Pol-Economy 2019 Class3

Political Economy.
Class 3
Alessandro Riboni
Master in Economics, 2019-20
Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 1 / 45

Europe
Crisis of European Union (Brexit, nationalistic parties, cleavage North

vs South, etc)
Economic recession has aggravated mistrust versus European
institutions (see Algan et al, 2017)
People are aware of the advantages of economic integration
According to surveys, more than 70% want EU to intervene more in
defense, terrorism, migration, energy supply.1
1
2016 Eurobarometer survey (European Commission 2016)
Europe
Yet, there is growing skepticism towards the EU

Why? Possibly, disagreement on ”how” to implement policies
Disagreement arises when economic conditions or preferences differ
across countries
Evidence there has been an economic convergence among European
states
What about “cultural” convergence? Evidence that Europe has
become more divided – especially North vs South.

Europe
Alesina Tabellini and Trebbi (2017) analyze 4 waves of the European

Values Survey (EVS)
First wave W1 (1980-81); the last W4 (2008-09)
Focus on the following questions.
religiosity (strength of religious beliefs and practice)
gender equality (in the workplace and family)
sexual morality (homosexuality, divorce, and abortion)
role of state (redistribution vs individual, left vs right, role of effort vs
luck)
cultural capital (trust towards others, how to educate children, etc)
They compute the “distance” between individuals within and across
European states.

Cultural distance
On average, from W1 to W4 Europeans have become more dissimilar,

both within and between countries.
Heterogeneity of preferences across countries is only slightly more
than within country
Inglehart and Norris (2019) argue that the emergence of populism
reflects a cultural backlash against cultural liberalism2
2
On the determinants (culture vs economy) of populism, see Noury and Roland, 2017
Nation-Building: Europe vs US
Cultural differences among Americans are not bigger than among

Europeans
If integration works well in the US, why not in Europe?
In the US nation-building started 250 years ago.
The US have a common language, more mobility and, at the
beginning, a common enemy (Britain)
European conflicts are more recent than US civil war
Nationalism in Europe is quite strong

Bilateral Trust
“I would like to ask you a question about how much trust you have in people from various
countries. For each, please tell me whether you have a lot of trust, some trust, not very much
trust, or no trust at all”3
3
Guiso et al, 2009
Bilateral Trust
Main predictors of trust: past wars, religious and GDP differences,
somatic distance.

Nationalism
Percentage of citizens very proud of their country has risen on average

Nationalism
Nationalism: ideology that people with same culture (of the same
“nation”) should have a sovereign space (state)
It is a recent phenomenon (c. 18th).
Before, ruling classes with a (pan-European) culture and many local
communities
Political authority was based on dynasties, religions and territorial
institutions (rather than shared culture)

Nationalism
modernists vs primordialists
Primordialists see nations as based on earlier ethnic identities

Modernists:
Nation is social constructed community, imagined by people who
perceive themselves as part of the group (Anderson).
“Nationalism makes nations” (Gellner).
Elite-led: “invented tradition” (Hobsbawm)
According to modernists, nationalism favoured by modernization
(education), print press, technological change and military rivalry.

Identity Politics
National identity is an exemple of “social identity”

Fearon (1999) defines “social identity” as “a set of persons marked by
a label and distinguished by rules deciding membership and (alleged)
characteristic features or attributes.”
Identity politics can be defined as the demand for recognition of one’s
identity
Todays’ identity politics by right-wing populist parties is based on
ascriptive characteristics, such as race, ethnicity, and religion.
Among different social identities (nation, economic class, ethnicity,
etc), how do we choose ours ?

Nationalism
Two (possibly complementary) models of nationalism
1 Nationalism arises in a model of social identity (Shayo, 2009)

2 Nationalism was first used as motivational tool by the elites in
interstates wars (Alesina, Reich, Riboni, 2017)

Social Identity Theory
The Robbers Cave experiment (Sherif, 1950s): “real” conflicts among

groups create antagonistic intergroup relations and strengthen
identification and attachement to the in-group.
A large literature (Minimal Group Paradigm, Tajfel, 1970) shows that
conflict is not necessary to trigger such behaviours
Arbitrary distinctions between groups, such as preferences for certain
paintings, can trigger a tendency to favour one’s own group at the
expense of others (strategy of “maximum difference”), even when it
means sacrificing in-group gain.
Individuals strive to maintain or enhance self esteem. Positive social
identity is based on favourable comparison.

A Model of Social Identity
Shayo, 2009
Nationalism arises in a model of social identity (Shayo, 2009)
Consider a nation of N individuals. Two classes: rich (y R ) and poor
(y P ). Poor are the majority (proportion λ > 1/2). y is average
income.
Taxes t ∈ [0, 1] are chosen in an election. Median voter is poor.
People vote sincerely.
Material payoff of individual i ∈ N
t2
πi = yi (1 − t) + (t − )y
| {z2 }
transfer
where transfer (tax revenue minus deadweight loss from taxes)

Absent group identity considerations, the poor would select
y − yP
τ̂ =
y
Shayo, 2009
Individuals identify with a group (their class or with the nation)

depending on (i) “distance“ to the group according to several
attributes (income, language, etc) and (ii) the status of the group
relative to the reference group
Three possible groups: G = {P, R, N} where P = {i ∈ N : yi = y P },

R = {i ∈ N : yi = y R } and N is the nation as a whole
Each individual is characterized by a vector of attributes
(qi1 , qi2 , ..., qiH ).
A social group is characterized by the “prototypical” attributes of its
members, which is assumed to be the mean across group members,
i.e. qJ = E [qi | i ∈ J], with J ∈ G

Shayo, 2009
Focus on 3 attributes
Each individual’s first attribute is the income.
Another attribute qiC differentiates rich and poor: qiC = 1 if i ∈ P
and qiC = 0 if i ∈ R
The last attribute qiN is shared by member of the nation: qiN = 1 if
i ∈ N and qiN = 0 otherwise
Define the (square) of the distance between individual i and group
J ∈ G according to three attributes
diJ2 = wy (yi − yJ )2 + wC (qiC − qJC )2 + wN (qiN − qJN )2

wy ,wC , wN are some ”salience weights”. They are fixed in the model.
In practice, the attention paid to different dimensions can change

Shayo, 2009
Besides distance, what matters is also the status of group J vis a vis a
reference group
SJ (τ ) = σ0J + σ1J (π̂J (τ ) − π̂r (J) (τ ))

where r (J) is the reference group of group J and π̂ is a measure of
group J material payoff
For simplicity, π̂P = πP and π̂R = πR and π̂N = (1 − λ)πR + λπP
The utility of an individual identifying with group J is
Ui (τ ) = πi (τ ) − βdiJ2 + γSJ (τ )
β and γ reflect importance of group membership vs individualism in
certain societies.

Shayo, 2009
Economic shocks can influence the utility from a given identity by

directly affecting the distance diJ or the status SJ
Changes in income inequality directly affect both the status of the
poor and of the rich, and the distance between them.
Migration flows can affect both group composition and the salience of
different attributes (e.g. skin color), thereby changing perceived
distances (Fouka et al., 2018).
Migration introduces new attributes that may split the working class
(ethnicity, language, etc).
Politicians can take actions that change the ‘salience weights”.
External threat also changes the salience of national identitification

Shayo, 2009
Each idividual chooses group (gi ∈ G ) and how to vote (ai ∈ [0, 1])
Group identification and voting decisions must be optimal given
others’ strategies
A Social Identity Equilibrium (SIE) is a profile of actions
a = (ai )i∈N and a profile of social identities g = (gi )i∈N such that for
all i ∈ N we have
πi (f (ai , a−i)) − βdig2 i + γSgi (f (ai , a−i)) ≥

πi (f (ai0 , a−i)) − βdig2 0 + γSgi0 (f (ai0 , a−i))
i
for all ai0 ∈ [0, 1] and gi0 ∈G

Shayo, 2009
Proposition 1: The tax rate preferred by a poor individual who

identifies with the nation is smaller than if he/she identifies with
her/his class: τN∗ (y P ) < τP∗ (y P )
Compute the tax that maximizes the following payoffs:

If the poor indentifies with her class
2
Ui (τ ) = πi (τ ) − βdiP + γ[σ0P + σ1P (y P (1 − t) − y R (1 − t))]
If the poor indentifies with the nation

2
Ui (τ ) = πi (τ ) − βdiN + γ[σ0N + σ1N (λπP + (1 − λ)πR − π̂r (J) ]

Voters Preferences

Equilibria
SIE is a fixed point:

(i) voters vote for their favourite tax given their identity
(ii) given the tax choice in the nation, group identity is optimally
chosen
A poor identifies with his class, if
2 2
πi (τ ) − βdpP + γSP (τ ) ≥ πi (τ ) − βdpN + γSN (τ )
or
β 2 2
SN (τ ) − SP (τ ) ≤ (d − dpP )
γ pN
At the same time, SN (τ ) − SP (τ ) is a decreasing function of τ :
A higher level of redistribution leads to more equality and hence
increases the status of the poor.

Equilibria

Shayo, 2009
We could have multiple equilibria: high redistribution-class

identification and low redistribution-national identification
Eq1: Low tax ⇒ low status of working class ⇒ national identification
⇒ low tax
Eq2: High tax ⇒ high status of working class ⇒ class identification
⇒ high tax
National identification reduces income redistribution and income
redistribution reduces national identification.
In contrast to Meltzer and Richard (1981) less inequality may lead to
more redistribution (by developing class identity)
The model predicts that the poor tend to be more nationalist

National Pride and Income
National pride is negatively correlated with income

National Pride and Redistribution
National identity negatively correlated with redistribution

National Pride and Redistribution

Wars and Nation-Building
Alesina, Reich, Riboni, 2017
States increase fiscal power to prepare for wars (Tilly, 1990, Besley and
Persson, 2011, Gennaioli and Voth, 2015)
But fiscal capacity is not enough to win wars
One needs motivated population especially in times of mass wars

e.g., French troops were 65,000 (in 1498), 155,000 (in 1635), 440,000
(in 1691), 700,000 (in 1812) and 8 million during WWI

Political Bargain
Mass warfare induced rulers to make concessions to the population

(e.g., Tilly, 1990, Levi, 1997)
“In Europe at the end of 19th century [...] central administration, justice,
economic intervention and, especially, social services all grew as an outcome
of political bargaining over the state’s protection of its citizens” (Tilly, 1990)
From 1830-1938 in Europe spending composition changed, not the level

(Aidt et al, 2006)

Nationalism and Nation-building
Mass warfare induced rulers to forge a

national identity: nationalism and
nation building. (e.g., Tilly, 1990, Posen,
1993)
Nation-building homogenizes the

country: e.g. building roads, teach
common language, indoctrination
Nationalism makes citizens appreciate

mass public goods provided by their
country

Setting
0 CA q CB 1
Country A Country B
Each country has ordinary citizens and the elite

“Ordinary” citizens pay taxes. tA is given (fiscal capacity).
Portion 1 − πA of tax revenue goes to the elite as rents
Government’s constraint:
πA tA q = gA + hλ
gA is public good located in CA and λ is nation-building.

Utilities
“Ordinary” citizens (measure q) have utility
Ui,A = θgA (1 − a |i − CA |) + consumption

| {z }
public good component
i ∈ [0, q] is the “location” of the citizen.

Parameter “a” measures country’s homogeneity
Elite (measure sA ) is located in the capital CA
Ue,A = θgA + yA + rents
Elite also choose how much to pay the soldiers (money comes from
expected loots)

Nation Building
Nation-building makes country more “homogenous”
With nation-building λ ∈ [0, 1], a citizen’s “location” becomes
i 0 = (1 − λ)i + λCA
Strasbourg gets closer to Paris and further away from Berlin

Bretons get closer to Paris but also to Berlin.
We label this nation-building as ”positive” because it makes people

appreciate national public goods

Nation Building
Nation-building makes country more “homogenous”
With nation-building λ ∈ [0, 1], a citizen’s “location” becomes
i 0 = (1 − λ)i + λCA
Strasbourg gets closer to Paris and further away from Berlin

Bretons get closer to Paris but also to Berlin.
We label this nation-building as ”positive” because it makes people

appreciate national public goods

Model’s Mechanism
Given fiscal capacity, elites choose the optimal allocation of tax

revenue. Four different uses:
(i) elites’ rents, (ii) public goods, (iii) nation-building, (iv) soldiers’ pay.
Citizen-soldiers motivated by what the state does for them (relative

to what they would get in case of defeat)

Model’s Mechanism
Given fiscal capacity, elites choose the optimal allocation of tax

revenue. Four different uses:
(i) elites’ rents, (ii) public goods, (iii) nation-building, (iv) soldiers’ pay.
Citizen-soldiers motivated by what the state does for them (relative

to what they would get in case of defeat)

Soldiers’ Motivation
Defeat=loss of sovereignty
Soldiers fight hard when

they are promised spoils of war
high national public good (and citizens like it)
small foreign public good (and citizens dislike it)

Results
What happens when states needed larger and larger armies?

With small armies: optimal for the elites to pay professional soldiers
with spoils of war:
no public good and tax revenues used as rents
no need to nation-build
Large armies: optimal for the elites to switch to motivating war by
providing mass public goods. Rents are reduced.
Need of larger armies transformed ancient regimes into modern states
Spending contagion

Results
Intuition
With large armies, spoils (private good) would get diluted. Elites
would have to give up too much of the spoils
Public good provision is better “technology” to motivate a larger

number of people
Important that after a defeat the national good is “replaced” by

foreign one
Paradoxically, if public good is not at risk, it is not provided.

Nation-building
When conflicts are about public goods, the country as a whole needs
to appreciate the goods provided by the elites
Nation-building improves the effectiveness of public spending as a

motivational tool
It increases value of national common goods and “differentiates”

them from foreign goods

Negative Nation-building
Nationalism might take purely negative

forms.
”Anti-German sentiment reinforced
desirability of becoming very French”
(Tilly, 1994)
Opposite implications on public good
provision.

’Negative” Nation-Building
“Politics of fear” makes citizens dislike gB .

In case of defeat, utility is:
−
Ui,A = (1 − λ0 )gB θ (1 − a |i − CB |) + yA − tA
Result: Negative nationalism is generally associated to no public goods

(gA = 0)

Negative vs Positive Propaganda
Distinction between positive and negative nation-building is still

meaningful today.
Evidence of many countries with high national pride and ineffective

government go

Negative vs Positive Nationalism
Which form of nationalism is preferred by the elites?
Result 4: Anti foreign propaganda is preferred by the elites of:

States with low fiscal capacity tA
States which face an opponent with large gB
More formally, negative nationalism is chosen when
gB ( 1a − (CB − q2 ))
tA < , (1)
∆q

Implications
Spending contagion does not necessarily take place. Higher gB may

lower gA
Our model provides a new channel trough which low state capacity
can affect development
Low fiscal capacity pushes elites to rely on inefficient forms of
nationalism (politics of fear)

4
Nationalism and Government Effectiveness back
4
Ahlerup and Hansson, 2011, JCE

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Political Economy.

Master in Economics, 2019-20

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 1 / 45

Crisis of European Union (Brexit, nationalistic parties, cleavage North

Yet, there is growing skepticism towards the EU

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 3 / 45

Alesina Tabellini and Trebbi (2017) analyze 4 waves of the European

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 4 / 45

On average, from W1 to W4 Europeans have become more dissimilar,

Cultural differences among Americans are not bigger than among

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 6 / 45

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 8 / 45

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 9 / 45

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 10 / 45

Primordialists see nations as based on earlier ethnic identities

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 11 / 45

National identity is an exemple of “social identity”

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 12 / 45

Two (possibly complementary) models of nationalism

1 Nationalism arises in a model of social identity (Shayo, 2009)

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 13 / 45

The Robbers Cave experiment (Sherif, 1950s): “real” conflicts among

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 14 / 45

where transfer (tax revenue minus deadweight loss from taxes)

Individuals identify with a group (their class or with the nation)

Three possible groups: G = {P, R, N} where P = {i ∈ N : yi = y P },

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 16 / 45

diJ2 = wy (yi − yJ )2 + wC (qiC − qJC )2 + wN (qiN − qJN )2

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 17 / 45

SJ (τ ) = σ0J + σ1J (π̂J (τ ) − π̂r (J) (τ ))

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 18 / 45

Economic shocks can influence the utility from a given identity by

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 19 / 45

πi (f (ai , a−i)) − βdig2 i + γSgi (f (ai , a−i)) ≥

for all ai0 ∈ [0, 1] and gi0 ∈G

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 20 / 45

Proposition 1: The tax rate preferred by a poor individual who

Compute the tax that maximizes the following payoffs:

If the poor indentifies with the nation

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 21 / 45

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 22 / 45

SIE is a fixed point:

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 23 / 45

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 24 / 45

We could have multiple equilibria: high redistribution-class

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 25 / 45

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 26 / 45

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 27 / 45

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 28 / 45

But fiscal capacity is not enough to win wars

One needs motivated population especially in times of mass wars

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 29 / 45

Mass warfare induced rulers to make concessions to the population

From 1830-1938 in Europe spending composition changed, not the level

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 30 / 45

Mass warfare induced rulers to forge a

Nation-building homogenizes the

Nationalism makes citizens appreciate

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 31 / 45

Each country has ordinary citizens and the elite

gA is public good located in CA and λ is nation-building.

Riboni (Master in Economics) Political Economy. Class 3 Master in Economics, 2019-20 32 / 45

“Ordinary” citizens (measure q) have utility