Political Economy Training and Mobility of Researchers Network

Among the main scientific advances recorded in the first year of the Network’s life was a better understanding of the advantages of separation of powers in political systems, viewed from a game-theoretic and contract-theoretic perspective. The work in this area has since proceeded in several directions. While work is continuing to understand the theoretical foundations of the separation of powers, research is also being carried out along the line of past years’ results, and in particular on the comparative analysis of political systems and of the interaction between various branches of government.

In several papers, Torsten Persson (IIES), Gérard Roland (ECARES) and Guido Tabellini (IGIER) have shown that in an incomplete contract perspective checks and balances between the executive and legislative branch of government create a conflict of interest between both branches that makes each more accountable to voters. This advantage can better be exploited in a presidential system where both branches are directly elected compared to a parliamentary system where the executive stems directly from the majority emerging in the legislature.

Persson and Tabellini’s paper ‘The Size and Scope of Government: Comparative Politics with Rational Politicians’ uses simple theoretical models to derive a number of hypotheses about how the electoral rule and political regime should affect the level and composition of government spending. Data from 60 democracies are consistent with a number of these hypotheses. Specifically, holding constant a number of socio-economic determinants, presidential regimes have significantly smaller governments than parliamentary regimes, whereas countries with majority elections supply fewer public goods than countries with proportional elections. The results of the research were presented in two public lectures: at ‘The Zeuthen Lectures’, University of Copenhagen, June 2^nd 1998, they presented chapters of a forthcoming book Political Economics and Economic Policy. At ‘The Marshall Lectures’, Berlin, 2-5 September 1998, they presented The Size and Scope of Government: Comparative Politics with Rational Politicians.

Persson has also studied how economic policies depend on the political system. ‘Lobbying and Legislative Bargaining’ (with Elhanan Helpman (Tel-Aviv University and the Sapir Center)) studies a hitherto unexplored issue, namely how the activities of interest groups interact with the bargaining over economic legislation in different kinds of legislatures. The paper demonstrates within a game-theoretic framework that lobbying tends to promote redistribution towards minorities within congressional regimes, but redistribution towards majorities in parliamentary regimes.

Persson’s work compares the two basic approaches to politics (voting models and lobbying models) in the comparativist perspective, looking at the impact of various forms of organization of government and separation of powers on economic outcomes. One of the important themes that comes out is that the interrelationship between various aspects of the institutional system matter, for example the relationship between the electoral system on the one hand and the legislative process on the other, or the interrelationship between the activity of interest groups and the legislative process.

In their work on the advantages of competing advocacies, also in an incomplete contract framework, Mathias Dewatripont (ECARES) and Jean Tirole (IDEI) show that, among other things, conflicts of interests between various branches of government create better incentives to gather relevant information needed for decisions. This research is especially promising in analyzing the organization of the judicial process.

The work by Jean-Jacques Laffont and David Martimort (both IDEI) shows, in a complete contract perspective, the advantages of separation of powers and responsibilities between different regulatory agencies in terms of reducing the costs of preventing regulatory capture by interest groups. They have worked on the separation of powers among government bodies and propose a theory based on its benefits in preventing regulatory capture. The information available to regulators gives them discretion and power. Splitting the information between competing regulators reduces their power and reduces the threat of capture. Laffont and Martimort also study the distributive and allocative consequences of this institutional choice.

Juan Carrillo (1996-97 post-doc based at ECARES) has worked in collaboration with Micaël Castanheira (post-doc based at IGIER) on the strategic positioning of parties when political platforms are two-dimensional: policy and quality. They show that the median voter theorem is weakened by lack of information about the ‘quality’ dimension of the platforms. This latter result is complementary to the results of the ‘voting for losing parties’ point where voters force parties to diverge in order to elicit information about the electorate.

Castanheira has also pursued his work on strategic voting in several directions. First, he continued his work on the vote for losing parties, in order to extend the analysis to more general cases. Second, he set up a general framework for the analysis of the turnout decision, where he shows that many stylized features of turnout rates are consistent with a rational behaviour of voters.

Alessandro Lizzeri (1997-98 post doc at IDEI) devoted his year at Toulouse to the analysis of political institutions, and in particular to coalition building and constitutional design. Candidates for elections generally face a trade-off between efficiency and targetability: the benefits from public goods may be higher on average but they cannot be targeted to groups of voters as easily as the benefits from pork barrel projects or pure transfers. This trade-off is often resolved in favour of targetability and therefore the provision of public goods may be inefficient even in a world with identical voters. Under a winner takes all system, he shows that the incentives for targetability are in general stronger than under a proportional system where candidates care not only about winning but also about the margin of victory. The proportional system tends to be more efficient when the public good is very valuable. The winner-takes all system is more efficient when the public good is not very valuable.

Anouk Riviere (ECARES) has analyzed a model of party formation with strategic voting that leads to a form of Duverger’s law with only two parties entering electoral contests in equilibrium.

Here, the work of Laffont and Martimort is again of interest. They show that the separation of tasks between regulators yields less collusion which reduces the danger of capture by interest groups as well as the collusion with interest groups. In one of their papers, they show that this happens because the separation of tasks reduces the benefits from collusion, and thus the costs of preventing collusion, whereas in another paper they show that coordination by interest groups can be reduced via such separation.

Tirole and Dewatripont have studied the role of ‘Advocates’ in politics, the law, and more generally in organizations, and in collaboration with Ian Jewitt (University of Bristol and CEPR), they have analyzed the incentives of government officials and politicians. These incentives are based on career concerns rather than explicit performance based compensation. Bureaucrats and politicians do not receive bonuses and stock options, unlike their private sector counterparts; they aim at influencing their ‘labour market’ (internal and external labour market for bureaucrats, electorate for politicians) as to their ability.

David Strömberg (IIES) has carried out theoretical and empirical research on how the mass media interacts with politician’s economic policy choices.

Persson and Tabellini have produced a broad synthesis on the relationship between macroeconomic policy, including monetary policy, and the political process. Since joining the project in the second year, the Sapir Center, have been instrumental in carrying out work in this area. In particular, Alex Cukierman has analyzed (with coauthors Miller and Neyapti) issues of central bank reform, liberalization and inflation in transition economies. Also, with Francesco Lippi (Banca d'Italia), he has been analyzing the links between central bank independence, centralization of wage bargaining, inflation and unemployment.

Laura Bottazzi (IGIER and CEPR) and Paolo Manasse (IGIER and Université Statale di Milano-Biocca) have written two papers on this topic: ‘Bankers' versus Workers' Europe(I): Asymmetric Information in EMU’ and ‘Workers' versus Bankers' Europe(II): Asymmetric Information in EMU’.

Francesco Giavazzi (IGIER and CEPR), Carlo Favero (IGIER and CEPR) and Rudi Dornbusch (MIT and CEPR) have authored ‘Immediate challenges for the ECB’, which was published in Economic Policy No. 26 (1998) analyses the choices the ECB will face early on in its life, particularly given the uncertainties and the possible asymmetries surrounding the monetary transmission mechanism inside the EMU.

Francesco Giavazzi has co-authored ‘The ECB: Safe at Any Speed?’, with David Begg (Birkbeck College and CEPR), Charles Wyplosz (GIIS Geneva and CEPR), Harald Uhlig (CentER, Tilburg University and CEPR) and Paul De Grauwe (Katholieke Universiteit Leuven and CEPR), asks whether the ECB would prepared to face a financial crisis, in particular one that were to hit European banks. The paper also discusses the distribution of power between the ECB’s Executive Board and the National Central Bank Governors in its Council.

Guido Tabellini has co-authored the first Annual Report of the CEPS Macroeconomic Policy Group ‘Macroeconomic Policy in the First Year of Euroland’ with Daniel Gros (CEPS), Olivier Blanchard (MIT and member of CEPR's Scientific Advisory Committee), Michael Emerson (CEPS and LSE), Thomas Mayer (Goldman Sachs), Gilles Saint-Paul (Universitat Pompeu Fabra and CEPR), Hans-Wermer Sinn (Universität München and CEPR).

The work by Verdier (DELTA) with Ades relates the interaction between economic activities, rent-seeking in the political process and the distribution of wealth and income. The model provides an explanation for why certain societies exhibit important social polarization and a high level of distortions and why others are more equal and exhibit less economic distortions.

John Hassler (IIES) has been working on the political economics of unemployment insurance. ‘Employment Turnover and Unemployment Insurance’, with José Vicente Rodríguez Mora (UPF Barcelona, visiting the IIES September 1998-August 1999), is based on a search model of the labour market. The paper shows that low labour market turnover (as in Europe) leads to high political pressure for generous unemployment insurance, whereas high turnover (as in the US) leads to low political demand for public assistance. (This paper has been preliminarily accepted for publication by the Journal of Public Economics.)

‘Equilibrium Unemployment Insurance’ by Hassler, Rodríguez Mora, Kjetil Storesletten (IIES) and Fabrizio Zilibotti (post-doc at IIES) is a more ambitious attempt to explain the observed differences between Europe and the US. This preliminary paper shows how essentially identical economies can end up in either of two very different equilibria, one with high endogenous unemployment insurance, unemployment and low turnover and one where the opposite is true.

Hassler and Rodriguez-Mora have also worked on issues in economic growth. ‘IQ, Social Mobility and Growth’ formulates a theoretical model of the bi-directional relation between growth and the social allocation of talent

In addition to his aforementioned work on unemployment insurance, Zilibotti has worked on economic growth and on unemployment.

John Hassler (IIES), Jose Vicente Rodriguez Mora (UPF) and Joseph Zeira (SAPIR) have begun a project on the relationship between Inequality and Mobility. The project analyzes the various correlations between the two variables and when can they occur. The paper points at both technology and development on the one hand, and at educational policy on the other hand, as affecting the correlation between the two variables. It focuses not only on education policy in general, but at how it is directed at different parts of society.

Here, new results have been produced by the work of Olivier Debande (ECARES) and Guido Friebel (IIES and CEPR). They analyze the effects of privatization policies, in an incomplete contract framework. Their model produces the traditional result that privatization increases incentives in the firm but they also find that privatization, associated with loss of control over firms may lead some privatized firms to increase lobbying efforts to secure higher subsidies.

Bruno Biais (IDEI and CEPR) and Enrico Perotti (University of Amsterdam and CEPR) have worked on the analysis of political privatization design in a bi-partisan environment where politicians lack commitment power. Suppose the median class voters a priori favour redistributive policies: if the privatization programme succeeds in allocating enough shares to these citizens, they become averse to redistributive policies, which would be detrimental to the values of their shareholdings. To induce the median class voters to buy enough shares to shift their political preferences, underpricing is often necessary. The more unequal the society, the poorer the median class, the less willing they are to buy shares, the larger the necessary underpricing. When inequalities are large this leads to voucher privatization. Shifting the preferences of the middle class by privatization is impossible when strong ex-ante political constraints require large upfront transfers to insiders, reducing the value which may be distributed through the privatization programme, or when social inequality is extreme.

Gérard Roland (ECARES) has also started working on ‘Law enforcement and Transition’, with Thierry Verdier (DELTA). This work analyses the conditions of emergence of credible law enforcement in countries undertaking large scale institutional change, such as that which occurs in transition economies.

Guido Friebel (IDEI) has investigated theoretical and empirical issues of the political economy of enterprise privatization.

In addition to the above, Cukierman (SAPIR) has been working on central bank reform.

Eliana La Ferrara (IGIER) and Robert H. Bates (Harvard University) are working on a paper on ‘Political Competition in Weak States: Rent Seeking, Coercion, and Identity Politics’.

Francesco Giavazzi (IGIER and CEPR) and Rudi Dornbusch (MIT and CEPR) have written ‘Heading off China's Financial Crisis’. The paper discusses the options facing the Chinese authorities given the volume of bad loans in the balance sheets of Chinese banks.

Sonai Falconieri (IDEI) has investigated the influence of lobbies on parliamentary reforms under the closed and open rules.

Much of the work produced so far by the Network in this area is by Persson, Roland and Tabellini, who put into perspective the theory of fiscal federalism against the background of new insights delivered by the political economy literature. They find not only that generalized second best arguments make arguments for centralization or decentralization of given competences less clear cut, but also that different interest groups benefit differently from centralization or decentralization because of their redistributive impact which cannot be separated from their allocative impact.

Per Petterson (IIES) has been carrying out empirical work on the so-called strategic debt hypothesis, using a panel data set for 275 Swedish municipalities, which makes it possible to hold constant a number of institutional factors (unlike earlier studies based on cross-country data).

Tryphon Kollintzas (IMOP and CEPR) has been working on fiscal policy in an economic union and George Alogoskoufis (IMOP and CEPR) has been researching problems of the entry of the Greek economy into EMU.

Abdul Noury (ECARES) has started to collect data on individual votes in the European Parliament to empirically analyze coalition formation.

Francesco Daveri (IGIER) has prepared a paper on EFU after EMU? (see the enclosed Abstract).

Month	Activity/Milestone	Output	Status
0	Project begins
1	Recruitment of visiting postdoctoral researchers begins	Advertisements and recruitment letters	Achieved
3	Visiting researchers join participating institutions First research workshop for Network participants	Contracts for visiting researchers Workshop	First research workshop took place in month 8
7	Second research workshop for Network participants Discussion Papers issued	Workshop Discussion Papers	Second research workshop took place in month 9 Discussion Papers published
11	Second wave of recruitment of visiting postdoctoral researchers	Advertisements and recruitment letters	Achieved
14	Visiting researchers join participating institutions Submission of first interim report and cost statement	Contracts for visiting researchers Report and cost statement	Achieved Reports submitted
20	Third research workshop for Network participants Discussion Papers issued	Workshop Discussion Papers	Third Research workshop took place in month 19 Discussion Papers published
23	Third wave of recruitment of visiting postdoctoral researchers	Advertisements and recruitment letters	Achieved
26	Submission of second interim report and cost statement Discussion Papers issued Visiting researchers join participating institutions	Report and cost statement Discussion Papers Contracts for visiting researchers	Achieved Discussion Papers published
29	Mid-term review and evaluation of the Network Fourth research workshop for project participants Discussion Papers issued	Mid-term review completed Workshop Discussion Papers	Mid-Term Review and fourth research workshop will take place in month 32
35	Fourth wave of recruitment of visiting postdoctoral researchers	Advertisements and recruitment letters	Achieved
37	Visiting researchers join participating institutions	Contracts for visiting researchers	Achieved
38	Submission of third interim report and cost statement Discussion Papers issued Fifth research workshop for project participants	Report and cost statement Discussion Papers Workshop	Report Submitted Discussion Papers published Workshop will take place in month 45
45	Final conference Submission of final report and cost statement	Conference Cost statement and report	A request for a 12 month extension has been submitted to the Commission so the timing of the remaining activities/milestones will depend on this
48	Dissemination of research output through Discussion Papers and public meetings Publication of conference volume	Discussion Papers Public discussion meetings Conference volume
50	Submission of final report and cost statement	Report and cost statement

The Network structure has been very instrumental in fostering collaboration in research and scientific interaction. Network members have met at various workshops and conferences during the course of this project, including:

In addition to these more formal events, a number of bilateral visits have taken place, including:

ECARES hosted visits from members of several other Network teams: Guido Tabellini (IGIER), Thierry Verdier (DELTA), Guido Friebel (IDEI), José Vicente Rodríguez Mora (IIES). Micael Castanheira (IGIER) visited ECARES on a number of occasions to work with Juan Carrillo.

IGIER hosted the following visitors: Juan Carrillo (ECARES), Guido Friebel (IIES) and Torsten Persson (IIES). Members of the IGIER team also visited other members of the Network, with the support of Network funds: Guido Tabellini visited Brussels, Toulouse and Paris to conduct joint work on the project and to present his research.

IIES: Persson visited IDEI in Toulouse for two weeks in January-February of 1998, and IGIER in Milan for 10 days in July of 1998. Mora visited ECARES in Brussels for one week in February 1998. The IIES researchers also made shorter visits to other nodes in the Network Thus Zilibotti gave a seminar at IDEI and Strömberg gave a seminar at ECARES. They also interacted with researchers from other nodes in the Network in a number of international conferences and workshops, several of which were arranged by CEPR. For example, Hassler, Strömberg, and Zilibotti presented papers at the CEPR Summer Symposium in Macroeconomics (Tarragona, May 27-30); Hassler, Mora, Zilibotti at the CEPR conference on Social Inequality and Social Mobility (La Coruna, April 3-4); Petterson and Strömberg at a workshop on Political Economics, in conection with Persson and Tabellini’s Zeuthen Lectures (Copenhagen, June 10); Hassler and Mora at the NBER Summer Institute (Cambridge, MA July 20-24). All the IIES researchers participated in the annual EEA Congress (Berlin, September 3-5).

IMOP: researchers from IMOP gave papers at several different conferences, including a presentation by Alogoskoufis at a conference at LSE, London, on ‘The Greek Economy and Society in View of the Economic and Monetary Union’; a presentation by Alogoskoufis at Oxford University (May 1998) on ‘Greece and the Euro’; and papers given at EEA 98 and ESEM 98 (Berlin, September 1998) by Vassilatos and Kollintzas.

SAPIR: There have been a small number of Network visits during 1998-99, the first year that SAPIR has been a full member of the Network. Joseph Zeira, the Sapir team leader visited DELTA in Paris in April 1998, to expand cooperation with Sapir. DELTA is an important part of the Network for Sapir, since it specializes in income distribution, an area in which many Israeli researchers work. A second visit was to the EEA meeting in September 1998. During the meetings Zeira expanded the contacts of Sapir with the Network and participated in a formal meeting of the Network coordinators. A third visit was to the Institute of International Economic Studies in Stockholm in September 1998, for research collaboration with the Stockholm Network. During the next year Sapir plans to deepen the networking activity in addition to the ongoing research effort. They plan the following visits: Mark Gradstein and Oded Galor in Delta Paris, Yossi Spiegel in IDEI Toulouse and Joseph Zeira in ESSIM Portugal.

A planning meeting for this Network was held during the European Economic Association meetings in Berlin in September 1998, at which a representative of each partner was present. The purpose of this meeting was both to discuss the administrative details of the project (financial arrangements, reporting, etc.) and to plan the further execution of the work plan.

In the context of the work of this Network, ‘Industry’ can be taken to mean the public and private sector policy community, including central banks, government departments, international institutions etc. Examples of industry representatives who have participated in several meetings where the work of the Network has been represented are as follows:

The Italian team is carrying out research related to that of the Network which is sponsored by Cofindustria, the Italian Confederation of Industry. This has resulted in the following papers:

This paper investigates how the structure and incentives of the Italian non-employment benefits will change after the introduction of a means-tested social assistance scheme of the last resort such as the reddito minimo d’inserimento (RMI), currently been run on a experimental basis in a few municipalities, mainly in the Southern part of Italy. This new cash transfer mechanism will modify the Italian unemployment benefit system introducing a third level of benefits after the Cassa Integrazione- Liste di Mobilità and the “ordinary” unemployment benefits. The disincentives to work for those in unemployment are analysed by relating the amount of transfers in each program to the potential income from work of persons with characteristics like those of the person whose income are below established for access to social assistance. The analysis suggests that this new scheme should be carefully designed (e.g., with an appropriate system of earning disregards) in order to avoid unemployment and poverty traps. It is also argued in the paper that the RMI could affect the distribution of unemployment across households increasing the polarisation of employment and unemployment. A positive correlation between the relevance of means-tested cash transfers and polarisation of unemployment is indeed observed across countries.

‘Unemployment benefits in some European countries: the reforms in the 90's’, E. Frontini (Bocconi University) and G. Tabellini (IGIER), published in ‘Mercato del lavoro e ammortizzatori sociali - Ricerca del Centro Studi Confindustria’ edited by Giulio de Caprariis, Società Editrice il Mulino, 1999

During the 90's some European countries have introduced important changes in the protection systems for unemployed income. Which lessons could be taken from these experiences? Which are the more effective reforms? Which problems remain unsolved? These are the main questions faced in the paper. At present, it seems evident that these questions are of extreme significance in Italy. Our country lacks of an effective and comprehensive protection system of unemployed income. In order to learn from different experiences of countries similar to Italy, we have carefully analysed the experience of six European countries: Denmark, France, The Netherlands, United Kingdom,, Spain and Sweden.

CEPR has considerable experience in fostering close contacts between researchers and users of research in business and industry. The Centre provides a variety of fora in which users of research can interact directly with researchers and influence the research process, and the active CEPR dissemination programme also ensures that the results of the networks research are communicated promptly and effectively to users in the private and public sectors.

Research emanating from this Network has not yet been presented at CEPR lunchtime briefings and public discussion meetings, but it is expected that as research progresses researchers associated with the Network will participate actively in this dissemination programme.