Essays in political economy

Defence date: 11 June 2019Examining Board: Prof. David K. Levine, European University Institute (Supervisor); Prof. Andrea Mattozzi, European University Institute; Prof. Steven Callander, Stanford University; Prof. Salvatore Nunnari, Bocconi UniversityThe thesis is composed of three chapters on political economy. each chapter tries to answer policy relevant questions by extending seminal models. each part is introduced with a detailed abstract of that particular chapter, therefore here i will give a short overview of the entire thesis. the first chapter develops a politician-candidate model, by introducing the possibility of costly lying into the citizen-candidate model. this allows for an analysis of the identity of the candidates, as well as their lying, because the entry decisions are endogenous and politicians run with promises which are more costly if the promise is further from the candidate’s identity. unlike the usual assumption that promises are cheap talk, here they are not, and furthermore, the potential entrants are fully informed, therefore the population considering entry may be considered as strategic, i.e. politicians rather than citizens. the model seeks to identify institutional conditions that would ensure only honest entrants, however one of the main results of the paper is that for any primitives of the model the equilibrium composed of only honest entrants can happen, but at the same time a continuum of equilibria with dishonest entrants is possible. this is particularly dire as it implies that we are very unlikely to experience honest candidates in a democracy with trusting voters. the second chapter modifies the seminal lobbying model (grossman-helmpan) by adding confidence, trust and shocks, as well as the possibility of protesting and striking to the strategy space. in other words, it looks at how the contributions special interest groups give to politicians change when voters are emotional and can protest, while the members of the special interest group can strike. it finds that emotions and shocks have a non-trivial effect, and that special interest groups account for the fact that voters can protest by pushing the policy in the groups favor as much as voters will allow. the main result of the paper finds that members of special interest groups will strike during recessions, and that the pessimism induced by the slump decreases the likelihood of strikes. this is at odds with the empirical exercise, therefore the appendix develops a theoretical justification how pessimism induced by a recession can lead to more strikes. the final chapter proposes a simple modification to the standard electoral competition model yielding significantly different predictions. it looks at the effect politicians can have if they try to induce disagreement in voter preferences. more precisely, it looks at the effect gaps in the distribution of voter preference has on the equilibrium policies. in the simplest case it finds that the forces that lead to the median voter theorem remain present, however by further restricting the model the predictions drastically change. that is, there exists a strong force pushing the equilibrium policies towards the extremes. the main intuition is that as division in society grows, so does the amount of admissible equilibrium policies, whereby populist policies also become sustainable. if politicians can influence the division in society, that is change the gap size (around the median) itself, by a limited amount, then the unique pure strategy equilibrium has both politicians choosing to maximize division in society and run with extremist messages. if politicians can also arbitrarily change the location of the gap, that is not only the division in society but also where the division will be created (e.g. on the left political spectrum), then pure strategy equilibria disappear and only mixed strategy equilibria are possible.I The Politician-Candidate Model 1 Introduction 2 Case Studies 2.1 First female Croatian President - Kolinda Grabar-Kitarovic (2015-) 2.2 UK’s Prime Minister 2010-2016 - David Cameron 2.3 US President 2009-2017 - Barack Obama 3 Literature Review 3.1 Citizen Candidate Model 4 Campaign promises in the Citizen-Candidate framework 4.1 Politicians run with messages 4.2 Potential entrants are politicians, different from voters 4.3 Salience 5 The Politician-Candidate Model 5.1 Setup 5.2 Equilibrium 5.3 Notation 6 Results 28 6.1 1-Candidate Equilibria 6.2 2-Candidate Equilibria 6.2.1 Lucky Votes 6.3 3-Candidate Equilibria 6.4 4-Candidate Equilibria 6.5 N-Candidate Equilibria 6.5.1 Equilibrium Messages 6.5.2 Pooling equilibria (Lucky votes) 7 Conclusion Appendix A Brown v. Hertlage (1982) 58 Appendix B United States v. Alvarez (2012) 59 Appendix C Evidence from Public Projects 60 Appendix D Evidence from Revenue Forecasts 60 Appendix E Case Study: Kolinda Grabar-Kitarovic further details 61 Appendix F Extended Theoretical-Literature Review F.1 Spatial competition F.2 Endogenous Entry F.3 Strategic Information Transmission Appendix G Proofs II AnElectoral Game with Interest Groups and EmotionalVoters who can Protest 1 Introduction 2 Literature Review 3 Model - Benchmark (Grossman-Helpman) 3.1 Voters 3.2 Parties 3.3 Special Interest Group (SIG) 3.4 Political Equilibrium (PE) 3.5 Functional Forms 3.6 Participation Constraint 4 Model - Modifications 4.1 Sentiments 4.1.1 Confidence 4.1.2 Trust 4.2 Unexpected Shock 4.3 SIG 4.4 Political Equilibrium 4.5 Timing 5 Equilibrium Analysis 5.1 Influence motive 5.1.1 The effects of the NPC 5.1.2 The effects of trust 5.1.3 The effects of confidence 5.1.4 The effects of unexpected shocks 6 Empirical Analysis 6.1 Data construction 6.2 Data analysis 7 Conclusion Appendix H Proofs 111 Appendix I Alternative reason for strikes and protests occurring during recessions115 Appendix J Combined Parameter Appendix K Electoral Motive III Is a divided society more prone to populism? 1 Introduction 2 Location model with gaps and messages 3 Restricting the message space of the candidates through identity 4 Allowing candidates to change the gap size by a small amount 5 Allowing candidate to freely change gap size 6 Empirical Analysis 7 Conclusion 8 Reference