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date: 25 September 2021

The Reach of Political Economy

Abstract and Keywords

This introductory article discusses a set of issues and approaches that have provided interesting results, and are most likely to prompt a number of researches in the next few years. It first looks at the research conducted on endogenous institutions, before focusing on legislative institutions. It looks at the revelation and aggregation of information, where the discussion is focused on the voters, particularly the voters who are uninformed in one way or another. One section covers the evolutionary models of human and political behaviour. The final section of the article discusses and considers the spread of political economy into new areas of research.

Keywords: endogenous institutions, legislative institutions, aggregation of information, uninformed voters, evolutionary models, human behaviour, political behaviour, political economy

Over its long lifetime, the phrase “political economy” has had many different meanings. For Adam Smith, political economy was the science of managing a nation's resources so as to generate wealth. For Marx, it was how the ownership of the means of production influenced historical processes. For much of the twentieth century, the phrase political economy has had contradictory meanings. Sometimes it was viewed as an area of study (the interrelationship between economics and politics) while at other times it was viewed as a methodological approach. Even the methodological approach was divided into two parts—the economic approach (often called public choice) emphasizing individual rationality and the sociological approach where the level of analysis tended to be institutional.

In this Handbook, we view political economy as a grand (if imperfect) synthesis of these various strands. In our view, political economy is the methodology of economics applied to the analysis of political behavior and institutions. As such, it is not a single, unified approach, but a family of approaches. Because institutions are no longer ignored, but instead are often the subject matter of the investigation, this approach incorporates many of the issues of concern to political sociologists. Because political behavior and institutions are themselves a subject of study, politics also becomes the subject of political economy. All of this is tied together by a set of methodologies, typically associated with economics, but now part and parcel of (p. 4) political science itself.1 The unit of analysis is typically the individual. The individual is motivated to achieve goals (usually preference maximization but in evolutionary games, maximization of surviving offspring), the theory is based in mathematics (often game theoretic), and the empirics either use sophisticated statistical techniques or involve experiments where money is used as a motivating force in the experiment (see Palfrey, this volume).

The purpose of this Introduction is to illustrate the intellectual excitement in political economy by covering some important elements on the scholarly frontier. As such, it neither provides an outline of the volume nor a summary of the major topics and results. In this chapter, we discuss a set of approaches and issues that have spawned interesting results and that are likely to spur considerable research in the next decade.

We divide our essay into five sections. In Section 1, we discuss research on endogenous institutions. The research agenda on institutions follows a natural progression. The first step is to determine how institutions affect behavior. Indeed, this step seems a necessary condition for a theory of endogenous institutions. Having built up a large literature on the effects of institutions, students of political economy have begun to treat institutions as endogenous (thereby incorporating some of the subject matter of sociology and anthropology). We focus our attention on legislative institutions because this is where much of the work has been done. The success of institutional analysis of legislatures is not surprising, as scholars have collected a large body of data and evidence (both quantitative and qualitative) on legislatures. For example, votes have been recorded with party affiliations and other attributes noted. These large data sets allow hypotheses to be tested and theory to be refined. Because the rules of the US Congress are internal to Congress, voting procedures, the type of committees, and committee assignments are all endogenous. So legislatures are fertile ground for exploring institutional choice.

One of the technically most challenging but at the same time one of the most exciting areas of research in political economy concerns the revelation and aggregation of information, the subject of Section 2. This work is exciting because many of the results contradict earlier beliefs based on decision‐theoretic models and because this research answers many puzzles. Here, our focus is on voters, particularly voters who are uninformed in one way or another, but are nevertheless rational. Since this research area is still in its infancy, we expect much more to be done in the ensuing years.

Section 3 is devoted to evolutionary models of human and political behavior. Political economy is now at the confluence of two related paradigms: utility maximization and evolutionary fitness. Both employ survival arguments in the context of competitive forces—for example candidates need to win elections to survive. And both employ the concept of equilibrium. These two concepts of survival and equilibrium distinguish political economy from other approaches to political behavior. However, these two approaches at times provide contradictory insights. As we will (p. 5) show, some kinds of irrational behavior may improve evolutionary fitness. So at the same time that political economy is pushing the envelope of hyper‐rationality (as illustrated in Section 2), it is also trying to incorporate elements of emotions and irrationality (Section 3). Furthermore, while political economy has traditionally been based on self‐regarding behavior, a considerable body of research in evolutionary politics tries to explain other‐regarding behavior, such as altruism and vengeance.

Scientific knowledge depends to a great extent on the interplay between empirical knowledge and theoretical development. Not surprisingly, our most comprehensive knowledge is about the advanced industrial democracies in general and legislatures in particular, where the great number of observations (of votes, party affiliation, etc.) allow for an extensive testing of hypotheses and considerable refinement of theory.2 Our Handbook of Political Economy reflects this emphasis.

Nevertheless, over time, there has been a spread of knowledge from the core areas of research. This spread has occurred for several reasons. First, the same behavioral relations that we observe within democracies may occur across political systems once we account for the divergent institutional constraints on the actors. For example, authoritarians may not face elections, but they too need political support to remain in power (see Bueno de Mesquita, this volume). Second, more information is being collected so that cross‐country comparisons can now be done.3 Finally, the political phenomena in non‐democratic countries raise a host of questions typically ignored in democratic countries that demand answers: why is there ethnic conflict? When is democracy a stable political system? What if any is the relationship between democracy and capitalism? And why are so many nations underdeveloped?4

In Section 4, we consider the spread of political economy to new areas of research. Here the empirical and theoretical answers are the least certain, but perhaps the most interesting because of their novelty. We use, as our illustrative example, work on the size and wealth of nations. A motivating reason for choosing the size of nations as our prime example of the spread of political economy is that rational choice models have often been (unfairly) accused of dealing with “epiphenomena” such as voting rather (p. 6) than with “deeper and more substantive” issues. The size and wealth of nations clearly passes the gravitas test.

1 Endogenous Institutions: The Structure of Congress

Institutions can be studied at three different levels. First, the most basic and common level takes institutions as given and studies their effects. Second, the first method can be used as a form of comparative institutional analysis to study the implications of different forms of institutions. Third, the deepest level of institutional analysis is to take the institutions themselves as endogenous; and to explain how and why institutions are structured in particular ways, and why some types of institutions survive but not others. The third approach is both the newest and the least explored of the three approaches to institutions and is therefore likely to be a major frontier in the coming years.

To illustrate the differences in the three approaches to institutions, we focus on legislatures, where scholars have made significant progress on institutional choice. We begin our discussion with models that take legislative institutions as given and study their effects. In a relatively ‘institution‐free’ legislature with majority rule voting in one dimension, legislative choice will be the preference of the median legislator. By adding institutional features to this simple spatial model of legislative choice, scholars have studied the implications of a variety of institutional details. For example, several scholars have studied the effect of committee gatekeeping authority (Denzau and MacKay 1983; Shepsle and Weingast 1981) or party gatekeeping authority (Cox and McCubbins 2005) on legislative choice. The idea is that committees (during the mid‐twentieth century) or parties (during the late twentieth century and early twenty‐first century) held the power to keep issues within their jurisdiction from coming up for a vote. In contrast to the median voter model, the gatekeeping models show that some non‐median status quos can be sustained: the gatekeeper will keep the gates closed for any status quo that she prefers to the median's ideal. This research agenda has produced a wealth of knowledge about how legislative institutions affect both legislative policy choices and policy decisions by the other branches. For example, Laver and Shepsle (1996; see Laver, this volume) show how parliamentary institutions affect policy choice; Krehbiel (1998, this volume) demonstrates the effects of internal congressional rules (notably, the filibuster) for policy‐making, including how policy‐making changes with various types of electoral change; Ferejohn and Shipan (1990; see Huber and Shipan, this volume) show how potential threats of legislation affect bureaucratic decision‐making even without any legislation passing; and Marks (1988; see McCubbins and Rodriguez, this volume) demonstrates the close relationship between legislative preferences and judicial decisions that interpret the meaning of statutes.

(p. 7)

The second type of institutional analysis utilizes the above methodology to make comparative statements about different institutions. For example, pivotal politics models show the differences in behavior between a unicameral majoritarian system, a bicameral system where each chamber uses majority rule, and a bicameral system in which one chamber employs a filibuster rule allowing a minority of legislators to prevent the passage of legislation. The first institution always results in the median legislature's ideal policy. The second institution creates a gridlock range of possible policy choices—the set of points between the ideal policies of the median in each chamber. Any status quo policy in this set is an equilibrium in that there does not exist a majority in each chamber that can overturn it. The third institution extends the set of status quo points that cannot be overturned even further: the possibility of a filibuster means that only policies commanding 60 per cent in one chamber and a majority in the other can overturn a policy, so more status quo policies are stable. For a further discussion of these issues see Krehbiel (this volume) and Cutrone and McCarty (this volume).

Third, a much smaller set of papers studies the structure of the legislature itself and treats its institutions as endogenous.5 Four different approaches have been used to explain legislative structure: (1) legislator preferences, (2) committees as commitment devices, (3) parties as transactions cost reducers, and (4) committees as information providers.6 We will now discuss each in turn.

1.1 Legislator Preferences

The simplest of the approaches bases legislative choice on legislator preferences and relies on the “majoritarian postulate,” which holds that legislative policy and procedural choices are made by majorities (Krehbiel 1991). In the context of one‐dimensional models of policy choice, the preference‐based approach has the following implications (Krehbiel 1993). First, policy choice corresponds to that of the median legislator. Second, suppose that legislators join one of two parties, and, further, that those to the right of the median largely join one party while those to the left of the median largely join the other party.

Suppose that the status quo is to the right of the median and the proposed legislation seeks to move policy left toward the median voter's ideal. The “cutting line” divides the set of voters into those favoring the status quo and those favoring the proposal. In this context, the cutting line is that policy halfway between the status quo and the proposed alternative (assuming that legislator utility functions are symmetric). Since the status quo is to the right of the median, so too will be the cutting line. The proposal makes every legislator to the right of the cutting line worse off, so they vote against the policy; while every legislator to the left of the cutting line is better off under the proposal and will vote for it.

(p. 8)

Given the assumption of how legislators choose parties, nearly all legislators from the left party vote for the proposal; while most of those of the right party vote against it. Indeed, if the status quo is not too far to the right relative to the distribution of legislature preferences, then most of the members of the right party will vote against the change. In other words, voting on this legislature will exhibit polarization by party even though the party exerts no pressure on its members to vote one way or another.

A lesson of this model is that polarized party voting can emerge as the combined result of legislative preferences and sorting into parties without being a function of any legislative institutions that advantage parties or that constrain member behavior.

Although this approach rationalizes only minimalist legislative institutions, it provides an important baseline from which to judge other models. While most approaches rely on legislator preferences to some degree, we term this approach a preference‐based approach because it relies solely on legislative preferences and the median voter model to explain political phenomena, such as polarized party voting.

1.2 Committees as Commitment Devices

The second approach is exemplified by Weingast and Marshall's (1988) “Industrial organization of Congress.” This approach built on previous theoretical and empirical work. Going back to Buchanan and Tullock (1962), many models of legislative choice emphasized logrolling and vote‐trading. By logrolling and trading votes, members and the districts they represented were better off. Logrolling can thus be seen as a legislative institution parallel to market institutions in the economic sphere.

Empirically, the substantive literature on Congress emphasized the central importance of committees, which were seen to dominate the policy‐making process. That literature emphasized committee specialization and self‐selection onto committees by members most interested in the committee jurisdiction (Fenno 1966, 1973; Shepsle 1978). Clearly, this form of committee organization suited members' electoral goals (Mayhew 1974). So committee organization was seen as reflecting the preferences of the legislators and their constituents. In this view, the key to understanding legislative organization was legislative exchange.

Weingast and Marshall sought an explanation of congressional organization that accounted for the fundamental features then found in the substantive literature. They based their approach on two observations: first, the legislature faced many different issues that cannot be combined into a single dimension: agriculture is not commensurate with civil rights, banking, or defense. Second, vote‐trading had significant enforcement problems as a means of legislative exchange. For example, suppose that one group of legislators seeks to build dams and bridges, another group seeks regulatory control of some market, and that neither group alone comprises a majority. The two groups could, per logrolling, agree to support one another's legislation. But this raises a problem: once their dams and bridges are built, what stops those receiving them from joining those locked out of the original trade to renege on the deal by passing (p. 9) new legislation ending the regulation? Because of the possibility of reneging, some logrolls will fail ex ante as legislators fear their deals will ultimately fail.7

Enforcement problems imply that direct exchange of votes is not likely to provide a durable means of legislative exchange. Instead, Weingast and Marshall argued that legislators were likely to institutionalize their exchanges in the form of a legislative committee system (LCS) that granted legislators greater powers over policies within the committee's jurisdiction. They showed that, in the context of a mechanism to grant rights to committee seats in combination with self‐selection onto committees, the LCS made members with different preferences better off.

Consider the problem of reneging noted above. Self‐selection onto committees with gatekeeping power prevents this type of reneging. Suppose the group favoring dams and bridges seek to renege on their original deal and introduce legislation to undo the regulation. This legislation now goes to the committee with jurisdiction. Populated by those who favor maintaining the regulation, committee members prevent the legislation from coming before the legislature. This preserves both the status quo and the original legislative exchange.

This approach also addresses an important question raised by the majoritarian postulate. This postulate questions why a majority would ever vote to reduce or restrict its own powers in the future. In the context of a single dimension of legislative choice, it is hard to understand why the median (and hence a majority) would vote to restrict itself. In the context of multiple dimensions, however, no median exists. The exchange postulate underlying the LCS provides an answer to the question: a majority votes to restrict itself on a series of different policy issues simultaneously. Although this restricts the majority's actions on each dimension, if each member is assigned to a committee of higher value than the average, this exchange makes each better off (see also Calvert 1995).

In this model, committee organization solves the problem of legislative exchange. Given pervasive enforcement problems of direct exchange of votes, legislators instead choose to organize the legislature in such a way as to institutionalize a pattern of exchange that furthers the goals of all.

1.3 Legislative Parties as Solutions to Collective Dilemmas

The third approach uses legislative parties to explain legislative organization and behavior. In this view, parties are more than just a collection of people choosing the same party label. Cox and McCubbins (1993), for example, argue that legislators face a series of collective action problems that political parties can resolve. For example individual legislators have trouble passing their own legislation; and without coordinating, legislator activity fails to add up to enough to help each get (p. 10) re‐elected. In particular, all legislators face a common‐pool problem in which they have incentives to shift costs onto each other. Parties overcome these problems by enforced coordination.8

In the face of various coordination and related problems, Cox and McCubbins argue that members have an incentive to use parties to coordinate the behavior of their members for several ends: to produce legislation more attractive to their members; to develop a national reputation or brand name; and, in combination, to use these tools to help re‐elect their members (see also Wittman 1989, 1995). Committees in this view are a tool of the majority party used to further party goals; namely, to propose legislation benefiting party members and to prevent legislation that would make party majorities worse off. The majority party's delegation to each committee, rather than being composed of those most interested in the policy as in the Weingast and Marshall approach, were representative of the party. This particularly holds for gatekeeping committees, such as the budget committee where the members do not self‐select. Tests of the representatives of committees tend to support the party view (see, e.g. Cox and McCubbins 1993). Also consistent with this view was the striking partisan aspect of congressional voting, particularly since 1980.

However, this party‐centric approach has not been without its critics. Krehbiel (1993) presented a major challenge to this perspective by asking, ‘where's the party?’ Relying on the preference‐based approach noted above, he showed that many of the findings of the party‐centric perspective were consistent with the majoritarian perspective. We have already noted how polarized party voting, rather than being a product of the party organization of the legislature, can result from simple preferences in combination with legislator sorting into parties. Another aspect is the representativeness of committees. As noted, the party perspective emphasizes that each party's delegation to a committee is representative of the party; but if both parties do this, then the overall committee will be representative of the chamber, also consistent with the majoritarian perspective.

The debate about parties has spurned a remarkable empirical literature. See for example, Cox and McCubbins (2005), Krehbiel (this volume), and Groseclose and Snyder (2001). We do not have time in our introduction to cover this literature, but we do want to emphasize that the research in endogenous legislative institutions is empirical, as well.

1.4 Information Explanations for Structure

The final approach to legislative organization, associated with Gilligan and Krehbiel (1989) and Krehbiel (1991), emphasizes that legislators are uncertain about the impact of their choices on actual outcomes. Legislators therefore have an incentive to organize the legislature to reflect the task of gaining expertise and information that (p. 11) reduces this uncertainty. In this world, committees are bodies of legislative experts in the policies of their jurisdiction. Committee expertise allows committee members to reduce the uncertainty between legislation and actual outcomes.

This perspective has significant implications for legislative organization, including the choice of rules governing consideration of legislation on the floor. For example, because expertise requires costly investment, legislators will undertake this costly investment only if the system somehow compensates them for this. Krehbiel argues that restrictive rules that bias legislative choice in favor of committees are the answer. Although restrictive rules prevent legislators from choosing policy associated with the median voter ex post, legislators are better off ex ante because committee expertise allows committees to reduce the uncertainty associated with the difference between legislation and policy outcomes.

1.5 Concluding Thoughts

The debate about legislative institutions has been lively, and no consensus has yet emerged on the determinants of legislative organization. We cannot yet say whether one perspective will ultimately triumph (as Gilligan and Krehbiel 1995 suggest) or whether a synthesis of perspectives is likely to emerge (as Shepsle and Weingast 1995 suggest).

From a broader perspective, the study of legislative institutions provides a template for how research on institutions is likely to proceed in the future. The first stage is to see how a particular institution affects behavior; next, similar but somewhat different institutions are compared; then in the final stage, institutions are treated as being endogenous. If the history of research on endogenous legislative institutions is any guide, there will be disagreement on which institutions are endogenous to other institutions. These controversies, in turn, help shape our understanding of institutions and provide a deeper understanding of organizations.

2 Revelation and Aggregation of Information: Voting

In this section, we consider the revelation and aggregation of information. This is a game‐theoretic, as opposed to a decision‐theoretic, approach to information. An exciting aspect of this research is that it often turns the standard theoretic wisdom on its head. We illustrate by looking at voting behavior.9

Traditional democratic theory argues that, for democracy to work, voters should inform themselves about the candidates and the issues. Moreover, voters should be unbiased and rely on unbiased sources of information. Practice in all working (p. 12) democracies differs greatly from this ideal. Voters appear to be notoriously uninformed (and, indeed, have little incentive to become informed). Some voters base their choice of candidate solely on party label, while other voters rely on biased sources of information, including information provided by pressure groups.

Does this apparent lack of information imply that democracy will fall far from its ideal? Possibly not, if the lack of information is more apparent than real. In the following pages, we show how voters can make logical inferences so that their behavior is similar to perfectly informed voters.

We start with an easy example to illustrate how information revelation arises. A number of articles study the endogenous timing of elections in parliamentary systems.10 Because it has access to information, the ruling party is able to forecast future economic performance and other events that are likely to impact on voters' welfare. This information is not likely to be available to the voters. The party in power has an incentive to call an election when it is at the height of its popularity.

However, this decision‐theoretic analysis does not consider the voter response to an early election call. Voters can infer from an early election call that the ruling party expects to do worse in the future. Voters can therefore infer that there is likely to be bad news in the future.11 The ruling government realizes that voters will act this way. As a result, governments are less likely to call early elections than they would otherwise be, and when they do, voters will take this information into account and be less positively inclined towards the government. Smith (2003, 2004) provides empirical evidence in support of this argument. Polls taken after the announcement of an early election show a decline from polls taken before the announcement. Incorporating the voters' response made obsolete much of the earlier research on endogenous timing of elections that did not consider the possibility that voters could make inferences.

Let us now consider another area where earlier research assumed mechanical, uninformed voters, but more recent research assumes uninformed but rational voters, often with starkly differing results. Starting with Ben Zion and Eytan (1974) and continuing on into the recent past (see Baron 1994; Grossman and Helpman 1996), an extensive literature has assumed that the more money a candidate spends on advertising, the more votes the candidate receives from uninformed voters. Sources of money tend to come from interests on the extremes of the political distribution. To get contributions that pay for such advertising, candidates move their policies away from the median voter toward a pressure group's most preferred position.

Let us look at the Grossman and Helpman model in greater detail.12 Grossman and Helpman assume the following: voters, candidates, and pressure groups are arrayed along a one‐dimensional issue space. Each voter has a most preferred position with a concave utility function over policy; this means that voters are risk averse.13 There are (p. 13) two types of voters: informed voters who know the positions of the candidates and uninformed voters who have no knowledge of the candidates' or pressure group's positions. Informed voters vote for the candidate closest to the voter's most preferred position. Uninformed voters respond only to political advertising—the more money spent on advertising by one of the candidates, the greater the percentage of uninformed voters voting for the candidate.

Each candidate wants to maximize the percentage of votes that he or she receives. There is one pressure group (say, on the extreme right). The pressure group is willing to donate money to one of the candidates if the candidate moves right from the median voter.

The election proceeds as follows:

  1. 1. The pressure group makes a one‐time take‐it‐or‐leave‐it offer to one of the candidates. If the candidate agrees to move right of the median informed voter, then the pressure group provides funds to the candidate for political advertising. If the agreement is accepted, it is binding on both sides.

  2. 2. The candidate receiving the offer decides whether to accept or reject it.

    If the candidate accepts the offer, then the other candidate knows the position of the candidate accepting the offer. The other candidate will then choose a position between the candidate and the median informed voter to capture as many informed voters as possible.

    If the candidate rejects the offer, then the pressure group is out of the picture. Per the standard Downsian (1957) model, both candidates will then choose to be at the median of the informed voters.

  3. 3. The positions of the candidates are then made public to the informed voters. The candidate who received the donation then advertises.

  4. 4. The voters choose.

Given the set‐up of the model, it is not hard to see that the candidate will be willing to move right from the median of the informed voters as long as the advertising from the campaign funds sufficiently increases the number of uninformed voters to compensate for the loss of informed voters caused by the movement to the right and away from the median informed voter.

The model seems to imply that pressure groups are likely to undermine the political process. But is it rational for uninformed voters to act in the way postulated? Let us consider the model more carefully.

In the above model, the candidates, pressure group, and informed voters are all rational, but not the uninformed voters. As already mentioned, uninformed voters vote mechanically. But being uninformed does not mean being irrational. Suppose instead that the uninformed do not vote mechanically but can make logical inferences. We consider two variants with different characterizations of uninformed voter behavior.

First, let us continue to assume that the uninformed voters know neither the positions of the candidates nor the position of the pressure group (the pressure group being equally likely to be on the left or the right). Campaign advertising is, by its very (p. 14) nature, public so that an ordinary person can infer which candidate received the most contributions by observing which candidate has the most political advertising. The uninformed voters can simply watch television and passively observe the candidate who has the most advertisements. Given the logic of the model, the uninformed can infer that the candidate doing the advertising is further away from the median informed voter than the candidate not doing the advertising.

Given our assumption that the uninformed voter does not even know whether the pressure group is on the left or the right, the uninformed voter faces a greater risk from the candidate who is doing the advertising. Both candidates will on average be at the median informed voter's most preferred position, but the candidate receiving the campaign funds will be more extreme. Thus the risk‐averse uninformed voter should vote for the candidate not doing the advertising! The rational voter does not act like the mechanical voter in this case. Of course, if this behavior characterizes uninformed voters, then the candidate will not accept campaign donations from the pressure group in the first place.

Now suppose that the uninformed know something. For example, they may know that the National Rifle Association supports one of the candidates, and as a consequence these voters can infer that the candidate receiving the funds is closer than the median informed voter is to the position of the NRA. More generally, the uninformed voter may know whether the pressure group is on the right. If the uninformed voter also knows where he or she stands relative to the median voter, the uninformed voter to the left of the median voter can infer that he or she should vote for the other candidate, while those uninformed voters to the right will be inclined to vote for the candidate receiving funds from the right‐wing pressure group.

Consider two cases: if uninformed voters tend to be to the right of the median informed voter, then the candidate may accept funds from the right‐wing pressure group and even advertise this to be the case. This occurs when the candidate gets sufficiently more votes from the uninformed voters on the right than she loses from the uninformed voters on the left to make up for the reduced vote share from informed voters. Alternatively, if there are more uninformed voters to the left of the median informed voter, the candidate would lose if she accepted the deal from the pressure group. Hence she would not do so in the first place.

In this version of the model, pressure group contributions help the uninformed voters. If the mass of uninformed voters is to the right of the median of the informed voters (and hence, the overall median is to the right of the median of the informed voters), then one candidate will accept the funds and the effect of campaign donations will be to move the candidate to the right from the median of the informed voters. On the other hand, if more uninformed voters lie to the left of the median, neither candidate will accept funds from a pressure group on the right.14 In short, pressure groups aid the political process, rather than undermine it!

We have just modeled the case where some voters are uninformed about the candidates' positions. Another possibility is that voters are informed about the candidates' (p. 15) positions but not about their relative quality. Again, the voters are rational and the pressure group has private information (in this case, about the relative quality of the candidates). A number of recent papers consider this case but employ differing subsidiary assumptions: advertising has content (see Coate 2004; Wittman forthcoming); advertising has no content, but expenditures on advertising signal information (Prat 2002, this volume); pressure groups make the offers (Coate, Prat), candidates make the offers; there is one pressure group, there are multiple pressure groups; the candidates are only interested in winning, and the candidates have policy goals. These various modeling efforts do not all come to the same positive conclusion as the previous paragraph. In general, the results depend on whether the value of the revealed information is outweighed by the loss from inferior candidate positions when the candidates compete for pressure group funds. In turn, this balance depends to a great degree on the number of pressure groups and whether it is the candidates or the pressure groups that make the offer. All these various modeling efforts take into account that information valuable to uniformed voters is revealed by the pressure group's donation or endorsement and all of them assume rationality of the voters. This is the key methodological advance—how voters can incorporate information that others might want to distort or hide (see Prat, this volume).

We have shown how uninformed voters can make inferences from behavior and thereby become more informed. Because all of this is embedded in a game, all other players take this behavior and information into account when they make their decisions; and of course the uninformed take the other players' strategies into account when they make their own inferences.15

The final example for this section considers aggregation of information in the context of voting. Suppose a set of voters face a decision about how much money to spend. To gain intuition, we begin with an exceedingly simple example. Suppose that there are five voters with identical preferences: three have unbiased estimates of the correct action to take, while two are fully informed. The voters know whether they are informed or not. The uninformed know that there are informed voters, but not how many. Suppose further that the correct action is to spend $7 million and that, with equal probability, the uninformed players receive a signal that it should be 5, 7, or 9 million dollars. Assuming that the voters cannot communicate with each other, how likely is it that the majority rule decision is not 7? The answer is zero if the voters are rational: all the uninformed voters will rationally abstain. By doing so, they know that only informed voters will participate and that these informed voters will make the correct decision.

This example illustrates two important but related issues. First, the more informed people will choose to vote (here, at least, the argument does not go against conventional wisdom). Second, the potential voter asks: given that he will be pivotal, should (p. 16) he vote, and if he votes, how should he vote. In other words, the decision to vote and how to vote does not just depend on whether the person will be pivotal, but also on the preferences and information structure of all of the voters. Our understanding of the problem is no longer in terms of decision theory but of game theory.

To illustrate this idea in terms of a more complicated, but more realistic model, assume that there are three voters (or three groups of voters), labeled V, V i, and V u; and two states of the world, labeled 1 and 2. Assume that voter V votes for candidate D regardless of the state of the world. The second voter is independent but informed and will be labeled V i. This voter knows the state of the world and votes for D when the state of the world is 1 and votes for R when the state of the world is 2: given V i's preferences, D makes a better president if the state of the world is 1 while R makes a better president if the state of the world is 2. The third voter, V u, is also independent (with the same preference structure as V i), but is uninformed. However, V u knows the preferences and information sets of the other two voters.

How should V u vote if the probability of state 1 (where D is V u's preferred candidate) is more likely than the probability of state 2? The decision‐theoretic model, where V u's vote is based on the mostly likely state of the world (state 1), suggests that V u vote for D. But the game‐theoretic pivot model argues that V u should vote for R. The reasoning is as follows. If the state of the world is 1, then both voter V and voter V i vote for D, and D will win regardless of V u's vote. When the state of the world is 2, then the other two voters will split their vote and V u will be pivotal. Under such circumstances, V u should vote for R since she prefers R to D in state 2. So V u always votes for R.16 Behaving in this way allows the informed voter, V i, whose preferences are similar to V u's, to be pivotal in all circumstances. This behavior results in better outcomes for V u than those suggested by the decision‐theoretic perspective. Because the latter tells V u always to vote for D, V u votes for D even in the state 2 when she prefers R.

These two examples show that uninformed voters can make inferences about how to behave that make them better off, even when they remain ignorant of critical aspects of the election. Now this particular example requires V u to know a lot about the other voters, but the conceptual apparatus can be incorporated into other models where the information requirements are not so high. To get back to our earlier discussion of pressure groups where some voters are uninformed about the candidates' positions, Wittman (2005) shows that the uninformed voters to the right (left) of the median voter should always employ the following rule of thumb: vote for (against) the candidate endorsed by the right‐wing pressure group.17 Sometimes this could result in some of the uninformed voters on the right voting for the wrong candidate, and at other times this could result in some of the uninformed voters on the left voting for the wrong candidate. However, even if all the mistaken votes for one candidate were reversed this would not change the outcome. So fully rational but uninformed voters consider the effect of their behavior when pivotal even if their likelihood of being (p. 17) pivotal is small. Indeed, in this example, by their rule of thumb, the uninformed make the informed median over all voters the pivot.

To summarize: democratic theory has long held that ignorant voters harm the operation of democracy. The force of this section is to demonstrate that uninformed voters and uninformed actors more generally can make inferences based on the behavior of others, the structure of their strategic situation, and signals received from other actors. These inferences make uninformed voters better off than predicted by decision‐theoretic models; and they improve the workings of democracy more than predicted by traditional democratic theory.18 We believe that in the next decade the aggregation and revelation of information will continue to be a very important mode of research and that it will continue to overturn received wisdom (see Moulin, this volume; and Ledyard, this volume; for further examples).

3 Evolutionary Models of Human and Political Behavior

Both economics and evolutionary models of human behavior employ the concepts of survival and equilibrium (Alchian 1950). Nonetheless, the implications of economic and biological models at times conflict. Although people who are capable of achieving their goals because of either their physical or mental prowess are more likely to survive and produce offspring, it is not clear that fitness would accrue to those who maximized utility and were happier. Furthermore, at times evolutionary fitness may be gained by being less rational; for example, the emotional may serve as a useful commitment device (see Hirshleifer 2001).

Humans are pre‐eminently social animals. Political structures are one kind of social structure, and such structures need to be compatible for better or worse with the biology of human behavior. Are people naturally xenophobic, vengeful, or generally limited in their capacity for empathy? One can generate all kinds of hypotheses about human behavior. But economics and/or evolutionary biology demand that the hypothesized behavior survives in a competitive equilibrium. The principle of survival in equilibrium imposes discipline on modeling efforts because not all hypotheses satisfy this criterion.

Models of pure self‐regarding preferences have generated considerable insight into the political process—as this Handbook attests—yet such an assumption is not requisite for rational behavior. People may be other regarding in that they care about their children or feel altruistic or vengeful towards others.19 How other‐regarding (p. 18) behavior survives in equilibrium is a major research question that still has not been fully answered.

Let us start with an easy question. Why are human parents altruistic to their children? Infants and small children need care in order to survive. Parental altruism helps to ensure the genetic transmission. But genetic relatedness rapidly approaches zero as the population increases in size. So this simple explanation for altruism falters when we want to extend it to the population as a whole.

A significant number of researchers seek to understand the role of vengeance. The phenomenon of suicide bombers inspires some of this interest—being a suicide bomber hardly appears to improve genetic fitness. Further interest in vengeance is inspired by experiments demonstrating that the standard income‐maximizing model does not work well in certain situations. For example, consider the ultimatum game in which person A is given a certain amount of money (say ten dollars); A then offers a share of this money to B; B then either rejects or accepts the offer. If B rejects the offer, neither gets any of the money and the game is over. A theory that is based on humans being purely self‐regarding predicts that A should offer B a trivial amount, say one cent. Because one cent is better than nothing, B is better off accepting the offer than rejecting it. Experiments consistently reveal that B subjects often reject low offers even though this hurts them financially. Further, experiments also reveal that A subjects often offer significant amounts to B to forestall such a rejection.20

This vengeful behavior by B is contrary to income maximization. Thus, the key intellectual puzzle to resolve is how vengeful behavior can be evolutionarily stable.

Scholars provide two types of answers. One is that a reputation for vengeful behavior may enhance fitness because others may avoid provoking revenge by avoiding doing harm to the vengeful person in the first place. Following this intuition, some evolutionary models show that, under certain circumstances, two types of people, vengeful and non‐vengeful, can survive in equilibrium (Friedman and Singh 2005).21

Here we will concentrate on the second approach—the co‐evolution of memes (social constructs) and genes—because that is more relevant to our understanding of collective choice and social cooperation. Humans are more social than their ancestors, and many argue that this sociability evolved along with the social institutions that made such sociability result in greater reproductive success. Consider the following thought experiment. If chimpanzees had language (which in itself enhances sociability) and could do calculus, would chimpanzee society look like human society if they were able to observe our customs? The co‐evolution argument says no. Shame, guilt, the ability to be empathetic or vengeful, and certain conceptual possibilities that make us human would all be much more circumscribed in chimpanzees, which themselves (p. 19) show more of these qualities than marsupials. Without pro‐social emotions, all humans (rather than just a few) might be sociopaths, and human society as we know it might not exist despite the institutions of contract, government law enforcement, and reputation.22

Groups that overcome prisoner's dilemmas (and other social dilemmas) are likely to be more productive in gathering food and more successful in warfare against other groups. In turn, this leads to greater reproductive success. The central question for evolutionary models is how, if at all, evolutionary pressure keeps individual shirking in check. It seems, for example, that a person who is slightly less brave in battle is more likely to survive and have children than his braver compatriots. Bravery at once increases the risk for the brave while making it more likely that the less brave survive. If bravery/cowardice is genetic, how is a downward spiral of cowardice prevented?

The answer proceeds along the following lines: if the individuals are punished for shirking (in this case, being cowardly), this will keep them in line. But, because engaging in punishment is costly (possibly resulting in the would‐be punisher's death), who will do the punishing? The evolutionary approach suggests that punishment, a kind of vengeance, will be a successful strategy for the punisher if he gains even a mild fitness advantage (status, more females, etc.). This is because, in equilibrium, the cost to the punisher is relatively small since punishment does not have to be meted out very often. Punishment need not be carried out frequently to be effective. It is the threat that is important. To the degree that shirkers by being punished (possibly by being banished from the tribe) become less fit, the need to engage in punishment decreases even more as there are fewer shirkers. And given that those who punish are more aligned with the interests of the society and therefore may be more likely to survive, there may be enough potential punishers so that the need for any individual to bear the costs of punishment is reduced still further (which of course means that the benefits received will also be reduced). If altruism and vengeance are gene based rather than meme based, there may have been a co‐evolution of memes and genes. Over the eons, human society may have encouraged pro‐social genetically based emotions.23

The force of this argument is that pro‐social emotions bypass the cognitive optimizing process that is at the core of rational economic man. This cognitive difference implies that at times we should observe profound differences between the evolutionary model and the economic model. Under certain circumstances, seemingly irrational behavior, such as vengeance or shame, may be evolutionarily stable even if it runs counter to utility maximization. Moreover the relatively slow genetic evolution in comparison with meme evolution (especially in the last 100 years) yields a further (p. 20) conclusion: it is quite possible that some of the pro‐social emotions whose genetic basis evolved over the last 100,000 or more years are maladapted to the modern world.

At present the evolutionary study of genes and memes has produced very tentative results. Human behavior is part mammalian (possibly even reptilian), part primate, and part hominid. Although some have argued that much of human psychology developed in the savannah, it is not clear what part of human psychology developed then or earlier or, to a lesser degree, later. Also, we have only a rudimentary picture of human life in the savannah so evolutionary models of this period are very speculative. Furthermore, it is not clear whether the transmission of behavior is through memes or genes. On the other side of the coin, there appears to be much room for further research, and we believe that in the coming decade there will be many advances.24

4 Pushing the Envelope of Investigation

As political economy has matured, it has begun to tackle a wider range of topics. This work includes a series of larger questions, such as the origins of dictatorship and democracy. In this section, we consider one of these frontier topics—the size of nations.

Much of history reflects the expansion and contraction of nations. The conquests of Alexander the Great, the rise and decline of the Roman Empire, the aggressive expansions of Napoleon and Hitler, and the dissolution of the USSR are just a few examples. At the other end of the spectrum, many tiny countries, such as Singapore and Andorra, have survived a considerable length of time.

For over two millennia, historians and philosophers have asked why some nations have expanded, why others have contracted, and what is the optimal size of a polity (Plato, for example, said that the optimal size was 5,040 families). In this section, we discuss the political economy contribution to this area. In the process, we show how research in political economy builds upon earlier foundations.

The political economy approach to the size of nations starts with the basic Downsian characterization of voter preferences. In this case, voter or citizen preferences can be placed along a line (or a circle). This line or circle is then divided into n parts (not necessarily equal), each part representing a country. Each country chooses a policy position, X j, which might be the median or mean of the citizens' preferences. A citizen's utility for her nation's policy is assumed to be decreasing in distance from her own preferred position, x (e.g. − | xX j| or − (xX j)2). Individuals at the (p. 21) boundary of two countries can choose in which country to reside (see Spoloare, this volume; Alesina and Spoloare 2003, for a more complete coverage.).25

Each citizen would like to have his or her country's policy as closely aligned as possible to her preferred policy. If policy were the only factor, all countries would be composed of only one citizen. But other factors run counter to such extreme decentralization. The most important are economies of scale in production and military power. When barriers to free trade exist between countries, a more populous country achieves greater economies of scale through its larger domestic market. A larger population also allows for greater military power, which may make war against smaller and weaker states more profitable because of the higher probability of success. At the same time greater military power makes predation by other states less profitable to these other states and therefore less likely (see Skaperdas, this volume).

These insights can readily be converted into a comparative statics analysis. When barriers to free trade are reduced (so that economies of scale can be achieved within a small country as long as it has sufficient international sales) and the returns to warfare are decreased, the number of countries will increase and the average country size will decrease. The returns to warfare depend greatly on the nature of the victim country's wealth. If the wealth is in oil, the predating county can expropriate most of the wealth; when the wealth is in human capital, the predating country can expropriate very little. In the latter case, the benefits to predation are reduced, the threat of war is less credible, and the benefits of being a large country are diminished.

In a simple model where wealth is distributed evenly among the citizens, those citizens at the periphery of the country will be most dissatisfied with their country's policy. They are therefore the most likely citizens to exit and join the adjacent country. Because of economies of scale in production and military power, this “migration” is costly to those citizens left behind. In order to forestall such migration, countries might institute a non‐linear transfer scheme that grants citizens on the periphery greater resources. Le Breton and Weber (2001) make this argument and point to a number of cases, such as Quebec in Canada and some of the border states of India, where the center grants special rights to the peripheral states. This extension of the basic model affords a nice illustration of how political economy often grows. Instead of two competing models, the basic model is expanded so that we have a more general theory.

In the basic model, all of the countries have the same characteristics; and, when population is uniformly distributed on the line or circle, all countries are of the same size. Extensions of the basic model allow countries to have different characteristics. Nations are characterized as a nexus of public goods. A wise public policy choice may significantly increase the overall wealth of the citizenry. Successful countries create conditions for high productivity in the economic sphere by enforcing property rights and providing social overhead capital, while at the same time minimizing political costs by creating a system of rules that reduce influence costs and allow for (p. 22) diverse preferences. Countries also need an effective military apparatus to protect their wealth from predation by other countries. Success in these endeavors may lead to immigration and geographical expansion, while failure to meet these goals may lead to extensive emigration or break‐up of a country (see Wittman 2000).

Bolton and Roland (1997) consider another modification of the model. Until now we have assumed that the citizens are similar in all respects except for their preference for public policy, which has been given exogenously. Suppose instead that individuals differ in productivity and income, which determines their preference for redistributive public policy. Suppose further that there are two sections of the country and that each section votes by majority rule. Then two sections of a country may separate because of significant productivity differences. All of this is reflective of Tiebout's (1956) argument that jurisdictions specialize to reflect the preferences and wealth of their constituents.26

To summarize, political economy is making use of its basic tools to investigate an ever deepening set of questions. Ultimately, fewer institutions are treated as being exogenously determined and more institutions, including the nation state, are treated as variables to be explained. In this way, anthropology and history become part of political economy.

We conclude this section on pushing the envelope with a final observation. As the topics in this Handbook illustrate, the bulk of political economy research has focused on institutions and behavior within advanced industrial democracies. In these settings, the formal institutions of courts, legislatures, executives, bureaucracy, and elections can all be taken as given. Hundreds, if not thousands of papers have been written on these topics. Not surprisingly, the most progress has been made in these areas.

In contrast, political economy work that studies phenomena in countries outside of the advanced industrial democracies has made far less progress. Nevertheless, there are a number of exciting developments. We briefly mention a few areas of nascent research (posed as questions) that are likely to blossom in the future and that we cover in the Handbook:

  • What do authoritarians maximize and why do they make the decisions they do? In past, many scholars assumed that they maximize their share of rents (e.g. North 1981, ch. 3; Olson 2001). Yet this approach remains inadequate because it takes as given that the authoritarian remains in power, something deeply problematic (as Tullock 1987 observed). Bueno de Mesquita et al. (2003; see Bueno de Mesquita, this volume, for a summary) provide a new approach arguing that authoritarians maximize their likelihood of staying in power. Haber (this volume) provides a program for future research on this topic.

  • Why does democracy survive in some countries but not others? Przeworski (this volume) argues against some common answers and suggests that per capita wealth is an important reason.

  • (p. 23)
  • And while we are on the subject of democracy, what is the relationship between democracy and capitalism? Iverson (this volume) surveys various political economy models that try to answer this question.

  • Why do so many countries remain poor? And why did a handful of countries in the eighteenth and nineteenth centuries manage to rise well above the rest of the world? Here too we have important new political economy models that seek to answer these questions (see, for example Acemoglu and Robinson, this volume; and Bates, this volume).

  • What are the sources and circumstances of ethnic coalitions and violence? Fearon (this volume) provides an overview of the political economy approach and an agenda for future research.

In short, the extension of political economy methods beyond the advanced industrial nations is rapidly developing, and this Handbook provides overviews that can serve as building blocks for further research.

5 The Intellectual Arms Race

Although we have characterized political economy as a set of agreed‐upon methodological approaches, the set is quite large; different models and empirical studies frequently come to quite opposing conclusions. Scholarly works tend to play off each other so that there is an ever‐increasing level of sophistication. Thus, while we have characterized political economy as a synthesis of fields, the synthesis will nonetheless provide sparks and an exciting research agenda for decades to come.


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(1) See Austen‐Smith, this volume.

(2) This disproportionate focus of political economy research has arisen for several reasons. First, the political economy tools were first developed studying democratic countries and are therefore more easily adapted to other democratic countries than to non‐democratic ones. Second, close observation and data are more easily obtained in democratic countries so that theories applying to them have been honed the most. Third, the institutional tools of political economy are more readily applied to the more highly developed institutions of the advanced industrial democracies, in contrast to the less stable and less institutionalized politics in the developing world.

(3) Indeed, another defining characteristic of the political economy approach is the use of large data sets that enable econometric comparisons across a variety of countries, where the varieties are captured by different independent variables. For examples of cross‐country comparisons, see Persson and Tabellini (this volume) and Glaeser (this volume). The econometric approach is in stark contrast to the older comparative politics literature, which compared two or three countries at a time.

(4) For Handbook surveys of these fields see, respectively: Fearon (this volume), Przeworski (this volume), Iverson (this volume), and both Acemoglu and Robinson (this volume) and Bates (this volume).

(5) Weingast 2002 surveys this mode of analysis in different contexts. Shepsle (this volume) provides a variant on these themes.

(6) Laver (this volume) covers some of these issues; see also the summary in Shepsle and Weingast 1995.

(7) A second enforcement problem is that exchange of votes over time creates additional opportunities for reneging, especially as bills evolve.

(8) See also Cox (this volume) who shows how legislative parties arise endogenously as a means to resolve the problem of potential overuse of plenary time.

(9) Ansolabehere (this volume) reviews the broad topic of voting behavior.

(10) See for example, Cargill and Hutchison 1991 and the long list of citations found in Smith 2003, n. 6.

(11) Here, we ignore other reasons for calling an early election, in particular the desire of the ruling party in a coalition government to strengthen its hand.

(12) For heuristic purposes, we simplify their model.

(13) Risk aversion means that voters prefer a sure thing over a lottery having the same expected value as the sure thing.

(14) The exact result requires more technical specification and can be found in Wittman 2005a.

(15) There are other ways in which voters can be informed despite an apparent lack of information. Parties create brand names so that party labels are in fact informative about a candidate's position (Cox and McCubbins 1993, 2005). Relying on biased information can be rational for voters who have strong priors in favor of one of the parties (Calvert 1985). And, uninformed voters can learn from polls of informed voters (McKelvey and Ordeshook 1986).

(16) For a more extended discussion see Fedderson and Pesendorfer 1996, 1999.

(17) The actual model employs additional assumptions that assure that certain pathologies do not arise.

(18) See Ansolabehere (this volume) who makes this point.

(19) The phrase “other regarding” gets around the problem that altruistic behavior may make the person feel good and therefore altruism could be termed selfish behavior.

(20) The explanation for the rejection is that the person dividing the money has not been “fair.” For a further discussion of fairness in experiments and the implications for political behavior see Palfrey (this volume).

(21) To get this result, Friedman and Singh develop a new equilibrium concept—evolutionary perfect Bayesian equilibrium. Their paper, as is the case for much of the research on the evolutionary stability of vengeance, employs sophisticated mathematical modeling. This illustrates another theme of our chapter—that political economy, unlike other intellectual approaches to political science, emphasizes logical rigor, which often requires considerable mathematics.

(22) For further discussion along these lines see Bowles and Gintis, this volume; Friedman and Singh 2000; Boyd et al. 2003; Gintis et al. 2005.

(23) This just gives the flavor of the argument. Once again, it is worthwhile to emphasize that the research summarized here employs very carefully specified models. The challenge for researchers in the field is to characterize a situation where vengeance survives, but does not become so intense that it undermines social relations. At the same time, the researcher must account for the possibility that non‐vengeful types may want to mimic vengeful types. Finally, the researcher must mix the memes and genes so that they are in a stable equilibrium.

(24) Another group of social scientists employ a different strategy for generalizing about human behavior from the standard model of rationality, by drawing on cognitive science and psychology (e.g. North 2005). Space constraints prevent an adequate treatment.

(25) Of course, individuals might not be free to migrate. See Friedman 1977 for an explanation for the Iron Curtain and the promotion of linguistic boundaries.

(26) For an extensive discussion of the Tiebout hypothesis, see Wildasin (this volume). For ethnic causes of division, see Fearon (this volume).