Economics of Public
Governance with Strategic
Production of Information:
Four Essays
José Ansón
Doctoral Thesis
PhD Advisor: Pr. Olivier Cadot
Public Governance and Production of
Information
• The “privatization” of customs’ revenue
collection: is it worth for a country to pay a
private surveillance firm for providing more
information about the value of imports to
corrupt customs?
• Special interests’ capture: could conflict
and inequality provide incentives to lowstake groups to transmit more information
to the government and capture real political
authority?
Public Governance and Production of
Information
• Lobbying: how can a declining industry
survive (or die) with the provision of money
… and information to politicians?
• Direct Democracy: How well-informed is the
electorate in a direct democracy and does
this influence participation and vote?
Tariff Evasion and Customs
Corruption: Does PreShipment Inspection Help?
Accepted and Published in the B.E. Journals of Economic
Analysis & Policy (Contributions) Vol. 5 Issue 1 (2006)
Funding by the World Bank Research Program on Customs
Corruption and Pre-Shipment Inspection Services
Developing countries need trade
taxes income
• A low fiscal pressure in many developing countries:
sometimes as low as 5 to 10% of GDP in Sub-Saharan
Africa
• A large part of this low fiscal pressure is accounted for
by trade taxes, i.e. tariffs on imports
• However tariff evasion and customs corruption is
endemic in many developing countries
• The International Monetary Fund and the World Bank
advice to contract private surveillance firms to curb
tariff evasion with pre-shipment inspection
Strategic substitutability: the
expected benefits of customs’
“privatization” may go unrealized…
• Does private surveillance firms’ provision of
information about each import value reduce tariff
evasion by importers?
• Private surveillance firms’ provision of information demotivates customs since their bargaining power with
the importers becomes weaker:
customs lose their bonuses for uncovering fraud which
matters for corruption
• Return to inspection may be reduced for customs
whilst return to fraud may be increased for importers
• The end-result on tariff evasion is theoretically
ambiguous and becomes an empirical question
Information Structure
I  (I ,P ,C )
Customs Knows:
Importer’s
Declaration
Pre-shipment
Inspection
Valuation
Customs’ Own
Valuation
Information Structure
I  (I ,P ,C )
Customs Does
Not Perfectly
Know:
Whether or not the Valuation
of Imports by the PreShipment Inspection
Company Is Right
The Game: First Case
Fraud Value
True Value
I  (v, V , V )
Should Customs
Accept a Bribe β
Proposed by the
Importer
Declaring v and
not Uncover
Fraud, i.e. V - v?
Proportional
Penalty k1
Yes if
   k1 
 k0
Prob. p
Fixed
Penalty
k0
(V  v)t
Prob. π Government
Reconciles PSI and Customs
Info
Tariff t
The Game: Second Case
I  (v, v, V )
Should Customs
Accept a Bribe β
Proposed by the
Importer
Declaring v and
not Uncover
Fraud, i.e. V - v?
Yes if
 b
Bonus b the Government
offers for uncovering fraud
Prob. (1 – p)
Nash Equilibrium Outcomes
Average Customs’ Inspection Intensity:
E e(v)  (1  p)b  E (V )  v  t
Level of Importer’s Fraud:
1 1   p(1  k1 ) 
 V v 

2 
2b t 
1 p

1
 V v  2
2b t
Without PSI
With PSI
Pre-Shipment
Inspection Reduces
Evasion iff π(1+k1)>1
“Test of our" PSI effectiveness test”
Empirical Evidence
Effect of PreShipment
Inspection
Effect of the
level of tariff
Effect of
tariff
variance
Increased
Fraud
Decreased
Fraud
Increased
Fraud
(significant)
(significant)
(significant)
Increased
Fraud
Decreased
Fraud
Increased
Fraud
(significant)
(significant)
(significant)
The
Philippines
Decreased
Fraud
Decreased
Fraud
Increased
Fraud
(7019 observations)
(not significant)
(significant)
(significant)
Argentina
(5902 observations)
Indonesia
(5799 observations)
After estimation of switching regression models by the maximum likelihood
Anecdotic Evidence … indeed
Conflict, Stake Asymmetry
and Capture of Real
Political Authority
Available at B.E. Press Selected Works:
http://works.bepress.com/jose_anson
There is a prejudice against conflict
and inequality in the capture of
political influence
• Political consensus between groups is often viewed by
the public and medias as a great achievement in a
modern democracy
• Inequality raises concerns about the sustainability of
economic and social welfare due to the hypothesis that
political power increases for high-stake groups
• Capture of politicians is often related to bribery and
electoral campaign financing by high-stake groups
• Politicians may lack “money”
… they may lack
i-n-f-o-r-m-a-t-i-o-n even more so!
Yet conflict and inequality could
make low-stake groups better off
• Conflict and inequality may act as a motivation device
for low-stake groups in order to produce more
information to be transmitted to the government
• Provided a high enough level of conflict and/or
inequality, the informational lobbying effort by highstake groups may well be useless
• Hence high-stake groups may be discouraged of
pursuing lobbying activities … provided that the
government is not systematically biased towards the
high-stake groups’ interests
• This may help explain the lower democratic
development of countries with relatively high levels of
conflict and inequality
Information Structure
I  (1 , 2  ,1);(1,  , 1 );( ,  ,  2 );(, , );(0,0,0)
Government (G)
and Special
Interests
Groups (SIGs) 1
and 2 know:
1, 2 and G’s payoffs
when 2’s preferred
policy “2” applied
1, 2 and G’s payoffs
when 1’s preferred
policy “1” applied
1, 2 and G’s payoffs
when G’s preferred
policy “G” applied
1, 2 and G’s payoffs
when status-quo (socalled policy “0”)
chosen
Information Structure
I  (1 , 2  ,1);(1,  , 1 );( ,  ,  2 );(, , );(0,0,0)
Government (G)
and Special
Interests
Groups (SIGs) 1
and 2 also
know:
1, 2 and G’s payoffs
when the so-called
worst policy “W” is
eventually chosen
Information Structure
I  (1 , 2  ,1);(1,  , 1 );( ,  ,  2 );(, , );(0,0,0)
Government (G),
with prob. 1-e,
and Special
Interests Groups
1 and 2 Do Not
Know:
?
?
?
?
G
W
0
1
Policies set
2
In the set of possible policies (at
least 5), the policy which
respectively triggers 1, 2 and G’s
highest payoff as well as the worst
policy W with infinitely negative
payoffs for everybody
Information Structure
I  (1 , 2  ,1);(1,  , 1 );( ,  ,  2 );(, , );(0,0,0)
We know
1
G
0
W
Policies set
2
But they don’t know … without producing an effort to
find them out!
Main Parameters Assumptions
A1: e  0,1 ;
Government neither completely
informed nor completely uninformed
A2 :  i  0,1 , i  1, 2;
Government prefers policy G
A3 :   ,1 ;
A4 :  2  1 ;
A5 :   1.
Combined with A2 means that SIG i
prefers policy i, and negative values
imply opposed interests between SIGs
SIG 1 preferences closest to the
government
SIG 2 has higher stakes than SIG 1
I  (1 , 2  ,1);(1,  , 1 );( ,  ,  2 );(, , );(0,0,0)
Congruence matters!
A Three-Stage Game
Stage one
mi 0,1
Stage two
Ei  0,1
Stage three
PG 0,1, 2, G
SIG i (1 or 2) decides whether or
not to get organized into a lobby
SIG i (1 or 2) decides how much
effort Ei it puts into information
production and finds out the
right match between policies and
payoffs with prob. Ei
Government chooses policy 1, 2
or G, or status-quo 0
I  (1 , 2  ,1);(1,  , 1 );( ,  ,  2 );(, , );(0,0,0)
Neither strategic complements … nor
strategic substitutes
Comparative static of conflict
Comparative static of conflict
After solving first stage, conflict may lead to less lobbying
rather than more with one-sided lobbying conducted by the
low-stake group!
Comparative static of inequality
(stake asymmetry)
Comparative static of inequality
(stake asymmetry)
After solving first stage, inequality (combined with strong
enough conflict) may lead to less lobbying rather than more
with one-sided lobbying conducted by the low-stake group!
Comparative static of a more
independently informed government
Comparative static of a more
independently informed government
After solving first stage, government ignorance (combined
with strong enough conflict) may lead to less lobbying rather
than more with one-sided lobbying conducted by the lowstake group!
Intra-Industry Competition
for Political Influence: an
Empirical Investigation of
U.S. Steel Industry Firms’
Lobbying
Accepted and Presented at the European Economic
Association Congress, Amsterdam (2005)
Funding by the Swiss National Foundation Research Program
1214 ― 063953.0
Old steel sector in the U.S.:
producing less and less … yet
lobbying more and more for survival
• An industry with historical political support: the steel sector
• A sharp evolution of technology triggering divergence of
interests since the late seventies: old “integrated” steel
producers vs. increasingly modern mini-mills
• A country with public disclosure of lobbying expenditures:
the United States of America
• An intra-industry competition for political influence with
the provision of “money” and information to
Representatives and Senators in Congress
• The Asian crisis triggering a call and vote for support
The provision of information
leverages the return of one dollar of
campaign contribution
• The “information-leveraged” return of campaign
contributions delayed the bankruptcy of least efficient steel
producers
• But not as much as it could have been expected …
• This is because most efficient steel producers did not
leverage their campaign contribution with information in
order to push old steel producers out of the market
• The main steel-using industry, automobile, did leverage its
campaign contribution with information for avoiding trade
protection for steel
• This could have provided an alert about the bad state of the
American automobile industry in the early Millennium
Econometric evidence
Firm
Expected Profit
Situation of the
Firm
Actual
Expenditures in
Information
Production by the
Firm
Estimated Political
Support for Trade
Protection of Steel
Triggered by the
Firm’s Campaign
Contributions
(Clustered Probit
Regression)
Bethlehem (steel)
low
high
high
LTV (steel)
low
high
high
Allegheny (steel)
high
low
low
Carpenter (steel)
high
low
low
AK (steel)
high
low
low
Texas ind. (steel)
high
low
low
Ford (auto)
low
high
low
GM (auto)
low
high
low
DC (auto)
low
high
low
From the econometric analysis of H.R. 975 Vote on Steel Imports Quotas (430 obs.)
Beyond the “Röstigraben”:
the Swiss Electorate
Divided About the EU
Accepted and Published in the Swiss Journal of Economics
and Statistics II.I (2004)
Funding by the Swiss National Foundation Research Program
1214 ― 063953.0
The Swiss (German) electorate knows
much more than the “rösti” recipe…
• The Swiss electorate is divided about the European
integration policy
• Medias often point out the language geographical barrier
“Röstigraben” (German vs. French) as the main driver of the
differences in EU referenda outcomes between Swiss
communities
• However the “anti-European” party has been grabbing more
and more political power over years … whilst the
“Röstigraben” remains at the same place
• Culture obviously matters to “Nein-Sagers”…
… Economic interests’ even more so for them (Swiss
German) than for “Non-No Sagers” (French and Italian
speaking)!
Stronger participation by the
opponents to the European
integration delays full integration
• The level of information and rationality of the Swiss
electorate is very high
• Electorate who did not participate was more favorable
to the European integration process
• Economic factors (winning and losing sectors, losing
sectors*real estate ownership, level of education?)
explain most of the variation in referendum outcomes
between communities though education may only have
a cultural influence
• Besides economics (Ricardo-Viner, Hecksher-Ohlin?),
rösti matter but even more so the combination of
altitude and distance to the next city in terms of
cultural factors
Thank you
Merci
Contact:
http://works.bepress.com/jose_anson