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)