Public Economics
Lec 9: Political economics
Alessandro Martinello
alfa 4035B
[email protected]
AM’s reminders
Link to group schedule
Lecture on seminar day
1 / 17
Today’s readings
RG ch. 6
Kruse & Stahlberg, 2013
Recommended readings
On gerrymandering: http://www.washingtonpost.com/
blogs/wonkblog/wp/2014/05/15/
americas-most-gerrymandered-congressional-districts/
http://freakonomics.com/2013/04/01/
how-gerrymandering-works/
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Political economics
Gruber: lack of transparency is a great political tool
1
Political decision making crucial
2
Economists know it best (always and undisputably)
Apply economic principles to decision making processes
Obamacare
D&D: decide what to do with that shady guy at the tavern
Aggregating individual preferences into collective decision
Rule =⇒ consequences
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Direct democracy
Also senate/parlament
Unanimity rule
Lindahl prices
Majority rule
Simple majority (50%)
Qualified majority (> 50%)
Choice
1
2
3
First
Second
Third
A
B
C
C
B
A
B
C
A
4 / 17
Voting order and first paradoxes
Choice
1
2
3
First
Second
Third
A
B
C
C
B
A
B
C
A
5 / 17
Voting order and first paradoxes
Choice
1
2
3
First
Second
Third
A
B
C
C
A
B
B
C
A
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Voting order and first paradoxes
Choice
1
2
3
First
Second
Third
A
B
C
C
A
B
B
C
A
Order in which votes are taken crucial
Agenda manipulation
Voting paradox: Individuals’ preferences consistent,
community’s are not
A>B>C>A
Cycling
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Graphing qualified preferences
U
2
3
1
A
B
C
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Voting paradoxes & median voter’s role
Issue: Non-single-peaked preferences
Not sufficient condition for ∃ of voting paradox (necessary)
Median voter theorem
If preferences single-peaked
Then outcome reflects preferences of median voter
1
2
3
4
5
5
0
10
5
15
100
20
101
25
102
Moderate positions win =⇒ Politics
Median prefs. not necessarily maximize welfare function
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Logrolling
Log-roll: Helping neighbours with moving timber
Majority rule: does not allow to express how strongly one
feels about one option
Status-quo bias
Logrolling in politics: I scratch your back, you scratch mine
Trading of votes to make of a given proposal pass
A
B
C
1
2
3
Total
welfare
200
-40
-120
-50
150
-60
-55
-30
400
95
80
220
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Logrolling
Log-roll: Helping neighbours with moving timber
Majority rule: does not allow to express how strongly one
feels about one option
Status-quo bias
Logrolling in politics: I scratch your back, you scratch mine
Trading of votes to make of a given proposal pass
A
B
C
1
2
3
Total
welfare
200
-40
-270
-110
150
-140
-105
-120
400
-15
-10
-10
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Arrow’s impossibility theorem (I)
Voting rule: preference aggregator mechanism
Individual → society
Simple majority may lead to inefficient outcomes/paradoxes
Point voting, exhaustive voting, plurality voting, Borda counts,
Condorcet elections. . .
Also potentially flawed
Arrow’s theorem: Any rule is potentially flawed
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Arrow’s impossibility theorem (II)
Criteria
1
Whatever individual preferences, rule can produce a
decision
2
Rule able to rank all possible outcomes
3
Responsive to individuals’ prefs.
If for everyone A > B, then for society A > B
4
Consistent: if A ≥ B and B ≥ C, then A ≥ C
5
Independence of irrelevant alternatives
Society’s ranking of A and B 6⊥ on individuals’ ranking of C
6
No dictatorship
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Arrow’s impossibility theorem (II)
Criteria
1
Whatever individual preferences, rule can produce a
decision
2
Rule able to rank all possible outcomes
3
Responsive to individuals’ prefs.
If for everyone A > B, then for society A > B
4
Consistent: if A ≥ B and B ≥ C, then A ≥ C
5
Independence of irrelevant alternatives
Society’s ranking of A and B 6⊥ on individuals’ ranking of C
6
No dictatorship
In general impossible for a rule to satisfy all 6 requirements
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Implications
Is democracy doomed?
Ethical validity: dropping one criteria =⇒ rule can be
constructed
Impossibility is a possibility.
Rule cannot be guaranteed to be 100% bulletproof, but it can
still satisy all 6 criteria. E.g. identical preferences
A Brave New World
Fiscal federalism
Only some set of preferences (e.g. multipeaked) cause it to fail
Failure of criteria might be good for society
Buchanan: Inconsistencies =⇒ policy alternance (social
experiments)
11 / 17
Representative democracy
Decision costs
Increasing with the number of voters
Median voter theorem =⇒ decisions taken by median.
Two-party systems tend to converge
Perhaps median not the best?
Falls apart if number of parties > 2
Rankings on multiple dimensions
Attitude depends on issue considered
Ideology & personality: more unobservables to the problem
Leaders: do they have an influence?
Dahl et al. (WiP)
Gerrymandering
12 / 17
Gerrymandering
A
1
Y
2
Y
B
3
N
4
Y
Y
5
Y
Y
C
6
N
7
Y
8
N
9
N
N
Representative = direct
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Gerrymandering
A
1
Y
2
Y
B
3
N
4
Y
Y
5
Y
C
6
N
7
Y
8
N
Y
N
B
C
9
N
Representative = direct
A
1
Y
2
Y
4
Y
3
N
Y
5
Y
N
6
N
7
Y
8
N
9
N
N
Representative 6= direct
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Gerrymanderin’ U.S.A.
14 / 17
Gerrymanderin’ U.S.A.
14 / 17
Gerrymanderin’ U.S.A.
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Other issues
Gerrymandering = vote swap
You swap when your preferred candidate has no chance to win
in your district
Decision to vote
Is it rational to vote? See Dubner & Levitt
Bureaucreats’ incentives
Rent-seeking: manipulate governemtn expenditure to obtain
higher than normal returns
Lobbyism, cartels (license emissions)
15 / 17
Enforcing a cartel
P
pc
p∗
S
D
q
c
q
∗
Q
16 / 17
Enforcing a cartel
P
pc
p∗
S
D
q
c
q
∗
Q
16 / 17
Explaining government’s growth
Citizen preferences
Chance events + inertia: loss aversion
Status-quo bias
Acquired privileges
Median voter theorem + income redistribution
Median income (inequality)
Median age (pension system)
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For next time
RG, ch.6, ex 6
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