Advanced Political Economy

(ECON3029)

Lecturer:
Robin Cubitt

Lecture 20:
Economic effects of democratic
constitutions I

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 Introducing Part 3 lectures
• Parts 1 and 2: Main emphasis on
– theory and concepts;
– including some classic figures:
– Smith, Walras, Edgeworth, Arrow, Debreu, Hayek, Stiglitz,
Thaler, Downs, Nozick, etc.
• Part 3: Now turn more strongly towards
– applications and empirics;
– explanatory focus;
– relatively recent research.

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 Lecture topics for Part 3
• Explaining cross-country policy differences
(among democracies):
– Topic 1: Broad focus;
– Topic 2: Narrower focus
• Looking back and forward
– Topic 3: The origins of democracy
– Topic 4: Populism and a glance ahead

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 Explaining cross-country policy
differences between democracies
• Topic 1: The economic effects of constitutions
– Torsten Persson & Guido Tabellini
– Explaining differences between wide range of democratic
countries in broad extent and pattern of government activity.
• Topic 2: Fighting Poverty in the US and Europe – a World of
Difference?
– Alberto Alesina & Edward Glaeser
– Explaining differences between specific democratic countries in
specific area of policy (redistributive policy).
• These topics each inspired by landmark book whose title is used
above for the topic (by the authors listed). BUT:
• Required reading will be related articles or selected chapters;
• We will include updates, etc.

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 Government economic activity
• The extent of government activity in economies
– has changed over time;
– and varies across countries.
• At very broad level, the extent can be measured
by government spending as % of GDP.

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 Selected countries 1880-2011

Source: Our World in Data: 6

Robin Cubitt https://ourworldindata.org/government-spending
 OECD countries in 2019

General government spending as % GDP, 2019, OECD countries.

Source: OECD. NB: Outside OECD, even wider variation.
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Ireland USA Japan UK Germany France

General government spending as % GDP, 2019, OECD countries.

Source: OECD. NB: Outside OECD, even wider variation.
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 Finding our focus: Topic 1
• Q. Why is there so much variability in level of
government activity? And in what governments do?
• We use as our focus research by Torsten Persson &
Guido Tabellini on effects of different political
institutions on cross-country variability in size and
composition of government activity.
• In particular, they consider:
– wide range of democratic countries, with different
democratic institutions;
– size of government measured by central
government spending (for data availability);
– what governments provide and to whom. 9
Robin Cubitt
 Size of government 1960-2000

Source: Persson and Tabellini, Economic Effects of Constitutions, p. 38.

Central government spending as % of GDP.

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 Controlling for baseline effects
• Preliminary: Research on size and composition of
government often controls for basic socio-economic
variables.
• Influential examples from Persson, Tabellini & Roland,
JPE 2000 and Persson & Tabellini, EER 1999:
• per capita income;
• proportion of population over 65;
• openness to trade;
• ethnic/linguistic heterogeneity.
• We will call these the baseline controls.
• PT 1999: Regression of size of government on just these
controls explains c.60% of cross-country variability.

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 Variation in size and scope of
government
• Next two slides give on vertical axis, as % of GDP:
• First slide: central government spending;
• Second slide: central government spending on key public
goods (transport, education, safety and order).
• Each white column represents a country.
• Each black column is the residual for that country from a
regression of dependent variable on certain controls:
– First slide: Dep. variable = central government spending (% of
GDP); controls = the baseline controls;
– Second slide: Dep. variable = central government spending on
key public goods (% of GDP); controls = baseline controls +
measure of centralisation in government spending.
• Source: Persson & Tabellini, European Econ. Review,
1999, pp. 700-1. Data for 1988-92.
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 Size of government

Source: Persson & Tabellini, European Economic Review,

1999, p. 700.
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 Provision of key public goods

Source: Persson & Tabellini, European Economic Review,

1999, pp. 701.

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 Persson and Tabellini
• Objective: To answer:
– Q. Can explanation of cross-country variability in size
and composition of government activity be improved if
(besides baseline controls) we take account of impact
of differences in democratic institutions between
countries?
– Q. If so, why do institutional differences matter?
• Strategy: Extensions of Downsian models.
• Today: Focus on some theoretical arguments of
Persson & Tabellini, European Economic Review
1999.

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 Beyond Downs
• Persson & Tabellini (1999) models are Downsian in 2 key
respects:
– Voters and politicians are rational.
– Politicians are office-seeking.
• But, P&T also go beyond Downs:
– Voting for representatives of localities, not points in
policy-space;
– Policy-space is multi-dimensional;
– Parties uncertain of voters’ preferences.
– So, choices of platforms are solutions to trade-offs.

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 Multi-dimensionality: simple model
• 3 activities of government, financed by taxation:
– Provision of national public goods that benefit whole population.
– Selective goods: provision of goods/services that benefit
specific groups.
• May be non-excludable within group that benefits, but not for
whole population.
• Financed by general taxation, so provision redistributive.
• Benefitting groups interpreted as geographically identifiable.
– Rents for politicians.
• Can interpret as “salaries” for politicians or more broadly.
• Key: They are not valued by voters.

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 Dilemma of office-seeking politician
• Office-seeking politicians (or political parties):
– want rents, BUT
– must provide public goods and/or selective goods
and/or low taxes to get/stay elected.
• Key insight:
• Resulting policies will vary across (democratic)
political systems if different institutions give
politicians different incentives.

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 Institutions
• Rest of today:
– Consider “electoral rules” for legislature (using
Persson & Tabellini, EER 1999 theoretical analysis).
• NB: Legislature = body that passes laws, e.g. Parliament, Congress.

• Next lecture:
– Consider “forms of government” – i.e. relationship
between legislature and executive;
– Further theoretical considerations;
– Evidence.

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 Electoral rules
• In most democracies, voting is only indirectly for policy.
Instead, it’s for representatives of localities.
• Electoral rules can vary by:
– size of localities;
– number of representatives per locality;
– rules for selecting representatives of each locality,
given the votes.
• Example: UK general elections: 650 constituencies,
each electing 1 representative by “plurality voting” in that
constituency.
– Plurality voting = Each voter can cast one vote and candidate
with most votes wins.

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 Electoral rules: a broad distinction
• Proportional:
– Match each party’s proportion of
representatives in legislature closely to
proportion it has of the national vote.
• Majoritarian:
– Match each party’s proportion of
representatives in legislature closely to
proportion of localities in which it gets the
most votes.
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 Electoral rules in practice
• Proportional systems typically have:
– relatively large localities;
– multiple representatives per locality; and
– mechanism for balancing proportions of
representatives with balance of local or national
preference.
• Majoritarian systems typically have:
– relatively small localities;
– few (often 1) representatives per locality;
– awarded predominantly (often all) to locally winning
party (in plurality vote).
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 UK General Election 2019
Party Share of national Seats Share of seats
vote (%) (%)
Conservative 43.6 365 56.2
Labour 32.2 203 31.2
Liberal Democrat 11.5 11 1.7
Scottish National 3.9 48 7.4
Green 2.7 1 0.2
Brexit Party 2.0 0 0.0
Others 3.7 22 3.3

UK is a prime example of majoritarian electoral rules. Note how seat

shares do not match vote shares.

(Table lists all parties with >1% of vote. Source: BBC News website)
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 A stylised country
Structure Each column is a locality.
• 11 localities, each with 9
voters represented by
cells in figure. Each
column is one locality.
• Two parties (Red, Blue).
Each voter’s colour
indicates the party they
vote for.
• 11 Members of
Parliament (MPs) to be
selected. 24
 A stylised country
Electoral rules Each column is a locality.
• Proportional (perfectly)
– Red party has (72/99) of
national vote; and so gets
(8/11) MPs.
– Blue party has (27/99) of
national vote; and gets
(3/11) MPs.
• Majoritarian
– Red party wins every
locality and gets 11 MPs;
Blue party gets 0 MPs.

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 How can Blue win control?
Electoral rules Each column is a locality.
• Proportional (perfectly)
– Blue need (54/99) of national
vote to get 6 MPs without
rounding (or 50/99 with
rounding).
– Currently has 27 votes, so need
net gain = 27 (23) votes.
• Majoritarian
– Blue can win 6 localities by
gaining 1 more vote in each of
the localities where it now has
4.
– Might only need net gain = 3
votes. 26
 Lessons
• For given votes, different electoral rules give
different compositions of legislature.
• A currently-losing party may need much smaller
swing under Majoritarian electoral rules to win
than it would under Proportional rules.
• Under Majoritarian rules, a party does not need 50% of
national vote to control legislature even when there are only
2 parties.
• Majoritarian electoral rules give strong incentive
for parties to fight for votes in particular “swing
localities” (known as “marginal seats” in UK).
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 Persson & Tabellini 1999:
electoral rules
• Modelling assumptions:
– Parties commit to policy platforms before
election.
– A platform is a choice of:
• levels of provision for general public goods,
selective goods, and rents;
• and a tax rate.
• For simplicity, assume budget must balance.
– Parties choose platforms by making trade-offs
in light of incentives provided by electoral
rules.
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 Persson & Tabellini 1999:
electoral rules
• Electoral rules:
– Majoritarian: politics = intense battle for (swing)
marginal localities. Matters where party’s support is
located.
– Proportional: all votes for a party are similarly
valuable to it.
• Predictions: Selective versus public goods
– Majoritarian rules give stronger incentives for
platforms giving selective goods to marginal localities.
– Proportional rules give stronger incentives to
provision of general public goods.
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 Persson-Tabellini 1999 and
electoral rules
• Predictions: Intensity of competition:
– Persson-Tabellini 1999: Political competition is more
intense with majoritarian rules.
• Predictions: Rents:
– Persson-Tabellini 1999: Hence, lower rents under
majoritarian than proportional rules.
• Effect accentuated if there is more individual accountability
under majoritarian rules.

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 Persson-Tabellini 1999 and
electoral rules
• Predictions: Total size of government.
– Bigger total government spending under majoritarian rules.
– Political cost of taxation, as perceived by parties, lower
under majoritarian rules as they encourage parties to
take little account of costs of taxation to voters in non-
marginal localities.
• “With majoritarian elections, we should …observe more
targeted redistribution towards the … middle class, …a
lower supply of public goods and smaller rents. ….[W]ith
distortionary taxation, … majoritarian elections should be
associated with larger governments.”
Persson & Tabellini, 1999, pp. 713-4.
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 Persson-Tabellini 1999 and
electoral rules
• Overall predictions: Relative to Proportional
electoral rules, Majoritarian rules lead to:
• bigger government spending relative to GDP;
• policies more skewed toward provision of selective goods
that benefit marginal localities, with lower rents and less
provision of general public goods.
– NB:
• Above describes theoretical predictions on electoral rules as
summarised in Persson & Tabellini, EER 1999.
• See next time for how:
– Persson & Tabellini AER 2004 (and elsewhere)
subsequently take a different view;
– extension to forms of government;
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– evidence on both issues.
Robin Cubitt