Torsten Persson

Why a Stubborn Conservative would Run a Deficit: Policy with Time-Inconsistent Preferences

A conservative government, in favor of a low level of public consumption, knows that it will be replaced by a government in favor of a larger level of public consumption. We show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future. In particular, we show that if the conservative government is more stubborn (in a particular sense) than the succeeding government, the conservative government will borrow more than it would had it remained in power in the future.

The Size and Scope of Government: Comparative Politics with Rational Politicians

We try to demonstrate how economists may engage in research on comparative politics, relating the size and composition of government spending to the political system. A Downsian model of electoral competition and forward-looking voting indicates that majoritarian—as opposed to proportional—elections increase competition between parties by focusing it into some key marginal districts. This leads to less public goods, less rents for politicians, more redistribution and larger government. A model of legislative bargaining and backward-looking voting indicates that presidential—as opposed to parliamentary—regimes increase competition between both politicians and voters. This leads to less public goods, less rents for politicians, less redistribution, and smaller government. We confront these predictions with cross-country data from around 1990, controlling for economic and social determinants of government spending. We …nd strong and robust support for the prediction that the size of government is smaller under presidential regimes, and weaker support for the prediction that majoritarian elections are associated with less public goods.

Comparative Politics and Public Finance

This paper presents a model of electoral accountability to compare the public finance outcomes under a presidential-congressional and a parliamentary system. In a presidential-congressional system, contrary to a parliamentary system, there are no endogenous incentives for legislative cohesion, but this allows for a clearer separation of powers. These features lead to clear differences in the public finance performance of the two systems. A parliamentary system has redistribution towards a majority, less underprovision of public goods, more waste and a higher burden of taxation, whereas a presidential-congressional system has redistribution towards a minority, more underprovision of public goods, but less waste and a smaller size of government.

Designing institutions for monetary stability

Abstract Lack of credibility or political feasibility are typically cited as serious obstacles to achieving monetary stability. We ask what kind of institutional reforms may help resolve such incentive problems in monetary policy, by help of the new theory of information, contracts and regulatory design. Credibility problems can be resolved by a remarkably simple performance contract that imposes a linear penalty for inflation on the central bank. Results extend when contracts cannot be conditioned on the state of the economy, in which case central bank announcements become important. When only incomplete and simple contracts can be embodied in the central banking institution, a tradeoff between incentives and information emerges; however, optimum institution design may circumvent the tradeoff between credibility and flexibility that has been stressed in the literature.

Political Economics and Macroeconomic Policy

This paper surveys the recent literature on the theory of macroeconomic policy. We study the effect of various incentive constraints on the policy making process, such as lack of credibility, political opportunism, political ideology, and divided government. The survey is organized in three parts. Part I deals with monetary policy in a simply Phillips curve model: it covers credibility issues, political business cycles, and optimal design of monetary institutions. Part II deals with fiscal policy in a dynamic general equilibrium set up: the main topics here are credibility of tax policy, and political determinants of budget deficits. Part III studies economic growth in models with endogenous fiscal policy.

Currency Unions and Trade: How Large is the Treatment Effect? ∗

The impact of a common currency on trade can be grossly mismeasured if countries that belong to currency unions are systematically different from those that do not, and if the relationship between trade and its observable determinants is complex. I argue that such complications are plausible and likely to distort the empirical results of a recent Economic Policy paper by Andrew Rose (Issue 30, 2000: pp. 7-45). Using techniques designed to be robust in this situation, I find that the effects of common currency on international trade are considerably less dramatic and much less precisely estimated. Copyright CEPR, CES, MSH, 2001.

Democratic Capital: The Nexus of Political and Economic Change

We study the joint dynamics of economic and political change. Predictions of the simple model that we formulate in the paper get considerable support in a panel of data on political regimes and GDP per capita for about 150 countries over 150 years. Democratic capital -- measured by a nations historical experience with democracy and by the incidence of democracy in its neighborhood -- reduces the exit rate from democracy and raises the exit rate from autocracy. In democracies, a higher stock of democratic capital stimulates growth in an indirect way by decreasing the probability of a successful coup. Our results suggest a virtuous circle, where the accumulation of physical and democratic capital reinforce each other, promoting economic development jointly with the consolidation of democracy.

Constitutional Rules and Fiscal Policy Outcomes

We investigate the effect of electoral rules and forms of government on fiscal policy outcomes in a large sample of democracies. We rely on different estimation methods to address prospective problems of statistical inference, due to nonrandom selection of these constitutional rules. The findings are consistent with our theoretical priors: presidential regimes induce smaller governments than parliamentary democracies, while majoritarian elections lead to smaller governments and smaller welfare programs than proportional elections.

Federal Fiscal Constitutions: Risk Sharing and Redistribution

The paper studies the political and economic determinants of regional public transfers. Specifically, it focuses on how such transfers are shaped by alternative fiscal constitutions, where a constitution is an allocation of fiscal instruments across different levels of governments plus a procedure for the collective choice of these instruments. Realistic restrictions on fiscal instruments introduce a tradeoff between risk sharing and redistribution. Different constitutions produce very different results. In particular, a federal social insurance scheme, chosen by voting, provides overinsurance, whereas an intergovernmental transfer scheme, chosen by bargaining, provides underinsurance.

Electoral rules and government spending in parliamentary democracies

We present a theoretical model of a parliamentary democracy where electoral competition inside coalition governments induces higher spending than under single party governments. Policy preferences of parties are endogenous and derived from opportunistic reelection motives. The electoral rule affects government spending, but only indirectly: proportional elections induce a more fragmented party system and a larger incidence of coalition governments than do majoritarian elections. Empirical evidence from post-war parliamentary democracies strongly supports these predictions.