Essays in political economy

Abstract

The following essays address the impact of special interest groups on economic decision making processes.

The hypothesis of the first essay is that there exists a dynamic relationship between politicians and lobby groups. Politicians may choose to support "projects" proposed to them by lobbies because they yield clear economic benefits. However, governmental support may continue after these benefits have been exhausted, implying a cost to society and yielding rents to the lobbies. A theoretical framework is developed to model the incentives a government might have to behave in a manner consistent with the hypothesis. In this structure despite the fact that they support projects from which all economic rents have been extracted, politicians are rationally reelected.

In the second chapter I examine how structural changes in the US steel industry affect the voting behavior of House Representatives on trade related bills. The hypothesis is that Representatives face opposing incentives after the PBGC bailed out the pension plans of major steel firms. Representatives have an incentive to vote less for protectionist policies, because the bailout makes the steel firms more competitive. But the Representatives also have an incentive to yield to the demands of affected steel workers, who favor more protection after the bailout. The data set underlying this study is a panel including votes on trade related bills over 9 years. The results obtained using fixed effects techniques support the hypothesis.

In the third chapter, I develop a theoretical model of the dissolution of countries. I model a society with two different groups of citizens, who have different preferences over public goods, to analyze under which political regime the dissolution of these groups into separate countries is most likely. Differentiating between revolutions and civil wars allows me to look at the effects of both forms of political violence. I find that while the threat of a revolution can induce oligarchies to increase the franchise, the threat of a civil war can induce a. country to dissolve peacefully. The model predicts that peaceful dissolution is more likely in democracies, whereas oligarchies are more likely to risk civil war to stay united.