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Session 5: Political Economic Theory

July 30-31, 2020
Organized by: 
  • Avi Acharya, Stanford University
  • Kyle Bagwell, Stanford University
  • Steve Callander, Stanford GSB
  • Hulya Eraslan, Rice University
  • Dana Foarta, Stanford GSB
  • Tom Palfrey, California Institute of Technology

This session will bring together researchers from political science and economics who apply economic theory to the study of politics. This includes work in the areas of voting theory, political bargaining, policy-making and implementation, lobbying and regulation, and the media and information environment in which politics takes place. The session will encourage productive dialogue between researchers in economic theory that have developed ideas and tools relevant to the study of politics, and those in political science study questions and topics that can be addressed by economic theory.

In this Session

Jul 30 | 9:00 am to 9:45 am

Coalition Formation in Legislative Bargaining

Presented by: Marco Battaglini (Cornell University)

We propose a new model of legislative bargaining in which coalitions have different values, reflecting the fact that the policies they can pursue are constrained by the identity of the coalition members. In the model, a formateur picks a coalition and negotiates for the allocation of the surplus it is expected to generate. The formateur is free to change coalitions to seek better deals with other coalitions, but she may lose her status if bargaining breaks down, in which case a new formateur is chosen. We show that as the delay between offers goes to zero, the equilibrium allocation converges to a generalized version of a Nash Bargaining Solution in which —in contrast to the standard solution— the coalition is endogenous and determined by the relative coalitional values. A form of the hold-up problem specific to these bargaining games may lead to significant inefficiencies in the selection of the equilibrium coalition. We use the equilibrium characterization of the distortions to study the role of the head of state in avoiding (or containing) distortions. We also show that the model helps rationalizing well known empirical facts that are in conflict with the predictions of standard non-cooperative models of bargaining: the absence of significant (or even positive) premia in ministerial allocations for formateurs and their parties; the occurrence of supermajorities; and delays in reaching agreements.

Jul 30 | 9:45 am to 10:00 am


Jul 30 | 10:00 am to 10:45 am

Bargaining Over Mandatory Spending and Entitlements

Presented by: Marina Azzimonti (Stony Brook University)
Co-Author(s): Laura Karpuska (BlueLine Asset Management) and Gabriel Mihalache (Stony Brook University)

Do mandatory spending rules improve society’s welfare? To answer this, we analyze an infinite horizon dynamic political-economy model with two parties which disagree on how to split a fixed budget between public and private goods. We study the welfare implications of introducing two types of budget rules, mandatory spending on public goods and entitlement programs, the latter imposing constraints on the private goods’ allocations that can be implemented. We model budget rules following the literature on legislative bargaining with an endogenous status quo. Under a mandatory spending rule on public goods, expenditures are governed by criteria determined by enacted law. In particular, previous year’s spending bill is applied in the current year unless explicitly changed by a majority of policymakers. Entitlement programs, on the other hand, impose restrictions on the provision of private transfers through eligibility rules and generosity formulas that can only be modified with bi-partisan support. We find that entitlement programs induce over-provision of private goods and under-provision of public goods, whereas the opposite is true under a mandatory spending rule on public goods. We show that mandatory spending rules are typically associated with larger welfare gains than entitlement programs. The desirability of the rule, however, depends on the degree of political turnover: (i) with high enough political turnover, both budget rules are better than discretion, but (ii) entitlement programs can generate welfare losses when political persistence is large. This happens because entitlement rules actually increase the volatility of private and public consumption, and reduce public goods’ provision significantly. Finally, we describe conditions under which budget rules would arise in a bargaining equilibrium.

Jul 30 | 10:45 am to 11:15 am


Jul 30 | 11:15 am to 12:00 pm

Deliberative Minipublics

Presented by: Arjada Bardhi (Duke University)
Co-Author(s): Nina Bobkova (Rice University)
Jul 30 | 12:00 pm to 1:15 pm


Jul 30 | 1:15 pm to 2:00 pm

Informational Lobbying and Activism

Presented by: Bard Harstad (University of Oslo)
Co-Author(s): Georgy Egorov (Northwestern University)

In many markets, both consumers and regulators care about characteristics of the product itself (e.g., safety) or of the production process, (e.g., pollution). At the same time, it is typical that neither the regulator nor consumers have precise information at the time of buying. NGOs and activists often have the motivation, expertise, and capacity to acquire such information, but to influence the market they need to present this information to either consumers, who might subsequently boycott the product, or to the regulator, who might enforce the regulation or withdraw the license. We show that activists are more likely to choose the former strategy (informational boycotts) if the market is very competitive and the latter strategy (informational lobbying) otherwise. Our analysis suggests that the regulator may prefer ”closed-door” policy, where she commits to ignore information from NGOs, as this makes boycotts more effective, and that this is more likely in historically more competitive markets such as the U.S.

Jul 30 | 2:00 pm to 2:30 pm


Jul 30 | 2:30 pm to 3:15 pm

Endogenous Experimentation in Organizations

Presented by: Germán Gieczewski (Princeton University)
Co-Author(s): Svetlana Kosterina (Princeton University)

We study policy experimentation in organizations with endogenous membership. An organization initiates a policy experiment and then decides when to stop it based on its results. As information arrives, agents update their beliefs, and become more pessimistic whenever they observe bad outcomes. At the same time, the organization’s membership adjusts endogenously: unsuccessful experiments drive out conservative members, leaving the organization with a radical median voter. We show that, under mild conditions, the latter effect dominates. As a result, policy experiments, once begun, continue for too long. In fact, the organization may experiment forever in the face of mounting negative evidence. This result provides a rationale for obstinate behavior by organizations, and contrasts with models of collective experimentation with fixed membership, in which under-experimentation is the typical outcome.

Jul 30 | 3:15 pm to 3:45 pm


Jul 30 | 3:45 pm to 4:30 pm

Mediating Conflict in the Lab

Presented by: Alessandra Casella (Columbia University)
Co-Author(s): Evan Friedman & Manuel Perez Archila
Jul 31 | 9:00 am to 9:45 am

Accountability and Political Competition

Presented by: Arianna Degan (Université du Québec à Montréal)
Co-Author(s): Braz Camargo (Sao Paulo School of Economics)

Is increasing political competition good for voters? We study this question in the political career concerns framework. Our results show that the relationship between political competition, viewed as the cost of challenging incumbent politicians, and the politicians’ incentive to behave in the voters’ interest is undetermined. The same holds for the relationship between political competition and voter welfare, where selection of politicians into office also matters. In particular, voter welfare need not be maximized when challenging incumbent politicians is costless. So, unlike in economy markets, where increased competition is beneficial, in political markets increased competition can have adverse effects.

Jul 31 | 9:45 am to 10:00 am


Jul 31 | 10:00 am to 10:45 am

Political Career Dynamics

Presented by: Elliot Lipnowski (Columbia University)
Co-Author(s): Avi Acharya (Stanford University) and João Ramos (University of Southern California)

How does political accountability shape the careers of politicians? We examine a model of accountability under repeated moral hazard, and study the career dynamics of incumbent politicians under the voter-optimal equilibrium. When discounting is low then stationary equilibria are optimal. But for higher rates of discounting, the equilibrium path features richer dynamics under which the re-election prospects of a politician improve with good performance and deteriorate with bad performance. First term politicians are among the most electorally vulnerable, while a politician that is able to succeed in office for a sufficiently long period of time becomes entrenched, never exerting effort and never being replaced. We show that entrenchment is a necessary consequence of providing politicians with the optimal incentives. In particular, we cannot conclude from the fact that a politician becomes entrenched that accountability was not at work.

Jul 31 | 10:45 am to 11:15 am


Jul 31 | 11:15 am to 12:00 pm

Crime Entanglement, Deterrence and Witness Credibility

Presented by: Harry Pei (Northwestern University)
Co-Author(s): Bruno Strulovici (Northwestern University)

When a defendant is accused of multiple crimes, one may consider punishing him if theprobability that he has committed at least one of these crimes is high. We show that entangling criminal accusations in this way can severely harm deterrence and reduce witnesses’ credibility. When conviction entails a large punishment, an individual’s decisions to commit distinct crimes are substitutes and witnesses’ reports are complements. This tension induces negatively correlated private information and a coordination motive among witnesses, which leads to uninformative reports, ineffective deterrence, and frequent crimes in equilibrium. We discuss various remedies to restore credibility and reduce crime.

Jul 31 | 12:00 pm to 1:15 pm


Jul 31 | 1:15 pm to 2:00 pm

Voting and Trading: The Shareholder’s Dilemma

Presented by: Adam Meirowitz (University of Utah, David Eccles School of Business)
Co-Author(s): Shaoting Pi (University of Utah, David Eccles School of Business)

We develop a game theoretic model of shareholder voting that captures the fact that shareholders are ultimately traders seeking to maximize the value of their portfolio. Whether or not this induces them to vote for policies that they believe will benefit the firm must be determined in equilibrium. The presence of liquidity generates a shareholder dilemma: Voting for the choice that a shareholder thinks is optimal for the firm maximizes her portfolio value only if she is pivotal; in all other instances it is better to protect her informational advantage over the market by strategically voting against her information–moving the share price and then capitalizing on her informational advantage by buying or selling shares that she understands are slightly mis-priced. We find that the shareholders’ dilemma requires that the equilibrium informativeness of voting must balance these forces and will tend to be quite low. As the number of shareholders tends to infinity shareholder’s votes are uncorrelated with their private information. Moreover, in all equilibria shareholders will have strong incentives to trade immediately after they vote and heterogeneity on which side of the market they are on depends on their private information. We close by showing how these incentives carryover in the presence of institutional investors that control a block of votes and isolate the relationship between liquidity and the informativeness of block voting.

Jul 31 | 2:00 pm to 2:30 pm


Jul 31 | 2:30 pm to 3:15 pm

Equitable Voting Rules

Presented by: Leeat Yariv (Princeton University)
Co-Author(s): Laurent Bartholdi (Institute of Advanced Studies, Lyon), Wade Hann-Caruthers (California Institute of Technology), Maya Josyula (California Institute of Technology) and Omer Tamuz (California Institute of Technology)
Jul 31 | 3:15 pm to 3:45 pm


Jul 31 | 3:45 pm to 4:30 pm

Are Trade Agreements Good for You?

Presented by: Giovanni Maggi (Yale University)
Co-Author(s): Ralph Ossa (University of Zurich)