Topic 5: Political Economy

Question 1

Direct democracy

Answer 1

Voters directly cast ballots in favour or opposition to particular public projects (two forms: referendum or voter initiative)

Question 2

Indirect democracy

Answer 2

Voters elect representatives, who in turn make decisions on public projects

Question 3

Majority voting

Answer 3

Individual policy options are put to vote and the option that receives the majority of votes is chosen (pairwise comparisons)

Question 4

Requirements for consistent aggregation of social preferences

Answer 4

1. Dominance
2. Transitivity
3. Independence of Irrelevant Alternatives (IIA)

Question 5

Cycling

Answer 5

when majority voting does not deliver a consistent aggregation of individual preferences (individual transitivity does not translate to social transitivity) - preferences are double peaked

Question 6

Condorcet paradox

Answer 6

generation of social intransitivity from individual transitivity (a.k.a cycling)

Question 7

Condorcet winner (or voting equilibrium)

Answer 7

option that defeats all the other in pairwise majority voting, no matter the order of the agenda (i.e. outcome that wins in majority voting against any other alternative)

Question 8

Arrow’s impossibility theorem

Answer 8

There is no social decision rule that converts individual preferences into consistent aggregate decision without either
1. restricting preferences
or
2. imposing a dictatorship

Question 9

Common solutions to Arrow’s impossibility theorem

Answer 9

1. Restrict preferences to single peaked preferences (median voter theorem)
2. Let intensity of preferences play a role (SWF and Samuelson rule for efficiency)

Question 10

Single peaked preferences (in context of funding)

Answer 10

Preferences for the funding increase and then decrease (always increasing, or always decreasing also fine)

Question 11

Median voter

Answer 11

Voter whose peak is at the median (half have lower peaks, half have higher peaks)

Question 12

Median Voter Theorem

Answer 12

Peak of median voter is a voting equilibrium

Question 13

Median voter and efficiency

Answer 13

Median outcome is not efficient unless Median = Average (what matters for efficiency is the average marginal benefit across individuals not the median marginal benefit)

Question 14

Assumptions of the Median Voter Model

Answer 14

1. Single-dimensional voting
2. Only two candidates
3. No selective voting (everyone votes)
4. No money
5. Full information
6. Politicians have no ideology

Question 15

Single-dimensional voting

Answer 15

The median voter model assumes that voters are basing their votes on a single issue (theorem breaks down with multiple dimensions)

Question 16

Why does median voter model break down with more than two candidates?

Answer 16

There is no stable equilibrium in the model with three or more candidates because there is always an incentive to move in response to your opponents’ positions

Question 17

Why does median voter model break down with money?

Answer 17

If taking an extreme position on a given topic maximises fundraising, even if it does not directly maximize votes on the topic, it may serve the long-run interests of overall vote maximisation by allowing the candidate to advertise more strongly.

Question 18

Median voter model assumes perfect knowledge on which three dimensions:

Answer 18

1. Voter knowledge of the issues
2. Politician knowledge of the issues
3. Politician knowledge of voter preferences

Question 19

Borda voting

Answer 19

1. With n options each voter’s first choice gets n points, the second choice gets n-1 points, and so forth; the worst choice gets 1 point
2. Then the scores are added up, and option with the highest score wins.

Question 20

What requirements of Arrows theorem does Borda voting violate?

Answer 20

Independence or irrelevant alternatives (IIA)

Question 21

Plurality voting

Answer 21

1. Only the first choice of each voter matters and it is given one point
2. Scores are added and the option with the highest score is the plurality winner

Question 22

Problem with plurality voting

Answer 22

Less incentive to reveal preferences

Question 23

Approval voting

Answer 23

Each voter may vote for (approve) as many options as they like (voting for one option does not exclude approving any other options)

Question 24

Problem with approval voting

Answer 24

May fail to pick the Condorcet winner when one exists

Question 25

Run-off voting

Answer 25

Only first place votes are counted and, if there is no majority, there is a second run-off election involving only the two strongest candidates

Question 26

Problem with run-off voting

Answer 26

1. May fail to select a Condorcet winner when one exists
2. Violates fundamental principle of democracy: positive responsiveness (changing votes in favour of winning party may lead to a change in social ordering!)

Question 27

Lobbying

Answer 27

The expanding of resources by certain individuals or groups in an attempt to influence a political process

Question 28

Lobbying and efficiencies

Answer 28

1. Lobbying could correct inefficiencies due to median voter theorem: those who really value public bridge pay politicians, who can then provide transfers to those who don’t want good as much and get it built
2. Lobbying can also lead to inefficiencies if public does not have perfect information and, hence, does not care to pay attention