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Globalization: Markets, Instututions & Policy. Professor O’Halloran Lecture 3. Preferences (interests). Government. Policies (legal constraints on economic or social activity). electoral process. governmental process. Basic Approach. Preferences In -- Policies Out. Issues emerge,

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Globalization markets instututions policy

Globalization: Markets, Instututions & Policy

Professor O’Halloran

Lecture 3

Basic approach





(legal constraints on economic or social activity)

electoral process

governmental process

Basic Approach

  • Preferences In -- Policies Out

  • Issues emerge,

  • Interests (preferences) are formed, and

  • Information is transmitted to the

  • Institutions of government, where policy may or may not change.

Central questions
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
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





Definition of Public Goods

  • Must be non-rival and non-excludable to qualify






Scientific Discoveries

Public Park

Macy’s Day Parade

National Defense

Tariffs, Quotas

Oil Pools below >1 country

Migratory Resources

Public Goods

The problem of public goods
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
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
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
Example: Prisoners’ Dilemma

Prisoner 2



Interpretation of payoffs:

0 = Temptation

-1 = Reward

-5 = Punishment

-10 = Sucker

Condition: T > R > P > S

(-1, -1)

(-10, 0)


Prisoner 1

(0, -10)

(-5, -5)


(1’s payoff, 2’s payoff)

The dominant strategy is for both players to defect, so individually rational behavior produces a socially suboptimal outcome.

Extension to n players 4 diners
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?


  • 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.”:

  • 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
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 organizations (e.g., GATT, WTO)

  • These are all extensions of -- not covered within -- the one-shot PD considered above.

  • Political action as a public good
    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
    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




    Equilibrium Amount of Political Action



    Political Action

    The Market for Political Action

    • Marginal Benefits depend on substitutes

    • Marginal Costs are difficulty of organization

    • Equilibrium: Costs and Benefits Equate

    Distributive politics spread sheet
    Distributive Politics Spread Sheet

    Supporting Interests

    Opposing Interests

    Boeing in a pickle continued
    Boeing in a Pickle (continued)

    • Estimate total political action supplied on either side of the issue.

    • Predicted result ???

    Wilson lowi matrix


    loophole closing

    rivers and harbors

    welfare (increases)

    Wilson/Lowi Matrix

    If the proposed policy is adopted, how does the policy change the distribution of costs and benefits?




    Interest group








    Client politics


    Is cafe good policy
    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.

    The cafe outcome generally
    The CAFE Outcome, Generally

    • The Bryan Bill died - the status quo prevailed.

      • 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

    • It 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
    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.

    • Flooropposition again filibusters bringing the bill to a vote.

    • Floorsupporters 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)