Checking date: 20/05/2022

Course: 2022/2023

Political Economy
Study: Dual Bachelor in Law and Economics (230)

Coordinating teacher: LOEPER , ANTOINE

Department assigned to the subject: Economics Department

Type: Electives
ECTS Credits: 6.0 ECTS


Requirements (Subjects that are assumed to be known)
PREREQUISITE Attendance to class is highly recommended. The announced dates for midterms and homeworks are final, and they cannot be rescheduled with any justification. Most of the material that is taught in this class is theoretical, although only basic mathematical tools will be used. The students are expected to have some familiarity with microeconomics. THE TOOLS THAT THE STUDENTS NEED TO KNOW ARE THE FOLLOWING: - the concept of ordinal preferences (weak and strict preferences, transitive preferences, rational preferences) - differential calculus (differentiation of a simple function of two variables) - basic maximization theory (how to maximize a function of one variable or two variables) - welfare economics (social welfare functions, public goods, free-riding) - basic notions of game theory (Nash equilibrium, in pure and mixed strategy)
Attendance to class is highly recommended. The announced dates for the midterms and final exams are definitive. There is no make-up exam unless the circumstances requires to organize a make-up exam according to the university rules. Standard economic models have shown that in some cases, markets are not perfect and can fail to achieve a socially optimal outcome. The question is then: how can we remedy these inefficiencies? A naïve public economic approach would state that, with appropriate tools (taxes, subsidies, public provisions, antitrust policies, regulations...), a public intervention can fix the market failure and restore the social optimum. However, this approach is not satisfactory because it compares a realistic market system with all its imperfections to an ideal, benevolent, and omniscient government which always implements the right policy. As everyone knows, governments do not always implement socially optimal policies. Political representatives may be biased because of reelection concerns, lobbying, or outright corruption; voters can vote against their interest because they are poorly informed about the candidates and the policies they propose; even when voters are perfectly informed, majority rule does not always lead to the socially optimal decision. A realistic model of government or collective decision should take into account these political failures. Taking into account the possibility of market failures and government failures, to assess whether public intervention is beneficial, one has to compare the potential failures of free markets, and economic freedom in general, with the potential failures of public interventions and collective action. Market failures are relatively well understood by economists. Therefore, to complete the picture, one has to understand how government and collective institutions function. This is precisely what political economy is about. Political economy uses the modern tools of economic analysis (basic decision theory, welfare economics, incentive theory, and game theory) to analyze the functioning and failures of political institutions. The questions that we will focus on in this class are the following: - How to make collective decisions for a group of individuals with heterogeneous needs and preferences? What are the typical failures of different voting rule? Can we design a voting rule that makes rational decisions and that satisfies some minimal democratic requirement? - How do governments function? Can we use parsimonious economic models to predict the level of public good provision and the degree of redistribution in a democracy? - How does electoral competition work? Why are economic competition and electoral competition so different in nature? - What is the role and influence of interest groups in the political process?
Skills and learning outcomes
Description of contents: programme
THEME 1: HOW TO TAKE COLLECTIVE DECISION? Preferences aggregation rules and voting rules: how to make collective decisions based on the preferences of the individual members of society? Majority rule: we will see why majority rule can be viewed as the most democratic voting rule. We will compare it to alternative voting rule such as the unanimity rule, the plurality rule, the Borda rule, or the Condorcet rule. Condorcet cycles and voting paradoxes: we will see why majority rule can lead to irrational decisions. Arrow and Brown's impossibility theorems: why it is impossible to make collective decisions that are both democratic and rational? THEME 2: DOES MAJORITY RULE TAKE GOOD DECISIONS? The median voter theorem: how to predict the outcome of a majoritarian decision process. We will use this model to investigate whether majority rule can mitigate the problem of inequality in the distribution of income. We will use this model to investigate whether majority rule can solve the free-riding problem in public good provision. We will see that the degree of redistribution of the taxation system used to finance the public goods in democratic societies can distort the incentives of voters, and thus lead to an excessive level of public goods. The chaos theorem: why voting over multiple issues at the same time can lead to unpredictable and chaotic decisions? THEME 3: VOTING IN LEGISLATURE (if time permits) We will describe the dynamic voting procedure (amendment rule) used in practice in most legislatures, and build a simple model to predict the outcome of these voting procedures. We will see how the details of the voting procedure can affect the outcome of the vote. We will see how the agenda setter (the person in charge of setting the agenda of the legislature) can manipulate the outcome of the vote. THEME 4: ELECTORAL COMPETITION We will build a simple model of electoral competition that will allow us to: - see how political competition can shape the incentives of politicians - investigate whether political competition induces candidates to propose what the citizens wants - investigate whether political competition induces candidates to differentiate themselves or to all propose similar policies - discuss the impact of politicians, ideologies, and credibility. THEME 5: POLITICAL PARTICIPATION AND VOTER BEHAVIOR We will study the incentives of voters in large elections. We will see in particular what incentives they have to participate in the election, and to carefully think about the different options on the ballot. THEME 6: PUBLIC CHOICE (if time permits) Political representation and agency costs: do elected official do what they are supposed to do, or what is in their interest? One man one vote versus one dollar one vote: what is the role of special interests, lobbying, and money in politics? Rent seeking: what is it? Is it really different from economic competition?
Learning activities and methodology
METHODOLOGY During the first 10 weeks (approximately), the course will alternate between theory groups ("magistrales") and class groups ("reducidos"). The class groups will be devoted to the illustration and application of the theory through exercises, presentation of research papers, and class discussions. Students are expected to be active during class discussion, and to express their opinion on the most controversial points of the theory. The last 4 weeks (approximately) of the course will be devoted to student presentations.
Assessment System
  • % end-of-term-examination 60
  • % of continuous assessment (assigments, laboratory, practicals...) 40
Calendar of Continuous assessment
Basic Bibliography
  • Shepsle, K. A. and M. S. Bonchek. Analyzing politics : rationality, behavior, and institutions.. New York, W.W. Norton.. 1997
  • Timothy Besley. Principled Agents? : The Political Economy Of Good Government. The Lindahl Lectures. Oxford University Press. 2007

The course syllabus may change due academic events or other reasons.