Globalization: Markets,
Instututions & Policy
Professor O’Halloran
Lecture 3
Basic Approach

Preferences In -- Policies Out
Preferences
Government
(interests)
electoral process
Policies
(legal constraints
on economic or
social activity)
governmental process
•
•
•
•
Issues emerge,
Interests (preferences) are formed, and
Information is transmitted to the
Institutions of government, where policy may or may not change.
Central Questions
 What
determines whether preferences will
be voiced?
 What determines whether these voices will
be heard?
 What determines whether policy will
change in response?
Objective: Understand the supply and
demand for political action and how it
influences public policy.
Theory of Collective Action

All group behavior is the sum of individual
actions.

But rational individual behavior can lead to
collectively irrational outcomes.

So groups must motivate their members
(provide incentives) to achieve their goals.
This is the basis of effective interest group
action.
Definition of Public Goods
Rival
Excludable
Non-Excludable
Non-Rival
Cars
Haircuts
Education
Concerts
Information
Scientific Discoveries
Oil Pools below
>1 country
Migratory Resources
Public Park
Macy’s Day Parade
National Defense
Tariffs, Quotas
Public Goods
 Must
be non-rival and non-excludable to qualify
The Problem of Public Goods
 All
individuals in a group benefit from having
the good supplied.
 But once it is supplied, cannot prevent others
from using it.
 Each individual would rather have others pay
the costs, and take the benefits themselves.
Many public goods are not supplied, even
though their total utility exceeds their cost.
Free Rider Problem
 Definition:
– An individual “free rides” if they pay less than
their true marginal value derived from the
public good.
 Example:
– Public Television
– Highway Construction
The Prisoners’ Dilemma
 Substantive
problem
 Cooperation
is valuable. . .
 . . . but it is hard to achieve.
 What
makes cooperation valuable?
– Greater social benefits (aggregate payoffs)
when it occurs than when it doesn’t occur.
 What
makes cooperation hard to achieve?
– The incentive to free-ride, defect, not
cooperate, not contribute. . .
Concepts:
dominant strategy, equilibrium
Example: Prisoners’ Dilemma
Cooperate
Defect
Prisoner 1
Prisoner 2
Cooperate
(-1, -1)
(0, -10)
Defect
(-10, 0)
(-5, -5)
Interpretation of payoffs:
0 = Temptation
-1 = Reward
-5 = Punishment
-10 = Sucker
Condition: T > R > P > S
(1’s payoff, 2’s payoff)
The dominant strategy is for both players to
defect, so individually rational behavior
produces a socially suboptimal outcome.
Prisoners’ Dilemma Illustrated
Extension to n-players: 4 diners

Tab Rule:
– Split the tab equally
 After
the main course:
– Everybody is full but not stuffed; waiter offers assortment of
$4 desserts.

Benefits:
– For each satisfied-but-not-stuffed-diner, the benefit of a
dessert is only $2.

Choice:
– Each must choose either to have dessert (Yes) or not to have
dessert (No).

Questions:
– (1) What are the payoffs? (2) What is the dominant strategy?
(3) What is the equilibrium? (4) Is it socially optimal?
Answers
Payoffs are b - c, where b = $2 if you get dessert, c = (4n)/4
where n is the number who order a $4 dessert.
The dominant strategy for each diner is to say “yes.”:
Benefit
b
Choice
Cost
c
Net Ben.
b-c
Payoff as f(n Yes’s)
0
1
2
3
No
0
(4n)/4= n
–n
0
-1
-2
-3
Yes
2
(4n)/4= n
2–n
1
0
-1
-2
The equilibrium is for everyone to order dessert.
This is not socially optimal.
 Everyone prefers that everyone would have said “no.”
 Cooperation here is abstinence.
 As in any PD situation, it’s valuable and hard to obtain.
Ways Around the Dilemma
 The
players themselves
– Internal moral rules, codes of conduct, norms…
– Communication
– Repetition
 if
the probability of continuation is “sufficiently high” then
cooperation becomes an equilibrium
 External
solutions
 Privately
agreed upon 3rd party monitoring
 Contract
law & its enforcement by courts
 International
 These
organizations (e.g., GATT, WTO)
are all extensions of -- not covered within -the one-shot PD considered above.
Political Action as a Public Good
 No
individual can be excluded from
benefits
– For example:
Passing a law
 Cleaner environment

 Success
or failure of action does not depend
on any one individual
– Leads to free riding
 One
protester more or less will not alter outcomes
 Political action will be under supplied
Supply & Demand of Political Action
 Benefits
of Political Action
– Substitutes
– Magnitude of Benefits
– Per capita Benefits
 Costs
–
–
–
–
of Political Action
Size of the group
Coverage or geographic dispersion
Resources Available
Costs of Organization
The Market for Political Action
Cost/Benefits
Marginal
Cost
Equilibrium Amount of
Political Action
Marginal
Benefit
Political Action
 Marginal
Benefits depend on substitutes
 Marginal
Costs are difficulty of organization
 Equilibrium:
Costs and Benefits Equate
Distributive Politics Spread Sheet
Supporting Interests
Supporting
Interests
Interests
Demand Side
Supply Side
Benefits from Supporting
Ability to Generate Political Action
Substitutes
Magnitude
Per Capita
Numbers
Coverage
Prediction
Resources
Cost
Amount
Opposing Interests
Opposing
Interests
Interests
Demand Side
Supply Side
Benefits from Supporting
Ability to Generate Political Action
Substitutes.
Magnitude
Per Capita
Numbers
Coverage
Resources
Prediction
Cost
Amount
Boeing in a Pickle
Supporting
Interests
Interests
Demand Side
Supply Side
Benefits from Supporting
Ability to Generate Political Action
Substitutes
Prediction
Magnitude
Per Capita
Numbers
Coverage
Resources
Cost
Amount
Boeing
Lower price

Shareholder
Sell shares
Large
Small
Large
Extensive
Large
Very
high
Little

Employees
Few
Large
Substantial
Large
Little
Limited
Very
low
Little impact

Suppliers
Other
business
Large
Moderate
Large
Extensive
Moderate
High
Moderate
Community

Boeing
Few
Large
Considerable
Small
Little
Small
Low
Little impact

Suppliers
Few
Moderate
Moderate
Considerable
Extensive
Small
High
Limited
Oil Rigs
Lower price
Moderate
Small
Few
Little
Moderate
Low
Little
Containers
Lower price
Moderate
Small
Few
Little
Moderate
Low
Little
Lessors
Other loans
Moderate
Small
Small
Little
Large
Low
Little
Boeing in a Pickle (continued)
Opposing
Interests
Interests
Demand Side
Supply Side
Benefits from Supporting
Ability to Generate Political Action
Prediction
Substitutes.
Magnitude
Per Capita
Numbers
Coverage
Resources
Cost
Amount
Taxpayers
None
Large
Very small
Huge
Complete
Huge
Very high
Little
Tax-exempt
None
Substantial
Substantial
Large
Extensive
Small
Low
Large
 Estimate
total political action supplied on
either side of the issue.
 Predicted
result ???
Wilson/Lowi Matrix
If the proposed policy is adopted, how does the policy change
the distribution of costs and benefits?
Benefits
Costs
Dispersed Concentrated
Concentrated
Interest group
politics
Dispersed
Entrepreneurial
politics
telecommunications
loophole closing
Client politics
Majoritarian
politics
rivers and harbors
welfare (increases)
Is CAFE Good Policy?
 CAFE
costs about seven to ten times as much as a
petroleum tax that would induce comparable
consumption.
 CAFE
is an even less efficient mechanism to reduce
greenhouse gases.
– To reduce CO2 emissions, a carbon tax is much more
efficient than a petroleum tax, which in turn is decidedly
more efficient than CAFE standards.
– CAFE standards would cost the economy at least 8.5 times as
much as a carbon tax with equivalent effects on carbon
emissions.
Dimensions of CAFÉ Legislation
Issue
For
Against
Issue Type
Higher CAFE standards
environmentalists
US car makers
Foreign car makers
UAW
Entrepreneurial
Percentage System
US car makers
UAW
environmentalists
Foreign car makers
Interest Group
Anti-Backsliding/
No Outsourcing
UAW
environmentalists
US car makers
Foreign car makers
Interest Group
Delay in Implementation
US car makers
environmentalists
Foreign car makers
UAW
Client Politics
Coalitional fluidity in CAFÉ
Proposal
For
Against
Higher CAFÉ
 Greens
 US Auto Cos
 Foreign Auto Cos
 UAW
Percentage CAFÉ
 Greens
 US Auto Cos
 UAW
 Foreign Auto Cos
Anti-backsliding
 Greens
provision/outsourcing  UAW
restrictions
Status quo
 GM
 Foreign Auto Cos
 Elderly
 US Auto Cos
 Foreign Auto Cos
 Ford, Chrysler (?)
 UAW
 Greens
Strategy and Outcomes
Strategy
US Auto Makers
Propose Alternatives
Foreign Auto Makers
Fight percentage approach
UAW
Free Riding on
Domestics Auto makers

Carbon Tax
No Backsliding
Waiting to see if they Cut deals to get
should jump in on the no something passed.
out sourcing provisions

Old Car Buy Back
Give Testimony
Grass Roots Support
Grass Roots Support

Build own Coalition


Take out Adds

Target Key Legislators
Environmentalists
Mobilize membership
Foreign Car Dealers
Predictions
Winning Coalition
US\For\UAW
Outcome
Status Quo
Environment\UAW
Percent Approach plus no out-sourceing
US\UAW\Environmentalists
Percentage approach
The CAFE Outcome, Generally

The Bryan Bill died - the status quo prevailed.
–
–
–
–
 It
Issue took a back seat to others
Interest group activity was intense
Multiple institutional arenas
New information on safety was key in defeating the Bryan
bill and keeping CAFE out of the Clean Air Act Amendments
was not a “what is good policy?” struggle. Rather,
competing interests well-informed about, and
strategically wise within, the institutions.
 The issue periodically resurfaces (9/10/96 WSJ)
Specifics on the CAFE Outcome

Bryan bill passed by the committee on a 14 to 4 vote

Floor vote scheduled for September; (Iraq invades Kuwait in August)

Filibuster fails on a 68-28 Cloture vote.

Auto companies and their coalition partners swing into high gear.

President Bush emphasizes the safety, choice, and pollution issues. A DoT
Report quantifies deaths due to downsizing.

Floor opposition again filibusters bringing the bill to a vote.

Floor supporters of the bill file a petition for cloture.
– Filibuster sustained as the vote for Cloture is only 57 to 42. (60 needed)

Who switched in the successive cloture votes?
–
8 Republicans
–
3 Democrats: Sasser (Tennessee), Nunn (Georgia), Glenn (Ohio)
(All three had Japanese auto auto plants or suppliers in their states)