Francesco Passarelli's website - Economics - Recent Publications

Emotions and Political Unrest

with G. Tabellini

Journal of Political Economy
125, no. 3 pp.903-946, 2017.

This paper formulates a general theory of how political unrest influences public policy. Political unrest is motivated by emotions. Individuals engage in protests if they are aggrieved and feel that they have been treated unfairly. This reaction is predictable because individuals have a consistent view of what is fair.
This framework yields novel insights about the sources of political influence of different groups in society. Even if the government is benevolent and all groups have access to the same technology for political participation, equilibrium policy can be distorted.
Individuals form their view of what is fair taking into account the current state of the world. If fewer aggregate resources are available, individuals accept a lower level of welfare. This resignation effect in turn induces a benevolent government to procrastinate unpleasant policy choices

Supplementary material

$We study which policy tool and at what level is chosen by majority voting in order to reduce negative externalities, such as pollution. We consider three instruments: a rule, that sets an upper limit to the activity which produces the negative externality, a quota that forces a proportional reduction of the activity, and a proportional tax on it. For all instruments the majority chooses levels which are too restrictive when the activity is performed mainly by a small fraction of the population, and when costs for reducing activities or paying taxes are quite convex. However, in case of a rule too restrictive levels are more frequent than in case of a tax or a quota. Even though a tax is in general superior to the other two instruments, the majority may strategically choose a rule in order to charge the minority a larger share of the cost for the externality reduction.$

Regulation versus Taxation

with A. Alesina

Journal of Public Economics
vol. 110(C), pp.147-156, 2014.

We study which policy tool and at what level is chosen by majority voting in order to reduce negative externalities, such as pollution. We consider three instruments: a rule, that sets an upper limit to the activity which produces the negative externality, a quota that forces a proportional reduction of the activity, and a proportional tax on it. For all instruments the majority chooses levels which are too restrictive when the activity is performed mainly by a small fraction of the population, and when costs for reducing activities or paying taxes are quite convex. However, in case of a rule too restrictive levels are more frequent than in case of a tax or a quota. Even though a tax is in general superior to the other two instruments, the majority may strategically choose a rule in order to charge the minority a larger share of the cost for the externality reduction.

Promises, Expectations, and Causation

with G. Di Bartolomeo, M. Dufwenberg, and S. Papa

Games and Economic Behavior, forthcoming

Why do people keep their promises? Vanberg (2008) and Ederer & Stremitzer (2016) provide causal evidence in favor of, respectively, an intrinsic preference for keeping one’s word and an expectations-based account (suggested by Charness & Dufwenberg 2006) based on guilt aversion. The overall picture is incomplete though, as no study disentangles effects in a design that provides exogenous variation of both (the key features of) promises and beliefs. We present an experimental design that fills the gap.

The European countries are in the process of reforming the EU's institutions. If ratified, the Lisbon Treaty will have strong implications for the balance of power among member states. Building on the work of Shapley (1977) and Owen (1972), we present a measure of power that is based on players' preferences and number of votes. We apply this measure to the Council of Ministers to see who wields power now and who is likely to wield power with the future voting scheme. Further, we show how a country's power can change based on the preferences of the agenda setter, which, in this case, is the European Commission

Who has the power in the EU?

with J. Barr

Mathematical Social Sciences
vol. 57(3), pp. 339-366, 2009.

The European countries are in the process of reforming the EU's institutions. If ratified, the Lisbon Treaty will have strong implications for the balance of power among member states. Building on the work of Shapley (1977) and Owen (1972), we present a measure of power that is based on players' preferences and number of votes. We apply this measure to the Council of Ministers to see who wields power now and who is likely to wield power with the future voting scheme. Further, we show how a country's power can change based on the preferences of the agenda setter, which, in this case, is the European Commission

Supermajorities have their advantage as well as their disadvantage: they provide an hedge against being in the minority, but they make being in the majority less likely. We characterize this trade-off and compute the most preferred majority threshold. The relevant parameters are voting power, risk aversion and pessimism. People who feel powerful prefer low thresholds. High thresholds are preferred by risk averters or by those who are pessimistic about being in the majority. Further we study constitutional agreements on the voting rule. Members of the constituent assembly are heterogeneous in the parameters above. We show that weak and minority members succeed in pushing forward on high and protective rule

Voting as a Lottery

with G. Attanasi and L. Corazzini

Journal of Public Economics
vol. 146, pp. 129-137, 2017

Supermajorities have their advantage as well as their disadvantage: they provide an hedge against being in the minority, but they make being in the majority less likely. We characterize this trade-off and compute the most preferred majority threshold. The relevant parameters are voting power, risk aversion and pessimism. People who feel powerful prefer low thresholds. High thresholds are preferred by risk averters or by those who are pessimistic about being in the majority. Further we study constitutional agreements on the voting rule. Members of the constituent assembly are heterogeneous in the parameters above. We show that weak and minority members succeed in pushing forward on high and protective rule.

Appendix with Proofs

Integration Contracts and Asset Complementarity: Evidence from US Data

with P. Di Giannatale

International Journal of Industrial Organization, forthcoming

Firms sign integration contracts to increase proofs from trade and competition with third parties. An integration contract can improve complementarity among partners (productivity effect) and increase their power in the marketplace (strategic effect). We investigate three bilateral contracts: M&A, Minority Stake purchase, and Joint Venture. Using a cooperative game approach, we characterize quite general protability conditions. To estimate them, we adopt a novel complementarity index. It shows that for any kind of contract, a signifcant share of the integration proofs is due to the strategic effect of increased market power. In most cases productivity gains are relatively less important.

this paper we describe systemic financial risk as a pollution issue. Free riding leads to excess risk production. This problem may be solved, at least partially, either with financial regulation or taxation. From a normative viewpoint taxation is superior in many respects. However, reality shows that financial regulation is more frequently adopted. In this paper we make a positive, politico-economic argument. If the majority chooses a tax, then it is likely to be too low. If it chooses regulation it will possibly be too harsh. Moreover, a majority of low polluting portfolio owners may strategically use regulation in order to charge the minority a larger share of the externality reduction.

Financial Systemic Risk: Taxation or Regulation?

with D. Masciandaro

Journal of Banking and Finance
37(2), pp. 587-596, 2013.

In this paper we describe systemic financial risk as a pollution issue. Free riding leads to excess risk production. This problem may be solved, at least partially, either with financial regulation or taxation. From a normative viewpoint taxation is superior in many respects. However, reality shows that financial regulation is more frequently adopted. In this paper we make a positive, politico-economic argument. If the majority chooses a tax, then it is likely to be too low. If it chooses regulation it will possibly be too harsh. Moreover, a majority of low polluting portfolio owners may strategically use regulation in order to charge the minority a larger share of the externality reduction.

We present and experimentally test a theoretical model of majority threshold determination as a function of voters' risk preferences. The experimental results confirm the theoretical prediction of a positive correlation between a voter's risk aversion and the corresponding preferred majority threshold. Furthermore, the experimental results show that a voter's optimal majority threshold negatively relates to the voter's confidence about how others will vote. Moreover, in a treatment in which individuals receive a private signal about others' voting behavior, the private signal tends to replace confidence

Risk Aversion, Over-Confidence and Private Information as determinants of Majority Thresholds

with G. Attanasi, L. Corazzini and N. Georgantzis

Pacific Economic Review
vol. 19(3), pages 355-386, 2014.

We present and experimentally test a theoretical model of majority threshold determination as a function of voters' risk preferences. The experimental results confirm the theoretical prediction of a positive correlation between a voter's risk aversion and the corresponding preferred majority threshold. Furthermore, the experimental results show that a voter's optimal majority threshold negatively relates to the voter's confidence about how others will vote. Moreover, in a treatment in which individuals receive a private signal about others' voting behavior, the private signal tends to replace confidence

study political distortions that emerge in situations where agents' political power is disproportionate with respect to their economic power. We provide a specific definition which adopts the same measure unit, the Shapley value, to evaluate both the economic and the political power. We show that usual weighted majority voting cannot prevent political distortions from emerging in a huge mass of situations. We propose an alternative voting method based on random assignments of voting rights. Agents are given chances to vote instead of weights. If chances are computed according to a specific formula, no political distortion occurs. As an application, we analyze the rotation voting system recently adopted by the European Central Bank. We find that this system yields an enormous amount of political distortion. Then we compute the voting chances that should be assigned to countries in order to eliminate it.

Voting chances instead of voting weights

with P. Di Giannatale

Mathematical Social Sciences
vol. 65(3), pp. 164-173, 2013.

We study political distortions that emerge in situations where agents' political power is disproportionate with respect to their economic power. We provide a specific definition which adopts the same measure unit, the Shapley value, to evaluate both the economic and the political power. We show that usual weighted majority voting cannot prevent political distortions from emerging in a huge mass of situations. We propose an alternative voting method based on random assignments of voting rights. Agents are given chances to vote instead of weights. If chances are computed according to a specific formula, no political distortion occurs.
As an application, we analyze the rotation voting system recently adopted by the European Central Bank. We find that this system yields an enormous amount of political distortion. Then we compute the voting chances that should be assigned to countries in order to eliminate it.."

In this paper, we present a generalization of power indices which includes the preferences of the voters. Using a Multilinear Extension perspective (Owen, 1972a) we measure the probability of the players’voting “yes” for a particular political issue. Further, we randomize the issues and show the influence that the Agenda Setter can have on a player’s power. We demonstrate these results using data from theEuropean Union to show how the power distribution may shift after enlargement and under the new Constitutional Treaty

Preferences, the Agenda Setter, and the Distribution of Power in the EU

with J. Barr

Social Choice and Welfare
28(1), pp. 41-60, 2007.

In this paper, we present a generalization of power indices which includes the preferences of the voters. Using a Multilinear Extension perspective (Owen, 1972a) we measure the probability of the players’voting “yes” for a particular political issue. Further, we randomize the issues and show the influence that the Agenda Setter can have on a player’s power. We demonstrate these results using data from theEuropean Union to show how the power distribution may shift after enlargement and under the new Constitutional Treaty

To get older publications please go to my profile on www.academia.edu

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Recent Publications

Emotions and Political Unrest

Supplementary material

﻿​﻿Regulation versus Taxation

Promises, Expectations, and Causation

Who has the power in the EU?

Voting as a Lottery

Integration Contracts and Asset Complementarity: Evidence from US Data

Financial Systemic Risk: Taxation or Regulation?

Risk Aversion, Over-Confidence and Private Information as determinants of Majority Thresholds

Voting chances instead of voting weights

Preferences, the Agenda Setter, and the Distribution of Power in the EU

To get older publications please go to my profile on www.academia.edu

Regulation versus Taxation