Politics and Policy: Essays in Economics

Abstract

This dissertation consists of three essays investigating questions of politics and policy. The first essay proposes an index that assigns probabilities to all majority coalitions. This index takes as inputs the seat shares and policy positions of the parties represented in parliament. In addition to providing coalition probabilities, it has some desirable properties lacking from the commonly used concept of the minimum-connected winning coalition. In an empirical test, the proposed index slightly outperforms the predictions generated by this standard concept. Furthermore, the probabilities generated by the index are shown to be empirically meaningful. The second essay proposes a model of voter decision-making in proportional representation systems: ultra-rational strategic voters construct expectations of coalitions and policy outcomes based on expected seat distributions and attributed policy positions and vote to maximize their expected utility. The predictions of the model are examined using data from the Netherlands and successfully predict the voting behavior of significant numbers of voters. Nevertheless, other factors matter more than the strategic prediction. Three main take-aways follow: (1) At least to some extent, voters seem to take complex coalition considerations into account. (2) There is a need for large-scale qualitative studies about voter decision-making in proportional representation systems. (3) Narrowly defined strategic voting might matter less in proportional representation systems than in plurality systems. The third essay presents new data on effective corporate income tax rates in 85 countries in 2004. The data come from a survey, conducted jointly with the World Bank’s Doing Business unit and PricewaterhouseCoopers, of all taxes imposed on "the same" standardized mid-size domestic firm. In a cross-section of countries, the estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI, and entrepreneurial activity. Corporate tax rates are correlated with investment in manufacturing but not services, as well as with the size of the informal economy. The results are robust to the inclusion of many controls.