2. Electoral agency in the lab: preliminary findings Leif Helland Lars Monkerud Rune Sørensen

3. Motivation Liberal concept of democracy Roots in liberal political philosophy (Mill, Locke) Democracy negatively defined: citizens should be free from restraint and exploitation by state power: a) constitutional constraints, b) accountable leadership Accountability: achieved by retrospective voting for competing alternatives (Schumpeter 1942; Popper 1982, Riker 1984). A contemporary economists formulation (Myerson 1999): “When elected leaders use political power for their own profit, we call it corruption or abuse of power, or in its most extreme form, tyranny. One of the basic motivations of democracy is the hope that electoral competition should reduce such political abuse of power, below what would occur under an authoritarian system, just as market competition reduces oligopolistic profits below monopoly levels” What we want is: 1.An explicit model of electoral agency: a) based on parsimonious motivational assumptions, b) allowing for moral hazard on behalf of elected representatives, and c) allowing voters to select representatives through elections (Austen-Smith & Banks 1989, Banks & Sundaram 1993, Besley 2006) 2.Data on how real voters behave in situations resembling such a model.

4. The electoral agency model (1) Two periods t=(1,2) with an election in between. Incumbents are of two possible types i  {H,D}. Let  {s,1} signify a productivity parameter with 0<s<  <1, where  is a discount factor. At the beginning of t=1 random draws determine the type of the first period incumbent and the nature of the productivity shock, with commonly known probabilities Pr(i=H)=  and Pr(  =s)=q. Type and productivity is private information to the incumbent. Let q > ½ by assumption. The t=1 incumbent selects public production for t=1, and production is publicly announced. There is an election at the end of t=1. If the challenger wins, challenger type is randomly determined at the beginning of t=2, with commonly known probability Pr(i=H)= . If the challenger looses, the t=1 incumbent continues as incumbent in t=2. The t=2 incumbent selects public production for t=2. Production is publicly announced, payoffs are distributed and the game ends.

5. The electoral agency model (2) Let payoff to an incumbent of type D be V D =r 1 +  r 2, where r t is rents (diversion of public funds for private ends) in period t Let the type H incumbent set r t =0 for t=(1,2) Let voter payoff be U t =(1-  )y+  x t, where  is the tax rate, y is income before tax, x t is public production in period t, and  >1 Let the budget restriction of the incumbent be  (  y-r t )=x t. Finally, let maximal rents equal r t =  y. It follows readily that a D-type incumbent always extracts maximal rents in t=2. Note also that r 1 =  y dominates r 1 =0 for a D-type incumbent Rent taking in t=1ReelectedNot reelected r 1 =0  y 0 r1=yr1=y (1+  )  y y y

6. A pooling equilibrium It may still be in the interest of a D-type incumbent to mimic a H-type incumbent (by setting 0<r 1 <  y) in order to be reelected (and take r 2 =  y) The central question becomes: what is the rationally updated voter belief after observing production x 1 =s  y? Let 0< <1 be the probability that a D-type incumbent facing  =1 mimics a H-type incumbent facing  =s Bayes rule now provides an answer: Now, assuming voters use pure cutoff strategies; in which they reelect only if  > , we appreciate that as long as q > ½ all incumbents that produces either x 1 =s  y or x 1 =  y will be reelected unanimously while no incumbent that produces x 1 =0 will get any votes. As long as  >s mimicking is profitable for a D-type incumbent.

7. Experimental design (1) Endowment = 100 Schillings per period (1 Schilling = 0.25 NOK in the money sessions) Tax rate = 50% per period 1 Schilling in public production is worth 1.1 Schilling Productivity parameter  {½,1} Politician is programmed as follows: –If H-type and  =1 50 Schillings worth of production in both periods –If H-type and  =½ 25 Schillings worth of production in both periods –If D-type and  =1 25 Schillings worth of production in t=1 and 0 in t=2 –If D-type and  =½ 0 Schillings worth of production in both periods In all treatments  =0.20 TREATMENT: q=0.55 or q=0.85 This produces a marginal update to  =0.23 (  =0.03) and a substantial update to  =0.59 (  =0.39) respectively We have done 4 sessions with electorates of n=3 / 7 games Two of these where in the pilot (lottery-payoff) and two where money sessions We will do sessions with n=1 / 20 games (and possibly also with n=5 / 4 games) If things get interesting we may seek to fund cross-cultural studies

8. Experimental design (2) Two desiderata in the design is a) to root out social preferences, and b) produce statistically independent observations 1.The politician is an automaton (a preprogrammed machine). There is no sense in punishing a machine. 2.Every electorate is unique (due to an absolute stranger design). There is no sense in trying to punish or reward other subjects for previous play, since this can not possibly have any disciplining effects that the subject benefits from (he or she does not meet the punished or rewarded subject again). 3.Majority decision ensures that all subjects in the same electorate earn the same amount in a specific game. No subject therefore is ahead or behind any other subject in a specific game. Thus, social preferences based on inequality aversion can have no effect. Due to 2. we may also be confident that observations are statistically independent

11. The pilot: Right direction Master of Science students (PE 1st and 2nd year). First session absolute stranger; second session 5 subjects reused. Payoff: Points provide winning chances in a lottery for two bottles of wine (utility will then be linear in points, cf. Roth & Malouf 1979) Main result: q=0.85 Production = 0.0 Production = 77.5 Production = 105.0 Voted against (%)96.731.9- Voted for (%)3.368.1- N9036- q=0.55 Production = 0.0 Production = 77.5 Production = 105.0 Voted against (%)100.065.319.4 Voted for (%)0.034.780.6 N547236 Substantial update Marginal update Difference with respect to production = 77.5 is significantly different from zero in a Wilcoxon test (Mann Whitney U test) (p=0.0001; z-value = 3.945 with 2 df).

12. The two money sessions Questions of interest: –Do we find a difference between treatments that goes in the right direction? –How much of this difference remains if we check for adaptive / fictitious play updating? –Does aggregation by majority rule lead to more correct decisions (rational expectations / Condorcet jury theorem) –Can we describe the heterogeneity of the subjects with respect to updating rules?

13. Money sessions: Right direction BA students (various years and majors). Both sessions absolute stranger. Payoff: Schillings; 1 Schilling = 0.25 NOK Main result: q=0.85 Production = 0.0 Production = 77.5 Production = 105.0 Voted against (%)96.743.2- Voted for (%)3.352.8- N9036- q=0.55 Production = 0.0 Production = 77.5 Production = 105.0 Voted against (%)98.661.138.9 Voted for (%)1.438.961.1 N723618 Difference with respect to production = 77.5 is barely significantly different from zero in one sided Wilcoxon test (Mann Whitney U test) (p=0.12; z-value = 1.168 with 2 df).

14. Logistical regression (period>0) Combination of rational and adaptive belief formation Frequency honest: observed honest politicians in past play / (observed honest + observed dishonest in past play)

15. Probability curves

16. Individual- versus majority decisions Does majority rule aggregate to behavior more in accordance with the model? Main result: Maybe not… q=0.85 Production = 0.0 Production = 77.5 Production = 105.0 Majority against (%)100.050.0- Majority for (%)0.050.0- N3012- q=0.55 Production = 0.0 Production = 77.5 Production = 105.0 Majority against (%)100.075.033.3 Majority for (%)0.025.066.7 N24126 Difference with respect to production = 77.5 is barely significantly different from zero in one sided Wilcoxon test (Mann Whitney U test) (p=0.11; z-value = 1.204 with 2 df).

17. All sessions

18. Heterogeneity? Roughly 1/3 is within an absolute deviation of 8 percentage points. We call them “roughly Bayesians”. Roughly 1/5 is off mark by more than the prior probability of drawing a good politician (20 percent).

19. Consistency of beliefs and actions 6/10 subjects have one or less mistakes over the nine rounds. No subject has more than 4/9 mistakes

20. Summing up Providing a more powerful update assures behavior more in line with model There are traces of adaptive expectations in the subject sample Controlling for these increases the effect of the update No clear results with respect to the aggregation properties of majority rule: a consequence of the distribution of non-Bayesians in the sample? Heterogeneity: Few Bayesians / few imbeciles. High level of consistency between actions and given believes.