1. 4. public choice in a representative 2. origins of the ...public+choice/public... · democracy...
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© Freytag 2015 1
4. Public Choice in a Representative
Democracy
I. Federalism
a) The logic
b) Why is the size of the government too
large?
c) Why is the size of the government too
large and to small?
II. Two-party competition and deterministic voting
a) Outcomes in the Hotelling-Downs-Model
b) Two-party competition in a constrained
policy space
c) Two-party competition (probabilistic
voting)
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 2
III. Multi-party-Competition
a) Selecting a representative body
b) Proportional representation in practice
c) Electoral rules and the number of parties
d) Goals of parties
e) Cabinet stability
f) Strategic voting
IV. The paradox of voting
a) Rational voter hypothesis
b) Expressive voter hypothesis
c) Ethical voter hypothesis
d) Voting as duty
V. Rent seeking
a) The basic model
b) Rent seeking through regulation
c) Rent seeking through tariffs and quotas
d) The logic of collective action
e) The costs of protection
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 3
VI. Bureaucracy
a) Budget maximization
b) Price-setting behavior
c) Slack maximization
d) The power of the agenda setter
e) The government as leviathan
f) Regulatory capture
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 4
Introduction
Whereas in a direct democracy, problems of lobbying
and administration do not play a major role, in a
representative democracy they do.
Principal-agent-problem
In a representative democracy, public choice analysis is
even more adequate, as a political market can clearly be
observed. On this market, political entrepreneurs try to
sell their product, and rent-seeking groups express their
demand.
There are different levels of decision-making. This
constitutes more difficult problems.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 5
I. Federalism
Federalism can be interpreted as an application of the
theory of clubs.
The assignment problem under federalism is not about
the horizontal assignment of responsibility for e.g.
monetary policy, fiscal policy, industrial relations etc (see
below). Rather it is about the assignment of policy
responsibility to different levels of decision-making.
Following the Tinbergen-principle, each policy goal
needs an individual instrument.
Neoclassical assignment adds the requirement to have
an individual agency for each objective.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 6
The assignment problem
Objective Instrument Agency
growth fiscal policy govt.
stable prices monetary policy ECB
employment wages unions/
empl.
a) The logic
A simple example may illustrate the point.
Consider a community of nine, divided into sub-
communities of three, A, B and C. Two public goods,
GF as the federal and GL as the local public good, are
to be provided.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 7
First assume the both, GF as the federal and GL as the
local public good, are provided centrally under majority
rule.
A1 A2 A3 B1 B2 B3 C1 C2 C3
Under Plott’s theorem, B2 is the median and the amount
of both GF and GL will be provided.
In the case of the federal public good, all have to
consume the chosen level.
In the case of the local public good, the groups A, B and
C would prefer a different outcome. They would chose
A2, B2 and C2 respectively.
GF, GL
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 8
Group A would consume less of the local public good GL,
whereas group C would like to have more of it.
The superior solution would, therefore, be to assign the
responsibility for GF to the larger community and for GL to
the local communities.
Federalism has two salient properties (compare: FOCJ):
• separate and overlapping levels of government,
• different responsibilities at different levels.
Obviously, federalism has its limits. There are least
classes of public goods provided on the same political
level, and the number of levels must not be too high; the
reason being
transaction cost.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 9
Geographic representation vs. at large
representation
Geographic representation implies that each local
community sends one (or more) representatives to an
assembly of the higher level of government.
At large representation implies that all voters select their
candidates for the higher governmental level from one
single list.
There is not necessarily a consideration of the regional of
local minorities, depending on the individual voting
behaviour.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 10
b) Why is the size of government too large under
federalism?
Log-rolling!
Under local responsibility, group A will consume less the
local public good GL than groups B and C.
If B and C form a coalition to provide GL within the large
community, they can reduce their tax per capita at the
expense of A.
This scenario happens under geographic
representation.
It may be different under at-large representation.
Log-rolling may hit back in the future universalism!
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 11
Intergovernmental grants under federalism
Is there a justification for grants from one governmental
level to another (normally top down)?
Positive externalities, example state highway (US), used
by citizens from all US states.
A federal grant then is a Pigouvian subsidy, financed e.g.
through lump sum taxes.
What are the effects of …
• a matching grant (Figure 4.1);
• an unconditional grant (Figure 4.2);
• an earmarked grant?
Grants can also be justified by financial differences
across communities.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 12
U2
U1
B
B
B‘
GMG
G0
X0
X
G
E
F
G
EF – substition effect
FG – income effect
Figure 4.1: The effects of matching grants1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 13
B
B‘
B B‘X0 XUG
GUG
G0
B‘‘U1
U2
X
G new budget constraint: BB“B‘
EF income effect, no substitution effect
E
F
U4
U5U3
switch U3 U4 not possible
switch U3 U5 possible
Figure 4.2: The effects of unconditional and earmarked
lump-sum grants1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 14
Empirical evidence is contradicting the basis hypothesis
as derived from Figure 4.2: Both unconditional and
earmarked grants should be divided into an increase of
the public good and more private consumption or savings
(e.g. via tax reduction).
Flypaper effect: federal money sticks where it
lands, in the local governmental budget!
Reasons:
• fiscal illusion;
• bureaus tend to maximise their budget
(Niskanen 1971);
• an earmarked grant is treated like a matching
grant.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 15
c) Why may the size of government be too large and
too small under federalism?
Assume a two level state with a government only striving
for re-election; a very simple model where median voter
theorem does not hold.
In the model, spending money increases the probability
of re-election, raising taxes decreases it
Under geographic representation, two public goods are
in the calculus of the government; GL and GF.
As a result of the optimisation process, the government
provides GL on a more then optimal level and GF on a
less than optimal one.
Figure 4.3 a) and b).
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 16
0 GG G0L
GGL
GL
MCL
MCGL
MVL, MCL
0 GG GGFG0
FGT
F
MCF
MVGF
MVF
MVF+MVGF
GF
Figure 4.3: Effects of grants on government
expenditures in a federalist system
(a) (b)
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 17
II. Two-party competition - deterministic
voting
With an increasing size of communities (polities), direct
democracy becomes unrealistic. Thus, decisions are taken
by representatives. These are assumed to behave
rationally and as utility maximisers.
Put differently: “…parties formulate policies in order to win
elections, rather than win elections in order to formulate
policies.” (Downs 1957, p. 28, cited after Mueller 2003, p.
230).
Three important aspects
• behaviour of representatives (campaign and office),
• behaviour of voters,
• outcome under representative democracy.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 18
Much of what we learned with respect to direct democracy,
also applies to representative democracy, e.g.
• median outcome,
• cycling,
• log-rolling.
a) Outcomes in the Hotelling-Downs-Model
The basic model is the Downs model.* However, the first to
analyse political competition in a spatial model was Harold
Hotelling.**
The easiest way to think of Hotelling’s model is to imagine
a western city with a couple of saloons. Where will you find
the saloons?
* Downs, Anthony (1957), An Economic Theory of Democracy, New York.
** Hotelling, Harold (1929), ‘Stability in Competition’, The Economic Journal, Vol. 39,
pp. 41-57.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 19
Figure 4.4: Median voter outcomes under two-party
competition
Number of
voters
Position of
candidatesL X RM
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 20
Number of
voters
Position of
candidates
X MNumber of
voters
Position of
candidates
M
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 21
The findings of Figure 4.4 (upper part) very much are
similar to the outcome under direct democracy (median).
However, the assumptions are unrealistic:
• one issue dimension (left or right),
• single peaked preferences,
• symmetric and unimodal preference distribution,
• all individuals vote,
• two candidate parties (the terms candidate and
party are used synonymously).
Two reasons may be responsible for a relaxation of the
assumption that all voters do vote:
• indifference and
• alienation.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 22
Then, still the median voter outcome holds, as long as the
preference distribution is unimodal and symmetric. The
median voter determines the outcome.
This may change if either preferences are asymmetrically
distributed (mid part of Figure 4.4) or if the distribution is
multimodal (lower pat of Figure 4.4).
In both cases, the degree of alienation is decisive; and in
both parts of the figure, it is too small to change the
median voter outcome.
Like in direct democracy, a problem of instability may arise
if the world is multidimensional, i.e. if a program
comprises of many issues.
Combined with multimodal preference distribution and
alienation, multidimensionality might cause that extreme
candidates win over the median.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 23
Again, log-rolling may arise, causing cycles.
Voters Issue 1 Issue 2 Issue 3
A 4 -2 -1
B -2 -1 4
C -1 4 -2
A candidate preferring all alternatives, maximises social
welfare.
However, a candidate preferring issues 1 and 2 and
preferring not issue 3 may win over the first one, as voters
A and C can gain at the expense of voter B.
Cycling, as every platform can be defeated.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 24
In a representative democracy, cycles should not be
observed in single elections, as individual candidates
cannot rotate within one campaign.
However, it should be observed in a permanent change of
government (revolving doors).
Alternative hypotheses:
• random hypotheses and
• conspiracy hypotheses.
In the US (the appropriate example for two-party
competition), the incumbent party left government only in
a fourth of the cases.
Why so much stability?
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 25
b) Two-party competition in a constrained policy
space
Candidates may restrict their platforms only to a subset of
the policy space.
Imagine two parties and three voters (Figure 4.5) with
equally long contract curves. No point in the (x1,x2)-
diagram can defeat all others (see Figure 3.10).
It seems rational for candidates to restrict their platforms
to points close to the voters’ ideal points.
The restricted set of platforms is called the uncovered set.
These still can be defeated, but only in a cycle.
___
In figure 4.5, the uncovered set is the Pareto set ABC.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 26
A
B
C
x2
x1
Figure 4.5: Cycling outcomes for a
three-voter electorate
K
I
J
H
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 27
Relaxing further assumptions
1) If candidates have personal preferences,
• they may only reluctantly remove policy positions,
• the number of dimension may be reduced,
• ideology may become the single dimension.
2) If candidates are not exogenously given, but can enter
and leave the contest, the result is similar. Under the
median voter outcome, it does not make sense to enter, if
one candidate has already declared her platform.
On the other hand, this relaxation shows that under two-
party elections both candidates will not have identical
platforms.
Empirical tests don’t support to the median voter outcome.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
c) Two-party competition (probabilistic voting)
A B
C
M
UA UB
UC
Figure 4.6: Cycling possibilities
x
y
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015
So far, we have assumed that the voters are easily caught
by and immediately react to the candidates’ moves (see
Figure 4.6). A slight change to the left wins certain votes
and loses others.
This “jerky” response by the voters is implausible:
• the voters are unlikely to be fully informed about
the candidates’ positions;
• the candidates may not know where the voters’
optimal points are;
• there may be random events having influence on
the voters’ decisions.
If we assume probabilistic voting instead of deterministic,
i.e. if voters behave continuously instead of
discontinuously, the median voter outcome is confirmed.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015
The equilibrium is within the Pareto set, i.e. within the
triangle ABC. Therefore, the normative properties of the
equilibrium are desirable.
What happens if interest groups are introduced into the
analysis?
• The existence of interest groups implies a bias in
the probability of a candidate of being voted for
(see Figure 4.7);
• the candidates know the distribution of the bias
term, but not the individual bias;
• still, the Pareto set can be reached;
• however, different interest groups receive
different weights (welfare);
• “one man, one vote” does not hold any longer.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015
0li ri bij
hi
Frequency
Figure 4.7: A uniform distribution of biases1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015
© Freytag 2015 32
III. Multi-party competition
a) Selecting a representative body
Two party competition is not accounting for differences in voters’
preferences accurately multi party competition.
Imagine s groups with homogenous preferences each; in a
representative body there are s seats proportional
representation.
Each group sends one representative, so that all kinds of
preferences are represented in the assembly. If s still is too big,
then one could restrict the size of the assembly to m < s members.
Then m – s groups would not be represented. Alternatives
(additions) are
• runoff elections to sort out the number of votes
each of the m elected candidates has,
• randomised choice of m out of s representatives
relying on the law of large numbers.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 33
b) Proportional representation in practice
Political practise is still different. In general, it is a
compromise between geographical and at large
representation.
If more than one person per geographic district is sent to
the assembly in the election, a formula to translate votes
into seats in the parliament is needed.
Largest remainders rule:
q = v/s with v (s) = total number of voters (seats),
q = Hare quotient;
vp/q = I + f with vp = votes won by party p,
I = number of seats won by party p,
f = remainder.
The seats are assigned according to the size of I and high f.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 34
The d’Hondt method allocates the remaining seats (after
adding I) by repeated application of the largest
remainders rule.
Alternatives to the Hare quotient are the Droop quota d:
d = v/(s+1) or
d = [v/(s+1)] + 1;
and the Imperiali I:
i = v/(s + 2).
See Table 13.1 in Mueller (2003, p. 268).
If not parties but candidates are elected, the single
transferable vote (STV) can be applied.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 35
c) Electoral rules and the number of parties
Duverger’s law: under plurality rule, the number of parties
converges to two. To test this law, one can use the effective
number of parties based on the number of votes (ENV) and
the number of seats (ENS) a party receives respectively:
ENV = [(vp/v)2]-1, and ENS = [ (sp/s)2]-1.
Example Federal Election 9/22/2013
5 parties, 20 per cent of the votes each,
5 party system;
5 parties, 60, 30, 7, 2, 1 per cent of the votes respectively,
2 party system.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 36
L R0 1 3 5 7 9 10
Party A Party B Party C Party D Party E
20% 20% 20% 20% 20%
Figure 4.8: Party positions with a uniform distribution
of voter ideal points
d) The goals of parties
Two aspects (levels) are of relevance:
• position on the ideological spectrum
• decision on joining a coalition or forming a
cabinet after election
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 37
L R0 1 3 5 7 9 10
Party A
Party B
Party C
Party D
Party E
10% 20% 24% 30% 16%
Figure 4.9: Party positions with a nonuniform
distribution of voter ideal points
It is very difficult to say theoretically how both aspects
are dealt with in politics. Parties tend to settle into certain
ideological positions and remain there (empirical
observation).
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 38
A B C D E F G
15 28 5 4 33 9 6
If a single party does not hold an absolute majority, a
coalition is necessary. There are 61 possible coalitions
that form a majority in the above scenario.
A coalition is called a minimal winning coalition if the
removal of any one member (party) is changing it into a
minority coalition. These are:
BE, ABF, ACE, ADE, AEF, AEG, ABCD, ABCG, ABDG,
CDEF, DEFG.
A minimum winning coalition contains the smallest
number of seats of all minimal winning coalitions (CDEF).
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 39
Not all of the eleven possible coalitions are equally likely
to start existing.
First, smaller coalitions with respect to the number of
parties are easier to run, as negotiations take shorter time
and as the probability of survival is higher.
Second, there should be an ideological closeness of the
coalition members. This minimal connecting winning
hypothesis reduces the number of likely coalitions to four
(ABCD, BCDE, CDEF, DEFG).
Trade off between these two hypotheses.
Another important aspect is the number of dimensions.
With more than one issue, cycling becomes possible,
coalitions may become unstable.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 40
IG
IS
IF
ICCC
FF
GG
SS
G C
C F
Economic Policy
Foreign
Policy
Figure 4.8: Cabinet formation in the German Bundestag
in 19871. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 41
Figure 4.11: Determinants of cabinet stability
Number of parties
Number of
representatives
elected per
district
Number of issue
dimensions
Ethnic, religious and
ideological diversity
Cabinet stability
e) Cabinet stability1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 42
f) Strategic voting
Why do the Free Democrats in Germany always stay in
the Bundestag, but regularly miss to meet the 5 per cent
threshold in the state parliaments?
S C F
49 47 4
49 41 10
The voters of the Christian Democratic Party have
regularly voted strategically (mainly before the
appearance of the Green Party) to ensure a victory of the
conservative spectrum over the Social Democratic Party.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 43
IV. The paradox of voting
“…Thus the typical citizen drops down to a lower level of
mental performance as soon as he enters the political
field. He argues and analyzes in a way which he would
readily recognize as infantile within the spheres of his real
interest. He becomes a primitive again…” Joseph
Schumpeter, quoted after Mueller (2003, p. 303).
Schumpeter concludes that human beings would relax
their moral standards and give in to prejudices in the
political arena.
Is Schumpeter right?
How rational is the voter?
And why does she vote anyway?
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
)1(22
32)
2
1)(1(2
N
eP
pN
© Freytag 2015 44
a) The rational voter hypotheses
A rational voter will vote for the party (candidate)
according to the own expected utility derived from this
candidate’s victory (difference B between the expected
utilities of both parties victories).
It is unlikely that an individual voter’s vote is decisive
(from an individual perspective).
The formula 4.1 shows the probability that an individual
voter decides the election.
4.1
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 45
When p = 0.5 and N = 100,000,000 P = 0.00006;
when p = 0.5 and N = 50,000,000 P = 0.000085.
P decreases with p deviating from 0.5.
Given that the probability to be run over by a car while
going to or coming back from the election, is higher than
P, one wonders why people do vote.
Three explanations can be thought of:
• redefinition of rationality,
• relaxing the rationality assumption,
• relaxing the self-interest assumption
Changing rationality can imply a taste for voting, cat and
mouse, and minimising regret instead of maximising
utility.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 46
Empirical evidence for the rational voter hypothesis
One votes, if PB + D – C > 0,
with D being the benefit from the act of voting and C
being the cost of voting.
For an empirical estimation of the hypothesis we define
R = PB + D – C, to answer the question “Did you
vote?” The literature uses 5 groups of variables:
• personal characteristics,
• cost variables (C),
• strategic value of voting (P and B),
• interest in campaign (D),
• obligation to vote (D).
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
Study Sample and time period P B D C E Y
Riker and
Ordeshook, 1968
4,294 questionnaires
(quest.), 1952, 1956,
1960, U.S. presidential
elections (p.e.)
+ + +
Brody and Page,
1973
2,500 quest., 1968 p.e. 0 +
Ashenfelter and
Kelly, 1975
1,893 quest., 1960,
1972, U.S.-p.e.
0 + + - + +
Silver, 1973 959 quest., 1960 U.S.-
p.e.
0 +
?
+
?
- +
Frohlich,
Oppenheimer,
Smith and Young,
1978
1,067 quest., 1964 U.S.-
p.e.
+ +
?
+
?
-
?
© Freytag 2015 47
Table 4.1: Summary of studies testing the Downsian
model (with extensions) using survey data1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
Study Sample and time period P B D C E Y
Perry, Moser and
Day, 1992
~1600 quest., 1984 and
1985 U.K. national and
local elections
+
?
+
?
- 0
Matsusaka and
Palda, 1993
2,744 quest., 1979 and
1980 Canadian national
elections
0 + 0
Knack, 1994 4,651 quest., 1984,
1986, 1988 U.S.
national elections
+ + +
Greene and
Nikolaev, 1999
~21,000 quest. 1972-
1993 U.S. elections
- + +
Thurner and
Eymann, 2000
1,400 quest., 1990
German national
election
+1
© Freytag 2015 48
P,B,D,C are proxies for main components of Downsian model;
R = PB + D – C; E stands for education level and Y for the income of the voter.1Thurner and Eymann test whether perceived differences in party positions on key
issues increases the likelihood of the respondents voting. Only for immigration
policy was a significant effect found.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 49
b) The expressive voter hypothesis
Relaxing the rationality assumption, leads to the
expressive voter hypothesis.
Instead of aiming at a certain result, the voter wants to
express an opinion of how the outcome of the election
should be;
the outcome of the election is the same as in Downsian
model.
The motivation is different. However, the result then can
also be changing:
irresponsible voting.
The hypothesis stands in contrast to strategic voting.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 50
c) The ethical voter hypothesis
Relaxing the self interest assumption, leads to the ethical
voter hypothesis.
The voter is seen as both ethical and selfish (Jekyll-and
Hyde view):
Oi = Ui + θ Uk with k ≠ i and 0 ≤ θ ≤ 1.
d) Voting as duty
Voting is seen as a sense of duty no theoretical
explanation. Behavioural psychology offers an explanation
for θ > 0 . Individuals learn that voting is sensible.
Therefore, ethical voting is indeed selfish.
Tautology?
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 51
V. Rent seeking
a) The basic model
Difference between rents and profits:
Entrepreneur profit seeking,
Lobbyist rent seeking.
Rent seeking is an activity to generate income without
efforts on markets for goods and services. These cause
socially wasted expenditures (social costs):
• expenditures of potential recipients,
• expenditures of third parties suffering from the
successful rent-seeking,
• efforts of governments associated with rent
seeking.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 52
Figure 4.9: The social costs of
monopoly with rent seeking
MC
Price
Quantity
R
L
Pm
Pc
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
rRn
nI
TI
RIrI
TI
RrI
IRTI
IGE
If
IfI
r
rr
r
r
r
r
n
jjj
ii
ii
2
2
11
1
)1(
01)(
)(
)(
)()(
© Freytag 2015 53
The basic rent-seeking model with a fixed number of players
(1)
(2)
(3)
(4)
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
rn
n
R
nI
rRn
nrR
n
nnnI
rn
n
)1(
)1()1(
1
2
© Freytag 2015 54
The basic model with diminishing or constant returns, r ≤ 1.
(5)
(6)
(7)
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 55
b) Rent seeking through regulation
The normative grounds for regulation are cases of market
failure (chapter 2).
Market failure is regularly combated by taxes, subsidies
and regulation.
In addition, one finds many cases of regulation not
justified by market failure (state failure).
A utility maximising government will set a price (price
regulation) so that the marginal gain in support by the
rent-seeking group equals the marginal loss in support by
the consumers.
Therefore, the main beneficiaries of regulation are the
regulated firms (plus the regulatory office (see section 4.f).
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 56
One interesting implication is that the prices are between
competitive prices and pure monopoly prices (as the latter
would increase the loss in support by consumers above
the gain in support by the very industry).
Valuable explanation of agriculture protection and
taxicab regulation around the world.
Environmental regulation can be explained by this theory,
e.g. pesticide regulation and the number of listed species
by individual state in the Endangered Species Act in the
US.
Becker (1983, 1985) shows that the rent seeking process
can be reverted. If the costs for the consumers (or the
suffering group) increase, their rent seeking activities also
increase, and the government starts a new calculus.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 57
c) Rent seeking through tariffs and quotas
To explain rent seeking in international trade, the Ricardo-
Viner-model with specific factors of production is adequate.
All factors employed in the country’s sectors with
comparative disadvantages lose by a change from autarky
to international trade.
Therefore, the whole industry invests into rent-seeking
activities. The calculus of the government includes again the
marginal gains and losses in support by the industry and the
consumers plus the effects of certain instruments of
protection on the international trade policy agenda.
As quotas have always been forbidden, VERs were
introduced, giving the exporting country the chance to get
the rents; after 1994, VERs also have been prohibited.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
Study Economy Year Welfare loss
Krueger (1974) India 1964 7% GNP
Krueger (1974) Turkey 1968 15% GNP
(trade sector)
Posner (1975) United States various 3% GNP
(regulation)
Cowling and Mueller
(1978)
United States 1963-9 13% GCP1
(private
monopoly)
Cowling and Mueller
(1978)
United
Kingdom
1968-9 13% GCP
(private
monopoly)
Ross (1984) Kenya 1980 38% GNP
(trade sector)
© Freytag 2015 58
Table 4.2: Estimates of the welfare losses from rent
seeking.1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
Mohammad and
Whalley (1984)
India 1980-1 25-40% GNP
Laband and
Sophocleus (1988)
United States 1985 50% GNP
Lopez and
Pagoulatos (1994)
United States 1987 12,5%
domestic
consumption
Study Economy Year Welfare loss
© Freytag 2015 59
1GCP=gross corporate product
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 60
d) The logic of collective action
How can we explain that some interest groups are more
successful than others in a) organising themselves and
b) obtaining rents in politics? Both questions can be
answered with:
• rent-seeking as collective (club) good free
riders,
• opportunity cost of rent seeking.
In addition, interest group formation can be enhanced
by:
• additional private goods offered by the group,
• obligations to join a group,
• different size of group members.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 61
VI. Bureaucracy1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 62
The bureaucracy is a part of the supply side of the
political market.
The term bureaucracy has a negative connotation – the
static and conformist bureaucrat is seen as the antipode
to the dynamic entrepreneur. We use the term without
this connotation, as we want to explain the bureaus’
performance with rational behaviour and do not want to
judge them morally.
a) Budget maximization
Bureaus are budget maximizers, as income is fixed.
Bureaucrats pursue power; a basic foundation of power
is superior information PAP.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 63
The output of bureaus has a non-market nature. The buyer
cannot observe the quality, as market prices do not exist.
In addition, there is a bilateral monopoly between bureau
and sponsor (government).
Output is too large and probably not efficiently produced.
Instead of the optimal output of the benefit maximising
sponsor satisfying B’ (Q) = C’ (Q), the bureau’s output is too
large satisfying B (Q) = C (Q).
At this point social surplus is zero (E = F).
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 64
)(')('
)()(
)('1
)('
))()(()(
0'',0'),(
0'',0'),(
QCQB
QCQB
QCQB
QCQBQBO
CCQCC
BBQBB
B
(1)
(2)
(3)
(4)
(5)
(6)
The basic model: budget maximising bureaucrats1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 65
Figure 4.10: The oversupply of a bureau‘s output
B‘, C‘
E
C‘
B‘s
F
Q0 Q* Qs Q
B‘
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
'1
)(
1
0
dP
dQ
Q
P
PBO
dP
dQ
Q
P
dP
dQPQ
dP
dB
PQB
© Freytag 2015 66
Extensions of the model: alternative
institutional assumptions.
(7)
(8)(9)
(10)
(11)
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 67
Figure 4.11: Options for a price setting bureau
Q
P
PH
P1
Q1
C‘H
C‘L
η>1
η=1
η<1
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 68
Alternative behavioural assumptions
So far, we assumed excessive but efficient supply of the
public good. It may also be possible that the bureaucrats
have additional objectives, e.g. the increase of personnel,
the size of the office space etc.
c) Slack maximization
X-inefficiency or bureaucratic slack slack-maximising
bureaus
It is difficult to measure efficiency of bureaus data
envelopment analysis to calculate the efficiency frontier
and compare it with the actual outcome.
In Figure 4.15, the distance between BE’ (the efficiency
frontier) and BS’ the actual outcome would be the result.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 69
Figure 4.12: The output choice of
a slack-maximizing bureau
QB
Z
E
S
B
Y
E‘
S‘
Z‘
QS QZ
Umax
Umin
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 70
Empirical evidence:
Whether or not bureaucrats are able to maximise their own
objectives, depends among others on the discretionary
leeway they have agenda setter or not?
d) The power of the agenda setter
If they are agenda setter, they may force the sponsor to
approve a much higher than optimal budget.
Oregon school budget referendum process:
By offering two alternatives below and above the maximal
utility of the median voter, the school bureaucracy
managed to receive a higher budget than in the median
voter’s optimal position (Figure 4.16).
Comparison between privately and publicly provided
services (Mueller 2003, pp. 373-380).
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 71
GrGm Gb G
Median voter‘s
utility
Figure 4.13: Options for the budget
maximising agenda setter1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 72
Comparison between publicly and privately provided
services (Mueller, 2003, pp. 373-380)
20 sectors are subject to the comparison:
1) Airlines
2) Banks
3) Bus and transit service
4) Cleaning services
5) Debt collection
6) Electric utilities
7) Fire protection
8) Forestry
9) Hospitals and nursery services
10) Housing
11) Insurance business
12) Ocean tanker repair and maintenance
13) Railroads
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 73
14) Refuse collection
15) Saving and Loans
16) Schools
17) Slaughterhouses
18) Water utilities
19) Weather forecasting
20) Industrial companies
In general, private provision is more efficient and
saves costs for the public!
Public firms invest more; higher capital intensity.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 74
e) The Government as Leviathan
One can even extend the model in that sponsor and
bureau is interpreted as one joint unit ”monolith
monopolist”.
Government in this view is looked at as a malevolent
budget maximizer rather than a benevolent public good
provider.
If this view has a point, a the normative solution is to
reduce discretionary power of governments by means of a
constitution veil of uncertainty.
Figure 4.14 shows that the Leviathan would impose a
higher tax on the citizen if he is free to choose.
Consequences for the theory of optimal taxation!
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 75
Figure 4.14: Alternative strategies for
taxing income and leisureEarned
Income
Leisure
BH D
A
C
G
U1
U2U3
E
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 76
Government as Leviathan – empirical evidence
The empirical literature has focused on the systems of
checks and balances:
• constitutions constrain the legislature,
• federal structures are opposing huge
governments,
• application of the subsidiary principle diminishes
government size,
• intergovernmental competition does alike,
• government collusion (log-rolling on the EMU
level) increases government size.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice
© Freytag 2015 77
f) Regulatory capture*
Bureaus do not only provide public goods. They also are
responsible for regulation in the case of market failure.
As shown above, the regulated sector normally benefits
from regulation; prices are between competitive and
monopolistic outcome.
Therefore, it makes sense for interest groups to stay in
close contact with the regulatory office.
At the same time, the regulatory office gains its status only
by regulation. It is not in its interest to give up regulation,
even if market failure cannot be observed any longer.
* Stigler, George J. (1971), The Theory of Economic Regulation, The Bell
Journal of Economics and Management Science, Vol. 2, S. 3-21.
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
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6. Normative Public
Choice
© Freytag 2015 78
It is sensible to assume the position of the regulated
industry.
The bureau is captured by the industry. Consequences
include longer and heavier regulation than needed for, job
offers for regulators in the very industry.
Potential examples:
Coal mining industry Ministry of Economic Affairs
Telecommunication incumbent communication regulator
Insurance industry financial regulator
Utilities energy regulator
1. Introduction
2. Origins of the State
3. Public Choice in a Direct
Democracy
4. Public Choice in a
Representative
Democracy
5. Application of Political
Economy Models
6. Normative Public
Choice