Persistent electoral success with endogenous rents

Vukovic, Vuk (2013): Persistent electoral success with endogenous rents.

Abstract

The paper examines how is it possible for an incumbent political party to stay in power for long periods of time without having to trade-off rents for holding office. It presents a new way of explaining and measuring the real effects of rent-extraction on political re-election in local government. It models local government due to the different and exact way rent-extraction can be measured there; through pork-barrel spending on public goods upon which a political party is able to extract rents. By setting rents as an endogenous variable the paper alters certain typical assumptions of political agency models, which permits it to evaluate their effect on political re-election and preservation of power in a more realistic scenario of politics. The incumbent’s decision on budget redistribution and rent-extraction directly affects the state of the economy upon which the voters decide whether to re-elect the incumbent or not. Incumbents make their decisions based on observing a stochastic growth shock which affects the next period budget redistribution. In a repeated game setting an incumbent chooses an optimal strategy with respect to the observed shock. This way, for high enough levels of economic growth an incumbent party may stay in office for an infinite amount of periods and keep maximizing rents with respect to the given constraints, without having to trade-off rents for holding office. The paper presents empirical evidence on United States gubernatorial and state legislature elections from 1992 to 2008 to evaluate the underlining theory.

• Item Type: MPRA Paper
• Language: English
• Keywords: Political agency, rent-extraction, re-election, public good expenditures, political parties, endogenous rents
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C71 - Cooperative Games; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H72 - State and Local Budget and Expenditures; D - Microeconomics > D7 - Analysis of Collective Decision-Making > D72 - Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models

References

Acemoglu, D., and Verdier, T. (2000) “The Choice between Market Failures and Corruption”, American Economic Review, 90(1):194-211.

Alesina, A. (1988) “Credibility and Policy Convergence in a Two-Party System with Rational Voters”, American Economic Review, 78(4): 796-805.

Alesina, A., Roubini, N., and Cohen G. (1997) Political Cycles and the Macroeconomy. Cambridge: MIT Press.

Alt, J., de Mesquita, E.B., and Rose, S. (2011) “Disentangling Accountability and Competence in Elections: Evidence from US Term Limits”, Journal of Politics, 73(1): 171-186.

Austen-Smith, D., and Banks, J. (1989) “Electoral Accountability and Incumbency.” In P.C. Ordeshook, (ed.), Models of Strategic Choice in Politics. Ann Arbor: University of Michigan Press, pp.121-148.

Banks, J., and Sundaram, R. (1993) “Adverse Selection and Moral Hazard in a Repeated Elections Model”, in W. Barnett, M. Hinich, and N. Schofield (eds.) Political Economy: Institutions, Information, Competition and Representation. New York: Cambridge University Press, pp.295-311.

Barro, R. (1973) “The Control of Politicians: An Economic Model”, Public Choice 14: 19-42.

Besley, T. (2004) “Paying Politicians: Theory and Evidence”, Journal of the European Economic Association 2(2-3): 193-215.

Besley, T. (2006) Principled Agents? The Political Economy of Good Government. New York: Oxford University Press.

Besley, T., and Case, A. (1995a) “Incumbent Behaviour: Vote-Seeking, Tax-Setting and Yardstick Competition”, American Economic Review, 85(1): 25-45.

Besley, T., and Case, A. (1995b) “Does Political Accountability Affect Economic Policy Choices? Evidence from Gubernatorial Term Limits”, Quarterly Journal of Economics, 110(3): 769-798.

Besley, T., and Case, A. (2003) “Political Institutions and Policy Choices: Evidence from the United States”, Journal of Economic Literature, 41(1): 7-73.

Besley, T., and Coate, S. (1997) “An Economic Model of Representative Democracy”, Quarterly Journal of Economics, 112(1): 85-114.

Besley, T., and Smart, M. (2007) “Fiscal Restrains and Voter Welfare”, Journal of Public Economics, 91: 755-773.

Brender, A., and Drazen, A. (2008) “How Do Budget Deficits and Economic Growth Affect Reelection Prospects? Evidence from a Large Panel of Countries”. American Economic Review, 98(5): 2203-2220.

Brennan, G., and Buchanan, J. (1980) The Power to Tax: Analytical Foundations of a Fiscal Constitution. Cambridge: Cambridge University Press.

Buchanan, J., and Tullock, G. (1962) The Calculus of Consent. Logical Foundations of Constitutional Democracy. Ann Arbor: University of Michigan Press.

Buchanan, J. (1975) The Limits of Liberty. Between Anarchy and Leviathan. Chicago: University of Chicago Press

Bueno de Mesquita, B., Smith, A., Siverson, R., and Morrow J. (2005) The Logic of Political Survival. Cambridge: MIT Press.

Caselli, F., and Morelli, M. (2004) “Bad Politicians”, Journal of Public Economics, 88: 759-782.

Coate, S., and Morris, S. (1995) “On the Form of Transfers to Special Interests”, Journal of Political Economy, 103(6): 1210-1235.

Diermeier, D., Keane, M. and Merlo, A. (2005) “A Political Economy Model of Congressional Careers”, American Economic Review, 95: 347-373.

Downs, A. (1957) An Economic Theory of Democracy. New York: Harper and Row.

Ferejohn, J. (1986) “Incumbent Performance and Electoral Control”, Public Choice 50: 5-25.

Ferraz, C., and Finan, F. (2011) “Electoral Accountability and Corruption: Evidence from the Audits of Local Governments”, American Economic Review, 101(4): 1274-1311.

Gagliarducci, S., Nannicini, T., and Naticchioni P. (2010) “Moonlighting Politicians”, Journal of Public Economics, 94(9-10): 688-699.

Goel, R., and Nelson, M. (1998) “Corruption and government size: A disaggregated analysis” Public Choice 97: 107-120.

Helland, L., and Sorensen, R. (2012) “Persistent rent-extraction” Public Choice 153:205-213.

Higgs, R. (1987) Crisis and Leviathan. Critical Episodes in the Growth of American Government. New York: Oxford University Press.

Krueger, A. (1974) “The Political Economy of the Rent Seeking Society”, American Economic Review, 64: 291-303.

Levy, G. (2004) “A Model of Political Parties”, Journal of Economic Theory, 115(2): 250-277.

Mattozzi, A., and Merlo, A. (2008) “Political Careers or Career Politicians?” Journal of Public Economics, 92(3-4): 597-608.

Maddison, A. (2001) The World Economy – A Millennial Perspective. Paris: OECD Development Centre.

Mauro, P. (1998) “Corruption and the composition of government spending” Journal of Public Economics 69(1998): 263-279.

Persson, T., Roland, G. and Tabellini, G. (1997) “Separation of Powers and Political Accountability”, Quarterly Journal of Economics, 112(4): 1163-1202.

Persson, T., and Tabelini, G. (2000) Political Economics. Explaining Economic Policy. Cambridge: MIT Press.

Rogoff, K. (1990) “Equilibrium Political Budget Cycles”, American Economic Review, 80(1): 21-36.

Smart, M., and Sturm, D. (2006) “Term Limits and Electoral Accountability” CEP Discussion Papers dp0770, Centre for Economic Performance, London School of Economics.

Tax Foundation (2011) State and Local Tax Burdens: 1977 – 2009. [online] Available at: <http://www.taxfoundation.org/news/show/335.html> [Accessed 5th August 2011].

Tullock, G. (1967) “The Welfare Costs of Tariffs, Monopolies and Theft”, Western Economic Journal. 5(3): 224-232.

United States Census Bureau (2011) Statistical Abstract of the United States. [online] Washington DC, years 1992 – 2010. Available at: <http://www.census.gov/statab/> [Accessed 27th June 2011].

United States Department of Commerce, Bureau of Economic Analysis (2011) Interactive Data, GDP, years 1990 – 2008. [online] Available at: <http://www.bea.gov/iTable/ index_nipa.cfm> [Accessed 30th July 2011].