as well as the sensitivity of migration choices to the citizenship issue

a model of political equilibrium in a representative democracy abstract this paper studies political equilibrium in a two party representative democracy in which the political parties are policy motivated and voters trade off their policy preferences against their party identity it is shown that the parties will in general adopt differing policy positions in equilibrium and that under certain qualifications the winning policy will lie between the more popular party s preferred policy and a certain utilitarian optimum the winning policy will be closer to this utilitarian optimum the less biased the electorate is in terms of party identification

political deadlocks and distributional information the value of the veil contractarian normative theory relies on the veil of ignorance construct to generate the political consensus required for its theories of justice by eliminating distributional information the veil is presumed to facilite consensus building by reducing conflict over the distributional effects of proposed constitutional rules or institutions this paper explores the extent to which excessive distributional information might also impede the ordinary day to day decision making of democratic institutions our analysis suggests that distributive information makes political deadlocks under majority rule more likely statistical evidence suggests that the efficacy of the u s congress has been reduced by the dramatic increase in distributional information made available to it over the past twenty five years

the size and scope of government comparative politics with rational politicians we try to demonstrate how economists may engage in research on comparative politics relating the size and composition of government spending to the political system a downsian model of electoral competition and forward looking voting indicates that majoritarian as opposed to proportional elections increase competition between parties by focusing it into some key marginal districts this leads to less public goods less rents for politicians more redistribution and larger government a model of legislative bargaining and backward looking voting indicates that presidential as opposed to parliamentary regimes increase competition between both politicians and voters this leads to less public goods less rents for politicians less redistribution and smaller government we confront these predictions with cross country data from around 1990 controlling for economic and social determinants of government spending we nd strong and robust support for the prediction that the size of government is smaller under presidential regimes and weaker support for the prediction that majoritarian elections are associated with less public goods

mortgage terminations heterogeneity and the exercise of mortgage options as applied to the behavior of homeowners with mortgages option theoiy predicts that mortgage prepayment or default will be exercised if the call or put option is in the money by some specific amount our analysis tests the extent to which the option approach can explain default and prepayment behavior evaluates the practical importance of modeling both options simultaneouisly and models the unobserved heterogeneity of borrowers in the home mortgage market the paper presents a uinified model of the competing risks of mortgage termination by prepayment and default considering the two hazards as dependent competing risks that are estimated jointly it also accounts for the unobserved heterogeneity among borrowers and estimates the unobserved heterogeneity simultaneously with the parameters and baseline hazards associated with prepayment and default functions our results show that the option model in its most straightfolward version does a good job of explaininig default and prepayment but it is not enouigh by itself the simultaneity of the options is very important empirically in explaining behavior the results also show that there exists significant heterogeneity among mortgage borrowers ignoring this heterogeneity results in serious errors in estimating the prepayment behavior of homeowners

balanced budget redistribution as the outcome of political competition this paper models balanced budget redistribution between socio economic groups as the outcome of electoral competition between two political parties equilibrium is unique in the present model and a sufficient condition for existence is given requiring that there be enough stochastic heterogeneity with respect to party preferences in the electorate the validity of hotelling s principle of minimum differentiation and of director s law are examined under alternative hypotheses concerning administrative costs of redistributions and voter s possibilities both of abstaining from voting and of becoming campaign activists for one of the parties the policy strategy of expected plurality maximization is contrasted with the strategy of maximizing the probability of gaining a plurality incomes are fixed and known so lump sum taxation is feasible however constraints on tax transfer differentiation between individuals are permitted in the analysis

the median and the competitive equilibrium in one dimension two alternative models of legislative outcomes are the minimum winning coalition and the competitive equilibrium koford 1982 in a unidimensional setting the outcome under the former is the median while the outcome under the latter is the highest net demand location this paper describes the competitive equilibrium in a unidimensional model and shows that under some common conditions it coincides with the median in particular for pure redistributive issues however for distributive issues the two equilibria will differ finally the comparative statics of the two models are examined while the winning coalition is sensitive only to changes in the location of the median for distributive issues the competitive equilibrium has the standard economic comparative statics that the outcome adjusts in the direction of the change in preferences

majority rule and election models abstract this paper surveys the theoretical work that has been done on majority rule and economic models of elections section i provides an overview of the topic section 2 reviews the most important results that have been obtained about majority rule as an abstract collective choice rule section 3 identifies some alternative inferences that can be made from those results section 4 covers some models that include additional features that are present in political institutions where majority rule is used section 5 concentrates on some alternative election models and equilibrium concepts section 6 focuses on election models with abstentions and or candidate uncertainty about voter behaviour section 7 compares and contrasts models where candidates are certain about what the voters choices will be contingent upon about the choices made by the candidates and models where they are uncertain about those choices section 8 closes the survey by identifying some emerging areas of research

pareto optimality of policy proposals with probabilistic voting this paper studies the pareto optimality properties of policy proposals and electoral outcomes when there is probabilistic voting theorem 1 proves that when the position of one candidate is taken as fixed the other candidate will propose a pareto optimal alternative this implies that whenever there is an electoral equilibrium in pure strategies the electoral outcome is pareto optimal it also implies that even if there is no such equilibrium the electoral outcomes from a sequence of elections will be pareto optimal except possibly for an initial status quo

the political economy of public health expenditure and wait times in a public private mixed health care system this paper investigates the determinants of public health expenditure in a public private mixed health care system where a longer wait time for public care is the major difference between public and private sectors voter preferences for health care vary according to their age and by income and public policy choices are part of a multi dimensional competitive political equilibrium we show how equilibrium public health expenditure and wait times depend on demographics and explain why they are independent of the distributions of income and political influence we also show that population aging may not always lead to more public health expenditure ce texte examine les determinants des depenses en sante publique dans un regime mixte public prive de soins de sante quand un temps d attente plus long est la difference majeure entre les secteurs public et prive les preferences des electeurs dans le monde de la sante varient selon l ge et le revenu et les choix de politique publique sont partie d un equilibre politique concurrentiel multidimensionnel on montre que les depenses en sante publique et les temps d attente en equilibre dependent de la demographie et que cela explique pourquoi elles sont independantes de la repartition des revenus et de l influence politique on montre aussi que le vieillissement de la population peut ne pas toujours entrainer des depenses en sante publique additionnelles

the economics and politics of the structure of public expenditure the paper derives a complete system ofdemand equations for public consumptionexpenditures as the outcome of rationalbehaviour in a model where governmentmaximizes expected electoral support theallocation of expenditures is found todepend not only on the prices of publicservices and total expenditure and tosatisfy the constraints of demand theory which have been the focus of attention ofprevious empirical studies of theallocation of public expenditures but inaddition on the prices of privateconsumption goods the distribution ofvoter incomes and the expected change invoter support from varying the levels ofpublic provision

rational ignorance rational voter expectations and public policy a discrete informational foundation for fiscal illusion this paper demonstrates that rational ignorance properly defined allows the possibility that fiscal illusion affects policies in a democracy the implications of rational ignorance are examined in a setting where voters are assumed to completely understand the fiscal environment and make perfect use of any information that they possess in this setting it is demonstrated that ignorance may be rational manipulated and generate biased expectations over fiscal parameters

equilibrium in multicandidate probabilistic spatial voting this paper presents a multicandidate spatial model of probabilistic voting in which voter utility functions contain a random element specific to each candidate the model assumes no abstentions sincere voting and the maximization of expected vote by each candidate we derive a sufficient condition for concavity of the candidate expected vote function with which the existence of equilibrium is related to the degree of voter uncertainty we show that under concavity convergent equilibrium exists at a minimum sum point at which total distances from all voter ideal points are minimized we then discuss the location of convergent equilibrium for various measures of distance in our examples computer analysis indicates that non convergent equilibria are only locally stable and disappear as voter uncertainty increases

on fiscal disparities across cities abstract some cities have fewer taxable resources and higher costs for providing public services than do other cities the result which is widely regarded as unfair is a wide variation in the ability of cities to supply public services but our understanding of these fiscal disparities particularly on the cost side is limited this paper provides a general treatment of fiscal disparities by incorporating input and environmental costs into a model of local expenditure determination investigating the consequences of fiscal disparities in a system of local governments including housing price adjustments and migration and designing intergovernmental grants to offset fiscal disparities

polarized platforms and moderate policies with checks and balances abstract in standard spatial models of elections parties with policy preferences take divergent positions their platform positions are less separated than are the parties ideal policies if policy is the result of an executive legislative compromise the policy preferences of the parties can be moderated by voter behavior divided government may result since parties anticipate the moderated outcomes they have an added incentive to choose separated platforms consequently divergence in platforms is greater than in the standard model especially when uncertainty is high and the legislature more powerful than the executive for some parameters parties may even posture by adopting platforms that are more extreme than their true ideal points

subprime mortgages and the housing bubble this paper explores the link between the house price expectations of mortgage lenders and the extent of subprime lending it argues that bubble conditions in the housing market are likely to spur subprime lending with favorable price expectations easing the default concerns of lenders and thus increasing their willingness to extend loans to risky borrowers since the demand created by subprime lending feeds back onto house prices such lending also helps to fuel an emerging housing bubble these ideas are illustrated in a theoretical model and tentative support is found in empirical work exploring the connection between price expectations and the extent of subprime lending the views expressed in this paper are those of the authors and do not necessarily reflect those of the federal reserve bank of philadelphia the federal reserve board of governors or the federal reserve system this paper is available free of charge at http www philadelphiafed org research and data publications working papers

redistribution tax under non benevolent governments i analyze redistribution policies of majority governments in one kind of representative voting system i employ these assumptions members gain special benefits in the majority parties act strategically by using redistribution transfers the member s utility function is given in a quasi linear function the government s objective functions are the weighted summation of utilities and i classify governments according to the weight the four main results are a stable majority dose not support myopic government the stable redistribution policy of benevolent government is expressed by a scope of transfers the stable transfer of non benevolent governments depends on private utilities of the majority and opportunity costs of the minority and the altruistic government is not displayed by any other majority because it offers the total welfare of the majority to the minority as a subsidy

electoral equilibria with restricted strategies we construct a spatial election model in which candidates inherit initial positions in the strategy space presumably from previous political activity and they are restricted to strategies close to their initial positions we establish sufficient conditions for the existence of an equilibrium the equilibrium need not entail an expectation of a zero plurality for each candidate we then apply this model to a sequence of elections in which a series of opposition candidates challenge incumbents given certain regularity conditions the result will be an apparent incumbency advantage corresponding to that observed in recent congressional elections

endogenous tariff formation under representative democracy a probabilistic voting model wolfgang mayer 1984 applied duncan black s 1948 median voter theorem to investigate endogenous tariff formation under direct democracy this paper extends mayer s model from direct to representative democracy the extension from direct to representative democracy is straightforward if candidates possess perfect information one can still apply the median voter theorem for a candidate in a two party representative democracy also chooses the most preferred tariff of the median voter mayer 1984 himself fully recognized this direct extension 2 nevertheless if candidates possess imperfect information which is believed typical in the real world how the medianvoter outcome might alter or be modified remains unanswered the purpose of the current paper is to answer the question that candidates are something more than simply policy surrogates is the highlight of the article by james m enelow and melvin j hinich 1982 in contrast to direct democracy in which only policies matter in voter choices in a representative democracy candidates are thought to be judged by voters on the basis of both nonpolicy candidate characteristics and proposed policies in this paper i adopt the view of enelow and hinich 1982 and combine it with candidate uncertainty more specifically i consider a model incorporating candidates lack of information regarding voters nonpolicy preferences the model gives rise to probabilistic rather than deterministic voting 3 i show that in such a framework the equilibrium tariff is no longer dictated by the most preferred tariff of the median voter but is a weighted mean or even the mean of voters most preferred tariffs moreover the income distribution resulting from the equilibrium tariff tends to be more equalized than that from free trade the plan of the paper is as follows section i introduces the model of the paper it consists of an economic and a political structure section ii characterizes the equilibrium tariff and discusses its implications for income distribution concluding remarks are presented in section iii

the choice of insurance in the labor market employment protection and unemployment benefits are considered the most prominent insurance devices for workers to protect themselves against the risk of unemployment it occurs that societies either choose a high level of employment protection relative to unemployment benefits or vice versa this paper explains where countries locate on this trade off it is argued that higher coverage of voters out of the labor force with intra household transfers yields a politico economic equilibrium with relatively high employment protection and relatively low unemployment benefits cross country data and survey data on voters preferences are presented that corroborate the outcomes of the model

public education and redistribution when talents are mismatched in democratic countries elected policymakers determine public spending the level of public spending depends on taxes that are decided by a voting mechanism policymakers also decide how to allocate funds among different policies such as public education and pure redistributive transfers how are the levels of funding for public education and redistribution determined in the political process what impacts do votes on these two policies have on inequality growth and social mobility we develop a politico economic model that highlights a novel mechanism public education provides opportunities for the children of the poor to be recognized for their talent this reduces the probability of a mismatch which takes place when individuals with low talent who come from rich families find jobs that should go to people with high talent and vice versa hence the poor may prefer public spending on education to direct redistribution while the rich prefer redistribution as education implies more competition for good jobs from the poor

to segregate or to integrate education politics and democracy how is the quality of public education affected by the presence of private schools for the rich theory and evidence suggest that the link depends crucially on the political system we develop a theory that integrates private education and fertility decisions with voting on public schooling expenditures we find that the presence of a large private education sector benefits public schools in a broad based democracy where politicians are responsive to low income families but crowds out public education spending in a society that is politically dominated by the rich the main predictions of the theory are consistent with state level data and micro data from the u s as well as cross country evidence from the programme for international student assessment study

the political economy of dynamic elections accountability commitment and responsiveness we survey the literature on dynamic elections in the traditional settings of spatial preferences and rent seeking under perfect and imperfect monitoring of politicians we define stationary electoral equilibrium which encompasses notions used by barro 1973 ferejohn 1986 banks and sundaram 1998 and others we show that repeated elections mitigate the commitment problems of politicians and voters and that a responsive democracy result holds under general conditions term limits however attenuate the responsiveness finding we also touch on related applied work and we point to areas for fruitful future research including the connection between dynamic models of politics and economics

electoral competition and special interest politics have fixed positions on some issues but vary their positions on others in order to attract votes and campaign contributions in this context we examine whether special interest groups are governed by an electoral motive or an influence in their campaign giving and how their contributions affect the equilibrium platforms we show that each party is induced to behave as if it were maximizing a weighted sum of the aggregate welfares of informed voters and members of special interest groups the party that is expected to win a majority of seats caters more to the special interests

informative and persuasive campaigning in this paper we use a simple downsian spatial model to analyze the properties of campaign contributions we first consider campaign contributions that are intended to inform voters of candidate positions we show that it is difficult to construct arguments in a downsian spatial model for why some voters would choose to contribute to a candidateand the candidate would want to spend the money contributed to inform voters of his position we then define persuasive campaign expenditures as those that are intended to convince an individual to vote for a candidate regardless of the candidate s position on issues in the presence of persuasive campaign expenditures some voters have an incentive to contribute to one or both candidates and the candidates have an incentive to spend the money we show why the nature of persuasive campaign expenditures may explain both their growth in recent years and the increasing advantage of incumbency

political influence economic interests and endogenous tax structure in a computable equilibrium framework with application to the united states 1973 and 1983 we consider the properties of a computable equilibrium model ofa competitive political economy in which the economic interestsof groups of voters and their effective influence on equilibriumpolicy outcomes can be explicitely distinguished and computed the model incorporates an amended version of the gemtap taxmodel calibrated to data for the united states for 1973 and1983 emphasis is placed on how the aggregation of gemtaphouseholds into homogeneous groups affects the numericalrepresentation of interests and influence for representativemembers of each group

a model of stability and persistence in a democracy abstract we develop an intertemporal model of political competition which accounts for three stylized facts of political life in representative democracies i political stability and the absence of discrimination ii a limited degree of political competition and iii the persistence of different political outcomes in otherwise similar economies in our model political stability is desirable for risk averse voters voters only vote for decent policy proposals which do not discriminate against single groups we derive properties of the set of possible political outcomes and study the issue of robustness against renegotiation journal of economic literature classification numbers c72 d70 d72

probabilistic choice and procedurally bounded rationality abstract we derive a family of probabilistic choice models including the multinomial logit model from a microeconomic model in which the decision maker has to make some effort in order to implement any desired outcome the disutility of this effort enters the decision maker s goal function in an additively separable way a particular disutility function yielding the multinomial logit as a special case is characterized axiomatically the present approach naturally leads to a normalization of the achieved utility with respect to the number of alternatives the approach also applies to continuum choice sets in euclidean spaces and provides a microeconomic foundation for logit type quantal response models in game theory

a computable equilibrium model for the study of political economy theory the need for the development and use of a concept of joint political economic equilibrium is increasingly recognized by students of democracy and markets yet to date no adequate theoretical and methodological synthesis of this kind has been produced the few works which have attempted it suffer from a lack of theoretical balance between economic and political theory unrealistic temporally aggregated conceptions of political economic equilibrium failure to incorporate theoretically meaningful stochastic elements of economic and political processes and the absence of a coherent methodology for gauging the empirical power of political economic models methods in the spirit of the ajps workshop it is shown how these problems can be solved an improved model is built one which fuses a branch of real business cycle theory and the theory of presidential approval this model produces a notion of computable political economic equilibrium that provides for market clearing and simultaneous stochastic optimization by economic and political agents then using data analysis techniques developed in parallel by real business cycle theorists hansen and heckman 1996 kydland and prescott 1990 1996 lucas 1987 prescott 1986a 1986b 1991 sims 1996 and political methodologists brady 1996 jackson 1995 the model is parameterized for the united states more specifically on the basis of estimates from economics and political science and some numerical experimentation certain of its parameters are set so that when simulated the model mimics the united states political economy in the 1980s results the parameterized model is used to study some important counterfactuals the first is the impact of increased approval volatility on political economic equilibration such volatility is expected in view of america s likely involvement in the post cold war era s increasing number of low intensity international conflicts the second is the impact of presidents pursuing relatively high nonminimum winning levels of approval this kind of behavior is attributed to certain presidents along with the claim that it has harmful effects on markets and hence on various facets of social welfare the former

the relationship between energy consumption energy prices and economic growth time series evidence from asian developing countries this paper estimates the causal relationships between energy consumption and income for india indonesia the philippines and thailand using cointegration and error correction modelling techniques the results indicate that in the short run unidirectional granger causality runs from energy to income for india and indonesia while bidirectional granger causality runs from energy to income for thailand and the philippines in the case of thailand and the philippines energy income and prices are mutually causal the study results do not support the view that energy and income are neutral with respect to each other with the exception of indonesia and india where neutrality is observed in the short run c 2000 elsevier science b v all rights reserved jel classifications c22 q43 q48

local equilibrium equivalence in probabilistic voting models abstract electoral equilibria depend upon candidates motivations maximization of expected vote share may not lead to the same behavior as maximization of the probability of winning the election accordingly it is desirable to understand when electoral equilibria are insensitive to the choice of candidate motivations this paper examines sufficient conditions for local equilibrium equivalence between expected vote share maximization and maximization of probability of victory in the spatial model of elections with probabilistic voters

are contributors rational untangling strategies of political action committees empirical public choice literature and casual observation suggest that the behavior of political action committees is remarkably unsophisticated meaning that pacs give to those legislators who would support their interests anyway thus it is suggested that contributor behavior deviates from rational behavior which is a cornerstone of economic analysis in this paper a switching regression model is estimated that allows for strategies of pacs to vary for different contribution recipients i analyze the behavior of farm pacs over three election cycles in contrast to previous findings i find that contributor behavior is not inconsistent with rational behavior contributors who attempt to influence the voting behavior of members of congress give the most money to legislators whose constituency interest suggests that they are likely to be undecided on how to vote and pacs give less money to legislators who represent districts with larger farm populations because those legislators are likely to vote in con

manipulation and the allocational role of prices it is commonly believed that prices in secondary financial markets play an important allocational role because they contain information that facilitates the efficient allocation of resources this paper identifies a limitation inherent in this role of prices it shows that the presence of a feedback effect from the financial market to the real value of a firm creates an incentive for an uninformed trader to sell the firm s stock when this happens the informativeness of the stock price decreases and the beneficial allocational role of the financial market weakens the trader profits from this trading strategy partly because his trading distorts the firm s investment we therefore refer to this strategy as manipulation we show that trading without information is profitable only with sell orders driving a wedge between the allocational implications of buyer and seller initiated speculation and providing justification for restrictions on short sales

deconstructing a mortgage meltdown a methodology for decomposing underwriting quality technical progress in originating and pricing mortgages has enabled a trend since 1979 toward more relaxed credit standards on mortgage lending which is reflected in rising foreclosure rates we develop a methodology for decomposing the trend in mortgage performance in the national serviced portfolio into a part due to economic conditions and a part due to underwriting changes the decomposition provides natural metrics or indices of underwriting quality and economic conditions the results suggest that the recent mortgage debacle can be attributed about equally to each factor the relaxation in observable credit standards is not monotonic while the easing of important risk characteristics like loan to value ratios in the early 1990s was arguably deliberate the negative effects of lower standards was masked by strong local and national economic conditions after 2000 there was little change in observable loan characteristics nevertheless loan performance continued to erode even after controlling for the economic environment we present evidence that the erosion in the latter period must have arisen from underwriting covariates that are typically unobservable to investors in securitizations this evidence is consistent with the hypothesis that moral hazard in non agency securitizations of mortgages particularly subprime and alt a loans caused underwriting risks to be mispriced

feedback effects and asset prices feedback effects from asset prices to firm cash flows have been empirically documented this finding raises a question for asset pricing how are asset prices determined if price affects fundamental value which in turn affects price in this environment by buying assets that others are buying investors ensure high future cash flows for the firm and subsequent high returns for themselves hence investors have an incentive to coordinate which may generate self fulfilling beliefs and multiple equilibria using insights from global games we pin down investors beliefs analyze equilibrium prices and show that strong feedback leads to higher excess volatility

are we witnessing a paradigm shift in the analysis of political competition this presidential address assesses the crisis of the downsian model of political competition in light of the mounting evidence on policy divergence and evaluates the possibility that the new theories of politicians quality and political selection provide an alternative theoretical conceptualization of political competition based on a critical review of the literature and on the author s works on content analysis of policy speeches income redistribution politicians quality and political legislation cycles this address concludes that multidimensional downsian models of political competition are adequate to explain policy divergence and points out the serious theoretical and empirical problems that models of political selection have to solve

clientelism and aid abstract using a model of probabilistic voting we analyze the impact of aid on the political equilibrium in the recipient country or region we consider politicians with mixed motives they are interested in promoting social welfare but also value the benefit of holding office we label as clientelistic the politician who most values the benefit of being in power we find that the impact of aid on the political equilibrium and therefore on the quality of policy in the recipient country using utilitarian social welfare as a benchmark ultimately depends on the value of the elasticity of the marginal utility of consumption when elasticity is low the expected policy outcome gets further away from the socially desirable policy set this substitution of policy quality for aid can help to explain the poor performance of aid in improving policy perhaps more surprising is the opposite case which arises for high values of elasticity of marginal utility an increase in aid tilts the equilibrium policy towards the welfare maximizing policy set

an analysis of legislative inefficiency and ideological behavior this paper explores the theory of legislative inefficiency and the role of ideological preferences of legislators it is shown that inefficiency can be caused by many factors other than legislative ideological behavior three major sources are emphasized cost of voting and policy position information asymmetries across groups of voters and barriers to entry in political competition ideological preferences of legislators is not a cause of inefficiency independently legislators who care about both policy and winning will give inefficient representation to their constituents only when groups of voters are prevented from participating equally in the legislative process

elections and income redistribution this paper has analyzed a model of elections in which each candidate selects a reputation for the distribution of income that can be expected if he is elected the first result established that whenever there are three or more groups of voters and no single group has half or more of the voters if the candidates believe that the voters choices are determined solely by the candidates redistributional reputations then there is no electoral equilibrium the candidates expectations about the voters choices were then reformulated using a qualitative response model the next result established that this alternative model leads to the existence of electoral equilibria the remainder of the paper analyzed the nature of these equilibria for any given electorate among other things the results established that there is always a unique equilibrium provided a simple procedure for finding the precise location of this equilibrium and showed that this location implicitly maximizes the sum of the voters utility functions on the possible income distributions the penultimate sections provided some simple examples which illustrate the main results in the paper and a discussion of these results in terms of the politics of redistribution

endogenous cycles in a stiglitz weiss economy the literature on financial imperfections and business cycles has focused onpropagation mechanisms in this paper we model a purereversion mechanism such that the economy may converge to a two period equilibrium cycle this mechanism confirms that financial imperfections may have a dramatic amplification effect unlike in some related models contracts are complete indexation is not assumed away the welfare properties of a possible stabilizing policy are analyzed the model itself is a dynamic extension of the well known stiglitz weiss model of lending under moral hazard although stylized the model still captures some important features of credit cycles

a political economic analysis of labor migration and income redistribution we present a two country political economic model of income redistribution with internationally mobile labor migration can be exogenous and or endogenous i e determined by labor income differentials political influence is determined by the size and homogeneity of the groups where the latter can be affected by immigration we show that immigration can increase the transfers to and the income of the mobile group we also investigate the possibility of migration regulation tax transfer policy competition and coordination and finally coordination of regulation policies it is shown that the selection of any of those regimes will depend on the particular distribution of political influence among the relevant social groups in the two countries

a theory of voting in large elections this paper provides a game theoretic model of probabilistic voting and then examines the incentives faced by candidates in a spatial model of elections in our model voters strategies form a quantal response equilibrium qre which merges strategic voting and probabilistic behavior we first show that a qre in the voting game exists for all elections with a finite number of candidates and then proceed to show that with enough voters and the addition of a regularity condition on voters utilities a nash equilibrium profile of platforms exists when candidates seek to maximize their expected margin of victory this equilibrium 1 consists of all candidates converging to the policy that maximizes the expected sum of voters utilities 2 exists even when voters can abstain and 3 is unique when there are only 2 candidates