Lecture 9

1. Lecture 9 Political agency and accountability: empirical evidence Readings: T. Besley, Principled Agents?, chapter 3

2. Political agency and accountability • In the previous lecture we have analyzed the basic incentives problem in the delegation of power from voters to decision-makers • Using a simple two-period model of political agency where: • Voter (principal) cannot observe the state of the world and the “type” of the politician • Politician (agent) observes the state of the world and knows his own “type” (dissonant, congruent) • The voter updates his prior on the politician type using the information he obtains on his own payoff ( which depends on the action undertaken by the politician and the state of the world) • The voter uses election as a tool to provide incentives to the incumbent legislator

3. Results • In the second period, there are no elections, hence every politician choose his short term most preferred action • Congruent politician always chooses what voter want at=st • Dissonant politician choose the opposite 1-st • In the first period, congruent politician chooses what the voter wants, dissonant politician chooses what the voter want provided that he earns sufficiently small rent from choosing a dissonant policy in the first period • All politician who choose what voter want are re-elected

4. Performance and time horizon • If the politician is congruent, we will not observe any difference in performance between first and second period • However, if the politician is dissonant, his performance in the first period will be different than in the second period • Politicians that deliver “congruent” policies are re-elected

5. The term limit effect • Based on the results of our simple agency model, comparing politician who can run for elections with politicians who cannot run, we should observe a term limit effect • Politicians behave differently when they can and cannot run for re-election • Can we test this prediction using data on politicians, electoral rules and policies?

6. Empirical evidence on term limits and performance: US Congress • Lott and Brontars (1993) analyse congressional voting from 1975-1990 and they do not find any significant change in the way congressman vote over policies during their last term of office • Problem: the congressman that decide to step down are not bound by law to do so, hence we cannot use their behaviour to draw conclusions on legislators that are bound to step down

7. Empirical evidence on term limits and performance: US Congress • McArthur and Marks (1988) using data of congressional behaviour during the “lame duck” sessions of congress (i.e. the session held after the elections but before the swearing in of the new Congress) find that members who have not been re-elected voted differently

8. Empirical evidence on term limits and performance: US Governors • In several US States the number of terms a Governor can serve is mandated by law and hence term limits are in place • Besley and Case (2000) analyze • the effect of term limits on policy choice • The determination of re-election chances of governors who are eligible to stand for elections

9. Term limits and policy choices • independent variable • pst be the policy chosen in state s at time t • Main explanatory variable • Tst dummy variable that is equal to 1 when there is a binding term limit and zero otherwise • Other explanatory variables: • Real income percapita • Demografic variables • Party affiliation of governor, etc. • State fixed effects • Year fixed effects

10. Term limits and policy choices • Regression • Given the introduction of fixed effects and the limited number of states changing term limits laws, the effect of term limit Tst is primarily identified from the difference between first and second term of office for incumbent who face term limits

11. Term limits and policy choices • Policies • Real government spending percapita • Total taxes percapita • Sales taxes percapita • Income taxes percapita • Corporate taxes percapita

13. Term limits and policy choices • Results • Governor spend significantly more when they are lame duck as compared to when they can run for elections • The evidence on taxation is not very clear, but for some taxes it turns out that lame duck choose significantly higher taxes as compare to the term where they could run for election

14. Elections and performance • Our model of agency also predicts that incumbent should be rewarded with re-election if they choose congruent policies • Estimation of the re-election probability of governors • We can use a linear probability model to estimate the re-election probability (Probit)

15. Voting regression • Independent variable • Rgst – dummy variable equal to one if the governor g of state s in time t is re-elected and zero otherwise • Explanatory variables • Pst policy chosen during the term t in state s • Growth in real taxes percapita • Growth in real expenditures percapita • Growth in real income percapita • Personal characteristics of governor • Years of experience in politics • Education • Other work experience • Age

17. Results • Governors who increase taxes are significantly less likely to win elections • State Income growth is positively correlated with re-election probability • Growth in state spending does not affect re-election probability of governors

18. Conclusions • Evidence on gubernatorial elections an policies consistent with agency models of politics • Politicians who cannot run for elections choose different policies as compared to non lame duck • Electors reward (to some extent) politicians based on their performance (taxation policy and economic growth affect re-election probabilities)

19. Questions • Consider the first table presenting the regression results of Besley-Case (1995). Do gubernatorial term limits have significant effects on taxes and spending? Show the size and significance of the relevant coefficients and provide a theoretical argument explaining the relationship between policies and term limits • Repeat the same exercise for the second table of regressions presented in the lecture (voting regressions)