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Keynes Fund

 

Project Summary

Dr. Toke Aidt - Political Representation, Market Failure and Public Policy: A Long-run Study of the United Kingdom (JHOA).

Market failures arise for three fundamental reasons: information asymmetries, externalities and increasing returns to scale. Government policy, ideally, is designed to correct such failures and in that way improve the allocation of resources and social welfare. However, in practice government policy is far from this ideal. The agents of government – politicians and bureaucrats – have their own objectives and react to the incentives created by the institutions under which they operate. The (unintended) consequence of this, in many cases, is to make things worse. That is, rather than correcting market failures by setting up regulation and policies that will align incentives in the private sector with social objectives, endogenous distortions are created through policies and regulation aimed at favouring particular groups in society at the cost of the common good.

This project proposes a new and innovative way to revisit the fundamental question of how the basis upon which government is constituted – how representative it is – shape government policy, making it more responsive to the needs of the many and less tailored to the special interests of the few. Viewed in a long historical perspective, probably the most important institutional innovation aimed at creating more responsive and representative government was the extension of the voting franchise, which gave ordinary citizens the right to participate in regular elections for national assemblies. In the United Kingdom as well as in many other, now developed, countries this happened gradually over time. This gradualism is helpful for social scientists interested in the consequences of widening the constituency of government for regulation, tax and spending policy, or for other government interventions into the economy. However, establishing the causal order in the nexus amongst institutional reform, public policy, and a host of other factors is difficult; it is only too easy to imagine that mounting public policy challenges could encourage attempts at institutional reform or that both policy and reform are fundamentally driven by social processes that we do not observe or are unable to quantify. Yet, the prominent view in the literature – summarized under the heading “the redistribution hypothesis” – is that suffrage reform is associated with more public spending and more redistribution simple because this is what the (new) median voter demands.

We revisit the redistribution hypothesis but address the issue of the causal order from a new angle building on work by Kevin D. Hoover. The approach – the Hoover approach – combines historical narrative analysis with state of the art structural breaks econometrics in order to determine, in as far as it is possible to do so from observable data, the causal order. The main innovation in the Hoover approach is to study the evolution over time of the marginal and the conditional distributions and to look for patterns of breaks in the underlying time series that can establish the causal order. The historical narrative analysis provides an important cross check on the statistical tests for structural breaks (a break when no intervention can be identified historically may indicate statistical mis-specification).

In preliminary work reported in Aidt, Winer and Zhang, Franchise extension and redistribution: evidence from the United Kingdom 1820-1913, we study the effect of franchise extension on redistribution and public spending in the United Kingdom between 1820 and 1813 using the Hoover approach. We find some instances in which the historical narrative and the pattern of structural breaks are consistent with the redistribution hypothesis, but we also find instances where the causality appears to run the other way. This finding is important because it challenges conventional wisdom and casts doubt on the validity of the redistribution hypothesis.

Project Activities

  1. Workshop at Jesus College, November 2017 with guest speaker Professor Roger Congleton.
  2. Presentation at the European Public Choice Society Meeting in Rome, April 2018.
  3. Presentation at the Silvaplana Workshop in Political Economy, Switzerland, July 2018.

Research Output

Aidt, TS Winer SL, and Zhang, P. (2018) Franchise extension and redistribution: evidence from the United Kingdom 1820-1913. Working paper.

Project Team

Dr Toke S Aidt, Faculty of Economics, Cambridge.

Professor Stanley L Winer, Carleton University, Canada.

Dr Peng Zhang, Simon Fraser University, Canada.