The Political Economy of Governance

Rodrik (Journal of Economic Perspectives 28(1):189–208, Winter 2014), in a recent paper, calls on economists to recognize the role of ideas in institutional change. This chapter takes up the challenge by considering ideas about how the world works and ideas about the legitimacy of social arrangements, distinguishing between instrumental models (the relations between instruments and outcomes) and moral models (issues of legitimacy). I then explore an empirical case, the efforts by the government of Iceland 2009–2013 to dismantle the country’s regulatory system of ocean fisheries, which is based on individual transferable quotas and widely seen as the most efficient system of its kind in Europe. The exports of fish products have for more than a century been Iceland’s engine of growth. The attempts at introducing inefficient institutions came in the wake of, and even as a response to the country’s dramatic 2008 financial collapse. I identify seven instrumental and moral theories that were crucial for the reform process. The decision makers’ varying understanding and acceptance of these ideas gave substance to the traditional variables of power and interests and influenced how the agents responded to individual transferable quotas.

It is well established that institutions evolve in a path-dependent manner, yet this essay shows that certain types of formal institutions leave a cultural legacy by creating political attitudes and behaviors that can persist for a surprisingly long time even in the face of hostile material and institutional environments. Making use of a natural experiment of history, a partition of a homogenous population of ethnic Ukrainians between Austrian and Russian empires, the chapter demonstrates how differences in political preferences that came about as a result of a historical accident have persisted over the course of several centuries. The essay records contemporary differences in political attitudes and behaviors in a survey of over 1,600 individuals residing in settlements that are located within 15 miles of a long-defunct Austrian–Russian imperial border. The chapter also proposes and tests a theory of political identity transmission. It finds that families, as long as they remain embedded within likeminded communities, play a vital role in transmitting historical political identities. By contrast, state institutions, and especially schools, are dominant in identity building and transmission in families where historical political identities have not taken root.

This chapter compares the institutional differences between some European social actors and their implications in the policymaking process. We observe the difference between reinforcement of social pacts or reinforcement of social actors and their results in economic performance. We emphasize the pernicious effects of bargaining systems excessively based on institutional rewards and political rationales as opposed to centralized and coordinated bargaining system. If the roles of social actors in economic policymaking are restricted in exchange for monopoly of representation, that reduces the necessity to recruit new members and ensures access to public resources. In the case study between different countries firstly, we argue that social pacts are often short-sighted compromises with no compulsory clauses concerning policy outcomes. Secondly, we point out that political social pacts draw upon numerous trades off logics between the government and social actors. In this case, thirdly, such a scenario urges social actors to be focused primarily on institutional representation. However, they face serious constraints as far as most of the advisory forums and monitoring institutions remain outside the core of decision-making. The cases of Spain and Italy give the best examples to understand the incapacity to resolve political and economic problems with this instrument.

This chapter delves into the role of historical institutions and culture in current regional economic inequality in Spain. It starts from the theoretical basis that there exist certain cultural traits that are associated with a better economic performance within a liberal institutional framework—generalized trust, orientation toward political issues, associative participation, attitudes toward individual independence, etc. are highly persistent and were partly shaped by political experiences in the distant past. With regard to the relevant historical facts that could have led to the promotion of these cultural traits, this study relies on two different but related works: Tabellini (Journal of the European Economic Association, 8(4), 677–716, 2010) and Guiso et al. (Journal of the European Economic Association, 6(2–3), 295–320, 2008). Specifically, two historical political aspects that vary regionally are considered: the type of political institutions in the Early Modern Age and the level of local autonomy in the High Middle Ages. The former is measured by the political constraints on the executive within the period 1600–1850 and the latter by the level of autonomy in the formation process of the local legal order between the eleventh and fifteenth centuries. This work empirically tests this causal argumentation that relates past political institutions to current regional economic distribution through this cultural legacy. The results support this hypothesis and are robust even against other so-called fundamental causes of development such as geography and human capital.

Institutional Change in Spain in the second half of the twentieth century has been a story of success. After the Spanish Civil War, a dictatorship was established in the country in 1939 and the political regime implied an institutional design that evolved over time. In 1959 there was an important reform that propelled economic markets and development, and the death of General Franco in 1975 opened up a period of institutional change that conduced to democracy. The new self-enforcing institutional framework that emerged in the political reform of democratization has implied a modern democratic system, the adhesion to the EU and an Europeanization of civil society, a decentralization political process, social and cultural modernization, the making of a Welfare State, and the expansion of the economy. These institutional foundations adequately worked until the Great Recession that has intensely affected the Spanish economy since 2008. The huge economic crisis has implied electoral changes, new social movements, and distrust on political institutions, and understanding these trends is relevant to study how the economic crisis can influence the process of institutional change in Spain. Therefore, this study attempts to provide new and original empirical evidence on the existence of a long-run relationship between economic crisis and political trust in Spain using monthly data. Specifically, the Autoregressive Distributed Lag (ARDL) approach to cointegration is employed to discover such relationship and to quantify the impact of the economic crisis on the Spanish political trust. The empirical findings indicate that the economic crisis has a negative impact on political trust and provide an estimation of this effect.

The current study attempts to explore significant determinants of institutional quality—economic and political—in the case of non-programme and programme countries. The period of analysis is 1980–2009, as the activity of IMF increased during this time. Results primarily indicate that the military in power significantly reduces institutional quality, while improvement in property rights, openness, aggregate governance and real GDP growth all remain highly important in improving institutional quality, while enhancement in monetary and investment freedom also help and hence need to be focused upon by IMF programmes.

This chapter uses experimental analysis to test the Feddersen and Pesendorfer (American Political Science Review 92(1):23–35, 1998) theoretical results regarding the Condorcet jury theorem. Under the assumption that jurors will vote strategically (rather than sincerely based on private information), Feddersen and Pesendorfer derive the surprising conclusion that a unanimity rule makes the conviction of innocent defendants more likely, as compared with majority rule voting. Previous experimental work largely supported these theoretical predictions regarding strategic individual behavior, but failed to find support for the conclusions about the relative merits of unanimity and majority rule procedures in terms of group decisions. We extend this literature with an experiment in which the cost of convicting an innocent defendant is specified to be more severe than the cost of acquitting a guilty defendant. This payoff asymmetry results in a higher threshold of reasonable doubt than the 0.5 level used in earlier studies. We find very little evidence of the strategic voting predicted by theory (even for our asymmetric payoff structure) and no difference between the use of unanimity and majority rules. Overall, it was very difficult for the juries in our experiment to achieve a conviction, and no incorrect convictions occurred. Our experimental results suggest that the standard risk neutrality assumption can lead to misleading conclusions. We argue that a high cost associated with convicting the innocent can interact with risk aversion to produce an even higher threshold of reasonable doubt than would result from risk neutrality, which tends to neutralize the negative effects of strategic voting under a unanimity rule.

In this chapter, we explore the question of how the inclusion of a niche party influences the allocation of ministries in coalition governments. In particular, we ask whether niche parties have an advantage because of higher values that they place on certain ministries that the other parties are less interested in. We provide a model where two parties are dividing a portfolio of three ministries, and compare the stable coalitions formed by two mainstream parties with those formed by a mainstream party and a niche party. The results show that in some cases the niche party is able to form stable coalitions with higher payoffs than the mainstream party. This advantage, however, makes the niche party a less desirable coalition partner because the latter cannot commit not to ask for better payoffs.

The spatial model of electoral competition has for decades been a staple of formal political theory. As part of this field, a number of authors have developed two-stage spatial models in which electoral candidates must first win intra-party primary elections, and then compete in a general inter-party election. A universal result in these two-stage models is that party selectorates, and in particular the “median party activist”, exert a centrifugal pull on party platforms. The current paper brings this basic finding into question, suggesting that party voters only exert this centrifugal force under fairly strict conditions; and in particular only if candidates attach fairly high value to the outcome. The paper’s primary result, a “Median-Activist Theorem”, suggests that if candidates place little value on winning the nomination in and of itself, primaries are necessary, but not sufficient, for generating more extreme electoral platforms.

It is commonly assumed that primaries induce candidates to adopt extremist positions. However the empirical evidence is mixed, so a theoretical investigation is warranted. This chapter develops a general model introducing the fundamental elements of primary elections in the well-known spatial voting model by Downs (An economic theory of democracy. Harper and Brothers Publishers, New York, 1957). In spite of significant incentives for candidates to diverge, I find the surprising result that they will all converge to the median voter’s ideal point. The result in this paper suggests that primaries are not sufficient to create polarization by themselves. Rather, for candidates to diverge from the center, other complementary features must be present. An implication is that previous formal results in the literature predicting that primaries lead to polarization probably contain other factors that must be interacting with primaries. Future research should endeavor to disentangle these factors.

This chapter studies a scenario of political competition between two parties, a traditional downsian party and a party implementing assembly democracy. The latter party celebrates a pre-electoral assembly and a post-electoral assembly open to all who wish to take part in which citizens are invited to launch proposals and vote over them. The multiple proposals at the assembly generates a lottery over some policies which is evaluated by voters against the single policy proposed by the traditional party. We show that extremist assembly parties induce the traditional party to locate at the median policy position, whereas centrist assembly parties move the traditional party away from the median just in the opposite direction of the assembly’s median. Besides, we find that centrist assemblies, with respect to extremist assemblies, have more chances of winning the elections.

This chapter presents a model in which the party that loses the general elections can still try to capture the majority in Parliament by convincing members of the majority faction to switch sides. These attempts are not successful in equilibrium. Nonetheless, the results of the general elections are partly determined by this additional stage of political conflict. Larger majorities are shown to lead to lower rent payments and some voters therefore face a trade-off between lowering rent payments by supporting the party that wins the elections or supporting their preferred party. Multiple equilibria in the general elections with either party winning are possible. Moreover, the size of the equilibrium majority is larger than when no bribes after the elections are possible.

This chapter studies one particular property of voting rules in applications in which the choice set is one-dimensional: whether the median alternative is chosen. Our results suggest that with three or more alternatives, it is difficult to rule out non-median outcomes, even if all voters have linear Euclidean preferences.

Voting weight and voting power are not necessarily equal. The former represents the number of votes allocated to each member while the latter represents the ability of a member to influence voting outcomes. In this paper, we observe that, in general, ‘calculated’ voting powers, measured by the normalized Banzhaf index, tend to be linearly linked to voting weight. However, there are key exceptions; larger countries or ‘outliers’ have powers far less or more than proportional to their weight and their powers vary with majority requirements. First, based on a sample of weighted voting organizations [(African Development Bank (AfDB), International Bank for Reconstruction and Development (IBRD), International Fund for Agricultural Development (IFAD) and International Monetary Fund (IMF)], we ask, ourselves, how the votes should be weighted to reflect the existing and ‘calculated’ distribution of voting power, or the potential ‘calculated’ voting powers a larger country could expect with its ‘existing’ voting weight if proportionately between weight and voting power is the one observed for all other smaller countries and is the desired one. In this last case we offer an estimation of the opportunity cost of cooperation in the international organization in terms of loss of power but at the same time an estimation of the minimum implicit gains which cover these costs.

Formal modelers of party competition often have to face the fact that their models predict far too centrist equilibrium positions when compared to empirically observed party positions. Various components have been suggested as extensions for the standard Downsian spatial model, in order to receive more plausible, diverging equilibrium configurations. One important improvement was the inclusion of a valence term that accounts for non-policy related factors that influence vote decisions.The underlying assumption is that valence describes an overall perceived external popularity or competence, that is ascribed to a party and/or its leader and cannot be attributed to the parties, policy position.This valence term is thus assumed to be exogenously and constant among the voters. The model can further be extended by the inclusion of an additional individual specific non-policy element, such as partisan bias or ideological distances to party positions. This stabilizes the formal game of party competition by diminishing the probability of parties leapfrogging each other in equilibrium configurations. Still, the predictions of those models show significant discrepancy to empirical party configurations.

The chapter aims to estimate the modification of the classic spatial electoral model and to evaluate the convergence of the electoral system at the origin for the case when the assumption of irrelevant alternatives (IIA) is violated, and, hence, the standard multinomial logistic model is inapplicable. The work looks at the General British Election of 2010, in which the voters from Scotland and Wales could vote for Scottish National Party and Plaid Cymru, respectively, in addition to the parties common with the voters of England. To account properly for the presence of these additional parties, the theoretical model of Yamamoto (2011) for the varying choice logit (VCL) is implemented by applying Gibbs sampling. For the convenience of the analysis, the set of common parties is restricted to the three major parties, the Conservatives, Labour, and Liberal Democrats, that are of our main interest. In the end, we find that the electoral system diverges, because of the saddle location of Plaid Cymru. Meanwhile, conditional on the insignificance of this party, the system converges. A separate study of Scotland is particularly relevant because of the referendum on Scottish independence in September, 2014. The method deployed here is also relevant in many countries in Europe where there are regional parties, including Spain, Belgium, and Italy.

This chapter presents a formal model of electoral competition where parties’ platforms are endogenously chosen and depend on the degree of the electoral rule disproportionality. We first show that proportional electoral systems generate centrifugal forces that increase candidate differentiation. This in turn implies that more proportional systems are associated with lower levels of abstention from indifference. This two-step theoretical prediction of the effect of electoral systems on turnout is then empirically validated even when we jointly control for the prevailing pivotality and party-system size hypotheses. Thus, our work highlights an additional link in the proportionality-turnout nexus.

As is well known, the United States is a federal country composed of 50 states plus the District of Columbia, where the individual states and the country as a whole are each sovereign jurisdictions. This is reflected everywhere in its political-administrative structure, including the election of the US President, who is elected by the Electoral College and not directly by the people; an issue that provokes a confrontation between abolishers of the Electoral College and supporters of the current system each time a candidate not winning the most popular votes is elected President (last time in 2000 elections). Between both extremes, there are intermediate solutions that, while continuing to respect the spirit of a federal nation like the USA, enable proportionality to be incorporated into the process. This was, for example, the idea behind Amendment 36 to the Colorado Constitution (LCCGA, Analysis of the 2004 ballot proposals. Research Publication No. 527-1. Legislative Council of the Colorado General Assembly, Colorado, 2014). After studying the merits and drawbacks of the current system, this paper investigates what would have happened if Colorado proposal had been used nationwide in Presidential elections from 1828 to 2012. The chapter concludes that the Colorado idea might have made electoral colleges’ results closer to popular will, would have diminished the risk of electing a non-popular winning President and would have served to require a more balanced regional support to be elected. As counterpart, it would have encouraged the emerging of third minor candidates.