4th Workshop

(Most papers are work in progress and preliminary and should not be cited without the consent of the authors.)
 

Alvaro J. Name Correa | Universidad Carlos III
Huseyin Yildirim | Duke University
Biased Experts, Majority Rule, and the Optimal Composition of Committee Downloadpaper (PDF, 336 KB)vertical_align_bottom

An uninformed principal or planner appoints a committee of experts to vote on a multi-attribute alternative, such as an interdisciplinary project. Each expert can evaluate only one attribute and is biased toward it (specialty bias). The principal values all attributes of the alternative equally but has a status quo bias, reflecting the organizational cost of a change. We study whether the principal would compose the committee of more or less specialty-biased experts. We show that her optimal composition is nonmonotonic in the majority rule, with the most biased experts appointed under intermediate rules. We then show that the principal would be less concerned about the committee composition if its members can be uninformed, as they induce the informed to vote less strategically. Surprisingly, although uninformed members lower the quality of the committee’s decision, the principal may prefer to have some when its composition is suboptimal and the majority rule is sufficiently extreme, such as the unanimity. By the same logic, the principal may exclude some informed experts from the committee.

Salvatore Nunnari | Bocconi University
Jan Zápal | CERGE-EI
A Model of Focusing in Political Choice Downloadpaper (PDF, 1.1 MB)vertical_align_bottom

This paper develops a model of voters' and politicians' behavior based on the notion that voters focus disproportionately on and, hence, overweigh certain attributes of policies. We assume that policies have two attributes|resources devoted to two distinct issues (e.g., defense and education)|and that voters focus more on the attribute in which their options dier more. First, we consider exogenous policies and show that focusing polarizes the electorate. Second, we consider the endogenous supply of policies by politicians running for office and show that focusing leads to ineciencies: voters that are more focused are more influential; distorted attention empowers social groups that are larger and more sensitive to changes on either issue; resources are channelled towards divisive issues. Finally, we show that augmenting classical models of electoral competition with focusing can contribute to explain puzzling stylized facts such as the inverse correlation between income inequality and redistribution.

Marco Battaglini | Cornell University
Chaos and Unpredictability in Dynamic Public Policy Problems Downloadpaper (PDF, 782 KB)vertical_align_bottom

I study a dynamic model of environmental protection in which the level of pollution is a state variable that strategically links policy making periods. Policymakers are forward looking but politically motivated: they have heterogeneous preferences and do not fully internalize the cost of pollution. This type of political economy model is often reduced to a “modified” planner’s problem, and yields predictions that are qualitatively similar to a planner’s constrained optimum, albeit with a bias: too much pollution in the steady state (or, in other applications, too little investment in public goods, too much public debt, etc.). I highlight conditions under which this reduction is not possible, and the dynamic time inconsistency generated by the political process is responsible for a new type of distortion. Under these conditions, there are equilibria in which, for a generic economy and generic initial conditions, the state evolves in complex cycles, or unpredictable chaotic dynamics. Depending on the fundamentals of the economy, these equilibria may generate ergodic distributions that consistently overshoot the planner’s steady state of pollution, or that fluctuate around it.

Marina Azzimonti | Stony Brook University
Laura Karpuska | EESP-FGV
Gabriel Mihalache | Stony Brook University
Bargaining over Taxes and Entitlements Downloadpaper (PDF, 1.2 MB)vertical_align_bottom

We analyze the welfare implications of introducing budget rules, composed by a tax code and an entitlement program, in a dynamic infinite horizon political-economy model featuring disagreement over the distribution of resources. Poor agents want expansive entitlement programs, whereas rich agents prefer a small government that imposes low taxes. Under budget rules, changes in the tax code and the generosity of entitlement programs require bipartisan support. We model these rules following the literature on legislative bargaining with endogenous status quo, and find that entitlement programs induce under-provision of public goods but also a smoother path for private consumption. Whether budget rules are welfare-improving depends critically on political turnover. When proposers alternate frequently, such rules benefit society because they reduce the volatility of private consumption. Outcomes under rules, however, can be worse than under discretion if the political power of a proposer is persistent enough. Even though the political equilibrium may be more efficient in such case, it can also be significantly less equitable, exacerbating the initial degree of income inequality. We also consider an institutional reform, where parties are allowed to vote on both, the introduction and generosity of the entitlement program and the tax code. Because such a reform must be Pareto improving (by design), policymakers may prefer to stay under discretion.

Akaki Mamageishvili | ETH Zurich
Oriol Tejada | ETH Zurich | external pageWebsitecall_made
Elections and Interim Turnout Downloadpaper (PDF, 455 KB)vertical_align_bottom

We examine the effect of the interim release of turnout information on elections in a costly voting model of a large electorate with private values and two alternatives. We consider that (i) one group of citizens votes before the rest and that (ii) the individuals of the second group know the first group's turnout—but not the vote tally—before they vote. The alternative that receives more votes in total is implemented. We show that the ex ante probability that each alternative is implemented is one half and, hence, the same as when no information about turnout is released in the midst of voting. One interpretation of this result is that interim information about turnout may not distort the election's outcome (from an ex ante perspective). This is consistent with many countries (a) reporting the ongoing turnout rate at several points in time during election day, (b) allowing early voting and making public the number of citizens who did so before the day of election, and/or (c) considering different opening hours for voting stations across different time zones, if there are some. Beyond our main result, we provide several further equilibrium properties of our political game which both broaden our contribution to the theoretical understanding of the costly voting paradigm and provide additional testable hypotheses about elections.

Marina Agranov | California Institute of Technology
Social Learning in Groups: an Experimental Study (with Gabriel Lopez-Moctezuma, Philipp Strack, and Omer Tamuz)

A large literature in economics and finance has shown the dangers associated with — and the inefficiencies that arise from — the imitation of others’ actions, and from herd behavior in particular. We contribute to this literature by providing empirical evidence of the benefits of imitation in repeated social learning environments. We show experimentally that observing the actions of others improves the quality of decisions and leads to higher information aggregation rates, even in settings where the actions of others do not provide additional information, beyond the private information available to agents.
Specifically, we conduct a series of controlled laboratory experiments, in which subjects repeatedly try to estimate an unknown state of nature while observing private information that arrives sequentially, and, depending on the treatment, additional observations of others. There are no direct externalities in this setting, and each subject is rewarded independently of others for estimating correctly. Between treatments, we vary the information available to subjects at the time they make their guesses. This simple setting allows us to address two questions. First, we document whether at all and to what extent people are capable of extracting the information contained in their peers’ private signals by observing their actions, in a repeated setting. Second, we study the usefulness of observing other people’s decisions when private signals of others are also available, and, thus, others' actions should be irrelevant.

William Howell | University of Chicago
Stefan Krasa | University of Illinois
Mattias Polborn | Vandervilt University
Expressive Politics: A Model of Electoral Competition with Enmity and Cognitive Dissonance Downloadpaper (PDF, 300 KB)vertical_align_bottom

We study a model of electoral competition that incorporates both the instrumental and expressive benefits of candidate position taking. In the model, voters care about standard policy concerns as well as the psychological costs of deviating from one’s own preferred policy and the psychological benefits of antagonizing an out-group that one actively dislikes. Whereas concerns about cognitive dissonance temper candidate extremism, we find, animus exacerbates it. We show that candidates become more polarized when proposals routinely fail to become law. And when policy disagreements run high and communications are siloed, candidates  have incentives to stoke inter-group animosities. The findings have broad implications for our understandings of political polarization, separation of powers, and an increasingly fragmented media market.

Gilat Levy | LSE
Ronny Razin | LSE
Short-term political memory and the inevitability of polarisation Downloadpaper (PDF, 620 KB)vertical_align_bottom

We analyse a dynamic model in which voters use past observations to learn about the optimal policy but have a fi…nite memory. Political parties are self-interested, with polarised ideal policies, and voters with party loyalty are responsive to a certain degree to parties whose policy is based on a better interpretation of past observations. We show that short-term memory leads to political cycles of polarisation and convergence. Historical periods of convergence lead parties to polarise, whereas periods of polarisation imply convergence of platforms. More generally our framework allows us to model the strategic use of biased histories in political competition such as the use of nostalgia.

Marco Battaglini | Cornell University
Thomas R. Palfrey | California Institute of Technology
Organizing for Collective Action: Olson Revisited

We are interested in studying collective action when interest groups can organize, but are faced with asymmetric information about the preferences of their members and limited contractual capacity. To this goal, we characterize and study the properties of the optimal communication mechanism in a group when members have continuous private information about their preferences for the public good, side payments are not possible, and successful achievement of the group interest requires costly participation of some fraction of its members. The optimal "honest and obedient" mechanism can be implemented with a minimal amount of communication via an indirect mechanism where members are required to send one of only three messages. Having an optimal organization, however, is only a limited solution for the internal free-rider problem: just as for unorganized groups, the probability of group success converges to zero as the number of members increases to infi…nity. Still, even without side payments, the optimal mechanism provides an order of magnitude improvement compared to unorganized groups and allows to achieve meaningful probabilities of success even for large groups. We pursue a number of additional questions, including: Under what conditions can we expect organized groups to form? How does this depend on the size of the group, the success threshold, and the distribution of preferences? If there are multiple groups and their interests are competing, how does this affect the optimal mechanism and the probability of successful collective action?
 

The 4th ETH Workshop on Democracy: Theoretical Political Economy, in collaboration with CEPR, will take place on the 3th and 4th of June, 2021 (via external pageZoomcall_made).

The workshop is organized by the Chair of Macroeconomics: Innovation and Policy and aims to:

• present leading theoretical approaches to modeling Politics,
  
• present cutting-edge theoretical analyses of Political Economy problems,
  
• explore new forms of democracy.

We expect the workshop to provide a stimulating discussion of ongoing research among a limited number of invited participants. Each presentation will last 50 minutes that will be split as follows: 30 min (speaker) + 15 min (discussant) + 5 min (questions)