Political Economy

1
Political Economy GV307
Spring 2020
Assignment 4
Due on March 17 2020 at 9 AM —follow the instructions for FASER. All of
your work should be your own.
In Word or other word processing format (can be converted to pdf), please!
1. 5 %
According to Treisman (2007) what is the strongest predictor/correlate of the level of corruption
across countries? (Limit your answer to 15 words/symbols)
2.
Consider the utility function below where a firm gets positive utility from its market income
(theta) plus a government provided subsidy R. However, the firm can only gain this subsidy by
paying a campaign contribution to the government (C). The higher the campaign contribution, the
higher fraction of the government subsidy the firms receives, represented by the term RC.
However, paying the campaign contribution involves an opportunity costs represented by C
squared.
𝑈𝑓𝑖𝑟𝑚 = 𝜃 + 𝑅𝐶 − 𝐶
2
a. 10 %
What level of campaign contribution maximizes the firm’s utility? (Hint: Use first-order-condition).
Show calculations.
b. 5 %
According to the previous result, what happens to the level of campaign contribution, as the size
of the government subsidy increases? Limit your answer to 20 words/symbols.
2
2.1
Now consider the government’s utility function below, where the government get utility from the
campaign contributions paid by the firm C (as determined by the firm’s maximization of its utility
with regards to C) and popular support (rho) which is declining with the level of subsidies (R)
provided to the firm.
𝑈𝑔𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 = 𝐶(𝑚𝑎𝑥𝑈𝑓𝑖𝑟𝑚) +
𝜌
𝑅
a. 15 %
What level of subsidies maximizes the government’s utility, when taking into account the firm’s
provision of C? (Hint: Use first-order-condition and remember the solution from 2.a.). Show
calculations.
b. 5 %
According to the previous result, when is the government more likely to increase the level of
subsidies? Limit your answer to 40 words/symbols.
3.
Consider the extend form game below, where and autocrat has the choice between accepting an
aid-for-policy deal, and the elite has to make the choice between replacing or not replacing the
autocrat. Pay-offs for the autocrat are on the left and pay-offs of the elite is on the right. If the
autocrat stays in power, she gets 2, if not she gets 0. If the autocrat accepts the deal and stays in
power, the gets an additional A which is the value for the aid program. If the policy is implemented
(which only happens if the autocrat accepts the deal and stays in power), it imposes a cost (P) on
the elite. If the elite does not replace the autocrat, it receives a pay-off of R. If it replaces the
autocrat, it gets WR, where W is the winning coalition size, which can vary from 0 to 1.
3
a. 5 %
Given that that the autocrat has accepted the aid-for-policy deal, under which circumstances will the
elite choose to replace the autocrat? Limit your answer to 20 words/symbols.
b. 10 %
Which conditions need to be fulfilled in order for “accept aid-for-policy” and “do not replace
autocrat” to emerge as the Nash equilibrium? Limit your answer to 20 words/symbols.
c. 5 %
According to the model above, in which type of autocratic political systems are the autocrat more
likely to accept aid-for-policy deals? Limit your answer to 20 words/symbols.
4
4. 5 %
According to the results in Mesquita and Smith (2009) do former colonies of OECD countries
receive more or less aid than other countries conditional of receiving aid in the first place. Limit
your answer to 15 words/symbols.
5. 10 %
According to Ross (2008) which are the three mechanism causing oil production wealth to
decrease female labor market participation in developing countries? Limit your answer to 100
words/symbols.
6.
a. 5 %
According to model 1 in table 2 from Li (2009), what are the effects being a democracy on the
annual number of expropriation acts? Limit your answer to 25 words/symbols.
b. 5 %
According to model 2 in regression table 2 from Li (2009) and the associated text, what explains
the difference between the level of expropriations in democracies and autocracies? Limit your
answer to 20 words/symbols.
7.
Consider the model developed by Johns and Wellhausen (2016).
a. 5 % Under what conditions does the government break the contract? Limit your answer to 55
words/symbols.
b. 5 % What does an increase in 𝑖
(economic link between the target and partner firm) do to the
probability that the government will honor its contract and why? Limit your answer to 40
words/symbols
c. 5 % What does an increase in v (target firm value) do to the probability that the government will
honor its contract and why? Limit your answer to 80 words/symbols