why democracies produce efficient results by applying the standard tools of microeconomic analysis i argue that democratic markets work as well as economic markets in particular i show that previous work has greatly exaggerated the existence of principal agent and informational problems in electoral markets and has drawn incorrect conclusions

fiscal policy outcomes and electoral accountability in american states clear fiscal policy effects appear in american state gubernatorial and legislative elections between 1968 and 1992 independent of the effects of incumbency coattails term limits and macroeconomic conditions the results show that accountability is generally stronger following a period of unified party control than under divided government voter reactions to taxes and spending relative to the state economy are conditional on expectations which differ for each party net of these expectations republican gubernatorial candidates lose votes if their party is responsible for unanticipated increases in the size of the state budget democrats do not and indeed may be rewarded for small increases independent of this the incumbent governor s party is punished in legislative elections for failing to maintain fiscal balance taken together these results show how electoral accountability for fiscal policy outcomes is strong but highly contingent on a complex configuration of party labels partisan control expectations and institutions

separation of powers and political accountability political constitutions are incomplete contracts and therefore leave room for abuse of power in democracies elections are the primary mechanism for disciplining public officials but they are not sufficient separation of powers between executive and legislative bodies also helps to prevent the abuse of power but only with appropriate checks and balances checks and balances work by creating a conflict of interest between the executive and the legislature yet requiring both bodies to agree on public policy in this way the two bodies discipline each other to the voters advantage under appropriate checks and balances separation of powers also helps the voters elicit information

state responses to fiscal crises the effects of budgetary institutions and politics this paper explores the dynamics of state taxes and spending during the late 1980s when regional economic downturns and increased expenditure demands led to substantial state budget deficits more restrictive state fiscal institutions such as no deficit carryover rules and tax and expenditure limitations are correlated with more rapid fiscal adjustment to unexpected deficits political factors are also important when a single party controls the state house and the governorship deficit adjustment is much faster than when party control is divided in gubernatorial election years tax increases and spending cuts are both significantly smaller than at other times

off farm work decisions of farm couples estimating structural simultaneous equations with ordered categorical dependent variables we estimate a full system of structural farm and off farm labor supply equations of farm couples as a set of simultaneous equations with categorical dependent variables in a first step the reduced form is estimated by ordered probit with unknown thresholds then the identified structural coefficients are recovered from the reduced form coefficients through minimum distance estimation using census data from israel we find that for men a one hour increase in farm labor supply causes a one hour decrease in off farm labor supply but not for women this could not have been found without estimating structural coefficients

voters as fiscal conservatives voters penalize federal and state spending growth this is the central result of my analysis of voting behavior in presidential senatorial and gubernatorial elections from 1950 1988 the composition of federal spending growth seems irrelevant the vote loss to the president s party from an extra dollar of defense or nondefense spending is the same however in gubernatorial elections expansion of state welfare spending exacts a disproportionate political price deficit financing of federal or state spending does not appear to matter politically i conclude by discussing the obvious question of why government budgets have grown in the face of this voter hostility

severing the electoral connection shirking in the contemporary congress studies of representation focusing on legislative shirking tend to offer an interesting tension when the opportunity presents itself it seems that exiting members do not change their votinq behavior ideological shirking but do reduce their effort level by voting less participatory shirking our analysis avoids the pitfalls of prior studies by defining a simple quasi experimental research design contrasting those certain that they are seeking reelection with those sure that they are departing the house for the102nd 103rd and 104th congresses 1991 1996 we measure changes in ideology and participation using all roll call votes in the last six months of election years controlling for possible member selection effects and short term influences and show that legislators are disposed toward ideological and participatory shirking while selection effects are unimportant thus we reconcile results seemingly at odds and suggest that policies affecting member turnover such as term limits can interfere with representation a fundamental issue concerning political representation is the extent to which the necessity of reelection constrains officeholders if incumbents plan to retire thus freeing themselves of their electoral shackles or if they pursue higher office and face a distinct constituency will they behave differently or do members continue to behave in the same manner even in the absence of an electoral connection to the districts they represent answers to such questions have important implications for how we understand and model the representative process additionally they have ramifications for the likely impact of public policy choices that affect member turnover rates such as the imposition of term limits on the political system a primary means of drawing inferences regarding shirking which we simply define as legislator behavior that differs from what would be observed given perfect monitoring and effective punishment by constituents is to determine if politicians change their behavior when electoral discipline is removed most notably scholars examine members actions during their last period in office on the grounds that those voluntarily departing can behave according to a distinct set of preferences even if they run afoul of their districts or of their electoral coalitions empirical results on final period behavior are voluminous and sometimes contradictory bender and lott 1996 nevertheless two general inferences seem to have gathered support first there is little evidence for shirking in terms of vote choice ideological shirking while as we will discuss shortly there are a variety of potential explanations for such nonfindings one intuitive and frequently offered reason is that they reflect member specific selection effects this implies that

the causes of legal rents extraction evidence from spanish municipalities this paper analyzes the causes of legal political rent extraction by using a direct measure of it namely local top politicians wages in particular we investigate whether local politicians incentives to extract rents by setting their own wages are influenced by the degree of political competition and voter information we use a sample of the largest spanish municipalities over the years 2008 2010 the results indicate that weaker political competition and lesser voter information are related to more rent extraction in an additional analysis we show that higher wages do not ensure better financial management these findings confirm that when politicians can set their own salaries higher wages do not mean better management but they are just political rents

does electoral accountability affect economic policy choices evidence from gubernatorial term limits this paper analyzes the behavior of u s governors from 1950 to 1986 to investigate a reputation building model of political behavior we argue that differences in the behavior of governors who face a binding term limit and those who are able to run again provides a source of variation in discount rates that can be used to test a political agency model we find evidence that taxes spending and other policy instruments respond to a binding term limit if a democrat is in office the result is a fiscal cycle in term limit states which lowers state income when the term limit binds

budget referendums and government spending evidence from swiss cantons vortrag im forschungsseminar der wirtschaftswissenschaftlichen fakultat der universitat basel schweiz am 20 november 2000

does remuneration affect the discipline and the selection of politicians evidence from pay harmonization in the european parliament we study the harmonization of the base pay for the members of the european parliament meps prior to this reform implemented in 2009 base pay was aligned with that of national parliamentarians causing large differences in pay between the meps representing 27 member states based on detailed information on individual meps between 2004 and 2011 we find that the reform which introduced an exceptional base pay increase of 200 per national delegation on average has a positive incentive effect on in office effort proxied by the number of speeches written declarations and reports drafted however more generous remuneration is associated with higher rates of absenteeism with respect to political selection we find that higher pay also raises reelection rates the composition of the pool of meps in terms of ex ante quality approximated by formal education previous political experience in elected office and occupational background is however unaffected if we restrict our attention to newly elected meps a salary increase is related to fewer meps with previous political experience at the highest national level

off farm labor supply responses to permanent and transitory farm income a sample of iowa farm couples is used to evaluate whether off farm labor supply decisions respond to permanent and transitory components of farm income off farm labor supply of both spouses declines in response to increases in permanent farm income farm wives also reduce off farm labor supply in response to positive transitory farm income shocks consequently one mechanism farm households use to smooth their goods consumption when facing fluctuating farm income is to modify their consumption of leisure ability to smooth goods consumption does not imply the absence of liquidity constraints among farm households unless leisure consumption is also smoothed

state economies and state taxes do voters hold governors accountable theory states have sufficient autonomy in the policies they adopt that voters hold state officials partly responsible for the condition of the state economy as the best known state official elected by a statewide constituency governors in particular are held accountable for the economic performance of their states with respect to taxes the clear locus of responsibility in state actions and the high visibility of certain taxes suggest that governors will also be held responsible for increased rates hypotheses the performance of the state economy tax increases and voters personal financial situations all influence voting behavior in gubernatorial elections methods logit equations using 1986 abc washington post exit polls in 34 of 36 gubernatorial races combined with economic and tax data from the states results a poor state economy increases in taxes and lowered personal finances all contribute to votes against incumbent governors and their parties

higher pay worse outcomes the impact of mayoral wages on local government quality in peru abstract in this paper i study how wages earned by local politicians affect local government quality to identify the effects i use caps imposed by the peruvian central government on mayoral wages as an excluded instrument the results show that mayoral wages do not improve government performance in particular there is a negative impact on public investment implementation and on performance goals set by the central government moreover there is no evidence of a positive effect on politician selection municipal bureaucratic capacity and political effort wages do strongly affect the local political landscape increasing political competition and reducing political support for the mayor these changes may help explain the drop in performance as local authorities may face more political obstacles when implementing their policy agenda overall the results show that higher politician wages need not improve local government quality

multiple job holdings among dairy farm families in new york and ontario abstract previous empirical studies of multiple job holding have tended to focus on the characteristics of those obtaining off farm employment and the factors affecting the hours supplied to those obtaining off farm activities none of these studies have explicitly addressed the reasons behind the decision to seek off farm employment neither have they been able to examine in depth the important issue of how this major component of the farm sector responds to alternative policies since most studies have used cross sectional data for a given region a comparison between countries would permit the analysis of how multiple job holding responds to differing government policies the purpose of this paper is to examine the reasons for and factors affecting multiple job holdings of dairy farm families in neighboring regions of two counties united states and canada the bordering regions of new york and ontario have similar geographic conditions but significantly different farm support and social service policies the results indicate the importance of farm income on why people work off the farm and provide evidence of multiple job holding as a flexible mechanism for coping with changes in the economic environment facing the household for operators the driving characteristics influencing off farm labor participation is the farm s financial position the supply managed milk marketing system ensures higher and more stable returns for ontario dairy farm labor in contrast it is family demographics educational level and social support policy that appears to largely influence spousal off farm employment decisions free medical care in ontario lowers the reservation wage for household members the effect of these farm and social support policies on the relative returns to labor in agriculture and non farm employment explains the lower participation rate and hours supplied in off farm work by both operators and hours supplied in off farm work by both operators and spouses in ontario dairy farm household

the other side of the trade off the impact of risk on executive compensation the principal agent model of executive compensation is of central importance to the modern theory of the firm and corporate governance yet the exiting empirical evidence supporting it is quite wea

incumbent performance and electoral control in the pure theory of electoral competition citizens compare the platforms of the candidates and vote for the one whose platform is preferred candidate strategies are identified with promises about future performance in office models of this sort have been developed in both static mckelvey 1975 and dynamic kramer 1977 i settings and all appear to have the property that if the set of alternatives is large enough in some sense equilibrium platforms rarely exist but these models have another feature that is quite as disturbing as their instability in the static setting discussed by mckelvey little attention is paid to the possibility that once in office the politician s preferences may diverge from those of his constituents and that he may therefore choose policies at variance from his platform instead it is simply assumed that promises will be kept whether or not such behavior is congruent with the interest of the officeholder it is sometimes argued that an enforcement mechanism may exist to discipline politicians for failing to keep promises but without a specification of the mechanism it is not obvious that it would be in the interests of the

economic reform voting and local political intervention evidence from india abstract this paper uses the indian tariff reforms of the early nineties to estimate how voters hurt by economic reforms respond regions more hurt by the tariff reform increased their support for both the party that initiated their suffering and parties with similar preferences in favor of poverty centric policies this response is surprisingly sophisticated where voters did not simply punish incumbents for negative income shocks and correctly discounted initial anti reform stances by opposition parties that later turned out to be false furthermore the strength of this voting response varied with both geography and local political incentives suggesting that the economic effects of reforms might vary substantially in large and decentralized democracies

why is there so little money in u s politics in this paper we argue that campaign contributions are not a form of policy buying but are rather a form of political participation and consumption we summarize the data on campaign spending and show through our descriptive statistics and our econometric analysis that individuals not special interests are the main source of campaign contributions moreover we demonstrate that campaign giving is a normal good dependent upon income and campaign contributions as a percent of gdp have not risen appreciably in over 100 years if anything they have probably fallen we then show that only one in four studies from the previous literature support the popular notion that contributions buy legislators votes finally we illustrate that when one controls for unobserved constituent and legislator effects there is little relationship between money and legislator votes thus the question is not why there is so little money politics but rather why organized interests give at all we conclude by offering potential answers to this question this abstract was borrowed from another version of this item

are ceos really paid like bureaucrats a common view is that there is little correlation between firm performance and ceo pay using a new fifteen year panel data set of ceos in the largest publicly traded u s companies we document a strong relationship between firm performance and ceo compensation this relationship is generated almost entirely by changes in the value of ceo holdings of stock and stock options in addition we show that both the level of ceo compensation and the sensitivity of compensation to firm performance have risen dramatically since 1980 largely because of increases in stock option grants

optimal exercise prices for executive stock options although exercise prices for executive stock options can be set either below or above the grant date market price in practice virtually all options are granted at the money we offer an economic rationale for this apparent puzzle by showing that pay to performance incentives for risk averse undiversified executives are typically maximized by setting exercise prices at or near the grant date market price we provide an operationally useful alternative to black scholes 1973 for the purpose of both valuing executive stock options and measuring the incentives created by options our framework has implications not only for exercise price policies but also for indexed options option repricings exchanges of cash for stock based compensation and the design of bonus plans

managerial incentives and product market competition are imperfectly competitive leibenstein 1966 claims that there may be a substantial amount of x inefficiency where x inefficiency measures the degree to which actual profits depart from the maximum of profits that could be obtained if all operations in the firm were carried out at minimal costs he offers empirical evidence from case studies showing that the welfare loss due to organizational slack is of an order of magnitude bigger than the welfare loss due to monopolistic price distortions on imperfectly competitive markets these results support the common presumption that increasing competition reduces organizational and in particular managerial slack however this early literature does not offer a theoretical explanation for the link between competition and managerial incentives in particular it ignores the fact that managerial incentives can be affected by the design of an incentive scheme in this paper i derive the optimal incentive scheme for a manager as a function of the competitiveness of the environment in which his firm operates the basic impact of increased competition is that it reduces the profits of a firm this has two effects in the model first if a firm has high costs then the reduction of profits may be sufficient to render the firm unprofitable so the probability that it has to be liquidated goes up this unambiguously induces the manager of the firm to work harder for a cost reduction in order to avoid liquidation and to keep his job second the reduction in profits may affect

pay for politicians and candidate selection an empirical analysis abstract a growing theoretical literature on the effect of politicians salaries on the average level of skills of political candidates yields ambiguous predictions in this paper we estimate the effect of pay for politicians on the level of education of parliamentary candidates we take advantage of an exceptional reform where the salaries of finnish mps were increased by 35 in the year 2000 intended to make the pay for parliamentarians more competitive a difference in differences analysis using candidates in municipal elections as a control group suggests that the higher salary increased the fraction of candidates with higher education among female candidates while we find no significant effect for male candidates

incumbent behavior vote seeking tax setting and yardstick competition this paper develops a model of the political economy of tax setting in a multijurisdictional world where voters choices and incumbent behavior are determined simultaneously voters are assumed to make comparisons between jurisdictions to overcome political agency problems this forces incumbents into a yardstick competition in which they care about what other incumbents are doing we provide a theoretical framework and empirical evidence using u s state data from 1960 to 1988 the results are encouraging to the view that vote seeking and tax setting are tied together through the nexus of yardstick competition

the off farm work behavior of farm operators there is widespread concern about the opportunities for people to begin farming most observers argue that the financial barrier to entry into agriculture has risen relative to farm incomes several authors have pointed to off farm earnings as one important way to overcome this barrier coffman carlin and ghelfi steeves steeves in particular cited evidence that fewer than 20 of canadian farm entrants between 1966 and 1971 recorded no significant off farm work in 1971 nearly 43 of these entrants worked 229 to 365 days off the farm in that year similar evidence for farm entrants in iowa is found in kaldor and jetton hence off farm work by new farmers is often viewed as an important way to manage the high capital investment required to establish a viable farm this viewpoint is not the only one possible neoclassical theory predicts that farmers increase off farm work when marginal returns to off farm work become larger than marginal returns to farming lee bollman sumner because entering farmers often have current off farm work skills they may choose some off farm work regardless of the financial obligations of farming because offfarm work skills depreciate and returns to farming appreciate over time established farmers are less likely to engage in off farm work clearly a simple correlation between farm entry and off farm work will not allow us to distinguish between these views this paper develops two formal models of offfarm labor supply to examine these two interpretations first it analyzes the off farm work decisions in a conventional utility maximizing framework consistent with the view that off farm work is chosen when marginal returns to farming fall below potential off farm returns the paper then analyzes the off farm work decisions when an income target reflecting the need to meet the financial obligations of farming is the objective the paper demonstrates that these models produce divergent predictions about off farm work decisions only under the assumption that the higher financial obligations exceed the higher returns to work on larger farms the models are then tested under this assumption using the 1978 agricultural enumerative survey for the canadian province of saskatchewan

are politicians really paid like bureaucrats abstract we provide the first empirical analysis of gubernatorial pay using u s data for 1950 90 we document substantial variation in the wages of politicians both across states and over time gubernatorial wages respond to changes in state income per capita and taxes we estimate that governors receive a 1 percent pay cut for each 10 percent increase in per capita tax payments and a 4 5 percent increase in pay for each 10 percent increase in income per capita in their states there is evidence that the tax elasticity reflects a form of reward for performance the evidence for the income elasticity of pay is less conclusive but is suggestive of rent extraction motives finally we find that democratic institutions play an important role in shaping pay for example voter initiatives and the presence of political opposition significantly reduce the income elasticity of pay and increase tax elasticities of pay

do better paid politicians perform better disentangling incentives from selection the wage paid to politicians affects both the choice of citizens to run for office and the performance of those who are appointed first if skilled individuals shy away from politics because of higher opportunities in the private sector an increase in politicians pay may change their mind second if the re election prospects of incumbents depend on their in office deeds a higher wage may foster performance we use data on all italian municipal governments from 1993 to 2001 and test these hypotheses in a quasi experimental setup in italy the wage of mayors depends on population size and sharply rises at different thresholds we apply a regression discontinuity design to the only threshold that uniquely identifies a wage increase 5 000 inhabitants exploiting the existence of a two term limit we further disentangle the composition from the incentive component of the effect of the wage on performance our results show that a higher wage attracts more educated candidates and that better paid politicians size down the government machinery by improving efficiency importantly most of this effect is driven by the selection of competent politicians rather than by the incentive to be re elected

traveling agents political change and bureaucratic turnover in india abstract we develop a framework to empirically examine how politicians with electoral pressures control bureaucrats with career concerns and the consequent implications for bureaucrats career investments unique microlevel data on indian bureaucrats support our key predictions politicians use frequent reassignments transfers across posts of varying importance to control bureaucrats high skilled bureaucrats face less frequent political transfers and lower variability in the importance of their posts we find evidence of two alternative paths to career success officers of higher initial ability are more likely to invest in skill but caste affinity to the politician s party base also helps secure important positions

a theory of political and economic cycles abstract we develop a theoretical framework in which political and economic cycles are jointly determined these cycles are driven by three political economy frictions policymakers are non benevolent they cannot commit to policies and they have private information about the tightness of the government budget and rents our first main result is that in the most favorable equilibrium to the households distortions to production emerge and never disappear even in the long run this result is driven by the interaction of limited commitment and private information on the side of the policymaker since in the absence of either friction there are no long run distortions to production our second result is that if the variance of private information is sufficiently large there is equilibrium turnover in the long run so that political cycles never disappear finally our model produces a long run distribution of taxes distortions and turnover where these all respond persistently to temporary economic shocks

on capital income tax policies under uncertainty this paper investigates corporate income and dividend taxation in a multi country world where production is subject to country specific productivity shocks singlecountry non cooperative tax policy is shown to imply a tax on foreign source dividends and a subsidy to domestic source dividends the optimal corporate tax may be negative if international portfolios are little diversified at the outset finally each country in a coordinating region should subsidize rather than tax domestic citizen s investment in equity in partner countries 1998 elsevier science b v all rights reserved

politicians bureaucrats and targeted redistribution abstract the paper argues that for political reasons elected politicians are more likely to be engaged in targeted redistribution than appointed bureaucrats it uses the example of patronage jobs in the u s local governments to provide empirical support for this claim it shows that the number of public employees is higher for elected chief executives this difference is stronger in public services with bigger private public wage differential and it increases during election years it also finds that the number of public employees increases with the age of bureaucrats while there is no such relationship in the case of politicians which is consistent with younger bureaucrats having stronger career concerns