Political Economics
(Advanced
Economic Policy)
Spring 2005:
Thursday 9-12
David Dreyer Lassen, Christian Schultz
8 ECTS
The last decades have witnessed a large and rapidly growing literature on how policy in general and economic policy in particular is formed in democratic societies. The starting point is that a party in order to implement a preferred policy has to be able win votes in an election. This gives a link between the policies preferred by a majority of voters and the implemented policies. The research on political economy focuses on how this link is affected by: the existence of different interest groups, different political structures, different levels of government etc., etc.
The basic premise is that different interest groups – for instance political parties, unions, organized lobby-groups – all seek to influence the economic policy in a direction, which benefits them. The social planner is dismissed and replaced with democratic institutions and special interests.
The different agents – interest groups, unions, parties, governments etc – are supposed to be rational agents seeking to maximize utility under constraints given by the political and economic system. Economic policy is formed in a strategic interaction between these groups. At a formal level, the theory is therefore often an application of game theory. The large increase in the political economy literature mirrors the development of game theory and industrial organization in the last decades. The political economy literature much resembles the industrial economics literature (as for instance taught in the 3. year IO course or advanced industrial organization). The literature has reached a level of maturity where many of the theories have been taken to data and empirical testing is on the current agenda. The course will cover both theory as well as empirical contributions.
Among the topics covered will be: What determines the size of redistribution programmes, unemployment benefits, pensions etc? What determines the size of the public sector. Will different political systems lead to different answers? What determines the stance of fiscal and monetary policy, will it be affected by the electoral cycle? How does democracy function, when voters are ill informed about the about the working of the economic system? How does special interests and lobby groups influence on the political outcome?. How is taxation and public debt influenced by the political competition? Can we explain why countries often seem to end up with excessive public debt levels? Should important redistributive programmes be decided centrally (e.g. in Bruxelles) or locally (in the nation-states)?. How will such issues be affected by a possible increase in migration? etc., etc.
The course will also cover the necessary formal political theory to be used as a tool along with the economic theory.
The backbone of the readings for the lectures will be the graduate textbook by Persson and Tabellini: Political Economics, Explaining Economic Policy, MIT Press 2000. The book will be supplemented by a list of readings of journal-articles and working papers.
The book contains a number of exercises, solutions can be found in: Workbook to Accompany Political Economics by Isabelle Brocas, Micael Castanheira, Ronny Razin, and David Strömberg, MIT Press.
If foreign students participate, the course will be taught in English, otherwise in Danish.
No previous courses are mandatory. However, a basic knowledge of game theory (at the level of Gibbons book: A primer in game theory or the relevant chapters in Mas-Colell, Whiston and Green: Microeconomic Theory) would help as would an interest in macro-economics.
Material used when the course was taught - in a sligthly different format - in 2003
Reading list 2003, will be sequentially updated
Material from last time I offered a similar course. We
will not use all of it.