Globalization: Markets, Instututions & Policy

Professor O’Halloran

Lecture 3

Basic Approach Preferences In -- Policies Out

• Issues emerge,• Interests (preferences) are formed, and• Information is transmitted to the• Institutions of government, where policy may or may not change.

Preferences(interests)

Policies(legal constraints on economic or social activity)

electoral process

governmental process

Government

Central Questions What determines whether preferences will

be voiced? What determines whether these voices will

be heard? What determines whether policy will

change in response?

ObjectiveObjective: Understand the supply and demand for political action and how it influences public policy.

Theory of Collective Action

All group behavior is the sum of individual actions.

But rational individual behavior can lead to collectively irrational outcomes.

So groups must motivate their members (provide incentives) to achieve their goals.

This is the basis of effective interest group action.

Definition of Public Goods

Excludable

Non-Excludable

Rival Non-Rival

CarsHaircutsEducation

Public ParkMacy’s Day ParadeNational DefenseTariffs, Quotas

Oil Pools below >1 countryMigratory Resources

ConcertsInformationScientific Discoveries

Public Goods

Must be non-rival and non-excludable to qualify

The Problem of Public Goods

All individuals in a group benefit from having the good supplied.

But once it is supplied, cannot prevent others from using it.

Each individual would rather have others pay the costs, and take the benefits themselves.

Many public goods are not supplied, even though their total utility exceeds their cost.

Free Rider Problem

Definition:– An individual “free rides” if they pay less than

their true marginal value derived from the public good.

Example:– Public Television– Highway Construction

The Prisoners’ Dilemma Substantive problem

Cooperation is valuable. . .. . . but it is hard to achieve.

What makes cooperation valuable?– Greater social benefits (aggregate payoffs)

when it occurs than when it doesn’t occur.

What makes cooperation hard to achieve?– The incentive to free-ride, defect, not

cooperate, not contribute. . .

Concepts: dominant strategy, equilibrium

Example: Prisoners’ Dilemma

Cooperate Defect

Coo

pera

teD

efec

tP

ris

on

er

1

Prisoner 2

(-1, -1)

(0, -10)

(-10, 0)

(-5, -5)

(1’s payoff, 2’s payoff)

Interpretation of payoffs:

0 = Temptation

-1 = Reward -5 = Punishment-10 = Sucker

Condition: T > R > P > S

The dominant strategy is for both players to defect, so individually rational behavior produces a socially suboptimal outcome.

Prisoners’ Dilemma Illustrated

Extension to n-players: 4 diners Tab Rule:

– Split the tab equally After the main course:

– Everybody is full but not stuffed; waiter offers assortment of $4 desserts.

Benefits: – For each satisfied-but-not-stuffed-diner, the benefit of a

dessert is only $2. Choice:

– Each must choose either to have dessert (Yes) or not to have dessert (No).

Questions:– (1) What are the payoffs? (2) What is the dominant strategy?

(3) What is the equilibrium? (4) Is it socially optimal?

AnswersPayoffs are b - c, where b = $2 if you get dessert, c = (4n)/4

where n is the number who order a $4 dessert.

The dominant strategy for each diner is to say “yes.”:

The equilibrium is for everyone to order dessert.This is not socially optimal.

Everyone prefers that everyone would have said “no.” Cooperation here is abstinence. As in any PD situation, it’s valuable and hard to obtain.

Benefit Cost Net Ben. Payoff as f(n Yes’s)Choice b c b-c 0 1 2 3

No 0 (4n)/4= n – n 0 -1 -2 -3

Yes 2 (4n)/4= n 2 – n 1 0 -1 -2

Ways Around the Dilemma The players themselves

– Internal moral rules, codes of conduct, norms…– Communication– Repetition

if the probability of continuation is “sufficiently high” then cooperation becomes an equilibrium

External solutions Privately agreed upon 3rd party monitoring Contract law & its enforcement by courts International organizations (e.g., GATT, WTO)

These are all extensions of -- not covered within -- the one-shot PD considered above.

Political Action as a Public Good No individual can be excluded from benefits

– For example: Passing a law Cleaner environment

Success or failure of action does not depend on any one individual– Leads to free riding

One protester more or less will not alter outcomes

Political action will be under supplied

Supply & Demand of Political Action

Benefits of Political Action– Substitutes– Magnitude of Benefits– Per capita Benefits

Costs of Political Action– Size of the group– Coverage or geographic dispersion– Resources Available– Costs of Organization

The Market for Political Action

Marginal Benefits depend on substitutes Marginal Costs are difficulty of organization Equilibrium: Costs and Benefits Equate

MarginalBenefit

MarginalCost

Equilibrium Amount of Political Action

Political Action

Cost/Benefits

Distributive Politics Spread Sheet

SupportingInterests

Demand Side Supply Side Prediction

Benefits from Supporting Ability to Generate Political Action

Interests Substitutes Magnitude Per Capita Numbers Coverage Resources Cost Amount

OpposingInterests

Demand Side Supply Side Prediction

Benefits from Supporting Ability to Generate Political Action

Interests Substitutes. Magnitude Per Capita Numbers Coverage Resources Cost Amount

Opposing Interests

Supporting Interests

Boeing in a PickleSupportingInterests

Demand Side Supply Side Prediction

Benefits from Supporting Ability to Generate Political Action

Interests Substitutes Magnitude Per Capita Numbers Coverage Resources Cost Amount

Boeing Lower price

Shareholder Sell shares Large Small Large Extensive Large Veryhigh

Little

Employees Few Large Substantial Large Little Limited Verylow

Little impact

Suppliers Otherbusiness

Large Moderate Large Extensive Moderate High Moderate

Community

Boeing Few Large Considerable Small Little Small Low Little impact

Suppliers Few Moderate Moderate Considerable Extensive Small High Limited

Oil Rigs Lower price Moderate Small Few Little Moderate Low Little

Containers Lower price Moderate Small Few Little Moderate Low Little

Lessors Other loans Moderate Small Small Little Large Low Little

Boeing in a Pickle (continued)

OpposingInterests

Demand Side Supply Side Prediction

Benefits from Supporting Ability to Generate Political Action

Interests Substitutes. Magnitude Per Capita Numbers Coverage Resources Cost Amount

Taxpayers None Large Very small Huge Complete Huge Very high Little

Tax-exempt None Substantial Substantial Large Extensive Small Low Large

Estimate total political action supplied on Estimate total political action supplied on either side of the issue.either side of the issue.

Predicted result ???Predicted result ???

Wilson/Lowi MatrixIf the proposed policy is adopted, how does the policy change the distribution of costs and benefits?

BenefitsConcentrated Dispersed

Con

cent

rate

dD

ispe

rsed

Interest grouppolitics

Entrepreneurialpolitics

Majoritarianpolitics

Client politics

Coststelecommunications

welfare (increases)

loophole closing

rivers and harbors

Is CAFE Good Policy?

CAFE costs about seven to ten times as much as a petroleum tax that would induce comparable consumption.

CAFE is an even less efficient mechanism to reduce greenhouse gases.

– To reduce CO2 emissions, a carbon tax is much more efficient than a petroleum tax, which in turn is decidedly more efficient than CAFE standards.

– CAFE standards would cost the economy at least 8.5 times as much as a carbon tax with equivalent effects on carbon emissions.

Dimensions of CAFÉ Legislation

Issue For Against Issue Type

Higher CAFE standards environmentalists US car makersForeign car makersUAW

Entrepreneurial

Percentage System US car makersUAWenvironmentalists

Foreign car makers Interest Group

Anti-Backsliding/No Outsourcing

UAWenvironmentalists

US car makersForeign car makers

Interest Group

Delay in Implementation US car makersForeign car makersUAW

environmentalists Client Politics

Coalitional fluidity in CAFÉ Proposal For Against

Higher CAFÉ Greens US Auto Cos Foreign Auto Cos UAW

Percentage CAFÉ Greens US Auto Cos UAW

Foreign Auto Cos

Anti-backslidingprovision/outsourcingrestrictions

Greens UAW

US Auto Cos Foreign Auto Cos

Status quo GM Foreign Auto Cos Elderly

Ford, Chrysler (?) UAW Greens

Strategy and OutcomesStrategy

US Auto Makers Foreign Auto Makers UAW EnvironmentalistsPropose Alternatives Fight percentage approach Free Riding on

Domestics Auto makersMobilize membership

Carbon Tax No Backsliding Waiting to see if theyshould jump in on the noout sourcing provisions

Cut deals to getsomething passed.

Old Car Buy Back Give Testimony

Grass Roots Support Grass Roots Support

Build own Coalition Foreign Car Dealers

Take out Adds

Target Key Legislators

Predictions

Winning Coalition OutcomeUS\For\UAW Status Quo

Environment\UAW Percent Approach plus no out-sourceing

US\UAW\Environmentalists Percentage approach

The CAFE Outcome, Generally The Bryan Bill died - the status quo prevailed.

– Issue took a back seat to others

– Interest group activity was intense

– Multiple institutional arenas

– New information on safety was key in defeating the Bryan bill and keeping CAFE out of the Clean Air Act Amendments

It was not a “what is good policy?” struggle. Rather, competing interests well-informed about, and strategically wise within, the institutions.

The issue periodically resurfaces (9/10/96 WSJ)

Specifics on the CAFE Outcome Bryan bill passed by the committee on a 14 to 4 vote

Floor vote scheduled for September; (Iraq invades Kuwait in August)

Filibuster fails on a 68-28 Cloture vote.

Auto companies and their coalition partners swing into high gear.

President Bush emphasizes the safety, choice, and pollution issues. A DoT Report quantifies deaths due to downsizing.

Floor opposition again filibusters bringing the bill to a vote.

Floor supporters of the bill file a petition for cloture.

– Filibuster sustained as the vote for Cloture is only 57 to 42. (60 needed)

Who switched in the successive cloture votes?

– 8 Republicans

– 3 Democrats: Sasser (Tennessee), Nunn (Georgia), Glenn (Ohio) (All three had Japanese auto auto plants or suppliers in their states)