Politics through the Lens of Economics
Lecture 13: Presidential vs. Parliamentary Systems
Masayuki Kudamatsu
18 January, 2017
Discussion time
Can the legislative bargaining model explain
Japan's minimum wage policy?
Image source: twitter.com/OECD/status/595978516438585344
Minimum wage across Japanese prefectures in 2015
Image source: twitter.com/ta_yu_ru/status/694882677481078785/
Basic economics of minimum wage
Wage
# of employees
Supply
Demand
Equilibrium
Equilibrium
Basic economics of minimum wage
Wage
# of employees
Supply
Demand
Equilibrium
Equilibrium
Minimum wage
Minimum wage does not have any impact
Basic economics of minimum wage
Wage
# of employees
Supply
Demand
Equilibrium
Minimum wage
Minimum wage reduces employment
Motivation: Forms of Government
Parliamentary system
Presidential system
Two major forms of democracy
Major difference: how the chief executive is elected
But the legislative policy-making process differs, too
Presidential system
Different congressional committees hold proposal power over different policy issues
Separation of Power
=
Taxation
Spending
Parliamentary system
Ruling party legislators propose almost all bills
A disagreement within ruling party members leads to a government crisis (vote of no confidence)
June 1993: Vote of no confidence against Prime Minister Miyazawa was approved as some LDP members voted in favour
Legislative cohesion
=
Today's Road Map
Model of Presidential vs. Parliamentary Systems
Fiscal Policies in Presidential System
Fiscal Policies in Parliamentary System
Evidence on Size of Government
Region 1
Region 2
Region 3
Legislator 1
Legislator 2
Legislator 3
A country of 3 regions, each represented by one legislator
Model ingredient #1: Legislators
Amount of tax to be collected
(tax burden is equally shared by 3 regions)
Model ingredient #2: Policies
Amount of
public goods
to be provided
Transfer
to
Region 1
Transfer
to
Region 2
Transfer
to
Region 3
No budget deficit allowed (for simplicity)
Model ingredient #3: Legislators' objective
Assume each legislator perfectly represent their region's citizens
(as in the citizen-candidate model)
Each legislator prefers:
Less tax
More public goods
More transfer to their own region
Doesn't care about:
Transfer to other regions
Presidential system: separation of power
Legislator 1 proposes tax
Legislator 2 proposes spending allocation
Parliamentary system: no separation of power
Legislators 1 & 2 (ruling party members)
jointly propose tax and spending allocation
Model ingredient #4: Agenda setters
Presidential system: no legislative cohesion
Each bill requires a (potentially different) majority to pass
e.g. 1 & 2 approve tax and 2 & 3 approve spending
Parliamentary system: legislative cohesion
Ruling party legislators can veto each other
i.e. 1 & 2 need to approve both tax and spending
Model ingredient #5: Winning coalition
Timing of Events in Presidential System
1
2
4
5
Legislator 1 proposes tax
Legislators vote on the tax proposal
Legislator 2 proposes spending allocation
Legislators vote on the spending proposal
If rejected, the default tax rate is implemented
If rejected, the default allocation is implemented
3
Legislators 1 & 3 submit a request on transfer to their region
Timing of Events in Parliamentary Systems
Legislators 1 & 2 negotiate tax & spending
If the agreement is reached,
The policies are proposed to the legislature
and approved by majority voting
If either disagrees,
The vote of no confidence is approved
and the government collapses.
The default policy is implemented
1
2a
2b
(The ruling party forms a majority in parliament)
Today's Road Map
Model of Presidential vs. Parliamentary Systems
Fiscal Policies in Presidential System
Fiscal Policies in Parliamentary System
Evidence on Size of Government
Timing of Events in Presidential System
1
2
4
5
Legislator 1 proposes tax
Legislators vote on the tax proposal
Legislator 2 proposes spending allocation
Legislators vote on the spending proposal
If rejected, the default tax rate is implemented
If rejected, the default allocation is implemented
3
Legislators 1 & 3 submit a request on transfer to their region
Transfer to non-proposers' regions
Given the requests of legislators 1 & 3
Legislator 2 approves the one whose request is smaller
By majority voting, only 1 more yes vote is needed
Expecting this, legislators 1 & 3 compete for the lower request
They both end up requesting zero transfer
cf. Bertrand competition
Consider two gas stations next to each other
They compete for drivers by offering cheaper gasoline
This price competition drives down the price
to the cost of selling gasoline (whole sale price + wage + rent etc.)
For a consumer price to be low,
two suppliers are enough (unless they collude)
Boeing and Airbus in aircraft market
Microsoft and Apple in OS market
Public good vs transfer to proposer's region
Legislator 2 maximizes his region's benefit
Transfer
Public goods
Tax revenue
Extra benefit from transfer
Extra benefit from public goods
Legislator 2 maximizes his region's benefit
Transfer
Public goods
Tax revenue
Extra benefit from transfer
Extra benefit from public goods
Optimal allocation
Public good vs transfer to proposer's region
Larger tax revenue will increase transfer, not public goods
Transfer
Public goods
Tax revenue
Extra benefit from transfer
Extra benefit from public goods
Optimal allocation
Timing of Events in Presidential System
1
2
4
5
Legislator 1 proposes tax
Legislators vote on the tax proposal
Legislator 2 proposes spending allocation
Legislators vote on the spending proposal
If rejected, the default tax rate is implemented
If rejected, the default allocation is implemented
3
Legislators 1 & 3 submit a request on transfer to their region
Tax revenue
Legislator 1 expects 2 to transfer zero to his region
Every additional tax revenue will be spent on transfer to 2's region
Collect tax just enough to finance public goods
And this proposal will be supported by both legislators
as long as it is better than the default policy
Transfer
Public goods
Tax revenue
Extra benefit from transfer
Extra benefit from public goods
That is,
Policies chosen by the presidential system
Public goods
Tax revenue
& No transfer to any region
Today's Road Map
Model of Presidential vs. Parliamentary Systems
Fiscal Policies in Presidential System
Fiscal Policies in Parliamentary System
Evidence on Size of Government
Transfer to opposition's region
No support is needed from the opposition to pass the bill
Transfer to region 3 = Zero
Public goods & Transfer to ruling party's regions
Legislators 1 & 2 jointly maximize their benefits
Allocation of the joint benefit depends on their bargaining power
We're interested in the size of government
So we assume legislators 1 & 2 split the joint benefit in half
Maximizing the joint benefits
Transfer to regions 1 & 2
Public goods
Tax revenue
Extra joint benefit from transfer
Extra joint benefit from public goods
Maximizing the joint benefits
Public goods
Tax revenue
Optimal allocation
Transfer to regions 1 & 2
Extra joint benefit from public goods
Extra joint benefit from transfer
Tax revenue
Legislators 1 & 2 jointly maximize their benefits
Every additional tax revenue (from all regions including 3)
will be used as transfer to regions 1 & 2
Collect tax as much as possible
Public goods
Tax revenue
Optimal allocation
Transfer to regions 1 & 2
Extra joint benefit from public goods
Extra joint benefit from transfer
Summary 1: Public goods
Under-provided in presidential system
Public goods
Presidential
system
Extra benefit from public goods
Parliamentary
system
Public goods
Summary 1: Public goods
Under-provided in presidential system
Extra joint benefit from public goods
Summary 2: Transfer
Opposition region exploited
Presidential system
Equal allocation (zero to all)
Parliamentary system
Summary 3: Tax revenue (= Total spending)
Public goods
Tax revenue
Presidential
system
Tax revenue
Transfer to regions 1 & 2
Public goods
Parliamentary
system
Summary 3: Tax revenue (= Total spending)
Extra joint benefit from public goods
Extra joint benefit from transfer
Today's Road Map
Model of Presidential vs. Parliamentary Systems
Fiscal Policies in Presidential System
Fiscal Policies in Parliamentary System
Evidence on Size of Government
Forms of government across the world in 1998
Source: Figure 4.1 of Persson and Tabellini (2003)
Presidential
Parliamentary
Not democratic
Caveat: same as for electoral rules (lecture 7)
Central govt spending as % of GDP
22.2%
33.3%
vs.
Presidential
Parliamentary
Source: Tables 1-2 of Persson and Tabellini (2004)
The difference is not driven by:
Electoral rules
Income per capita
Trade openness
Total population
% of population aged 16-54 / 65+
Years since democratization
Degree of democracy
Federal system
OECD member countries
Continents
Former colonizers
Next Lecture...
Lobbying
Image source: www.thenation.com/article/shadow-lobbying-complex/
This lecture is based on the following academic articles and books:
Persson, Torsten, Gérard Roland, and Guido Tabellini. 2000. “Comparative Politics and Public Finance.” Journal of Political Economy 108(6): 1121–61.
See also Chapter 10 of Persson, Torsten, and Guido Tabellini. 2000. Political Economics: Explaining Economic Policy. Cambridge, Massachusetts: MIT Press.
Persson, Torsten, and Guido Tabellini. 2004. “Constitutional Rules and Fiscal Policy Outcomes.” American Economic Review 94(1): 25–45.
See also chapters 4 & 6 of Persson, Torsten, and Guido Enrico Tabellini. 2003. The Economic Effects of Constitutions. MIT Press.