Will generative AI mean the end of rational ignorance?

In this Substack post back in March, Andy Hall made the case for generative AI to create 'political superintelligence':

The more I work with and study AI, the more I believe it can give every human being on the planet access to a sort of political superintelligence, if we shape it right. And that intelligence, in turn, can make governments smarter and more effective, representatives more faithful, and institutions more responsive than anything we’ve built in over 2,000 years of experimenting with democracy.

Hall's post is worth reading in its entirety, but I want to explore a related point - will generative AI mean the end of rational ignorance for voters? Rational ignorance is the idea that it may be better for voters to not know what decisions policymakers are making on their behalf. That's because it's costly (in terms of time and effort) for voters to keep track of how the decisions that policymakers (and politicians) make on their behalf will affect them (economists call those monitoring costs). The benefit that a voter would receive by becoming informed of what policymakers (and politicians) are doing is relatively small, because their ability to change an election (and therefore policy) is very small. When the monitoring costs are greater than the benefits of being better informed, then voters would be better off not paying the monitoring costs. That is, voters would be better off not paying attention to what the policymakers (and politicians) are doing - the voters would be better off remaining rationally ignorant. This theory of rational ignorance was introduced in the 1950s by the late economist Anthony Downs.

Where does generative AI fit into this? Generative AI could meaningfully lower the monitoring costs for voters, as it gives the opportunity for voters to ask for quick summaries of policy proposals that may affect them. This will be even more effective as generative AI understands more about users' preferences. Moreover, agentic AI offers voters even greater opportunity to investigate what policymakers (and politicians) are doing, at relatively low cost.

When the monitoring costs decrease, then the rationale for voters to remain rationally ignorant weakens. We might expect voters to become more engaged with what the government is doing on their behalf, and to be more active in engaging with government to make their preferences known. Or, at least, maybe voters will delegate these activities to their favourite agentic AI model.

There are, of course, some reasons for caution. Generative AI might reduce the cost of obtaining political information without reducing the cost of checking whether that information is accurate or unbiased. Moreover, an overly sycophantic generative AI that knows the voter's preferences might reinforce the voter's existing views rather than challenging them. So, perhaps generative AI simply moves the monitoring costs from monitoring the government to monitoring the generative AI?

Hall makes the point that political superintelligence has the potential to increase the quality of governance. If generative AI enables voters to become better informed at low cost, it could strengthen political accountability. Policymakers (and politicians) who know that voters can easily scrutinise their decisions may be less willing to act against voters’ interests, or may face greater consequences when they do.

We may not have political superintelligence yet, and large numbers of voters may still be rationally ignorant. However, it may not be long before we start to see some substantive changes in the political process, driven in part by the emergence of generative AI.

[HT: Marginal Revolution for the Andy Hall post]

National's tax policy and the goals of government

In my ECONS102 class, we talk in the first week of class about decision-makers' goals. The goal of people is to maximise utility (satisfaction, or happiness). The goal of firms is to maximise profits. So far, so good. 

The goal of government is not so straightforward. The starting point is that the goal of government is to maximise the wellbeing of the population. When we're talking about markets, that translates into maximising economic welfare (what economists refer to as allocative efficiency). However, we must always remember that government is made up of legislators who are people, who have their own individual goals (they are trying to maximise utility). One way that legislators may maximise their own utility is by maximising their chances of getting re-elected. Maximising re-election chances may not be consistent with maximising the wellbeing of the population. That tension is one of the key insights of the theory of public choice.

One example where political goals trump allocative efficiency is when some of the economic welfare generated by a market goes to non-voters. Since, by definition, non-voters don't vote, legislators may feel much less inclined to protect those market participants from harm. Taking that point even further, if government can find ways of capturing welfare from non-voters and transferring that welfare to voters, that might be a good option for the legislators themselves, by increasing their chances of re-election.

Now, consider National's new tax policy proposals in light of this. As this article in The Conversation from earlier this week, by Jonathan Barrett and Lisa Marriott (both Victoria University of Wellington), notes:

The National Party’s newly released tax package makes a clear and politically prudent play for the middle-income vote. Proposing to alleviate the financial pain of this “squeezed middle”, it may be key to determining who forms the next government...

To ensure the package is revenue neutral, four new taxes will be introduced. If the policy is aimed at those who vote, then three of the new taxes are aimed at shifting the tax burden to those who cannot vote.

The Foreign Buyer Tax (FBT) will be levied at a flat rate of 15% on residential properties worth more than NZ$2 million bought by non-residents.

A second stream of revenue will come from a tax on offshore gambling.

And a third will be from cost recovery from immigrants to cover public spending on the immigration system. To be competitive, charges will not exceed 90% of corresponding Australian immigration charges.

These proposals would cost voters very little, but increase the tax revenue generated from non-voters. Additional financial benefits can then be transferred to voters:

National has announced four key initiatives as part of its tax plan, with implications for those on middle incomes, as well as those at the top and bottom of the income spread:

• shifting income tax brackets to compensate for inflation

• expanding tax credits to reach more modest income earners

• introducing the “FamilyBoost” childcare tax credit (while ending Labour’s extension of 20 hours’ early childhood education for two-year-olds that was scheduled to start in July 2024)

• increasing Working for Families tax credits for working families (from July 2024).

It will be interesting to see how well these proposals are received by the electorate. An overall package that costs voters little, but benefits them financially, could be a winning strategy. Of course, there are limits to how much tax non-voters are willing to bear, but National may not care so much about that. On the other hand, there are other issues with the proposal, and the foreign buyers tax has come in for specific criticism already. Ultimately, we'll find out how successful this strategy is on Election Night in October!

Ethnic diversity of local government and decision-making gridlock

Is it better to have more (ethnically) diverse local government, or less diverse local government? There are valid theoretical arguments in both directions. If local government leaders (e.g. elected council members) are more diverse, then they will have a diversity of opinions and preferences, possibly leading to more disagreements and less consensus decision-making, and government may become 'gridlocked', unable to make key decisions. On the other hand, local government leaders do feel electoral pressure, including the pressure to conform, and to the extent that there is effective electoral pressure, gridlock would not be a problem.

Whether more diverse local governments spend less on public goods (or not) is the subject of this 2017 article by Brian Beach (College of William & Mary) and Daniel Jones (University of South Carolina), published in the American Economic Journal: Economic Policy (ungated version here). They use data from the:

...California Election Data Archive (CEDA), which provides the names and number of votes for every candidate in every local government election occurring between 1995 and 2011.

For the 5177 candidates who won elections (or were close but lost) over the period from 2005 to 2011, they collect data on ethnicity, either directly from city councils, or by asking workers on Amazon Mechanical Turk (mTurk) to classify the candidates' ethnicities. They got 10 mTurk workers to classify each candidate, and had 94 percent agreement overall (they drop the 31 candidates who had low agreement from their sample). This was similar to the level of agreement between mTurk workers and city council data (95 percent).

Beach and Jones then measure the ethnic diversity of each city council, using indices of fractionalisation and polarisation. As they explain:

Both indices range from zero to one, where zero corresponds to a situation where there is no diversity. Fractionalization is maximized when each council member is of a different ethnicity. Polarization, on the other hand, is maximized when the seats are distributed into two ethnic groups.

The outcome variable that Beach and Jones are most interested in is public goods expenditure, which they calculate:

...by taking a city’s total expenditures for the year and removing expenditures on “government administration” and debt repayment. The “public goods” category therefore includes all spending on roads, parks, police protection, sewerage, public transportation, etc.

Now, a simple regression approach would be to look at the relationship between diversity (fractionalisation and polarisation) and public goods spending. The problem with that approach is the potential for endogeneity - maybe there are city-level factors that affect both the diversity of local government and local public goods spending. For example, perhaps having a more diverse population requires a greater variety of public goods, and more public goods spending, but also tends to lead to a more diverse city council. In that case, the relationship between diversity of the council and public goods spending is biased because of the relationship of both variables to the diversity of the population overall. Beach and Jones deal with that problem by looking at what happens subsequent to close elections, where one of the candidates is the majority ethnicity, and one is a minority. In sufficiently close elections, it is close to random which candidate is ultimately elected, provided some random variation in the diversity of the council, that doesn't depend on any other variable.

Beach and Jones identify 684 close elections with candidates of different ethnicities over the period from 2006 to 2009. Using that data, they find that:

Regardless of whether we measure diversity with fractionalization... or polarization... there is a strong and positive relationship between the election of a non-modal candidate and the diversity of the city council.

No surprises there. Electing a minority candidate increases the diversity of the council. Moving onto the effect on public goods, they find that:

...per capita spending on public goods falls by approximately 13 percent (significant at the 1 percent level) following the election of a non-modal candidate. The effect on nonpublic goods spending remains positive (roughly 14 percent) but is not significant at conventional levels.

So, more diverse local governments spend less on public goods. Beach and Jones then drill down into potential mechanisms that explain their results, and the consequences, and show that:

Our results indicate that diversity leads to gridlock. Cities reduce the amount they spend on public goods as their city council becomes increasingly diverse. These effects are largest for segregated cities and cities with more income inequality (where the potential for disagreement may be largest). We also find that all members of a council that experienced an exogenous shock to diversity receive fewer votes when they run for reelection. This latter point suggests that the city’s population is dissatisfied with the decline in public goods, ruling out the possibility that diverse councils simply achieve greater efficiency in public good provision.

So, ethnic diversity of local government appears to encourage gridlock, reducing local public goods spending, and it isn't an outcome that citizens favour. However, one thing that Beach and Jones didn't consider, is whether (or to what extent) a match between the majority ethnicity of local government and the majority ethnicity of the population matters. Or whether the effect is different at different levels of ethnic representativeness. Those would be interesting follow-up questions.

Also, the negative implications of this research need to be juxtaposed with the problem of groupthink. Groupthink occurs when there is too much consensus, leading to decision-making that lacks critical evaluation. This is more likely when the group of decision-makers is less diverse. So, perhaps the quantity of public goods spending is higher when there is less diversity in local government, but perhaps the quality of that spending is lower?

Dani Rodrik on the benefits of economic populism

I just read an interesting 2018 article by Dani Rodrik (Harvard University), published in the AER Papers and Proceedings (ungated here). Rodrik starts by outlining a taxonomy of regimes, based on whether there are political restraints and/or restraints on economic policy, resulting in the following 2x2 matrix (Table 1 from the article):

*****

Rodrik describes the four possibilities in the 2x2 matrix as:

Personalized regimes such as Vladimir Putin’s in Russia or Tayyip Erdogan’s in Turkey are characterized by the absence of restraints in both the political and economic domains (box 1). But it is possible to conceive of autocratic regimes where important aspects of economic policy are placed on automatic pilot or delegated to technocrats (box 2). Pinochet’s regime in Chile provides an example.

Alternatively, a regime can be populist in the economic sense without rejecting liberal, pluralist norms in the political domain (box 3). Finally, a regime that is constrained in both politics and economics might be called a “liberal technocracy” (box 4). The European Union may be an example of the last type of regime: economic rules and regulations are designed at considerable distance from democratic deliberation at the national level, which accounts for the frequent complaint of a democratic deficit.

The rest of the article then mostly discusses the differences between regime (3) and regime (4), drawing an important distinction between two types of restraints on economic policy. First, there are:

...restraints on economic policy that take the form of delegation to autonomous agencies, technocrats, or external rules. As described, they serve the useful function of preventing those in power from shooting themselves in the foot by pursuing short-sighted policies.

Rodrik provides the example of delegating monetary policy to an independent central bank, or constraining trade policy through the use of free trade agreements. In terms of the second type of restraint on economic policy:

Commitment to rules or delegation may also serve to advance the interests of narrower groups, and to cement their temporary advantage for the longer run. Imagine, for example, that a democratic malfunction or random shock enables a minority to grab the reins of power. This allows them to pursue their favored policies, until they are replaced. In addition, they might be able to bind future majorities by undertaking commitments that restrain what subsequent governments can do.

Rodrik again uses the example of monetary policy, where a central bank's rigid adherence to inflation targeting can make us worse off, and to trade policy, where rules on intellectual property are exported and this extends the market power of holders of intellectual property rights.

Then comes the crux of Rodrik's argument - that economic populism, where the constraints on economic policy are relaxed or removed, may actually be beneficial in some cases. In particular, since:

...delegation to independent agencies (domestic or foreign) occurs in two different contexts: (i) in order to prevent the majority from harming itself in the future; and (ii) in order to cement a redistribution arising from a temporary political advantage for the longer term. Economic policy restraints that arise in the first case are desirable; those that arise in the second case are much less so.

Rodrik uses the substantial economic policy changes wrought by Franklin D. Roosevelt and the New Deal as an illustrative example. This paper presents an interesting framework to think about when constraining government economic policy may be a good idea, and when it may be better to relax the constraints. However, the short format of the article prevents a deeper examination of all of the implications of this framework. As described, I'm sure it could be used opportunistically to argue in favour of relaxing constraints in almost any situation. Hopefully, this is a topic that Rodrik is going to follow through on, as it really needs a book-length treatment (and I've quite enjoyed some of his other books - see reviews here and here).

Voting, MMP, and the futility of the electorate vote

As I will discuss with my ECONS102 class next week, one of the characteristics of rational behaviour is that it is consistent with the cost-benefit principle. That is, a decision-maker will undertake an action if, and only if, the benefits of that action are at least as great as the costs of the action.

Economists have long noted that voting seems to present a challenge to the idea that decision-makers act rationally. I don't mean that people don't make a rational decision when voting (although recent elections and referendums in the Northern Hemisphere may present some obvious counter-examples), but the decision of whether to vote or not seems to defy the cost-benefit principle.

Consider the costs and benefits of voting. A voter incurs a cost when voting, because they have to take the time to go to a polling booth, think about who they want to vote for, and complete the voting form. All of that takes time (as well as some cognitive effort, for those who do more than just blindly tick one of the boxes based on the colour of the party insignia), and that time has an opportunity cost. The voter could have been doing something else instead, and they give up the opportunity to do that other thing when they decide to vote.

What about the benefits of voting? The simplest argument for voting is that people vote because they hope that their vote is going to affect the outcome of the election. However, for the vast majority of people, their vote for a particular candidate is not going to mean the difference between that candidate winning or losing the election. So, the chances that a vote on its own makes the difference between winning and losing is vanishingly small, and because of that, the benefit of voting is also vanishingly small.

However, under an MMP voting system like that in New Zealand, it gets even worse. Under MMP, most candidates have two chances to be elected. First, they could be elected as the candidate who receives the most votes in a particular electorate. Second, they could be elected as a 'list MP', making up the numbers so that each party has a proportion of MPs that is roughly equal to its proportion of the party votes. The list is ordered, with candidates higher on the list having a better chance of being successful.

Now consider a local electorate candidate, from one of the two main parties, who has a high position on their party's list. They are almost certain to get elected as a list MP, if they are unsuccessful at winning their electorate. So, regardless of whether a voter votes for that candidate or not, the candidate will become an MP. In other words, the benefit of voting for that candidate is not even vanishingly small, it is zero! Voters might as well not bother with voting for an electorate MP, and simply complete the party vote section of their voting paper.

Consider the Hamilton East electorate. Labour candidate Jamie Strange is 42nd on Labour's list - he is almost certain to be elected as a list MP, if he doesn't win the electorate. So, voting for Strange is essentially a waste of time. National hasn't released its list yet, but National candidate and incumbent Hamilton East MP David Bennett was 24th on the list in 2017, and has likely improved his ranking since then. So, voting for Bennett is also essentially a waste of time. If you are a Hamilton East voter, your electorate vote only matters if you vote for one of the minor parties.

In contrast, an electorate vote in Hamilton West might actually matter, because Labour candidate Gaurav Sharma is 65th on the Labour list, and unlikely to get in otherwise. National candidate Tim Macindoe was 25th on the National list in 2017, and if you count from the top of this page of the National Party website, he is 23rd, so would probably get in as a list MP if not re-elected as electorate MP.

If you are sensing that I am somewhat frustrated with the MMP voting system, you would be right. The futility of voting for electoral candidates when those candidates would get in regardless of your vote makes a bit of a mockery of the system. Are voters for Jacinda Ardern in the Mount Albert electorate simply engaged in some anonymous virtue signalling? They certainly aren't making any difference at all to the composition of parliament. Neither will voters for Todd Muller in the Bay of Plenty electorate.

What would work better? In the original MMP referendum, one of the options was called 'Supplementary Member' (which is described here). Like MMP, each voter would have two votes - one for an electorate MP, and one for a party. The party vote would only be used to calculate the proportion of list MPs each party gets, rather than the proportion of total MPs. At least then, electorate votes would count.

Another alternative, which I am quite partial to, is to have a rule that no electorate candidates can be on the party list. The reason I like this solution is that electorate MPs who are high on their party's list don't actually have to work as hard to represent their constituents as electorate MPs who are low on their party's list, because they will likely be re-elected anyway. Having electorate MPs not on the list ensures that they have the incentives to faithfully represent their electorate.

Anyway, coming back to the original point, if the benefit of voting is the chance that a voter affects the outcome of the election, then voting fails the cost-benefit test. Does that mean that all voters are irrational? Perhaps not. There is a benefit of voting other than the simple chance that a voter affects the outcome of the election, and that is the 'warm glow' feeling that a voter may receive by knowing that they have completed their civic duty. As this 2017 paper by Henrique Barros (New University of Lisbon) notes, people vote because they value the act of voting itself, rather than because they think they will influence the outcome of the election. So, perhaps voting is rational after all.

The persistent impact of autocratic rule on social capital

Social capital is the capital that is embodied in inter-personal relationships. It encompasses networks, alliances, shared norms and values, reciprocity, and trust. The level and forms of social capital are determined by people's attitudes and beliefs. So, if political or economic institutions alter those attitudes or beliefs, then the level or form of social capital might also be altered.

That is the thesis underlying this working paper by Melanie Xue (Northwestern University) and Mark Koyama (George Mason University), which looks at the impact of autocratic rule in Qing dynasty China on subsequent measures of social capital. Specifically, Xue and Koyama look at the impact of literary inquisitions. As they explain:

Following the Manchu occupation of China in 1644, and the establishment of the Qing dynasty, imperial China saw a sharp increase in political repression and an entrenchment of autocratic rule. Intellectuals, the most influential figures in local society, saw new restrictions imposed on them. One watershed event was the intensification and routinization of literary inquisitions - investigations which targeted the speech and writings of intellectuals.

Essentially, Xue and Koyama compare prefectures that had had at least one literary inquisition (the 'treatment' group in this quasi-experimental research) with prefectures that had not (or had not yet) had any literary inquisitions (the 'control' group). They look at both historical measures of social capital (e.g. the number of local charities) and more modern measures (e.g. generalised trust).

This is a very detailed paper. Their first step is to demonstrate that political repression through the literary inquisitions affected attitudes and beliefs. Looking at the number of 'reputable individuals', which is based on a compendium that listed people who were:

...well known for reasons that included prominence in science and technology, medicine and healthcare, education, classical and literary scholarship, history, art, or poetry.

Comparing matched treatment and control prefectures over the period 1640-1819, they found that:

...literary inquisitions led to fewer reputable individuals and that this decline was more pronounced among individuals who came of age in the decade of a literary inquisition... This concurs with historical accounts that individuals withdrew from public life and sought to evade attention in order to keep a low profile...

Next, they looked at the contemporaneous impact on social capital. Charities are a good measure of social capital in this context because:

...the level of charity provision reflects the degree to which individuals are willing to volunteer time and resources to help other members of society...

They found that:

...after a prefecture was first exposed to a literary inquisition case, the number of local charities in that prefecture fell by an average of 38% in the following decades, relative to prefectures that never had a literary inquisition, or prefectures that had not yet experienced a literary inquisition. Mapping out the full dynamic response of charity formation, we characterize the evolution of social capital after exposure to literary inquisitions, and show that the “charity gap” between prefectures which had and which had not been affected, kept widening for the next four decades before stabilizing. This effect did not go away towards the end of the charity data series in the early 20th century.

So, the impact of political repression on social capital was relatively large. It also endured for some time. Looking at data from the Chinese General Social Survey (CGSS), they found that:

...Qing persecutions are associated with lower generalized trust. This effect is economically significant: in our main specification, political repression is associated with a decline of 0.179 in trust, which is 16.7% of its standard deviation...

In contrast, there is no effect on trust in family members, so the impact of political repression is on trust outside of the family. Xue and Koyama also demonstrate negative effects on literacy levels among those educated in the early 20th Century, when education was decentralised and so relied more on social capital for its delivery. They also show that those effects don't depend on other political and social events such as the Taiping Rebellion, the exodus to Taiwan in 1949, and the Cultural Revolution (the latter two events might affect the earlier results because they change which people would be observed in the CGSS sample). They also provide evidence using instrumental variables analysis that their results are causal - the literary inquisitions in Qing China caused the differences in literacy rates in 20th Century China.

Finally, they also show impacts on modern political attitudes and behaviour:

Starting with attitudinal questions, we find that individuals in prefectures with a legacy of literary inquisitions are less likely to say that people like themselves can have an impact on decisions made by government... and less likely to believe that their suggestions to the government will be adopted... reflecting greater political apathy in affected prefectures... Next, we examine participatory behavior... Our main findings are that survey respondents from affected prefectures are less likely either to volunteer on local committees... or to make suggestions to local committees...

We find that individuals in prefectures with a legacy of literary inquisitions are less likely to agree with the following statements: “Western-style multi-party systems are not suitable for China”... “Free speech is ‘Western’ and will only lead to chaos”... and “Modern China needs to be guided by wisdom of Confucius”... For other questions in the survey, such as those regarding social issues, there is no systematic difference in individual responses between prefectures with a legacy of literary inquisitions and those with no such past.

There is a lot to digest in this paper. The authors conclude that:

Both the results from the historical panel and those from post-Qing cross sections suggest that political repression permanently reduced social capital. The effect of literary inquisitions on social capital has survived, even after local institutions were transformed by the modern socialist state...

We establish social capital as a missing link to understanding the dynamics of state-society relations. Autocracies can provide order and public goods when social capital is low. For this reason, autocracy may appeal to individuals in societies with low social capital. Hence, by reducing social capital, autocratic rule can introduce a self-reinforcing cycle that favors its survival and persistence.

This self-reinforcing cycle has implications for many modern societies that have tried unsuccessfully to adopt more democratic norms. It demonstrates the persistence of autocratic rule, and the norms and attitudes that sustain it.

Strategic behaviour by Italian mayors differs by age

In my ECONS102 class, we cover a little bit of the theory of public choice. One aspect of that is the way that politicians behave. Of course, voters want politicians to act in the voters' best interests. However, there is a principal-agent problem here. Voters are the principal - they have engaged the agents (politicians) to act on their behalf. The problem is that politicians have their own motivations, which don't necessarily align with the goals of the voters, and if they aren't monitored closely, politicians will act in their own best interests (and not necessarily those of the voters).

That disconnect, between the goals of voters and the motivations of politicians, explains a lot of the reason why politicians act in ways that voters don't necessarily like. And, voters may let them get away with it because of rational ignorance. Monitoring the behaviour of politicians is costly to voters. If the costs of any negative behaviour of politicians is less than the cost of monitoring them, then it is rational for voters to avoid the monitoring costs and be rationally ignorant of the politicians' behaviour.

One of the things that politicians may do, which may not align with the goals of the voters, is engage in strategic behaviour designed explicitly to get the politician re-elected. They may provide 'favours' or re-direct resources to some groups of voters, or engage in high profile but costly (in terms of public welfare) activities that give them good press coverage. This strategic behaviour is likely to intensify in the lead-up to an election.

That brings me to this new article by Alberto Alesina (Harvard), Travis Cassidy (University of Alabama), and Ugo Troiano (University of Michigan), published in the journal Economica (ungated earlier version here). Alesina et al. use data on Italian mayors over the period from 1998 to 2014, to test how younger and older mayors behave differently.

In theory, there are a number of reasons to believe that younger mayors will behave differently from older mayors. Alesina et al. note that:

Younger politicians may differ from older ones for at least five reasons. One is that they have a potentially longer political career ahead of them and therefore have stronger career concerns. The second is simply that, as younger citizens, they have a longer horizon and therefore they may have an incentive to adopt more long-term policies... The third and more mundane reason is that younger politicians may be more energetic and productive at work. The fourth reason is that there could be different self-selection patterns by age: because people of different ages have different opportunities in the labour market, this may affect the decision to become a politician. The fifth reason is that politicians of different ages may have different political connections—innate or accumulated doing the course of their previous work.

The career-concerns reason is interesting to consider. Younger politicians have a potentially longer political career ahead of them. So, the benefits of engaging in strategic behaviour to ensure their re-election are higher for younger politicians than for older politicians. Alesina et al. find some support for this. After showing that younger candidates are statistically significantly more likely to be seek re-election, and more likely to be re-elected, than older candidates, they consider whether these results are indicative of younger mayors enacting better policies. They investigate this by looking at house prices (because areas with better local government policies would be attractive places to live in, so house prices would be higher). However, they find that:

...there is little evidence that house prices respond to the age of the mayor in office.

They also show that the age of the mayor has no effect on the speed of public goods provision (another indicator of the quality of governance). So, having established some evidence that younger mayors are not better politically than older mayors are, they consider how younger and older mayors differ in terms of local government spending. They find no statistically significant differences in local government revenue per capita or current expenditure per capita. However, with capital expenditure they find evidence of a political cycle in spending. That is, younger mayors spend more in the year immediately before an election, such that:

...a typical younger mayor will increase capital expenditure before the election by 9.66 euros per capita, while a typical older mayor will actually decrease capital expenditure before the election by 2.1 euros per capita.

Capital expenditure is attractive for political candidates to be strategic about, because it is highly visible (voters will remember the politician who cut the ribbon on their new expressway), and because unlike current expenditure it is less subject to balanced-budget rules.

If mayors are engaging in strategic behaviour, it is reasonable to consider how voters can respond to try to reduce this behaviour. Closer monitoring is unlikely to be effective because of rational ignorance. So in my ECONS102 class, we discuss alternative solutions to the principal-agent problem, one of which is paying an efficiency wage - effectively paying a higher wage to the agent, to increase the incentives for them to engage in behaviour that is aligned with the principal's wishes (otherwise, they lose their job and have to go work elsewhere for a lower wage). Interestingly, in supplementary results, Alesina et al. find that:

...the effect of age on political budget cycles is smaller when the mayor’s wage is higher...

So, maybe there is some support for increasing mayoral wages to reduce this strategic behaviour.

Slime molds and the independence of irrelevant alternatives

Many people believe that rational decision making is the sole preserve of human beings. Still others recognise that isn't the case, as many studies in animals as varied as dolphins (e.g. see here), monkeys (e.g. see here) or crows show. How far does that extend though?

I've been reading How Not to Be Wrong - The Power of Mathematical Thinking by Jordan Ellenberg (book review to come in a few days). Ellenberg pointed me to this 2011 article (open access) by Tanya Latty and Madeleine Beekman (both University of Sydney), published in the Proceedings of the Royal Society B; Biological Sciences. You're probably thinking that's a weird source for me to be referring to on an economics blog, but Ellenberg explains:

You wouldn't think there'd be much to say about the psychology of the plasmodial slime mold, which has no brain or anything that could be called a nervous system, let along feelings or thoughts. But a slime mold, like every living creature, makes decisions. And the interesting thing about the slime mold is that it makes pretty good decisions. In the slime mold world, these decisions more or less come down to "move toward things I like" (oats) and "move away from things I don't like (bright light)...

A tough choice for a slime mold looks something like this: On one side of the petri dish is three grams of oats. On the other side is five grams of oats, but with an ultraviolet light trained on it. You put a slime mold in the center of the dish. What does it do?

Under those conditions, they found, the slime mold chooses each option about half the time; the extra food just about balances out the unpleasantness of the UV light.

All good so far. But this isn't a post about the rationality of slime mold decision-making. It's actually about the theory of public choice. And specifically, about the independence of irrelevant alternatives. Say that you give a person the choice between chocolate and vanilla ice cream, and they choose chocolate. Before you hand over the ice cream though, you realise you also have some strawberry as well, so you offer them that instead. The person thinks for a moment, and says they would like vanilla instead. They have violated the independence of irrelevant alternatives. Whether strawberry is available or not should not affect the person's preference between chocolate or vanilla - strawberry is irrelevant to that choice. And yet, in the example above, it made a difference.

Ok, back to slime molds. Ellenberg writes:

But then something strange happened. The experimenters tried putting the slime mold in a petri dish with three options: the three grams of oats in the dark (3-dark), the five grams of oats in the light (5-light), and a single gram of oats in the dark (1-dark). You might predict that the slime mold would almost never go for 1-dark; the 3-dark pile has more oats in it and is just a dark, so it's clearly superior. And indeed, the slime mold just about never picks 1-dark.

You might also guess that, since the slime mold found 3-dark and 5-light equally attractive before, it would continue to do so in the new context. In the economist's terms, the presence of the new option shouldn't change the face that 3-dark and 5-light have equal utility. But no: when 1-dark is available, the slime mold actually changes its preferences, choosing 3-dark more than three times as often as it does 5-light!

What's going on here? The slime mold is essentially making collective decisions (which is why I said this was a post about the theory of public choice). And with collective decisions, the independence of irrelevant alternatives can come into play. As Ellenberg notes, in the 2000 U.S. presidential election, the availability of Ralph Nader as a candidate has been credited with George W. Bush's victory over Al Gore. Nader took just enough votes from Gore supporters (who would have probably voted Gore if Nader was not available) to ensure that Bush won the critical state of Florida, and ultimately, the election. Something similar is going on with the slime molds, as Ellenberg explains:

...the slime mold likes the small, unlit pile of oats about as much as it likes the big, brightly lit one. But if you introduce a really small unlit pile of oats, the small dark pile looks better by comparison; so much so that the slime mold decides to choose it over the big bright pile almost all the time.

This phenomenon is called the "asymmetric domination effect," and slime molds are not the only creatures subject to it. Biologists have found jays, honeybees, and hummingbirds acting in the same seemingly irrational way.

Except, it's not irrational. In the case of the slime molds at least, it's a straightforward consequence of collective decision-making.

Arnold Kling on public choice theory and lobbying

In my ECONS102 class, we discuss the lobbying activities of firms with market power. The motivation for that discussion is that firms with market power make a large profit (how large the profit is depends in part on how much market power they have), so they have an incentive to use some of the profits (their economic rent) to maintain their market power. They can do this by lobbying government to avoid excess regulation. However, that simple exposition doesn't explain the full range of lobbying activities that firms engage in, and it doesn't explain why consumers don't engage in lobbying (e.g. for lower prices) to the same extent that producers do.

On Medium last week, Arnold Kling wrote an interesting article on why costs increase in some industries faster than others. However, on the above point it was this bit that caught my attention:

In reality, you do not produce everything in the economy. You are much more specialized in production than in consumption. This makes you much more motivated to affect public policy in the sector where you produce than in the sector where you consume.

In theory, government policy is supposed to promote the general welfare. But as a producer, your goal for government policy is to increase demand and restrict supply in your industry. If you are in the field of education, you want to see more government spending devoted to education, tuition grants and subsidies for student loans, in order to increase demand. You want to make it difficult to launch new schools and colleges, in order to restrict supply. If you run a hospital, you want the government to subsidize demand by providing and/or mandating health insurance coverage. But you want to restrict supply by, for example, requiring prospective hospitals to obtain a “certificate of need.” If you are a yoga therapist, you want the government to mandate coverage for yoga therapy, but only if it is provided by someone with the proper license.

Think about an average consumer (and worker), considering how much effort to put into lobbying the government for a policy change. They might be quite motivated to engage in lobbying government in terms of their employment or wages (e.g. subsidising wages, or introducing occupational licensing), where they are a producer, and can capture a lot of the gains from a policy change. In that case, the benefit to be gained from the policy change will affect them a lot, and may offset the cost of the effort of lobbying. However, they will be much less motivated to engage in lobbying government in terms of consumption goods. In the latter case, the benefit is much lower than lobbying in terms of employment or wages, while the cost is likely to be about the same.

This explanation also relates to the idea of rational ignorance. Consumers individually face only a small cost of a policy (like a subsidy on sugar farmers) that provides a large benefit to producers. The producers have a great incentive to lobby against losing the policy (or in favour of gaining it), but consumers have only a small incentive to lobby in favour of eliminating the policy (or against it being implemented in the first place).

There's a lot more of interest in Kling's article. Market power and lobbying is just one of many reasons why costs increase faster in some industries or sectors than others.

The law and economics (and game theory) of Survivor

As I mentioned in a post last year, I really love the reality show Survivor. One day I might even collate some of the cool economics-related examples from the show - comparative advantage, asymmetric information, risk and uncertainty, public goods, common resources, and lots and lots of game theory (coalitions, prisoners' dilemmas, repeated games, coordination games, and so on).

I recently ran across this 2000 working paper by Kimberley Mason and Maxwell Stearns (both George Mason University) on the law and economics of Survivor. It would probably be more correct if the title said it was about the game theory of Survivor, which is what it is. It was written soon after the conclusion of the first season of Survivor (which is currently showing its 37th season - David vs. Goliath). The paper is interesting in that it traces out all the strategic decision-making in the first season, and relates it to game theory and rational decision-making. Mason and Stearns also highlight the masterstroke of the eventual winner, Richard Hatch, in bowing out of the last immunity challenge:

The strenuous nature of the competition helped Richard to justify a decision that was ultimately a well disguised defection from his suballiance with Rudy. Recall that Richard withdrew from the competition, claiming that he knew he would not win. If one construes the Richard/Rudy suballiance as a commitment to do whatever they can to ensure that they emerge as the finalists... then by withdrawing, Richard defected. To see why consider how the game was necessarily played as a result of Richard’s decision. Had Rudy won the competition, he would have voted to keep Richard on as a finalist, consistent with his commitment to the suballiance. Because Kelly preferred Rudy to Richard (as shown in her first vote in cycle 13), this would have risked a 4 to 3 vote for Rudy by the jury. (This assumes that the remaining six jurors vote as they did.). But if Kelly won the game, then she would choose between Rudy and Richard. She knew that either of them would vote for the other as a juror. The only question from her perspective was who was more popular with the remaining jurors. As Richard likely knew, Rudy was more popular, meaning that if Kelly won, Richard would still be selected as a finalist. In contrast, if Richard stayed in the immunity contest and won, he faced another Catch-22. If he voted to keep Rudy, then Kelly would vote for Rudy as a juror, and as a result, Richard would lose (again assuming the other jurors voted as they did). And if he voted for Kelly, then he would violate the express terms of the suballiance with Rudy, and risk Rudy’s retribution. If Rudy also defected, then Kelly would win. The only way that Richard could reduce the likelihood of this result was to withdraw from the game. While he would remain a finalist regardless of whether Rudy or Kelly won, he hoped that Kelly would win because she would eliminate his toughest final competitor.

Kelly won the challenge, and Richard duly won Survivor by a vote of 4-3. Mason and Stearns conclude:

At the beginning of this essay, we posited that Survivor was played in a manner that was consistent with the predictions of rational choice theory. We certainly do not suggest that every player played in a manner that optimized his or her prospects for winning. Indeed, that is largely the point. At each step in the game, those who best positioned themselves to win were the ones who played in a rational and strategic manner.

Interestingly, the paper also contains a discussion of the optimal size of an alliance, based on theory from Gordon Tullock and Nobel Prize winner James Buchanan, which should be familiar to my ECONS102 students:

Professors Buchanan and Tullock present an optimal size legislature as a function of two costs, agency costs, which are negatively correlated with the number of representatives, and decision costs, which are positively correlated with the number of representatives... The optimum point, according to Buchanan and Tullock, is that which minimizes the sum of agency and decision costs...

These two conflicting costs, which are both a function of coalition size, pit the benefits of safety in numbers against the risks of disclosure to non-alliance members... As the size of the coalition increases, the members are increasingly protected against the risk that a member will defect in favor of an alternative coalition. Conversely, as coalition size increases, the members face an increased risk of disclosure, which could lead to a coalition breakdown.

The optimal size of an alliance is one that correctly balances the benefits of being large enough to be safe from the non-allied players voting you off (the marginal benefit of adding one more person to the alliance decreases as the alliance gets larger), against the costs of the alliance being revealed to all players (the marginal cost of adding one more person to the alliance increases as the alliance gets larger). The cost of having a large alliance also relates to the chance of defection - the chance that one or more members of the alliance switch sides and blindside someone. It is easier to maintain trust and cohesion in a smaller alliance.

Survivor is a great example of economics in action. If you aren't already a fan, you should start watching it!

Read more:

• The economics of Survivor

The optimal size of groups in a settlement negotiation

Last week the student-led Waikato Economics Discussion Group (EDG) discussed "Are large natural groupings (iwi) the best people to be negotiating treaty settlements?". It was an interesting discussion, which really boiled down to a debate about whether it was better to negotiate with a small number of large groups, or a larger number of small groups (and you can find some context that precipitated the choice of topic here). At the end of the session I pointed out that there is an existing framework that can be used to understand this decision, which comes from 1986 Nobel Prize winner James Buchanan.

In deciding the optimal number of people to be involved, there are two types of costs that need to be balanced:

1. Decision-making costs - the costs of coming to an agreement (usually associated with the time and effort required to agree on a decision), which increase when the number of people (or groups) involved in the decision-making increases
2. External costs - the costs borne by members of society who disagree with the decision (usually because they were not involved in the decision-making), which increase when the costs are borne by a larger number of people (that is, when fewer people, or groups, are involved in the decision-making)

So, if you think about the number of people (or groups) involved in negotiating a settlement, the decision-making costs increase with the number of groups, and the external costs decrease with the number of groups. This is illustrated in the diagram below, where the x-axis (Q) is the number of people (or groups) included in the settlement negotiations.

On the left of the diagram, there are a few large groups included in the negotiations (at the limit, there is just one representative of everyone). The decision-making costs are lowest, since agreement between the Crown and a single representative is relatively easy. However, the external costs are large, because many people may disagree with what the single representative has agreed on their behalf.

On the right of the diagram, there are many small groups included in the negotiations (at the limit, every person is individually included in the negotiations). The decision-making costs are highest, since agreement between the Crown and every person individually is going to take a lot of time and effort (and there may be 'holdout minorities' who hold out for a better deal). However, the external costs are minimised, because no individual will agree to the settlement if it makes them worse off.

The optimal number of groups to be included in the negotiation occurs where the two curves intersect (at Q*). At that point, the total of decision-making costs and external costs is minimised.

This only provides a framework for understanding how to decide how many groups should be included in the negotiations. If decision-making costs are high, then that would favour having fewer groups that are larger in size in the negotiations (because Q* will be further to the left). If external costs are high, then that would favour having many smaller groups in the negotiations (because Q* will be further to the right).

In the case of the Crown negotiating with iwi over Treaty of Waitangi settlements, it seems to me that the external costs are likely to be high. The decision-making costs may be high as well, but Maori culture is much more collective and inclusive than Western culture, and there are likely to be intrinsic costs faced by Maori who feel disenfranchised by being included within a larger grouping. I would suggest that this tends to favour negotiations with smaller groups, where necessary.