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Session 5: Political Economic Theory

July 30-31, 2020, 7:55 am - 1:05 pm PDT
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 | 7:55 am to 8:40 am

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)

Moderator(s): Steve Callander, Tom Palfrey
Panelist(s): Adam Meirowitz, Alessandra Casella, Maggie Penn, Ashish Goel, Mark Fey, Arunava Sen

May’s Theorem (1952), a celebrated result in social choice, provides the foundation for majority rule. May’s crucial assumption of symmetry, often thought of as a procedural equity requirement, is violated by many choice procedures that grant voters identical roles. We show that a weakening of May’s symmetry assumption allows for a far richer set of rules that still treat voters equally. We show that such rules can have minimal winning coalitions comprising a vanishing fraction of the population, but not less than the square root of the population size. Methodologically, we introduce techniques from group theory and illustrate their usefulness for the analysis of social choice questions.

 

Jul 30 | 8:45 am to 9:30 am

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)

Moderator(s): Dana Foarta and Hulya Eraslan
Panelist(s): Laurent Bouton, Arjada Bardhi, Philip Bond, Evan Friedman, Howard Rosenthal

We develop a game theoretic model in which shareholders maximize the value of their portfolio and can buy or sell shares. Liquidity generates a shareholder dilemma: Voting for the policy that seems optimal for the firm maximizes portfolio value only when pivotal; in all other instances it is better to vote against one’s information and then buy or sell at the distorted price. The informativeness of individual votes must balance these forces and will tend to be quite low. As the number of shareholders tends to infinity each shareholder’s vote becomes uncorrelated with her private information and in the limit information aggregation does not obtain in a very strong sense even though the underlying information environment is very nice. The probability of making the correct decision converges to quantity strictly less than 1; moreover the limit is even lower than the probability that a single agent observing just one signal would make the correct decision.

Jul 30 | 9:35 am to 10:20 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)

Moderator(s): Dana Foarta, Hulya Eraslan
Panelist(s): Ying Chen, Facundo Piguillem, Adriana Piazza, Giovanni Maggi, Braz Camargo, Wiola Dziuda

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 | 10:25 am to 11:10 am

Coalition Formation in Legislative Bargaining

Presented by: Marco Battaglini (Cornell University)

Moderator(s): Hulya Eraslan, Avi Acharya
Panelist(s): Nageeb Ali, Svetlana Kosterina, Jan Zapal, Gary Cox, Salvatore Nunnari

We propose a new model of legislative bargaining in which coalitions may 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 contributes to generate significant inefficiencies in the selection of the equilibrium coalition. We show that the model helps rationalize 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 | 11:10 am to 11:30 am

Break

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

Political Career Dynamics

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

Moderator(s): Dana Foarta, Steve Callander
Panelist(s): Georgy Egorov, German Gieczewski, Carlo Prato, John Duggan, Cesar Martinelli, Andrea Matozzi

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, stationary equilibria are optimal and provide perfect incentives. For higher rates of discounting, however, the equilibrium path features richer dynamics under which a politician’s re-election prospects improve with good performance and deteriorate with bad performance. First-term politicians are among the most electorally vulnerable, while a politician who succeeds in office for sufficiently many terms becomes entrenched, exerting no subsequent effort and never being replaced. In our setting, entrenchment is a necessary consequence of providing politicians with optimal incentives. We therefore cannot conclude from the fact that a politician becomes entrenched that accountability was not at work.

Jul 30 | 12:20 pm to 1:05 pm

Accountability and Political Competition

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

Moderator(s): Tom Palfrey, Avi Acharya
Panelist(s): Federica Izzo, Peter Buisseret, Ken Shotts, Gabriel Gratton, Laura Karpuska,
Nina Bobkova

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 | 7:55 am to 8:40 am

Are Trade Agreements Good for You?

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

Moderator(s): Steve Callander, Kyle Bagwell
Panelist(s): Gabriel Mihalache, Jaume Ventura, Bard Harstad, Renee Bowen, Paola Conconi

We examine how deep agreements a§ect global welfare when such agreements are influenced by producer lobbies. We Önd that international cooperation on product standards can decrease welfare, and this is more likely to happen when producer lobbies are stronger. On the other hand, international cooperation on production regulations tends to enhance welfare when lobbying pressures are strong. Key to the welfare impact of deep agreements is whether the interests of producer lobbies in di§erent countries are aligned or in conáict: the former situation tends to occur with product standards, while the latter tends to occur with production regulations.

Jul 31 | 8:45 am to 9:30 am

Crime Aggregation, Deterrence, and Witness Credibility

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

Moderator(s): Kyle Bagwell, Dana Foarta
Panelist(s): Joao Ramos, Navin Kartik, Wade Hann-Caruthers, Dan Bernhardt, Edoardo Grillo

We present a model for the equilibrium frequency of offenses and the informativeness of witness reports when potential offenders can commit multiple offenses and witnesses are subject to retaliation risk and idiosyncratic reporting preferences. We compare two ways of handling multiple accusations discussed in legal scholarship: (i) When convictions are based on the probability that the defendant committed at least one, unspecified offense and entail a severe punishment, potential offenders induce negative correlation in witnesses’ private information, which leads to uninformative reports, information aggregation failures, and frequent offenses in equilibrium. Moreover, lowering the punishment in case of conviction can improve deterrence and the informativeness of witnesses’ reports. (ii) When accusations are treated separately to adjudicate guilt and conviction entails a severe punishment, witness reports are highly informative and offenses are infrequent in equilibrium.

Jul 31 | 9:35 am to 10:20 am

Mediating Conflict in the Lab

Presented by: Evan Friedman (Columbia University)
Co-Author(s): Alessandra Casella & Manuel Perez Archila (both Columbia University)

Moderator(s): Tom Palfrey, Avi Acharya
Panelist(s): Massimo Morelli, Marina Agranov, Erik Snowberg, Marco Battaglini,
Leeat Yariv, Pedro dal Bo

According to the theory of mechanism design, the presence of a mediator can strictly improve the chances for peace between two contestants. What is striking is that the result follows even when the mediator is less informed than the two parties and has no enforcement power. We test the theory in a lab experiment where two subjects negotiate how to share a resource. In case of conflict, the subjects’ privately known strength determines their payoff. The subjects send cheap talk messages about their strength to one another (in the treatment with direct communication) or to the mediator (in the mediation treatment), before making their demands or receiving the mediator’s recommendations. We find that, in line with the theory, messages are significantly more sincere when sent to the mediator. However, contrary to the theory, peaceful resolution is not more frequent, even when the mediator is a computer implementing the optimal mediation program. While the theoretical result refers to the best (i.e. most peaceful) equilibrium under mediation, multiple equilibria exist, and the best equilibrium is particularly vulnerable to small deviations from full truthfulness. Subiects are not erratic and their deviations induce only small losses in payoff, but translate into significant increases in conflict.

Jul 31 | 10:25 am to 11:10 am

Informational Lobbying and Activism

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

Moderator(s): Dana Foarta, Kyle Bagwell
Panelist(s): Mattias Polborn, Gleason Judd, Arianna Degan, Marina Azzimonti

 

Jul 31 | 11:10 am to 11:30 am

Break

Jul 31 | 11:30 am to 12:15 pm

Endogenous Experimentation in Organizations

Presented by: Germán Gieczewski (Princeton University)
Co-Author(s): Svetlana Kosterina (Princeton University)
Moderator(s): Hulya Eraslan, Avi Acharya
Panelist(s): Keith Schnakenberg, Elliot Lipnowski, Shaoting Pi, Alex Hirsch, Mike Powell

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 there are conditions under which 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 31 | 12:20 pm to 1:05 pm

Deliberative Minipublics

Presented by: Arjada Bardhi (Duke University)
Co-Author(s): Nina Bobkova (Rice University)

Moderator(s): Steve Callander, Kyle Bagwell
Panelist(s): Chris Edmond, Harry Pei, Omer Tamuz, Takuo Sugaya, Amanda
Friedenberg

Link to paper