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Democratic Governance and Economic Performance pp 3–13Cite as

Theory

What Should We Observe if Democratic Governance Weakens Economic Performance?

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Part of the book series: Studies in Public Choice ((SIPC,volume 14))

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Notes

  1. 1.

    The IDEA conference on “Building Electoral Participation” is illustrative – see http://idea.int/, accessed on 31 July 2003.

  2. 2.

    See, for example, http://www.ifes.org/civil.html, accessed on 4 December 2008.

  3. 3.

    Source H-PolMeth Discussion Network. Available at http://www.h-net.org/. Accessed 6 July 2004 (emphasis added).

  4. 4.

    Arthur Denzau and Michael Munger (1986) developed a related conclusion from a model where competition between lobbying firms creates forces that discourage complete capture.

  5. 5.

    By total surplus, we mean the sum of consumers’ benefit from purchasing a good or service at a price below their willingness to pay and producers’ benefit from selling a good or service above their willingness to supply. Graphically, in Fig. 1.1, total surplus equals the sum of the areas below the demand curve and above a given price (consumer surplus) and above the supply curve and below that price (producer surplus). Note that this measure of economic performance reaches its maximum (the size of the pie is greatest) when competition exhausts all mutually beneficial trades and thus extinguishes the “deadweight loss” triangles C and F.

  6. 6.

    Thomas Lyon (2003) developed a similar insight to evaluate how the migration of regulatory authority from the municipal- to state-level may have strengthened regulatory commitments.

  7. 7.

    See, for example, Joseph Pereira’s (2008a,b) reports on a recent Supreme Court decision(and subsequent political backlash) that minimum-pricing contracts are not per se anticompetitive.

  8. 8.

    This dependence is also evident in Gary Becker’s (1983) model of pressure group competition.

  9. 9.

    Peltzman (1976) argued that the cost of transacting in political markets limits the gains of “dominant groups.” Applied to our current framework, this limit implies that the parameter α will not rest at either of its extreme values (i.e., α ≠ 0 or 1, although Peltzman’s reference to the competitive outcome as a “benchmark” and corresponding reference to equilibrium (regulated) prices and quantities being read off of demand curves imply that he considered α = 0.5 as an effective maximum). Our objective in examining the related problem (1.1) is to facilitate a more general normative investigation of electoral accountability by making transparent the observable implications of changing α.

  10. 10.

    The constraint Q(P) = Qs(P) defines rule (Equation 1.7)’s domain as the interval α ∈ (1/2, 1).

  11. 11.

    Edward Leamer (1985) prominently called attention to this importance.

  12. 12.

    Looking forward to our formal empirical examination, if we define quantity as an option for households to connect to the telecommunications network, then marginal costs plausibly increase with quantity; e.g., the physical distance over which local exchange service producers and subscribers must connect increases with additional subscribers. In this case, the supply curve slopes upward as in our pressure group model. If, instead, quantity refers to exercised options (e.g., calling minutes), then marginal (but not average) costs may be negligible.

  13. 13.

    Finn Kydland and Edward Prescott (1977) developed a seminal model of this type of opportunism.

  14. 14.

    See, for example, Levy and Spiller (1994), Acemoglu et al. (2001), Rodrik et al. (2002), Stasavage (2002), and Falaschetti (2003b).

  15. 15.

    Sidak (2001, p. 747) argued that giving producers (corporations, in particular) a voice in policy deliberations is “significant” since “the repudiation of substantive due process, the decline of the Takings and Contract Clauses since the New Deal, and the simultaneous rise of the administrative state as a regulator of economic activity have made it increasingly difficult for individuals to defend their property against expropriation by the state.”

  16. 16.

    The literature on mechanism design in “multitasking” environments also highlights “the difficulties of contracting in a multidimensional outcome setting” (Hatfield and Miquel 2006).

  17. 17.

    Besley and Coate (2003) developed preliminary evidence to this effect.

  18. 18.

    Jerry Hausman (1997) and Hausman and J. Gregory Sidak (1999) argued for the importance of accounting for such options when regulating the price at which incumbent local exchange companies sell unbundled network elements to competitors.

  19. 19.

    The idea here is that lowering price caps does not change the variance in expected revenues(i.e., price caps do not change uncertainty about the demand curve per se, though they do change where we expect to end up on a given demand curve), but it does reduce the reward for accepting that risk, and thus discourages investment.

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Authors and Affiliations

  1. Florida State University, Tallahassee, FL, USA

    Dino Falaschetti (Associate Professor of Law and Economics)

  2. Hoover Institute, Stanford University, Stanford, CA, USA

    Dino Falaschetti (Associate Professor of Law and Economics)

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Falaschetti, D. (2009). Theory. In: Democratic Governance and Economic Performance. Studies in Public Choice, vol 14. Springer, New York, NY. https://doi.org/10.1007/978-0-387-78707-7_1

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