Session 6: Political Economic Theory

A decision maker (DM) takes a binary decision and cares about their reputation for being responsive to evidence—a non-partisan type—as opposed to having a fixed agenda—a partisan type. Non-partisans have heterogeneous "leniency," i.e., evidence thresholds above which the high action is preferred, whereas partisans always prefer the low action. Before the evidence is realized, the DM can send a cheap talk message to the public about his plans following the evidence. A wide range of communication equilibria exists, including an "ex-ante signaling" in which the DM announces (and follows through on) a threshold above which he will take the high action. We show that the ex-ante signaling equilibrium generates the highest probability of taking the high action across all equilibria. We then endogenize the evidence distribution as the choice of an investigator who seeks to maximize the probability of the high action. Allowing for communication qualitatively changes the structure of the optimal investigation, pushing towards "unpredictability" in the distribution of evidence that hinders the partisan type in targeting his announced action threshold.

A group of privately informed agents chooses between two alternatives. How should the decision rule be designed if agents are known to be biased in favor of one of the options? We address this question by considering the Condorcet Jury Setting as a mechanism design problem. Applications include the optimal decision mechanisms for boards of directors, political committees, and trial juries.

While we allow for any kind of mechanism, the optimal mechanism is a voting mechanism. In the terminology of the trial jury example: When jurors (agents) are more eager to convict than the lawmaker (principal), then the defendant should be convicted if and only if neither too many nor too few jurors vote to convict.

This kind of mechanism accords with a judicial procedure from ancient Jewish law.

I study a repeated bilateral relationship subject to termination. One player, the proposer, offers a transfer in each period. The receiver can accept and continue the relationship, or quit and take an outside option whose value is private information. Unlike in Coasian bargaining, remaining types are those from whom more can be extracted, potentially inviting ratcheting. Tirole (2016) shows that if the receiver’s type is persistent, there is actually no ratcheting. I show that if the receiver’s incentives to accept are affected even by small, transient shocks that the proposer cannot perfectly observe, then offers worsen over time, until the receiver inevitably quits. The reason is that a small escalation causes exit only if the receiver’s type is marginal and the shock is unfavorable. Major escalations may alternate with periods of slow ratcheting. Exit may be inevitable even if the proposer has commitment power. Applications include crisis bargaining in international relations and surplus extraction from an employee.

Elections are brutal, winner-take-all contests that require a cohe-
sive team. To ensure this cohesion, merit often takes a back seat to loyalty. We propose a model of the allocation of talent in winner-take-all tournaments and derive some empirical implications. The winner-take-all nature of the contest induces a threshold effect such that if things are looking down, talented followers may quit. A political leader must choose between competent individuals who may increase the chances of winning the contest, but may bolt at the first hint of bad news, and loyalists who have fewer outside options. We
study when loyal followers are more necessary; when loyal leaders solve the problem of low quality teams and when they make it worse; and when, fearing backstabbing, leaders prioritize internal competition over external competition. The value of loyalty increases when pre-election information (polls etc.) is more precise; less competitive

This paper studies quid-pro-quo dynamic agreements between an interest group and two
political parties. Political parties repeatedly compete for office. Before each election, the interest
group decides which party to support. When in power, parties choose the rent they transfer to the
interest group to buy its support. Yet, binding agreements are not possible, so agreements must
be self-enforcing. When electoral uncertainty is low, the interest group favors an opportunistic
agreement in which it always supports the current incumbent. As electoral uncertainty increases,
the interest group prefers an exclusive agreement in which it supports a single party even when
it is in opposition. An interest group with more inefficient rents is also less likely to favor an
opportunistic agreement. The model offers a novel explanation for why studies on the impact
of campaign contributions on policymaking find mixed evidence. Besides, my results shed new
light on existing empirical findings by showing that interest groups’ long-term loyalty does not
necessarily imply an ideological alignment, and interest groups’ opportunism can be a signal of
effective institutions. Lastly, I study the impact of emergencies, weak political parties, and the
interest group’s entry costs on the interest group’s best agreement.

We study public good provision and technology investment when two parties, with differing values of the public good, alternate in power stochastically. In each period, the incumbent decides on public good provision and technological investment that lowers future costs of provision. We obtain the following results in Markov Perfect equilibria of the model. (i) When polarization is low, the steady state distribution is unaffected by the degree of investment reversibility, but when polarization is high, the party favoring the public good always invests more, with both parties providing more public good under irreversible investment. (ii) Higher turnover results in increased levels of technology stock and greater public good provision if polarization is low. (iii) Under high turnover, as parties become more polarized, the expected technology stock and public good provision decline initially, but jump upward as irreversibility starts to bind

We study a principal choosing the ideology of a representative who will participate in legislative bargaining over spatial policy. We show there are pervasive incentives for strategic delegation if bargaining can continue after rejected proposals. This feature introduces an intuitive strategic force — the representative’s ideology affects legislature-wide expectations about further bargaining — that has unknown consequences for representation. We highlight how these expectations crucially affect what can pass and, in turn, alter extremist proposals. We find a general preference for moderation. Specifically: (i) Moderate principals prefer more centrist representatives and (ii) centrist principals want centrist representatives who will be veto players. Moreover, under standard assumptions, principals want to skew inward towards a centrally located locus of attraction, which varies with the balance of extremist proposal power. Broadly, principals strategically skew their representative to counteract this balance of power.

We model legislative decision-making with an agenda setter who can propose policies sequentially, tailoring each proposal to the status quo that prevails after prior votes. Voters are sophisticated and the agenda setter cannot commit to future proposals. Nevertheless, the agenda setter obtains her favorite outcome in every equilibrium regardless of the initial default policy. Central to our results is a new condition on preferences, manipulability, that holds in rich policy spaces, including spatial settings and distribution problems. Our findings therefore establish that, despite the sophistication of voters and the absence of commitment power, the agenda setter is effectively a dictator.

Motivated by novel survey evidence, this paper develops a theory of political behavior in which values are a luxury good: the relative weight voters place on values rather than material considerations increases with income. The model predicts: (i) voters who are sufficiently rich to afford voting left; (ii) that more rich than poor people vote against their material interests; (iii) that Democrats are internally more fragmented than Republicans; (iv) that income and voting Republican are positively correlated across voters but negatively across states; and (v) the realignment of rich moral liberals and poor moral conservatives. We test our predictions empirically.

U.S. congressional roll-call voting records show that as polarization of the two parties along the economic dimension changes, polarization along the social/cultural dimension tends to change in the opposite direction. A model of party competition within a two-dimensional ideology space is developed in which party platforms are determined by voters who compose the party. It is shown that if the distribution of voter preferences is radially symmetric, polarization of party ideologies along the two dimensions is inversely related, as observed. The model gives a remarkably good quantitative account of the historically observed movements in polarization along the two dimensions.

This paper studies the manipulation of electoral maps by political parties, known as gerrymandering. At the core of our analysis is the recognition that districts must have the same population size, but only voters matter for electoral incentives. Using a novel model of gerrymandering that allows for heterogeneity in turnout rates, we show that parties adopt different gerrymandering strategies depending on the turnout rates of their supporters relative to those of their opponents. The broad pattern is to pack-crack-pack along the turnout dimension. That is, parties benefit from packing both supporters with a low turnout rate and opponents with a high turnout rate in some districts, while creating districts that mix supporters and opponents with intermediate turnout rates. This framework allows us to derive a number of empirical implications about the link between partisan support, turnout rates, and electoral maps. Using a novel empirical strategy that relies on the comparison of maps proposed by Democrats and Republicans during the 2020 redistricting cycle in the US, we then bring such empirical implications to the data and find support for them.

We develop a model of strategic voting in a spatial model with multiple candidates when voters have both expressive and instrumental concerns. The model endogenizes the strategic coordination of voters, yet is flexible enough to allow the analysis of political platform competition by policy-motivated candidates. We fully characterize all strategic voting equilibria in a three-candidate setting. The results upend the standard calculus both for models with purely sincere voters and those where voters have only instrumental concerns, i.e., where voters solely care about pivotality. To illustrate the differences, we analyze a setting with two mainstream and a spoiler candidate, showing that the spoiler can be made better off from entering, even though she has no chance of winning the election and reduces the winning probability of her preferred mainstream candidate.