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Essays on Political Economics
笠松 怜史東京大学大学院経済学研究科
2019年2月14日
Mail: [email protected]
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mailto:[email protected]
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Outline
1. Introduction
2. Game Theoretic Analysis of Negative Campaigning. [Kasamatsu(2016), Kasamatsu and Kishishita(2017)]
3. When Populism Meets Globalization: Analysis of Tax Competition. [Kasamatsu and Kishishita(2018)]
4. International Capital Market and Repeated Tax Competition. [Kasamatsu and Ogawa (2017)]
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Introduction
• From the 2000s through the present time, the political and economic environment in Japan and in the world has
changed significantly.
• Political environment
▫ Japan:Regime change/Some regional parties had influence.
▫ America, British:The President Donald Trump/Brexit
• Economic Environment : Globalization(TPP)
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Introduction
• Keyword
1. Populism
2. Negative Campaign
3. Globalization
• In this paper, I study the welfare impact of the Negative Campaign and the Populism policy
▫ Approach:Game theory (Information Economics), Tax competition model.
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Outline
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Political Issue
Negative Campaign
Kasamatsu (2016) Ch.3: Game Theoretic Analysis of Positive and Negative Campaign for Policy
Kasamatsu and Kishishita (2017) Ch. 2:
Informative Campaigning in
Multidimensional Politics: A Role of Naïve
Voters
Populism
Kasamatsu and Kishishita (2018) Ch.4: When Populism Meets Globalization: Analysis of Tax Competition
Economic Issue:Tax competition
Globalization
Kasamatsu and Ogawa (2017) Ch.5: International Capital Market and Repeated Tax Competition
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Ch.2
Informative Campaigning in Multidimensional Politics:
A Role of Naïve Voters
(Joint work with Daiki Kishishita)
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Informative Campaigning in Multidimensional Politics: A
Role of Naïve Voters
[Kasamatsu and Kishishita (2017)]
• We construct an election model in which an incumbent and a challenger decide how to allocate campaign resources to
two types of campaign (policy and ability). Then, we show
that
1. Its allocation conveys truthful information only when
sophisticated voters and naïve voters coexist.
2. In any separating equilibria, negative campaign against
the incumbent’s ability occurs as a signal of the
incumbent’s low ability.
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Introduction
Political campaigning (e.g., advertising, speeches, and debates) is important for voters to acquire information about candidates.
But, …
1. Information is soft.
2. Severe conflicts of interests exist.
Does campaign covey truthful information?
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Campaign strategy
Candidates must decide what issue to focus on in campaigning (= campaign strategy)
▫ The amount of time in debates is limited, and thus they cannot convey their opinions on all relevant issues.
• If the strategic choice of campaign messages (i.e., what issue to focus on in campaigning) depend on private information a candidate has, information is transmitted through the choice.
• We investigate this signaling role of campaign.
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The Model (Players)Construct a four-stage election game,where there exist
• Two candidates (Incumbent 𝐴, Challenger 𝐵),- Policy(Common knowledge) and Ability(Private info)
• Sophisticated voters and naïve voters.- Voters are continuum of measure one. (𝛾: 1 − 𝛾)
• Sophisticated voters are those who know about whose policy is best, and update their beliefs using Bayes rule.
• Naïve voters are those who do not know a good policy for themselves, and are persuaded by campaigns naively. (Uninformed and non-Bayesian updaters.)
• Mass media : omit
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Incumbent A Challenger B
Naïve Voters𝟏𝟎𝟎 − 𝜸%
Sophisticated Voters𝜸 %
Media
Prob. 𝛿
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Characteristics of Candidates• Candidate 𝑘 ∈ 𝐴, 𝐵 : Policy 𝑥𝑘 and Ability 𝜃𝑘.
• The policy that will be implemented if a candidate wins the elections is her ideal policy.
• 𝑥𝑘 : Common knowledge
• Ability 𝜃𝑘 : A challenger’s ability is unobservable to anyone including the challenger.The incumbent’s ability has already been revealed, and the challenger as well as the incumbent knows the ability. However, voter doesn’t know it.
• Incumbent 𝐴’s (challenger 𝐵’s) ability 𝜃𝐴 𝜃𝐵 is 𝑔 > 0 with prob. 0.5 and 0 with prob. 0.5 which is common knowledge.
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Voters’ utility
• 𝐼: The set of all voters.
• Each voter votes for one of two candidates in an election. (No abstention.)
• Voters take into account each candidate 𝑘’s policy 𝑥𝑘and the ability 𝜃𝑘 when they vote in the election.
• Each voter 𝑖 ∈ 𝐼 has an ideal policy 𝑥𝑖 ∈ 𝑥𝐴, 𝑥𝐵 .- 𝑥𝑖 = 𝑥𝐴 𝑥𝐵 with prob. 𝜌 1 − 𝜌 .
• Sophisticated (Naïve) voters (do not) know 𝑥𝑖.
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Voters’ utility• The degree of the feeling toward incumbent 𝐴 denoted
by 𝜀𝑖.- 𝜀𝑖 follows an independent and identical symmetricdistribution whose mean is zero.
• Since each voter has no strategic power, we consider sincere voting.
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Voters’ utility• Voter 𝑖 decides who s/he votes for based on
𝑢𝑖 𝐴 − 𝑢𝑖 𝐵= 𝛼 𝑣 𝑥𝐴, 𝑥𝑖 − 𝑣 𝑥𝐵 , 𝑥𝑖 + 𝛽 𝜃𝐴 − 𝜃𝐵 + 𝜀𝑖
𝑤ℎ𝑒𝑟𝑒 𝛼, 𝛽 > 0,
𝑣 𝑥𝑘 , 𝑥𝑖 = 0 if 𝑥𝑖 = 𝑥𝑘
−𝑑 otherwise.
• 𝐸 𝑢𝑖 𝐴 − 𝑢𝑖 𝐵 > < 0: 𝑖 votes for 𝐴 𝐵 .
• 𝐸 𝑢𝑖 𝐴 − 𝑢𝑖 𝐵 = 0: 𝑖 votes for 𝐴 with prob. a half.
• Assumption:𝛼𝑑 > 𝛽𝑔 2
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Campaign
• Each candidate has one unit of campaign resource.
• Each candidate 𝑘 allocates it to campaign on policy 𝐶𝑘
and on ability 1 − 𝐶𝑘 so as to maximize his expected number of obtained votes after they observe the incumbent’s ability.
• Each candidate chooses the fraction of campaign on policy from
𝐶𝐻 , 𝐶𝐿 where 0 < 𝐶𝐿 <1
2< 𝐶𝐻 < 1.
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Campaign
• Campaign on policy persuades a naïve voter that the voter’s ideal policy is the candidate’s policy.
• The challenger’s (incumbent’s) campaign on ability persuades a naïve voter that the incumbent’s ability is low (high). (Negative campaign)
• 𝑝𝑘 𝐶𝑘 , 𝐶−𝑘 and 𝑛𝑘 1 − 𝐶
𝑘 , 1 − 𝐶−𝑘 :
- Candidate 𝑘 persuades 100 × 𝑝𝑘% of the naïve voters that candidate 𝑘’s policy is good.- The challenger (incumbent) persuades 100 ×𝑛𝐵 𝑛𝐴 % of the naïve voters that the incumbent’s ability is low (high).
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Mass Media• There exists one media outlet.
• It can observe the true value of the incumbent’s ability 𝜃𝐴 with prob. 𝛿 ∈ 0, 1 by spending cost 𝑚.
• The media outlet reports the news iff it observes truth.
• Suppose that- Only the sophisticated voters receive information through news.- Only news that the incumbent’s ability is low is profitable.
• If the media outlet reports such news, it obtains the revenue 𝑎 > 0 . If not, it obtains zero revenue.
• Assume that 𝛿𝑎 > 𝑚.
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Timing of the Game1. Nature chooses 𝜃𝐴 independently.
2. Each candidate observes the incumbent’s ability 𝜃𝐴 andchooses the fraction of campaign on policy 𝐶𝑘 ∈𝐶𝐻 , 𝐶𝐿 simultaneously. Then, the media outlet and the
sophisticated voters observe 𝐶𝑘𝑘∈ 𝐴,𝐵
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3. The media outlet decides whether to spend costs 𝑚 andgather news to observe the incumbent’s ability 𝜃𝐴. If itspends costs, it can observe 𝜃𝐴 with probability 𝛿 and thenreports the observed value of incumbent’s ability to thesophisticated voters.
4. Each voter votes for either the incumbent or the challengerin the election.
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Voting Behavior of Naïve Voters
• 𝐹 𝐶𝐴, 𝐶𝐵 : The ratio of naïve voters who vote for A.
Lemma 2 Under reasonable assumptions,𝐹 𝐶𝐻 , 𝐶𝐻 − 𝐹 𝐶𝐿 , 𝐶𝐻 = 𝐹 𝐶𝐻 , 𝐶𝐿 − 𝐹 𝐶𝐿 , 𝐶𝐿= 𝐹 𝐶𝐻 , 𝐶𝐿 − 𝐹 𝐶𝐻 , 𝐶𝐻 = 𝐹 𝐶𝐿 , 𝐶𝐿 − 𝐹 𝐶𝐿 , 𝐶𝐻 > 0
• All of the marginal effect of campaign is the same.
• Campaign on policy is more efficient than campaign on ability in terms of mobilizing the naïve voters.
Reason:
• Policy: The one’s policy is good = The other’s one is bad. (Ex: Trade policy)
• Ability: The above relation doesn’t hold.
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Separating Equilibria
• Separating Equilibria can exist.
Result 1: Campaign strategy about what issue to focus on can
be informative.
• All separating equilibria have the following property: The challenger focuses on the incumbent’s ability if and
only if the incumbent’s ability is low.
Result 2: In any separating equilibria, negative campaigning
against the incumbent’s ability occurs as a signal of the
incumbent’s low ability.
Why: Negative campaigning about the incumbent’s ability is
costly for the challenger.
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Proposition’s intuition• This result is because of the mechanism that creates
informative campaign.- If the number of naïve voters increases, cost of negative campaign increases.⇒Credible Signal. (+)- If the number of naïve voters increases, a candidate can win the election by providing a large amount of campaign on policy independently of whether campaign contains truth telling information. (-)
Result 3: There is a non-monotonic relationship between the number of the naïve voters and the credibility of a message campaign conveys.
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Numerical example
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0.5 0.6 0.7 0.8 0.9
𝛿
𝛾
Only pooling equilibria exist.
(*) At least one of negative campaign equilibria satisfies the intuitive criterion, and other equilibria do not satisfy the intuitive criterion.
Negative campaign equilibria exist, but (*) does not hold.
Only pooling equilibria exist.
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Ch.3
Game Theoretic Analysis of Positive and Negative
Campaign for Policy
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Game Theoretic Analysis of Positive and Negative
Campaign for Policy[Kasamatsu(2016)]
• Construct a competitive election model which
1. Two candidates choose policy and the degree of campaign
for policy to maximize their winning probability for an
election.
2. Analyze relationship between candidates’ behavior and
voters’ awareness for policy.
3. Whether should negative for policy campaign be
regulated?
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Introduction• Past literatures focus on relationship between candidates’
ability and campaign.
1. However, effect of campaign is not limited.
(Effect may not be assumed.)
2. Neglect voters’ aspect.
• We should consider that positive (negative) campaign represents my own good aspect (competitor’s bad aspect).
• We should consider the relationship candidates and voters.
• We construct a competitive election model in order to be able to analyze the relationship between candidates and
voters.
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Sketch of the model
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1st stage: Each candidate 𝑖 chooses manifest policy 𝑥𝑖 ∈ 0, ∞ .
𝑥1 𝑥2
Good Aspect: 𝒇 𝒙𝒊
Bad Aspect : 𝒈 𝒙𝒊
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Sketch of the model
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Sketch of the model
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2st stage: Each candidate 𝑖 distributes one resource to positive campaign𝑝𝑖 and negative campaign 𝑛𝑖.
𝑝1 𝑝2
𝒇 𝒙𝟏
𝒈 𝒙𝟏
𝒇 𝒙𝟐
𝒈 𝒙𝟐
𝑛1 𝑛2
𝑃 𝑝1 % 𝑃 𝑝2 %
𝑁 𝑛1 % 𝑁 𝑛2 %
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ModelAssumption
i. Function 𝑃: 0,1 → 0,1 and 𝑁: 0,1 → 0,1 are 𝐶2-function and satisfy 𝑃′ > 0, 𝑃′′ ≤ 0, 𝑁′ > 0, 𝑁′′ ≤ 0 .
ii. 𝑃 0 = 𝑁 0 = 0, 𝑃 1 = 𝑁 1 = 1 .
• If a candidate increases the resource of campaign, then the effect of campaign increases
but marginal effect of campaign decreases.
• We assume that
𝑃 𝑝𝑖 = 𝑝𝑖𝑡 , 𝑁 𝑛𝑖 = 𝑛𝑖
𝑡 𝑡 ∈ 0, 1 .
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Sketch of the model
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Median voter knows 𝛼 % of the good and bad aspect of candidates’ policy.
She understands an unknown part of policy by using campaign.
𝜶𝒇 𝒙𝟏 𝟏 − 𝜶 𝑷 𝒑𝟏 𝒇 𝒙𝟏
𝜶𝒈 𝒙𝟏 𝟏 − 𝜶 𝑵 𝒏𝟐 𝒈 𝒙𝟏
The above graph represents the value of candidate 1’s good (bad)
aspect which voter thinks.
Good
Bad
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Result
1. Symmetric equilibrium policy 𝑥∗ is more extreme than voters’ welfare maximizing policy 𝑥1.
2. If voters know the effect of policy more, the resource of
negative campaign decreases and voters’ welfare improves.
3. We consider negative campaign for policy should not be
regulated.
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Proposition 1
If some regulatory conditions hold,
there exists symmetric equilibrium policy 𝑥1 = 𝑥2 =𝑥∗ and symmetric equilibrium policy 𝒙∗ is greater than voters’ welfare maximization policy 𝒙𝟏 .
=>Symmetric equilibrium policy 𝑥∗ is more extreme than voters’ welfare maximizing policy 𝑥1 .
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Intuition of Proposition 1• In this model, Voters’ awareness is imperfect.
Voters react campaign at high sensitivity.
• For example, if we input voters’ welfare maximizing policy 𝑥1 for equation (5),
then because of equation (3), the amount of positive campaign resource is more than of negative one.
Therefore candidates have incentive to use extreme policy.
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Proposition 2
Suppose some regulatory conditions hold.
If voters’ awareness 𝛼 increases, then symmetric equilibrium policy 𝒙∗ decreases and symmetric equilibrium resource of positive (negative)
campaigning increases (decreases).
=>If voters know the effect of policy more, the resource of negative campaign decreases and voters’ welfare improves.
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Intuition of Proposition 2• Awareness 𝛼 is high => voters can understand the
effect of policy by not using campaign, by using own knowledge.
Candidates have incentive to use mild policy which is close to voters’ welfare maximizing policy 𝑥1.
• Policy is mild => bad effect of policy decreases rapidlyand good effect of policy decreases slowly.
Amount of campaign is determined by comparative assessment. So, decrease candidates’ incentive to use negative campaign.
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Proposition 4
If some regulatory conditions hold, then voters’ welfare
in no regulating negative campaigning is greater than
in regulating negative campaigning.
• We consider negative campaign for policy should not be regulated.
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Intuition
• If candidates choose voters’ welfare maximizing policy, then they distribute the resource for positive and negative campaign by the same.
If negative campaign is regulated, this outcome loses touch with voters’ optimal outcome more than no regulation case.
• In Japan, negative campaign is regulated on several cases.
However we discover the case where negative campaign should not be regulated.
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Ch.4
When Populism Meets Globalization:
Analysis of Tax Competition
(Joint work with Daiki Kishishita)
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When Populism Meets Globalization:
Analysis of Tax Competition
[Kasamatsu and Kishishita (2018)]
We construct a two-country tax competition model in which
the residents in one of the two countries do not know their
policymaker’s type (benevolent or leviathan).
Then, we show that
1. Reputation concerns inducing populism can be beneficial
for the country or world in tax competition while this is
not the case in closed economy.
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Populist economic policy
Populists often argue extreme (in particular taxation) policies:
• Left-wing populism: redistribution
• Right-wing populism: neo-liberalism, anti-taxation
▫ Neoliberal populism in 1990s (Latin America & Western Europe)
▫ Neoliberal populism in Japan that emerged in the 2000s and 2010s.
• Objective of this study:Analyze extremely low taxation (a feature of right-wing
populism)
What is the welfare implication of right-wing populism?
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Populism meets globalization
Is it enough to consider one country solely? NO!!
▫ Globalization: production factors are mobile across countries.→ Tax bases (e.g., capital) are now mobile across countries.
▫ Countries are involved in international tax competition.←Firms tend to locate in countries whose corporate tax rates are low.
• Without taking into account this aspect, we may overlook some critical properties of populism in the age of globalization.
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Main result
• Globalization alters the welfare implication of right-wing populism:
▫ Reputation concerns inducing populism can be beneficial for the country or world in tax competition while this is not the case in closed economy.
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Model: basic setting• Two countries 𝑖 ∈ {1, 2}.
• The number of residents: 𝐿𝑖 = 1 (Immobile)
• Capital endowment per capita: 𝑘 (Mobile)
• Two goods: 𝑐𝑖 (private good) and 𝑔𝑖 (public good)▫ Residents in country 𝑖’s utility:
𝑈 𝑐𝑖 , 𝑔𝑖 = 𝑐𝑖 + 𝑔𝑖 = 𝑤𝑖 + 𝑟 𝑘 + 𝑡𝑖𝑘𝑖• Private good: perfect competitive markets
▫ Output per capita: 𝑓𝑖 𝑘𝑖 = 𝐴𝑖 − 𝑘𝑖 𝑘𝑖 .
▫ Δ ≡ 𝐴1 − 𝐴2 where Δ ≤ 16 𝑘 and 𝐴𝑖 ≥ 4 𝑘.
▫ 𝜋𝑖 = 𝑓𝑖 𝑘𝑖 − 𝑤𝑖 − 𝑟𝑘𝑖 − 𝑡𝑖𝑘𝑖.
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Model: mobilty of capital
• Tax competition model (globalization)
▫ 𝑘𝑖 is determined to satisfy𝑓1
′ 𝑘1 − 𝑡1 = 𝑟 = 𝑓2′ 𝑘2 − 𝑡2.
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Model: politicians• In each country, there is the incumbent policy-maker who
chooses the tax rate 𝑡𝑖.• Good politician (Benevolent):
max𝑡𝑖
𝑈(𝑐𝑖 , 𝑔𝑖) + 𝜆𝑝 𝜋 𝑡𝑖
▫ 𝜋(𝑡): the residents’ beliefs that the policy-maker in country 𝑖 is the benevolent given 𝑡𝑖.
▫ 𝑝 𝜋 𝑡𝑖 : the reelection probability.
▫ 𝑝 0 = 0, 𝑝 1 = 1, 𝑝 is non-decreasing.▫ A simple dynamic elections model yields the same result.
▫ 𝜆 ∶ Intensity of reputation concerns. 𝜆 ≤ 16 𝑘 + Δ• Bad politician (Leviathan):
max𝑡𝑖
𝑇 + 𝑡𝑖𝑘𝑖 + 𝜆𝑝 𝜋 𝑡𝑖
→ Politicians want to acquire the reputation that they are benevolent!
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Model: information structure
• Country 2: Country 2’s policy-maker is known to be the benevolent.
• The type of country 1’s policy-maker is unknown to residents as well as country 2’s policy maker.
• The prior probability that country 1’s policy-maker is the benevolent: 𝜌 ∈ 0, 1
• Equilibrium concept: PBE satisfying the intuitive criterion.
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Country 1
𝜌 1 − 𝜌
Benevolent Leviathan
𝑡1
Resident
Update belief 𝜋1 𝑡1
𝑟
Benevolent
𝑡2
𝑘 𝑘Resident
Country 2
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Definition of right-wing populism
• Definition (Right-wing populism)
▫ The equilibrium tax rate chosen by the benevolent 𝑡1𝑂𝐵∗ is
lower than that maximizing the country’s welfare given the equilibrium tax rates chosen by the other players.
▫ The politician who implements the extreme tax rate
acquires good reputations i.e., 𝜋 𝑡1𝑂𝐵∗ > 𝜌.
→ Populism can arise only in separating equilibria.
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Result
• If the reputation concerns is sufficiently high, right-wing populism occurs.
▫ Key concept: Signaling.
• Reputation concerns inducing populism can improve the welfare of country 1 (world welfare) in the tax
competition model when the country 1’s productivity is
smaller (larger) than that of country 2.・Key concept: Terms of trade effects (DePeter & Myers 1994, JUE)
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Equilibrium with reputation concernsTheorem 2
Suppose that 𝜆 > 0.
• When 𝜆 ≤16 𝑘+Δ
15+𝜌, there exist unique separating equilibrium tax
rate which is the same as Nash equilibrium tax rate.
• When 𝜆 >16 𝑘+Δ
15+𝜌, there exist unique separating equilibrium tax
rate: 𝑡𝐵1𝑂∗
𝜆 =Ω− 5+𝜌 2 𝜆
5.
(Right-wing populism)
(where Ω = 12 𝑘 + 2Δ)
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Signaling as a cause of populism
Model structure:• Politicians’ types are unknown to residents in country 1• Politicians have reputation concerns.
Mechanism:• The leviathan prefers higher tax rates than the
benevolent.• The benevolent can separate themselves from the
leviathan by implementing extremely low tax rates.• Extremely low taxation as a signal that the policy-
maker is the benevolent.Remark: Our mechanism is based on that of Acemoglu et al. (2013, QJE).
▫ Application: Matsen et al. (2016, JDE)
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Country 1’s welfare implications
Proposition 1
Suppose that 𝜆 ≥16 𝑘
15+𝜌and 𝜌 𝜆 − 16 𝑘 ≤ Δ < 15 + 𝜌 𝜆 − 16 𝑘.
• Suppose that Δ = 0. 𝑊𝐵1𝑂∗
𝜆 < 𝑊𝐵1𝑂∗
0 while 𝑊𝐿1𝑂∗
𝜆 >
𝑊𝐿1𝑂∗
0 .
• When 𝜌𝑊𝐵1𝑂∗
𝜆 + 1 − 𝜌 𝑊𝐿1𝑂∗
𝜆 > 𝜌𝑊𝐵1𝑂∗
0 + 1 − 𝜌 𝑊𝐿1𝑂∗
0 holds
for some Δ,there exists Δ′ < 0 such that if and only if Δ < Δ′,
𝜌𝑊𝐵1𝑂∗
𝜆 + 1 − 𝜌 𝑊𝐿1𝑂∗
𝜆 > 𝜌𝑊𝐵1𝑂∗
0 + 1 − 𝜌 𝑊𝐿1𝑂∗
0 .
In addition, there exist 𝑘, 𝜆, 𝜌 under which
𝜌𝑊𝐵1𝑂∗
𝜆 + 1 − 𝜌 𝑊𝐿1𝑂∗
𝜆 > 𝜌𝑊𝐵1𝑂∗
0 + 1 − 𝜌 𝑊𝐿1𝑂∗
0 for some Δ.
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Welfare implications (Proposition 1)
• When there is no productivity difference Δ = 0 andthe incumbent policy-maker is benevolent (Leviathan) type,
the welfare in occurring populism is smaller (higher) than
that in no occurring populism.
• Reputation concerns inducing populism can improve the welfare of country 1 in the tax competition model when
the country 1’s productivity is smaller than that of country 2.・Key concept: Terms of trade effects (DePeter & Myers 1994, JUE)
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Implication of world welfare
Proposition 2
Suppose that 𝜆 ≥16 𝑘
15+𝜌and 𝜌 𝜆 − 16 𝑘 ≤ Δ < 15 + 𝜌 𝜆 − 16 𝑘.
• When 𝜌𝑊𝐵𝑂∗
𝜆 + 1 − 𝜌 𝑊𝐿𝑂∗
> 𝜌𝑊𝐵𝑂∗
0 + 1 − 𝜌 𝑊𝐿𝑂∗
0holds for some Δ, there exists Δ′′′ > 0 such that if and only if Δ >
Δ′′′, 𝜌𝑊𝐵𝑂∗
𝜆 + 1 − 𝜌 𝑊𝐿𝑂∗
𝜆 > 𝜌𝑊𝐵𝑂∗
0 + 1 − 𝜌 𝑊𝐿𝑂∗
0 .
In addition, there exist 𝑘, 𝜆, 𝜌 under which
𝜌𝑊𝐵1𝑂∗
𝜆 + 1 − 𝜌 𝑊𝐿1𝑂∗
> 𝜌𝑊𝐵1𝑂∗
0 + 1 − 𝜌 𝑊𝐿1𝑂∗
0 for some Δ.
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Implication of world welfare
• The larger difference in tax rates between two countries distorts the efficiency of capital allocation more.
• When Δ is high, country 1’s tax rate is higher than that of country 2 without populism.
• Populism lowers country 1’s tax rate. => The difference in tax rates is reduced.
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Numerical Example
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Ch.5
International Capital Market and Repeated Tax
Competition
(Joint work with Hikaru Ogawa)
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International Capital Market and Repeated Tax
Competition. [Kasamatsu and Ogawa (2017)]
• We propose an infinitely repeated game of tax competition with an endogenous capital supply.
• We show that
▫ The larger the capital supply elasticity to interest rates, the easier it is for interregional tax coordination within a country to be achieved.=> Positive aspect of globalization for the world coordination.
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International Capital Market and Repeated Tax
Competition. [Kasamatsu and Ogawa (2017)]
• OECD (1996) : Existence of severe tax competition.
• The way to avoid severe tax competition is tax coordination.
• Related literature: Itaya et al. (2008)
▫ They show that a larger disparity between countries makes it easier to achieve tax coordination.
• We consider the case where there are symmetric two countries.
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Model• Two countries 𝑖 ∈ {1, 2}.
• The number of residents: 𝐿𝑖 = 1 (Immobile)
• Capital endowment per capita: 𝑘 (Mobile)
• Two goods: 𝑐𝑖 (private good) and 𝑔𝑖 (public good)▫ Residents in country 𝑖’s utility:
𝑈 𝑐𝑖 , 𝑔𝑖 = 𝑐𝑖 + 𝑔𝑖 = 𝑤𝑖 + 𝑟 𝑘 + 𝑡𝑖𝑘𝑖• Private good: perfect competitive markets
▫ Output per capita: 𝑓𝑖 𝑘𝑖 = 𝐴 − 𝑘𝑖 𝑘𝑖 .▫ 𝜋𝑖 = 𝑓𝑖 𝑘𝑖 − 𝑤𝑖 − 𝑟𝑘𝑖 − 𝑡𝑖𝑘𝑖.
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Model: mobilty of capital
• Tax competition
▫ 𝑘𝑖 is determined to satisfy𝑓1
′ 𝑘1 − 𝑡1 = 𝑟 = 𝑓2′ 𝑘2 − 𝑡2.
• Capital market
𝑘1 + 𝑘2 = 2𝑘 + 𝑐 × 𝑟 − 𝑟∗
▫ 𝑟∗: capital price in world capital market.
▫ 𝑐 : the responsiveness of the capital supply to the interest differential. [Eichner and Runkel (2012), Wang and Ogawa
(2018)]
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Stage game
• The government chooses the capital tax rate to maximize her resident’s utility:
max𝑡𝑖
𝑓 𝑘𝑖 + 𝑟 𝑘 − 𝑘𝑖
• The tax rates in Nash equilibrium is the following:
𝑡1𝑁 = 𝑡2
𝑁 =Ω𝑐
2𝑐2 + 4𝑐 + 1.
where Ω ≡ 𝐴 − 2𝑘 − 𝑟∗.
• The capital allocation in the Nash equilibrium is the following:
𝑘1𝑁 = 𝑘2
𝑁 = 𝑘 +Ω 2𝑐 + 1 𝑐
2 2𝑐2 + 4𝑐 + 1.
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Tax coordination
• The tax rates to maximize the sum of the utilities is the following:
𝑡1𝐶 = 𝑡2
𝐶 =Ω
2 + 𝑐=
𝐴 − 2𝑘 − 𝑟∗
2 + 𝑐.
Remark: The difference in Itaya et al. (2008)
The optimal tax rate for cooperation is not determined
uniquely.
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Repeated game
• We consider the trigger strategy.
• 𝛿 ∈ 0, 1 : the discount factor.
• 𝛿: the critical value of 𝛿 so that each country chooses a cooperative tax rate.
• Proposition 1
The tax coordination may be easier to achieve the
responsiveness of capital supply with respect to the interest
rate increases:
𝑑 𝛿
𝑑𝑐< 0.
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Repeated game
• Proposition 1
The tax coordination may be easier to achieve the
responsiveness of capital supply with respect to the interest
rate increases:
𝑑 𝛿
𝑑𝑐< 0.
• Intuition of Proposition 1: Assume Ω > 0.
𝑑 𝑡𝑖𝐶 − 𝑡𝑖
𝐷
𝑑𝑐< 0.
where 𝑡𝑖𝐷 is the best-deviation tax rate of region 𝑖.
▫ The difference between 𝑡𝑖𝐶 & 𝑡𝑖
𝐷 shrinks in increasing c.
Remark: This proposition holds under asymmetric regions.
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Appendices of Ch. 2
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Campaign strategy
Candidates must decide what issue to focus on in campaigning (= campaign strategy)
▫ The amount of time in debates is limited, and thus they cannot convey their opinions on all relevant issues.
Example:
First debate in the 1996 U.S. presidential election (Clinton vs. Dole)
▫ Dole attacked Clinton’s character.
▫ Clinton focused on policy issues, and shifted the discussion away from the question about his character.
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Contribution
• Compare our contributions to Prat (2002a, b).
1. Not candidates but interest groups send a signal to voters.
Even a candidate can send a credible message through campaign. (cf. Daley & Snowberg (2011))
2. Not a message campaign conveys but the amount of campaign spending matters.
Not the total amount of campaign spending but messages campaign conveys can be informative.
3. Voters are sophisticated. ⇒ Introduce naïve voters.
An increase in the # of naïve voters does not necessarily undermine the credibility of a message campaign conveys. (cf. Grillo (2016); Kartik, Ottaviani & Squintani (2007))
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Contribution
• Strategic choice of campaign issue and information transmission (2nd content on previous slides)
• In most of the existing literature, either voters are non-Bayesian updaters (e.g., Dragu & Fan 2016), or the condition under which information campaign argues is transmitted is exogenously assumed(e.g., Polborn and David 2006; Hao and Li 2013; Egorov2015; Bhattacharya 2016; Shipper and Woo 2016).
• In our model, (i) there are Bayesian updaters (sophisticated voters), and (ii) when information is transmitted depends on endogenous players’ strategies, and information is soft. (Cf. Zhang 2016)
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Negative Campaign Equilibrium [1]• We drive the necessary & sufficient condition under which
there is at least one equilibrium in which
1. the challenger increases the campaign allocation which
focus on the incumbent’s ability if and only if the
incumbent’s ability is low
2. the incumbent’s allocation of campaign resources is
independent of the incumbent’s ability. (𝐶𝐴 = 𝐶𝐻)
• We call this class of equilibria negative campaign equilibrium [1].
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Proposition 1There exists a separating equilibrium in which (i) 𝐶𝐵 =𝐶𝐿 if and only if 𝜃𝐴 = 0, and (ii) 𝐶
𝐴 is independent of the value of 𝜃𝐴, if and only if 𝛾 ≤ 𝛾 ≤ 𝛾 , where
𝛾 ≡𝑀𝐸
𝑀𝐸 + 𝜌 𝛷𝐻𝐻 − Φ𝐻𝐿 + 1 − 𝜌 Φ𝐿𝐻 − Φ𝐿𝐿;
𝛾 ≡𝑀𝐸
𝑀𝐸 + 1 − 𝛿 𝜌 𝛷𝐻𝐻 − Φ𝐻𝐿 + 1 − 𝜌 Φ𝐿𝐻 − Φ𝐿𝐿(where 𝑀𝐸 = 𝐹 𝐶𝐻 , 𝐶𝐿 − 𝐹 𝐶𝐻 , 𝐶𝐻 ).
In addition, 𝛾, 𝛾 ∈ 0, 1 .
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The role of media for Proposition 1
• The cost of campaign is not enough.
• In our model, media tries to gather the news if it believes the incumbent’s ability is low.
• The challenger’s lie is detected and the challenger cannot win the election with some probability by the media even if s/he increases the fraction of campaign on the incumbent’s ability.
• Therefore, the benefit of campaign on ability is smaller for the challenger when the ability is high than when the ability is low.
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Negative Campaign Equilibrium [2]• Next, we examine another class of separating equilibria
(negative campaign equilibrium [2]).
• That is the equilibrium in which
1. the challenger increases negative campaign on ability if
and only if the incumbent’s ability is low, and
2. the incumbent increases campaign on ability if and
only if the incumbent’s ability is high.
• The difference from negative campaign eqm [1] is that this is a separating equilibrium with multiple senders.
• In this case, we can get almost the same result as Negative Campaign Equilibria [1].
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Eliminate the pooling equilibrium
• In our model, there exist a pooling equilibrium where 𝐶𝐻 , 𝐶𝐻 independently of the incumbent’s ability.
• By using the intuitive criteria proposed by Cho and Kreps (1987), we can obtain the range where the above pooling equilibrium is eliminated.
• Theorem (Summary)If and only if the slightly smaller range of the fraction of the sophisticated voters than Theorem 1’s range, negative campaign [1] or [2] only satisfies intuitive criteria.
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Appendices of Ch. 4
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Effect on country 1’s welfare under the
benevolent policy-maker
Result: When Δ = 0, 𝑊𝐵1𝑂∗
𝜆 < 𝑊𝐵1𝑂∗
0 .
• 𝑡𝐵1𝑂∗
0 < 𝑡2𝑂∗ 0 because country 2’s policy-maker
chooses the tax rate taking into account the possibility that
country 1’s policy-maker is the leviathan.
• Country 1 is the capital-importer when its policy-maker is the benevolent.
• An increase in the interest rate (price of capital) hurts country 1’s terms of trade.
• Here, 𝑟𝐵𝑂∗
𝜆 > 𝑟𝐵𝑂∗
0 because the benevolent in country 1 chooses the extremely low tax rate.
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Effect on country 1’s welfare under the
leviathan policy-maker
Result: When Δ = 0, 𝑊𝐿1𝑂∗
𝜆 > 𝑊𝐿1𝑂∗
0 .
• 𝑡𝐿1𝑂∗
0 > 𝑡2𝑂∗ 0 because country 2’s policy-maker
chooses the tax rate taking into account the possibility that
country 1’s policy-maker is the benevolent.
• Country 1 is the capital-exporter when its policy-maker is the leviathan.
• An increase in the interest rate (price of capital) improves country 1’s terms of trade.
• Here, 𝑟𝐿𝑂∗
𝜆 > 𝑟𝐿𝑂∗
0 because the tax rates are lower.
Spread of low taxation: 𝑡1𝑂𝐵 ⇓⟶ 𝑡2𝑂
∗ ⇓⟶ 𝑡𝐿1𝑂∗
⇓
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Expected welfare of country 1Result: When 𝜌𝑊𝐵1𝑂
∗𝜆 + 1 − 𝜌 𝑊𝐿1𝑂
∗𝜆 > 𝜌𝑊𝐵1𝑂
∗0 +
1 − 𝜌 𝑊𝐿1𝑂∗
0 holds for some Δ,there exists Δ′ < 0 such that if and only if Δ < Δ′,𝜌𝑊𝐵1𝑂
∗𝜆 + 1 − 𝜌 𝑊𝐿1𝑂
∗𝜆 > 𝜌𝑊𝐵1𝑂
∗0 + 1 − 𝜌 𝑊𝐿1𝑂
∗0 .
As Δ ≡ 𝐴1 − 𝐴2 becomes smaller,• the negative effect on country 1’s welfare under the benevolent
policy-maker is mitigated・because the amount of capital country 1 imports becomes smaller
• the positive effect on country 1’s welfare under the leviathan policy- maker is larger・because the amount of capital country 1 exports becomes larger.
• When Δ is small, the positive effect can dominate the negative effect.
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What’s new?: Literature of populism
• Show that extremism can be welfare-improving.・It is harmful by definition in the existing studies.・Eguia & Giovannoi (2017, WP): Extremism can be optimal if the extreme (unorthodox) policy can be better for voters in the future.
• Show that globalization alters the welfare implications of populism:・Some studies examine globalization as causes of populism.
→Autor et al. (2017, WP) etc
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What’s new?: Literature of tax competition
• In reality, some countries implement extremely low capital tax rates with a lot of supports by voters.
• Show that this can be the case in the tax competition and analyze its consequences.
▫ Existing studies of strategic delegation cannot explain this reality.
・Leviathan: Edwards & Keen (1996, EER), Pal & Sharma (2013, RSUE), Kawachi, Ogawa & Susa (2017, WP)
・Capital share: Persson & Tabellini (1992, RES), Ihori & Yang (2009, JUE), Ogawa & Susa (2017, E&P), Nishimura &
Terai (2017, WP)
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