shadow banking and the financial side of financialisation this paper tries to shed some light on the nature and functioning of shadow banking with a special focus on its role in the evolution of financialization as well as in sharpening income and wealth inequality on the one hand it discusses how securitization has allowed traditional banks to expand their business providing the financial system with the raw materials for the manufacturing of complex structured financial products on the other hand it questions the view of traditional and shadow banks as two parallel and alternative systems claiming that financialization did not alter the role of commercial banks as money creators but rather diverted endogenously created money to the financial sphere feeding its expansion finally our work discusses some policy options for the de financialization of the economy through more progressive taxation of the financial sector as well as a stronger engagement to reduce income and wealth inequality

media scrutiny and the quality of public officials i investigate whether attempts by the media to determine a candidate s fitness for office lowers the average quality of public officials what i call the media scrutiny paradox media scrutiny imperfectly signals heterogeneous candidates type but imposes privacy costs and reputational costs on politicians the quality of office holders falls if the selection effect is adverse and outweighs the screening effect a low quality information signal which could result if the media focus on irrelevant aspects of behavior makes the screening effect small and the media paradox more likely to hold individuals of good character might invest more in their reputation and have more at stake from being falsely identified as a rapscallion the actual malice standard established in new york times v sullivan likely increased relatively the cost of candidacy for good people and lowered the quality of officials

blame game politics in a coalition government abstract delays in the adoption of reforms is an important question in political economics this paper explores this issue in the context of a representative democracy where the government is a coalition and citizens observe neither the decision making process nor politicians preferences for a reform we show that a coalition member who favors a reform may nonetheless choose to veto its adoption thus delaying it until after the next election and let his coalition partners share the blame for the non adoption we refer to this strategy as blame game politics we then identify three reasons for a politician to play the blame game one is to make an issue salient in the next election a second reason is to avoid a split in his electorate which is accomplished by hiding his stance on an issue a third reason is to enhance bargaining power during the formation of the next government

an egalitarian system breeds generosity the impact of redistribution procedures on pro social behavior in a meritocratic system people are compensated on the basis of their individual ability whereas in an egalitarian system people are equally compensated essentially in the latter system high performers are taxed and subsidize underperformers would differences in income redistribution procedures affect people s pro social behavior in experiments we found that people are more generous toward strangers in an egalitarian treatment than in a meritocratic treatment interestingly being taxed does not reduce the generosity of high performers whereas being subsidized significantly increases the generosity of low performers jel c91 d63 d64 i introduction numerous experimental studies have established that humans exhibit other regarding behavior camerer 2003 that is humans care not only about their own material payoffs but also about fairness reciprocity and other people s well being some explanations for this other regarding behavior have been offered in the literature becker 1974 and andreoni 1989 assert that people are altruistic becker focuses on the notion of pure altruism and argues that caring for others is inherent in human nature andreoni focuses on the notion of impure altruism or warm glow and argues that a person is altruistic because he she receives some private benefit from the altruistic act itself rabin 1993 and levine 1998 point out the importance of the reciprocity based motive where a person s behavior toward another person is driven by the expected intention of the other person fehr and schmidt 1999 and bolton and ockenfels 2000 on the other hand argue that other regarding behavior is driven primarily by the final distribution of payoffs among people in the reference group all these studies share one common thread they focus on factors directly related to allocation decisions such as the intentions behind those decisions the consequences of those decisions on the allocators and the recipients and the expectation of how the recipients will respond to those decisions but the studies are silent on a factor seemingly unrelated to but that could potentially influence allocation decisions namely the procedure by which a money endowment or income is redistributed among allocators in reality this procedure is determined by the prevailing social system governing the way individual effort is rewarded it also differs greatly across societies in this paper we study how this endowment redistribution procedure shapes people s pro social behavior consider two distinct social environments inhabited by people of different abilities the first is characterized by a meritocratic system in which people are compensated on the basis of their individual ability and performance the second is characterized by an egalitarian system in which everybody is compensated equally regardless of his her individual ability the former resembles a pure capitalist system with no taxation and the latter acts like a socialist system with an egalitarian income redistribution essentially in the latter the low performers are subsidized whereas the high performers are taxed a natural question that emerges is whether people s pro social behavior will differ between these two social environments we postulate two factors associated with the endowment redistribution procedure that could potentially influence this pro social behavior the first is the working of serial reciprocity which encourages an individual who benefits from a kind act rendered by somebody to forward the received kind act to a third party in an egalitarian system underperformers are treated nicely by the system which could motivate them to reciprocate by treating other people nicely as well thus being treated nicely may inculcate a pay it forward spirit this notion of serial reciprocity differs from the more common form of reciprocity namely direct reciprocity which refers to recipients of the kind act returning the deed by behaving nicely back toward the person who treated them nicely

good types in authoritarian elections the selectoral connection in chinese local congresses a new electoral design for subnational congress elections in china allows me to investigate the informational utility of authoritarian elections authoritarian regimes are notoriously bad at solving the moral hazard problem in the voter s agency relationship with politicians borrowing from the literature on political selection i theorize that authoritarian elections can nonetheless solve the adverse selection problem chinese voters can use their electoral power to select good types with personal qualities that signal they will reliably represent local interests i analyze original data from a survey of 4 071 chinese local congressmen and women including voter nominees and communist party nominees i find that voters do in fact overcome coordination difficulties to nominate and elect good types in contacting politicians about local problems after the elections however voters hedge their bets by contacting regime insiders too at these very local levels congressional representation by means of

fairness in public good provision an investigation of preferences for equality and proportionality a binary public good voting mechanism is designed to test for preferences for income equality and cost benefit proportionality the voting design isolates preferences for equality from those for proportionality and controls for alternative external preferences such as altruism envy and the rawlsian difference principle individuals choose between greater income or fairness in these demand revealing votes treatments vary whether the positions of voters are earned or random whether votes are hypothetical or real and whether they are over gains or losses significant deviations from self interested voting are observed in all treatments testing for equality and in some treatments testing for proportionality

on the dynamics of ethnic fractionalization does fractionalization change over short periods of time if so are there any substantial implications for economic performance to answer such questions we construct a new panel data set with measures of ethnic linguistic and religious fractionalization for 26 former communist countries covering the period from 1989 to 2002 our fractionalization measures show that transition economies became more ethnically homogeneous over such a short period of time although the same did not happen for linguistic and religious diversity in line with the most recent literature there seems to be no effect of exogenous diversity on macroeconomic performance that is on per capita gdp growth however we find that dynamic endogenous ethnic diversity is negatively related to growth although this is still not the case for linguistic and religious diversity these findings are robust to different specifications polarization measures and instrument sets as well as to a composite index of ethnic linguistic religious fractionalization

the role of party reputation in the formation of policy abstract this paper shows that a party can credibly establish a platform more moderate than the ideology of its members and thereby raise the probability that the party s nominee wins the election a lame duck incumbent optimally implements his party s platform in order to maintain his party s reputation for having a moderate platform this increases the likelihood that his party retains power when candidates credibly locate themselves in policy space via this mechanism we show that if candidates are sufficiently impatient then their policies are bounded away from one another the policy convergence result is not robust

regulation and the theory of legislative choice the interstate commerce act of 1887 this article concerns the economic incidence of the interstate commerce act of 1887 ica our focus is the short haul pricing constraint a provision of the ica that prohibited railroads from charging higher rates to isolated primarily agrarian shippers than it charged to intercity shippers of similar commodities utilizing the event study methodology we find that the impending passage of the ica generated a distribution of abnormal returns to railroads and shipping firms that is consistent with the theoretical implications of our analysis of the short haul pricing constraint shpc however early interpretations of the shpc by the interstate commerce commission reduced some of the abnormal returns to railroads in a manner that is inconsistent with the hypothesis that the short haul pricing constraint was an important mechanism of early railroad regulation the analysis does support a multiple interest interpretation of the interstate commerce act and has implications for the positive theory of regulation

a general equilibrium model of congressional voting in this paper we specify a model in which congressmen constituents and campaign contributors simultaneously decide on behavior constituents and contributors desire to influence the voting behavior of congressmen congressmen on the other hand want to be elected and vote accordingly we empirically test this model using roll call voting on eight bills dealing with economic regulation and find support for the model our results indicate that part of the voting behavior of congressmen may be explained by noneconomic factors we also find that unions and businesses as campaign contributors are sometimes influential unions are more often influential than is business ideological factors are also important in explaining voting

politicians as experts electoral control and fiscal restraints we propose an argument for fiscal restraints that is based on the premise that the services of politicians are credence goods politicians are experts who specialize in observing the true state of the economy budget maximizing politicians are better informed than the electorate about the level of public spending necessary to manage public affairs voters who are able to observe the size of the budget but not the necessary level of spending affect the government s spending behavior via electoral control a fiscal restraint limits the maximum spending a government can choose we identify conditions under which such a fiscal restraint improves voter welfare and discuss the role of the political opposition as a second expert in situations in which the state of the economy requires a level of spending which exceeds the fiscal restraint

capture and ideology in the economic theory of politics the economic theory of regulation long ago put public interest theories of politics to rest these theories have correctly been viewed as normative wishings rather than explanations of real world phenomena they have been replaced by models of political behavior that are consistent with the rest of microeconomics anthony downs 1957 james buchanan and gordon tullock 1965 george stigler 1971 sam peltzman 1976 recently however debate has arisen over whether some version of a public interest theory of regulation will have to be readmitted to our thinking about actions and results in the political arena what is at issue is the empirical importance of the altruistic publicly interested goals of rational actors in determining legislative and regulatory outcomes james kau and paul rubin 1979 kalt 1981 peltzman 1982 this study assesses the nature and significance of publicly interested objectives in a particular instance of economic policymaking u s senate voting on coal strip mining regulations the existence of such objectives is of course no contradiction of the economic view of human behavior kenneth arrow 1972 gary becker 1974 and may well be rooted in genetic biological history becker 1976 jack hirshleifer 1978 generally however individuals altruistic publicly interested goals have been given little attention this reflects the judgment that such goals are so empirically unimportant as to allow the use of occam s razor in positive models or well founded apprehensions that these goals are unusually difficult to identify measure and analyze notwithstanding the latter problem we find that approaches which confine themselves to a view of political actors as narrowly egocentric maximizers explain and predict legislative outcomes poorly the tracking and dissecting of the determinants of voting on coal strip mining policy suggest that the economic theory of politics has been prematurely closed to a broader conception of political behavior

who wants to redistribute the tunnel effect in 1990s russia abstract support for governmental redistribution tended to be greater for the poor than the rich in a representative sample of russian adults in 1996 however support for redistribution is higher amongst those who expect their welfare to fall and this effect is strongest amongst the currently well off a rising trajectory inhibits demand for redistribution support is also stronger in rural areas amongst those with less schooling those who fear losing their job the elderly and amongst women our results are consistent with albert hirschman s idea of a tunnel effect whereby prospects of mobility in both directions influence demand for governmental redistribution

electoral competition and politician turnover abstract in this paper we analyze the selection by opportunistic parties of the candidates who run for election we consider a setting with incomplete but symmetric information about the candidates abilities in which electoral campaigns provide voters with additional information about candidates parties care only about selecting an appropriate candidate to win the election while voters elect the best candidate conditional on their information we first argue that in order to defeat an established very good candidate of its rival a party may favor a new candidate with highly uncertain ability rather than an established good candidate next we establish that the discrepancy between the objective of parties and the objective of the electorate leads to inefficient conservatism in the selection of candidates i e each party keeps its incumbents too often from the voters viewpoint

an overlapping generations model of electoral competition this paper presents a dynamic model of political competition between two parties with different policy preferences a party is explicitly modeled as a sequence of overlapping generations of candidates all of whom face finite decision horizons in general there is a conflict between the interests of the individual policymakers and those of the party which includes subsequent generations of candidates we characterize this conflict and suggest a scheme of intergenerational transfers within the party which can resolve or mitigate this conflict the paper shows how the overlapping generations model can be usefully applied to the political arena this abstract was borrowed from another version of this item

the provision of public goods under alternative electoral incentives politicians who care about the spoils of office may underprovide a public good because its benefits cannot be targeted to voters as easily as pork barrel spending we compare a winner take all system where all the spoils go to the winner to a proportional system where the spoils of office are split among candidates proportionally to their share of the vote in a winner take all system the public good is provided less often than in a proportional system when the public good is particularly desirable we then consider the electoral college system and show that it is particularly subject to this inefficiency

inequality leverage and crises the paper studies how high leverage and crises can arise as a result of changes in the income distribution empirically the periods 1920 1929 and 1983 2007 both exhibited a large increase in the income share of the rich a large increase in leverage for the remainder and an eventual financial and real crisis the paper presents a theoretical model where these features arise endogenously as a result of a shift in bargaining powers over incomes a financial crisis can reduce leverage if it is very large and not accompanied by a real contraction but restoration of the lower income group s bargaining power is more effective

political economy of pension plans impact of institutions gender and culture abstract national pension systems are an important part of financial intermediation and worker welfare in most countries but how and why do they differ internationally controlling for important political economic and social institutions we document that international differences in pension progressivity or how pensions reflect lifetime earnings are negatively related to masculinity uncertainty avoidance individualism long term orientation employment rights average pension levels social trust and economic inequality we also find that pension progressivity is positively related to the economic and societal role of women the extent of catholicism as well as political voice and accountability these results provide important insights for both public policy and mnc managers

good bye lenin or not the effect of communism on people s preferences preferences for redistribution as well as the generosities of welfare states differ significantly across countries in this paper we test whether there exists a feedback process of the economic regime on individual preferences we exploit the experiment of german separation and reunification to establish exogeneity of the economic system from 1945 to 1990 east germans lived under a communist regime with heavy state intervention and extensive redistribution we find that after german reunification east germans are more in favor of redistribution and state intervention than west germans even after controlling for economic incentives this effect is especially strong for older cohorts who lived under communism for a longer time period we further find that east germans preferences converge towards those of west germans we calculate that it will take one to two generations for preferences to converge completely

a new view of political accountability for economic performance most political support models imply that in evaluating economic performance voters use a standard that would provide poor predictions of the future and leave the economy vulnerable to manipulation by vote hungry politicians drawing on macroeconomic theory we develop a simple standard of evaluation which encompasses a concern not only for current economic outcomes but also for accurately assessed future consequences of current policies we find that political support for the president can be explained as well by models that assume that voters use this sophisticated standard as by models that assume voter naivete our analysis questions the wisdom of measures typically used to assess voter evaluation of economic performance in a variety of theoretical contexts the results also help to explain the absence of convincing evidence that governments exploit voter ignorance in manipulating the economy

are legislators ideologues or the agents of constituents abstract legislatures often make important economic decisions a decade ago economists viewed each legislator as the agent if not of the median voter of some pivotal voter in a party constituency therefore the voting decision of a legislator could readily be predicted if one could measure the preferences of the relevant pivotal voter models where interests on specific issues can be simply linked to votes on the same issues are questionable however since votes will be traded across issues political parties are one important vehicle for organizing such trades a simple empirical test for the united states senate however clearly rejects the notion that the representative is the agent of the median voter or a local party constituency even if vote trades are allowed thus there is ample opportunity for politicians even under reelection constraints to either voice their own ideology or that of idiosyncratic support coalitions the relevant theory and empirical evidence is summarized and some validating tests for european parliaments are suggested

demand for redistribution individuals responses to economic setbacks although economic circumstances have been argued to be a major determining factor of attitudes to redistribution there is little well identied evidence at the individual level utilizing a unique dataset with detailed individual information provides new and convincing evidence on the link between economic circumstances and demand for redistribution in the form of benefits and support the swedishnational election studies are constructed as a rotating survey panel which makes it possible to estimate the causal effect of economic changes the empirical analysis shows that individuals who experience a job loss become considerably more supportive of redistribution yet attitudes to redistribution return to their initiallevel as economic prospects improve suggesting that the effect is only temporary despite the fact that a job loss also changes attitudes to the political parties theprobability to vote for the left wing is not affected

is polarization bad abstract the adverse effects of political and social polarization on government policies are empirically well documented yet some democracies seem to cope well or even benefit from diversity in this paper we develop a theoretical model to show how elections in polarized societies contribute to improve quality of government we consider both polarization among citizens and political actors political polarization where the second is endogenously determined by parties competing to win the support of the majority of voters we find that more heterogeneous societies are more likely to be politically polarized but that the divergence of positions in the political arena helps the electorate control government corruption by raising electoral stakes our results which are consistent with the findings of a substantial empirical literature suggest that when funneled into political competition polarization may help improving quality of government and policies

globalisation as commodification while recognising that most pre capitalist formations exhibited elements of commodity exchange marx argued that capitalism differentiates itself as a genuine commodity system by virtue of two interdependent processes having reached a critical stage of development a stretching of commodity relations to the point where production for the market displaces subsistence production as the primary form and a deepening of commodity relations such that these encompass not only goods and services but the capacities for producing them this paper argues that globalisation can best be understood as the culminating stage of these stretching and deepening processes the former in the sense that commodity relations now embrace the entire planet and the latter in the sense that they cover not merely goods or the capacities for producing goods but also every other type of capacity and every other type of outcome copyright 2005 oxford university press

super cycles of commodity prices since the mid nineteenth century summary decomposition of real commodity prices suggests four super cycles during 1865 2010 ranging between 30 and 40 years with amplitudes 20 40 higher or lower than the long run trend non oil price super cycles follow world gdp indicating they are essentially demand determined causality runs in the opposite direction for oil prices the mean of each super cycle of non oil commodities is generally lower than for the previous cycle supporting the prebisch singer hypothesis tropical agriculture experienced the strongest and steepest long term downward trend through the twentieth century followed by non tropical agriculture and metals while real oil prices experienced a long term upward trend interrupted temporarily during the twentieth century

social mobility and redistributive politics just like economists voters have conflicting views about redistributive taxation because they estimate its incentive costs differently we model rational agents as trying to learn from their dynastic income mobility experience the relative importance of effort and predetermined factors in the generation of income inequality and therefore the magnitude of these incentive costs in the long run left wing dynasties believing less in individual effort and voting for more redistribution coexist with right wing dynasties this allows us to explain why individual mobility experience and not only current income matters for political attiitudes and how persistent differences in perceptions about social mobility can generate persistent differences in redistribution across countries

the control of politicians in divided societies the politics of fear autocrats in many developing countries have extracted enormous personal rents from power in addition they have imposed inefficient policies including pervasive patronage spending i present a model in which the presence of ethnic identities and the absence of institutionalized succession processes allow the ruler to elicit support from a sizeable share of the population despite large reductions in welfare the fear of falling under an equally inefficient and venal ruler that favours another group is enough to discipline supporters the model predicts extensive use of patronage ethnic bias in taxation and spending patterns and unveils a new mechanism through which economic frictions translate into increased rent extraction by the leader these predictions are consistent with the experiences of bad governance ethnic bias wasteful policies and kleptocracy in post colonial africa

why the subprime crisis is different a minskyian approach minsky s financial instability model suggests that financial crises can be resolved efficiently with lender of last resort and big government interventions the crisis that began in 2007 hereafter the 2007 crisis has been different it has been more profound and resistant to policy interventions this paper examines why our approach is to expand minsky s balance sheet approach in several ways first we incorporate two factors minsky missed because he built his model in the 1970s the impact of racial exclusion and u s cross border imbalances on u s financial dynamics in addition we draw out the analytical implications of the systematic differences between banks and non banks balance sheets minsky didn t do this but because of the transformation of banking after 1980 these differences have become deeply significant one key effect of so doing is to see that asset liability balances as well as cash flows are crucial in financial dynamics this paper concludes that the 2007 crisis has been so profound and unresponsive to policy intervention for several reasons banks no longer bear as well as originate credit risk banks made exploitative loans to minority borrowers and then generalized these loans as housing prices rose and subprime homeowners and structured investment vehicles became more leveraged than banks copyright the author 2009 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

individual preferences for political redistribution what drives people s support of governmental reduction of income inequality we employ data from a large international survey in order to evaluate the explanatory power of three competing forces referred to as the homo oeconomicus effect the public values effect and the social rivalry effect the empirical analysis reveals that at the aggregate level all three effects play a significant role in shaping individual preferences for political redistribution attitudes of citizens in formerly socialist countries turn out to differ from those of western citizens in a systematic way 2002 elsevier science b v all rights reserved

economic freedom and government ideology across the german states potrafke n economic freedom and government ideology across the german states regional studies this paper examines whether government ideology influenced economic freedom across the german states the results show that in former west germany rightwing governments promoted economic freedom whereas leftwing governments confined it in the former east germany however rightwing governments were not associated with propagating economic freedom this finding appears to conflict with the common notion of policy convergence at the federal level in fact the observed variation in political preferences across states may indicate that politicians gratify the local electorate and in return offer moderate policies at the federal level potrafke n potrafke n la liberte economique et l ideologie du gou

the hidden cost of raising voters expectations reference dependence and politicians credibility abstract two politicians compete to get elected each politician is characterized by a valence which is unobservable to the electorate and can take one of two values high or low the representative voter prefers politicians with high valence but random shocks may lead him to appoint a low valence politician politicians make statements concerning their valence if the voter is a standard expected utility maximizer politicians statements lack any credibility and no information transmission takes place by introducing reference dependence and loss aversion we show that truthful communication is possible in equilibrium and we characterize the conditions under which it can arise intuitively these behavioral biases introduce a cost of overstating one s valence as overstatements may shift the electorate s preferences toward better skilled opponents

why is fiscal policy often procyclical many countries especially developing ones follow procyclical fiscal policies namely spending goes up taxes go down in booms and spending goes down taxes go up in recessions we provide an explanation for this suboptimal fiscal policy based upon political distortions and incentives for less than benevolent government to appropriate rents voters have incentives similar to the starving the leviathan classic argument and demand more public goods or fewer taxes to prevent governments from appropriating rents when the economy is doing well we test this argument against more traditional explanations based purely on borrowing constraints with a reasonable amount of success

the role of the state and the hierarchy of money this paper uses minsky s definition of money as a two sided balance sheet phenomenon to challenge many common positions on the nature evolution and role of money his definition is applied to two opposing theories in the history of monetary debates and it is shown that the chartalists as opposed to the metallists developed a general theory of money that can be applied equally convincingly to the entire era of state money this theory is then used to show that the state s power to make and enforce tax laws renders its money the most acceptable form of debt within what can be considered a hierarchy of monies this leads to some important policy implications as well as a strengthening of the endogenous money position copyright 2001 by oxford university press

polarization and corruption in america abstract using panel data from the us states we document a robust negative relationship between state level government corruption and ideological polarization this finding is sustained when state polarization is instrumented using lagged state neighbor ideology we argue that polarization increases the expected costs of engaging in corruption especially deterring marginal low level corruption consistent with this thesis federal prosecutorial effort falls and case quality increases with polarization tangible anti corruption measures including the stringency of state ethics laws and independent commissions for redistricting are also associated with increased state polarization

preferences for redistribution a country comparison of fairness judgements this paper seeks to explain within and between country variation in redistributive preferences in terms of self interest concerns and an input based concept of fairness which we examine by looking at the effects of beliefs regarding the causes of income differences results of estimations based on data for 25 countries indicate that both factors are indeed important determinants of redistribution support in line with hypothesised patterns we find that while differences in beliefs on what causes income differences seem to be important for explaining within country variation in redistributive preferences they do little to explain between country differences differences in the effects of holding certain beliefs however are important for explaining between country variation in redistributive preferences suggesting considerable heterogeneity across societies in what is considered as fair

linking conflict to inequality and polarization in this paper we study a behavioral model of conflict that provides a basis for choosing certain indices of dispersion as indicators for conflict we show that a suitable monotone transform of the equilibrium level of conflict can be proxied by a linear function of the gini coefficient the herfindahl hirschman fractionalization index and a specific measure of polarization due to esteban and ray jel classification d74 d31

public protests and policy making technological advances and the development of social media have made petitions public protests and other form of spontaneous activism increasingly common tools for individuals to influence decision makers to study these phenomena in this article i present a theory of petitions and public protests that explores their limits as mechanisms to aggregate information the key assumption is that valuable information is dispersed among citizens through petitions and protests citizens can signal their private information to the policy maker who can then choose to use it or not i first show that if citizens individual signals are not sufficiently precise information aggregation is impossible no matter how large is the population of informed citizens even if the conflict with the policy maker is small i then characterize the conditions on conflict and the signal structure that guarantee information aggregation when these conditions are satisfied i show that full information aggregation is possible as the population grows to infinity when they are not satisfied i show that information aggregation may still be possible if social media are available

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

social limits to redistribution in many countries equality of political rights including the right to vote over taxes and transfers goes along with substantial inequality of economic conditions this observation lies at the root of one fundamental issue in political economy one about the factors that limit the extent of redistribution in democracies the conventional economic wisdom on this issue can roughly be summarized by two arguments firstly redistributive taxation may be limited by various kinds of incentive costs of taxation as e g in james a mirrlees 1971 kevin w s roberts 1977 dennis n epple and thomas romer 1991 and thomas piketty 1995 secondly redistribution may be dampened by the lobbying activity of high income groups and by various imperfections inherent to the political process that determines the tax system as e g in gary s becker 1983 and john e roemer 1995 while both arguments offer illuminating insights into the phenomenon of redistribution they are also based on a very crude description of human behavior one which ignores social motivations of action both in the economic and the political sphere the present paper develops an explanation that takes such motivations into account specifically it shows that limits to redistribution may arise when economic inequality has an informational value for social decisions our approach is based upon the following observation many goods and decisions that heavily affect an individual s quality of life are not allocated or made through markets but through social interactions thomas scitovsky 1976 for instance although people have strong preferences over how they are treated by others and over whom they mate with these things are not the object of market transactions a number of sources of satisfaction like conversation dinners and parties playing with others and being observed and admired are nonmarket goods for which a keen social competition between individuals often develops as shown by harold cole et al 1992 the existence of social rather than market competition for some goods can endogenously generate a concern for relative position in the income distribution when information about relative income is private individuals become interested in the observable consumption differentials between them and their social competitors since consumption differentials are influenced by redistributive taxation the political attitudes of people toward redistribution will be shaped by its expected impact on social competition in some identifiable environments this concern for social success may be the crucial factor that limits the extent of redistribution desired by a majority of voters specifically while the middle class may obtain economic benefits from a large amount of redistributive taxation it may oppose an equalization of living standards since this would harm its social success the fear of losing social status in favor of the poor induces the middle class to enter a political alliance with the rich which supports conservative taxation programs in the sociological literature scholars of voting behavior have often suggested that the need for social recognition plays a crucial role in shaping political attitudes seymour m lipset 1967 pointed out that white collar workers tend to be socially valued similarly as those higher in the system and although their income may be only slightly larger than that of manual workers white collars are much more likely to corneo department of economics university of osnabruck rolandstrasse 8 d 49069 osnabruck germany cesifo munich and cepr london gruner department of economics university of mannheim d 68131 mannheim germany iza bonn and cepr london we would like to thank emmanuelle auriol dieter bos peter funk mike hout olivier jeanne peter jonas georg noldeke thomas piketty regis renault john roemer jens weidmann and three anonymous referees for insightful comments and suggestions we have also benefited from the comments of participants at workshops and conferences in barcelona bonn davis jena maastricht magdeburg mannheim montreal munich rotterdam silvaplana tel aviv tilburg toulouse and warwick at which we presented earlier versions of this work financial support from the deutsche forschungsgemeinschaft sfb 303 at the university of bonn is gratefully acknowledged

challenger entry and voter learning we develop a model of strategic interaction between voters and potential electoral challengers to sitting incumbents in which the very fact of a costly challenge conveys relevant information to voters given incumbent failure in office challenger entry is more likely but the threat of entry by inferior challengers creates an incentive for citizens to become more politically informed at the same time challenges to incumbents who perform well can neutralize a voter s positive assessment of incumbent qualifications how a voter becomes politically informed can in turn deter challengers of different levels of competence from running depending on the electoral environment the model permits us to sharpen our understanding of retrospective voting the incumbency advantage and the relationship between electoral competition and voter welfare while pointing to new interpretations of and future avenues for empirical research on elections

the strength of issues using multiple measures to gauge preference stability ideological constraint and issue voting a venerable supposition of american survey research is that the vast majority of voters have incoherent and unstable preferences about political issues which in turn have little impact on vote choice we demonstrate that these findings are manifestations of measurement error associated with individual survey items first we show that averaging a large number of survey items on the same broadly defined issue area for example government involvement in the economy or moral issues eliminates a large amount of measurement error and reveals issue preferences that are well structured and stable this stability increases steadily as the number of survey items increases and can approach that of party identification second we show that once measurement error has been reduced through the use of multiple measures issue preferences have much greater explanatory power in models of presidential vote choice again approaching that of party identification

repeated shocks and preferences for redistribution abstract a society that believes wealth to be determined by random luck rather than by merit demands more redistribution we present evidence of this behavior by exploiting a natural experiment provided by the l aquila earthquake in 2009 which hit a large area of central italy through a series of destructive shakes over eight days matching detailed information on the ground acceleration registered during each shock with survey data about individual opinions on redistribution we show that the average intensity of the shakes is associated with subsequent stronger beliefs that for a society to be fair income inequalities should be leveled by redistribution the shocks however are not all alike we find that only the last three shakes occurred on the fourth and the eighth day of the earthquake have a statistically significant impact overall we find that the timing and repetition of the shocks play a role in informing redistributive preferences

social mobility and the demand for redistribution the poum hypothesis this paper examines the often stated idea that the poor do not support high levels of redistribution because of the hope that they or their offspring may make it up the income ladder this prospect of upward mobility poum hypothesis is shown to be fully compatible with rational expectations and fundamentally linked to concavity in the mobility process a steady state majority could even be simultaneously poorer than average in terms of current income and richer than average in terms of expected future incomes a e rst empirical assessment suggests on the other hand that in recent u s data the poum effect is probably dominated by the demand for social insurance in the future everyone will be world famous for e fteen minutes andy warhol 1968

optimal retention in agency problems this paper studies the interaction between a single long lived principal and a series of short lived agents in the presence of both moral hazard and adverse selection we assume that the principal can influence the agents behavior only through her choice of a retention rule this rule is further required to be sequentially rational i e no precommitment is allowed we provide general conditions under which equilibria exist where a the principal adopts a cut off rule under which agents are retained only when the reward they generate exceeds a critical bound and b agents separate according to type with better agents taking superior actions we show that in equilibrium a retained agent s productivity is necessarily declining over time but that retained agents are also more productive on average than untried agents due to selection effects finally we show that for each given type agents of that type are more productive in the presence of adverse selection than when there is pure moral hazard i e when that type is the sole type of agent in the model nonetheless adding uncertainty about agent types cannot benefit the principal except in uninteresting cases

dynamic government performance honeymoons and crises of confidence we use a formal theoretical framework to explore the interplay between a government s longevity and its performance ministers perform well when their careers are valuable this is so when the government s duration is expected to be long the government s survival depends on its popularity and finally that popularity depends on its ministers performance the feedback loop between performance and longevity means that multiple rational expectations equilibria can arise ministers work hard for a popular government but divert efforts elsewhere if they believe the government is doomed these alternatives are both self fulfilling prophecies however the presence of perhaps small random events that buffet the performance and popularity of a government is sufficient to pin down a unique equilibrium we explore the dynamics that arise a crisis of confidence involving the rapid collapse of a government s performance is sparked when a sequence of negative shocks push the popularity of the government below a unique critical threshold

the flypaper effect identifying areas for further research the flypaper effect literature dates back three decades it is overwhelmingly neo classical in approach attempting to improve the median voter demand model and or temper it with public choice supply side perspectives whilst this approach provided valuable early substantial analytical insights more recent papers seem to have contributed only marginally to an understanding of the flypaper effect if indeed it exists at all hence as well as providing a long overdue comprehensive review of the literature on the flypaper effect this paper identifies more productive avenues for further research

why do members of congress support agricultural protection it seems paradoxical that until recently developed countries have continued subsidizing agriculture even though their agricultural sectors had been declining in relative importance since the middle of the 20th century what drives support for agricultural protection the broad array of subsidies to farmers and taxes and quotas imposed on agricultural imports in developed countries we answer this question by testing three competing hypotheses about what drives support for agricultural protection in the us i legislator preferences ii electoral incentives or iii lobbying using data on the roll call votes of the members of the 106th through the 110th congresses 1999 2009 and the scores given to each legislator by the farm bureau our findings suggest that electoral incentives explain a great deal of the variation in support for agricultural protection but that legislator preferences and lobbying might play a role too moreover legislator preferences and electoral incentives appear to be substitutes for one another why does congress support agricultural protection because many members have electoral incentives to and because many of those who do not still have other personal or strategic interests at stake

lame ducks and local fiscal policy quasi experimental evidence from portugal i use the introduction of mayoral term limits in portugal to identify how an exogenous variation in eligibility for office affects policy decisions relying on a quasi experimental difference in differences approach i find that term limited incumbents pursue more conservative fiscal policies than those who are eligible for re election heterogeneous effects show that the treatment effects primarily reflect the behaviour of right leaning term limited incumbents results are in line with a model in which right leaning officeholders try to maintain a good reputation by pleasing an electorate prone to redistribution while they are eligible but adopt policies closer to their true preferences when term limited

beyond the median voter preferences district heterogeneity and political representation despite the centrality of the median voter prediction in political economy models overwhelming empirical evidence shows that legislators regularly take positions that diverge significantly from the preferences of the median voter in their districts however all these empirical studies to date lack the necessary data to directly measure the preferences of the median voter we utilize a unique data set consisting of individual level voting data that allows us to construct direct measures of voter preferences we find that legislators are most constrained by the preferences of the median voter in homogeneous districts

segregation and the quality of government in a cross section of countries we provide a new compilation of data on ethnic linguistic and religious composition at the subnational level for a large number of countries using these data we measure segregation of groups within the country to overcome the endogeneity problem that arises because of mobility and endogenous in ternal borders we construct an instrument for segregation we find that more ethnically and lin guistically segregated countries i e those where groups live more spatially separately have a lower quality of government there is no relationship between religious segregation and governance trust is an important channel of influence it is lower in more segregated countries jel hi 1 h77 j15 017 z12 z13 racial and religious conflicts are often associated with poor politicoeconomic performance especially in developing countries economists have recently turned their attention to ethnolinguistic fractionalization as an explanation of differences in the pace of development starting with an influential paper by william easterly and ross levine 1997 since then many others have shown that fractionalization is negatively correlated with a host of policy outcomes and the quality of government 1 however many ethnically diverse countries the united states for instance are quite successful what makes different countries more or less capable of handling

credible communication in dynastic government abstract this paper studies information disclosure in a model of dynastic government when information about past policy choices comes exclusively from the reports of previous administrations each administration has an incentive to choose its suboptimal one shot expenditure policy and then misrepresent its choice to its successor consequently it has been suggested that horizontal accountability i e a system of governance where auditing functions lie outside the executive branch can ensure credible disclosure of a government s activities this paper suggests a cautious approach to that view the baseline model examines the reporting incentives of an external auditor who can independently verify the information each period even with auditing credible disclosure is shown to be problematic various extensions to this baseline model are examined in one extension liberal i e those prefering larger government expenditures and conservative those prefering smaller expenditures regimes and auditors evolve over time it is shown that conservative liberal auditors are not credible when the current regime is also conservative liberal moreover because information transmission stops when the auditor s and the regime s biases coincide effective deterrents even in the good periods when the auditor s and the administration s biases differ are difficult to construct in all periods the equilibrium requirement of auditor neutrality constrains the dynamic incentives for efficient policy choices these constraints are shown to bind away from optimal policies in standard constructions of equilibrium various ways in which auditing protocols can overcome these problems are discussed

energy polarization and popular representation evidence from the russian duma in this article we introduce the term energy polarization to explain the politics of energy market reform in the russian duma our model tests the impact of regional energy production party cohesion and ideology and electoral mandate on the energy policy decisions of the duma deputies oil gas and electricity bills and resolution proposals between 1994 and 2003 we find a strong divide between single member district smd and proportional representation pr deputies high statistical significance of gas production is demonstrated throughout the three duma terms and shows gazprom s key position in the post soviet russian economy oil production is variably significant in the two first dumas when the main legislative debates on oil privatization occur there is no constant left right continuum which is consistent with the deputies proclaimed party ideology the pro and anti reform poles observed in our poole based single dimensional scale are not necessarily connected with liberal and state oriented regulatory policies respectively party switching is a solid indicator of russia s polarized legislative dynamics when it comes to energy sector reform

bipolar multicandidate elections with corruption the goals of democratic competition are not only to implement a majority s preference on policy questions but also to provide a deterrent against corrupt abuse of power by political leaders we consider a simple model of multicandidate elections in which different electoral systems can be compared according to these two criteria among a wide class of single winner scoring rules only approval voting is found to satisfy both effectiveness against corruption and majoritarianism for this model

competition and incentives with motivated agents a unifying theme in the literature on organizations such as public bureaucracies and private nonprofits is the importance of mission as opposed to profit as an organizational goal such mission oriented organizations are frequently staffed by motivated agents who subscribe to the mission this paper studies incentives in such contexts and emphasizes the role of matching the mission preferences of principals and agents in increasing organizational efficiency matching economizes on the need for high powered incentives it can also however entrench bureaucratic conservatism and resistance to innovations the framework developed in this paper is applied to school competition incentives in the public sector and in private nonprofits and the interdependence of incentives and productivity between the private for profit sector and the mission oriented sector through occupational choice jel d23 d73 h41 l31 the late twentieth century witnessed a historic high in the march of market capitalism with unbridled optimism in the role of the profit motive in promoting welfare in the production of private goods moreover this generated a broad consensus on the optimal organization of private good production through privately owned competitive firms when it comes to the provision of collective goods no such consensus has emerged debates about the relative merits of public and private provision still dominate this paper suggests a contracting approach to the provision of collective goods it focuses on two key issues how to structure incentives and the role of competition between providers at its heart is the idea that organizations that provide collective goods cohere around a mission 2 thus production of collective goods can be viewed as mission oriented

social divisions and institutions assessing institutional parameter variation this paper investigates the hypothesis that the association between property rights institutions and income is weaker in countries with high social divisions it argues that social divisions should have a negative effect on perceived institutional inclusiveness which in turn should depress institutional payoffs absent a property rights indicator that captures the perceived inclusiveness of institutions social divisions should then weaken the observed association between property rights institutions and income the empirical results support this hypothesis and highlight the importance of evaluating whether the institutions measure used captures the institutional framework applying to the population at large

incentive contracts and elections for politicians with multi task problems abstract we consider a model with a politician facing a multi task problem while in office the reelection mechanism distorts the allocation of effort in favor of tasks whose outcomes can be measured more precisely than others we show that a combination of elections and incentive contracts can alleviate this inefficiency the incentive contract does not require direct information about the performance of the politician and is self financing across terms

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

preferences for redistribution in the land of opportunities this paper explores how individual preferences for redistribution depend on future income prospects in addition to estimating the impact of individuals socioeconomic background and of their subjective perceptions of future mobility we employ panel data to construct dobjectivet measures of expected gains and losses from redistribution for different categories of individuals we find that such measures have considerable explanatory power and perform better than dgeneral mobilityt indexes we also find that preferences for redistribution respond to individual beliefs on what determines one s position in the social ladder ceteris paribus people who believe that the american society offers equal opportunities are more averse to redistribution d 2004 published by elsevier b v

spatial models of delegation canonical assumptions this approach may be justified on grounds of tractability but the failure to grasp the significance of different assumptions and push beyond specific models has limited our understanding of the incentives for delegation consequently the justifications for delegation that have received recent scrutiny and testing differ from some of the more plausible justifications offered by informal studies of delegation we show that surprisingly few results in the literature hinge on risk aversion and surprisingly many turn on the ignored though equally canonical technological assumption that uncertainty is fixed relative to policies relaxing the key assumptions about dimensionality and functional forms provides a clearer intuition about delegation one that is closer to classical treatments the theory allows us to relate different institutional features commitment specialization costs monitoring multiple principals to delegation s observable properties lthough the practice of delegation dates back to antiquity the book of exodus refers to itonly in the last century has much scholarship examined its causes and effects and only recently has research focused on developing and testing formal theories that explore the logic of delegation 1 despite this recent surge in formal work on delegation scholars have failed to generalize several important properties of the early pathbreaking models instead of revisiting assumptions that were initially imposed for the sake of convenience recent papers tend to maintain and reinforce the cannonical assumptions applying these limited models to ever richer institutional settings although the breadth of understanding about delegation across various settings is impressive this approach has come at a price it has produced an understanding that only partly captures delegation s informational rationale in even the simplest contexts the literature is rich in predictions about delegation in complicated institutional settings when stylized foundational assumptions are satisfied but poor in explanations for and intuitions about why a poorly informed boss chooses to delegate to subordinates with different preferences moreover we lack an understanding of what basic features drive the boss s choice of which agent is given control of policy for example scholars have provided detailed explanations about how separation of power systems affect delegation by legislatures to agencies but the basic question does the informational rationale for delegation hinge on the boss s risk preferences has been ignored despite the analysis of complicated signaling and screening games between bosses with ex post controls and their subordinates we do not yet understand when or why the ally principle the boss picks the most ideologically similar agent as delegatee fails in simple settings we try to put models of delegation on more solid footing by examining a larger more general set of environments we eschew the canonical assumptions of quadratic utility or even risk aversion unidimensional outcome spaces and additive and homogeneous random shocks to policy our analysis focuses first on two basic questions when does delegation occur and to whom does the boss delegate we then consider richer institutionally driven extensions e g the role of commitment and monitoring devices the impact of multiple bosses and the institution in which their preferences are aggregated through a sequence of nested models with varying levels of abstraction the analysis isolates the relations between various assumptions and different findings

electoral control in new democracies the perverse incentives of fluid party systems how do fiuid party systems that exist in many new democracies affect democratic accountability to address this question the authors analyze a new database of all legislative incumbents and all competitive elections that took place in poland since 1991 they find that when district level economic outcomes are bad voters in that country punish legislators from a governing party and reward legislators from an opposition party as a result electoral control in poland works through political parties just as it does in mature democracies however the authors also find that in contrast to mature democracies legislators from a governing party tend to switch to an opposition party when the economy in their district deteriorates when they do so their chances of reelection are better than those of politicians who remained loyal to governing parties and are no worse than those of incumbents who ran as opposition party loyalists these empirical results suggest that while elections in new democracies function as a mechanism of political control fiuid party systems undermine the extent to which elections promote democratic accountability

politics and the suboptimal provision of counterterror i present a model of interactions between voters a government and a terrorist organization the model focuses on a previously unexplored conceptualization of counterterrorism as divided into tactic specific observable and general unobservable tactics when there is divergence between voters and government preferences strategic substitution among different modes of attack by terrorists and agency problems between the voters and government create a situation in which the politically optimal counterterrorism strategy pursued by the government in response to electoral and institutional incentives is quite different from the security maximizing counterterrorism strategy in particular in response to electoral pressure the government allocates resources to observable counterterror in excess of the social optimum this problem is particularly severe when governments put great weight on rent seeking or care less about counterterror than do voters and when terrorists have a large set of tactics from which to choose voters can decrease the magnitude of the agency problem by increasing the benefits of reelection by for example slackening requirements for nonsecurity related public goods i have received valuable comments and advice from bruce bueno de mesquita randy calvert martin cripps james fearon amanda friedenberg robert powell matthew stephenson and barbara walter i thank the weidenbaum center on the economy government and public policy at washington university for financial support

candidates credibility and re election incentives i study elections between citizen candidates who cannot make binding policy commitments before taking office but who are accountable to voters due to the possibility of re election in each period a representative voter chooses among heterogeneous candidates with known policy preferences the elected candidate chooses the policy to implement and how much rent seeking to engage in when in office as the voter decides both which candidate to elect and subsequently whether the candidate is retained this framework integrates elements of electoral competition and electoral accountability i show that in the best stationary equilibrium when utility functions are concave over policy non median candidates are elected over candidates with policy preferences more closely aligned with the voter in this equilibrium there are two candidates who are elected at some history and the policies these candidates implement in office do not converge this divergence incentivizes candidates to engage in less rent seeking increasing voter welfare copyright 2013 oxford university press

when complexity meets finance a contribution to the study of the macroeconomic effects of complex financial systems in the last decade complexity economics has emerged as a powerful approach to the understanding of the most relevant factors influencing economic development the concept of economic complexity has been applied to the study of different economic issues such as economic growth technological change and inequality with this work we aim at extending the application of this concept to the study of the financial side of the economy and in particular of the macroeconomic effects of rising financial complexity in this paper we present an agent based model integrating an increasingly complex financial sector with a real side of the economy populated among other sectors by heterogeneous households we test the systemic impact that the increasing complexity of both the financial system and the financial products it manufactures bear on economic growth macroeconomic stability and inequality we find mixed results with respect to the positive economic implications the existing literature ascribes to products complexity and deepening production capabilities despite higher financial complexity may lead to faster growth our model suggests that this comes at the cost of heightened financial fragility a more crisis prone economic system and increasing levels of income and wealth inequality according to these findings and consistently with pioneering insights from minsky we claim that rising complexity does not always entail positive consequences for the well being of the economy this is particularly true when it comes to financial innovations and financial complexity

social preferences self interest and the demand for redistribution preferences for redistribution may be influenced by values and beliefs about distributive justice as well as by self interest people may prefer more redistribution to the poor if they believe that poverty is caused by circumstances beyond individual control therefore beliefs about the causes of income may affect demand for redistribution alternatively the effect of these beliefs on redistributive preferences may be spurious if they are correlated with income and self interest is not properly controlled for they may also measure incentive cost concerns using social survey data i find that self interest cannot explain the effect of these beliefs on redistributive preferences 2001 elsevier science b v all rights reserved

the political economy of the us mortgage default crisis we examine the effects of constituents special interests and ideology on congressional voting on two of the most significant pieces of legislation in us economic history representatives whose constituents experience a sharp increase in mortgage defaults are more likely to support the foreclosure prevention act especially in competitive districts interestingly representatives are more sensitive to defaults of their own party constituents special interests in the form ofhigher campaign contributions from the financial industry increase the likelihood of supporting the emergency economic stabilization act however ideologically conservative representatives are less responsive to both constituent and special interests jel d72 g21 g28

political economy of mechanisms we study the optimal mirrlees taxation problem in a dynamic economy in contrast to the standard approach where the taxation mechanism is operated by a benevolent planner with full commitment power we focus on economies in which policy decisions are made by self interested politicians who cannot commit to policies the society controls politicians using elections we show that the provision of incentives to politicians can be partly separated from redistribution across agents and that political economy constraints can be modeled as introducing additional aggregate distortions in the dynamic mirrlees problem we provide conditions under which the political economy distortions persist or disappear in the long run if the politicians are as patient as the agents the best sustainable mechanism leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear in contrast when politicians are less patient than the citizens positive aggregate labor and capital taxes remain even asymptotically we conclude by providing a brief comparison of centralized

do voters affect or elect policies evidence from the u s house there are two fundamentally different views of the role of elections in policy formation in one view voters can affect candidates policy choices competition for votes induces politicians to move toward the center in this view elections have the effect of bringing about some degree of policy compromise in the alternative view voters merely elect policies politicians cannot make credible promises to moderate their policies and elections are merely a means to decide which one of two opposing policy views will be implemented we assess which of these contrasting perspectives is more empirically relevant for the u s house focusing on elections decided by a narrow margin allows us to generate quasi experimental estimates of the impact of a randomized change in electoral strength on subsequent representatives roll call voting records we find that voters merely elect policies the degree of electoral strength has no effect on a legislator s voting behavior for example a large exogenous increase in electoral strength for the democratic party in a district does not result in shifting both parties nominees to the left politicians inability to credibly commit to a compromise appears to dominate any competition induced convergence in policy

bargaining in legislatures over particularistic and collective goods we develop a bargaining model in which a legislature divides a budget among particularistic and collective goods by incorporating both private and public goods in a unified model we uncover nonmonotonic relationships between legislative preferences for collective spending and the amount of the budget actually allocated to collective goods put simply policy proposers can exploit coalition partners strong preferences for public goods to actually provide fewer public goods in equilibrium while directing more private goods to themselves these results explain why policy reforms to limit special interest spending often fail this unified model also sheds new light on when legislatures prefer open or closed amendment rules and when coalitions take different sizes and shapes

democracy the market and the logic of social choice this article compares the types of knowledge democracy and the market require to rationally allocate resources i argue that high levels of public ignorance and voters inability to compare the effects of different parties policies make it difficult for parties and elections to rationally allocate resources markets mitigate these problems because the simultaneous existence of multiple firms products facilitates comparisons that mimic the conditions of scientific experimentation the economy of knowledge involved in such comparisons indicates there are epistemic advantages to using firms and markets instead of political parties and elections to allocate scarce resources however in contrast to arguments that markets merely provide better information than political decisions i argue markets epistemic advantages are derived from the way they facilitate comparisons that minimize decision makers need for knowledge or understanding