The trade-off between governance and
checks and balances
Alvaro Forteza
FCS-UDELAR, Uruguay
Juan S. Pereyra
ECARES - Université libre de
Bruxelles & FNRS
dECON-FCS
Marzo, 2017
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Political Accountability and C&B
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Principal Agent Problem: Voters vs Politicians
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Voters should control politicians
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to minimize politicians’ rents and,
I
to align policies to citizens’ preferences.
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One important device: Elections (Barro, 1973; Ferejohn,
1986; Besley, 2005) but they may be insufficient
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Separation of Powers and C&B complement elections
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Separation of Powers and Checks and Balances
Source: Red Millennial.com
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General Goal
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Formal model and case studies.
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Formal model of the trade-off:
Governance vs CB (≈ Horizontal Accountability)
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How do voters manage this trade-off?
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Why and when do voters undermine checks on the executive?
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Acemoglu et al. (2013): Why Do Voters Dismantle CB?
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CB make politicians cheaper to bribe by elites
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Plausible only under pro-redistribution executives, but what if
the executive is pro elite?
I
Did voters support the dismantling of CB to make leaders
more expensive to bribe? (controversial)
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Are these guys so sophisticated and cynical?
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Empirical Evidence
Democracies have moved to stronger C&B (Besely and Persson, 2011).
However, there have been reversals in some countries, let’s see...
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Peru under Fujimori 1990-2000
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88-89: Economic & Political Crisis
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90: Elections
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April 92: Auto-coup: suspending congress & Overriding
judiciary
I
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71% approve closing legislature
80% agree on the restructure of the judiciary
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July 92: Constitutional Congress (Strong Majority)
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July 93: New Constitution (less C&B)
I
I
I
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Unicameral legislature
Reelection
Presidential legislative power
1995: Reelection
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Rhetoric
“The lack of identification of some
fundamental institutions with the national
interests, like the legislature and the
judiciary, blocks the actions of the
government oriented to national reconstruction
and development.”
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Argentina under Menem 1989-1999
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88-89: Economic Crisis
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1989: Elections
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Main concern: Judiciary
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1990-91: Reform of the Supreme Court
I
I
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Expand the number of judges (5 to 9)
Opaque appointing procedures
Automatic Majority
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April 94: Constitutional convention (majority)
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Aug 94: New Constitution: Option for reelection
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1995: Reelection
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Judiciary Independence?
“My only bosses are Perón and Menem”
“I cannot dictate a ruling that is against the
government. I only issue rulings that are
favorable to administration officials.”
(Judge Rodolfo Barra)
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The 2000s: Anti-markets reforms
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Venezuela under Chavez: 1999-2013
I
I
I
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Ecuador under Correa: 2007 I
I
I
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1999: Constitutional Reform (approved by 72%)
Unicameral legislature
Right to rule by decree
2008: New constitution (approved by 68%)
Allow for reelection
2011: Judiciary Reform: “...the President of the Republic is
not only the head of the executive power, he is the head of the
whole Ecuadorian state, and the Ecuadorian state is the
executive power, the legislative power, the judicial power, the
electoral power,...”
Bolivia under Morales: 2006I
I
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2009: New Constitution
Get rid of super-majorities
Remove one-term limit
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Common themes
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Strong leaders claiming the need of reforms
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Rhetoric: CB block reforms
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Citizens support the loosening of CB
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Executives vis-a-vis legislative and judiciary
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Not exclusive of left-wing government:
90s pro-market vs 2000s anti-market
But then,
Which elements convinced voters to support the loosening of CB?
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Model: Outline
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Imperfect Information Game.
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Exec. and Leg. decide on policy issue and rent extraction.
I
Agencies have a policy bias, like their own rents and dislike
rents extracted by the other agency.
I
Agencies observe the state of nature and make proposals
(commitment).
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Voters are uncertain about the state of nature.
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Referendum to decide on the constitutional rule: CB or SP
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CB ⇒ No reform + No rents
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SP ⇒ Reform + rents
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Contribution in a nutshell (cont’d)
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X observes s and may call for referendum on special powers
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Voters vote for SP iff their expected gains from reform are
larger than the costs of rent extraction.
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Expected gains from reform depend on
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Importance of policy agenda.
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Probability that the reform is beneficial.
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Executive credibility.
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Commitment.
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Contribution in a nutshell (cont’d)
Two types of equilibria with special powers
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Truth-telling: aligned preferences. Only needed reforms are
implemented.
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Always reform: strong pro-reform bias.
Extensions
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Judiciary instead of Legislature
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No commitment
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Elections: endogenous divided government.
Model
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Model I
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Three players: Voters, Executive (X ), Legislature (L).
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Two policy dimensions: a policy issue p ∈ {0, 1} and rX , rL
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Two states of Nature s ∈ {0, 1}. (q = Pr {s = 1})
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Payoffs:
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Citizens
v = −Es (p − s)2 − c(rX + rL ),
I
c >0
Politicians
uj = −Es (p − (s + δj ))2 + aj rj − b r−j ,
aj > 0, j ∈ {L, X }, and b > 0
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Model II
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Constitutional rules:
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Checks & Balances:
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Policies:
p=
I
if pX = pL

 p0
if pX 6= pL
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Executive chooses r ∈ [0, r¯]
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Legislature chooses rL ∈ [0, r ]; rX ∈ [0, r − rL ]
Special Powers:
I
I
I


 pX
Policies: p = pX
Executive chooses rX ∈ [0, r¯]; rL ∈ [0, r¯ − rX ]
We focus on a case in which:
I
I
The status quo policy is p0 = 0.
The legislature is conservative (the interesting and likely) case:
pL = 0.
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Timing
pX , pL
CB or SP
p, rX , rL
Executive & Legislature
Voters
Executive & Legislature
p0 , s, X , L
t
Nature
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Solving the model using backward induction
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After the referendum: perfect information games between the
executive and the legislature
1. With CB:
p = p0 = 0, and rL = rX = 0.
2. With SP:
p = pX , rL = 0, and rX = r¯.
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Before the referendum: imperfect information game between
voters and the executive ⇒
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Equilibrium concept: Perfect Bayesian Equilibrium
Extensive form...
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The extensive form referendum game
r −δ 2 , 0
X
−δX 2 , 0 r
@
@
@ CB
@
@r
p
p
p
p
SP pp
p
2
r
p
−δX + aX r¯, −c r¯
p
Voters pp
p
2
r
p
−(1 + δX ) , −1
p
@
@
p
CB
p
@
p
@ pp
@rp
SP
−(1 + δX )2 + aX r¯, −1 − c r¯ r
CB
pX = 0
pX = 0
Xr
pX = 1
r
p
@
p
p @
p
s = 0, (1 − q) pp SP @
p
@
@r −(1 − δ )2 + a r¯, −1 − c r¯
p
X
X
p
bN
Voters pp
p
r −(1 + δ )2 , −1
p
X
p
p
s = 1, (q)
CB
p
p
p
p
rp
r
@
X pX = 1
@
SP @
@
@r −δ 2 + a r¯, −c r¯
X
X
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Equilibria with Special Powers
Proposition 1
There are two, and only two, PBE with SP:
1. (0, 1, CB, SP) is a PBE iff c r¯ ≤ 1 and − 1+a2 X r¯ ≤ δX ≤
2. (1, 1, CB, SP) is a PBE iff c r¯ ≤ 2q − 1 ≤ 1 and δX ≥
1−aX r¯
2
1−aX r¯
2
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Equilibria without Special Powers
Proposition 2
There are five, and only five, PBE where SP are never part of the
equilibrium outcome.
1. (0, 0, CB, CB) iff c r¯ ≥ 2Pr (s = 1|pX = 1) − 1;
2. (0, 0, CB, SP) iff c r¯ ≤ 2Pr (s = 1|pX = 1) − 1 and δX ≤ − 1+a2 X r¯;
3. (1, 1, CB, CB) iff c r¯ ≥ 2q − 1;
4. (0, 1, CB, CB) iff c r¯ ≥ 1;
5. (1, 0, CB, CB) is a PBE. (weakly Pareto dominated)
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Equilibrium Outcomes
δX
CB &
1
2
SP & reform
0
−
1
c
r¯
1
2
aX
2c
− 12
CB & no reform
1
2
2q−1
c
1
2
δX
no reform
CB & no reform if s = 0
SP & reform if s = 1
1
aX
1
c
0
aX
2c
−
r¯
CB & no reform if s = 0
− 12
SP & reform if s = 1
CB & no reform
− 21 −
CB & no reform
− 12
−
aX
2c
aX
2c
Figure: If q ≤
Figure: If q >
1
2
1
2
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Special Powers at equilibrium
Corollary 1
SP are part of the equilibrium outcome if, and only if,
1. Voters expected gains from reform are larger than their utility
cost from rent extraction, i.e. if
Pr (s = 1|pX = 1) − Pr (s = 0|pX = 1) ≥ c r¯,
and
2. the incumbent is not strongly pro-status-quo biased:
δX ≥ −
1 + aX r¯
2
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Extensions
Judiciary
No Commitment
Or directly to the
Concluding Remarks
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Extension I: Judiciary
Two regimes:
1. CB:
I
I
p = p0
r =0
2. SP:
I
I
p = pX
Executive chooses rX ∈ [0, r¯]
“Conservative” judiciary: always chooses p = p0 .
uX = −Es (p − (s + δX ))2 + aX rX ,
v = −Es (p − s)2 − c rX ,
Back
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Extension II: No Commitment
There is no information transmission between politicians and voters
in the model without policy commitment.
δX
SP
CB
1
2
SP
0
CB
2q−1
c
q
c
SP
1
c
r¯
CB
− 12
CB
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Extension II: No Commitment (Welfare)
Proposition 3 (The effects of commitment on welfare)
Without commitment:
1. Voters and executive are
weakly better off
iff δX ≥
1
2
−
aX r¯
2
2. Voters are weakly worse off, executive is weakly better off iff
δX ≤
1
2
−
aX r¯
2
and r¯ ≤
q
c
Graph
3. Both voters and the executive are
δX ≤
1
2
−
aX r¯
2
and
weakly worse off
q
c
≤ r¯ ≤
iff
1
c
4. With other parameter values, commitment has no impact on
welfare.
Back
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Concluding Remarks
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Back to case studies: Why did voters support SP?
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q rose before these events:
80s: Lost decade
90s: Drawbacks of pro-market reforms
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Pro-reform leaders (opportunities for corruption?)
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Qualitative change:
From CB and no reform to always reform equilibrium
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Next Step. Introducing Elections:
Political Accountability Through Elections and Checks and
Balances
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Thank you
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No Commitment I: Better off without commitment
δX
SP & reform
CB &
no reform
2q−1
c
1
2
1
c
0
1
2
−
r¯
aX
2c
− 12
CB & no reform if s = 0
SP & reform if s = 1
q
c
CB & no reform
− 12 −
aX
2c
Figure: If q >
1
2
Back
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No Commitment II:
Voters worse off without commitment & Executive better off
δX
CB &
1
2
SP & reform
no reform
1
c
0
1
2
−
r¯
aX
2c
− 12
CB & no reform if s = 0
SP & reform if s = 1
q
c
CB & no reform
− 12
−
aX
2c
Figure: If q >
Back
1
2
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No Commitment III: worse off without commitment
δX
CB &
1
2
SP & reform
no reform
1
c
0
− 12
r¯
CB & no reform if s = 0
SP & reform if s = 1
q
c
CB & no reform
− 12 −
aX
2c
Figure: If q >
1
2
Back
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