Political Economic Theory

We present an equilibrium model of politics as a battle between narratives over public opinion. We conceptualize narratives as subjective models that attribute a commonly valued outcome to (potentially spurious) postulated causes. When quantified against empirical observations, these models generate a belief over the outcome as a function of its postulated causes. In our setting, a political platform consists of a policy, a coalition of social groups with diverse intrinsic attitudes to policies, and a narrative. Coalition members share a belief that is induced by their common narrative. The intensity of this belief and the intrinsic attitudes to the policy determine the strength of the coalition’s mobilization. Only platforms that generate maximal mobilization prevail in equilibrium. Our equilibrium characterization demonstrates how false narratives can be detrimental for the common good, and how political fragmentation leads to their proliferation. The false narratives that emerge in equilibrium attribute good outcomes to the exclusion of social groups from ruling coalitions.

We study a communication game between a sender and receiver where the sender has access to a set of informative signals about a state of the world. The sender chooses one of her signals and communicates it to the receiver. We call this an “anecdote”. The receiver takes an action, yielding a utility for both players. Sender and receiver both care about the state of the world but are also influenced by a personal preference so that their ideal actions differ. We characterize perfect Bayesian equilibria when the sender cannot commit to a particular communication scheme. In this setting the sender faces “persuasion temptation”: she is tempted to select a more biased anecdote to influence the receiver’s action. Anecdotes are still informative to the receiver but persuasion comes at the cost of precision. This gives rise to “informational homophily” where the receiver prefers to listen to like-minded senders because they provide higher-precision signals. In particular, we show that a sender with access to many anecdotes will essentially send the minimum or maximum anecdote even though with high probability she has access to an anecdote close to the state of the world that would almost perfectly reveal it to the receiver. In contrast to the classic Crawford-Sobel model, full revelation is a knife-edge equilibrium and even small differences in personal preferences will induce highly polarized communication and a loss in utility for any equilibrium. We show that for fat-tailed anecdote distributions the receiver might even prefer to talk to poorly informed senders with aligned preferences rather than a knowledgeable expert whose preferences may differ from her own because the expert’s knowledge also gives her likely access to highly biased anecdotes. We also show that under commitment differences in personal preferences no longer affect communication and the sender will generally report the most representative anecdote closest to the posterior mean for common distributions.

Why does misinformation persist, and how does it distort the long-run beliefs and actions of rational agents? We study a model where receivers see an infinite stream of messages from a sender of unknown type who observes private signals about an unknown state of the world. We characterize the conditions for “doublespeak” equilibria where one sender type repeatedly reveals each private signal truthfully but another sender type repeatedly fabricates false values of her private signals. Receivers only partially learn the true state in the long run irrespective of the true sender type, resulting in long-run disagreement and ex post incorrect actions by some receivers. Equilibrium fact-checking by receivers does not induce more truth-telling among sender types but reputational concerns can. Our results cast doubt on the presumption that rational agents can pierce through persistent extreme lies in the long run and highlight the deleterious effects of such lies for receiver welfare.

Casual observation suggests that social media can have an important impact on political activism: Increased connectedness via social media means that even dispersed groups see more similar information, allowing them to get united and mobilized towards a shared goal. This paper presents a natural model of a protest game, in which different groups of agents must strategically decide whether to engage in a mass protest against a regime. There is incomplete information about the desirability of the regime change. Protesting is costly for any individual protestor, but a minimum number of protestors is required to make a protest successful. Thus, contrary to most of the existing literature, our model allows us to view protests as games with both strategic substitutability and strategic complementarity. Further, there is uncertainty about the population size. In such a setting, we examine the role of increased interdependence of information on the size of mass protests. We propose a natural order of interdependence of information structures and use it to characterize when increased interdependence increases or reduces the size of mass protests. Formally, we consider a model with a binary state of the world θ ∈ {0, 1}, with protest being desirable in one state (θ = 1) and not in the other. Society comprises a finite number of groups NG ≥ 2, who all have the same preferences but do not have access to the same information. Each group receives a signal y about the state, drawn from a distribution with finite support. Each individual must decide whether or not to engage in costly protest after observing only the signal of her own group. Protesting entails a cost c > 0, and a successful protest yields a benefit θ in state θ. A minimum number of protesters ¯n is required for a mass protest to be successful. Individuals do not know the size of their own or other groups: In particular, group sizes are independent Poisson random variables with mean N. Notice that there is strategic uncertainty (uncertainty about whether agents from other groups will turn up to protest) that stems from two sources: First, individuals do not know what information individuals in other groups have, and second, they don’t know the sizes of the groups. Increasing interdependence or similarity of information across groups can potentially mitigate some strategic uncertainty because the private signal of a group now has additional information about the other groups’ signals, and thus their likelihood of turning up to protest. We show, in fact, that increasing interdependence can have two opposing effects. On the one hand, it can help coordination by encouraging individuals to protest because their belief, conditional on their own signal, points towards other groups protesting as well. On the other hand, it can exacerbate the incentive to free-ride: A high likelihood of many agents protesting reduces the probability that any individual is pivotal, dampening the individual incentive to engage in costly protest. We propose a natural order of interdependence of information structures, that we call “Concentration Along Diagonal (CAD) order,” and use it to provide a simple characterization, in terms of the primitives, of when increased interdependence increases or reduces the size of mass protests. In particular, we show that increasing interdependence in the CAD order is unambiguously good (bad) when the resilience of the regime (measured by the number of protesters required for successful protest) is high (low) enough. We also characterize how interdependence affects not just the size of the protests but also the probability of successful protests. Somewhat counterintuitively, it turns out that increased interdependence of information can increase the size of mass protest, while at the same time reducing the probability of a successful protest. The paper also makes a methodological contribution by proposing the CAD order for comparing the interdependence of information structures. Intuitively, it captures the idea of realized signals being higher together or lower together. Importantly, in contrast to other standard notions of interdependence of distributions, CAD provides a way to compare conditional distributions that can be useful in many other game theoretic settings.

We study project development and selection by an organization whose members prefer different projects. The organization faces a trade-off between fostering collaboration among its members and responding efficiently to projects’ evolution. Choosing the most ex-post profitable project undermines members’ motive to collaborate, causing ex-ante inefficiency. We show a time-varying threshold rule is uniquely optimal, with the organization choosing the first project to achieve a sufficient lead. The optimum thus entails an early phase of uninterrupted competition, always followed by a permanent collaborative regime. We develop a new martingale-based solution approach, using weak solutions to construct the optimal contract.

According to resource-curse theory, oil revenues constitute a lucrative prize, motivating rebel groups to fight for control of resource-rich territory. Yet, we demonstrate, rebels rarely attack sites with the most oil, such as oil fields and terminals. To explain this finding, we develop a new model with elements of crisis-bargaining and Blotto games and use geo-spatial data on the location of oil infrastructure and armed conflict events to assess its implications. First, we show that rebels focus their attacks on pipelines and that more critical infrastructure has no discernible effect on conflict. Second, to prevent the government from thwarting their attacks, we find that rebels strategically randomize where they strike. Third, we find that increased oil prices have countervailing effects: as the black-market price increases, so too do the returns to oil theft; but as the export price increases, violence abates because, we argue, governments are more eager to “bargain away” conflict. Overall, groups sabotage pipelines because they expect these sites to be vulnerable and because such disruption can compel governments to address their demands.

This paper presents a model of partisan media trying to persuade a sophisticated and heterogeneous audience. We base our analysis on a Bayesian persuasion framework where receivers have heterogeneous preferences and beliefs. We identify an intensive-versus-extensive-margin trade-off tthat drives the media’s choice of slant: Biasing the news garners more support from the audience who follows the media but reduces the size of the audience. The media’s slant and target audience are qualitatively different in polarized and unimodal (or non-polarized) societies. When the media’s agenda becomes more popular, the media become more biased. When society becomes more polarized, the media become less biased. Thus, polarization may have an unexpected consequence: It may compel partisan media to be less biased and more informative.

We study how media choice driven by political identity can influence electoral results. Citizens gather information from mainstream news but also from partisan media sources which filter news in particular predetermined ways. We assume that citizens process all information they receive correctly but choose their own media sources in a behavioral self-serving way to try to preserve their political faith/identity. That is, they attempt to rationally counteract mainstream news that they might view as unfavorable. In the baseline setup, we assume that citizens on either side of the political spectrum are exposed to different extents to non-partisan mainstream news, as in the U.S. case. This endogenous media choice generates an electoral advantage for the less exposed side, which can turn into a sure electoral victory even for the wrong candidate in a democracy. Results are robust to forms of media distrust and are stronger if citizens have biased priors. In illiberal democracies, where the government controls the media, official media propaganda works only if citizens are unaware of its bias or if the government can engage in censorship. Propaganda backfires in the presence of freely available chosen media.

In this paper we develop a formal model in which two parties repeatedly bargain over both an ideological and a common values policy. In this setting, the ability to bundle proposals on the common values and ideological dimensions together increases the bargaining leverage of the proposer. As such, the common values dimension opens a window of opportunity that allows the proposer to obtain more favorable ideological policy. Consequently, the majority party may propose an inefficient common values policy today in order to exploit this window tomorrow. We show that this inefficiency only arises if parties anticipate polarization to increase in the future.

Once established, government spending programs tend to continue. Spending inertia can lead to unsustainable debt levels that require fiscal stabilization, such as “sequestration.” We develop a political economy model of debt with sticky spending by assuming that the government must maintain a fraction of past spending. We show that inertia insures against the risk of political turnover, which may reduce politicians’ incentives to accumulate debt. However, if preexisting commitments are large, as in the current U.S. context, inertia exacerbates incentives to increase debt; faced with the prospect of stabilization, the government overspends to “dilute” the spending commitments of past administrations.

This paper provides a dynamic theory of the effects of organizational capacity on public policy. Consistent with prevailing accounts, a bureaucratic organization with higher capacity, i.e., a better ability to get things done, is more likely to deliver projects in a timely, predictable, or efficient fashion. However, capacity also interacts with political institutions to produce far-reaching implications for the size and distribution of public projects. Capacity-induced delays and institutional porousness can allow future political opponents to revise projects in their favor. In response, politicians design projects to avoid revisions, for example by over-scaling projects to increase the cost of future revisions. We derive conditions under which higher organizational capacity can increase inequalities in the distribution of project benefits, increase delays, and reduce the project scales.