David P. Baron

Bargaining in Legislatures.

Bargaining in legislatures is conducted according to formal rules specifying who may make proposals and how they will be decided. Legislative outcomes depend on those rules and on the structure of the legislature. Although the social choice literature provides theories about voting equilibria, it does not endogenize the formation of the agenda on which the voting is based and rarely takes into account the institutional structure found in legislatures. In our theory members of the legislature act noncooperatively in choosing strategies to serve their own districts, explicitly taking into account the strategies members adopt in response to the sequential nature of proposal making and voting. The model permits the characterization of a legislative equilibrium reflecting the structure of the legislature and also allows consideration of the choice of elements of that structure in a context in which the standard, institution-free model of social choice theory yields no equilibrium.

ELECTORAL COMPETITION WITH INFORMED AND UNINFORMED VOTERS

I present a model of electoral competition in which candidates raise campaign contributions by choosing policies that benefit interest groups and then expend those contributions to influence voters who are uninformed about the policies. Informed voters, however, vote based on those policies, so candidates face a trade-off between choosing a policy to generate funds to attract the uninformed vote and choosing a policy to attract the informed vote. Electoral equilibria are characterized for two categories of policies: particularistic and collective. In the case of particularistic policies, the equilibrium policies of the candidates are separated if the proportion of uninformed voters is sufficiently high, and the degree of separation is an increasing function of that proportion. The model is extended to include the public financing of elections and incumbency advantages. For the case of collective policies, the candidates locate at the median of the ideal points of the informed voters, and contributions are zero.

Regulation and information in a continuing relationship

Abstract Regulation typically involves a continuing relationship between a regulator and a firm, and that relationship is often complicated by asymmetric information. A multiperiod model of this relationship is analyzed in which a regulated firm has private information about its costs which may changed over time in a manner observable only to the firm. The regulator is assumed to be able to commit to a policy for the entire regulatory horizon, and the optimal pricing policy is shown to depend on an informativeness measure that indicates how information by the firm in one period will be used in future periods.

Persistent Media Bias

The news media plays an essential role in society, but surveys indicate that the media is widely viewed as biased. This paper presents a theory of media bias that originates with private information obtained by journalists through their investigations and persists despite profit-maximizing news organizations and rivalry from other news organizations. Bias has two effects on the demand for news. First, rational citizens are more skeptical of potentially biased news and thus rely less on it in their individual decision-making. Second, bias makes certain stories more likely than others. This paper presents a supply-side theory in which bias originates with journalists who have a preference for influence and are willing to sacrifice wages to exercise it. News organizations can control the bias by restricting the discretion allowed to journalists, but granting discretion and tolerating bias can increase profits. Citizens have a demand for news they can use in their everyday lives, but their skepticism reduces demand and leads the news organization to set a lower price for its publication the greater is the bias it tolerates. Lower quality news thus commands a lower price. Bias is not driven from the market by competition from a rival news organization nor a news organization with an opposing bias. Moreover, bias can be greater with competition than with a monopoly news organization. If citizens collectively choose regulation in place of their individual decision-making, bias increases the stringency of regulation.

Design of regulatory mechanisms and institutions

Publisher Summary This chapter focuses on the design of regulatory policies that take into account the opportunities for strategic behavior provided by incomplete information and limited observability on the part of the regulator. The design of regulatory mechanisms is straightforward, albeit complex, in such a case where the regulator or mechanism designer has the same information as the regulated firm, observes the actions taken by the firm and has the authority to exercise control. The chapter presents the design of regulatory mechanisms and institutions in settings in which the regulator has incomplete information and limited ability to observe the actions of the firms under its jurisdiction. Incomplete information and limited observability create opportunities for strategic behavior on the part of both the regulator and the regulated. The mechanisms considered are reflections of that strategic behavior and are characterized as equilibria of a game whose structure corresponds to the authority granted to the regulator. Regulatory policies are, thus, viewed as endogenous responses to informational asymmetries and limited observability rather than as exogenously specified mechanisms descriptive of actual regulatory arrangements. Although the mechanisms are weak in their descriptive power, they reflect the incentives present in regulatory relationships and take into account the way the parties involved respond to those incentives.

Corporate Social Responsibility and Social Entrepreneurship

Milton Friedman argued that the social responsibility of firms is to maximize profits. This paper examines this argument for the economic environment envisioned by Friedman in which citizens can personally give to social causes and can invest in profit-maximizing firms and firms that give a portion of their profits to social causes. Citizens obtain social satisfaction from corporate social giving, but corporate giving may not be a perfect substitute for personal giving. The paper presents a theory of corporate social responsibility (CSR) and shows that CSR is costly when it is an imperfect substitute. When investors anticipate the CSR, shareholders do not bear its cost. Instead, the entrepreneurs who form the CSR firms bear the cost. Shareholders bear the cost of CSR only when it is a surprise, and it is to such surprises that Friedman objects. A social entrepreneur is willing to form a CSR firm at a financial loss because either doing so expands the opportunity sets of citizens in consumption-social giving space or there is an entrepreneurial warm glow from forming the firm. Firms can also undertake strategic CSR activities that increase profits, and a social entrepreneur carries strategic CSR beyond profit maximization and market value maximization. The paper also examines the implications of taxes and the effect of the market for control for the sustainability of CSR.

A Spatial Bargaining Theory of Government Formation in Parliamentary Systems

A theory of government formation in parliamentary systems is developed from a model incorporating policy-oriented parties with spatial preferences and a formation process in which parties are selected in sequence to attempt to form a government. A government is formed when the policy proposed by the party selected is sustained on a vote of confidence. The equilibria identify the government and the policy it will implement and depend on the configuration of preferences and on the government formation process. For example, in a political system with two large parties and one small party and in which one of the two large parties will be selected to attempt to form a government, the government will be formed by a large party with the support of the small party. The policy will reflect the preferences of the small party but will be closer to the ideal point of the large party.

Majoritarian Incentives, Pork Barrel Programs, and Procedural Control

Inherent in majority rule institutions is the incentive to particularize benefits and to collectivize costs, and this majoritarian incentive can lead to the adoption of economically inefficient distributive programs. These inefficient, or pork barrel, programs are often said to occur under a norm of universalism in which benefits are distributed among all legislative districts. The distribution of particularistic benefits is studied in the context of a legislative model that reflects the sequential nature of proposal making and voting. The set of distributive programs that a legislature will adopt in a perfect Nash equilibrium is characterized, and although inefficient programs will be adopted, the distribution of benefits is majoritarian and not universalistic. The set of programs that will be adopted depends on the amendment procedure used by the legislature, and the set corresponding to a closed rule that prohibits amendments includes very inefficient programs. Through the use of procedures, however, the legislature is able to control the extent of the inefficiency. For example, allowing amendments under an open rule limits, but does not eliminate, the inefficiency of the programs that would be adopted by the legislature. From an ex ante perspective, the legislature prefers an open rule to a closed rule for those policy jurisdictions in which inefficient programs can be expected to be proposed.

Elections, Governments, and Parliaments in Proportional Representation Systems

This paper presents a theory of parliamentary systems with a proportional representation electoral system, a formateur selected based on party representation in parliament, and parties that cannot commit to the policies they will implement once in government. Government formation involves efficient proto-coalition bargaining, and elections yield unique strong Nash equilibrium outcomes. Depending on the status quo, minimal-majority, surplus, or consensus governments can form. If parties and voters are myopic and the status quo is subject to shocks, consensus governments and centrist policies occur only in a crisis. Otherwise, governments are minimal winning, and policies reflect only the preferences of the government parties.

Government Formation and Endogenous Parties.

I provide a formal theory of government for a political system characterized by a proportional representation electoral system, a parliamentary government that exercises collective responsibility, and a government formation process. Political parties are assumed to be policy-oriented and to serve the interests of those who vote for them. Parties choose policy platforms that determine their representation in parliament; and given that representation, the parties bargain over the government to be formed and the policies that government will implement. The model yields equilibria with the property that parties choose dispersed policy positions. Thus, electoral incentives in proportional representation parliamentary systems need not lead to policy convergence. The theory provides predictions of party locations such as those developed in the manifesto project.