Spring 2005
http://weber.ucsd.edu/~jlbroz/Courses/POLI200C/
Professor J. Lawrence Broz
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Professor Clark Gibson
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jlbroz@ucsd.edu
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ccgibson@ucsd.edu
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SSB 389
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SSB 397
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822-5750
Office Hours: W 12-2
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822-5140
Office Hours: |
A. Introduction
This module in the “Principles of Political Science” sequence provides an overview of the normative and positive issues associated with decentralized (market) and centralized (state) mechanisms of allocation. It is motivated by two questions at the heart of the discipline: (1) What is the appropriate role of government in the economy? (2) How do we explain the actual role of government in the economy?
Substantial portions of the readings are from economics, including some canonical papers from industrial organization and welfare economics. Topics covered include efficiency, social welfare, market failures, public goods, asymmetric information, moral hazard, adverse selection, government failures, regulation and rent-seeking, property rights, inefficient redistribution, time inconsistency, and political business cycles.
Required Books:
· Joe B. Stevens, The Economics of Collective Choice,” Westview, 1993 (paperback ISBN: 0813315670 $44)
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Robert H. Bates, Markets and States in Tropical
· Mancur Olson, The Logic of Collective Action. Revised 2nd printing, Harvard UP, 1990 (paperback ISBN: 0674537513, $20).
·
Arthur M.
Okun, Efficiency vs. Equality,
Recommended Books:
Students will:
1. Participate in course activities (40% of grade). These include:
a. Discussion of each week’s assigned readings
b. Presentation of two critical analyses of course readings during the quarter (for details, see the “Template” on the final page of this syllabus).
2. Take two exams, mid term and final (60% of grade). Each exam is a take home,
7-10 page paper. Each will be due one week after distribution.
Week 1: Markets and States as Mechanisms of
Allocation
How do we evaluate and compare alternative allocation mechanisms (i.e. systems for producing and exchanging resources)? While markets are generally effective in the efficiency with which they allocate resources to their most valued uses, markets do not always work well. Moreover, they can produce equity outcomes that will not necessarily be supported by all members of a community. This segment of the course introduces the normative and positive aspects of markets and states as allocation mechanisms. Topics include
Ø
Efficiency, Pareto-optimality, social welfare
functions
Ø
Equality (of what?), equity, fairness
· Stevens, chapters 1-2
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Okun, Arthur M. 1975. Efficiency
vs. Equality,
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Lerner, Abba P. "The Economics and Politics of Consumer
Sovereignty." American
Economic Review (May 1972):
258-66.
·
Hardin, Russell. 1993. "Efficiency,”
in Robert E. Goodin and Philip Pettit, eds., Companion to Contemporary
Political Philosophy,
·
Smith,
What are the political foundations of a
market economy? How do these preconditions differ with other forms of economic
organization (e.g., traditional/cultural allocation, socialism, and communism)? Certain preconditions are associated with
competitive markets, including the provision of property rights. In addition, markets work or fail for a
variety of reasons, having to do with information, culture, and
institutions. Topics include:
Ø
The
“state of nature” and conceptions of the “social contract” (i.e. normative
theory).
Ø
Traditional
market failures (public goods, externalities, imperfect competition transaction
costs) and the demand for government (i.e. positive theory).
Ø
Collective decisions, fairness, the State, and
coercion.
· Stevens, chapters 3-4
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Hardin, Russell. 1997. "Economic
Theories of the State,” in Dennis C. Mueller, ed., Perspectives on
Public Choice: A Handbook,
· Coase, Ronald, "The Lighthouse in Economics." Journal of Law and Economics 17, 2 (October 1974): 357-76.
· Greif, Avner. “Cultural Beliefs and the Organization of Society,” Journal of Political Economy 102, 5 (1994): 912-950.
How do markets respond to ill-defined property rights and public goods problems? This segment surveys the voluntary market responses to these problems. Topics include:
Ø
Endogenous
property rights
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Common-pool resources
Ø
Local
public goods
Readings:
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Demsetz, Harold, “Toward
a Theory of Property Rights,” American Economic Review 57, 2 (May 1967): 347-59.
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Hardin, Garrett. “The
Tragedy of the Commons.” Science 162 (1968): 124–48.
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Boserup, Ester.
“Systems of Land Use as a Determinant of Land Tenure,” in Boserup,
The Conditions for Agricultural Growth,
Aldine Publishing , 1965: 77-87.
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Ostrom, Elinor,
Governing the Commons (Cambridge
University Press, 1990), pp. 58-102 (chapters 3 and 4).
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Libecap, Gary D. 1996.
“Economic Variables and the
Development of the Law: The Case of Western Mining Rights,” in Alston, Eggertsson and North (eds)
Empirical Studies of Institutional Change,
Cambridge: Cambridge University Press: pp. 34-58.
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Tiebout, Charles M.
"A
Pure Theory of Local Expenditures." Journal of Political Economy 64
(Oct. 1956): 416-424.
How do markets respond to transaction costs and externality problems? This segment surveys the voluntary market responses to these problems. Topics include:
Ø Transaction costs and the theory of the firm
Ø Asset specificity
Ø Vertical integration
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Stevens, chapter 5
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Coase,
Ronald H. “The Nature of
the Firm,” Economica 4, 16. (Nov., 1937): pp. 386-405.
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Coase,
Ronald H. “The
Problem of Social Cost," The Journal of Law and Economics, 3
(Oct. 1960): 1-44.
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Klein, Benjamin, Robert G. Crawford, and Armen
Alchian, "Vertical
Integration, Appropriable Rents, and the Competitive Contracting Process,"
Journal of Law and Economics 21, 2 (1978): 297-326
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Klein,
Benjamin. “Fisher-General Motors
and the Nature of the Firm.” Journal of Law and Economics 43, 1 (April 2000): 105-42.
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Alchian, Armen A. and Harold Demsetz,
“Production,
Information Costs, and Economic Organization,” American Economic Review 62, 5. (Dec., 1972):777-795.
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Williamson, Oliver E.
“Credible Commitments: Using Hostages to
Support Exchange,” American Economic Review 73, 4 (September 1983): 519-40.
How do markets respond to informational problems and other sorts of uncertainty in economic exchange? This segment surveys these problems and the associated market responses.
Ø Asymmetric information (hidden actions and hidden traits)
Ø Adverse selection and moral hazard
Ø Incomplete contracts and ex-post opportunism
Ø Agency problems
Ø Hierarchies, Organization, and Institutions
· Varian, Hal A. “Asymmetric Information,” in Hal A. Varian, Intermediate Microeconomics: A Modern Approach, 5tth ed (W.W. Norton, 2002): 642-662.
· Akerlof, George A., "The Market for Lemons: Quality Uncertainty and the Market Mechanism," Quarterly Journal of Economics 84 (August 1970): 488-500.
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Hart, Oliver D. “Incomplete
Contracts and the Theory of the Firm,” in Oliver E. Williamson and Sidney
G. Winter, eds., The Nature of the Firm, pp.138-158,
New York: Oxford University Press, 1993.
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Milgrom, Paul R. and John Roberts,
"Bargaining Costs, Influence
Activities, and the Organization of Economic Activity," in James E.
Alt and Kenneth A. Shepsle (eds.), Perspectives on Positive Political
Economy (Cambridge: Cambridge University Press, 1990): 57-89.
· Milgrom, Paul, Douglass C. North and Barry R. Weingast, "The Role of Institutions in the Revival of Trade: The Medieval Law Merchant, Private Judges, and the Champagne Fairs," Economics and Politics 1 (1990): 1-23.
· Shleifer, Andrei and Robert W. Vishny, “A Survey of Corporate Governance,” Journal of Finance 52, 2. (Jun., 1997): 737-783.
What are the similarities and differences between economic and political markets? This segment surveys a range of economic arguments that have been applied to political topics, highlighting the usefulness and the limitations of the approach. We cover some of the most prominent approaches (bulleted below) as well as the distinctive features of politics that complicate, or defy, economic analogy.
Ø Incentives of politicians: what do rulers maximize?
Ø Limitations of political competition as a mechanism for achieving social goals (normative and positive aspects).
Ø Corruption and other government pathologies
· Stevens, Chapters 6-7
· Jon Elster, “The Market and the Forum: Three Varieties of Political Theory,” in Jon Elster and Aanund Hylland (eds.) Foundations of Social Choice Theory, pp.102-132, Cambridge UP, 1986.
· Weingast, Barry R and William J. Marshall, “The Industrial Organization of Congress; or, Why Legislatures, Like Firms, Are Not Organized as Markets”, Journal of Political Economy 96, 1 (Feb. 1988): 132-63.
· Moe, Terry. "The Politics of Structural Choice: Toward a Theory of Public Bureaucracy." In Organizational Theory from Chester Bernard to the Present, ed. Oliver Williamson, 116-153. Oxford: Oxford University Press, 1990.
· McCubbins, Matthew D., Roger G. Noll, and Barry R. Weingast. "Administrative Procedures as Instruments of Political Control." Journal of Law, Economics and Organization 3 (1987): 243-277.
· Niskanen, W. “Bureaucrats and Politicians,” Journal of Law and Economics, December (1975) 18: 617-43.
· Shleifer, Andrei and Robert W. Vishny. 1993. “Corruption,” Quarterly Journal of Economics, v108 (3): 599-617.
How efficient are political markets when societies are composed of actors with heterogeneous interests and asymmetric incentives to act politically? This segment covers the relationship between individual, group, and societal incentives and the consequences for political competition. Topics include:
Ø Consumers and voters
Ø Organized interests and collective action
Ø Pluralism and social welfare
Ø Social classes and models of class conflict
Readings:
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Olson, chapters 1-4, and 6.
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Przeworski, Adam and Michael Wallerstein,
“The
Structure of Class Conflict in Democratic Society,” American Political
Science Review 76 (1982): 215-236.
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Meltzer, Allan H. and Scott Richards,
“A
Rational Theory of the Size of Government” Journal of Political Economy
89, 5 (1981): 914-927.
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Ronald Rogowski, "Political
Cleavages and Changing Exposure to Trade," American Political Science Review 81, 4 (December 1987):1121-1137.
Does the structure of interests in society help or hinder the government to maintain an appropriate role in the economy? Governments may overstep their legitimate role in the economy due to an exchange between (re)election-seeking politicians and special interests, involving campaign contributions. Topics include:
Ø Endogenous regulation and rent-seeking
Ø Inefficient redistribution (or why governments fail to chose the least costly method of rewarding special interests)
· Stevens, chapter 8.
· Viscusi, Kip et al., “Introduction to Economic Regulation,” in W. Kip Viscusi, John M. Vernon, and Joseph E. Harrington, Jr. Economics of Regulation and Antitrust, 3rd ed. (Cambridge, MA: MIT Press, 2000), pp. 297-336.
· Noll, Roger G. “Economics Perspectives on the Politics of Regulation,” In R.D. Willig and R. Schmalensee, eds. Handbook of Industrial Organization, Vol. 2, North-Holland (1989): 1254-1287.
· Krueger, Anne O. “The Political Economy of Rent-Seeking,” American Economic Review 3 (1974): 291-303.
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Tullock,
Gordon,
“The Costs of Special Privilege,” in James
E. Alt and Kenneth A. Shepsle, Perspectives on Positive Political Economy
(Cambridge University Press, 1990), pp. 195-211.
· Stigler, George J. “The Theory of Economic Regulation,” The Bell Journal of Economics and Management Science 2, 1 (Spring, 1971): 3-21.
· Peltzman, Sam. “Toward a More General Theory of Regulation.” Journal of Law and Economics 19 (1976): 211-240.
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Becker, Gary,
“A
Theory of Competition among Pressure Groups for Political Influence,” Quarterly
Journal of Economics 98 (1983): 371-400.
Why is it that even a benevolent social planner would produce sub-optimal economic policies? This segment introduces the concept of credibility and incentives to adopt automatic rules and delegation schemes to conduct policy. It also relaxes the benevolent dictator assumption and considers the credibility problem in the context of real-world politicians with electoral and/or partisan ambitions. Topics include:
Ø Time inconsistent policy promises
Ø Monetary policy and central bank independence
Ø Commitment problems in trade and development
Ø Opportunistic (electoral) political business cycles
Ø
Partisan political business cycles
·
Drazen, Alan, “The
Time-Consistency Problem,” and “Laws,
Institutions, and Delegated Authority,” (chapters 4-5) in Alan Drazen, Political
Economy in Macroeconomics (Princeton, NJ: Princeton University Press,
2000), pp. 101-165.
·
Barro, Robert and David Gordon,
“Rules, Discretion and Reputation in a Model of
Monetary Policy.” Journal of Monetary Economics 12 (1983): 101-121.
· Greif, Avner, Paul Milgrom and Barry Weingast. “Coordination, Commitment and Enforcement: The Case of the Merchant Guild.” Journal of Political Economy 102, 4 (1994): 745-776.
· Nordhaus, William. “The Political Business Cycle.” Review of Economic Studies 42 (1975):169-90.
· Hibbs, Douglas. “Political Parties and Macroeconomic Policy.” American Political Science Review 71 (1977):1467-87.
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Drazen, Allan,
“The Political
Business Cycle after 25 Years,” NBER
Macroeconomics Annual (May 2000).
Week 10: Political
Failure, Part III – Predatory Government
What prevents government from overstepping its proper role and extracting resources for itself? Why is control over politicians problematic? With so much power over allocation, politicians face incentives to exploit their positions for personal enrichment, to the detriment of society. This segment covers the topic of political rent-seeking and the associated policies that hinder economic performance. Topics include:
Ø Representation and accountability
Ø Accountability for economic outcomes
Ø Checks and balances and economic performance
· Stevens, chapters 9-11
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Olson, M.
2000.
Power and Prosperity.
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Bates, Robert H. 1981. Markets and States in Tropical
Template for
Weekly Presentations
Students will introduce topics each week. This entails critically summarizing the readings and leading the subsequent discussion. The opening presentations, about 10 minutes in length, are meant to develop seminar communication skills and to encourage participation by all members.
Presentations should go directly to the heart of the analysis and succinctly state the author’s dependant variable(s), motivation or “puzzle,” argument, and findings. Avoid summarizing the details. We strongly encourage all students to prepare a PowerPoint or hard copy of their presentation. Please use the following template to help isolate the main topic and arguments:
Author
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Dependant Variable
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Independent Variables
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Name |
Outcome(s)
the author seeks to explain
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Factors crucial to the explanation.
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Example:
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Author
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Dependant Variable
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Independent Variables
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Mancur Olson, Logic of Collective Action.
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Variation
in the formation of interest groups - some individuals with common interests
form special interest groups, some don’t.
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- Number of individuals
- Proportion of benefits going to each group member - Use of “selective” (private) incentives to induce membership |
Note: If the author explains more than one outcome, use multiple listings. Feel free to disaggregate readings according to the dependant variables addressed.
· Handouts or transparencies are extremely useful. These will help highlight main points and focus attention on areas of debate for further discussion. Keep them simple! As a rule, less is more. We recommend the above template for your presentations.
· Begin your presentation by introducing the topic. The heading in the syllabus is a good clue but try to go beyond it, indicating, for example, why the topic is important. For example, why is it relevant to discuss “Markets and States as Mechanisms of Allocation”?
· Close your presentation with a set of discussion questions aimed at getting the discussion going. A visual can help here too. You might develop a set of questions on hotly debated topics. For example: Are equality and efficiency really tradeoffs, or is this a false dichotomy? What evidence do proponents and opponents bring to bear to make their case? Do you find this evidence compelling? How would you attempt to resolve the debate?