Behavioural Economics: A Virginia Political Economy Perspective


Economic Affairs, Volume 36, Issue 3

Abstract: Behavioural economics offers a critique of modern neoclassical economics by providing empirical evidence that the model of rational choice does not accurately describe human decision-making processes. The existence of cognitive biases, what we might term ‘agent failure’, becomes reason to doubt the efficacy of unhampered markets, and is seen by some as a sufficient condition for government intervention. This article offers a critique of this argument from an Austrian and public choice theory comparative institutions perspective. Agent failure arguments are analogous to market failure arguments of the mid-twentieth century and the same kinds of responses made against the latter are applied to the former. Behavioural economics arguments for intervention ignore the cognitive biases of political actors, neglect the comparative perspective that results from such biases, and do not examine the ways in which markets are superior to politics in providing the information and incentives actors need to become aware of their errors and correct them. The existence of imperfectly rational agents, like the existence of imperfect markets, is therefore not a sufficient condition for government intervention into the market.

Competitive Federalism, Government’s Dual Role and the Power to Tax


Journal of Institutional Economics, Volume 12, Issue 4

Abstract: Theories of competitive federalism generally focus on exit as the principal mechanism for making governments responsive to the interests of those who are subject to their powers. This paper draws attention to the fact that democratic governments act in two distinguishable roles, as ‘territorial enterprises’ and as ‘club enterprises’. As territorial enterprises they define and enforce the rules and terms that apply to everybody, whether citizen or alien, who resides and/or operates within their jurisdictional boundaries. As club enterprises, they define and enforce the rules and terms of membership in the respective polity. The focus of this paper is on the implications of the fact that ‘exit’ means something different when one looks at governments’ role as territorial enterprises (exit = leaving the territory) in contrast to their role as club enterprises (exit = giving up one’s membership status/citizenship).

American Individualism Rises and Falls with the Economy: Cross-temporal Evidence that Individualism Declines When the Economy Falters



Abstract: Past work has shown that economic growth often engenders greater individualism. Yet much of this work charts changes in wealth and individualism over long periods of time, making it unclear whether rising individualism is primarily driven by wealth or by the social and generational changes that often accompany large-scale economic transformations. This article explores whether individualism is sensitive to more transient macroeconomic fluctuations, even in the absence of transformative social changes or generational turnover. Six studies found that individualism swelled during prosperous times and fell during recessionary times. In good economic times, Americans were more likely to give newborns uncommon names (Study 1), champion autonomy in children (Study 2), aspire to look different from others (Study 3), and favor music with self-focused language (Study 4). Conversely, when the economy was floundering, Americans were more likely to socialize children to attend to the needs of others (Study 2) and favor music with other-oriented language (Study 4). Subsequent studies found that recessions engendered uncertainty (Study 5) which in turn tempered individualism and fostered interdependence (Study 6).

An Interest Group Theory of Public Goods Provision: Reassessing the Relative Efficiency of the Market and the State



Abstract: Extending Brennan and Buchanan’s model of leviathan, in which rulers represent the residual claimants of constitutionally unconstrained tax revenue, this paper presents a model in which the government provides the level of public goods that maximizes its revenue surplus as a function of the cost of emigration. To the extent that emigration is impeded, government converges toward pure monopoly provision, generating monopoly rents that facilitate the rent-seeking society. In contrast with Niskanen’s model, in which governments tend to overproduce public goods, this model suggests that governments tend toward underproduction. This result undermines the notion that government must provide public goods to overcome the underproduction of private provision; in reality, government provision may be less efficient than private provision.

Financial Property Rights Under Colonialism: Some Counterfactual Possibilities


JOURNAL OF INSTITUTIONAL ECONOMICS, Volume 12, Issue 4, pp. 797-824

Abstract: This article seeks to explain the lack of the development of contemporaneously ‘modern’ money and credit markets in the 18th to 19th century economy of India. Borrowing from the literature on property rights, it demonstrates that the emergence of ‘modern’, and state-connected money markets was the result of a certain kind of power relationship between rulers and financial capital holders where the two were forced to mutually cooperate; financial systems represented the institutionalization of this mutual cooperation. Specific kinds of ‘colonialism’ represent just one special case of a relationship where the latter did not obtain. The article thus proposes a mechanism though which the spread of European capital could have retarded financial market formation in now-developing areas with otherwise considerable concentration of ‘native’ mercantile capital.

Identity Voting


PUBLIC CHOICE, October 2016, Volume 169, Issue 1, pp 77–95

Abstract: This paper analyzes voting behavior in parliamentary elections in which positional and identity issues sustain the party system. We extend the conventional spatial voting model to incorporate identity issues. Identity is tied to the race, language, religion or culture of the voters and both voters and political parties may belong to different identity groups. By identity voting we show that voters, who are otherwise centrist, move toward the parties that align with their identities. To illustrate the mechanics of identity voting, we provide an empirical analysis of parliamentary elections to the Basque Autonomous Community. Besides the two positional issues in the region—left–right ideology and nationalism—we show that language and Basque sentiment have significant effects on voting. Our analysis suggests that identity voting polarizes voters and can sustain stable multi-party systems. This finding is of immediate importance to other regions and countries where the electorate is divided by strong ties to different religions, languages or cultures.

Inequality, Extractive Institutions, and Growth in Nondemocratic Regimes



Abstract: This study investigates the effect of income inequality on economic growth in nondemocratic regimes. We provide a model in which a self-interested ruler chooses an institution that constrains his or her policy choice. The ruler must care about the extent of citizens’ support in order to remain in power. Under an extractive institution, the ruler can extract a large share of citizens’ wealth, but faces a high probability of losing power because of low public support. We show that inequality affects the ruler’s tradeoff between the expropriation of citizens’ wealth and his or her hold on power. Substantial inequality among citizens makes support for the ruler inelastic with respect to his or her institutional choice. The ruler therefore chooses an extractive institution, which impedes investment and growth. These results provide an explanation for the negative relationship between inequality and growth as well as the negative relationship between inequality and institutional quality, both of which are observed in nondemocratic countries.