1. Midterm Review ECO 362 – Public Choice October 17, 2013 Dr. Watson

2. Test Format 1 page of multiple choice. Circle ALL that apply. 1 page of long-answer. Choose 8/11. ~50 words 1 more question for chuckles and giggles No math

3. Tips for doing well Ask for big picture questions A LOT of application Testimonials Slides and what’s in class Outside reading: Bates book, Acemoglu book, remember the day when we did our first group work, Additional resources on moodle for review When did DW get excited? Prayer

4. What have we covered? Market failure Voting – Median Voter and Rational Ignorance Bandit King and state formation Bates (see also moodle) Efficient corruption Specific policies – president vs parliament; term limits; 9ja constitution Selectorate theory – f; W/S; chance your vote decisive Ethnicity 1 multiple choice question on Acemoglu

5. Stuff we’ve listed or defined Bates 3 main variables that impact whether the bandit king behaves or not – Revenues (behaves) – Discount rate of the future – What you get if you predate According to Max Weber: what is a nation state? – Monopoly of violence What is ethnicity? – Language, culture, geography, race What is democracy? What are institutions? What is the selectorate/winning coalition?

6. BIG PICTURE What is public choice economics? – Favorite quote: Politics without romance – Assume that political decision makers are just as self- interested as market decision makers. Voters vote their private interest Only reason to vote is to effect policy – Low benefit, high cost to being informed  rationally ignorant Government is highly self-interested  Bandit King or Bates; Government cares more about one group than another  Selectorate

7. Median Voter Theorem Conditions – One dimension – Single peaked preferences – No strategic voting Easy to remember summary: Whatever baby bear wants, baby bear gets – The last person whose vote you need is the swing voter. You can’t get a big enough coalition without the swing voter, so their preferences are the ones that count.

8. Examples US Senate for Obamacare – 3 holdout Republican senators got big pork (lots of money to their consituency), relaxation of the rules in my state, watered it down Israel – Small parties as king-makers who get to pick which ministry they will run Other voting rules: 50.00000001%; – 60% US Senate to close debate – 100% (unanimity/consensus): the policy will be decided by the person who is least interested in it happening

9. Note that ties in to selectorate W/S – who is the last person you need to support you/the measure. That’s the key person whose vote determines the policy.

10. “Efficient” corruption Sometimes governments face constraints and bribery or corruption can get you out of those constraints; secondly, it’s a way of getting people to self-select Imagine a bureaucrat who can only approve a limited number of forms. Who does he work on? Imagine inefficient, time-consuming regulation. Bribe orders firms into most efficient and least efficient and the most efficient firms get the licnese/form.

11. Why don’t I agree? (Moral case, duh. Why else?) Bribes increase bad government – terrible regulation, encourage low capacity or the image of low capacity What do we really mean by efficient? You could be paying them money, or you could be shmoozing (making friends, come over to the house). It encourages firms to invest in unprofitable political transaction costs) – (Directly Unproductive Profits – coming up after the midterm) You can also bribe your way through good regulation

12. Grease or sand in the wheels On moodle there is more information and example of this discussion Blattman does not believe that corruption is GOOD, just that we (outsiders) can’t do anything about it and the connection to economic growth is questionable – At the end of that paper are several stories and examples of corruption doing big bad things You don’t have to agree with DW (but you should know both sides of the argument and defend yours)

13. Bandit King If there are a lot of bandits or low tenure, take everything If there is a good chance I will still be around for the future, I am more likely to behave, to take very little, and then take some next year and the year after that. BK will protect villagers from outside threats (And each other in Bates) – monopoly of violence In my version of the fable, the only decision maker is the BK; social contract

14. Bandit King In my research, I showed that even a kleptocrat would invest in public goods (somewhat) More growth means more taxes, but it also increases the risk BK loses power One of the lessons from last week: the story we tell does matter. What is BH?

15. Ethnicity Bates: ethnicity only shows up after the state fails Easterly (and Levine): the more fractured society is, the lower economic growth is – – More prone to violence – Set up institutions that are bad for growth WB: the relationship btw ethnicity and violence is not a straight line More recent concerns: what dimensions matter politically? (When does it make a difference whether you are Hausa/Fulani? Male/female? Christian/Muslim? North/South?)

16. Selectorate (Some questions were asked about the supporting information and self-quiz I put up on moodle. There’s more there than we went through. This is the part I reviewed that’s relevant.) When W and S are small we have a military dictatorship. When W is small but S is large we have an autocracy/anocracy. When W and S are large we have a democracy.

17. Selectorate 2 It costs more to secure someone’s loyalty in a military dictatorship because a challenger can credibly promise “you” will still be in the winning coalition under him, so the current leader has to pay you more to stay loyal. In an anocracy (partial democracy, like Nigeria) the chance of you being in the winning coalition is very low, so the leader doesn’t have to pay much in private transfers and doesn’t invest in public goods. This is really nice for the leader.

18. In a democracy it is too expensive to buy loyalty (lots of people and you have to pay them a lot) so you spend the money on public goods instead. Society is happiest in a real democracy because of public goods. Winners like military dictatorships more than anocracies.