Alesina et al. (1997) Flashcards
Theory memorisation.
What is the main assumption regarding politicians Alesina et al. (1997) makes?
Alesina et al. (1997) assumes politicians are opportunistic and only care about gaining office in order to extract rents.
What is the broad topic Alesina et al. (1997) covers?
Alesina et al. (1997) covers the topic of political budget cycles.
Briefly describe the behaviour of politicians in Alesina et al. (1997).
As voters are assumed myopic, opportunistic politicians take advantage of an exploitable Phillip’s curve relation between unemployment and inflation.
Voters are assumed to be myopic. Is this the Traditional or Rational model? State what myopic means and how this is important to politician behaviour.
Myopic voters are associated with the Traditional model and easily forget the past. This means that the same tactics can be repeatedly enforced by politicians to the same effect.
Also, voters do not understand how the economy works; in particular, they don’t understand the link between inflation and unemployment via the Phillip’s curve.
This means that, near elections, a politician can engage in expansionary fiscal policy to lower unemployment and gain favour with the adverse effects of rising inflation going unnoticed. Post-election, this process is reversed to reduce unemployment and inflation back to the natural rate.
What concept does the Rational Opportunistic Model rely on?
The Rational model of opportunistic politicians relies on the concept of politician competence (Theta).
Define politician competence as per Robert Lucas’ Rational Opportunistic Model.
Competence is defined by the ability to reduce waste in the budget process, promote growth by minimising inflation, insulating the economy from shocks, and efficiently providing public goods to constituencies.
Briefly note the key differences between the Traditional and Rational models of opportunistic politicians.
Traditional:
Myopic voters, larger and longer-term political cycles.
Rational:
Rational voters, shorter and small political budget cycles.
Politicians make use of a Hidden Effort to maximise their chance of re-election. Describe how this is put into effect in the Rational model.
The Hidden Effort relates to how, in the rational model, politicians must be careful about how they influence the voter base via expansionary policy. If they do so too soon and too blatantly, the voters will realise this and take it into account. This means the public’s perception of politician competence will not change.
As such; politicians engage in expansionary policy much closer to election dates and in a smaller magnitude.
Rather than meddle with macroeconomic indicators such as unemployment, Rogoff (1990) makes note of an alternative Hidden Effort. Describe the alternative.
Rogoff (1990) posits that shifting the composition of government spending is a more effective hidden effort than messing with unemployment in the short run.
Macro variables are easy to observe, yet shifting the budget more towards constituencies that are not ‘safe bets’ will more reliably improve chances of reelection.
