POLI 200C: States and Markets
Spring 2010, SSB 104
Course Website:
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Professor Lawrence Broz
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Professor Megumi Naoi
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jlbroz@ucsd.edu
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mnaoi@ucsd.edu
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SSB 389
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SSB 373
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Office
Hours: Tues 1:30-3:30
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Office
Hours: Tues 1-2, Wed 2-3
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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)
- Robert H. Bates, Markets and States in Tropical Africa: The Political Basis of Agricultural Policies.
University
of California Press,
1981.
- Mancur Olson, The
Logic of Collective Action. Revised 2nd printing, Harvard
UP, 1990 (paperback ISBN: 0674537513, $20).
- Arthur
M. Okun, Efficiency vs. Equality. Washington DC: The Brookings Institution, 1975.
Recommended
Books:
Students may also want to
purchase a good microeconomics textbook, targeted for either advanced
undergraduates or first-year graduate students in economics. An example of the former is Hal A. Varian, Intermediate
Microeconomics: A Modern Approach, 8th ed (W.W. Norton, 2009). An example of the latter is David M. Kreps, A
Course in Microeconomic Theory (Princeton UP, 1990).
B. Requirements
1. Weekly Memo-Reflection & critiques of readings
You will be submitting
a weekly memo on a message board (http://polisci.ucsd.edu/ps200c/) by Monday 4:00 pm.
The memo should be one paragraph to a page and contain either (i) a critique of
some of the readings, (ii) possible discussion questions for the class meeting and your (tentative) answers, or, (iii) interesting ways to compare and contrast
readings. The memo should not be a summary of readings. During the weeks you make
a presentation, you do not need to turn in the memo.
2. Presentations on Discussion Questions
Each week, there will
be presentations by students on questions that are posed on the syllabus. These
presentations should be no more than 12 minutes each, and should be presented
using PowerPoint slides or handouts. In general, weak presentations will simply
summarize the readings ("A says x, B says y"). Good presentations will:
Describe any key
conceptual issues that must be addressed by work on the question;
Describe the central
arguments/debates in the literature on the question;
Describe any
methodological issues that bear on the question;
Offer criticisms and/or
suggest pathways for future research.
3. Mid-term
and Final papers
There will be one midterm
and one final exam. The midterm will be
distributed on January 29th and due on February 5th. The final will be given out on March 4th and
due on March 17th (Monday) 4pm.
Each exam is a take-home
essay. Each paper should not be more than seven pages, 1.5 space, and 12
fonts. Late papers will be penalized one half grade
per day.
C. Grades
Final grades will be awarded on the
following basis:
1. Participation in course
activities (40% of grade). These
include:
a. Discussion of each week's assigned readings
b. Weekly Memo
c. Presentations
2. Take two exams, mid term and final (60% of
grade).
D. Reading
assignments
All readings will
be posted to the course webpage. All dates & assignments are subject to
change.
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.
Readings:
- Stevens, chapters 1-2
- Okun, Arthur M.
1975. Efficiency vs. Equality, Washington
DC: The Brookings
Institution.
- 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, Oxford:
Basil Blackwell, pp. 462-470.
Week 2: Market Failures and the
Political Foundations of Economic Systems
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.
Discussion
Questions:
What good is efficiency?
What purposes should a "social contract"
serve?
When does market failure justify government
intervention?
Can fairness be a benchmark for public policy?
Readings:
- Stevens, chapters 3-4
- Hardin, Russell. 1997. "Economic
Theories of the State," in Dennis C. Mueller,
ed., Perspectives on Public
Choice: A Handbook, New
York: Cambridge
University Press,
pp. 21-34.
- 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.
Week 3: Incentives in Market Exchange, Part I
How do markets respond to ill-defined property
rights and public goods problems? This segment
surveys the voluntary market responses to these problems.
Discussion
Questions:
What are
property rights and when do they emerge?
What are the
conditions
under which property rights can be established and enforced by private actors?
What are
common pool resource problems and how can
they be solved without government intervention?
Readings:
- Demsetz, Harold. 1967. "Toward
a Theory of Property Rights,"American Economic Review 57, 2
(May): 347-59.
- Hardin,
Garrett. 1968. "The Tragedy of the
Commons." Science 162: 124-48.
- Ostrom, Elinor. 1990. Governing the Commons. Cambridge
University Press, pp. 58-102 (chapters 3 and 4).
- 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.
- Acemoglu,
Daron, Simon Johnson, and James A. Robinson. 2001. "The Colonial Origins of
Comparative Development: An Empirical Investigation." American Economic Review 91, 5
(December):1369-1401.
- Sokoloff,
Kenneth L. and Stanley L. Engerman. 2000. "History Lessons: Institutions,
Factors Endowments, and Paths of Development in the New World." Journal of Economic Perspectives 14, 3
(Summer):217-232
- Glaeser, Edward L., Rafael La Porta, Florencio
Lopez-de-Silanes and Andrei Shleifer. 2004. "Do
Institutions Cause Growth?" Journal
of Economic Growth 9, 3 (September): 271-303.
Week 4: Incentives in Market
Exchange, Part II
How do
markets respond to transaction costs and externality problems? This segment
surveys the voluntary market responses to these problems.
Discussion
Questions:
Why do firms
exist?
When can markets
give rise to opportunism, and how can opportunistic behavior be contained?
What are the
costs and benefits of vertical integration?
Readings:
- Stevens, chapter 5
- Coase, Ronald H. "The
Nature of the Firm," Economica 4, 16. (Nov., 1937): pp.
386-405.
- Coase,
Ronald H. "The
Problem of Social Cost," The
Journal of Law and Economics, 3 (Oct. 1960): 1-44.
- Klein, Benjamin. "Fisher-General Motors and the Nature of the Firm."Journal of Law and
Economics 43, 1 (April 2000): 105-42.
- Alchian, Armen A. and
Harold Demsetz, "Production,
Information Costs, and Economic Organization," American
Economic Review 62, 5. (Dec., 1972):777-795.
- Williamson,
Oliver E. "Credible
Commitments: Using Hostages to Support Exchange," American
Economic Review 73, 4
(September 1983): 519-40.
Week 5: Incentives in Market
Exchange, Part III
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.
Discussion
Questions:
What are the
sources of uncertainty that arise in economic exchange?
How do markets
respond to informational problems in economic exchange?
Who bears and who
should bear the information costs in market exchange?
Readings:
- Varian,
Hal A. "Asymmetric
Information," in Hal A. Varian, Intermediate Microeconomics: A Modern
Approach, 5tth ed (W.W. Norton, 2002): 642-662.
- Spence, Michael. 1973. "Job Market Signaling," The Quarterly Journal of Economics Vol.
87 #3 (August): 355-374
- 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. 1997. "A Survey of Corporate
Governance." Journal of Finance 52, 2. (June):737-783.
Week 6: Incentives in Politics
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.
Discussion
Questions:
What are the
incentives of politicians and why do they matter?
Why do we
need to control bureaucrats and how do we do it?
How does the
structure of political institutions affect public policy?
Readings:
- Stevens, Chapters 7 and 9
- 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, William. "Bureaucrats and
Politicians," Journal of Law and Economics,
December (1975) 18: 617-43.
Week 7: Political Failure I-Credibility and Economic Policy
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.
Discussion
Questions:
What are possible solutions to the time
inconsistency problem in economic policy?
Under what conditions can reputation promote
optimal economic outcomes?
What are political business cycles and why
do they emerge?
Readings:
- Drazen, Allan. 2000. "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):101-165.
- Barro,
Robert and David Gordon. 1983. "Rules,
Discretion and Reputation in a Model of Monetary Policy." Journal
of Monetary Economics 12 : 101-121.
- Greif,
Avner, Paul Milgrom and Barry Weingast. 1994. "Coordination, Commitment
and Enforcement: The Case of the Merchant Guild." Journal
of Political Economy 102 (4):
745-776.
- Nordhaus, William. 1975. "The Political Business Cycle." Review of
Economic Studies 42 (1):169-90.
- Drazen, Allan. 2001. "The Political Business
Cycle after 25 Years." In NBER Macroeconomics Annual 2000, Ben S.
Bernanke and Kenneth Rogoff, editors (15):75-138.
Week 8: Structure of Interests in Society
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.
Discussion
Questions:
Is social
class the basis of democratic policy-making?
What types
of interest groups are politically influential and why?
What
determines the size of government?
Readings:
- Olson, chapters 1 and 3
- Przeworski, Adam and Michael Wallerstein, "The Structure of Class
Conflict in Democratic Society," American Political Science
Review 76 (1982): 215-236
- Meltzer, Allan H. and Scott Richards, "A Rational Theory of the Size
of Government" Journal of Political Economy 89, 5 (1981): 914-927
- Ronald Rogowski, "Political
Cleavages and Changing Exposure to Trade," American Political Science Review 81, 4
(December 1987):1121-1137.
- Hibbs,
Douglas. "Political Parties and
Macroeconomic Policy." American Political Science Review 71
(1977):1467-87.
- Iversen,
Torben, chapters 1 and 3 from Capitalism,
Democracy and Welfare. Cambridge
University Press. 2005. University Press 2005
Week 9: Political Failure II- Special Interest Politics
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.
Discussion
Questions:
What
conditions foster rent-seeking?
Does
competition between interest groups ensure efficient public goods provision?
Why do governments sometimes fail to choose the least costly method of
redistribution?
Readings
Stevens, Chapters
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 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.
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.
Discussion
Questions:
Can
political corruption be prevented?
What kinds
of societies are most prone to predation?
To what
extent does democracy check predation?
Readings:
Bates, Robert H. 1981. Markets and States in Tropical Africa: The Political Basis of Agricultural Policies.
Berkeley, CA: University of California
Press.
Shleifer, Andrei and
Robert W. Vishny. 1993. "Corruption," Quarterly Journal of Economics,
v108 (3): 599-617.
McChesney, Fred S. Chapter
2 in Money for Nothing :
Politicians, Rent Extraction, and Political Extortion. Cambridge, MA.
Harvard University
Press.