ECON3106 Politics and Economics
Exercises 2
1 Audits in Brazil
All the questions this Section refer to the paper: "Audit risk and rent extrac- tion: Evidence from a randomized evaluation in Brazil - Zamboni and Litschig
(2018)"
1.1 Describe ONE situation under which even if the audit risk of a municipality increases we could expect no change in the rent extraction.
1.2 Describe the policy change in May 2009 that the au- thors use to identify the e ects of auditing.
1.3 Do you think the following statement is true or false? "The authors nd that the reduction in rent extrac- tion had negative e ects on the welfare of the citi- zens of the a ected municipality". Justify your an- swer with ONE piece of evidence
2 Corruption
A small town has 60 voters and 2 types of jobs. 20 voters work as farmers (f) and 40 voters work in the mine (m). The small town must decide whether to build a water damn (d = 1) or not (d = 0). In case the water dam is not built everybody earns 8. If the water dam is built farmers the earning of the farmers increase by 10. Miners do not bene t from the construction of the water dam. The cost of the water dam is 180 and in case is built must be nanced equally by all 60 voters through a head tax. All voters care about the di erence between their earning and the taxes they have to pay
2.1 Write down the utility function of a farmer and a miner in the case that the water dam is not built. Do the same in the case the water dam is built
2.2 Is building the water dam e cent according to the social welfare citerion?
Now imagine that the town's major works in the mine and he is the only one with the power to decide whether the water dam should be built. A group of 5 farmers decides to bribe the major by paying 2 each only if water dam is built.
2.3 Will the major accept the bribe?
2.4 Is bribing e cient according to the social welfare cri- terion?
3 An election
A society of 99 voters must choose a policy p in the space (0, 1). Voter i's utility is given by
Two candidates, A and B , propose platforms .30 and .505, respectively. Candi- dates compete in a plurality election and each voter is expected to vote for the candidate whose platform he likes the most. Each candidate only wants to win the election.
3.1 What is the bliss point of voter i?
3.2 Voters exhibit single-peaked preferences. Show that this is true for i = 40.
3.3 How many votes will each candidate receive?
3.4 According to the Median Voter Theorem, what should we expect the two candidates to propose?
3.5 Suppose now that there are 3 candidates: A, B , and
C. The candidates' platforms are respectively .1, .5, and .9. You are told that voters are strategic and all voters i ≤ 50 will vote for A and all voters i > 50 will vote for C (i.e., nobody is voting for B). Is this a Nash Equilibrium? (brie y explain your logic)
4 Lobbying
In order to bring fast internet connection to the rural areas a country has to decide whether to build new antennas outside the cities. Givent that there is the same number of people living in the cities and the rural areas in case the antenna is built the total construction cost of the antennas of 10 Millions AUD will be equally split between rural towns and the cities. Rural towns are lobbying for the construction of these antennas spending a total of 1 Million AUD$ in their lobbying activities. The cities instead are spending 3 Millions AUD$ against the construction of the antennas. The probability that the antennas are built is described by the following contest success function:
4.1 Given the lobbying e orts what is the probability that the bill is introduced
The social welfare of the rural towns before taking account any lobbying activity and taxes is 10 Millions AUD$ in case the antennas are not built and it increase by 15 Millions AUD$ in case the antennas are built. The social welfare of the cities before taking account any lobbying activity and taxes is instead always 80 Millions AUD$ independently if the antennas are built or not.
4.2 Calculate the total social welfare of this country tak- ing into account taxes and lobbying e orts.
4.3 Compare this previous situtation to one where there is no lobbying and the antennas are not built. Which one is a preferred situation according to the social welfare criterion.