Content:

- The Political Economics Approach

- Political Institutions
- Incentives & Selection of Politicians
- Preference Aggregation & Voting
References:
- Besley (2007), ch. 1
- Hindriks & Myles (2013), ch. 11 (11.1-11.7)
- Political Economics vs Political Science
- Economic analysis of government intervention
Normative Approach
Positive Approach
- Our focus:
Positive analysis of policy making in representative democracies
- Public expenditure (and taxation) about 30% in the US vs 50% in Denmark (but high perceived quality)
And whats the matter with Italy?

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While Democratic values have triumphed in recent
years, there is still a huge amount of discussion about
the impact of different institutional choices.
Moreover, there are many debates about the
consequences of democratic policy making for
economics. The dominant early traditions in political
economy emanating from Virginia and Chicago
offered competing analyses of how democracy
generates policies and whether there are endemic
forms of democratic failures that need to be avoided.
The key challenge remains understanding how
government resource allocation works and
uncovering the institutional preconditions to
effective democratic governance.
The remarkable growth in government that
occurred in the twentieth century brings the two
competing perspectives on government that we
began with into sharp relief.
Government growth could be seen as
confirmation that government is out of control
with insufficient safeguards in place to restrain
its power to tax. However, it could
equally be viewed as confirmation of the
effectiveness of government in acting in the
common interest.
Total government expenditures = Final general government consumption expenditure ( goods and services
provided without charge to individual households and collectively to the community (including public employees)+
Transfers and subsidies cash payments to households and producers (include payment of interest on the national
debt, provision of public pensions for the elderly, income support for the unemployed and other cash outlays) + Public
investment of capital spending (aggregate of government capital formation)

Size of government Final general government consumption expenditure G in the relation
GDP=C+I+G+(X-M)
















The size of government in nominal terms has grown
as a share of national income in both countries,
although with signs of a leveling off towards the end
of the period. The graph in real terms shows that the
trend is largely flat in rich countries while the drift
upwards is still seen in the non-OECD sample. This
suggests that the increase in the size of government in
nominal terms in largely due to an increase in the cost
of providing a given bundle of services along the lines
of the unbalanced growth story suggested by Baumol
(1967). He argued that government growth in rich
countries is significantly affected by the fact that it
provides labour intensive services which have not
benefitted from labour saving technological change

How democratization has affected the growth of
government is moot. From a theoretical point of view,
democracies should put more weight on popular
opinion. Acemoglu and Robinson (2005) model
democracy as a system of government in which the
poor have greater influence which leads to greater
redistribution..


There is little difference in terms of government size between democracies and autocracies. The difference in
real terms prior to 1990 is largely an income effect -reflecting the larger difference in income levels between
democracies and autocracies in this period.
democracy comes in many forms and looking for an effect of democracy per se is probably misguided.
The important work of Persson and Tabellini (2003) shows that there are distinct patterns in terms of the
form of government and policy outcomes.
a robust relationship between both parliamentary (rather than presidential) government and proportional
representation (rather than majoritarianism) and the size of government.

The growth of government constitutes a remarkable act of public trust. Government is expected to spend this
significant part of national income wisely. Such trust can be supported in one of two ways : either we are
confident that government is populated by publicly spirited officials or else there must be sufficient
safeguards in place to curtail self-interested behavior.















Whether as cause or effect, corruption is associated with
low income. While it is extremely difficult to establish
the direction of causation, a poor country is having a
lower quality government.
This observation has affected debates about how to
promote economic development. The World Bank and
other organizations have pushed a governance agenda
which puts weight on combating corruption as means of
improving government performance throughout the
developing world.
Rich countries had significantly lower corruption levels.
Corruption is also lower in democracies compared to
autocracies over the same period.

La Porta et al. corruption and (i) ethno-linguistic
fractionalization, (ii) religion, and (iii) legal origins.
less diverse societies are less corrupt, as are those
with a larger fraction of Protestants. Common
law legal origin is also correlated with lower corruption.

Openness to trade

Persson and Tabellini consider the link between
corruption and political/constitutional variables. They
test the idea that majoritarian systems and larger voting
districts are less prone to corruption and that corruption
is negatively correlated with political turnover.
This coercive power can be used in a benign way to raise taxes to finance public goods and regulate externalities, but it can
also be used to expropriate wealth.
Without suitable restraints on the power of government, it is harder to foster a climate for private investment incentives.
Danger of private expropriation in situations in which the government is too weak. In such cases, private contracts may not
be enforced which will also have a deterrent effect on trade and investment leading to lower income per capita. Here, the
problem is one of private rather than public predation. The role of effective government as steering a path between the two
evils of authoritarianism and disorder.
There is a strong correlation between income per capita and enforcement of property rights.
The difficult issue is again to establish the direction of causation. Acemoglu uses settler mortality in colonial times as an
instrument for property rights enforcement, arguing that this has lead to institutional legacies.
































Why do people vote?
Government trust, political participation & social capital

Concern about the declining health of established
democracies. observed decline in voter turnout, from
an average of 84% in 1946-50 to 62% in 1996-2000, mainly
driven by the older democracies.

In general, there is a difficulty in assessing the welfare
consequences of declining turnout in the absence of any
agreed upon theory of voting.

The low likelihood that any voter will be decisive in mass
elections makes models based on the probability of being
pivotal, a questionable basis for the theory of voting.
Political scientists tend to work in frameworks where some
extra component of utility ( social duty) is invoked to
explain why people vote in large numbers.

If these feelings are correlated with perceived satisfaction
with government, this could create a link between turnout
and the quality of government, but the link is tenuous at
best.

If social duty is the main basis of deciding to vote,
declining turnout could also be linked to a general decline
in .social capital., i.e. a willingness by citizens to privately
provide public goods.

Other theories of voting put weight on the role of being
informed in affecting the decision to turnout - see
Feddersen and Pesendorfer (swing voters curse). If
elections were purely a common values problem (the value
of the election result is the same for all), then nobody would
mind if only one voter showed up and cast his vote
decisively provided that individual was informed.
(if my vote is pivotal and I am not informed, the optimal
choice is to abstain).
This argument has less force when there are important
ideological divergences between groups of voters. This is a
particular issue if the informed voters are mainly from one
particular ideological grouping.

There is a declining trust in government. This figure also
looks at turnout and shows that these two are broadly
moving in the same direction - both trust and turnout
having declined over the period. Trust showed some
evidence of recovery towards the end of the period.