Objectives of the Course: Political Economy PDF

Objectives of the Course Analyze the intersection of politics and economics in contemporary society The study of how economic theory and political processes influence each other Without doing macroeconomics Explore case studies, starting with France’s current political and institutiona...

Objectives of the Course Analyze the intersection of politics and economics in contemporary society The study of how economic theory and political processes influence each other Without doing macroeconomics Explore case studies, starting with France’s current political and institutional challenges Why study political economy?: To understand how political and economic systems shape society and impact individuals' lives Based on microeconomics methodology to explain « public »/ « collective » decision making Moving from individuals to the whole society From individual satisfaction (utility, profit) to « common good »/ « social welfare » 1 Key Themes: Power, state structures, economic policies, social welfare, and institutional dynamics [email protected]  Introduction to Political Economy Politics as the organization of the city (classical tradition) Definition: In classical thought, politics refers to the set of activities and institutions that organize collective life within the city. It involves governance and the regulation of public affairs to ensure the common good. Reference: Aristotle, in Politics, defines humans as "political animals" and views politics as a way of living together, where ethics and justice are central. Politics as the Management of Public Goods Definition: politics involves the management of collective resources and decision-making to optimize collective welfare. It entails public choices and trade-offs between individual and collective interests. Reference: In public choice theory, James Buchanan and Gordon Tullock view politics as a market where actors (citizens, elected officials, bureaucrats) negotiate to obtain public goods. 2 [email protected]  Introduction to Political Economy What is Economics? Economics, like other sciences, concerns causes and effects o Finding causes and effects requires using mathematical theories and empirical proofs to establish consistent causality relation between phenomenon. Choice theory: “people maximize and markets clear” Individuals are rational The outcome of the maximizing process is the equilibrium o Economics provides a useful normative standard: Efficiency criteria to measure the outcome. Economics provide both analytical and empirical methods to study political institutions: Collective decision-making process driven by interests 3 Measuring outcomes of the collective decision: public policies efficiency, institutions efficiency… [email protected]  Introduction to Political Economy The origins of political economy traced back Adam Smith: the division of labor and free markets in The Wealth of Nations. 1776 It expanded to include critiques, such as Karl Marx's analysis of capitalism ( Le Capital. Critique de l'économie politique, 1867 1er volume) Keynesian economics, which focus on government intervention in markets (La Fin du laisser-faire" (1926); "La Théorie générale de l'emploi, de l'intérêt et de la monnaie" (1936)) Today: bridges economics, political science, and sociology to address complex societal (collective) issues. Political economy is concerned with questions such as: How do institutions like governments and legal systems shape economic outcomes? How does political power influence resource allocation? What roles do policies play in promoting growth, equity, or sustainability? Political institutions are kind of constraint of the decision making Political institutions represent constraints on individual decision-making, and conversely, economic 4 behaviours also impose constraints on the political decision-making process. [email protected]  Case Study – France’s Political Crisis Background: France’s current crisis reflects the intersection of institutional limits, economic challenges, and political dynamics Social and Economic Conditions Fueling the Crisis: the french debt (France's public debt stands at approximately 111% of its GDP in january 2025); and the pension reform The Use of Article 49.3: Executive bypass of parliamentary debate on critical reforms (e.g., pension reform) Lacking an absolute majority in the National Assembly, the government has the option of "forcing through" legislation by invoking Article 49.3 of the Constitution, which allows a law to be adopted directly. Paragraph 3 of Article 49 permits the Prime Minister, "after deliberation in the Council of Ministers," to "make the government's responsibility before the National Assembly conditional" on the passage of certain bills. When the Prime Minister uses this procedure, members of Parliament have 24 hours to file a no-confidence motion. If the motion is supported by a majority of MPs, the bill is rejected, and 5 the government is overthrown [email protected] Case Study – France’s Political Crisis 6 [email protected]  Case Study – France’s Political Crisis What kind of political economy issues stems from 49.3? Constitution design: it illustrates political power issues: Executive/Legislative Articles in the Constitution are not « decided » at random There is also rationality behind. Democratic representativeness of the National Assembly Strained relationship between the state and citizens, eroding trust in political institutions Risk of “no political decision”: What roles do institutions play in stabilizing or destabilizing political economies? And promote economic development & performance 7 [email protected]  Institutions matter Institutions refer to the set of formal rules (laws, regulations) and informal rules (social norms, customs) that structure economic, social, and political interactions. They frame behaviors, reduce uncertainties, and influence the incentives of individuals and organizations. The “highest” political institution: The Constitution France’s institutional crisis open again the debate over a new Constitution The origin of Constitution: the origin of the state The state is a specific form of organization that exercises legitimate political authority over a given territory. It has normative power, meaning it creates institutions (laws, regulations) that structure interactions within society. need for organization in the face of common challenges: resource management, collective defense, or conflict resolution. 8 Tribal communities have a Constitution [email protected]  Formal institution: The Constitution Playing the game of state of nature-Social contract In a No-State world (“state of nature”): there are only resources: people, land, equipment to exploit lands, weapons and no government intervention. Each individual or family will devote resources to both production and defense of their property. Cooperate Defect Cooperate (3,3) (0,5) Defect (5,0) (1,1) 9 [email protected]  Informal institution: Convention Playing the game of driving on the left or on the right? Picture two cars approaching each other on a narrow street. Let us call the drivers Julie and Théo. When they meet, each can steer either left or right. Cooperate Defect Cooperate (0,0) (-2,-2) Defect (-2,-2) (0,0) 10 [email protected]  KEY CONCEPTS Allocation refers to how resources (like land, labor, and capital) are used to produce goods and services. In an economy, resources are limited, so societies must decide: What to produce, How to produce it, And for whom to produce it. Allocation can happen through markets (supply and demand) or through government planning. Distribution focuses on how the goods and services produced in the economy are divided among individuals or groups. This includes income (wages, rents, profits) and wealth. It asks: Who gets what share of the economic "pie"?For example, a worker receives wages, a landlord earns rent, and a company owner gains profit. The result depends on factors like education, skills, and access to resources. 11 [email protected]  KEY CONCEPTS Redistribution occurs when governments or institutions intervene to adjust the distribution of income or wealth in society. This can happen through: o Taxes, where higher earners pay more, o Social benefits, such as unemployment insurance or subsidies for low-income households. The goal of redistribution is often to reduce inequality and provide everyone with basic opportunities or safety nets. Imagine a bakery: Allocation: Deciding how much flour to use for bread versus cakes. Distribution: How the profits are shared among the baker, the workers, and the suppliers. Redistribution: If the government taxes the bakery's profits and uses the money to 12 fund free school meals for low-income families. [email protected]  From individual welfare to social choice Studying collective action means: Evaluating collective outcomes: the result of collective choice For instance: For example, does a tax policy effectively reduce inequality without harming economic efficiency Evaluating collective processes: how we move from individual well being to collective decision Are the mechanisms of collective decision-making efficient? For instance: vote mechanism The concept of efficiency lies at the heart of economic assessment the study of collective choices is about more than just policies or processes—it is about understanding how institutions can foster cooperation, resolve conflicts, and create a sustainable framework for collective welfare. We need to evaluate and aggregate individual preferences, utility, satisfaction 1 [email protected]  From individual welfare to social choice Collective action refers to any coordinated and joint action undertaken by a group of individuals or entities to achieve a common goal, often in contexts where cooperation is necessary to overcome challenges related to public goods, externalities, or divergent interests. This concept is based on several key elements: Common Objective: Participants share a common interest or goal (e.g., reducing pollution, defending social rights). Coordination: Success depends on the group’s ability to coordinate their efforts and go beyond individual interests. Incentive Challenges: Collective action is often hindered by opportunistic behaviors, such as the free-rider problem, where some benefit from others’ efforts without contributing themselves. Institutions and Governance Mechanisms: In many cases, successful collective action requires formal (rules, norms) or informal institutions to structure behavior and align incentive 2 [email protected]  From individual welfare to social choice The Guard Game: A Coordination Problem for Survival Context: A prehistoric community is regularly attacked by predators. Each night, at least one person must stand guard to protect the group. Standing guard is costly for the individual (in terms of fatigue, lost time for hunting or resting). If no one stands guard, the whole group suffers significant costs in terms of safety and losses. If at least one player stands guard, the community is protected, but the one who stands guard incurs a personal cost. If no one stands guard, the community suffers an attack, and everyone incurs a significant loss. G NGP G (-2 ,-2) (-2,+5) NGP (+5,-2) (-10,-10) 3 [email protected]  From individual welfare to social choice The Guard Game: A Coordination problem for survival Outcome without coordination: If both players act individually and rationally, the result is (N,N), where no one stands guard, and the group suffers an attack (−10,−10). The coordinated solution: If players cooperate or if a rule enforces coordination, the optimal outcome is for one player to stand guard. For example: (G,N) or (N,G), where one player incurs the cost −2, while the other benefits from protection. The Role of the State: This game demonstrates that without coordination, players often end up with a suboptimal equilibrium.. The state plays a crucial role by imposing institutions (rules) to distribute efforts and resolve such coordination dilemmas. For example: A rule might mandate that every community member stands guard in rotation, reducing individual costs while ensuring collective security. In return, individuals give up some of their personal freedom (the choice not to stand guard) to ensure a collective benefit (safety). This model illustrates why individuals, when facing coordination problems, may willingly relinquish some autonomy to establish an institutional framework. The state, as an enforcer of these rules, becomes the mechanism 4 that resolves the inefficiency of purely individual actions, ensuring sustainable and efficient solutions to collective dilemmas. [email protected]  From individual welfare to social choice Welfare economics attends to define and measure the “welfare” of society as a whole. It tries to identify which economic policies lead to optimal outcome and where necessary to choose among multiple optima. The main question is whether it is possible to derive the preferences of society from the preferences of individuals. Starting question: How can a society transform individual well-being into decisions that benefit the collective as a whole? o Introduce the challenge of aggregating individual preferences in a way that reflects societal goals. o Emphasize the need for tools and criteria to evaluate collective decisions, such as efficiency, equity, and the coherence of decision-making processes. Traced by to Adam Smith: market outcomes: maximizes “wealth” 5 [email protected]  From individual welfare to social choice Efficiency as a Starting Point Definition of Pareto Efficiency: Pareto efficiency is a foundational concept in economics. An allocation is Pareto efficient if no one can be made better off without making someone else worse off. It establishes a standard of optimality that focuses solely on resource allocation without making any judgment about fairness or justice. Implications of Pareto Efficiency: Pareto efficiency identifies a set of outcomes where resources are fully utilized and no further mutually beneficial trades are possible. However, Pareto efficiency does not account for how resources are distributed among individuals. For example, both (90,10) and (50,50) can be Pareto efficient, but they raise different equity concerns. Limitations of Pareto Efficiency: While it is a useful benchmark, Pareto efficiency is not sufficient for evaluating societal welfare. It says nothing about fairness, justice, or societal values. This leads to the need for additional 6 frameworks to evaluate collective decisions. [email protected]  From individual welfare to social choice PARETO EFFICIENCY Pareto efficiency is an extension of the Edgeworth box: Boite D'edgeworth to Pareto.pdf 5 15 Dotation totale en Eau=15 bouteilles J 5 10 I 12 17 Dotation totale en Coca=17 bouteilles 7 [email protected]  From individual welfare to social choice PARETO/ KALDOR HICKS SCITOVSKY: COMPENSATION CRITERIA CF Document on Ametice: « Microeconomics of Efficiency criteria » p. 477 of the book or p.7 of the PDF https://ametice.univ- amu.fr/pluginfile.php/9372986/mod_resource/content/1/Construction%20Pareto.pdf 8 [email protected]  From individual welfare to social choice The Social Welfare Function (SWF): Adding Normative Dimensions Definition and Role: The Social Welfare Function (SWF) goes beyond efficiency by incorporating societal values into the decision- making process. It aggregates individual utilities into a single measure of societal well-being and helps choose among Pareto-efficient outcomes. Types of SWFs: See document on Ametice « Microeconomics of efficiency » & « From Edgeworth to… » Utilitarian SWF: Maximizes the total sum of utilities. It prioritizes overall welfare but ignores inequality. Rawlsian SWF: Focuses on the welfare of the least advantaged individual, following the "maximin" principle. It emphasizes equity over efficiency. Egalitarian SWF: Seeks to minimize disparities between individuals, often at the expense of total welfare. Libertarian: if fair process, the outcome is fair. SWF and Equity: Each type of SWF reflects a different vision of fairness, balancing efficiency and equity in different ways. For instance, the Rawlsian approach explicitly prioritizes justice over aggregate welfare, while the utilitarian view focuses on efficiency. Consider a tax policy. A progressive tax might reduce income inequality (equity) but also distort labor incentives, leading to inefficiency. The balance between these goals depends on the societal values encoded in the SWF. 9 [email protected]  From individual welfare to social choice The Social Choice Function (SCF): From Preferences to Decisions Definition and Purpose: The Social Choice Function (SCF) is a framework that transforms individual preferences into collective decisions. It provides a mechanism for determining societal choices, such as voting systems or decision rules. Challenges of Aggregation: Aggregating preferences is not straightforward. The Condorcet Paradox demonstrates that collective preferences can be cyclical even if individual preferences are rational. This highlights the difficulty of achieving consistent outcomes in social decision-making. Arrow’s Impossibility Theorem: Arrow’s theorem shows that no SCF can satisfy all desirable fairness criteria (like unanimity, transitivity, and independence of irrelevant alternatives) simultaneously. This underscores the inherent trade-offs in designing mechanisms for collective choice. 10 [email protected]  From individual welfare to social choice Challenges of Aggregation: Aggregating preferences is not straightforward. The Condorcet Paradox demonstrates that collective preferences can be cyclical even if individual preferences are rational. This highlights the difficulty of achieving consistent outcomes in social decision-making. Condorcet's Paradox: An Illustration of Inconsistencies Clement’s ranking: a>b>c Vicky’s ranking: c>a>b Jade’s ranking: b>c>a The Problem: The transitivity of preferences should lead to the result that option a is preferred over option c by majority. However, this is not the case. Once there are more than two options and more than one voter, the majority rule does not always yield a coherent result. Lack of a Clear Winner : Condorcet’s pairwise comparison method Agenda manipulation? 11 [email protected]  From individual welfare to social choice Arrow's theorem explores the challenge of combining individual preferences into a collective decision in a way that satisfies certain fairness criteria. These are the five main conditions: Unrestricted Domain (or Universality): The system should work for any possible set of individual preferences. It must be able to handle all kinds of rankings, no matter how diverse they are. Pareto Efficiency (or Pareto Principle): If everyone prefers one option over another, the group’s decision should reflect this preference. In other words, collective choice must respect unanimous agreement. Non-Dictatorship: No single individual should have the power to determine the group’s choice, regardless of others' preferences. Independence of Irrelevant Alternatives: The group’s choice between two options should depend only on how individuals rank those two options, not on preferences involving other irrelevant choices. Transitivity: If alternative a is preferred to b, and b is preferred to c, then a should be preferred to c. Conclusion: impossible to find a choice procedure (voting system) that satisfies all those conditions all together when there are more than 2 alternatives and more than 1 voter. Majority rule does not satisfy the transitivity systematically (see Condorcet) This has significant implications for democratic decision-making and the design of fair and efficient voting systems. 12 [email protected]  Constitutional Economics and Public Choice We have seen that the State emerges to solve collective action problems. But how are the rules of this State decided? Is there any logic behing the choice of rules: is it possible to explain the production of rules? We have studied how collective choices are made to maximize well-being. But these choices are constrained by rules: who establishes them, and for what purposes?" Institutions as a matter of deliberative choice In the Origin of the State: we explain why indivuals prefer renouncing to their freedom in order to organize in a collective action (society) It s based on the rationality: comparing cost and benefit Now: which rules? It ‘s a decision, it s not made at random 1 Nathalie-audrey.rubio@univ-amu  Constitutional Economics and Public Choice Constitutional Rules: Definition: Foundational rules that define the structure and limits of state power, as well as the fundamental rights of individuals. Purpose: To provide a stable framework for governance, ensuring checks and balances, and protecting basic liberties. Illustrative Examples: Separation of powers, judicial independence, rights to free speech, and rules for electoral processes. Other Formal Rules (Non-Constitutional): Definition: Rules derived from legislation, regulations, or other formal agreements that govern specific domains (e.g., markets, industries, taxation). Purpose: To address more immediate and specific needs of society, often shaped by political bargaining and interest groups. Illustrative Examples: Tax codes, environmental regulations, and trade agreements. 2 Nathalie-audrey.rubio@univ-amu  Constitutional Economics and Public Choice Why Separate These Categories? Constitutional Rules: They are higher-order rules that govern how all other rules are created and enforced (the "rules of the game"). Relatively rigid and harder to amend, ensuring long-term stability. Example= Electoral rules determine how political actors compete for power. If it could be easily modified by those holding political power, then it could no longer guarantee democracy: Vladimir Putin amended the Russian Constitution to extend his time in power. In 2020, significant constitutional amendments were passed in Russia, which included resetting the presidential term limits for Putin. These changes allowed him to run for two additional six-year terms after his current term was set to expire in 2024. Non-Constitutional Rules: They are lower-order rules, designed to address evolving social or economic challenges. These rules are more dynamic and subject to frequent revision, often reflecting the outcomes of lobbying or rent-seeking in the political marketplace. Example: Subsidies or tax incentives favoring specific industries. Interdependence between constitutional and non-constitutional rules: For example: Electoral rules (constitutional) affect how political actors behave in creating taxation or spending policies (non- 3 constitutional). Nathalie-audrey.rubio@univ-amu  Public Choice Theory Key Authors: James Buchanan and Gordon Tullock Concept: Public choice theory addresses collective decision-making and applies economic tools to analyze political processes. Politicians, bureaucrats, and voters are considered rational agents pursuing their self-interest, which can lead to inefficient or suboptimal outcomes for the community. It’s the application of economics to political science Analysing non-market decision making (out of products and services) Integrating the Political Marketplace Major Work: The Calculus of Consent (1962) by Buchanan and Tullock. 4 Nathalie-audrey.rubio@univ-amu  Public Choice Theory Constitutional Rules and the Political Marketplace: Constitutional frameworks shape the behavior of political actors by setting boundaries for acceptable competition (e.g., limits on campaign financing, term limits). They are designed to minimize distortions in the political marketplace, such as corruption or excessive rent-seeking. Non-Constitutional Rules and the Political Marketplace: Political actors, influenced by voters, interest groups, and lobbying, determine these rules within the constitutional framework. Example: A government might pass regulations favoring a dominant industry due to lobbying, even if it conflicts with the common good. 5 Nathalie-audrey.rubio@univ-amu  Public Choice Theory RENT SEEKING Rent-seeking refers to the activity of individuals or groups attempting to obtain economic gains without contributing to productivity. Instead of creating wealth, rent-seekers use resources to secure favorable treatment, such as subsidies, tariffs, or monopolistic privileges, through political or bureaucratic means. Gordon Tullock (1967) and later popularized by Anne Krueger (1974). James Buchanan: how political institutions can incentivize rent-seeking behavior, leading to economic inefficiencies and distorted resource allocation. Examples of rent seeking activity: Regulatory capture: Firms influence regulators to impose rules that block new entrants. Corruption & bribery: Officials allocate resources based on favoritism rather than efficiency. Subsidy competition: Companies lobby for state subsidies that distort competition and market efficiency. 6 Nathalie-audrey.rubio@univ-amu  Public Choice Theory RENT SEEKING Basic Model: Assume the government offers a monopoly « privilege » that provides an economic rent R. N individuals (or firms) compete for this rent by spending resources 𝑪𝒊 (e.g., legal fees, campaign donations). 𝐶 The probability of winning the license is proportional to the resources spent: 𝑃𝑖 = σ𝑁 𝑖 𝑖=1 𝐶𝑖 𝐶 The expected return for each participant is: 𝐸𝑖 = σ𝑁 𝑖 × 𝑅 − 𝐶𝑖 𝑖=1 𝐶𝑖 In equilibrium, if N is large, total expenditures on rent-seeking σ𝑁 𝑖=1 𝐶𝑖 will tend to R, meaning that the entire value of the rent is dissipated. 7 Nathalie-audrey.rubio@univ-amu  Public Choice Theory RENT SEEKING Economic Consequences of Rent-Seeking Deadweight loss: Resources used in rent-seeking activity could be allocated to productive investments instead. Misallocation of resources: Instead of innovation or efficiency, firms focus on political connections. Inequality & unfair advantages: Well-connected firms gain privileges at the expense of others. Public Choice theory highlights the need for institutional constraints to limit such behavior and ensure a more efficient allocation of resources. 8 Nathalie-audrey.rubio@univ-amu  Public Choice Theory DISTINCTION BETWEEN RENT SEEKING AND LOBBYING Patent Protections vs. Evergreening in Pharmaceuticals: Lobbying (productive influence): Pharmaceutical firms lobby for strong patent protections to incentivize innovation: leading to new treatments that benefit society. Rent-Seeking (unproductive influence): Some pharmaceutical companies engage in “evergreening” by making minor modifications to existing drugs (e.g., changing a dosage form) and lobbying for extended patent protection. This prevents generic competition without contributing meaningful innovation. Environmental Regulations vs. Regulatory Capture in the Energy Sector: Lobbying (productive influence): Environmental groups and clean-energy firms lobby for stricter emissions regulations to promote sustainability. Rent-Seeking (unproductive influence): Large fossil fuel firms engage in regulatory capture by lobbying policymakers to create complex and costly compliance rules that only 9 established companies can afford, effectively blocking new entrants. Nathalie-audrey.rubio@univ-amu  Public Choice Theory LOGROLLING It refers to the practice of vote trading, where legislators support each other’s proposals to secure favorable outcomes. It can lead to wasteful government spending when legislators approve projects that benefit only a few at the expense of the broader public. logrolling might result in excessive public debt or inefficient policies. In some cases, logrolling facilitates necessary reforms that would otherwise fail to gain majority support. 10 Nathalie-audrey.rubio@univ-amu  Public Choice Theory LOGROLLING Concrete Example: Imagine three legislators who want to fund three different projects—a highway, a hospital, and a cultural center. Each project costs 90 million euros and is funded through public taxation. Individually, no project might have enough support to pass, but through logrolling, each legislator agrees to vote for the others’ projects in exchange for support on their own. Instead of funding just one necessary project, the government now funds all three, leading to a total expenditure of 270 million euros. This illustrates how logrolling can inflate public spending beyond what might be economically justified. Budgetary Cost: The projects approved through logrolling are publicly funded, meaning that their cost is spread across the entire tax base. If multiple legislators exchange votes to approve their respective projects, the government ends up financing multiple projects rather than just one, leading to increased public expenditure and potential budget deficits. Economic cost: Logrolling may result in inefficient allocation of resources, where government spending is not directed toward the most beneficial or necessary projects but rather toward those 11 that maximize legislative agreements. Nathalie-audrey.rubio@univ-amu  Public Choice Theory LIMITING RENT SEEKING AND LOGROLLING Limiting Rent seeking: Public Procurement Transparency & Competitive Bidding The « Code de la Commande Publique » (Public Procurement Code) enforces competitive bidding for public contracts, reducing favoritism and political influence in awarding contracts. Public tenders must be published online on platforms like BOAMP (Bulletin Officiel des Annonces des Marchés Publics) and PLACE (Platform for State Procurement), ensuring transparency. By forcing firms to compete based on quality and price rather than connections, these mechanisms mitigate inefficient rent-seeking behavior in public contracting. Limiting Logrolling: The Single Subject Rule requires that each legislative bill or amendment must only deal with one specific issue. This prevents lawmakers from bundling multiple unrelated measures into a single bill to gain mutual support through vote trading 12 Nathalie-audrey.rubio@univ-amu  Public Choice Theory BUREAUCRACY Bureaucracy is a key component of institutional frameworks and rule enforcement. Bureaucracy exists to implement the rules established by policymakers. it ensures continuity of governance beyond electoral cycles provides a « neutral » application of rules. but may also pursue their own interests, seeking to maximize their budgets and influence (Niskanen’s model of bureaucracy). A well-functioning bureaucracy reduces transaction costs and improves the efficiency of governance. Excessive bureaucracy can lead to over-regulation, administrative inefficiencies, and economic stagnation. Interaction between bureaucracy and interest groups (e.g., regulatory capture): can reinforce rent-seeking behaviors. William Niskanen – The Budget-Maximizing Bureaucrat 13 Bureaucrats, as rational agents, seek to maximize their budget to expand their influence, rather than focusing on efficiency. Gordon Tullock – Bureaucracy and Rent-Seeking Bureaucracies can become self-serving and subject to rent-seeking from interest groups. Nathalie-audrey.rubio@univ-amu  Public Choice Theory BUREAUCRACY There are several quantitative and qualitative indicators used to assess the size, efficiency, and impact of bureaucracy across different countries. These measures help compare how bureaucratic structures influence economic performance, governance quality, and regulatory burdens. Size of Bureaucracy Bureaucratic Efficiency Government Effectiveness Index (World Bank Governance Indicators) Ease of Doing Business Index (formerly published by the World Bank) Bureaucracy Quality Index (International Country Risk Guide - ICRG) Regulatory Burden and Administrative Complexity Regulatory Quality Index (World Bank) Bureaucracy and Corruption 14 Corruption Perceptions Index (CPI, Transparency International) Control of Corruption Index (World Bank Governance Indicators) Nathalie-audrey.rubio@univ-amu  Public Choice Theory BUREAUCRACY Cross-Country Comparison: Nordic countries (Sweden, Denmark, Norway, Finland): Highly efficient bureaucracies, low corruption, strong digitalization of public administration. France: Large and structured bureaucracy, but sometimes criticized for excessive administrative complexity. United States: Less centralized bureaucracy, yet highly regulated in key sectors. Developing countries: Often characterized by weaker bureaucratic efficiency, high levels of corruption, and heavy administrative burdens that hinder investment. Indicator of « bureaucratic efficiency »: : https://info.worldbank.org/governance/wgi/ 15 Nathalie-audrey.rubio@univ-amu  Public Choice Theory BUREAUCRACY NISKANEN MODEL A bureaucratic agency produces a public good (e.g., infrastructure, healthcare) but does not seek profit. The public good benefits the society Bureaucrats maximize their budget, which determines their salaries, influence, and prestige. Unlike a competitive firm that maximizes profit, the bureaucracy maximizes its own utility, which depends on its budget. The budget received by the bureaucracy is set by the government which has limited information about the true cost of production. Asymmetry of information between government and bureaucrats Principal-Agent relationship between government and bureaucrats. Main Predictions of the Model Overproduction of public services → Bureaucracies produce more than what is socially optimal, leading to inefficiency. Budget inflation → Bureaucrats request larger budgets than necessary, knowing that legislators lack full information. 16 Government overspending → Public expenditures grow beyond what is needed. Nathalie-audrey.rubio@univ-amu  Public Choice Theory BUREAUCRACY NISKANEN MODEL 𝟏 Social value of the public good: 𝑽 𝑸 = 𝒂𝑸 − 𝒃Q2 𝟐 where a,b>0 (diminishing marginal returns). True cost of production (only known to the bureaucracy): C(Q)=cQ The government allocates a budget B based on production Q, but it does not know the true costs. The bureaucracy does not minimize costs; instead, it maximizes its budget B(Q) The government approves the budget as long as the perceived net benefit is non-negative: V(Q)≥B(Q) In Niskanen’s model, the government always accepts the bureaucrat's budget request, provided the net benefit is positive. The bureaucracy maximizes its budget: 17 max​ B(Q) subject to the government’s acceptance constraint: V(Q)−B(Q)≥0 Nathalie-audrey.rubio@univ-amu  Constitutional Economics How do constitutional rules Influence economic performance? Separation of Powers: Preventing arbitrary government actions and enhancing policy stability. Checks and Balances: Limiting discretionary power, reducing policy volatility, and enhancing credibility. Judicial Independence: Protecting property rights, ensuring contract enforcement, and fostering long-term investment. The role of political institutions in economic outcomes Presidential vs. Parliamentary Systems: Comparing economic efficiency, policy stability, and corruption levels. Electoral Systems: Majoritarian vs. Proportional representation and their impact on fiscal policies and public goods provision. The opportunity to use referedum for deciding Federalism vs. Centralization: Decentralization as a mechanism for efficiency or a source of economic disparities. 18 Nathalie-audrey.rubio@univ-amu  Constitutional Economics Separation of powers Originating from Montesquieu: it ensures that no single branch (executive, legislative, judiciary) dominates decision-making. The economic rationale behind the separation of powers: reduces the risk of « government failure » Limits « expropriation » and « predatory » taxation: when a single authority controls taxation, spending, and enforcement: excessive and arbitrary taxation that does not finance public good or serve efficient redistribution but rather increase the government or public authority revenue and power. Encourages long-term policy credibility: investors and firms make long-term decisions when they trust institutional stability. Discretion vs Commintment: Kydland and Prescott 19 Nathalie-audrey.rubio@univ-amu  Constitutional Economics Separation of powers Strict separation of powers/Flexible separation of powers: Strict: Presidential regime → »Checks and balances » in US Flexible: Parliamentary regime Definition: Institutional arrangements ensuring that power is distributed and that each branch can limit the excesses of the others. Economic effects of « checks and balances » and effective separation of powers: Reduces corruption and rent-seeking: when branches of government can veto or challenge decisions, it becomes harder for special interest groups to capture policy. Prevents regulatory capture: independent regulatory agencies function better when protected from direct executive control. Central Bank independence Competition authority independence Enhances fiscal discipline: studies show that countries with effective separation of power tend 20 to have lower deficits and better fiscal management. Nathalie-audrey.rubio@univ-amu  Constitutional Economics Separation of powers Short focus on strict/flexible separation of powers The « design » depends on: Regime adopted in the Constitution: Presidential/Parliamentary? The Fifth Republic (1958) , designed by de Gaulle, aimed to strengthen the executive power to avoid the political instability of the Fourth Republic. The President has extensive powers, especially when the parliamentary majority aligns with the executive (absence of cohabitation). Unlike in the U.S., the French Parliament has weak legislative initiative and limited power over the executive: Article 49.3 allows the government to pass laws without a parliamentary vote. The Constitutional Council (Conseil constitutionnel) acts more as a guardian of constitutional compliance rather than a strong check on the executive. Magistrates are part of a hierarchical administrative structure: 21 Does not necessarily draw into question the independence of the judiciary Nathalie-audrey.rubio@univ-amu  Constitutional Economics Separation of powers Strong theoretical connections between separation of powers and efficiency The key idea is that well-designed institutions create the right incentives for economic agents reduces uncertainty prevent inefficiencies caused by excessive government intervention or policy volatility. Montesquieu (1748, The Spirit of the Laws) argued that separation of powers prevents the concentration of power and thus limits government arbitrariness and expropriation. Buchanan & Brennan (1985): Separation of Powers as a constraint on « Leviathan » It s a Public Choice argument for why separation of powers improves efficiency. They model the state as a "Leviathan" (tax-maximizing entity) that will extract as much wealth as possible unless institutional constraints (e.g., legislative and judicial checks) prevent it. - If power is too concentrated, the government over-taxes and over-regulates, leading to economic inefficiency and rent-seeking. 22 - Separation of powers introduces competition within the government, reducing the ability of any single entity to exploit citizens. Nathalie-audrey.rubio@univ-amu  Constitutional Economics Separation of powers It s a matter of Credible Commitment : uncertainty and unstability are pretty bad from an incentive perspective: Preventing Time-Inconsistency Problems (Kydland & Prescott, 1977) A policy is time consistent if a decision made today remains optimal in the future and does not need to be revised. A policy is time inconsistent if, when the time comes to implement it, it is rational to deviate from the original commitment, even if doing so harms credibility and economic efficiency. Governments have an incentive to change policies once firms and individuals have made economic commitments. Monetary Policy and Inflation (Kydland & Prescott, 1977) A government promises low inflation to encourage investment. Once firms and households have made long-term investment decisions, the government has an incentive to increase inflation to boost short-term output and reduce real debt. Rational investors anticipate this and demand higher interest rates → loss of credibility. 23 A government promises low taxes to attract investment, but once firms invest, it raises taxes. Nathalie-audrey.rubio@univ-amu  Constitutional Economics Separationof powers A Simple Model of Time Inconsistency: The Government and the Firm A Simple Model of Time Inconsistency: The Government and the Firm Players: ❖ Government (G): Decides tax policy. ❖ Firm (F): Decides whether to invest. I NI LT (+5 ,+3) (0,0) Timing of the game (two stages): ❖ Stage 1 (Firm’s Decision): HT (+1,-+6) (0,0) - The government announces a low tax rate (T low) to attract investment. - The firm decides whether to invest (I) or not invest (NI). Backward induction analysis: ❖ Stage 2 (Government’s Decision): If the firm invests, the government has an incentive to raise taxes (because 6 > 3). - If the firm has invested, the government chooses between: - Keeping its promise (T low). Anticipating this, the firm will not invest in - Raising taxes (T high) to extract more revenue. the first place. - If the firm did not invest, the game ends. Final outcome: (NI, 0,0) → No investment, no growth. Payoffs: Conclusion: Without commitment ❖ If the firm does not invest (NI) → Both get 0. mechanisms (e.g., independent judiciary, fiscal rules), the government has an incentive ❖ If the firm invests (I) and the government keeps its promise (T_low) → The firm to cheat. gets 5, and the government gets 3(from tax revenue). ❖ If the firm invests (I) and the government raises taxes (T_high) → The firm 24 gets 1, and the government gets 6 (by taking more in taxes). Nathalie-audrey.rubio@univ-amu  Constitutional Economics Judicial independence Judicial independence ensures that legal rules are enforced impartially and that economic actors can trust contracts and property rights: Businesses are more willing to engage in long-term contracts and international trade. Reducing political uncertainty: An independent judiciary stabilizes policy by acting as a constraint on executive overreach. Empirical evidence: Cross-country data: Stronger judicial independence have higher levels of private investment and economic growth (empirical) Stronger judicial independence is correlated with higher GDP per capita, greater foreign investment, and lower corruption levels. Acemoglu, D., Johnson, S. (2005). "Unbundling Institutions" 25 Nathalie-audrey.rubio@univ-amu  Constitutional Economics Judicial independence How does stable and strong contract law protection promote investment & economic efficiency? This game will illustrate how judicial independence ensures efficient economic outcomes by enforcing contractual agreements between firms. Without a strong judicial system, firms may breach contracts, leading to economic inefficiencies such as underinvestment Setup of the Game Two-player game between : - Firm A (Investor): Decides whether to invest in a contract-dependent project. - Firm B (Contract Partner): Decides whether to honor or breach the contract. A court (third-party enforcer) ensures contract enforcement, but its effectiveness depends on the level of judicial independence. Game Structure (Two Stages) Firm A decides whether to invest (I) or not invest (NI). If Firm A invests, Firm B chooses to: Honor (H): Cooperate and respect the contract. Breach (B): Take the investment benefits but fail to deliver. If the judiciary is independent, Firm B knows that breaching will be punished, ensuring an efficient contract 26 outcome. If the judiciary is weak, Firm B may breach, leading to a breakdown in investment incentives. Nathalie-audrey.rubio@univ-amu  Constitutional Economics Judicial independence Payoff Structure If no investment occurs (NI) → Both firms get 0. If investment occurs (I) and the contract is honored (H) → Firm A gets 5 (profit from the investment); Firm B gets 3 (benefits from cooperation). If investment occurs (I) but the contract is breached (B): Strong Judiciary: Firm B is punished and gets -2 (legal sanction). Firm A gets 5 (contract enforced). Weak Judiciary: Firm B gets 6 (keeps all the gains). Firm A gets -5 (loses the investment). 27 Nathalie-audrey.rubio@univ-amu  Constitutional Economics Judicial independence Firm B Breaches (B) Firm B Breaches (B) (Strong Firm B Honors (H) (Weak Judiciary) Judiciary) Firm A: No Invest (NI) Firm A: Invest (I) 28 Nathalie-audrey.rubio@univ-amu