Democracy undone. Systematic minority advantage in competitive vote markets

We study the competitive equilibrium of a market for votes where the choice is binary and it is known that a majority of the voters supports one of the two alternatives. Voters can trade votes for a numeraire before making a decision via majority rule. We identify a sufficient condition guaranteeing the existence of an ex ante equilibrium. In equilibrium, only the most intense voter on each side demands votes, and each demands enough votes to alone control a majority. The equilibrium strongly resembles an all-pay auction for decision power: it makes clear that votes are only a medium for the allocation of power. The probability of a minority victory is always higher than efficient and converges rapidly to one-half as the electorate increases, for any minority size. The numerical advantage of the majority becomes irrelevant: democracy is undone by the market

Democracy Undone: Systematic Minority Advantage in Competitive Vote Markets

We study the competitive equilibrium of a market for votes where voters can trade votes for a numeraire before making a decision via majority rule. The choice is binary and the number of supporters of either alternative is known. We identify a sufficient condition guaranteeing the existence of an ex ante equilibrium. In equilibrium, only the most intense voter on each side demands votes and each demand enough votes to alone control a majority. The probability of a minority victory is independent of the size of the minority and converges to one half, for any minority size, when the electorate is arbitrarily large. In a large electorate, the numerical advantage of the majority becomes irrelevant: democracy is undone by the market

Persistence of Power, Elites and Institutions

We construct a model of simultaneous change and persistence in institutions. The model consists of landowning elites and workers, and the key economic decision concerns the form of economic institutions regulating the transaction of labor (e.g., competitive markets versus labor repression). The main idea is that equilibrium economic institutions are a result of the exercise of de jure and de facto political power. A change in political institutions, for example a move from nondemocracy to democracy, alters the distribution of de jure political power, but the elite can intensify their investments in de facto political power, such as lobbying or the use of paramilitary forces, to partially or fully offset their loss of de jure power. In the baseline model, equilibrium changes in political institutions have no effect on the (stochastic) equilibrium distribution of economic institutions, leading to a particular form of persistence in equilibrium institutions, which we refer to as invariance. When the model is enriched to allow for limits on the exercise of de facto power by the elite in democracy or for costs of changing economic institutions, the equilibrium takes the form of a Markov regime-switching process with state dependence. Finally, when we allow for the possibility that changing political institutions is more difficult than altering economic institutions, the model leads to a pattern of captured democracy, whereby a democratic regime may survive, but choose economic institutions favoring the elite. The main ideas featuring in the model are illustrated using historical examples from the U.S. South, Latin America and Liberia.

Between the Market and State: Middle Class Clientelism in Central and Eastern Europe

In Central and Eastern Europe, wealth is on the rise, but democracy is in decline. Populist parties assail the foundations of constitutional rule of law and enhance their networks of patronage and clientelism to gain greater support with the electorate. Yet, it is little understood as to why citizens vote for illiberal parties in the region. This paper seeks to address this ongoing phenomenon by exploring voter support for clientelistic behavior by the middle classes of Russia, Poland, and Estonia. I develop and test a theory of “middle class clientelism” which seeks to explain under what conditions more wealthier voters become a cost-effective target for vote buying, patronage, and particularistic goods. The literature on clientelism has been fairly consistent in explaining that middle class voters are too cost prohibitive for parties and elites to clientelize because they have better access to personal wealth and employment opportunities. However, I determine two critical variables that can account for this occurrence. These are the levels of state management of the economy and vulnerabilities within the middle class that has been induced by years of financial crisis in Central and Eastern Europe. This type of clientelism is damaging for democratic outcomes because it allows parties to participate in state capture and fuse themselves into the state without responsive democratic pressure in response from the middle

Essays in Political Economy

This dissertation presents three essays in Political Economy with different approaches, but a single line of inquiry: how can political institutions shape individual behaviors by modifying the incentives of political actors? Krugman and Wells (2005) defines economics as "the study of economies, at both the level of individuals and of society as a whole" and an economy as "a system for coordinating society's productive activities." Political Economy, in parallel, can be seen at the study of politics, at both the level of individuals and of institutions as a whole, where institutions are defined as systems to coordinate individuals' interactions. The two dimensions are important: although politics consists in decisions taken at the individual level, the outcomes are shaped by the institutional rules which thus partly determines those choices. The three chapters presented here consider particular cases of this interdependence between individual political actors and political institutions. Chapter 1 analyzes how the effective super-majority in the US Senate along with the role of parties as imperfect coordinators of politicians' actions affect the incentives of the centrist senators; and suggests in a stylized model that, counter-intuitively, a smaller minority might be more successful in its effort to fight the majority's priorities. Chapter 2 studies empirically how changes in a country's constitutional executive term limits affect the incentives of politicians and the consequences on a country's default probability by considering the effect those shocks have on the perception that international investors have of a country's financial soundness. Chapter 3 completes the parallel between the standard definition of Economics and Political Economy by investigating the understudied extension of markets for goods to markets for votes, and shows that the idiosyncratic characteristics of votes imply that a typical market performs badly in allocating the decision power to the parties valuing it the most. This dissertation not only tackles a series of problems in Political Economy, but also discusses and develops a wide range of methods which are available to understand those issues. Chapter 1 proposes a participation game model where a certain number of contributors are required to pay in order for a public good to be provided. The main theoretical contribution of this paper is to show that when the contribution cost falls in the number of ex-post contributors, not only individual participation is more likely when the required number of participants increases with the size of the group, but the provision probability increases too. On the contrary, this does not occur in a fixed cost model. One practical implication of the model suggests that if a party in the US Senate keeps its majority while losing seats at the center of the political spectrum, it might be more successful in overcoming a cloture vote without any change in policy ideology. This chapter then uses a laboratory experiment to test the model's predictions and underlines how, generally, simple experiments can guide theorists to first find identifiable, testable comparative statics predictions, and second, design experiments which would not be easily replicated in the field and provide clean identification. The experimental results also show the importance of using models with testable implications: although the theory's predictions on individual behavior are qualitatively borne out by the data, the quantitative deviations from standard "rational" behavior as expressed in game theoretical solution concepts differ across the set of parameters and generate aggregate outcomes which do not match the theory exactly. Optimization-based models with additional, behavioral elements, or models of bounded rationality which are discussed in part in that chapter should thus also be an integral part of political economy models: a general equilibrium model which answers its motivating question under the assumption of perfect rationality will only be of limited use if it is not robust to the individual deviations from this assumption that we observe in reality. Chapter 2, co-authored with Laurence Wilse-Samson, is an empirical study which uses an event-study methodology to uncover the impact of changes in a country's constitutional executive term limits on international investors' perception of that country's risk, by analyzing the evolution of bond market spreads around the time of those changes. It provides two main contributions, one methodological, and the other empirical.. The flourishing literature on institutions mainly considers the impact of institutions on low-frequency variables such as fiscal outcomes, while this study uses high-frequency financial data. The trade-off in these two approaches is informative. With high frequency data and using event-studies, the identification is clear: any movement in financial markets can be linked to the institutional change under investigation. However, failures of rational expectations means that this impact on expectations might differ from the effect on realized economic variables. This chapter thus emphasizes that while these two types of analyses are complementary, high-frequency analyses are underused. On the empirical side, the chapter considers the unresolved debate over the impact of term limits on fiscal outcomes, as underlined by contradictory results in the empirical literature. Moreover, theories developed on term limits also suggest ambiguous effects: for instance, do term limits prevent insiders from controlling the political process, or do they prevent elections from creating incentives for the executive to behave well? The chapter considers the movement of bond spreads around term-limits "shocks" and shows that although bond spreads fall after restrictions on term limits, there is no significant impact of extensions. Furthermore, it provides suggestive evidence that the impact of such shocks is larger in relatively weakly institutionalized countries, and that the separation of branches also matter to investors since restrictions implemented by the judiciary also generate strong movements. Finally, Chapter 3, co-authored with Alessandra Casella, is motivated by the simple question of whether in a committee of members belonging to two opposing parties and voting on a binary decision, markets, which have been thoroughly studied in economic theory and are considered to function quite well in allocating goods to the agents valuing them the most, can work in allocating votes and decision power in the same way. Generally, one question in thinking about voting mechanisms has been that formulated by Dahl (1956): "What if a minority prefers an alternative much more passionately than the majority prefers a contrary alternative? Does the majority principle still make sense?". A market for votes appears like an intuitive way to allow members of a committee to sell and buy votes using a numeraire, but this chapter shows that it is unable to do so in an efficient way and usually performs worse than majority voting, in particular in a large electorate. A market for votes indeed yields a competition between the higher-intensity member of each party irrespectively of the size of those parties, which generates a systematic bias in favor of the minority which will win too often. In particular, it is shown that for any party sizes, the probability of a minority victory converges to a half as the electorate becomes infinitely large. The model also emphasizes other inefficiencies: this institution implies intra-party trade and supermajorities. Importantly, the implications of the model have been tested in a laboratory experiment in a previous paper and are generally verified by the experimental results

The Riddle of the Great Pyramids

Large pyramidal family controlled business groups are the predominant form of business organization outside America, Britain, Germany, and Japan. Large pyramidal groups comprising dozens, even hundreds, or listed and unlisted firms place the governance of large swathes of many countries' big business sectors in the hands of a few of their wealthiest families. These structures plausibly substitute for weak market institutions in economies undergoing rapid early-stage industrialization. They may also substitute for weak governments in coordinating Big Push growth programs to establish numerous interdependent simultaneously. However, no such role is evident in developed or in slowly growing developing economies, where such structures appear prone to agency problems and political rent-seeking. If sufficiently large, they may also add to economy volatility by rendering the risk of misgovernance systematic, rather than firm-specific.

Corporate Governance, Economic Entrenchment and Growth

Around the world, large corporations usually have controlling owners, who are usually very wealthy families. Outside the U.S. and the U.K., pyramidal control structures, cross shareholding and super voting rights are common. Using these devices, a family can control corporations without making a commensurate capital investment. In many countries, such families end up controlling considerable proportions of their countries'' economies. Three points emerge. First, at the firm level, these ownership structures vest dominant control rights with families who often have little real capital invested creating agency and entrenchment problem simultaneously. In addition, controlling shareholders can divert corporate resources for private benefits using transactions within the pyramidal group. The result is a poor utilization of resources. At the economy level, extensive control of corporate assets by a few families distorts capital allocation and reduces the rate of innovation. The result is an economy-wide misallocation of resources, and slower economic growth. Second, political influence is plausibly related to what one controls, rather than what one owns. The controlling owners of pyramids thus have greatly amplified political influence relative to their actual wealth. They appear to influence the development of both public policy, such as property rights protection and enforcement, and institutions like capital markets. We denote this phenomenon economic entrenchment. Third, we conceive of a relationship between the distribution of corporate control and institutional development that generates and preserves economic entrenchment as one equilibrium; but not the only one. Based on the literature, we identify key determinants of economic entrenchment. We also identify many gaps where further work exploring the political economy importance of the distribution of corporate control is needed.

Voter Turnout with Peer Punishment

We introduce a model where social norms of voting participation are strategically chosen by competing political parties and determine voters' turnout. Social norms must be enforced through costly peer monitoring and punishment. When the cost of enforcement of social norms is low, the larger party is always advantaged. Otherwise, in the spirit of Olson (1965), the smaller party may be advantaged. Our model shares features of the ethical voter model and it delivers novel and empirically relevant comparative statics results