Public Choice In a Representative Democracy

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

Intergovernmental grants under federalism

Is there a justification for grants from one governmental level to another (normally top down)?

Positive externalities, example state highway (US), used by citizens from all US states.

A federal grant then is a Pigouvian subsidy, financed e.g. through lump sum taxes.

What are the effects of …

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

G

B‘

GMG

B

G0

Public Choice

Figure 4.1: The effects of matching grants

G

F

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

© Freytag 2013

Public Choice

Figure 4.2: The effects of unconditional and earmarked lump-sum grants

B

GUG F

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

Empirical evidence is contradicting the basis hypothesis as derived from Figure 4.2: Both unconditional and earmarked grants should be divided into an increase of the public good and more private consumption or savings (e.g. via tax reduction).

Flypaper effect: federal money sticks where it lands, in the local governmental budget!

Reasons:

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

c) Why may the size of government be too large and too small under federalism?

Assume a two level state with a government only striving for re-election; a very simple model where median voter theorem does not hold.

In the model, spending money increases the probability of re-election, raising taxes decreases it

Under geographic representation, two public goods are in the calculus of the government; GL and GF.

As a result of the optimisation process, the government provides GL on a more then optimal level and GF on a less than optimal one.

Figure 4.3 a) and b).

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

Figure 4.3: Effects of grants on government expenditures in a federalist system

MVL, MCL

6.Normative Public

Choice

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

II. Two-party competition - deterministic voting

With an increasing size of communities (polities), direct democracy becomes unrealistic. Thus, decisions are taken by representatives. These are assumed to behave rationally and as utility maximisers.

Put differently: “…parties formulate policies in order to win

elections, rather than win elections in order to formulate policies.” (Downs 1957, p. 28, cited after Mueller 2003, p. 230).

Three important aspects

© Freytag 2013

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

Much of what we learned with respect to direct democracy, also applies to representative democracy, e.g.

• median outcome,

• cycling,

• log-rolling.

a) Outcomes in the Hotelling-Downs-Model

The basic model is the Downs model.* However, the first to analyse political competition in a spatial model was Harold Hotelling.**

The easiest way to think of Hotelling’s model is to imagine a western city with a couple of saloons. Where will you find the saloons?

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

Figure 4.4: Median voter outcomes under two-party competition

Number of

voters

© Freytag 2013