General Exam in Political Economy

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					                      CANDIDACY Exam in Political Economy
                     Beazer, Chidambaram, Hu, Blake, Shafique
                                   Autumn 2006


You have 6 hours to complete this exam. Answer a total of 3 questions from
below, of which one question must come from each section. The exam is open-

Part I. [Questions 1-5] Answer one of the following questions.

1. Find the perfect Bayesian equilibria to the following game:

                                                                 u           (3,0)

                                                   2             d
                            1                                    u
                                      D            2                     d
  N                                                                          (0,2)
                      1/3                                                     (-6,0)

2. Consider two players dividing a resource (normalized to one dollar) between themselves.

a. How would the dollar be divided in a take-it-or-leave-it scenario, in which Player 1 makes an
offer to divide the dollar and Player 2 must accept or reject the offer (with a rejection meaning
that neither player gets anything)?

b. How would the dollar be divided if Player 1 divides the dollar into two parts and Player 2 gets
to choose which of the parts she will receive?

c. How will the dollar be divided in an alternating offers (Rubenstein bargaining) scenario, in
which Player 1 makes the first offer, which then Player 2 accepts or makes a counter offer to,
which then Player 1 accepts or makes a counter offer to, and so on (with the dollar discounted to
a fraction  of its previous value upon each counter offer)?
d. Describe a real-world instance of bargaining between two actors common to political
economy. Would the resolution of that bargain be best described by any of the three scenarios
above, or by an entirely different process? What sort of game theoretic model is appropriate for
developing theory to explain your example, and what sort of data could be examined to test that

3. What is Arrow’s Theorem?
    a. Describe the main result of this theorem. What phenomenon does Arrovian social choice
       theory try to show?
    b. How relevant is this result for the study of real world political processes and institutions?
    c. In your answer, discuss specifically the applicability of the Arrovian result to two
       questions in the field of political economy. These may be the questions of collective
       action provision, the choice of institutions, or two other questions of your choice.

4. A prominent stream of research in political economy begins with the assumption of rationality.
    What does this entail? Under what circumstances is this assumption more or less plausible?
    a. In your answer, evaluate the role of the rationality assumption in two literatures of your
    b. How valid is the rationality assumption? Is there an alternative to rational, individual
       decision-making that would better serve streams of literature?

5. Consider a model of legislative delegation to an agency that makes policy subject to executive
oversight. The actors consist of a Legislature, a substantive Agency, and an Executive. Assume
that all actors’ ideal points, L, E, and A  R1, and that L < A < E, and without loss of generality,
assume that L = 0. Assume that all actors’ preferences are defined over the final policy chosen,
as well as any costs they must incur to influence the location of the policy, and whether a
particular policy is politically salient to their interests. In other words, we assume that certain
policies are more salient to the actors’ interests than others.
         More formally, the Legislature’s preferences are defined over the final policy outcome
and any costs it must incur to create policy, and can be represented by the following utility
                                       U L ( x, k )    ( L  x) 2  k ,
where x  R1 is the final policy outcome, k ≥ 0 is the cost that it must incur if it chooses not to
delegate to the agency and rather make policy itself, and  {0, 1}, which is determined
stochastically, identifies whether the policy under consideration is politically salient to the
legislature. Hence, while the Legislature generically prefers policies that are located closer to its
ideal point, some policies will be revealed as not politically salient ( = 0), and hence, the
Legislature will be indifferent between a variety of policies, including those that are far away
from its ideal point.
         The Agency’s preferences are defined over the final policy outcome, and can be
represented by the following utility function:
                                           U A ( x)   ( A  x) 2 .
         Unlike the Legislature, this specification implies that the agency considers all policies

        Finally, the Executive’s preferences are defined over the final policy outcome, as well as
how costly it is for it to change policy from what has been proposed by the substantive policy
agency. Similar to the Legislature, the Executive’s policy preferences are also influenced by
whether it finds the issue to be politically salient to the executive, and they can be represented by
the following form:
                                   U E ( x)    ( E  x) 2  c(a  x) 2 ,
        where a is the policy proposed by the Agency, x is the final policy chosen by the
Executive, c ≥ 0, and  {0, 1}, which is determined stochastically. Hence, conditional on the
Executive realizing that a policy is politically salient ( = 1), its utility is determined by how far
the final policy (x) is located from its ideal point (E), as well as how far the final policy is from
the Agency’s proposal (a).
        The Sequence of play is as follows. In stage 1 the Legislature makes a legislation
decision, l= (d, xL) consisting of a delegation decision (d {1, 0}) for whether or not to cede
policymaking authority to a substantive Agency, and a policy decision xL {, R1}. If the
Legislature delegates authority to the Agency (d = 1), the Agency has complete discretion over
where to set policy. Alternatively, if it does not delegate to the Agency (d = 0), the Legislature
decides where to set policy, xLR1, subject to paying a fixed cost, k ≥ 0. If the Legislature
chooses not to delegate to the agency and create policy internally, Nature then reveals whether
the policy under consideration is salient to the Executive and/or the Legislature with the
following probabilities: with probability p1, the policy is salient to both the Executive and the
Legislature ( = 1,  = 1), with probability p2, the policy is salient to the Executive, but not the
Legislature ( = 1,  = 0), with probability p3, the policy is salient to the Legislature, but not the
Executive ( = 0,  = 1), where  pi  1 . Finally, the game ends, and payoffs are disbursed.
        In stage 2, assuming that delegation has occurred, the substantive Agency chooses a
policy a  R1, which serves as the policy under consideration for subsequent Executive review.
In Stage 3, Nature determines whether the policy is politically salient to the Executive and/or the
Legislature with probabilities identical to those described above, and finally, the Executive
observes the Agency proposal, ascertains whether the policy area is politically salient to its
interests, and chooses a final policy, xE R1.
        To simplify analysis, assume that p2 = p3 = p. That is, the probability that the Nature
reveals that a policy is salient to Legislature but not to the Executive is equal to the probability
that the opposite ensues.
    a) Draw/represent the extensive form of the game described above in Part II. (The game
   b) Conditional on the agency choosing any generic policy a, what policy will the Executive
       choose? (In other words, what (x*(a)) will the executive choose as the final policy?)
   c) What policy, a*, will the agency choose, knowing the equilibrium policy choice of the
       executive is x*(a)?
   d) Given your answers to parts (b) and (c) above, what is x*(a*)?

   e) What is the expected utility of the Legislature in the case that it decides to create policy
   f) What is the expected utility of the Legislature in the case it decides to delegate to the
   g) Characterize the conditions under which the Legislature will choose to delegate to the
       Agency, given the possibility of Executive review.

Part II. [Questions 6-9] Answer one of the following questions.

6. The literature on the aggregation of individual preferences through majority rule at first
identified two pitfalls in the distribution of individual preferences making the derivation of
policy outcomes from voters’ preferences fundamentally problematic: absence of single-peaked
preferences or issue multi-dimensionality. Subsequently, authors have resorted to two distinctive
concepts to deflate these foundational problems: institutionalism--the claim that the theoretical
solution to problematic preference distributions is provided by institutions, whose role is to
allocate agenda setting power and determine voting procedures--, and information and ideology--
the claim that poor information and ideology constrain the initial distribution of preferences in a
such way as to make aggregation unproblematic. Present the fundamental problem, develop the
two alternatives, and compare and contrast their relative advantages and shortcomings.

7. In his book, An Economic Theory of Democracy, Anthony Downs employs the median voter
theorem developed by Duncan Black to show that it is a dominant strategy for candidates to
converge to the median in two-candidate elections. First, prove this result. Second, discuss some
of the subsequent theoretical developments that have built upon Downs. This may include, for
instance, the study of spatial preferences, ideology, or political party competition. What, in your
view, is the enduring contribution of Downs’ book?

8. Institutions returned to the center of political economy in the 1990s after years of neglect.
With regard to the problems of cooperation and collective action, how well would you say
institutional analyses have fared in providing solutions to these major dilemmas of politics?
Where you find institutional analysis lacking, suggest which line if inquiry would do better.

9. There currently are two distinctive approaches to the study of institutions: the rational choice
approach, which treats institutions as responses to commitment or uncertainty problems, and
“historical institutionalism” approach, which emphasizes institutional change. Compare and
contrast the two approaches. Are there no possible bridges conceivable between the two

Part III. [Questions 10-13] Answer one of the following questions.

10. The study of domestic (and comparative) political economy and of international political

economy have traditionally been treated as distinct fields. Some argue that this distinction is
now obsolete with the rise of “globalization”. What do you think? Support your argument with
specific references to real-world trends and to the literature.

11. Discuss the emerging literature on the impact of international factors (broadly grouped under
the label 'openness') on domestic economic policy-making. Pay particular attention to explicating
the different causal mechanisms purported to connect 'openness' to policy-making, and to
evaluating the empirical evidence for these mechanisms. (Hint: you might wish to begin by
defining what is meant by 'openness'.)

12. How do political institutions influence policy-making toward financial markets?    Discuss,
with reference to specific cases.

13. In theory, free trade provides aggregate welfare benefits both within and across countries. In
practice, however, governments often erect barriers to free trade. How does the “logic of
collective action” help us understand the politics of international trade?


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