Session 7: Political Economic Theory

We study voting advice markets where proxy advising firms (PAs) compete to offer voting recommendations to institutional investors. Investors have heterogeneous goals: they differ in the weights they place on financial returns versus nonfinancial (“social”) returns, such as reductions in carbon emissions. We assume that investors vote for expressive reasons and may also differ in how much they care about voting correctly. PAs compete by first choosing an advising policy (how much relative weight they will place on the social return of the proposals), and then engaging in discriminatory price competition. In equilibrium, advising firms segment the market and tailor their advice to reflect the preference of their average investor. We show how the PAs’ profit- maximizing goals can skew voting outcomes away from what the outcomes would be if investors had access to free information. In particular, we define conditions such that PAs skew their advice and the voting outcome in favor of a minority of investors who have a strong preference for nonfinancial returns. We also study how increasing PA competition affects equilibrium outcomes.

This paper shows the substantial impact of a voting rule on which characteristics of an alternative voters learn about. Before casting their vote, voters can learn about an objective quality of the alternative or about their idiosyncratic match value. How voters allocate their learning attention across characteristics is shown to be nonmonotonic in the voting rule: the more demanding the majority rule, the less voters learn about the objective quality and the more they focus on their idiosyncratic match values. Similarly, the more lenient the minority rule, the less voters learn about the objective quality. The voting rule therefore can have dramatic consequences for the probability of implementing a low-quality alternative or rejecting a high-quality one.

This paper examines the consequences of public sector entities increasingly sharing sensitive personal data with external organizations to enhance service quality. It investigates the privacy concerns voiced by both advocates and the public regarding this trend, focusing on its potential adverse effects, particularly on vulnerable individuals. Through formal analysis, the study confirms these concerns, even in cases where public institutions act in the public’s best interest and individuals fully trust them. The research develops models to explore various scenarios of data sharing and evaluates the impact of privacy laws and individual data ownership. It finds that privacy laws are crucial for protecting vulnerable individuals, while measures related to individual data ownership have limited effectiveness. Additionally, without robust privacy laws, vulnerable individuals may opt out of public services, even if they trust the providers, leading to adverse equilibria driven by mis-coordination.

We analyze a game-theoretic model of crime and crime reporting to study the quality of crime statistics. A citizen potentially engages in illicit behavior; an enforcement agency chooses effort and how to report outcomes. Because of signaling concerns, the agency may misreport. We show that multiple equilibria can exist and characterize when crime is under- or over-reported. Increasing the agency’s costs of data manipulation can backfire, increasing misreporting in crime statistics. When calculating treatment effects of parameter changes, the effect on reported statistics will not equal the effect on true statistics, and the true effect can be under- or overestimated.

Liquid democracy is a system that combines aspects of direct democracy and representative democracy by allowing voters to either vote directly themselves, or delegate their votes to others. In this paper we study the information aggregation properties of liquid democracy in a setting with heterogeneously informed truth-seeking voters—who want the election outcome to match an underlying state of the world—and partisan voters. We establish that liquid democracy admits equilibria which improve welfare and information aggregation over direct and representative democracy when voters’ preferences and information precisions are publicly or privately known. When precisions are commonly known, we provide sufficient conditions for this improvement being strict and characterize optimal delegation for important classes of committees. Liquid democracy also admits equilibria which do worse than the other two systems. We discuss features of efficient and inefficient equilibria and provide conditions under which voters can more easily coordinate on the efficient equilibria in liquid democracy than the other two systems.

This paper explores how an opposition party strategically times evidence-backed accusations against a political candidate, knowing that their accusation will trigger a formal investigation which the candidate may obstruct. Obstruction is costly but slows down the arrival rate of incriminating information. The candidate’s probability of election is decreasing in voters’ belief that the candidate is guilty, and if the investigation uncovers evidence of wrongdoing, he may face legal penalties. We characterize how the optimal obstruction strategy changes over the course of an investigation and determine when the opposition releases evidence to trigger an investigation. When the election is close and evidence is credible or the opposition is the clear front-runner, they wait until right before the election to release evidence—an October Surprise—leaving the investigation no time to search for additional evidence before voting occurs. In contrast, when the election is close and evidence is weak or the candidate is the clear front-runner, the opposition releases evidence immediately to allow time for a full investigation. Obstruction interacts with this timing decision by making investigations less informative and inducing more October Surprises, which reduce voter information and welfare.

We present a theory of endogenous policy preferences and electoral competition with boundedly rational voters who find it costly to process detailed information. Voters are otherwise fully rational, and they strategically choose how much memory to devote to processing political information. We find that even if all voters start with a common prior such that they all prefer a moderate policy over extreme alternatives to the left or the right, and even if voters observe only common signals that in the limit would assure a perfectly rational agent that the moderate policy is indeed best for everyone, a majority of voters eventually become extreme and the electorate becomes polarized: some voters support the left policy, and some support the right policy. Two fully rational parties respond by proposing extreme platforms, and thereafter, the policy outcome in every period is extreme.

Electoral fraud happens frequently. An emerging literature focuses on election monitors to counter it. We propose an unexplored complementary approach: institutional design. We build on Rundlett and Svolik’s (2016) insight that fraud requires coordination among agents who participate only when they are optimistic about the incumbent’s chances. We identify an electoral design that eliminates election fraud and simultaneously preserves the majoritarian outcome, so that the incumbent wins exactly when a majority supports her. In this design, the electorate is divided into near-identical districts; the incumbent wins the election if she wins a super-majority of districts; and she wins a district if she receives the majority of the district’s votes. Requiring the incumbent to win a super-majority of districts amplifies her agents’ coordination problem by inducing mutual fear that others will abandon the incumbent. We highlight multiple directions for future research on fraud-proof institutional design.

Persuading political adversaries is hard. Policymakers distrust interest groups with divergent agendas, and yet organized interests can sometimes persuade distrustful policymakers despite the lack of technologies for verifiable signaling. How? In this article, we propose that talking as a group can allow for credible cheap talk where uncoordinate communication by individuals would fail. Prior work treat lobbying organizations as unitary actors with unlimited discretion and credible in-formation transmission is possible between approximate allies. We adopt the view that lobbying organization is a mechanism that aggregates the expressed views of its members. Through carefully selecting internal rules of decision and if it is of sufficient size, lobbying organizations can credibly persuade policymakers even when disagreement is large.

An agenda-setter repeatedly proposes a spatial policy to voters until some proposal is accepted. Voters have distinct but correlated preferences and receive private signals about the common state. I investigate whether the agenda- setter retains the power to screen voters as players become perfectly patient and private signals become perfectly precise. I show that the extent of this power depends on the relative precision of private signals and the conflict of preferences among voters, highlighting the crucial role of committee setting and single-peaked preferences. When the private signals have equal precision, the agenda-setter can achieve the full-information benchmark. When one voter receives an asymptotically more precise signal, the agenda-setter’s power to screen depends on preference diversity. These results imply that the lack of commitment to a single proposal can benefit the agenda-setter. Surprisingly, an increase in the voting threshold can allow the agenda-setter to extract more surplus.

We build a model of policymaking under the threat of unrest. A policymaker chooses how much effort to spend on a public good; effort is unobservable and the outcome conditional on effort is uncertain. A group of citizens protest if the outcome falls short of a reference point; the reference point is determined endogenously by rational expectations about the outcome and by the height of emotions. We show that the effects of stronger emotional reactions on policymaker’s effort and the probability of protest are nonmonotonic and depend on the group’s ability to inflict damage. Equilibrium may require the policymaker to randomize between providing some effort or no effort at all, in order to temper citizens’ aspirations, in which case strong emotional reactions are counterproductive. Optimal emotional reactions are fine-tuned to minimize the probability of protest.