Final Report Summary - WELSTAREF (Understanding the Ongoing Process of Welfare State Reform)
The aim of this project has been to study the way interest groups and political institutions shape economic reforms, both in general and with an interest in welfare state reforms. With this in mind, it has been crucial to understand two closely related questions: how the behaviour of interest groups is shaped by institutions, and why interest groups in some environments end up interacting in more coordinated and cooperative ways than in other settings, and all with a focus on how this shapes economic reforms. The project output can be divided up into four main parts, which will be described in the paragraphs to follow.
In the first part, I analyse the role of legislative institutions in policy change, particularly the role of the veto power of political executives. I study situations characterised by two key features: First, there is a status quo in place that is considered undesirable by all major legislative players. Secondly, there is variation in the political institutions, in particular, the strength of the veto power of the executive and this matters for the ability of interest groups with different ideal outcomes to reach a compromise. I first show theoretically that endowing a political executive (here a governor) with veto power may facilitate policy change. I then use state-level variation in the enactment of workers' compensation laws in the US to empirically examine the model's predictions. The empirical results support the prediction that a strong executive veto, in this setting, facilitates policy change. This part is an extension of previous work of mine, and was completed early during my Marie Curie project period (and the paper has been submitted to a journal).
In the second part, which is joint work with Stephen Kaplan at George Washington University, we develop a theoretical model of political behaviour in developing democracies and derive results showing that the way a country finances its debt will influence decisions regarding public spending before elections. We argue that a collective action failure among the interest groups of consideration here - the investors - are more common in the context of global bond financing than in the context of bank lending, given the ownership dispersion among international bond holders. Typically, collective action failures should impede interest groups from pressuring governments. Ironically, in this case, creditors benefit from their coordination problem, as it increases their influence over debtor governments. If countries do not demonstrate their commitment to restrictive economic policies that ensure debt repayment, bondholders can cut their financial ties without incurring a severe profitability shock. Hence, compared to vested bankers, bondholders' credible exit threat allows them to more crudely impose their austerity demands. We are still working on the theoretical model of this part, but have completed a first version of the paper and are about to submit to a journal.
In addition to these two parts that are more or less complete, I have been working on a theoretical framework for determining the level of coordination among interest groups. The basic feature of this theoretical framework is a model where interest groups are allowed to allocate their resources in two different ways: either locally or nationally. Allocating funds at the local level has direct benefits only to the contributing group, while allocating funds at the national level may deliver benefits to the contributing group but also to other groups. The groups have differing interest; some pairs of groups have completely opposing interests, while other pairs have interests aligned at the national though not the local level. The model has multiple stages, and groups with overlapping interests at the national level have the possibility of coordinating their actions by forming a national organisation in the first stage, before making any contribution decisions. Membership in a national organisation implies giving up sovereignty over the allocation of funds, but may lead to greater impact over the political process. The exact timing and nature of the game is determined by the institutional environment, such as the level of proportionality in a country's electoral system and the number of veto points in a country's legislative process. Although this model is still work in progress, the existing version delivers two key insights. First, I show that the institutional features of a country affect the incentives of interest groups to participate in centralised organisations that coordinate the actions of the member groups. Secondly, the model delivers a multiplicity of equilibria; that is, I show that even if two countries have similar economic characteristics and political institutions they may find themselves in outcomes with different levels of interest group centralisation.
I have, furthermore, been working on a project on the coordination and coalition formation in the context of international public goods provision. More specifically, I have just completed a first draft of a paper on 'agreement formation with heterogeneous agents in international climate change negotiations' together with one of the PhD students in our department (Christine Gutekunst). Topically, this project is a bit different from the ones described above, but methodologically it is closely related to the rest of the work here. I am also working on applying all of the results above to the reform of welfare states. This, however, turned out to be a more complicated task than originally envisioned. Hence, although this was part of the original purpose of the Marie Curie project, results are not ready yet, but I expect to eventually have results on this topic that will build on all of the parts described here above.