unemployment rates and political outcomes an incentive for manufacturing a political business cycle in recent years the interdependence of politics and economics has received an increasing amount of attention by both economists and political scientists the explanation for this interest lies in the rediscovery of political economy and may be at least partly due to the recent experiences that governmental advisors have had with simultaneously increasing inflation and unemployment conventional macroeconomic approaches have failed to pin point causes for the stagflation and to provide methods for solving the problem the traditional economic policies may have failed in part because these traditional solutions were simply not plausible in the political environments in which they were proposed it is the intent of a growing body of work to develop macromodels with endogenous political sectors the inference made in this literature is that 1 the economy can be manipulated or affected by a political sector and that 2 there is an incentive for the political sector to manipulate the economy this literature has however just begun to formalize the interaction of the political and economic sectors and empirical work is virtually nonexistent the purpose of this paper is to present some evidence on these two inferences in section 1 the first inference is examined in section ii literature on which the first inference is based is reviewed and evidence on the possible incentive to create such a cycle is presented in section iii concluding remarks are offered

asset prices and institutional investors empirical evidence indicates that trades by institutional investors have sizable effects on asset prices generating phenomena such as index effects asset class effects and others it is difficult to explain such phenomena within standard representative agent asset pricing models in this paper we consider an economy populated by institutional investors alongside standard retail investors institutions care about their performance relative to a certain index our framework is tractable admitting exact closed form expressions and produces the following analytical results we find that institutions optimally tilt their portfolios towards stocks that comprise their benchmark index the resulting price pressure boosts index stocks while leaving nonindex stocks unaffected by demanding a higher fraction of risky stocks than retail investors institutions amplify the index stock volatilities and aggregate stock market volatility and give rise to countercyclical sharpe ratios trades by institutions induce excess correlations among stocks that belong to their benchmark index generating an asset class effect institutions finance their additional purchases of index stocks by taking on leverage a policy prescription that calls for a reduction in leverage while reducing the riskiness of institutional portfolios would also reduce the ability of institutions to tilt their portfolios towards index stocks depressing the index level

does anticipated information impose a cost on risk averse investors a test of the hirshleifer effect this paper theoretically and empirically investigates how the risk of future adverse price changes created by the anticipated arrival of information influences risk averse investors trading decisions in institutionally imperfect capital markets specifically i examine how the selling activity of individual investors immediately following an earnings announcement is influenced by the tradeoff between risk sharing benefits of immediate trade and explicit transaction costs imposed on such trades consistent with my theoretically derived predictions i find that investors current trading decisions are less sensitive to the incremental transaction costs created by short term capital gains taxes on trading profits as both the duration and intensity of the risk of future adverse price changes increase this evidence is consistent with an incremental cost to investors that results from the revelation of precise information which is commonly referred to as the hirshleifer effect

general economic conditions and national elections the fact that economic conditions influence voters is a leading commonplace of conversation in election years the question is is this fact in fact a fact despite the overwhelming popularity of the fact it has received neither an explicit theoretical analysis presumably because it is so obvious that economic adversity should create political adversaries nor until recently a satisfactory statistical analysis gerald h kramer has presented a multivariate analysis of congressional elections which would strongly suggest that fluctuations in the rate of unemployment have no appreciable effect upon elections but that fluctuations in per capita real income are influential in the following pages i propose to 1 reaffirm his finding on the electoral unimportance of ordinary fluctuations in unemployment 2 argue that contrary to kramer fluctuations in real income also do not have important electoral effects and 3 present an argument based upon rational voter behavior for the unimportance of general economic conditions in national elections

an essay on the rationality of economic policy the test case of the electional cycle the literature on electional cycles is discussed in the light of the empirical findings by in particular the author two basically different types of explanations of such cycles are compared explanations based on the maximizing behavior of governments aiming at re election explanations building on the insufficiently controlled pressures of events in a democracy it is demonstrated that even when the most well known theory under the nordhaus macraemodel is a rather fragile construction a more robust argument termed the popularity investment argument can be constructed yielding the same basic result from the empirical literature it is concluded that almost the opposite pattern actually occurs in the data it is finally demonstrated that the weak but significant empirical pattern is easy to explain by the elections generate promises which give most real expansion in the second governmental year and most inflation in the third year an average behavior which hardly implies even medium term maximization by governments as assumed under

endogenous trade policy under foreign direct investment abstract using bernheim and whinston 1986 common agency game we endogenize trade policy in a duopoly composed of a domestic firm and a foreign firm where both firms influence the domestic government s trade policy via their contributions the foreign firm can jump over trade restrictions by undertaking foreign direct investment fdi in the domestic market the government prefers a voluntary export restraint ver to a tariff for two reasons first a ver leads to higher contributions from the foreign firm than a tariff second a ver provides a higher level of protection to the domestic firm without generating fdi by the foreign firm

outward foreign direct investment patterns of italian firms in the european union s emission trading scheme we consider the role played by the european union s emissions trading system eu ets as a possible driver of outward foreign direct investment fdi for italian manufacturing firms using a panel dataset of about 22 000 firms covering the first two phases of the eu ets and the period before the eu ets we measure the patterns of fdi towards countries not covered by the eu ets the results show that the eu ets had a weak effect on the number of new subsidiaries abroad extensive margin while it had a larger impact on production taking place in foreign subsidiaries intensive margin especially in trade intensive sectors

protectionist policies as the regulation of international industry the political feasibility of protectionist policies that regulate international industry derives from the absence of overt collusion among domestic import competing producers the regulation of international industry cannot be explicit since governments would thereby be perceived to be approving or instigating international collusion hence voluntary export restraints have been popularly presented with a focus on the difficulties confronted by domestic import competing producers and a de emphasis on the mutual gains to domestic and foreign producers from monitoring by a foreign government of a restrictive export cartel arrangement similarly trigger price mechanisms have popularly been explained in terms of the need for anti dumping measures to preserve fair competition likewise the involuntary export tax derived in the first instance from an administratively validated but as demonstrated by kalt s econometric analysis contentious complaint of unfair foreign competition voluntary export restraints trigger price mechanisms and involuntary export taxes are however protectionist devices the beneficiaries of which can transcend national jurisdictions and which have in common the characteristic that the gains to domestic industry interests derive from the regulation of foreign competitors

domestic politics foreign interests and international trade policy reply this paper incorporates the foreign interest in the determination of a country s international trade policy into a model of political competition between candidates contesting elective office we envisage foreign and domestic producer interests as expressing political support for a candidate via campaign contributions and candidates as making trade policy pronouncements to maximize political support from producer interests tariffs are divisive but vers are consistent with conciliatory policy positions yielding mutual gain to foreign and domestic interests no candidate has an interest in formulating a trade policy position using a tariff if a ver is a policy option protection in the developed countries has in recent years often taken the form of bilaterally negotiated voluntary export restraints vers rather than the more traditional unilaterally imposed import restrictions the use of voluntary export restraints has been paralleled by interest in the theoretical literature the effects of vers have been compared with tariffs and quotas and vers have been examined in a political economy framework with a view to identifying the gainers and losers from this form of restric

who determines mexican trade policy using a political economy approach the authors analyze the pattern of protection in mexico s manufacturing sector during the period of trade policy reforms 1985 89 when mexico experienced significant trade liberalization and an important inflow of foreign direct investment they take into account the potential effect of foreign direct investment on endogenous tariff formation it turns out that the data support this analytic approach in which the formulation of trade policy reflects political support and in which the presence of foreign direct investment in the sector strongly affects the pattern of tariff protection before and after reform in mexican manufacturing especially sectors with heavy foreign direct investment received greater protection in import competing sectors although the move toward greater openness was associated with a reduction in the influence of industrial and foreign investor lobbying

interest group politics in a federation the optimal degree of decentralization depends on the importance of inter state externalities of local policies we show that inter state externalities are determined by the spatial distribution of interest groups within the country interest groups who have multi state scope internalize inter state externalities to a larger extent than the lobbyists with interests within a single state we use variation in the geographic boundaries of politically powerful industrial interests to estimate the effect of inter state externalities on firm performance using firm level panel data from a peripheralized federation russia in 1996 2003 we show that controlling for firm fixed effects the performance of firms substantially improves with an increase in the number of neighboring regions under influence of multi regional business groups compared to the number influenced by local business groups our findings have implications for the literatures on federalism and on international trade as trade restrictions are a common source of inter state externalities

endogeneous protection factor returns and resource allocation we consider a heckscher ohlin samuelson trade model with two lobbies representing the interests of factor owners and two political parties the lobbies contribute resources to politics equating their returns to political and economic activity at the margin while the parties maximize their probability of election trading off general voter dissatisfaction with protection against the electioneering resources that favorable policies attract from the lobbies the equilibrium level of protection of a factor and its expected rate of return increase with its relative endowment if this relative endowment is high low then the factor will be better worse off than under free trade but at intermediate factor endowment ratios both factors will be worse off under parameter changes making lobbies more sensitive to the commodity price the lobbies contribute more resources to politics and can both be worse off even though the parties are proposing lower trade distortions

presidential popularity and the economy abstract this study tests the hypothesis that the sensitivity of the president s popularity to economic events differs across distinct demographic groups assuming that presidental popularity is negatively related to both the unemployment rate and the inflation rate the electorate is disaggregated according to sex age race education income and political affiliation and separate regressions are estimated for the individual subgroups using quarterly data covering 1976 through 1988 statistically significant differences in the marginal effects of unemployment and inflation on presidential approval are discovered for the various subgroupings

trading volume reactions to annual accounting earnings announcements the incremental role of predisclosure information asymmetry abstract this study provides empirical evidence regarding the effect of annual accounting earnings announcements on investors trading behavior we find that the magnitude of trading volume reaction is an increasing function of both the magnitude of the associated price reaction and the level of predisclosure information asymmetry these results are consistent with kim and verrecchia s 1991a theoretical trading volume proposition

rationality and the political business cycle the case of local government the empirical results which have been reported support the hypotheses implied by the model of rational political behavior set out in section 2 in pre election periods local government development expenditures deviate significantly from their normal levels the extent of deviation is approximately 20

price and trading volume reaction surrounding earnings announcements a closer examination the process of information dissemination and interpretation in securities markets is very complex and mostly unobservable while changes in prices and the amount of trading that takes place at the market level provide evidence of information processing verrecchia 1981 demonstrated that these are not sufficient to describe completely the dissemination of information and its interpretation by investors a descriptive study of price changes and trading volume however may still provide some insights into how investors react to information this paper is an empirical investigation of price changes and trading volume during the days surrounding the announcement of quarterly and annual earnings in the wall street journal wsj in the original paper investigating trading volume and price changes surrounding earnings announcements beaver 1968 was primarily concerned with whether the annual earnings announcement had information content i e led to changes in investors assessments of the probability distribution of future returns if there were any significant price changes and or trading volume during the week of the announcement then the annual earnings announcement was assumed to have had

quid pro quo foreign investment and welfare a political economy theoretic model abstract the classic paper by brecher and diaz alejandro 1977 analyzed the implications of tariff jumping direct foreign investment dfi induced by the imposition of an import tariff we analyze a new type of dfi where it occurs with a view to defusing not circumventing protection or rather the threat of protection by the host country an example is the dfi by japan in the united states the decision about the level of foreign investment is taken in the first of a two period horizon period this together with the level of exports in the first period determines the probability of a quota on exports being imposed in the second period policy makers aware of the effects of the first period decisions on the second period will impose an optimal tariff and an optimal tax subsidy on capital exports

volatility and the institutional investor inconsistent with the relationship predicted by most academic theory a positive contemporaneous association is documented between the level of institutional ownership and security return volatility after accounting for capitalization this relationship is consistent with two stories either riskier securities attract institutional investors or an increase in institutional holdings results in an increase in volatility these empirical results are consistent with the latter interpretation

capital gains taxes and equity trading empirical evidence individual investors have an incentive to defer selling appreciated stock until it qualifies for tax favored long term capital gains treatment shackelford and verrecchia 2002 show that these incentives can affect equity trading around public disclosures this article provides some empirical support for their theory with evidence of price increases and equity constrictions around announcements of quarterly earnings and additions to the s p 500 index we find share returns rise and trading volume falls with the incremental taxes saved by deferring the sale of appreciated property the price increases however are temporary reversing in subsequent trading days the results are consistent with buyers believing the compensation to sell before long term qualification through higher prices is less costly than holding an inappropriately weighted portfolio this finding that personal capital gains taxes affect equity trading adds to a growing literature that challenges longstanding assumptions that firm value is independent of shareholders and their taxes

a proposition on short run departures from the law of one price unanticipated inflation relative price dispersion and commodity arbitrage abstract this paper proposes an explanation of short run departures from the law of one price based on the characteristics of the inflationary process and changes in the distribution of relative prices unexpected inflation gives rise to volatility of relative prices the more unexpected and hence uneven the rate of inflation the greater the difficulty in discerning from a given structure of relative prices commodity arbitrage opportunities which may be expected to persist and those transient opportunities which do not warrant a firm s incurring fixed costs of arbitrage an illustration portrays a risk averse firm confronting an international arbitrage opportunity

unit tax versus ad valorem tax a tax competition model with cross border shopping abstract within the framework of spatial tax competition with cross border shopping we examine the choice of tax method between ad valorem tax and unit specific tax this study shows that governments endogenously choose the ad valorem tax method not because of a classic welfare reason but because it is a good strategy to compete for mobile consumers another key finding is that while governments are committed to the ad valorem tax method the choice leads to inferior outcome tax cutting competition becomes more serious when countries adopt ad valorem tax and competition in ad valorem tax results in smaller tax revenue than competition in unit tax

environmental regulation induced foreign direct investment the last decade has witnessed a renewed interest in the relationship between environmental regulations and international capital flows however empirical studies have so far failed to find conclusive evidence for this so called pollution haven or race to the bottom effect where foreign direct investment fdi is assumed to be attracted to low regulation countries regions or states in this paper we present a simple theoretical framework to demonstrate that greater stringency in environmental standards can lead to a strategic increase in capital inflows which we refer to as environmental regulation induced fdi our result reveals a possible explanation for the mixed results in the empirical literature and provides an illustration of the conditions under which environmental regulations in the host country can affect the location decision of foreign firms

empirical evidence of political influence on the size distribution of income in the united states 1959 1991 abstract political influence on the size distribution of income is tested in a statistical model using annual u s data for 1959 1991 we present empirical evidence that both democratic administration and reelected president appear to have significant downward redistributive effects

blackwell s ordering and public information abstract we characterize a precise comparative static on welfare and the amount of public information in an economy under uncertainty results dating to hirshleifer amer econom rev 61 1971 561 have suggested that information can have negative value in such a setting but counterexamples using competitive equilibrium outcomes have suppressed general results to this effect we show that under the solution concept of implementable allocations the negative relationship between more public information in the sense of blackwell and welfare is fully general furthermore blackwell s ranking is necessary as well as sufficient to obtain our ranking and hence ours provides an equivalent characterization of his ordering

institutional impact of foreign direct investment in china summary we provide firm level empirical evidence that the presence of foreign direct investment fdi has positively affected the institutional quality of the host regions in china specifically chinese domestic firms located in regions with a higher level of fdi tend to enjoy a lower level of tax and fee burdens less arbitrariness in such burdens as well as better legal protection to address the potential issue of endogeneity we adopt the instrumental variable approach in addition we explore the specific mechanisms through which the institutional impact is materialized and provide various extensions of the empirical findings that offer further support for the fdi induced institutional improvement argument

multinational firms political competition and international trade policy this paper considers how the presence of multinational firms influences international trade policy that is determined as the outcome of political competition multinational firms have plants to protect in all policy jurisdictions and hence are more protectionist than national firms that at least have an interest in free trade in export markets nonetheless because of changed incentives for firms to provide political support for free trade and protectionist candidates an increased multinational presence via either merger or direct foreign investment has a liberalizing influence on trade policy copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association