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EC304 (Making of Economics Policy) - Notes (Term 1)
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LECTURES:Week 1: Accountability, Corruption and Political Selection
CLASS:
- Political Agency Model: Analysis of the relationship between agents (politicians) and principals (citizens) in order to resolve the
problems of Moral Hazard (possibility for agents to act opportunistically) and Political Selection (possibility for agents to differ in
performance) as the consequences of limited information available to the public
- Election: selection function (voters select good agents which should leads good agents to power) and incentives function (voters reward
good agents which should lead opportunistic agents to power)
Brollo et al. (The Political Resource Curse 2010):
- Political Resource Curse: THES: Effect of additional government revenues on corruption/ability (e.g. Increase in Resources in
municipalities in Brazil)
- Career-Concerns Model: gt = θ(R−rt) where government budget constraint depends on θ = competence in providing public good, R =
fixed budget allocated to rt = rent (benefits mayor), gt = public good (benefits public)
® OUT: Moral Hazard Effect (Leads increase in corruption since applies from political rents), Selection Effect (Leads decrease in ability
since political rents favour hazardous management of resources), Further Effect (Leads re-election since benefits from political rents)
Besley (Principal Agents? 2007):
(i) Political Agency Models (PAM) ® Modelling Issues:
- Nature of Uncertainty: variations in what is unobservable to voters (e.g. competence/motivations/learning capacities of politicians)
- Nature of Accountability: variations in responsibilities of politicians (e.g. committees share accounts, positions have individual accounts)
- Election Motives: variations in motivations of politicians (e.g. “ego rent”, “legacy effect”, material gains of corruption)
- Retrospective Voting: variations in motivations of vote (e.g. candidate records, party identities, social relations)
(ii) Political Agency Models (PAM) ® Types:
- Adverse-Selection Model: problem of selecting the right type of incumbent (i.e. nothing to do to affect voters’ opinion)
- Achen and Bartels (Democracy for Realists 2016): selection process: voters do not control policies directly/indirectly since
these choose agents on the basis of social identities rather than political issues
- Career-Concern Model: problem of desire for re-election (i.e. choice max. rents in current period/min. rents for future period)
- De La O (Do Conditional Cash Transfers Affect Electoral Behavior? 2012): Progresa Programme (Mexico 2000): cash to women
in exchange of enrolment of children in public services (RCT of 505 treated villages 6/21 months before presidential election)
- ∆yi = θ + β treatmenti + εi where β = 1 if received longer ® OUTCOME: Increase of votes
- Hidden-Action Model: problem of moral hazard (i.e. differences in motivations/competences/public-information)
- Ferraz and Finan (Exposing Corrupt Politicians 2008): Audit Programme (Brasil 2003): audit of municipalities and
publishment of results ® OUTCOME: (i) voters take into account performance (ii) politicians take into account re-elections
(e.g. mayors who can run for re-election are less corrupt than those who cannot)
Week 2: Media and Politics
CLASS:
- Snyder and Stromberg (Press Coverage and Political Accountability 2008): information/vote and information/resignation correlation
on congressmen (i.e. use of random variation in the overlap of medias)
- McMillan and Zoido (How to Subvert Democracy 2004): Media corruption price > Politics corruption price (President Fujimori’s
corruption of Politicians/Medias in 2000 presidential elections in Peru)
- Della Vigna and Kaplan (The Fox News Effect 2007): Bias Increases voting turnout (∆RepubVoteit = COUNTY i + β FoxNewsit + εit)
(Bush/Gore in 2000 president election in US) (e.g. Fox News convinced 3% − 8% of its viewers to vote Republican)
- Allcot and Gentzkow (Social Media and Fake News 2017): social medias = important source of election news (e.g. 14% state “most
important”) (ii) fake news = marginally affects vote behaviour (iii) credibility = voters believe stories which favour their candidate
Gentzkow and Shapiro (Medias Bias and Reputation 2006):
(i) Finding on Medias: Ex-ante distortion of information to make it conform with consumers’ prior beliefs
(ii) Finding on Consumers: Ex-post verification sources decrease incentives to distort information
(iii) Finding on Competition: Competition decreases bias in information
- biasi = (bushi/(bushi+gorei) −0.5)^2 where bushi and gorei denote seconds given to each candidate, = 0 once equal coverage, = 0.25
once one is given coverage (e.g. Bush/Gore in 2000 president election in US)
Enikolopov et al. (Media and Political Persuasion: Evidence from Russia 2009):
- Factors affecting Medias: Political System (e.g. number/stability of parties), Ideological Unity (e.g. unclear/clear boundaries between
parties), Competition (e.g. number/independence of medias)
- votei;j = β0 + β1watchesNTVi;1999 + β3Xi;1999 + εi where i = individual respondents, j = parties. votei:j = 1 if i reported voting for party
j, watchesNTVi;1999 = 1 if i reported watching NTV in 1999, Xi;1999 = set of individual/regional level characteristics (NTV is only media)
® OUT: Media conviction in autocracies > Media conviction in democracies (e.g. 1999: Putin popularity = 2% once PM, 2000: Putin votes
= 52.9% votes once president)
Week 3: Political Economy of Election Cycles
DEFINITIONS:
- Economics: Positivist (factual) analysis of the interaction between human behaviour and the optimal use of scarce resources
which focuses on its market consequences
, - Political Economy: Normative (opinion) analysis of the interaction between politics and economics which focuses on its social
consequences
- Stilwell (Political Economy 2011): “political economy rejects a narrow focus on pure markets in favour of a broader view of
economic enquiry, its social purpose and its political application”
- Clift (Comparative Political Economy 2014): “political economy understands market relations as political constructions, where
questions about power relations and the inequality of capitalism’s distributive consequences need to be asked about economic
processes, institutions and outcomes”
Political Business Cycle (PBC):
- Political Business Cycle (PBC): Political Agency Model (PAM) which focuses on agents’ use of political tools in order to increase
the probabilities of re-election
- Kalecki (Political Aspects of Full Employment 1943): Political Business Cycle (PBC): “rational model” of (i) use of political tools
to stimulate the economy prior elections (satisfies the public opinion) (ii) use of political tools to reverse the stimulus after
elections (satisfies the capitalist opinion)
Nordhaus (The Political Business Cycle 1975):
- Political Business Cycle (PBC): “opportunistic model” of (i) use of political tools to exploit the Phillips Curve (PC) (ii)
Expansionary Policy = Increase inflation/Decrease Unemployment prior elections (iii) Contractionary Polity = Decrease
Inflation/Increase Unemployment
- πt = πEt + α(yt-te) where πEt = expected inflation, α(yt-te) = output gap
Kirshner (Money is Politics 2003):
- “every choice about money reflects the outcome of a political contest such that for every policy choice, there is an alternative that
some actors would prefer (…) market forces impose the best practice on states such that policies are chosen by the force of
economic logic rather than by politics”
- Quantitative Easing (QE): Monetary Policy (MP) in which the Central Bank (CB) facilitates the lending rate of financial
institutions (Process: Creation of Money to Increase the Money Supply (MS), Purchase of Assets (government bonds) to Decreases
interest rates, Facilitated lending to Increase Consumption)
Tucker (Unelected Power 2018):
- Conditions of Central Bank (CB) Legitimacy in “crisis of legitimacy of economic institutions”: (i) Independence (no social
political/financial involvement) (ii) Transparency (Statement of motivations/objectives/procedures of policies) (iii) Consistency (Set of
rules to respond to emergencies)
McNamara (Rational fictions 2002):
- (i) No Independence: Technocratic expertise does not de-politicise Monetary Policy (MP)
Stiglitz (Central Banking in a Democratic Society 1998): “the decisions made by central bankers are not just technical decisions: these
involve trade-offs, judgments about whether the risks of inflation are worth the benefits of lower unemployment, and these involve values”
- (ii) No Democratic-compatibility: Technocratic expertise does not take into account choices of voters (e.g. technical choice
involves winners/losers in all cases)
- (ii) No Economic-Influence: Effect on macroeconomic outcomes of social interaction > technical policy (e.g. expectations)
- (iii) No Results: Evidence does not reflect independency-economic outcomes relationship (e.g. empirical results)
Friedman (The Role of Monetary Policy 1968):
- Keynesianism (Keynes): assessment of economic activities in terms of stock variables at a point of time (e.g. aggregate
demand/supply) such that Monetary Policy (MP) has a straight effect (i.e. Central Banks “pengs” changes in interest rates)
- Monetarism (Friedman): assessment of economic activities in terms of flow variables overtime (e.g. rates of inflation, unemployment)
such that Monetary Policy (MP) has a latent effect (i.e. Central Banks “encourages” changes in interest rates)
- “Monetary Policy (1) cannot peg interest rates for more than very limited periods and (2) cannot peg the rate of unemployment for more
than very limited periods”
- Phillips Curve ® Implications: Short-Term (Increase Inflation/Decrease Unemployment) ® Medium-Term (Increase Prices/Decrease Real
Wages) ® Workers’ Dilemma: refuse to work/refuse to consume ® Long-Term (Decrease Consumption/Increase Unemployment)
- Monetary Policy (MP) ® Goal: management of the money machine through the address of internal cycles/external shocks from
appropriate (i.e. not excessive) adjustments to the Money Supply (MS) (i.e. priority to price-stability) rather than irresponsible Central
Banks which artificially stimulate growth (e.g. QE is not appropriate policy since is internal shock)
Week 4: The media, Politics and Corruption
CORRUPTION:
- Lapalombara (Corruption in Empirical Research 1994): corruption: “corruption is a ubiquitous aspect of the exercise of governmental
power and the transaction that go with it”
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