Political Economy

Universidad Carlos III de Madrid

Course Description

  • Course Name

    Political Economy

  • Host University

    Universidad Carlos III de Madrid

  • Location

    Madrid, Spain

  • Area of Study

    Business, Business Administration, Economics, International Business, International Economics

  • Language Level

    Taught In English

  • Prerequisites

    STUDENTS ARE EXPECTED TO HAVE COMPLETED
    PREREQUISITE
    Attendance to class is mandatory. The announced dates for midterms and homeworks are final, and they cannot be rescheduled with any justification.
    Most of the material that is taught in this class is theoretical. The students who choose this class must be aware of the fact that the content of the material is quite mathematical, although only basic mathematical toolds will be used. The students are expected to have some familiarity with microeconomics.
    THE TOOLS THAT THE STUDENTS NEED TO KNOW ARE THE FOLLOWING:
    - The concept of ordinal preferences (weak and strict preferences, transitive preferences, rational preferences)
    - Calculus (differentiation of a simple function of two variables)
    - Basic maximization theory (how to maximize a function of one variable or two variables)
    - Welfare economics (social welfare functions, public goods, free-riding)
    - Basic notion of game theory (Nash equilibrium, in pure and mixed strategy)

  • Course Level Recommendations

    Upper

    ISA offers course level recommendations in an effort to facilitate the determination of course levels by credential evaluators.We advice each institution to have their own credentials evaluator make the final decision regrading course levels.

    Hours & Credits

  • ECTS Credits

    6
  • Recommended U.S. Semester Credits
    3
  • Recommended U.S. Quarter Units
    4
  • Overview

    COMPETENCES AND SKILLS THAT WILL BE ACQUIRED AND LEARNING RESULTS.
    Standard economic models have shown that in some cases, markets are not perfect and can fail to
    achieve a socially optimal outcome. The question is then: how can we remedy these inefficiencies? A
    naïve public economic approach would state that, with appropriate tools (taxes, subsidies, public
    provisions, antitrust policies, regulations¿.), a public intervention can restore the social optimum.
    However, this approach is not satisfactory because it compares a realistic market system with all its
    imperfections to an ideal, benevolent, and omniscient government which always implements the right
    policy. As everyone knows, governments do not always implement the socially optimal policies. Political
    representatives may be biased because of reelection concerns; public servants might trade off the social
    welfare with the interest of their institutions; moreover, voters may not have the incentives to cast an
    informed vote; even when voters are perfectly informed, majority rule does not always lead to the
    socially optimal decision. A realistic model of government or collective decision should take into account
    these political failures.
    Taking into account the possibility of market failures and government failures, to assess whether public
    intervention is beneficial, one has to compare the potential failures of free markets, and individual
    freedom in general, with the potential failures of public interventions and collective action. Market
    failures are relatively well understood by economists. Therefore, to complete the picture, one has to
    understand how government and collective institutions function. This is precisely what political economy
    is about.
    Political economy uses the modern tools of economic analysis (basic decision theory, welfare economics,
    incentive theory, and game theory) to analyze the functioning and failures of political institutions.
    The questions that we will focus on in this class are the following:
    - How to make collective decisions for a group of individuals with heterogeneous needs and
    preferences? What are the typical failures of different voting rule? Can we design a voting rule that
    makes rational decisions and that satisfies some minimal democratic requirement?
    - How do governments function? Can we make parsimonious models of elections, referendum,
    and legislatures that can predict the outcome of the democratic decision processes?
    - How does electoral competition work? Why are economic competition and electoral competition
    so different in nature?
    - What is the role and influence of interest groups in the political process?
    DESCRIPTION OF CONTENTS: PROGRAMME
    THEME 1: A NORMATIVE THEORY OF VOTING
    Preferences aggregation rules and voting rules: how to make collective decisions based on the
    preferences of the individual members of society?
    Majority rule: we will see why majority rule can be viewed as the most democratic voting rule. We will
    compare it to alternative voting rule such as the unanimity rule, or the Borda rule.
    Condorcet cycles and voting paradoxes: we will see why voting can lead to irrational decisions.
    Arrow and Brown's impossibility theorems.
    The tension between equity, rationality, and resoluteness.
    THEME 2: A POSITIVE THEORY OF VOTING
    The median voter theorem: how to make predictions on the outcome of a majoritarian decision process.
    We will use this model to explain why a democratic decision processes can solve the free-riding problem
    in public good provision.
    We will see that the degree of redistribution of the taxation system used to finance the public goods in
    democratic societies can distort the incentives of voters, and thus distort the outcome of the
    majoritarian decision process.
    We will analyze the issue of redistribution, and capital versus labor taxation in democratic societies.
    The chaos theorem: why voting over multiple issues at the same time can lead to unpredictable
    decisions and chaos.
    THEME 3: VOTING IN LEGISLATURE
    We will describe the voting procedure used in practice in most legislatures, and build a simple model to
    predict the outcome of these voting procedures.
    We will see how the details of the voting procedure can affect the outcome of the vote.
    We will see how the agenda setter (the person in charge of setting the agenda of the legislature) can
    manipulate the outcome of the vote.
    THEME 4: ELECTORAL COMPETITION
    We will build a simple model of electioral competition that will allow us to:
    - see how political competition can shape the incentives of politicians, and is the likely outcome
    of an electoral race,
    - predict the outcome of an electoral race,
    - investigate whether political competition forces candidates to propose what the citizens wants,
    - discuss the impact of politicians¿ ideologies, credibility, and political parties.
    THEME 5: INFORMATION AGGREGATION AND VOTING
    The Condorcet jury theorem: under which circumstances can majority rule aggregate efficiently the
    information held by each individual?
    We will compare information aggregation in markets versus information aggregation in elections and
    referendums.
    THEME 6: POLITICAL PARTICIPATION AND VOTER BEHAVIOR
    We will study the incentives of voters in large elections. We will see in particular what incentives they
    have to participate in the election, and to invest time and energy to carefully weight the different
    options.
    THEME 7: PUBLIC CHOICE
    Political representation and agency costs: do elected official do what they are supposed to do, or what is
    in their interest?
    One man one vote versus one dollar one vote: what is the role of special interests, lobbying, and money
    in politics?
    Rent seeking: what is it? Is it really different from economic competition?
    LEARNING ACTIVITIES AND METHODOLOGY
    METHODOLOGY
    During the first 10 weeks (approximately), the course will alternate between theory groups ("magistrales") and class
    groups ("reducidos"). The class groups will be devoted to the illustration and application of the theory through
    exercises, presentation of research papers, and class discussions. Students are expected to be active during class
    discussion, and to express their opinion on the most controversial points of the theory.
    The last 4 weeks (approximately) of the course will be devoted to student presentations.
    PREREQUISITE
    Most of the material that is taught in this class is theoretical. The students who choose this class must
    be aware of the fact that the content of the material is quite mathematical, although only basic
    mathematical toolds will be used. The students are expected to have some familiarity with
    microeconomics. THE TOOLS THAT THE STUDENTS NEED TO KNOW ARE THE FOLLOWING:
    - the concept of ordinal preferences (weak and strict preferences, transitive preferences, rational
    preferences)
    - calculus (differentiation of a simple function of two variables)
    - basic maximization theory (how to maximize a function of one variable or two variables)
    - welfare economics (social welfare functions, public goods, free-riding)
    - basic notion of game theory (Nash equilibrium, in pure and mixed strategies)
    ASSESSMENT SYSTEM
    The continuous evaluation will be based on three or four problem sets (homework), two midterm exams
    (in class), and student presentations (in group) (optional or not, depending on the number of students
    enrolled in the class).
    The midterm exams and the final exam will consist of theoretical exercises and short qualitative
    questions. They are common to all groups.
    The course grade will be the greater of the two following grades:
    (i) CONTINUOUS EVALUATION ONLY: A weighted average of the grades of the three problem sets
    (about 15% in total), the midterm exams (about 85%), and a bonus (between 0% and 15%) for those who
    choose to do a presentation in class.
    (ii) CONTINUOUS EVALUATION AND FINAL EXAM: A weighted average of the final exam grade (60%)
    and the continuous evaluation grade as described in (i) (40%).
    In particular, if you pass the continuous evaluation (that is, if you get 50 points over 100 or more), you
    do not need to pass the final exam. If you fail at the continuous evaluation (that is, if you get less than
    50 points over 100), you can still pass the course if you get a sufficiently good grade at the final exam.
    In the "convocatoria extraordinaria", the course grade of the students will be based only on the grade of
    the extraordinary exam.
    % end-of-term-examination: 60
    % of continuous assessment (assigments, laboratory, practicals?): 40
    BASIC BIBLIOGRAPHY
    - Shepsle, K. A. and M. S. Bonchek Analyzing politics : rationality, behavior, and institutions., New York, W.W.
    Norton., 1997
    - Timothy Besley Principled Agents? : The Political Economy Of Good Government, The Lindahl Lectures. Oxford
    University Press, 2007

Course Disclaimer

Please note that there are no beginning level Spanish courses offered in this program.

Courses and course hours of instruction are subject to change.

Eligibility for courses may be subject to a placement exam and/or pre-requisites.

Credits earned vary according to the policies of the students' home institutions. According to ISA policy and possible visa requirements, students must maintain full-time enrollment status, as determined by their home institutions, for the duration of the program.

ECTS (European Credit Transfer and Accumulation System) credits are converted to semester credits/quarter units differently among U.S. universities. Students should confirm the conversion scale used at their home university when determining credit transfer.

Please reference fall and spring course lists as not all courses are taught during both semesters.

Availability of courses is based on enrollment numbers. All students should seek pre-approval for alternate courses in the event of last minute class cancellations

Please note that some courses with locals have recommended prerequisite courses. It is the student's responsibility to consult any recommended prerequisites prior to enrolling in their course.