As part of our efforts to train and produce future leaders in politico-economic research, we are promoting collaboration with a series of overseas universities, including Stanford University, Johns Hopkins University, and the University of California in the United States; Tilburg University in the Netherlands; and the University of Essex in the United Kingdom. In particular, an intensive course by Stanford University and summer school by Essex University are offered on our campus.
We are planning to invite researchers specialized in conducting empirical studies on companies from these institutions mentioned above as well as from those in Asia, including Seoul National University in South Korea, Shanghai Jiao Tong University and Nankai University in China, and Chulalongkorn University in Thailand, to jointly develop data using the same analytical procedures. In previous years, we have invited visiting professors from Stanford University, the University of Milan in Italy, Tilburg University, and the University of Essex on a mid-term basis, and from the University of Southern California and Bowdoin College in the United States on a longer term.
As for joint appointments, we have Associate Professor Hiroki Sayama of the State University of New York at Binghamton with us for this academic year, and we will invite two scholars for the academic year — We will further proceed with politico-economic experiments, which provide the basis for such endeavor, with the aim of becoming a global center for research in this field. We are already making remarkable achievements in the areas of international political science and economy, international security, development economics, experimental economics, and applied and theoretical economics.
In the area of empirical studies on companies, we will expand the scope of analysis to include not only corporate governance and business finance but also organizational structure, strategy choices, and accounting behavior, thereby aiming to become a global center in this field as well.
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Safari Windows version 38 later Macintosh version38 later WebSite. Given the assumption of how legislators choose parties, nearly all legislators from the left party vote for the proposal; while most of those of the right party vote against it. Indeed, if the status quo is not too far to the right relative to the distribution of legislature preferences, then most of the members of the right party will vote against the change.
In other words, voting on this legislature will exhibit polarization by party even though the party exerts no pressure on its members to vote one way or another. A lesson of this model is that polarized party voting can emerge as the combined result of legislative preferences and sorting into parties without being a function of any legislative institutions that advantage parties or that constrain member behavior.
Although this approach rationalizes only minimalist legislative institutions, it provides an important baseline from which to judge other models. While most approaches rely on legislator preferences to some degree, we term this approach a preference-based approach because it relies solely on legislative preferences and the median voter model to explain political phenomena, such as polarized party voting.
Going back to Buchanan and Tullock , many models of legislative choice emphasized logrolling and vote-trading. By logrolling and trading votes, members and the districts they represented were better off. Logrolling can thus be seen as a legislative institution parallel to market institutions in the economic sphere. Empirically, the substantive literature on Congress long emphasized the central importance of committees, which were seen to dominate the policy-making process, at least in the mid-twentieth century.
That literature emphasized committee specialization and self-selection onto committees by members most interested in the committee jurisdiction Fenno ; ; Shepsle Committee organization was seen as reflecting the preferences of the legislators and their constituents. In this view, the key to understanding legislative organization was legislative exchange. Weingast and Marshall sought an explanation of congressional organization that accounted for the fundamental features then found in the substantive literature.
They based their approach on two observations. First, the legislature faced many different issues that cannot be combined into a single dimension: Second, vote-trading had significant enforcement problems as a means of legislative exchange. For example, suppose that one group of legislators seeks to build dams and bridges, another group seeks regulatory control of some market, and that neither group alone comprises a majority.
But this raises a problem: Once their dams and bridges are built, what stops those receiving them from joining members locked out of the original trade to renege on the original deal by passing new legislation ending the regulation? Because of the possibility of reneging, some logrolls will fail ex ante as legislators fear their deals will ultimately fail. Enforcement problems imply that direct exchange of votes is not likely to provide a durable means of legislative exchange.
They showed that, in the context of a mechanism to grant rights to committee seats in combination with self-selection onto committees, the LCS made members with different preferences better off. Consider the problem of reneging noted above. Self-selection onto committees with gatekeeping power prevents this type of reneging. Suppose the group favoring dams and bridges seek to renege on their original deal and introduce legislation to undo the regulation.
This legislation now goes to the committee with jurisdiction. Populated by those who favor maintaining the regulation, committee members prevent the legislation from coming before the legislature. This system preserves both the status quo and the original legislative exchange. This approach also addresses an important question raised by the majoritarian postulate. This postulate questions why a majority would ever vote to reduce or restrict its own powers in the future.
In the context of a single dimension of legislative choice, it is hard to understand why the median and hence a majority would vote to restrict itself. In the context of multiple dimensions, however, no median exists. The exchange postulate underlying the LCS provides an answer to the question: A majority votes to restrict itself on a series of different policy issues simultaneously. In this model, committee organization solves the problem of legislative exchange. Given pervasive enforcement problems of direct exchange of votes, legislators instead choose to organize the legislature in such a way as to institutionalize a pattern of exchange that furthers the goals of all.
Of course, that model reflected the substantive literature of studying the textbook Congress of the mid-twentieth century, a world of Congress very different from that more partisan-dominated Congress of the late twentieth and early twenty-first centuries. The third approach uses legislative parties to explain legislative organization and behavior. In this view, parties are more than just a collection of people choosing the same party label Aldrich ; Rohde ; Sinclair Cox and McCubbins , for example, argue that legislators face a series of collective action problems that political parties can resolve.
For example, individual legislators have trouble passing their own legislation; and without coordinating, legislator activity fails to add up to enough to help each get re-elected. In particular, all legislators face a common-pool problem in which they have incentives to shift costs onto each other. Parties overcome these problems by enforced coordination.
Advances in Political Economy: Institutions, Modelling and Empirical Analysis
In the face of various coordination and related problems, Cox and McCubbins argue that members have an incentive to use parties to coordinate the behavior of their members for several ends: Committees in this view are a tool of the majority party used to further party goals; namely, to propose legislation benefiting party members and to prevent legislation that would make party majorities worse off. This particularly holds for gatekeeping committees, such as the budget committee where the members do not self-select. Tests of the representatives of committees tend to support the party view see, e.
Also consistent with this view was the striking partisan aspect of congressional voting, particularly since In more recent work, Cox and McCubbins present the negative agenda control model NAC , which holds that the majority party does not coerce its members to vote anything but their preferences, but does carefully control the agenda ; that is, the alternatives that arise for a vote. In particular, the majority party uses NAC to prevent any bill from arising that would make a majority of the majority party worse off.
This means that any bill seeking to move a status quo located between the floor median and the reflection of the floor median around the party median should never come up for vote.
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A range of empirical tests provide strong evidence for the proposition based on predicted asymmetries in roll-rates Cox and McCubbins , direction of movements in bills Cox and McCubbins , and estimated cutpoints Stiglitz and Weingast However, this party-centric approach has not been without its critics.
We have already noted how polarized party voting, rather than being a p. Another aspect is the representativeness of committees. The debate about parties has spurned a remarkable empirical literature. We do not have time here to cover this literature, but we do want to emphasize that the research in endogenous legislative institutions is empirical, as well.
The final approach to legislative organization, associated with Gilligan and Krehbiel and Krehbiel , emphasizes that legislators are uncertain about the impact of their choices on actual outcomes. Legislators therefore have an incentive to organize the legislature to reflect the task of gaining expertise and information that reduces this uncertainty. In this world, committees are bodies of legislative experts in the policies of their jurisdiction. Committee expertise allows committee members to reduce the uncertainty between legislation and actual outcomes.
This perspective has significant implications for legislative organization, including the choice of rules governing consideration of legislation on the floor. For example, because expertise requires costly investment, legislators will undertake this costly investment only if the system somehow compensates them for this. Krehbiel argues that restrictive rules that bias legislative choice in favor of committees are the answer.
Although restrictive rules prevent legislators from choosing policy associated with the median voter ex post , legislators are better off ex ante because committee expertise allows committees to reduce the uncertainty associated with the difference between legislation and policy outcomes. The debate about legislative institutions has been lively, and no consensus has yet emerged on the determinants of legislative organization. We cannot yet say whether one perspective will ultimately triumph as Gilligan and Krehbiel suggest or whether a synthesis of perspectives is likely to emerge as Shepsle and Weingast suggest.
From a broader perspective, the study of legislative institutions provides a template for how research on institutions is likely to proceed in the future. The first stage is to see how a particular institution affects behavior; next, similar but somewhat different institutions are compared; then in the final stage, institutions are treated as being endogenous.
If the history of research on endogenous legislative institutions is any guide, there will be disagreement on which institutions are endogenous to p. These controversies, in turn, help shape our understanding of institutions and provide a deeper understanding of organizations. In this section, we consider the revelation and aggregation of information. This is a game-theoretic, as opposed to a decision-theoretic, approach to information.
An exciting aspect of this research is that it often turns the standard theoretic wisdom on its head. We illustrate by looking at voting behavior. Traditional democratic theory argues that, for democracy to work, voters should inform themselves about the candidates and the issues. Moreover, voters should be unbiased and rely on unbiased sources of information. Practice in all working democracies differs greatly from this ideal.
Voters appear to be notoriously uninformed and, indeed, have little incentive to become informed. Some voters base their choice of candidate solely on party label, while other voters rely on biased sources of information, including information provided by pressure groups. Does this apparent lack of information imply that democracy will fall far from its ideal? Possibly not, if the lack of information is more apparent than real. In the following, we show how voters can make logical inferences so that their behavior is similar to perfectly informed voters.
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We start with an easy example to illustrate how information revelation arises. A number of articles study the endogenous timing of elections in parliamentary systems. This information is not likely to be available to the voters. The party in power has an incentive to call an election when it is at the height of its popularity. However, this decision-theoretic analysis does not consider the voter response to an early election call. Voters can infer from an early election call that the ruling party expects to do worse in the future.
The ruling government realizes that voters will act this way. As a result, governments are less likely to call early elections than they would otherwise; and when they do, voters will take this information into account and be less positively inclined towards the government. Smith ; provides empirical evidence in support of this argument. Polls taken after the announcement of an early election show a decline from polls taken before the announcement. Consider another area where earlier research assumed mechanical, uninformed voters, but more recent research assumes uninformed but rational voters, often with starkly differing results.
Starting with Ben Zion and Eytan and continuing on into the recent past see Baron ; Grossman and Helpman , an extensive literature has assumed that the more money a candidate spends on advertising, the more votes the candidate receives from uninformed voters. Sources of money tend to come from interests on the extremes of the political distribution. Let us look at the Grossman and Helpman model in greater detail. Each voter has a most preferred position with a concave utility function over policy; this means that voters are risk averse. Uninformed voters respond only to political advertising—the more money spent on advertising by one of the candidates, the greater the percentage of uninformed voters voting for the candidate.
Each candidate wants to maximize the percentage of votes that he or she receives. There is one pressure group say, on the extreme right. The pressure group is willing to donate money to one of the candidates if the candidate moves right from the median voter. The pressure group makes a one-time take-it-or-leave-it offer to one of the candidates. If the candidate agrees to move right of the median informed voter, then the pressure group provides funds to the candidate for political advertising.
If the agreement is accepted, it is binding on both sides. The candidate receiving the offer decides whether to accept or reject it. If the candidate accepts the offer, then the other candidate knows the position of the candidate accepting the offer. The other candidate will then choose a position between the candidate and the median informed voter to capture as many informed voters as possible. If the candidate rejects the offer, then the pressure group is out of the picture.
Per the standard Downsian model, both candidates will then choose to be at the median of the informed voters. The positions of the candidates are then made public to the informed voters. The candidate who received the donation then advertises. The model seems to imply that pressure groups are likely to undermine the political process. But is it rational for uninformed voters to act in the way postulated? Let us consider the model more carefully.
In the above model, the candidates, pressure group, and informed voters are all rational, but not the uninformed voters. As already mentioned, uninformed voters vote mechanically. But being uninformed does not mean being irrational. Suppose instead that the uninformed do not vote mechanically but can make logical inferences. We consider two variants with different characterizations of uninformed voter behavior.
First, let us continue to assume that the uninformed voters know neither the positions of the candidates nor the position of the pressure group the pressure group being equally likely to be on the left or the right. Campaign advertising is, by its very nature, public so that an ordinary person can infer which candidate received the most contributions by observing which candidate has the most political advertising. The uninformed voters can simply watch television and passively observe the candidate who has the most advertisements.
Given the logic of the model, the uninformed can infer that the candidate doing the advertising is further away from the median informed voter than the candidate not doing the advertising. Given our assumption that the uninformed voter does not even know whether the pressure group is on the left or the right, the uninformed voter faces a greater risk from the candidate who is doing the advertising. Thus the risk-averse uninformed voter should vote for the candidate not doing the advertising!
The rational voter does not act like the mechanical voter in this case. Of course, if this behavior characterizes uninformed voters, then the candidate will not accept campaign donations from the pressure group in the first place. Now suppose that the uninformed know something. For example, they may know that the National Rifle Association supports one of the candidates, and as a consequence these voters can infer that the candidate receiving the funds is closer than the median informed voter is to the position of the NRA.
More generally, the uninformed voter may know whether the pressure group is on the right. If the uninformed voter also knows where he or she stands relative to the median voter, the uninformed voter to the left of the median voter can infer that he or she should vote for the other candidate, while those uninformed voters to the right will be inclined to vote for the candidate receiving funds from the right-wing pressure group. If uninformed voters tend to be to the right of the median informed voter, then the candidate may accept funds from the right-wing pressure group and even advertise this to be the case.
This occurs when the candidate gets p. Alternatively, if there are more uninformed voters to the left of the median informed voter, the candidate would lose if she accepted the deal from the pressure group. Hence she would not do so in the first place. In this version of the model, pressure group contributions help the uninformed voters.
If the mass of uninformed voters is to the right of the median of the informed voters and hence, the overall median is to the right of the median of the informed voters , then one candidate will accept the funds and the effect of campaign donations will be to move the candidate to the right from the median of the informed voters. On the other hand, if more uninformed voters lie to the left of the median, neither candidate will accept funds from a pressure group on the right.
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Again, assume that voters are rational and the pressure group has private information in this case, about the relative quality of the candidates. A number of recent papers consider this case but employ differing subsidiary assumptions: These various modeling efforts do not all come to the same positive conclusion as the previous paragraph. In general, the results depend on whether the value of the revealed information is outweighed by the loss from inferior candidate positions when the candidates compete for pressure group funds.
In turn, this balance depends to a great degree on the number of pressure groups and whether it is the candidates or the pressure groups that make the offer. This is the key methodological advance—how voters can incorporate information that others might want to distort or hide see Prat We have shown how uninformed voters can make inferences from behavior and thereby become more informed. Suppose a set of voters face a decision about how much money to spend.
To gain intuition, we begin with an exceedingly simple example. Suppose that there are five voters with identical preferences: The voters know whether they are informed or not. The uninformed know that informed voters exist, but not how many. Assuming that the voters cannot communicate with each other, how likely is it that the majority rule decision is not 7? The answer is zero if the voters are rational: All the uninformed voters will rationally abstain. By doing so, they know that only informed voters will participate and that these informed voters will make the correct decision.
This example illustrates two important but related issues. First, the more informed people will choose to vote here, at least, the argument does not go against conventional wisdom. Second, the potential voter asks: Given that he will be pivotal, should he vote, and if he votes, how should he vote? In other words, the decision to vote and how to vote does not just depend on whether the person will be pivotal, but also on the preferences and information structure of all of the voters.
Our understanding of the problem is no longer in terms of decision theory but in terms of game theory. To illustrate this idea in terms of a more complicated but more realistic model, assume that there are three voters or three groups of voters , labeled V1, V2, and V3; and two states of the world, labeled 1 and 2.
Assume that voter V1 votes for candidate D regardless of the state of the world. The second voter, V2, is independent but informed. This voter knows the state of the world and votes for D when the state of the world is 1 and votes for R when the state of the world is 2: The third voter, V3, has the same preference structure as V2, but is uninformed.
However, V3 knows the preferences and information sets of the other two voters. But the game-theoretic pivot model argues that V3 should vote for R. The reasoning is as follows. When the state of the world is 2, then the other two voters will split their vote and V3 will be pivotal. Under such circumstances, V3 should vote for R since she prefers R to D in state 2. So V3 always votes for R.
This behavior results in better outcomes for V3 than that suggested by the decision-theoretic perspective. These two examples show that uninformed voters can make inferences about how to behave that make them better off, even when they remain ignorant of critical aspects of the election.
Barry R. Weingast and Donald A. Wittman
Now this particular example requires V3 to know a lot about the other voters, but the conceptual apparatus can be incorporated into other models where the information requirements are not so high. Vote for against the candidate endorsed by the right-wing pressure group. However, even if all the mistaken votes for one candidate were reversed this would not change the outcome. So fully rational but uninformed voters consider the effect of their behavior when pivotal even if their likelihood of being pivotal is small. Indeed, in this example, by their rule of thumb, the uninformed make the informed median over all voters the pivot.
Democratic theory has long held that ignorant voters harm the operation of democracy. The force of this section is to demonstrate that uninformed voters and uninformed actors more generally can make inferences based on the behavior of others, the structure of their strategic situation, and signals received from other actors. These inferences make uninformed voters better off than predicted by decision-theoretic models; and they improve the workings of democracy more than predicted by traditional democratic theory.
Both economics and evolutionary models of human behavior employ the concepts of survival and equilibrium Alchian Nonetheless, the implications of economic and biological models at times conflict. Although people who are capable of achieving p. Furthermore, at times evolutionary fitness may be gained by being less rational; for example, the emotional may serve as a useful commitment device see Hirshleifer Humans are preeminently social animals. Political structures are one kind of social structure, and such structures need to be compatible for better or worse with the biology of human behavior.
Are people naturally xenophobic, vengeful, or generally limited in their capacity for empathy? Hypotheses about human behavior abound. The principle of survival in equilibrium imposes discipline on modeling efforts because not all hypotheses satisfy this criterion. Models of pure self-regarding preferences have generated considerable insight into the political process; yet such an assumption is not requisite for rational behavior.
People may be other-regarding in that they care about their children or feel altruistic or vengeful towards others.
Let us start with an easy question. Why are human parents altruistic to their children? Infants and small children need care in order to survive.
Parental altruism helps to ensure the genetic transmission. But genetic relatedness rapidly approaches zero as the population increases in size. So this simple explanation for altruism falters when we want to extend it to the population as a whole. A significant number of researchers seek to understand the role of vengeance. The phenomenon of suicide bombers inspires some of this interest—being a suicide bomber hardly appears to improve genetic fitness. Further interest in vengeance is inspired by experiments demonstrating that the standard income-maximizing model does not work well in certain situations.
For example, consider the ultimatum game in which person A is given a certain amount of money say ten dollars ; A then offers a share of this money to B; B then either rejects or accepts the offer. If B rejects the offer, neither gets any of the money and the game is over. A theory that is based on humans being purely self-regarding predicts that A should offer B a trivial amount, say one cent.
Because one cent is better than nothing, B is better off accepting the offer than rejecting it. Experiments consistently reveal that B subjects often reject low offers even though this hurts them financially. Further, experiments also reveal that A subjects often offer significant amounts to B to forestall such a rejection. Thus, the key intellectual puzzle to resolve is how vengeful behavior can be evolutionarily stable.
Scholars provide two types of answers. One is that a reputation for vengeful behavior may enhance fitness because others may avoid provoking revenge by avoiding doing harm to the vengeful person in the first place. Following this intuition, some evolutionary models show that, under certain circumstances, two types of people, vengeful and nonvengeful, can survive in equilibrium Friedman and Singh forthcoming. Here we will concentrate on the second approach—the co-evolution of memes social constructs and genes—because that is more relevant to our understanding of collective choice and social cooperation.
Humans are more social than their ancestors, and many argue that this sociability evolved along with the social institutions that made such sociability result in greater reproductive success. Consider the following thought experiment. If chimpanzees had language which in itself enhances sociability and could do calculus, would chimpanzee society look like human society if they were able to observe our customs? The co-evolution argument says no. Shame, guilt, the ability to be empathetic or vengeful, and certain conceptual possibilities that make us human would all be much more circumscribed in chimpanzees, which themselves show more of these qualities than marsupials.
Without pro-social emotions, all humans rather than just a few might be sociopaths, and human society as we know it might not exist despite the institutions of contract, government law enforcement, and reputation. In turn, this leads to greater reproductive success. The central question for evolutionary models is how, if at all, evolutionary pressure keeps individual shirking in check.
It seems, for example, that a person who is slightly less brave in battle is more likely to survive and have children than his braver compatriots. Bravery at once increases the risk for the brave while making it more likely that the less brave survive. One answer proceeds along the following lines: If the individuals are punished for shirking in this case, being cowardly , this will keep them in line.
The evolutionary approach suggests that punishment, a kind of vengeance, will be a successful strategy for the punisher if he gains even a p. This is because, in equilibrium, the cost to the punisher is relatively small since punishment does not have to be meted out very often.
Punishment need not be carried out frequently to be effective. It is the threat that is important. To the degree that shirkers by being punished possibly by being banished from the tribe become less fit, the need to engage in punishment decreases even more as there are fewer shirkers. And given that those who punish are more aligned with the interests of the society and therefore may be more likely to survive, there may be enough potential punishers so that the need for any individual to bear the costs of punishment is reduced still further which of course means that the benefits received will also be reduced.
If altruism and vengeance are gene-based rather than meme-based, memes and genes may co-evolve. Over the eons, human society may have encouraged pro-social genetically based emotions. The force of this argument is that pro-social emotions bypass the cognitive optimizing process that is at the core of rational economic man. This cognitive difference implies that at times we should observe profound differences between the evolutionary model and the economic model.
Under certain circumstances, seemingly irrational behavior, such as vengeance or shame, may be evolutionarily stable even if it runs counter to individual utility maximization. Moreover the relatively slow genetic evolution in comparison with meme evolution especially in the last years yields a further conclusion: It is quite possible that some of the pro-social emotions whose genetic basis evolved over the last , or more years are maladapted for the modern world. At present the evolutionary study of genes and memes has produced very tentative results.
Human behavior is part mammalian possibly even reptilian , part primate, and part hominid. Although some have argued that much of human psychology developed in the savannah, it is not clear what part of human psychology developed then or earlier or, to a lesser degree, later.
Also, we have only a rudimentary picture of human life in the savannah so evolutionary models of this period are very speculative. Furthermore, it is not clear whether the transmission of behavior is through memes or genes. Clearly, we have much room for further research on these topics, and we believe that in the coming decade there will be many advances. As political economy has matured, it has begun to tackle a wider range of topics. This work includes a series of larger questions, such as the origins of dictatorship and democracy.
In this section, we consider one of these frontier topics—the size of nations. Much of history reflects the expansion and contraction of nations. The conquests of Alexander the Great, the rise and decline of the Roman Empire, the aggressive expansions of Napoleon and Hitler, and the dissolution of the USSR are just a few examples. At the other end of the spectrum, many tiny countries, such as Singapore and Andorra, have survived a considerable length of time.
For over two millennia, historians and philosophers have asked why some nations have expanded, why others have contracted, and what is the optimal size of a polity Plato, for example, said that the optimal size was 5, families. In this section, we discuss recent political economy contributions to this area.
In the process, we show how research in political economy builds upon earlier foundations. The political economy approach to the size of nations starts with the Downsian characterization of voter preferences. In this case, citizen preferences can be placed along a line or a circle. This line or circle is then divided into n parts not necessarily equal , each part representing a country. Individuals at the boundary of two countries can choose in which country to reside see Spoloare ; Alesina and Spoloare , for a more complete coverage.
If policy were the only factor, all countries would be composed of only one citizen. But other factors run counter to this extreme decentralization. The most important are economies of scale in production and military power. When barriers to free trade exist between countries, a more populous country achieves greater economies of scale through its larger domestic market.
A larger population also allows for greater military power, which may make war against smaller and weaker states more profitable because of the higher probability of success. At the same time greater military power makes predation by other states less profitable to these other states and therefore less likely see Skaperdas These insights yield comparative statics predictions.