Rational expectations & time-inconsistent preference problems

1. Rational expectations & time-inconsistent preference problems James Raymond Vreeland, Georgetown University Korea University Summer Campus Faculty Global KU Frontier Spirit Aug 2009

2. Lesson from the Mid-term & from the option to assign 0 weight to the final: • As long as there is a credible threat that the exam will count, it can solve your time-inconsistent preference problem • Why can I get away with this at summer campus? • Reputation – I wouldn’t do this on my home campus, or if I came to KU every summer • But ultimately, the test didn’t matter – it was just a mechanism to get you to solve your time-inconsistent preference problem

3. Weighting the final exam &Rational expectations • Rational expectations: the best predictor for future performance is past performance • Expected final grade = midterm grade • More precisely: • Final grade = midterm grade + >shock< • The shock is unobserved to me a priori • I don’t know if you worked harder in the beginning or the end of the semester • But I suspected that most of you worked harder in the second part (and give your grades, I was right) • Still, unless your performance deviated a GREAT deal, you ended up with the same grade as the mid-term • So, for most of you, allowing you to weight the exam made no difference • Still, assuming you – yourself – knew how well you did, then you should assign high weight only if you thought you did better • Thus, the option was an act of generosity… which some didn’t take!!!!

4. Note • Basically I gave you the option of dropping your poorer performance • (though you had to decide without knowing the 2nd grade)

5. Final exam

6. Recall mid-term:

8. Recall mid-term

9. Final grades

11. Why the games? • To amuse myself? • Pedagogic justification: What lesson have I been trying to teach you all semester? • THE LESSON OF USING AN INSTITUTION TO SOLVE A TIME INCONSISTENT PREFERENCE PROBLEM! • The (credible) exam ties your hands • Commitment • Hands tying of present government (two level game) – change the payoffs for other veto players • Hands tying of future governments – LOCK-IN! • Hands tying of present governments – signaling resolve to foreign and/or domestic audiences

12. Secret bonus level lecture!

13. Domestic institutions under dictatorship story… or CAT Selection:Why Dictatorships enter into the UN Convention Against Torture

14. The Puzzle (Hathaway 2003):

15. I will explain this puzzle… • The solution has to do with political institutions under dictatorship • Particularly: multi-party dictatorships • I will explain that… • We observe more torture in MP dictatorships • MP dictatorships are more likely to enter into the CAT

16. My solution begins with the logic of torture: • Torture is more likely when power is shared than when power is absolute (Kalyvas 2000, Arendt 1970). • A measure of power sharing? • Some dictatorships allow for • INDEPENDENT POLITICAL PARTIES (Gandhi 2003). • Under no-party & one-party states, limitations are obvious. • No ambiguity. • With multiple political parties, some degree of dissent is endorsed by the state. • Ambiguity. Some people go too far. • I predict torture to be ironically higher in more liberal dictatorships with multiple political parties.

17. Will no/one-party states enter into the CAT? • They are not anti-torture. • One reason we observe low levels of torture is because of the FEAR of torture. • They face no pressure from organized alternative political parties to adopt the CAT. • I predict no/one-party states are less likely to sign/ratify the CAT.

18. Will multi-party dictatorships enter into the CAT? • Institutions like multi-parties “encapsulate” parts of society into the regime (O’Donnell 1979, Gandhi and Przeworski 2006). • Regime faces pressure from organized political parties. • Policy concessions (Gandhi 2004). • Spend more on education, less on the military • Entering the CAT is a form of policy concession. • I predict more liberal dictatorships will be more likely to sign/ratify the CAT.

19. Empirical evidence • Show that MP dictatorships have more torture • Show that MP dictatorships are more likely to enter into the CAT

20. Dictatorships with parties have higher levels of torture

21. To put this plainly:holding other things equal… • For every 100 observations of dictatorships with no political parties and low levels of torture during a year, one can expect 7 of them to practice high levels of torture the following year (plus or minus 4). • For every 100 observations of dictatorships with political parties and low levels of torture during a year, one can expect 14 of them to practice high levels of torture the following year (plus or minus 6). • I conclude that torture is, somewhat counter-intuitively, more prevalent in dictatorships with multiple political parties.

22. Dictatorships with parties are more likely to sign/ratify the CAT

23. Ratifying the CAT

24. The story explains… • Why governments with more torture enter into the CAT: • We observe more torture because power is divided (political parties). • Governments enter the CAT as a concession to the interest groups represented in the political parties. • Why governments without torture do not enter the CAT: • There is less torture because there is more fear of torture. • The last thing these regimes–that rely on fear–want to do is make a gesture that they oppose torture. • These regimes are not anti-torture, and face no pressure to enter into the CAT.

25. THANK YOU글로벌 KU 프론티어 스피릿 !