Democracy, crises, and misconceptions [Elektronische Ressource] / vorgelegt von Hans-Jörg Beilharz

Democracy, Crises, andMisconceptionsInaugural-Dissertationzur Erlangung der Wurde einesDoctor Rerum Politicaruman der Fakultat fur Wirtschafts- und Sozialwissenschaftender Ruprecht-Karls-Universitat Heidelbergvorgelegt vonHans-Jorg Beilharzgeboren in EppingenHeidelberg, im August 2005VorwortDievorliegendeArbeitistwahrendmeinerTatigkeitalswissenschaftlicherMitarbeiter? ?am Lehrstuhl fur? Wirtschaftspolitik I der Universitat? Heidelberg entstanden.Mein besonderer Dank gilt Herrn Prof. Dr. Hans Gersbach, der durch seine allzeitverlasslicheBetreuungundUnterstutzungmeinerwissenschaftlichenArbeitwesentlich? ?zu deren Gelingen beigetragen hat. Herrn Prof. Dr. Jurgen? Eichberger moc? hte ichfur? die Anfertigung des Koreferats danken sowie fur? seine wertvollen Hinweise zurVerfeinerung der Analyse.Weiterhin danke ich folgenden Freunden und Kollegen fur? die Muhe,? die sie sich beimDurchlesen des Manuskriptes gemacht haben, um mir mit Verbesserungsvorschlagen?und anderen Hinweisen zu helfen: Dr. Martin Bentele, Meinhard Doelle, Ph.D., Elisa-beth, Prof. Dr. Hans Haller, Jan-Oliver Kuhr, Felix Muhe,? Bernhard Pachl und Dr.Lars Siemers.Meinen Eltern danke ich fur die materielle und ideelle Unterstutzung, mit der sie mir? ?mein Studium und die anschließende Promotion letztlich erst erm?oglicht haben.Neben der wissenschaftlichen Arbeit sind die Gespr?
Publié le : dimanche 1 janvier 2006
Lecture(s) : 42
Source : ARCHIV.UB.UNI-HEIDELBERG.DE/VOLLTEXTSERVER/VOLLTEXTE/2006/6140/PDF/BEILHARZ_DISS.PDF
Nombre de pages : 212
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Democracy, Crises, and
Misconceptions
Inaugural-Dissertation
zur Erlangung der Wurde eines
Doctor Rerum Politicarum
an der
Fakultat fur Wirtschafts- und Sozialwissenschaften
der Ruprecht-Karls-Universitat Heidelberg
vorgelegt von
Hans-Jorg Beilharz
geboren in Eppingen
Heidelberg, im August 2005Vorwort
DievorliegendeArbeitistwahrendmeinerTatigkeitalswissenschaftlicherMitarbeiter? ?
am Lehrstuhl fur? Wirtschaftspolitik I der Universitat? Heidelberg entstanden.
Mein besonderer Dank gilt Herrn Prof. Dr. Hans Gersbach, der durch seine allzeit
verlasslicheBetreuungundUnterstutzungmeinerwissenschaftlichenArbeitwesentlich? ?
zu deren Gelingen beigetragen hat. Herrn Prof. Dr. Jurgen? Eichberger moc? hte ich
fur? die Anfertigung des Koreferats danken sowie fur? seine wertvollen Hinweise zur
Verfeinerung der Analyse.
Weiterhin danke ich folgenden Freunden und Kollegen fur? die Muhe,? die sie sich beim
Durchlesen des Manuskriptes gemacht haben, um mir mit Verbesserungsvorschlagen?
und anderen Hinweisen zu helfen: Dr. Martin Bentele, Meinhard Doelle, Ph.D., Elisa-
beth, Prof. Dr. Hans Haller, Jan-Oliver Kuhr, Felix Muhe,? Bernhard Pachl und Dr.
Lars Siemers.
Meinen Eltern danke ich fur die materielle und ideelle Unterstutzung, mit der sie mir? ?
mein Studium und die anschließende Promotion letztlich erst erm?oglicht haben.
Neben der wissenschaftlichen Arbeit sind die Gespr?ache mit meinem Kollegen Bern-
hard Pachl von großem Wert fur michgewesen, bei denen immer wieder der Zeiger auf?
?die Uberwindung der ontologischen Differenz von Zeit und Sein gerichtet wurde.
Hans-J?org Beilharz
iiContents
1 Introduction 1
2 Conceptual Issues 4
2.1 Learning Theory and Awareness . . . . . . . . . . . . . . . . . . . . . . 4
2.1.1 Learning Theory . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.1.1.1 Basic Ideas . . . . . . . . . . . . . . . . . . . . . . . . 4
2.1.1.2 Rational Learning and Boundedly Rational Learning . 6
2.1.2 Relation to the Awareness of General Equilibrium Effects . . . . 17
2.2 Signaling and the Political Economy of Reform through Crises . . . . . 20
Part I: Awareness 23
3 Model 24
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.2 The Basic Economic Model . . . . . . . . . . . . . . . . . . . . . . . . 27
3.3 The Political Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.3.1 Views . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.3.1.1 Perceived Short-Run Political Equilibria under Gen-
eral Equilibrium Voting (GEV) . . . . . . . . . . . . . 32
3.3.1.2 Perceived Short-Run Political Equilibria under Partial
Equilibrium Voting (PEV) . . . . . . . . . . . . . . . . 32
3.3.2 Dynamics and Crisis . . . . . . . . . . . . . . . . . . . . . . . . 35
iiiContents
4 Long-Run Political Equilibria 38
4.1 Political under General Equilibrium Voting (GEV) 38
4.2 Long-Run Political Equilibria under Partial Voting (PEV) 41
4.3 Comparing Long-Run Political Equilibria of General Equilibrium Vot-
ing (GEV) and Partial Equilibrium Voting (PEV) . . . . . . . . . . . . 48
4.4 Reaction to Crises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
4.5 Interpretation of Results . . . . . . . . . . . . . . . . . . . . . . . . . . 49
4.5.1 General Equilibrium Voting (GEV) . . . . . . . . . . . . . . . . 49
4.5.2 Partial Voting (PEV) . . . . . . . . . . . . . . . . . 53
5 Variation: PartialEquilibriumVotingwhentheFirstMarketisCleared
(PEV1) 56
5.1 Perceived Market Equilibria under Partial Equilibrium Voting 1 (PEV1) 57
5.2 Political Equilibria under Partial Equilibrium Voting 1 (PEV1). . . . . 58
5.2.1 Perceived Utility Functions. . . . . . . . . . . . . . . . . . . . . 58
5.2.2 Short-Run Political Equilibria . . . . . . . . . . . . . . . . . . . 60
5.2.3 Long-Run Political . . . . . . . . . . . . . . . . . . . 63
5.3 Interpretation of Results . . . . . . . . . . . . . . . . . . . . . . . . . . 68
6 Discussion and Conclusions 73
6.1 Robustness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
6.2 Overall Comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
6.2.1 Economic Results . . . . . . . . . . . . . . . . . . . . . . . . . . 76
6.2.2 Political Results . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
6.3 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Part II: Policy Reversal 79
7 Model 80
7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
7.2 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
ivContents
7.2.1 Agents, Views and Preferences . . . . . . . . . . . . . . . . . . . 82
7.2.2 The Voting Game . . . . . . . . . . . . . . . . . . . . . . . . . . 86
7.2.3 The Starting Point: Crisis and Reform Proposals . . . . . . . . 89
8 Equilibrium Concept and Best Responses 92
8.1 Equilibrium Concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
8.2 Selection Criteria and other Assumptions . . . . . . . . . . 94
8.3 Best Responses and Beliefs . . . . . . . . . . . . . . . . . . . . . . . . . 97
8.3.1 The l-Party’s Best Responses . . . . . . . . . . . . . . . . . . . 97
8.3.2 The M-Group’s Best Responses and Beliefs . . . . . . . . . . . 100
9 Equilibria 107
9.1 Derivation of Sequential Equilibria . . . . . . . . . . . . . . . . . . . . 107
9.1.1 Preliminary Considerations . . . . . . . . . . . . . . . . . . . . 107
9.1.2 An Example: Sequential Equilibria in Area III . . . . . . . . . . 109
9.2 Potential Sequential Equilibria . . . . . . . . . . . . . . . . . . . . . . . 114
9.2.1 Discussion of Area-I-Equilibria . . . . . . . . . . . . . . . . . . . 115
9.2.2 of Area-II-Equilibria . . . . . . . . . . . . . . . . . . 117
9.2.3 Discussion of Equilibria in Areas III to V . . . . . . . . . . . . . 118
9.2.4 of Area-VI-Equilibria . . . . . . . . . . . . . . . . . . 121
9.2.5 Discussion of Area-VII-Equilibria . . . . . . . . . . . . . . . . . 123
9.3 Summary: General Characteristics of Sequential Equilibria . . . . . . . 123
9.4 Informational Quality of Sequential Equilibria . . . . . . . . . . . . . . 125
10 Discussion and Conclusions 129
10.1 Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
10.2 Equilibrium Refinements . . . . . . . . . . . . . . . . . . . . . . . . . . 131
10.2.1 Payoff Dominance . . . . . . . . . . . . . . . . . . . . . . . . . . 131
10.2.2 The Intuitive Criterion . . . . . . . . . . . . . . . . . . . . . . . 133
10.3 The Game’s Characteristic Sequential Equilibria . . . . . . . . . . . . . 136
vContents
10.3.1 Opportunistic Equilibria . . . . . . . . . . . . . . . . . . . . . . 136
10.3.2 Sincere Equilibria . . . . . . . . . . . . . . . . . . . . . . . . . . 136
10.3.3 Highly Informative Equilibria . . . . . . . . . . . . . . . . . . . 136
10.3.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
10.3.5 Numerical Examples . . . . . . . . . . . . . . . . . . . . . . . . 137
10.4 The r-Party Proposes the G-View instead of the P-View . . . . . . . . 140
P 110.5 Equilibria when the r-Party Proposes a Regulation Parameter w < . 143r 2
10.6 Development of Crises Over Time: Conditions for Policy Reversals . . . 147
10.7 Robustness: Discussion of Equilibrium Selection Criteria and other As-
sumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
10.8 Summary and Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . 157
10.8.1 Summary of Equilibria’s Characteristics and their Interpretation 157
10.8.2 of Conditions for Policy Reversal and their Interpre-
tation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
10.8.3 Conclusions: The Outside Observer, and the Relation to Con-
temporary and Further Research . . . . . . . . . . . . . . . . . 159
11 Overall Conclusions 161
A Appendix Part I 163
B Appendix Part II 172
B.1 The l-Party’s Best Responses . . . . . . . . . . . . . . . . . . . . . . . 172
B.1.1 Best Response Proposals . . . . . . . . . . . . . . . . . . . . . . 172
B.1.2 Best Response Information Decisions . . . . . . . . . . . . . . . 177
B.2 Further Proofs and Examples . . . . . . . . . . . . . . . . . . . . . . . 184
Bibliography 193
C Part II: Selected Tables and the Game Tree 201
viChapter 1
Introduction
A working democracy depends on the participation of people in the political and
economicdecision-makingprocess. Theknowledgerequiredtomakeinformedpolitical
decisions concerning an entire economy is enormous. This is especially the case for
policy measures such as the introduction of general minimum wages affecting many
1sectors of an economy. Political economy and behavioral economics have established
that voters may lack knowledge about the mechanisms describing the interaction of
markets in the economy. Consequently, democratic decisions may be inappropriate
and hence may produce inefficient outcomes or even lead to economic crises.
We examine the consequences of voters’ misconceptions and show how unemployment
can be explained in an economy where voters do not take all general equilibrium
repercussions into account when a binding minimum wage is introduced. Although
2thepossibilityofdemocraticfailureisfrequentlydoubted ,wecanjustifythisapproach
on several grounds.
Obviously political decisions are complex, whereas many single economic decisions are
lessdifficult,e.g.,abakerthinkingaboutthepricetoaskforhisbread. Thereisstrong
evidence in everyday life suggesting that agents are much more engaged in economic
activitiesdirectlyaffectingtheirpocketsandwelfarethaninpolicyaffairsbeyondtheir
tangible experience. This does not mean that people do not have opinions concerning
these issues. But they are rarely engaged in amassing enough knowledge to base fully
rational opinion on. Furthermore, it is hard to believe that the crises affecting many
European social states cannot be at least partially explained by insufficient economic
knowledgeonthepartoftheelectorateandtheagentsofotherdemocraticinstitutions.
For example, Tabellini (2000) has identified the lack of knowledge among citizens
1See Chapter 2 ”Conceptual Issues”.
2This pessimistic view on the performance of democracy is sometimes rejected as an oversimpli-
fication ignoring the economic rational-choice paradigm. One advocate of democratic efficiency is
Wittman (1995) “The Myth of Democratic Failure”.
1Chapter 1. Introduction
and conflicting interests among voter groups as the main reasons behind the delay of
necessary reforms in European social states. Convictions about insufficient economic
understanding are further strengthened by the fact that the economic environment for
all industrialized countries has changed dramatically in the last few decades due to
many complex structural changes.
Aftersubstantiatingthepossibilityofdemocraticinefficiency,wewillexaminesolutions
counteracting detrimental policy persistence based on misconceptions. We investigate
whether democratic institutions can provide all the necessary information enabling
voters to make fully rational choices without requiring a complete understanding of
theeconomy. Thistaskisusuallyassignedtopoliticalpartiesrunningforgovernmental
3offices.
Althoughpoliticalpartiesexistandoperatebyinfluencingpublicopiniontheproposed
solution may still be problematic in itself. One possible answer to this puzzle is that
parties themselves may not be well informed about the functioning of the economy,
either because the knowledge is genuinely not available or because parties are not
able to adopt it for various reasons. Therefore parties may be subject to the same
misconceptions as voters. Another eventuality is that parties may be well informed
but either fail to or have no incentive to inform voters. Assuming that, at least after
a while, there will always be some people who know how to solve an economic crisis in
technicalterms,weidentifyinefficientoutcomesasafailureinpoliticalcommunication.
It is the outcome of the interaction between rationally uninformed and risk-averse
voters on the one hand, and political parties motivated by their partisans’ interests
and the desire for power on the other.
The thesis is organized as follows. In the next chapter (Chapter 2) we discuss the
foundations for our models. We survey the theory of learning in macroeconomics and
games and relate it to the model used in Part I dealing with the awareness of general
equilibrium effects. We also relate the political economy of reform to the model of the
voting game used in Part II.
In Part I (Awareness), we explain the emergence of a crisis in a democratic process in
terms of inadequate patterns of thought (misconceptions). The crisis is a result of a
“learning process” in which voters do not take into account all the general equilibrium
effects caused by a minimum wage in a labor market.
In Part II (Policy Reversal), we discuss the potential reversal of a crisis. It is one
possible result of a voting game between voters and parties in which parties signal the
3Forexample, seeArt. 21(1)oftheGermanconstitution, theGrundgesetz(1949): ”DieParteien
wirken bei der politischen Willensbildung des Volkes mit [Parties participate in forming people’s
political opinion]. ...”
2Chapter 1. Introduction
correct view about the economy. We also discuss the conditions under which a crisis
will persist.
Our findings support the intuitive and frequently voiced hypothesis that crises induce
reforms. The findings rest on the supposition that crises can prompt agents to review
their patterns of thought. They recognize that the crisis is caused by structurally
misguided policies derived from an inadequate theory about the economy. Reform is
the outcome of a political process in which an adequate theory is chosen instead of an
inadequate one.
After discussion of the two models of potential democratic failure and success in Parts
I and II, we advance some general conclusions in Chapter 11.
3Chapter 2
Conceptual Issues
2.1 Learning Theory and Awareness
2.1.1 Theory
2.1.1.1 Basic Ideas
In economics the problem of learning is typically studied within the framework of
game theory and macroeconomic theory. In the following, we illustrate the principles
of learning in macroeconomic terms.
A macroeconomic model usually consists of a vector of endogenous variables x, ex-
ogenous variables (shocks) y, parameters, and a probability distribution of shocks and
parameters.
Learningtheorydealswithdynamiceconomicmodelsinwhichthestateoftheeconomy
eat time t, x , depends additionally on agents’ forecasts x at time t¡1 about thet t;t¡1
values of a subset of x . The reduced form of such a model ist
ex =F(x ;x ;y ) (2.1)t t¡1 tt;t¡1
where
n e mx 2IR and x 2IR ; m•n:t t;t¡1
Thevectory inequation(2.1)containsthevaluesofexogenousshocksint. Thevectort
x may contain values of endogenous variables that go further back than t¡1, andt¡1
x may also depend on forecasts for more than one period in the future (expectationalt
1leads).
Ascanbeseenfromequation(2.1),thedynamicsoftheeconomydependson“forecast-
ing rules” that transform all or part of the information available at t¡1 into forecasts
1See B ohm and Wenzelburger (2004) for a discussion of models with expectational leads.
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