# Chapter 1: What Is Political Economy?
**Key papers to cover:** Acemoglu (2003) "Why Not a Political Coase Theorem?", Besley (2006) *Principled Agents?*, North (1990) *Institutions, Institutional Change and Economic Performance*
***
## Opening Puzzle
Tariffs persist despite near-universal agreement among economists that free trade enhances aggregate welfare. Agricultural subsidies in wealthy countries exceed the entire GDP of many developing nations. Energy subsidies consume fiscal resources that could fund education or healthcare while accelerating climate change.
Everyone agrees better policies exist. Why don't governments implement them?
This gap—between what governments *do* and what they *should* do—defines political economy. Unlike normative public economics, which asks what policies maximize social welfare, political economy asks a different question: **Why do political systems produce the outcomes they do?**
***
## Stylized Facts: The Scale of Political Distortion
Before defining political economy, consider its empirical motivation. Political choices produce systematic, large, and persistent deviations from economically optimal policy—and these deviations vary substantially across political systems.
**Agricultural subsidies:** OECD countries collectively spend hundreds of billions of dollars annually supporting domestic agriculture (OECD, Agricultural Policy Monitoring and Evaluation). In many cases these subsidies exceed the market value of the supported output. The beneficiaries—farm operators—comprise under 5% of the workforce in advanced economies (World Bank, WDI), yet these programs survive generation after generation of reform efforts. The political logic is straightforward: highly organized, geographically concentrated interests defeat diffuse consumer majorities.
**Tax-to-GDP variation:** Among advanced democracies, government revenue as a share of GDP varies from roughly 25% (United States, Australia) to over 55% (Denmark, France) (OECD Revenue Statistics). Countries with similar income levels, technological capacities, and trade openness differ by 30 percentage points in fiscal scale. This variation correlates with political institutions—electoral systems, veto players, federalism—rather than economic fundamentals alone (Persson and Tabellini 2003).
**Policy quality variation:** The World Bank's Worldwide Governance Indicators (World Bank, WGI) reveal that countries at similar income levels differ by more than two standard deviations in rule of law, regulatory quality, and government effectiveness. Acemoglu, Johnson, and Robinson (2001) show that political-institutional history—specifically, the institutions European colonizers established—explains a substantial share of this variation independent of geography or culture.
**Persistence:** These patterns endure. Agricultural protection in the European Union has institutional roots in the 1957 Treaty of Rome; the policy has survived oil shocks, EU enlargement, and multiple reform rounds. Once established, political arrangements prove remarkably sticky even when their original rationale has disappeared.
These facts establish political economy's core agenda: not *whether* governments distort, but *why* they do so in the ways they do, why distortions vary systematically across countries, and why they persist.
***
## 1.1 Defining Political Economy
Political economy studies how political institutions, incentives, and constraints shape economic policies and outcomes—and how economic conditions influence political behavior and institutional change.
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**Definition:** Political economy analyzes the interaction between political and economic systems, treating institutions as endogenous and focusing on collective choice problems.
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Three features distinguish political economy from related fields:
### 1.1.1 Positive Rather Than Normative
Public economics typically begins with a social welfare function and derives optimal policy. Political economy begins with observed policy and asks why it takes that form. This is a *positive* rather than *normative* enterprise. We seek to explain, not prescribe.
This does not mean political economy is value-free. Understanding why bad policies persist is often the first step toward changing them. But the analytical starting point is explanation, not evaluation.
### 1.1.2 Institutions as Endogenous
Standard economic models often treat institutions—property rights, legal systems, regulatory frameworks—as exogenous constraints. Political economy recognizes that institutions are themselves the product of political choices. They emerge from conflict, bargaining, and historical contingency. Understanding why some societies develop growth-promoting institutions while others do not is a central concern.
### 1.1.3 Collective Choice Problems
Markets aggregate individual preferences through prices. Politics aggregates preferences through voting, bargaining, protest, and sometimes violence. These mechanisms have fundamentally different properties. Arrow's (1951) impossibility theorem tells us that no voting rule can simultaneously satisfy a minimal set of desirable properties—transitivity, unanimity, independence of irrelevant alternatives, and non-dictatorship. Any method of aggregating diverse individual preferences into a coherent collective ranking must violate at least one of these conditions. Political economy takes seriously the implications of this result: collective choice is inherently problematic in ways that market exchange is not. The impossibility theorem doesn't mean democracy is futile, but it does mean that all collective decision procedures involve trade-offs—and understanding those trade-offs is central to political economy (see Chapter 12 for formal treatment).
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**Arrow's Impossibility Theorem (1951).** No ranked-choice voting system over three or more alternatives can simultaneously satisfy unrestricted domain, Pareto efficiency, independence of irrelevant alternatives, and non-dictatorship.
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***
## 1.2 Three Traditions in Political Economy
Contemporary political economy draws on three intellectual traditions, each with its own methods and concerns.
### 1.2.1 Rational Choice
The rational choice tradition applies microeconomic tools—utility maximization, game theory, mechanism design—to politics. Actors (voters, politicians, bureaucrats, interest groups) are assumed to have well-defined preferences and to pursue those preferences strategically, subject to institutional constraints. The approach generates precise, testable predictions and clarifies the logic of strategic interaction, making it possible to identify when outcomes are efficient and when they are not. Its limitations are real: it can overestimate the role of calculation in political behavior, often abstracts away from historical context, and frequently generates multiple equilibria that limit its predictive power.
**Key works:** Downs (1957), Olson (1965), Buchanan and Tullock (1962). Buchanan and Tullock's *The Calculus of Consent* was foundational in establishing the "public choice" approach—applying economic reasoning to the study of constitutions, voting rules, and legislative bargaining. Their analysis of the costs of collective decision-making (external costs from suboptimal rules vs. decision-making costs of requiring broad agreement) remains the starting point for constitutional political economy (see Chapter 9 for legislative applications).
Downs (1957) established the spatial model of electoral competition. If voters have single-peaked preferences over a left-right policy dimension and two candidates compete for votes, both candidates converge to the policy preferred by the median voter. This striking result—that democratic competition produces the policy most preferred by the middle of the electorate—serves as the field's central benchmark. Much of political economy proceeds by asking when and why the median voter prediction fails: because of multiple dimensions (Chapter 9), interest group influence (Chapter 14), voter ignorance (Chapter 13), or identity-based voting (Chapter 15). Section 1.8 provides the formal statement.
Olson (1965) identified the fundamental obstacle to political organization: the free-rider problem. When the benefits of collective action are shared but the costs are borne individually, rational actors under-contribute. Large, diffuse groups—consumers, taxpayers, the general public—find it harder to organize than small, concentrated groups—industry associations, professional guilds, public-sector unions. This asymmetry explains why trade protection persists despite harming most citizens (our opening puzzle) and why regulatory agencies are captured by the industries they regulate. Olson's logic is formalized in Section 1.8.3 and applied extensively in Chapter 14.
### 1.2.2 Historical-Institutional
The historical-institutional tradition emphasizes path dependence, critical junctures, and the role of ideas. Institutions are "sticky"—they persist even when the conditions that created them have changed. Political outcomes depend heavily on historical sequence: the order in which events occur matters as much as the events themselves. This tradition takes history seriously, explains cross-national variation well, and is attentive to unintended consequences and institutional complementarities. But it can become merely descriptive, struggles to generate portable theoretical propositions, and sometimes invokes path dependence as a post hoc explanation rather than a testable mechanism.
**Key works:** North (1990), Pierson (2004), Acemoglu and Robinson (2012)
### 1.2.3 Behavioral
The behavioral tradition incorporates insights from psychology about systematic deviations from rational choice. Voters may be uninformed, politicians may be subject to cognitive biases, and both may be motivated by identity, fairness, or social pressure rather than narrow self-interest. The approach is grounded in experimental evidence and explains anomalies that rational choice cannot, while opening new policy levers such as nudges and framing effects. Its weaknesses mirror its strengths: the growing catalog of biases can seem ad hoc, it is often unclear when biases matter for aggregate outcomes and when they wash out, and a persistent tension exists between descriptive findings and prescriptive implications.
**Key works:** Caplan (2007), Achen and Bartels (2016), Thaler and Sunstein (2008)
### 1.2.4 Integration
This book draws on all three traditions. Rational choice provides the theoretical scaffolding—models that generate testable predictions. Historical-institutional analysis explains why institutions vary across countries and persist over time. Behavioral insights qualify rational choice predictions where evidence warrants.
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**Methodological Note:** The goal is integration in service of explanation, not eclecticism for its own sake. Different tools suit different questions.
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***
## 1.3 Core Questions
Political economy addresses interconnected questions that structure this book.
### 1.3.1 Why Do Institutions Persist?
North (1990) famously asked why some societies develop institutions that promote economic growth while others do not. Even more puzzling: why do dysfunctional institutions persist? If everyone would benefit from reform, why doesn't reform happen?
Several mechanisms explain institutional persistence. First, reform requires coordination: even if everyone prefers a new equilibrium, no individual may have an incentive to move first, creating a collective action problem. Second, institutions have winners and losers, and those who benefit from existing arrangements will resist change even when aggregate welfare would increase. Third, reformers today cannot bind future governments—if reform creates winners who might later reverse it, those who stand to lose may block reform preemptively. Finally, institutions create complementary investments that make change costly. A legal system requires lawyers, precedents, and expectations; replacing it means writing off these investments. This logic of increasing returns helps explain why institutional configurations persist long after their original rationale has vanished.
### 1.3.2 Who Gets What?
Lasswell (1936) defined politics as "who gets what, when, and how." Distributive conflict is central to political economy. Resources are scarce; political systems allocate them. Understanding which groups benefit from particular institutions and policies—and why—is essential.
This question links political economy to the study of inequality. Why do some democracies redistribute more than others? Why do authoritarian regimes sometimes provide public goods and sometimes extract resources? Answers require understanding both the preferences of those in power and the constraints they face.
Figure 1.1: Government consumption (% of GDP) versus Gini coefficient across countries. Source: World Bank WDI.
### 1.3.3 Why Do Policies Diverge from "Optimal"?
Return to our opening puzzle. Economists can typically identify Pareto improvements—policies that would make everyone better off. Yet such policies are often not adopted. Several explanations appear throughout the book. Voting systems, interest group influence, and bureaucratic incentives create systematic political distortions; the median voter theorem predicts policies favored by the median voter, but reality is more complex. Information problems compound these distortions: voters may not know which policies serve their interests, politicians may not know how to implement their preferred policies, and bureaucrats may exploit private information for their own ends.
Perhaps most pervasive are commitment problems. Governments cannot credibly bind themselves to future policies, which undermines investment, contract enforcement, and the sustainability of reform. A related difficulty is time inconsistency: policies that are optimal *ex ante* may not be optimal *ex post*. Once investments are sunk, governments face temptations to renege. Anticipating this, actors may not invest in the first place. This problem is particularly acute in macroeconomic policy, where central banks face a persistent temptation to generate surprise inflation (Chapter 19). Commitment problems recur throughout this book. They are central to explaining why democratization occurs (Chapter 5) and why wars happen despite their costs (Chapter 7).
Acemoglu (2003) provides the most systematic treatment of why political bargaining fails to achieve efficient outcomes. His paper asks: why is there no "Political Coase Theorem"? In economics, the Coase theorem holds that if property rights are well-defined and transaction costs are low, private bargaining will produce efficient outcomes regardless of the initial allocation of rights. Acemoglu argues that this logic breaks down in politics for three fundamental reasons.
First, political power is endogenous to current policies and institutions. Unlike economic transactions, where property rights are fixed during bargaining, political reforms alter the distribution of power itself. A group that agrees to institutional change may find that the new institutions shift power away from it, making the original bargain unenforceable. Second, commitment problems are endemic: those who hold power today cannot credibly promise to compensate losers tomorrow, because there is no third-party enforcer standing above the state. In market transactions, courts enforce contracts; in politics, the state is both a party to the bargain and the ultimate enforcer, and no external authority can compel a sovereign government to honor its commitments. Third, the losers from inefficient policies are often politically weak precisely because the policies are designed to keep them weak—creating a self-reinforcing dynamic in which inefficiency persists because those who could benefit from reform lack the power to demand it.
The Political Coase Theorem fails not because of transaction costs in the usual sense, but because the structure of political power prevents the bargains that would be needed to reach efficiency. This insight unifies much of the book: it explains why inefficient institutions persist (Section 1.3.1), why redistribution does not follow the Meltzer-Richard prediction (Chapter 16), and why commitment problems generate both democratic transitions (Chapter 5) and war (Chapter 7).
***
## 1.4 Political Economy vs. Related Fields
### 1.4.1 Development Economics
Development economics asks *how* development happens—what interventions improve the lives of the poor, how households and firms make decisions, what constraints limit growth. Political economy asks *why* some governments pursue development while others do not. Development economics typically takes the policy environment as given; political economy endogenizes it.
The fields are complementary. A development economist might design a conditional cash transfer program; a political economist asks why some governments adopt such programs while others prefer clientelism.
### 1.4.2 Public Economics
Public economics is fundamentally normative. It begins with a social welfare function and derives optimal taxation, spending, and regulation. Political economy is fundamentally positive. It begins with observed policy and asks why it takes that form.
The distinction is not absolute. Public economists increasingly incorporate political constraints, recognizing that optimal policies are irrelevant if politically infeasible. Political economists increasingly evaluate welfare, recognizing that understanding inefficiency is a precursor to remedying it.
### 1.4.3 Political Science
Political economy has roots in both economics and political science, and the boundary is porous. American politics scholars study Congress, voting, and parties using many of the same tools. Comparative politics scholars study regimes, institutions, and political development.
The disciplinary division is somewhat arbitrary. This book emphasizes economic outcomes—growth, redistribution, provision of public goods—more than political outcomes like regime stability or party systems. But the analytical frameworks overlap substantially.
***
## 1.5 The Scope of This Book
This book covers comparative political economy—the study of how political institutions and outcomes vary across countries and over time. Three emphases run throughout. First, cross-national variation: why do democracies differ in their policies and performance, why do autocracies, and what explains the distribution of regime types? Second, historical development: how did current institutions emerge, and what explains path dependence and institutional change? Third, causal identification: what is the effect of institutions on outcomes, and how can we distinguish causation from correlation?
Several important topics fall outside this book's scope. We do not cover American politics in depth, though examples drawn from the United States appear throughout. We do not cover international relations, though Chapter 18 addresses international political economy. And we do not engage with political philosophy or normative theory, though the positive analysis here often has normative implications.
***
## 1.6 Plan of the Book
The book proceeds in five parts.
**Part I: Foundations** establishes the analytical and empirical toolkit. Chapter 2 covers empirical methods, with attention to identification challenges specific to political economy. Chapter 3 examines the state—its origins, capacity, and variation.
**Part II: Regime Types and Transitions** analyzes the fundamental distinction between democracy and autocracy. Chapters 4-5 cover democratic performance and transition. Chapter 6 analyzes the internal logic of autocratic regimes. Chapter 7 examines political violence and conflict.
**Part III: Political Institutions** examines the structures through which political decisions are made. Chapters 8-11 cover constitutions, legislatures, executives, and bureaucracies.
**Part IV: Political Behavior and Competition** analyzes how individuals and groups participate in politics. Chapters 12-15 cover voting, accountability, interest groups, and identity politics.
**Part V: Political Economy of Policy** applies the frameworks developed earlier to substantive policy domains. Chapters 16-19 cover redistribution, media, international political economy, and macroeconomic political economy.
***
## 1.7 Theoretical Framework: A Preview
A simple framework organizes much of what follows. Political outcomes depend on:
1. **Preferences:** What do actors want? Voters seek policies that benefit them; politicians seek office, policy influence, or rents; bureaucrats seek budgets, autonomy, or public interest.
2. **Institutions:** What are the rules of the game? Who can vote, how are representatives selected, what checks constrain executives, how are bureaucrats appointed and monitored?
3. **Information:** What do actors know? Voters may be uninformed about policy consequences; politicians may have private information about their competence or intentions.
4. **Commitment:** What can actors credibly promise? Governments cannot bind future governments; promises made before elections may not be kept after.
These elements interact. Institutions structure the game that actors play. Information determines which strategies are feasible. Commitment problems limit what can be achieved even when preferences align.
Formally, we often represent political economy problems as games. Players have strategies; strategies determine outcomes; outcomes determine payoffs. Nash equilibrium (and refinements) characterize what we expect to observe. Comparative statics tell us how outcomes change when parameters change.
The next chapter develops the empirical methods needed to test these models.
***
## 1.8 Foundational Formal Results: A Preview
This section introduces three formal results that recur throughout the book. Each is stated briefly here and developed more fully in later chapters.
### 1.8.1 The Condorcet Paradox
Consider three voters (1, 2, 3) choosing among three alternatives ($A$, $B$, $C$) by majority rule. Suppose preferences are:
* Voter 1: $A \succ B \succ C$
* Voter 2: $B \succ C \succ A$
* Voter 3: $C \succ A \succ B$
Under pairwise majority voting:
$$
A \text{ vs. } B: \text{Voters 1 and 3 prefer } A \Rightarrow A \text{ wins } (2\text{-}1)
$$
$$
B \text{ vs. } C: \text{Voters 1 and 2 prefer } B \Rightarrow B \text{ wins } (2\text{-}1)
$$
$$
C \text{ vs. } A: \text{Voters 2 and 3 prefer } C \Rightarrow C \text{ wins } (2\text{-}1)
$$
Majority rule cycles: $A$ beats $B$, $B$ beats $C$, and $C$ beats $A$. There is no Condorcet winner—no alternative that defeats all others in pairwise contests. The collective preference ordering is intransitive even though each individual's preferences are transitive.
This is a concrete instance of Arrow's impossibility theorem (Section 1.1.3): majority rule satisfies unanimity, independence of irrelevant alternatives, and non-dictatorship, but it fails transitivity. No voting rule can satisfy all four properties simultaneously. The Condorcet paradox demonstrates that the problem is not merely theoretical—it arises from simple, natural preference profiles.
### 1.8.2 The Median Voter Theorem
Suppose $n$ voters (with $n$ odd) have single-peaked preferences over a one-dimensional policy space $x \in \mathbb{R}$. Each voter $i$ has an ideal point $x\_i$, and prefers policies closer to $x\_i$ over policies farther away. Order the ideal points:
$$
x\_1 \leq x\_2 \leq \cdots \leq x\_n
$$
Let $x\_m = x\_{(n+1)/2}$ denote the median voter's ideal point.
**Theorem (Black 1948; Downs 1957).** Under majority rule with single-peaked preferences, $x\_m$ is a Condorcet winner: it defeats every other alternative in a pairwise vote.
*Proof sketch.* Consider any alternative $y > x\_m$. Every voter with ideal point $x\_i \leq x\_m$ is closer to $x\_m$ than to $y$ (since $x\_i \leq x\_m < y$), so each prefers $x\_m$ to $y$. There are at least $(n+1)/2$ such voters—a majority. By a symmetric argument, for any $y < x\_m$, all voters with $x\_i \geq x\_m$ prefer $x\_m$ to $y$, which is again at least $(n+1)/2$ voters. Therefore $x\_m$ defeats every alternative by majority rule. $\blacksquare$
The median voter theorem resolves the Condorcet paradox by restricting the domain of preferences: when preferences are single-peaked, majority rule produces a transitive collective ordering and a stable outcome. This result is the benchmark for Chapters 4, 12, and 16.
### 1.8.3 The Collective Action Problem
Olson's (1965) logic of collective action can be formalized as an $N$-player public goods game. There are $N$ individuals, each choosing simultaneously whether to contribute ($c\_i = 1$, at private cost $k > 0$) or free-ride ($c\_i = 0$). Each player receives a benefit proportional to total contributions:
$$
u\_i(c\_i, c\_{-i}) = b \cdot \frac{\sum\_{j=1}^{N} c\_j}{N} - k \cdot c\_i
$$
where $b > 0$ is the per-capita benefit when all contribute. Assume:
1. **Social efficiency of contribution:** $b > k$, so universal contribution ($c\_i = 1$ for all $i$) yields each player a payoff of $b - k > 0$, which exceeds the payoff of universal free-riding ($0$).
2. **Individual incentive to free-ride:** $k > b/N$, so the marginal private benefit of contributing ($b/N$) falls short of the cost ($k$).
The marginal effect on player $i$'s payoff from switching $c\_i$ from 0 to 1 is:
$$
\Delta u\_i = \frac{b}{N} - k < 0
$$
Since this is negative regardless of what other players do, free-riding ($c\_i = 0$) is a strictly dominant strategy. The unique Nash equilibrium is $c\_i^\* = 0$ for all $i$: nobody contributes.
In equilibrium, every player earns $0$. Under universal contribution, each earns $b - k > 0$. The Nash equilibrium is Pareto-dominated. The gap between individual and collective rationality grows with group size $N$, since the individual incentive to free-ride ($k - b/N$) increases as $N$ rises.
This result formalizes why large, diffuse groups—consumers, taxpayers, unorganized workers—struggle to act collectively, while small, concentrated groups can more easily overcome the free-rider problem. The connection to interest group politics is developed in Chapter 14.
***
## 1.9 Research Frontier
### 1.9.1 The Credibility Revolution
Political economy has undergone a methodological transformation since the 1990s. The credibility revolution—the shift toward natural experiments, regression discontinuities, instrumental variables, and randomized evaluations—has resolved debates that theory and observational regression could not settle.
Key landmarks: Jones and Olken (2005) use random leader deaths to show individual leaders causally affect growth; Acemoglu, Johnson, and Robinson (2001) use settler mortality as an instrument for colonial institutions to show long-run institutional effects on income; Chattopadhyay and Duflo (2004) use the random assignment of reserved political seats in India to show female leaders choose different public goods. Each of these papers exploited plausibly exogenous variation to answer a causal question that cross-sectional regression could not. The methods are now standard tools in every chapter of this book.
### 1.9.2 Democracy, Institutions, and Long-Run Growth
Acemoglu et al. (2019) use regional democratization waves as instruments for country-level democratic transitions, finding that democracy increases GDP per capita by about 20% in the long run—resolving a decades-long debate mired in endogeneity problems. The mechanism appears to operate through investment in human capital and health rather than simply increased economic openness.
Longer-run work examines institutional persistence over centuries. Dell (2010) shows that the *mita* forced labor system in colonial Peru has persistent negative effects on household welfare today. Lowes et al. (2017) find that proximity to pre-colonial kingdoms in Africa predicts contemporary cooperation and norms of rule-following. The "deep roots" literature—examining how pre-historic human migration, agricultural suitability, and disease environments shaped contemporary institutions and income—has grown rapidly, though debates about mechanism and specification remain active.
### 1.9.3 Behavioral Political Economy
The integration of behavioral economics into political economy is reshaping foundational assumptions. Departures from rationality are not random noise in political behavior—they are systematic.
Gennaioli and Tabellini (2023) develop a model of "identity" in which voters conflate their personal identity with policy preferences, producing systematic distortions even under electoral competition. Experimental work shows that voters update differently on information that confirms versus challenges political priors (motivated reasoning). Achen and Bartels (2016) argue that much of what political scientists call "issue voting" is actually post-hoc rationalization of identity-based choices. These findings challenge models that treat voters as competent processors of political information.
### 1.9.4 Political Economy of Inequality and the "Crisis of Democracy"
Rising income inequality in advanced democracies and the simultaneous rise of populist movements have generated a new research agenda. Piketty, Saez, and Zucman (2018) document that the share of income flowing to top earners in the United States rose dramatically after 1980, while the bottom 50%'s share fell. Funke, Schularick, and Trebesch (2016) show that financial crises—which redistribute income downward then require austerity that hurts median voters—are systematically followed by political radicalization. Understanding why rising inequality has not produced more redistribution (as Meltzer-Richard would predict) is a central open question.
***
## Further Reading
### Foundational
* North, Douglass C. 1990. *Institutions, Institutional Change and Economic Performance*. Cambridge University Press.
* Persson, Torsten, and Guido Tabellini. 2000. *Political Economics: Explaining Economic Policy*. MIT Press.
* Besley, Timothy. 2006. *Principled Agents? The Political Economy of Good Government*. Oxford University Press.
### Intermediate
* Acemoglu, Daron. 2003. "Why Not a Political Coase Theorem? Social Conflict, Commitment, and Politics." *Journal of Comparative Economics* 31(4): 620-652.
* Drazen, Allan. 2000. *Political Economy in Macroeconomics*. Princeton University Press.
* Mueller, Dennis C. 2003. *Public Choice III*. Cambridge University Press.
### Frontier
* Acemoglu, Daron, and James A. Robinson. 2006. *Economic Origins of Dictatorship and Democracy*. Cambridge University Press.
* Bueno de Mesquita, Bruce, et al. 2003. *The Logic of Political Survival*. MIT Press.
* Besley, Timothy, and Torsten Persson. 2011. *Pillars of Prosperity: The Political Economics of Development Clusters*. Princeton University Press.
* Acemoglu, Daron, Suresh Naidu, Pascual Restrepo, and James A. Robinson. 2019. "Democracy Does Cause Growth." *Journal of Political Economy* 127(1): 47-100.
* Gennaioli, Nicola, and Guido Tabellini. 2023. "Identity, Beliefs, and Political Conflict." *Quarterly Journal of Economics* 138(3): 1779-1832.
* Funke, Manuel, Moritz Schularick, and Christoph Trebesch. 2016. "Going to Extremes: Politics after Financial Crises, 1870–2014." *European Economic Review* 88: 227-260.
***
## Exercises
1. **Institutional persistence:** Identify a policy or institution in your country that most economists would consider inefficient. Explain why it persists using the framework in Section 1.3.1.
2. **Methodological traditions:** For each of the following questions, which tradition (rational choice, historical-institutional, behavioral) would be most useful, and why?
* Why do voters in the United States turn out at lower rates than voters in Australia?
* Why did Latin American countries adopt presidential systems while most of Europe adopted parliamentary systems?
* Why do voters often support parties whose policies harm their economic interests?
3. **Distinguishing fields:** A country implements a conditional cash transfer program that increases school enrollment. Frame three research questions about this program—one from development economics, one from public economics, and one from political economy.
4. **Commitment problems:** Explain why a government might fail to protect property rights even when doing so would increase investment and growth. Use the concept of time inconsistency.
5. **Mapping the book:** Choose a current political controversy in your country. Which chapter(s) of this book would be most relevant for understanding it? What models or empirical strategies might apply?
6. **Positive vs. normative:** Consider the debate over universal basic income. Formulate one positive political economy question and one normative question about UBI. How would the methodological approach differ between them?
7. **Endogenous institutions:** Many countries adopted proportional representation electoral systems during periods of working-class mobilization (Rokkan 1970). Is this evidence that institutions are endogenous? What would a political economy analysis emphasize that a purely institutional analysis might miss?
8. **Integration across traditions:** Consider the puzzle of why some democracies redistribute more than others. Sketch how each of the three traditions (rational choice, historical-institutional, behavioral) would approach this question. Where do their predictions agree, and where do they diverge?
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