Political Economy and Policy Analysis

237 Pages·2018·2.905 MB·English

by  Antonio Merlo

i
Political Economy and
Policy Analysis
Mostofeconomicstakespoliticsforgranted.Throughsome(oftenimplausible)
assumptions,itseekstoexplainawaypoliticalstructuresbycharacterizingthem
asstableandpredictableorasinconsequentialinunderstandingwhatgoesonin
an economy. Such attempts are misguided, and this book shows how
governments and political institutions are composed of people who respond
to incentives and whose behavior and choices can be studied through the
lens of economics.
This book aims to bridge the gap between economics and politics, and in
doing so hopes to instill in the reader a deeper appreciation for social
scientific thinking. Opening with a refresher on microeconomics and an
introduction to the toolkit of political economy, it ensures that the necessary
building blocks are in place before building up from the level of the
individual and the firm to show how a political–economic equilibrium can be
achieved. The text explores how to separate primitives—the external parts of
a model that we cannot affect—from outcomes—the internal parts of a
model that we can. Moreover, it demonstrates that economic and political
issues alike can be studied within the same general framework of analysis.
Political Economy and Policy Analysis offers readers the chance to gain a more
sophisticated understanding of political processes, economic processes, and the
interplay among them. Adopting an applied microeconomics approach, it will
be ideal for upper-level undergraduate or postgraduate courses on political
economy, public choice, or policy analysis.
AntonioMerlo istheDeanoftheSchoolofSocialSciencesandtheGeorgeA.
Peterkin Professor of Economics at Rice University, USA. He is also the
founding and current director of the Rice Initiative for the Study of
Economics (RISE). In 2012, he was elected a Fellow of the Econometric
Society. His areas of expertise are political economy, policy analysis, public
economics, bargaining theory and applications, and empirical microeconomics.

iii
Political Economy
and Policy Analysis
ANTONIO MERLO
Firstpublished2019
byRoutledge
2ParkSquare,MiltonPark,Abingdon,OxonOX144RN
andbyRoutledge
52VanderbiltAvenue,NewYork,NY10017
RoutledgeisanimprintoftheTaylor&FrancisGroup,aninformabusiness
©2019AntonioMerlo
TherightofAntonioMerlotobeidentifiedasauthorofthisworkhasbeen
assertedbyhiminaccordancewithsections77and78oftheCopyright,
DesignsandPatentsAct1988.
Allrightsreserved.Nopartofthisbookmaybereprintedorreproducedor
utilisedinanyformorbyanyelectronic,mechanical,orothermeans,now
knownorhereafterinvented,includingphotocopyingandrecording,orin
anyinformationstorageorretrievalsystem,withoutpermissioninwriting
fromthepublishers.
Trademarknotice:Productorcorporatenamesmaybetrademarksor
registeredtrademarks,andareusedonlyforidentificationandexplanation
withoutintenttoinfringe.
BritishLibraryCataloguing-in-PublicationData
AcataloguerecordforthisbookisavailablefromtheBritishLibrary
LibraryofCongressCataloging-in-PublicationData
Names:Merlo,Antonio(Economist),author.
Title:Politicaleconomyandpolicyanalysis/AntonioMerlo.
Description:Abingdon,Oxon;NewYork,NY:Routledge,2019.|Includes
bibliographicalreferencesandindex.
Identifiers:LCCN2018037493(print)|LCCN2018039635(ebook)|
ISBN9780429490309(Ebook)|ISBN9781138591776(hardback:alk.paper)|
ISBN9781138591783(pbk.:alk.paper)
Subjects:LCSH:Economics—Politicalaspects.|Economicpolicy.|
Policysciences.
Classification:LCCHB74.P65(ebook)|LCCHB74.P65M472019(print)|
DDC330—dc23
LCrecordavailableathttps://lccn.loc.gov/2018037493
ISBN:978-1-138-59177-6(hbk)
ISBN:978-1-138-59178-3(pbk)
ISBN:978-0-429-49030-9(ebk)
TypesetinDanteandAvenir
byApexCoVantage,LLC
v
To my father, who taught me by example the meaning of work ethic.
To the memory of my mother, who taught me by example the meaning of resilience
and perseverance.
To my wife, who teaches me every day by example the meaning of empathy and
unconditional love.
Contents
Preface ix
Acknowledgments xi
1 Overview and introduction 1
2 Basic tools of microeconomics 5
2.1 A simple economy 7
2.2 Efficiency 8
2.3 Competitive equilibrium 10
2.4 Equity 13
2.5 The Social Planner Problem 17
2.6 Game theory 20
2.6.1 A simple game 20
2.6.2 Games with more than two actions 24
2.6.3 Games with a continuum of actions 27
2.7 Discussion 30
3 Basic tools of political economics 32
3.1 The Voting Problem 33
3.2 Median voter theorems 43
3.3 Discussion 50
4 Voters 52
4.1 Voter turnout 52
4.1.1 The calculus of voting 53
4.2 Sincere voting and strategic voting 62
4.2.1 Split-ticket voting 65
4.3 Discussion 68
vii Contents vii
5 Electoral competition 71
5.1 The Downsian model 71
5.2 The citizen-candidate model 76
5.2.1 A simple model with three types of voters 77
5.2.2 A general model with a continuum of voter types 80
5.3 Discussion 87
6 Parties 88
6.1 Voter mobilization 88
6.2 Policy platforms 91
6.3 Candidate recruitment 96
6.4 Discussion 100
7 Lobbies 102
7.1 Exogenous lobbies 103
7.1.1 Ex ante lobbying 104
7.1.2 Ex post lobbying 108
7.2 Endogenous lobbies 111
7.3 Discussion 113
8 Political careers 117
8.1 The political labor market 117
8.2 A model of politicians’ careers 118
8.3 Discussion 124
9 Public goods 125
9.1 A simple economy with public goods 127
9.2 Private provision 129
9.2.1 Competitive markets 129
9.2.2 Voluntary contribution games 131
9.3 Political provision 135
9.3.1 Heterogeneous preferences and
homogeneous income 136
9.3.2 Heterogeneous income and homogeneous
preferences 140
9.3.3 Heterogeneous preferences and heterogeneous
income 142
9.4 Discussion 143
10 Public schools 145
10.1 Political provision of primary education 145
10.1.1 Elected superintendent 148
10.1.2 Appointed superintendent 148
10.1.3 Elected politicians or appointed bureaucrats? 151
viii Contents viii
10.2 Taking the model to data 152
10.3 Discussion 154
11 Higher education 157
11.1 Pure private system 158
11.2 Pure public system 160
11.3 Mixed system 164
11.4 Discussion 167
12 Redistribution 169
12.1 Efficiency and redistribution 170
12.2 Political economy of redistribution 171
12.2.1 A different type of heterogeneity 181
12.3 Discussion 184
13 Health care 187
13.1 Health insurance 187
13.1.1 Private health insurance 188
13.1.2 Publicly provided health care 192
13.2 Electoral competition and health care 195
13.3 Discussion 198
14 Mobility 199
14.1 Local public goods 200
14.2 Local redistribution 203
14.3 Federalism 208
14.4 Discussion 212
Bibliography 214
Index 218
ix
Preface
I have written this book to bridge the gap between economics and politics,
which has become an unfortunate norm across much of the social sciences.
In so doing, I also hope to instill in the reader a deeper appreciation for
social scientific thinking. To understand what we are talking about you will
need to be able to think critically and abstractly, taking out bits and pieces of
information from a larger picture and using them to build up to a political–
economic equilibrium. You will need to separate primitives—the exogenous
parts of a model that we cannot affect—from outcomes—the endogenous
parts of a model that we can. You will also need to understand that economic
and political issues alike can be studied within the same general framework of
analysis, where a theory is a combination of models and equilibrium concepts
that starts from primitives to ultimately explain outcomes. And of course, you
will gain a more sophisticated understanding of political processes, economic
processes, and the interplay among them.
Thisbookisideallysuitedtoserveasatextbookforasemester-longcourse,
though it could be easily used in combination with other texts to cover any
portion of a course devoted to topics in political economy and/or policy anal-
ysis. The book is aimed at students with an understanding of basic economic
principles and a working knowledge of calculus. If you have taken a calculus-
based microeconomics foundations course you will be able to hit the ground
running.
As you go through the various chapters, you will encounter some formal
mathematics, which can often seem intimidating to some people. In fact,
some would even go as far as claiming that economics really is just a bunch
of esoteric formulas scribbled on a board. Well, this is not true. It turns out