Session 2: Political Economic Theory

In this paper we explore the effect of short memories on political outcomes in a model in which politics is viewed as a collective learning process . We analyse a dynamic model in which voters use past observations to learn about the optimal policy and political parties are self-interested, with polarised ideal policies. Voters balance party loyalty with a desire to vote for the party 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. Our framework also allows us to model the strategic use of biased histories and narratives in political competition, such as the use of nostalgia.

This paper proposes a new theoretical definition of (non-)democracy based on two "political rights" parameters (η , κ) that capture the extensive and intensive margin of the population's ability to replace the incumbent; and an "individual rights" parameter λ that captures the degree to which individual citizens are protected from political retribution. Within the rules of the game specified by (η , κ ), two office-motivated politicians compete for power by making promises to citizens.

The policy space features a trade-off between redistribution and public good provision. I study two types of public good: one that delivers egalitarian benefits, the other that delivers non-egalitarian benefits. I find that when political rights are stronger, and/or individual rights are weaker, competition drives politicians to treat citizens more equally, and to provide the egalitarian public good more efficiently. Regimes where political and individual rights are perfectly protected give politicians incentives to treat citizens inequitably for political advantage; these regimes provide the non-egalitarian public goods efficiently.

In the United States, the boundaries of congressional districts are often drawn by political partisans. In the resulting partisan gerrymandering problem, a
designer partitions voters into equal-sized districts with the goal of winning as many districts as possible. When the designer can perfectly predict how each individual will vote, the solution is to pack unfavorable voters into homogeneous districts and crack favorable voters across districts that each contain a bare majority of favorable voters. We study the more realistic case where the designer faces both aggregate and individual-level uncertainty, provide conditions under which appropriate generalizations of the pack and crack solution remain optimal, and analyze comparative statics. All districting plans that we find to be optimal are equivalent to special cases of segregate-pair districting, a generalization of pack and crack where all sufficiently unfavorable voter types are segregated in homogeneous districts, and the remaining types are matched in a negatively assortative pattern. Methodologically, we exploit a mathematical connection between gerrymandering—partitioning voters into districts—and information design—partitioning states of the world into signals.

Limits on a government's capacity to enforce laws can result in multiple equilibria. If most agents comply, limited enforcement is sufficient to dissuade isolated agents from misbehaving. If most agents do not comply, overstretched enforcement capacity has a minimal impact on behavior. We study the extent to which divide-and-conquer enforcement strategies can help select a high compliance equilibrium in the presence of realistic compliance frictions. We study the role of information about the compliance of others both in theory and in lab experiments. As the number of agents gets large, theory indicates that providing information or not is irrelevant in equilibrium. In contrast, providing individualized information has a first order impact in experimental play by increasing convergence to equilibrium. This illustrates the value of out-of-equilibrium information design.

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 differ 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 inefficiencies: 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.

We study how interest groups can organize to mitigate collective action problems in the presence of asymmetric information about the preferences of their members and limited contractual capacity.  To this goal, we characterize and study the properties of the optimal coordination/communication mechanism for 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 two or three messages. The optimal organization does not fully overcome a group’s free-rider problem but does produce an order of magnitude improvement compared to unorganized groups and generates 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 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?

We present a two-period model examining how the central bank and the elected government jointly shape elections and economic outcomes. An apolitical central bank minimizes a quadratic loss function in inflation and unemployment along an expectational Phillips curve, which is shifted by the government’s quality. Fully rational voters optimally choose between the incumbent, whose quality they infer from unemployment, and a challenger of unknown quality. We find that governments prefer more inflation-averse central banks than the social planner, rationalizing the political success of inflation-targeting in practice. Inflation-targeting, however, has negative economic consequences by allowing lower quality incumbents to be reelected.

This paper studies how an informed sender with state-independent preferences persuades receivers to approve his proposal with verifiable information. I find that every equilibrium outcome is characterized by each receiver’s set of approved states that satisfies this receiver’s obedience and the sender’s incentive-compatibility constraints. That allows me to describe the complete equilibrium set. In the sender-worst equilibrium, information unravels, and receivers act as if fully informed. The sender-preferred equilibrium outcome is the commitment outcome of the Bayesian persuasion game. In the leading application, I study targeted advertising in elections and show that by communicating with voters privately, a challenger may win elections that are unwinnable with public disclosure. The more polarized the electorate, the more likely it is that the challenger swings an unwinnable election with targeted advertising.