Political institutions and debt crises

This paper shows that political institutions matter in explaining defaults on external and domestic debt obligations. We explore a large number of political and macroeconomic variables using a non-parametric technique to predict safety from default. The advantage of this technique is that it is able to identify patterns in the data that are not captured in standard probit analysis. We find that political factors matter, and do so in different ways for democratic and non-democratic regimes, and for domestic and external debt. In democracies, a parliamentary system or sufficient checks and balances almost guarantee the absence of default on external debt when economic fundamentals or liquidity are sufficiently strong. In dictatorships, high stability and tenure play a similar role for default on domestic debt

Government Spending Cycles: Ideological or Opportunistic?

ands. The time series analysis, covering the period 1953–1993, allows for different types of government spending. In general, spending is inspired by ideological and opportunistic motives: all government expenditure categories show an upward drift during election times and the partisan motives behind government spending are clearly revealed: left-wing cabinets attach greater importance to social security and health care than right-wing cabinets and right-wing cabinets value expenditure on infrastructure and defense more than left-wing parties. Constructive comments by Frans van Winden, Wilko Letterie, Peter Cornelisse, Arie Ros, André de Moor, Harry ter Rele and an anonymous referee are gratefully acknowledged

Partisan Views of the Economy

In this paper it is argued that political parties may have incentives to adopt a partisan view on the working of the economic system. Our approach is based on a dynamical spatial voting model in which political parties are policy oriented. This model revolves around two interrelated issues x and y. The policy maker sets x directly. There exist two views on the relationship between x and y. Model uncertainty confronts policy makers with the problem of the selection of a model to base their actions on. We show that if voters have imperfect information about the working of the economic system that model selection contains a strategic element. Policy makers are inclined to adopt a view on the working of the economic system which fits in with their preferences. There is no inherent logic that places monetarists to the right of New Economists. They have different models of economic mechanism, but they need not have different political values. A conservative can be a Keynesian and a liberal a monetarist. These combinations are in fact surprisingly rare. James Tobin, 1974,The New Economics One Decade Older, p. 62. I am greatly indebted to Peter Broer, Ben Heydra, Jos Jansen and Wilko Letterie for many helpful suggestions. Furthermore, I would like to thank an anonymous referee for his comments

Don't tax me? : Determinants of individual attitudes toward progressive taxation

This contribution empirically analyses the individual determinants of tax rate preferences. For that purpose we make use of the representative German General Social Survey (ALLBUS) that offers data on the individual attitudes toward progressive, proportional, and regressive taxation. Our theoretical considerations suggest that beyond self-interest, information, fairness considerations, economic beliefs and several other individual factors drive individual preferences for tax rate structures. Our empirical results indicate that the self-interest view does not offer the sole explanation for the heterogeneity in attitudes toward progressive taxation. Rather, we show that the choice of the favoured tax rate is also driven by fairness considerations

Not Just Efficiency: Insolvency Law in the EU and Its Political Dimension

Certain insolvency law rules, like creditors’ priorities and set-off rights, have a distributive impact on creditors. Distributional rules reflect the hierarchies of values and interests in each jurisdiction and, as a result, have high political relevance and pose an obstacle to reforming the EU Insolvency Regulation. This paper will show the difficulty of reform by addressing two alternative options to regulate cross-border insolvencies in the European Union. The first one is the ‘choice model’, under which companies can select the insolvency law they prefer. Although such a model would allow distressed firms to select the most efficient insolvency law, it would also displace Member States’ power to protect local constituencies. The choice model therefore produces negative externalities and raises legitimacy concerns. The opposite solution is full harmonisation of insolvency law at EU level, including distributional rules. Full harmonisation would have the advantage of internalising all externalities produced by cross-border insolvencies. However, the EU legislative process, which is still based on negotiations between states, is not apt to decide on distributive insolvency rules; additionally, if harmonisation includes such rules, it will indirectly modify national social security strategies and equilibria. This debate shows that the choice regarding power allocation over bankruptcies in the EU depends on the progress of European integration and is mainly a matter of political legitimacy, not only of efficiency

Overlapping political budget cycle

We advance the literature on political budget cycles by testing for cycles in expenditures for elections to the legislative and the executive branches. Using municipal data, we identify cycles independently for the two branches, evaluate the effects of overlaps, and account for general year effects. We find sizable effects on expenditures before legislative elections and even larger effects before joint elections to the legislature and the office of mayor. In the case of coincident elections, we show that it is important whether the incumbent chief executive seeks reelection. To account for the potential endogeneity of that decision, we apply an IV approach using age and pension eligibility rules