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Why People Pay More Under Proportional Rule?: Electoral Systems, Corporate Governance and Price Differences

Why People Pay More Under Proportional Rule?: Electoral Systems, Corporate Governance and Price Differences. Jaekwon Suh UCLA. Why Price Matters ? . Signals of Price  Producer - production cost - accessibility to production factors

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Why People Pay More Under Proportional Rule?: Electoral Systems, Corporate Governance and Price Differences

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  1. Why People Pay More Under Proportional Rule?:Electoral Systems, Corporate Governance and Price Differences Jaekwon Suh UCLA

  2. Why Price Matters ? • Signals of Price  Producer - production cost - accessibility to production factors - a proxy measure of government service (rent-seeking)  Globalization makes producer more sensitive to price  Consumer Purchasing power of disposable income

  3. Motivation • Why people pay more in a country than those in another country?  Law of One Price “absent politically imposed barriers”  Politics matters

  4. Fact

  5. Fact

  6. Summary Statistics: Price

  7. Precursor Research • Rogowski & Kayser (AJPS 2002) : Majoritarian electoral system lowers price more than proportional system  seat-vote elasticity “… higher seat vote elasticity of majoritarian system makes politicians cater more on consumer than producer….”

  8. TM • Two-stage sequential price determination game

  9. 1st Stage: Factor Markets • Time schedule t = 0 : contract & establishing firm t = 1 : voting (for company law) t = 2 : re-contract t = 3 : dividing profit  Solution: Sub-game Perfect

  10. 1st stage: Agents • Agents: - homogeneous: entrepreneur & worker - heterogeneous: rentier • Utility Functions - UE = E V + D - UR = R V + B R - Uw = E(c) -  e

  11. 1st Stage: voting (t = 1) • Premise - two party competition - electoral system: maj. vs. proportional - two policy spaces (company law) : employment protection (labor market) + shareholder protection (financial market)

  12. 1st stage: political coalition • Characteristics of Electoral system • majoritarian : winning districts • proportional : winning votes • Prediction • Majoritarian: entrepreneur + rentier shareholder type corp.gov. • Proportional: enterpreneur + worker blockholder type corp.gov.

  13. 2nd stage: product market • Firm as a unified producer: - Firm’s price bidding as a function of profit structure: business profit + enterprise value • Consumer as a composite group - consumer’s nature as a function of political coalition at the 1st stage, whether take or deny the price?

  14. 2nd stage: Prediction High price under Blockholder type - Firm bids high price : higher cost pressure (high employment protection) + greater need for high level of retained earning (low shareholder protection  lack of capital market)  why should consumer take it ? Low price under Shareholder type - Firm bids low price : lower cost pressure (flexible labor market) + greater risk for high level of retained earning (high shareholder protection  developed capital market)  why won’t firm raise price and give more dividend shareholder?

  15. EI: 2 SLS regression analysis • System of Equations - Price = ƒ (CgÔv, income, openness…) - CgÔv = ƒ (elesys, IV…) * IV = Legal Origin (La Portal et al. 1998) • Obstacles - extrapolation problem(Ho 2005) - aggregation problem

  16. EI: Case Studies • Possible nice case: Japan • Reality: Since early 1990, Japan experienced sharp real price decrease. • Explanation: Just monetary phenomenon • My Model suspects that electoral system change in 1993-4 (more Maj.based on district size) can be an explanation.

  17. Discussion: TM • Internal inconsistency of the model • Three agents  Two agents • Too many steps  High complexity • Price determination is not bargaining game • Keep three agents at the second stage and plugging role of government • Two stages  one stage (parameterize P in the first stage?)

  18. Discussion: EM • Regression Analysis • Measurement: - electoral system - corporate governance • More case studies • Computational methods • Experimental design

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