editorial statement: the first year of the european journal of government and economics european journal of government and economics volume 1, number 2 (december 2012) issn: 2254-7088 103 editorial statement: the first year of the european journal of government and economics diego varela, university of a coruña, spain giacomo benedetto, royal holloway, university of london, united kingdom jose manuel sanchez-santos, university of a coruña, spain abstract in this editorial statement we present a balance of the first year of life of the european journal of government and economics. we discuss the main developments that concern the journal’s indexation by academic databases. we also comment on the approval of a code of publication ethics and malpractice. finally, we emphasise the dangers of excessive technical sophistication and the need to keep an integrated approach between the fields of political science and economics, according to the spirit of the journal. jel classification a11; a12; l17 keywords academic journal; economics, indexing; open access; political science european journal of government and economics 1(2) 104 with the publication of this second issue, it is a good time to present a balance of the first year of the journal. we thought that an editorial statement might be a good way to communicate with our fellow editorial board members, authors and readers. there have been some substantial changes since the first issue was published in june. we obtained an issn and took the first steps for indexation of our journal’s contents. the purpose was to increase the visibility and ease of use of the journal, thereby promoting its potential impact (see varela, 2012). these efforts gave some early fruits, and our journal contents are already indexed by google scholar, repec, worldcat and bielefeld academic search. another index that we would like to join but is taking longer than expected is the directory of open access journals (doaj). a particularity of this index, as its name indicates, is that it only lists journals that use a funding model that does not charge readers or their institutions for access. other than that, the formal requirements are that journals must have an issn and at least five research papers published. in practice, however, there is another factor that is making this an increasingly selective index. the doaj itself is not only open access, but nor does it charge indexed journals or publishers. as a consequence, there is great demand from journals to join this index, which cannot always be met by the limited staff at lund university in sweden, which is currently responsible for the maintenance of the index. as a result, there is backlog of journals to be indexed, among which ejge. this is a particular instance of rationing by waiting (see barzel, 1974), in which waiting can exclude new projects that do not have a firm vocation of continuity. other established indices, such as econlit, which used to be a very popular index in economics, the isi web of science, or scopus, also require a publication record of two or three years prior to indexation. the difference with the doaj is that the waiting periods and associated publication record requirements are not fixed but endogenous. in addition to the traditional requirements about periodicity and peer review, scopus also requires journals to publish a statement about their publication ethics and malpractice policy. we have published such a statement on our website, in which we cover the duties of authors, reviewers, and editors, and deal with issues such as replicability, acknowledgement of sources or conflicts of interest (ejge, 2012). writing this formal statement, basing ourselves on the experience of other major journals, publishers and associations, made us reflect about some of those important issues. this experience, which we initially thought of as merely a formal requirement, proved helpful when preparing this second issue, which includes an article about legislator shirking that is based on experiments with human subjects. the nine research papers included in the first volume of this journal include a fair geographical representation. our authors have come from germany, belgium, the us, the uk, france, spain, norway, italy, and hungary. so far as topics are concerned, we have covered many important issues, most of which are about the link between government and economics and thus can be of potential interest to political scientists and economists alike. however, we are somewhat concerned that the methodological differences between economists and political scientists may be creating an undesirable cleavage between both traditions, which we would like to avoid. in particular, some of the articles have a high component of technical sophistication, which may be discouraging some readers and potential authors. we believe that it is important to have a high standard of analytic rigour, but also think that technical sophistication should not be an end in itself. therefore, we would like authors to make an effort to convey their messages in a way that can be understood by less technically oriented readers. this view is consistent with that of some prominent economists that see a dangerous slip in their discipline. as steven levitt points out: european journal of government and economics 1(2) 105 there’s a lot of intellectual firepower going into economics today. at the same time, i think the profession has gone off the rails. the fetishistic infatuation with technicality and mathematical difficutlty is extremely unhealthy… i think that will make us increasingly irrelevant to the real world (interview with levitt in bowmaker, 2012: 246-7). therefore, we shall make an effort to reduce the unnecessary technical oversophistication of published papers, while retaining analytical rigour. we wish to encourage more political scientists to make submissions to our journal, which may require a rewording of the journal’s aims and scope. we believe this will focus the papers on important questions, and help reduce the current cleavage between economists and political scientists that goes against the spirit of our journal and social science in general. references barzel, yoram (1974) ‘a theory of rationing by waiting’, journal of law and economics 17(1): 73-95. ejge (2012) ‘editorial policies’, url (consulted dec. 2012): http://www.ejge.org/index.php/ejge/about/editorialpolicies. bowmaker, simon w. (2012) the art and practice of economics today: lessons from leading minds. cheltenham: edward elgar. varela, diego (2012) ‘the contribution of isi indexing to a papers’ citations: results of a natural experiment’, european political science advance online publication 5 october 2012, url: http://dx.doi.org/10.1057/eps.2012.29. european journal of government and economics volume 5, number 2 (december 2016) issn: 2254-7088 78 editorial statement: the first five years of the european journal of government and economics diego varela, universitatea alexandru ioan cuza din iasi giacomo benedetto, royal holloway, university of london jose manuel sanchez-santos, universidade da coruña abstract this editorial statement reflects on the experience from the first five years of the european journal of government and economics and proposes some broad ideas about what we believe should be the future of the journal in the following years. the developments and ideas presented here are divided in three parts: achievements and difficulties of the past five-year period, the renewal of the editorial team, and new challenges for the future. keywords academic publishing; journal management. jel classification a12; a30; p27. european journal of government and economics 5(2) 79 this editorial statement reflects on our experience as editors of the european journal of government and economics during its first five years of existence. it also presents some broad ideas about what we believe should be the future of the journal in the following years. the exposition is divided in three parts: achievements and difficulties of the past five-year period, the renewal of the editorial team, and new challenges for the future of the journal. achievements and difficulties the first five years of the european journal of government and economics have been very intense ones in which we have made important achievements but also faced considerable difficulties. as far as the achievements are concerned, besides managing to regularly publish two issues per year, which is an achievement in itself, we have also managed to include the journal in some globally recognised academic indices, such as a more stringent directory of open access journals, econlit, latindex and scopus. currently our journal is fully indexed by these services, which has increased its standing vis-à-vis fellow academics and authorities in a number of countries. achievements have also come on a personal side for the editors, and include the recent achievement of two jean monnet chairs selected by the european commission to be co-funded by the erasmus+ programme of the european union, in european political economy and eu budget policy, respectively. we have also faced difficulties, some of which still persist to a greater or lesser extent. one of these unresolved issues has been the understaffing of the journal, which has meant that the editors have had to undertake ourselves many of the tasks usually reserved for specialists, such as website management, copyediting or galley formatting of papers. this not only means an overload for the editors that detracts from their editorial duties, but also a gap in quality with respect to other journals. a second difficulty that still persists is the lack of integration between the fields of government and economics. although we are increasingly receiving a number of articles in areas that interlink both fields of politics and economics, the truth is that in many cases both fields have remained as watertight compartments. the increased level of technical sophistication of papers means that many experts in government do not understand or simply are not interested in the papers in the field of economics, and vice versa. another issue is related to the vocation of the journal to expand to other countries, and in particular to contribute to the integration of former communist countries of eastern europe. the difficulty in this case comes from the lack of economic and social cohesion in europe, which translates into great differences as far as research quality is concerned. in practical terms, this means that the distance between authors and reviewers across regions is so great that it is rather difficult to find an able reviewer or to get a paper accepted, unless regions are kept segregated, which is the opposite to our initial intentions as editors. but all in all the balance is positive, the main benefit being the experience we have acquired through the management of the journal, the contacts we have made, and the cohesion we have developed among the members of the editorial team. renewal of the editorial team these initial five years would not be possible without the help of our editorial board, which has brought together more than 30 colleagues from a number of countries in europe and beyond. after five years of service, time has come to thank them expressly for their efforts. besides us, this editorial board has included the following members: varela, benedetto and sanchez-santos ● the first five years of ejge 80  manel antelo, universidad de santiago de compostela, spain  eduardo bandres, universidad de zaragoza, spain  michael w. bauer, humboldt university berlin, germany  peter benczur, european commission, joint research centre, ispra, italy  oscar calvo-gonzalez, world bank, washington dc, united states  jose ramon cancelo, universidade da coruña, spain  raul caruso, università cattolica del sacro cuore, milano, italy  luiz de mello, organisation for economic co-operation and development, france  michael ehrmann, european central bank, frankfurt, germany  fabio franchino, università degli studi di milano, italy  miriam hartlapp, wissenschaftszentrum berlin für sozialforschung, germany  bjorn hoyland, university of oslo, norway  raya kardasheva, kings college london, united kingdom  santiago lago-peñas, universidad de vigo, spain  thierry madies, université de fribourg, switzerland  diego martinez-lopez, universidad pablo de olavide, sevilla, spain  jorge martinez-vazquez, georgia state university, united states  jan-hinrik meyer-sahling, university of nottingham, united kingdom  carmen nastase, universitatea stefan cel mare din suceava, romania.  jorge onrubia, universidad complutense de madrid, spain  fabio padovano, università degli studi roma tre, italy  antti pajala, university of turku, finland  george poede, universitatea alexandru ioan cuza din iasi, romania  lucia quaglia, university of york, united kingdom  yvon rocaboy, université de rennes 1, france  andres rodriguez-pose, london school of economics and political science, united kingdom  fritz sager, universität bern, switzerland  roger scully, cardiff university, united kingdom  stephan stetter, universität der bundeswehr münchen, germany  virgil stoica, universitatea alexandru ioan cuza din iasi, romania  robert thomson, university of strathclyde, united kingdom  frantisek turnovec, univerzita karlova v praze, czech republic  richard c. whitaker, university of leicester, united kingdom after five years, a new cycle starts that will surely bring a renewed editorial team with new faces both among editors and editorial board members, a team that will be able to base its project on the work initiated by these colleagues to whom we hereby thank, but that will also bring new ideas and enthusiasm with them. new challenges for the future the challenges for the new editorial team are related to the difficulties that we have mentioned above, the first of which will be, in our opinion, the needed professionalization of the journal. assuring the specialisation of functions such as copyediting, proofreading or formatting will allow editors to focus on their own functions and increase the quality of the journal. it is an open question whether this can be better undertaken at home or by means of outsourcing, and whether the european journal of government and economics 5(2) 81 funding for such improvements may come from subscription fees, author publishing fees, or some kind of institutional sponsorship. other unresolved issues that have been mentioned above are the integration of the fields of government and economics, and the integration of academics from different regions of the world with different academic backgrounds. finally, and most importantly, the new editorial team will need to continue our efforts to increase the quality of published papers. this, in turn, will allow the journal to rise in citation rankings and, ultimately, to be admitted to additional indices such as the journal of citation reports, and further increase in recognition and influence (varela, 2013). all these challenges are difficult ones in themselves, but especially if we consider that they interact among them. for instance, rising in established citation rankings may conflict with the objective to open up the journal to new countries and regions. institutional sponsorship arrangements needed for the professionalisation of the journal may also conflict with the journal’s autonomy. all in all, these are just a few of the open questions that will make the next cycle a challenging one for the editorial team of the european journal of government and economics. references varela, diego (2013) 'the contribution of isi indexing to a paper's citations: results of a natural experiment', european political science 12(2): 245-53. microsoft word ejge_03_01_010.doc european journal of government and economics volume 3, number 1 (june 2014) issn: 2254-7088 75 vertical externalities with lump-sum taxes: how much difference does unemployment make? diego martinez, universidad pablo de olavide, spain tomas sjögren, umeå university, sweden abstract this paper analyses how the existence of unemployment affects the conventional approach to vertical externalities. we discuss the optimality rule for the provision of public inputs both in a unitary and in a federal state. our findings indicate that decentralising spending responsability on public inputs in the presence of unemployment allows output to be closer to the first best level. moreover, we describe the inability of the federal government, behaving as a stackelberg leader, to replicate the unitary outcome, unless there are new policy instruments at government's disposal. jel classification j2; h4; h7. keywords public inputs; unemployment; vertical externalities. acknowledgements we are grateful to the participants at the 20th spanish meeting on public economics, three anonymous referees and the editor for their comments. the authors would like also to thank the spanish ministry of science (projects eco2010-15553 and eco2010-21706), junta de andalucia (projects sej-02479 and sej-6882), the bank of sweden tercentenary foundation (stiftelsen riksbankens jubileumsfond), the swedish council for working life and social research (fas) and the national tax board (skatteverket) for research grants. european journal of government and economics 3(1) 76 introduction the standard approach to vertical externalities establishes that sharing taxes between different levels of government has an impact on efficiency. from the seminal contribution by keen (1998), a number a papers has dealt with this issue, offering various solutions which may internalise this problem (see, for instance, boadway and tremblay, 2006). a common issue in all these contributions is assuming distortionary taxation. another common feature in this literature is the assumption of a competitive labour market, with the labour force matching exactly the demand for labour. papers such as dahlby and wilson (2003) and kotsogiannis and martinez (2008) give a central role to the supply and demand for labour in determining equilibria but always with labour market clearing. in such a world, there is no scope for one of the conventional fiscal policies aimed at fighting unemployment, namely the provision of public inputs. in fact, to the best of our knowledge, no paper so far has dealt with vertical expenditure externalities (caused by the provision of productivity-enhancing public expenditures in a federal context) in the presence of unemployment. this has not been the case when horizontal externalities are involved (ogawa et al, 2006). this paper precisely combines vertical externalities and labour market imperfections in a single model. indeed, we build a theoretical framework in which the federal government is in charge of unemployment benefits and the states provide a public input with positive effects on demand for labour. such a theoretical framework finds some real parallells in the international evidence so long as in countries like spain, the us or australia (just to name a few) the allocation of spending responsibilities and taxes across tiers of government is of the kind we are considering here. taxes are assumed to be lump-sum because we are interested in focusing on the efficiency implications derived from the expenditure side of government decisions rather than on vertical tax externalities. anyway, we will show that ignoring distortionary taxation as a policy variable may play a crucial role for correcting the vertical externality. the results in the paper may be summarised as follows. first, we show that, in spite of using exclusively lump-sum taxes to finance governments, a vertical expenditure externality arises when unemployment exists. this confirms a previous result found in the literature (dahlby and wilson, 2003; martinez, 2008), namely, that both vertical (tax and expenditure) externalities are independent of each other. the provision of public inputs creates a positive vertical impact on federal revenues as long as this type of public spending increases the demand for labour and, therefore, it reduces the resources needed at federal level for paying unemployment benefits. and this occurs without the co-occupancy of elastic tax bases. moreover, we also see how the rule for the provision of public inputs at state level is closer to the production efficiency condition than that corresponding to a unitary country with a non-clearing labour market. obviously, this does not imply that decentralisation is closer to optimality than centralisation but the fact that the assignment of distorting instruments (i. e., the public input) across different levels of government really matters for assessing optimality. second, we have analysed whether the federal government is able to replicate the outcome of a unitary country. as is standard in much of the earlier literature, we have assumed that the upper level government knows the states' reaction functions and therefore behaves as a stackelberg leader vis-a-vis the state governments. our results deviate from the earlier studies so long as the federal government has not sufficient policy instruments at its disposal to implement the unitary equilibrium. this is a consequence of using lump-sum instruments. martinez and sjögren ● vertical externalities with lump-sum taxes 77 in a sense, these results are related to the discussion initiated by sato (2000), who has shown that the ability of the federal government to replicate second-best results depends on what type of policy instrument is available to the federal government. precisely, as result of taking into consideration a new (non-lump-sum) policy instrument, i. e., a public input provided by the federal government that is complement to that offered by the states, the upper level of government is able to replicate the second-best outcome of a unitary country. the structure of the paper is as follows. section 2 describes the main features of the model and the different versions of the optimality rule for the provision of public inputs. sections 3 and 4 evaluate the ability of the federal government to replicate the unitary outcome. finally, section 5 concludes. the basic model this section aims to show two results. first, we characterise the equilibrium in a centralised country with unemployment. this allows us to see how the optimal rule for the provision of public inputs is modified in the presence of unemployment. it will also serve as a benchmark scenario with which we can compare the federal equilibria to be analysed below. second, the benchmark model presented in this section also highlights that the fiscal decisions taken by one level of government (particularly that with spending responsibilities on public inputs) will affect the other levels of the public sector. as a consequence, vertical expenditure externalities will arise even though only lump-sum taxes are used to raise revenue in the public sector. the theoretical framework consists of firms, households and two different tiers of government: the federal level and k subnational states.1 firms are identical across the country and, for the sake of simplicity, we assume that their number is normalised to one in each state. all of them produce a single good on the basis of the following production function:   ,,, 1  gkngknf  (1) where n is labour, k a fixed factor and g a public input. such a production technology allows us to qualify the public input as factor-augmenting.2 in this context, the public spending will increase the return to the fixed production factor k , which we normalised to one, in which case the profit can be expressed as:   ,, wngnf  (2) where w is the wage rate.3 the first-order condition for profit maximisation reads ),( gnfw n , and it implictly defines the demand for labour as:        1 1 11 1 , wggwn (3) 1 we do not denote the states by sub-indexes for making easier the notation and given that they are assumed to be identical. 2 an alternative approach would imply a production function with constant returns to scale in all the inputs (private and public). this would be the case of firm-augmenting public input. it would create economic rents that, in terms of the model we develop here, would not exhibit substantial differences with respect to what we obtain below. 3 the return to labour is not affected by the public input, although this would be the normal situation with factor-augmenting public inputs. this is not the case here because we are interested in considering the impact of the public input on employment, and the demand for labour we obtain below implies that the wage rate is independent of ),( gmw . in a model with full-employment, however, we should set up ),( gmw . european journal of government and economics 3(1) 78 by combining equations (2) and (3), we obtain the profit function:  gw, (4) we assume that all households have the same preferences for consumption c across the federation and these preferences are described by a utility function )(cu , which is increasing in c . each state is populated by three types of consumers: a firm-owner as well as employed and unemployed workers, respectively. these consumer types are denoted by the superindices "f", "e" and "u". the firm-owner is endowed with a fixed factor of production k , which the firmowner hires to the firm in return for the firm´s profit. his budget-constraint is defined by ffc   , where f is a lump-sum tax. regarding the other two types of consumers, we make a distinction between the total labour force available for working, m , and the number of households that effectively are employed n . obviously, full employment is characterised by nm  . the budget constraint for an employed worker is ee wc  , where e is a lump-sum tax, while the budget constraint facing an unemployed worker is given by bcu  , where b denotes a net of tax unemployment benefit. in a centralised country, for the policy variables  gbef ,,, , the government maximises a utilitarian welfare function   fue kuunmkknuw  (5) subject to the following budget constraint:   0 bnmkkgkkn fe  (6) in a situation where there is no unemployment, the first-order conditions are as follows:     ff ufoc  : (7)     ee ufoc  : (8)   1: gfgfoc (9)   ,0:  gnfoc fe  (10) where  is the lagrange multiplier associated with the government´s budget constraint. the first two equations show the standard result from optimisation with lump-sum taxes and transfers: the private marginal utility (of each type of consumer) must be equal to the social welfare cost of taxation, which here is captured by the lagrange multiplier  . equation (9), in turn, is the standard production efficiency condition in the provision of public inputs. finally, (10) is the budget constraint of central government, where the last term of lhs in (6) can be dropped as there is full employment and nm  . let us now turn to the equilibrium with unemployment. it is assumed that the existence of a minimum wage, ow , which exceeds the market-clearing wage, ew , creates unemployment so that nm  . this modification will have an impact on the optimal provision of g . in addition, the first-order condition for the unemployment benefit b must also be taken into consideration. the first-order conditions for b and g are martinez and sjögren ● vertical externalities with lump-sum taxes 79     uubfoc : (11)     .1:  ggeg ue g fbnn uun gfoc   (12) let us now modify the model to include different tiers of governments. we assume that the federal level is in charge of providing the unemployment benefit while the states provide the public inputs.4 both levels of government share the tax on employed workers (with the tax rates et and et chosen by the federal and state governments, respectively; eee tt  ). the revenues collected from the tax on profits are assigned in a proportion  (which is exogenously determined) to the states )10(  , while the tax rate f is exclusively decided by the federal government. in such a framework, let us assume that the states behave as nash players, that is, each subnational government ignores the impact of its fiscal decisions on federal revenues. therefore, the optimisation problem to be solved by the states is:         , , 0.. )( eo o fe ffbee ww gwnn sgntts ubunmwnuwmax       (13) where s is a vertical lump-sum from the federal government to states. the last inequality refers to the distortion existing in the labour market, which is the reason for unemployment. the first-order conditions for et , g and  give:     ee utfoc : (14)      01: geg ue g ftn uun gfoc  (15)    0: sgntfoc fe  (16) observe that we, for later use, define the first-order condition for g to be a function  whereas we also use the short notation  for the state government´s budget constraint. equation (14) sets up the same rule for choosing the optimal tax rate on employed workers in a centralised country as in a world with two tiers of government. this is a direct consequence of using lump-sum taxes. even in the presence of tax sharing between different levels of government, if household behaviour is not affected by taxes, there is no scope for vertical tax externalities. by contrast, and leaving aside the discussion on the optimal levels of g (see martinez and sanchez (2010) for a graphical analysis and martinez and sjongren (2013) with a similar model to this one), let us begin by comparing the provision of the public input in a two-tier public sector (equation (15)) with the provision in a 4 this distribution of spending responsabilities is not crucial for the results, which would be symmetric with an inverse vertical assignment of public expenditures. anyway, the scheme we follow here is in line with the mainstream of theory of fiscal federalism. european journal of government and economics 3(1) 80 unitary public sector (12). the term e gtn differs from its equivalent in (12), namely, )( bn eg  . as long as the federal government implements a nonnegative lump-sum tax et on employed workers, it follows that since the states decide over g , this tends to reduce the over-provision bias that the presence of unemployment creates in the provision of public inputs. in other words, expression (15) is closer to (9) than equation (12).5 in this regard, and contrary to the conventional view in the literature on vertical externalities, we propose here that more federalism may lead to more production efficiency. to see this in an extreme case, assume that all rent taxes accrue to the states ( 1 ); the federal government needs to be financed by a negative fiscal grant (from states) and/or by charging a positive tax rate et on workers. this latter solution involves an optimal rule for the provision of public inputs closer to the production efficiency condition, minimising the differential effect that the presence of unemployment creates in the discussion on optimality. consequently, the behaviour of federal government becomes a crucial issue to determine the effect of unemployment on the achievement of the production efficiency condition in the provision of public inputs. this is what we study in the next section. the ability of the federal government to replicate the centralised outcome a common way of correcting vertical (tax and expenditure) externalities is to assume that the federal government acts as a stackelberg leader vis-a-vis the lower level governments. in such a context, the sequence of the game is as follows. first, the federal government decides on et , f , s and, residually, on b , while taking into consideration the states' reactions to changes in federal policy variables. second, the state governments determine g and et , treating as exogenous all the decision variables of the upper-level of government. despite the fact that the federal government is the first-mover, we are not here strictu sensu in the presence of a pure stackelberg leader since it lacks enough policy instruments that are strategically complementary (or substitute) to the instruments of the follower(s). under the new conditions, the optimisation problem facing the federal government can now be stated as follows:      ffbee kubunmkwknuwmax   )( (17) 0)()1(..  ksbnmkkkntts fe  ),,,,,( nmstgg fe  (18) ),,,,,( nmsttt feee  (19)  gwnn , .eo ww  5 it is straightforward to show that with full employment no vertical (tax and expenditure) externalities appear. martinez and sjögren ● vertical externalities with lump-sum taxes 81 expressions (18) and (19) are the states' reaction functions.6 as written above, given that we have set up lump-sum taxes on labour income, there is no scope for vertical tax externalities. in other words, the changes in the federal tax rates do not affect the marginal cost of the public funds perceived by the state governments and, consequently, the state tax rates. therefore, for solving the federal problem, some information on comparative statics of these reaction functions is required. to do that, we start from the first-order conditions of states (15) and (16).7 differentiating the functions  and  (and ignoring superindex "e" for sake of simplicity in the notation) produces: 0 fsttg ddsdtdtdg f  (20) 0 fsttg ddsdtdtdg f  (21) this two-equation system can be expressed using a matricial form as follows (and after solving for dg and dt ):                                  fst st tg tg d ds dt dt dg f f   1 (22) from (22), we can retrieve: )( ttttt ag dt dg  (23) )( ststs ag ds dg  (24) )( fff ttf agd dg   (25) )( tgtgt at dt dt  (26) )( sgsgs at ds dt  (27) )( fff ggf atd dt   (28) where a is tgtg   1 . returning to the federal government´s problem, it is clear that its budget constraint can be written as    nm snt feb   1 . plugging this into the objective function (17), we obtain the first-order conditions for the policy variables of the federal government: 6 both equations are not fundamentally reduced forms since ),( gwnn  ; the next technical developments are, however, fully consistent with the complete definition of the functions involved. 7 the first-order condition (14) can be ignored in this analysis. in a sense, this expression does not admit any influence from federal variables and, consequently, it does not matter at this point. anyway, expression (14) can be easily inserted in (15) without modifying substantially the analysis below. european journal of government and economics 3(1) 82 0)()( )())(()1()(:)(   tg b tgtgn f tgttt b t ee gnugwngnfu gbtbbunmtuntfoc (29a) 0)()()( )())(()()(:)(   f ggn f gt b g bef ugwngnfu gbtbbunmgnutunfoc ff fffff    (29b) 0)()( )())(()()(:)(   sgsgn f sg b sgsts b s e gwngnfu gnugbtbbunmtunsfoc (29c) 0)()1(:)(  ksbnmkkkntfoc fe  (29d) taking into account that b can be residually obtained from the above four equation-system, we simplify (29a)-(29d), which gives us the following results: 0tt (30) n t f    (31) , 1 n ts  (32) where ),( gnfw n , (23)-(25) and the corresponding partial derivatives of  and  (according to (15) and (16)) have been used. what is implicitly established in (30)-(32) is the inability of federal government to affect states' behaviour. one conclusion is that the federal tax rate on employed workers, et , has no effect on the corresponding state tax rate, et (equation (30)), but also none of the policy variables of the upper level of government has any impact on the state provision of public inputs. indeed, from expressions (23)-(25), it is clear that 0 st ggg f , that is, there is no way through which the federal government can modify the provision of public inputs. the unique impact of the federal policy variables ( f and s on et ) is trivial: an increase (decrease) in some of them reduces (increases) the state tax rate in a magnitude given by the number of employed workers n . therefore, the highest level of government is not able to replicate not only the first-best outcome of (9) but also the optimality rule for the provision of public inputs in a unitary country with unemployment.8 new instruments for the federal government: complementary public inputs things may be different if the federal government is also in charge of providing a public input, fg , which is assumed to be complementary with the state public input (now denoted sg ). this modification means that the model becomes more realistic in the sense that different levels of government are now jointly involved in financing complementary public infrastructure projects. this modification of the model implies that the production, profit and labour demand functions are modified as follows: 8 anyway, we must be aware that the first-best values for et and et are guaranteed in each scenario as long as they are lump-sum taxes. martinez and sjögren ● vertical externalities with lump-sum taxes 83       ggknggknf fsf  1,,, (33)   ,,, wnggnf sf  (34)              1 1 111 1 ,, wggggwn sfsf . (35) as before, combining (34) and (35), the profit function can be written as follows:  .,, sf ggw in a unitary country, the government maximises   fue kuunmkknuw  , subject to   0 bnmkkgkgkkn sffe  . in a situation characterised by full employment ( nm  ), the optimal provision of public inputs is given by the standard production efficiency condition: 1 sf gg ff . by contrast, when unemployment appears as a result of non market-clearing wage rate, the first-order conditions w.r.t. fg and sg are, respectively:     1:  ffff ggeg ue gf fbnn uun gfoc   (36)     1:  ssss ggeg ue gs fbnn uun gfoc   (37) it is straightforward to show that when the government is concerned with the level of employment, if the effect of, say, the state public input on labour demand is higher than the equivalent effect by the federal public input ( fs gg nn  ), then the optimal amount of sg will exceed fg . in a decentralised environment, in which both the federal and the state governments behave as nash competitors, the first-order conditions for fg and sg are, respectively:     1:  ffff ggeg ue gf fbntn uun gfoc  (38)     1:  ssss ggeg ue gs fbntn uun gfoc  (39) comparing these expressions with (36) and (37), it is clear that both types of public inputs will be underprovided if governments set positive tax rates on employed workers. under these circumstances, the levels of fg and sg will be below the optimal ones derived from a centralised setting. in other words, each level of government decides a level of public input without considering its impact on other jurisdictions. consequently, there now exists a double vertical expenditure externality from each level of government to the other. the question now is whether the federal government, behaving as stackelberg leader, is able to replicate the second-best outcome. recall that the answer to this question was "no" in a setting in which the federal instruments were et , f , s and b . with the federal government also providing a public input, its optimisation problem is now: european journal of government and economics 3(1) 84       0)()1(.. )(   kskgbnmkkkntts kubunmkwknuwmax ffe ffbee   (40) ),,,,,,( ffes gnmstgg  (41) ),,,,,,( ffeee gnmsttt  (42)  fs ggwnn ,, .eo ww  note that the states' reaction functions (41) and (42) now include a new argument: the federal public input fg . as before, we first need to know some comparative statics of these functions. equations (23)-(28) are still valid in the new context -with a slight change: the term a must be substituted by a -(see below)and we only have to add the corresponding response of sg and et to the new federal policy instrument fg . particularly, we can write: )( ff gtgtf s a dg dg  (43) ),( fsfs ggggf adg dt  (44) where a is tsgtsg  1 . in this regard, a significant difference appears when comparing these new results with the previous ones. while in section 3 the federal government only had a very limited (and trivial) impact on state tax rate t (recall expressions (30)-(32) and the fact that 0 st ggg f ), things are now quite different. consider first the case of f s dg dg ; after some algebra manipulations it can be seen that the effect of changes in the federal public input on the state provision of public inputs is given by:       .0/ /     ssssss fsfsfs gggg ue gg gggg ue gg f s ftnuun ftnuun dg dg   this means that an increase in the federal public input encourages the provision of the state public input. that is, there is an additional channel through which the federal government can affect states' behaviour. in the case of the state tax rate, something similar happens: 0       fs gf s gf n dg dg n n t dg dt . but here the effect of federal public input on state policy variable is not so clear. indeed, an increase in the federal public input may lead to either an increase or a decrease in the state tax rate on employed workers. anyway, it is worth noting that again federal government may affect states' behaviour, which was not possible under the previous assumptions. given this, the first-order condition for the optimal provision of fg is as follows: martinez and sjögren ● vertical externalities with lump-sum taxes 85       .1)( :      f s ggf s gg f ue dg dg g ue gf dg dg nnbt dg dg ntn dg dt n uunuun gfoc sfsf f s sf  (45) after some algebra manipulations, it can be shown that to replicate the secondbest condition (36) requires to hold: .fs g ue f s g fb uu dg dg n           (46) if the individual utility is assumed to be linear ( ccu )( ), it is straightforward to prove that both sides of expression (46) have the same sign. hence, to replicate the second best outcome for the provision of public inputs is a real possibility when federal government can spend money in public inputs which are complementary to state public inputs. concluding remarks vertical externalities usually involve challenges for efficiency in federal countries. sharing taxes between different levels of government or the provision of certain public expenditures with effects on other tiers of government revenues imply deviations from the optimality rules, which would be obtained in a centralised world. however, the presence of vertical (tax and expenditure) externalities can be disregarded if lump-sum taxes are used. indeed, the idea of governments affecting fiscal decisions taken by others requires distorting taxes able to modify households' behaviour. all these general statements have to be qualified in the presence of unemployment, and this has been what we have done in this paper. particularly, we have built a simple model with lump-sum taxes and unemployment in which the optimal rule for the provision of public inputs depends on whether the structure of the country is federal or not. indeed, while there is no scope for vertical tax externalities (the fact of using lump-sum taxes here is crucial), a deviation from the second-best outcome takes place when states are in charge of the provision of productivity-enhancing public factors and the federal government finances unemployment benefits. we have confirmed that the optimality condition for the provision of public inputs must consider the impact of this type of public expenditure on employment and, consequently, on public spending in unemployment benefits. as the production efficiency condition for public inputs is not satisfied even in the case of a centralised country, we have analysed what would occur when states behaving as nash players take part in the game. since sub-national governments do not take into account the effect of their public expenditures on unemployment benefits, the over-provision of public inputs (compared to the first-best case with full employment) is lower with a federal structure than in a unitary country. when we have wondered about the capability of federal government to replicate the outcome of a unitary country, we have assumed that the upper level of government behaves as a stackelberg leader, considering the states’ reaction functions. under such a scenario, we have concluded that, unlike previous papers, federal government is not able to internalise the vertical expenditure externality. federal policy variables have no impact on states' decision variables. in part, this is caused by using lump-sum taxes; indeed, distortionary taxation can affect agents' behaviour and this is the way through which all the effects of public inputs can be internalised. by contrast, when the federal government is also in european journal of government and economics 3(1) 86 charge of providing a public input which is complementary to the state public input, it is possible to replicate the second-best outcome for the optimal provision of such as public inputs. a number of issues arise for further research. asymmetries at regional level in the federation can be taken into consideration. given our federal budget constraint, the characterisation of equilibria may then involve that not all the resources collected by the upper level of government in a region must be spent in such territory; consequently, some possibilities for horizontal redistribution arise and even for explicit equalisation schemes. also under this framework, in the presence of mobile production factors, phenomena of tax competition may take place, with the consequent effects on efficiency and regional labour markets. a third avenue for further research could be based on an alternative way for including unemployment in the model. let think us, for instance, of a system of generous enough unemployment benefits and in which the workers take labour decisions. as a policy implication we would underline how important the coordination of different levels of government is to attain social welfare gains. indeed, the design of federal and state fiscal policies must take into account the magnitude of their cross effects on the tax revenues of other tiers of government. particularly, this is true in the case of public infrastructure because this type of government expenditure is very vulnerable to public spending cuts and its benefits are very visible. increasing the coordination in the provision of public transport infrastructure (some roads may be provided at the regional level, whereas railways may be provided by the federal government) translates into more social welfare, part of which will be in terms of employment. this would be especially appropriate in countries like spain, where the unemployment rates have reached extraordinarily high values in the aftermath of the great recession. this is especially pertinent in the context of fiscal austerity of many developed countries in the aftermath of this recession. growth-enhancing policies such as those related to public infrastructure projects are able to generate positive fiscal externalities in the form of reduced public spending in unemployment benefits and increased tax revenues from labour taxation. this is a valuable benefit that should not be underestimated when designing economic policies. references boadway, robin and jean-françois tremblay (2006) ‘a theory of fiscal imbalance’, finanzarchiv/public finance analysis 62 (1): 1-27. dahlby, bev and leonard s. wilson (2003) ‘vertical fiscal externalities in a federation’, journal of public economics 87(5/6): 917--930. keen, michael (1998) ‘vertical tax externalities in the theory of fiscal federalism’, imf staff papers 45 (3): 454-485. kotsogiannis, christos and diego martinez (2008) ‘ad valorem taxes and the fiscal gap in federations’, economics letters 99 (3): 431-434. martinez, diego (2008) ‘optimal federal taxes with public inputs’, finanzarchiv /public finance analysis 64(4): 422-433. martinez, diego and a. jesús sanchez (2010) ‘a note on the optimal level of public inputs’, social choice and welfare 34(3): 363-369. martinez, diego and tomas sjongren (2013) ‘can labor market imperfections cause overprovision of public inputs?’, journal of economic research, 18 (2): 135 146. ogawa, hikaru, yasuhiro sato and toshiki tamai (2006) ‘a note on unemployment and capital tax competition’, journal of urban economics 60(2): 350-356. martinez and sjögren ● vertical externalities with lump-sum taxes 87 sato, motohiro (2000) ‘fiscal externalities and efficient transfers in a federation’, international tax and public finance, 7:119-139. microsoft word ejge_02_02_043.doc european journal of government and economics volume 2, number 2 (december 2013) issn: 2254-7088 137 value added tax and price stability in nigeria: a partial equilibrium analysis marius ikpe, federal university, ndufu-alike, ikwo, nigeria alwell nteegah, university of port-harcourt, nigeria abstract the economic impact of value added tax (vat) that was implemented in nigeria in 1994 has generated much debate in recent times, especially with respect to its effect on the level of aggregate prices. this study empirically examines the influence of vat on price stability in nigeria using partial equilibrium analysis. we introduced the vat variable in the framework of a combination of structuralist, monetarist and fiscalist approaches to inflation modelling. the analysis was carried out by applying multiple regression analysis in static form to data for the 1994-2010 period. the results reveal that vat exerts a strong upward pressure on price levels, most likely due to the burden of vat on intermediate outputs. the study rules out the option of vat exemptions for intermediate outputs as a solution, due to the difficulty in distinguishing between intermediate and final outputs. instead, it recommends a detailed post-vat cost-benefit analysis to assess the social desirability of vat policy in nigeria. jel classification e03; e62; e63 keywords value added tax; price stability; partial equilibrium analysis; static model; nigeria european journal of government and economics 2(2) 138 introduction one of the means by which government increases its internally generated revenue is value added tax (vat). this is a tax on the supply of goods and services which is eventually borne by the final consumer, but collected at each stage of the production and distribution chain. vat as a concept was first introduced by france in 1954, and has over time been embraced by well over 70 countries. it has in recent time become a major source of revenue in many developing countries, including the sub-saharan african countries. shalizi and squire (1989) found that vat accounted for about 30 percent of total tax revenue in ivory coast, kenya and senegal in 1982. bogetic and hasan (1993) found that indonesia introduced vat in 1983, and by 1988, the ratio of vat revenue to gdp had risen to 4.5 percent. this impressive record in virtually all countries where it was introduced clearly influenced the decision to introduce vat in nigeria in january 1994 as a replacement for the existing sales tax. it was imposed on all goods manufactured in nigeria, as well as on the goods that were imported and sold domestically. the federal inland revenue service (firs), the agency in charge of tax administration in nigeria, pointed out that vat is a consumption tax that is relatively easy to administer and difficult to evade, and has been embraced by many countries (firs, 1993a; 1993b; 1993c). in this context, it becomes necessary to empirically examine the likely macroeconomic impact of vat administration. evidence so far supports the view that vat is already a significant source of revenue in nigeria. for instance, vat revenue in the year of its inception (1994) was n8.194 billion, which was 36.5 percent greater than the projected n6 billion for that year (ajakaiye, 1999). however, the members of the organised private sector have been voicing their reservations in the sense that vat is taking a toll on the prices of their products. from an economic point of view, one expects the price of goods subject to vat to rise, however, beyond this expected rise, businesses are taking advantage of the existence of vat to increase prices of goods and services arbitrarily. according to aruwa (2008), the resulting price increase has led to higher inflation. this may have prompted mclure (1989) to state that policy makers should be concerned about the macroeconomic impact of vat, especially on prices, output, income and consumption, before considering its adoption. a few empirical works on the subject exist in the context of the nigerian economy. ajakaiye (1999) undertook the most detailed study for nigeria, including an extensive investigation of the impact of vat on key sectoral macroeconomic aggregates, by using a computable general equilibrium (cge) model of the nigerian economy. unfortunately, the study was carried out when vat was only six years old in nigeria, too early to get reliable conclusions on its impact on other macroeconomic aggregates. besides, from 1999 to date, the economic environment in nigeria has undergone a number of changes. for instance, there was a transition from a military to a democratic regime. as a result of the aforementioned factors, there is need for a re-examination of the possible macroeconomic impact of vat in nigeria, especially on the price level. the results of investigations of this kind will provide a basis for minimising the adverse effects of vat, while consolidating its benefits. this study seeks to assess the macroeconomic impact of vat on general price levels in nigeria by means of a partial equilibrium analysis. in particular, the study specifically seeks to estimate the price elasticity of vat. the paper first gives an overview of vat and inflation in nigeria and reviews the empirical literature. next, it deals with methodology, conceptual issues and data, before presenting the empirical results and a discussion. finally, the conclusion follows and presents some policy implications and a research agenda. ikpe and nteegah ● value added tax and price stability in nigeria 139 overview of the nigerian economy overview of vat and its administration in nigeria vat was introduced in nigeria in 1993 by the vat act no. 102 of 1993 as a replacement for the sales tax that was in operation in the federal capital territory. it was the outcome of dr. sylvester ugo’s study group on indirect taxation in november 1991. it was designed as a consumption tax payable on goods and services consumed by individuals, government agencies or business organisations. nigeria operates a vat rate that does not synchronise with the economic community of west african states (ecowas) protocol. ecowas adopted a uniform vat protocol due to the constant movement of people and goods across the countries in the region, and the need to be subject to similar conditions. under nigeria’s influence, the ecowas advisory rate has been reduced to 10 percent, while nigeria, despite being a signatory of the protocol, currently operates the lowest vat rate across the sub-region, at 5 percent. it should be noted that, since its inception in 1993 and subsequent implementation in 1994, the income tax burden has been reduced twice (company income tax from 35 to 30 percent and personal income tax from 30 to 24 percent), but the vat rate has remained static at 5 percent. exemptions granted to reduce the distortions of vat create a lot of complexities, lack of transparency and arbitrariness in terms of application and enforcement. hence, the government is affected by high levels of exemptions and a low vat rate. the nigerian gross product vat model is one that tries to maximise tax by disallowing cost. it however allows for restrictions on the recovery of vat paid on capital terms given that the cost of capital is amortised and spread across items. currently, 17 categories of goods and 24 categories of services are vat-eligible and all imports are vat-eligible, whether raw materials or finished goods. the benefit of vat in nigeria since its inception cannot be overemphasised. it has increased the revenue of nigeria over time, so that it is now the third highest revenue earner for the federal government, next to company income tax and petroleum profit tax. secondly, it has also reduced the tendency of tax evasion. however, there are increasing complaints from various quarters, especially the organised private sector, about the effects of vat on their operating costs and the prices of their products (ajakaiye, 1999).1 inflation and central bank of nigeria policy response inflation had its bitter toll on the nigerian economy, and monetary and fiscal policies among others have been developed to reduce it. the central bank of nigeria (cbn) has the statutory responsibility of formulating and implementing monetary policy with an emphasis on price stability. the inflationary trend has been cyclical since the mid-1970s, peaking in 1988, 1989, 1992, 1993, 1994, 1995, 1996, 2001 and 2005. the implementation of the recommendations of the udoji committee of 1975 and the hosting of black and african festival of arts and culture (festac) in 1977 constitute two events that had significant impacts on the history of inflationary trend in nigeria. the udoji committee, which doubled the basic minimum wage in the public sector in 1975, represents a climax in inflationary tendencies that led to widespread strikes and unrest in the private sector, on which the udoji recommendations were not binding. this cost push factor further crippled productivity and increased inflation as the economy’s level of productivity could not match increased money supply and aggregate demand. on the other hand, the hosting of festac in 1977 helped to compound the problem of macroeconomic instability, as the resulting public spending undermined the government’s traditional 1 kakaki online magazine, 4 august 2011; peoples daily newspaper, 5 april 2013. european journal of government and economics 2(2) 140 objective of ensuring fiscal discipline, and the resulting inflationary pressure continued unabated (fatukasi, 2005). in the past, the government under various administrations has adopted different measures for dealing with the situation. one of the measures taken by the monetary authorities (cbn) in recent times was a move from its traditional monetary policy to inflation targeting. since the last obasanjo regime, the primary objective of the authorities has been the attainment of a single digit inflation rate. with this, the authorities have been able to bring down the rate of inflation to a relatively mild level. the inflation-vat nexus the current study critically examines and analyses the existing relationship between inflation and vat using trend analyses for each of the aggregates. the result of this is shown in figure 1 below. figure 1. evolution of inflation and vat revenue, 1994-2010 0 10 20 30 40 50 60 70 80 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 year ra te ( % ) 0 50000 100000 150000 200000 250000 300000 m il li o n s o f n g n inflation (left axis) vat (right axis) vat revenue has been on the increase over the whole study period ever since its introduction into the nigerian economy in 1994. inflation, on the other hand, is observed to have decreased steadily to a lower level in the year 2000, from a previously higher level in 1994 and 1995. it increased again in 2001, but decreased thereafter in 2002, after which it remained stable up to the year 2005. beyond 2005, inflation decreased to an all time low in 2007, increased again in 2008, but then remained stable until 2010. from the analysis above, which fleshed out the trend of vat within the study period, and the behaviour of inflation that follows, a naïve analyst will quickly be drawn to the conclusion that inflation does not respond to vat policy outcomes under the nigerian context within the period under investigation. however, it may not be the case, given the fact that inflation in modern economies is never left to take its natural course, but is rather subjected to various anti-inflationary measures aimed at maintaining stability in prices. in other words, inflationary statistics reflect more the impacts of measures by the monetary authorities aimed at ensuring price stability. the conclusion drawn from the foregoing is the fact that the trend analysis might not truly have reflected the existing possible connection between vat policy and the level of prices in nigeria within the period being investigated. this might be due to the influence of monetary anti-inflationary measures by the cbn to ensure stable prices. ikpe and nteegah ● value added tax and price stability in nigeria 141 empirical literature few empirical works exist on the subject of vat especially in developing countries. extensive studies have been done on the impact of indirect taxation in developing countries in general, and nigeria in particular. naiyeju (1996) argues that the benefits from any tax depend on the extent to which it is properly managed. how tax law is interpreted and implemented, as well as its publicity, will determine how a particular tax is able to meet its objectives. the concern about the economic impact of vat led shoup (1989) to argue that it is all the more important because it may cause consumers to reduce their consumption of certain commodities that have direct and/or indirect effects on labour productivity. at a different level, some authors have raised arguments in favour of the computable general equilibrium (cge) model, which they argue is preferred to partial equilibrium analysis for the assessment of the impact of vat on any given economy. mclure (1989) was the first to highlight his preference for the cge model, which is an economy-wide framework that incorporates the interactions and feedbacks among demand, production and income. within this model, the relevant variables are adjusted until production and consumption decisions are consistent. following the same line of argument, ajakaiye (1999) undertook an analysis of the impact of vat on key sectoral macroeconomic aggregates, using a cge model that he argues to be suitable for nigeria. from the results of its model simulations for three scenarios, he concludes that the scenario where vat is treated in a cascading manner (i.e. where it is viewed as a cost) by the vat-eligible organisations, and vat revenue is re-injected into the economy, price, consumption, expenditure, output and income effects will be most deleterious, and this best approximates the nigerian situation. in a study of instability in government revenues and expenditures in less developed countries, lim (1983) observed that tax revenue instability was the major cause of expenditure instability within the period 1965 to 1973. bleaney, gemmel and greenaway (1995), with particular reference to sub-saharan africa, analysed the sources and the consequences of revenue instability in developing countries, and found that revenue instability is more common in poor, more open and more inflationary economies. furthermore, ebeke and ehrhart (2010) in a study on the sources and consequences of instability in tax revenues in sub-saharan african countries, using panel data for 39 countries over the period 1980 to 2005, give credence to bleaney, gemmel and greenaway (1995), guillanmont et al (1999), fatas and mihov, (2003), telvi and vegh (2005), furceri (2007), loayza et al (2007), thornthon (2008) and diallo (2009). ebeke and ehrhart (2010) argue that tax revenue instability in sub-saharan africa leads to public investment and government consumption instability, which in turn generates a lower public investment ratio, and is therefore detrimental to long-term economic growth. the need to specifically focus on the domestic economy, and vat in particular, may have led owolabi and okwu (2011), as reported by worlu and nkoro (2012), into the examination of the contribution of vat to the development of lagos state using simple regression models as abstractions of the respective sectors considered in the study. the study, which considered a vector of development indicators as dependent variables, regressing each on vat revenue, found that revenue contributed positively to the development of the respective sectors considered. it was however found to be statistically significant in the development of the agricultural sector only. unegbu and irefin (2011), also focusing on the domestic economy, carried out research on the impact of vat on economic and human development of emerging nations from 2001 to 2009, using regression discriminant analysis and anova. the outcome of the investigation revealed that vat has a significant impact on the expenditure pattern of adamawa state within the study period. european journal of government and economics 2(2) 142 from the foregoing analysis, ajakaiye (1999) remains the closest attempt at extensive examination of the macroeconomic impact of vat in nigeria. the study however is limited by the issue of the insufficient time lag necessary for proper alignment of the policy with other macroeconomic aggregates that is needed for better evaluation of vat policy in nigeria. this paper tries to overcome this limitation and some others, such as regime change, and it focuses on the impact of vat on the price level. methodology variables and data the dependent variable is inflation (inf), as measured by the annual rate of growth of the consumer price index (cpi), which is the most commonly used index in nigeria. the national bureau of statistics (nbs) computes the cpi for nigeria. the independent variables are inflation fundamentals, such as the fiscal deficits as a percentage of gdp (fd), the growth rate of the money supply (grm2), the real interest rate (rint), the value added tax (vat), and the real exchange rate (rexg). the data employed in the analysis span over the period 1994 to 2010. the inflation rate (inf) and fiscal deficit as a ratio of gdp (fd), and vat as well as broad money supply are sourced from the cbn’s annual statistical bulletin. the cbn publishes processed data on these aggregates annually. the real interest rate (rint) and real exchange rate (rexg) are sourced from the african institute of applied economics (aiae). processed data on these aggregates are available in the data bank of aiae (2010). broad money (m2) is adopted as the concept of money supply. its growth rate is calculated as a ratio of the amount by which the current period level of money supply differs from that for the preceding period level. model specification in modeling the impact of vat on the price level, we follow fatukasi (2005) in combining the structuralist, monetarist and fiscalist approaches to inflation modelling. the econometric equation is specified in dynamic logarithmic form as loginft = β0 + β1logfdt = β2loggrm2t + β3logrintt + β4logvatt + β5logrexgt + vt where log stands for the natural logarithm, v for the error term, t for the time parameter, and β1, β2, β3, β4, β5 are the elasticities of rates of fiscal deficits as a ratio of gdp, growth rates of money supply, real interest rate, and real exchange rates, respectively. a priori expectation is that β1, β2, β4, β5 >0, while β3<0. empirical analysis estimation results because macroeconomic variables are known to exhibit random-walk behaviour, we had to examine the stationarity properties of the variables in the model by means of an augmented dickey-fuller (adf) stationarity test. the results are presented in table 1. ikpe and nteegah ● value added tax and price stability in nigeria 143 table 1: results of augmented dickey-fuller (adf) stationarity test variables adf test statistics critical values % order of integration inf 5.121 1 i (1) fd 5.198 1 i (1) grm2 6.087 1 i (1) rint 3.710 1 i (1) vat 3.833 1 i (1) rexg 4.012 1 i (1) results of the adf test show that all the variables are stationary after first differentiating. this implies that the variables are integrated as order 1 (i.e. i(1)), and should enter the model in their growth forms (i.e in their differentiated forms). this is required by the fact that regressions using non-stationary variables lead to results that cannot be relied upon for predictions, so they must be differentiated. because the sample size for the study is not large enough to be considered for long-run analysis, the study avoided being drawn into the conventional test for long-run equilibrium relationships between the dependent and independent variables which would have been the case, given the coincidence of order of integration between the dependent variable and the set of independent variables. as a result, analysis herein is based on the static (multiple regression) model. moreover, when forecasting we do not bother about time frame, but about stationarity of data used, so that the data can forecast well, irrespective of the sample size. table 2: determinants of inflation (inf) independent variables/ constant coefficients t values c 60.879 1.248 fd 0.437 1.076 grm2 1.987 1.054 rint 1.082 12.385 vat 5.777 2.696 rexg 4.812 0.899 r 2 = 0.97 adj-r 2 = 0.95 f-statistic = 66.62 d–watson = 1.75 the ordinary least squares (ols) regression technique was employed in the estimation of the model. the estimation was carried out after making sure that the variables in their behaviours conform to the assumptions of the classical normal linear regression model (cnlrm). efforts were also made to ensure that the model adheres to the principle of parsimony using the akaike information criterion (aic) and the swartz bayesian criterion (sbc). results of the estimation as presented in table 2 show that two (rint and vat) out of the five explanatory variables are statistically significant at the conventional 5-percent level of significance, and have the theoretically expected signs. the coefficient of multiple determination (adjusted r2) is very strong at 0.95, which indicates the power of the explanatory variables in explaining variations in the rates of inflation. the model has very high f-statistics, showing that all the independent variables are non-zero at 95 percent level of confidence. the value of the durbin–watson statistics on the other hand reveals the presence of negative auto-correlation in the model that can be attributed to the quality of the data used. the result of the white heteroscedasticity test failed to reject the hypothesis of homocedasticity in the data, which variance can be assumed to be constant over time. from the correlation matrix, the model was observed to be free from any multicollinearity problem, given that all the pair-wise correlation values in the model fell well below the 0.8 rule of thumb mark. the jarque-bera (jb) test of normality failed to reject the hypothesis that the residuals are normally distributed. the jb statistic is given as 0.78276, and the probability of such a high value is 0.701778 . the conclusion from this is the fact that the residuals are normally distributed. european journal of government and economics 2(2) 144 discussion of results the analysis reveals that the main variable of interest, which is vat, exerts an upward pressure on price levels within the period studied. it is statistically significant and strong in influencing the rate of change in the price level. the strong positive impact on prices is most likely due to vat charges on intermediate outputs. it is however difficult to draw lines between these and final outputs in view of the fact that the final result of a given production process could be the input of yet another production process, whose outputs are successively subject to vat. when this happens, multiple vat burdens become the norm, and this translates to increases in prices of goods and services. from another perspective, the burden of vat for producers whose inputs are intermediate outputs amounts to an increased cost of production. the consequence of this is a reduction in the output level, and subsequent increases in unit prices, given the level of aggregate demand. ajakaiye (1999) has earlier reported that vat is more deleterious when viewed as a cost. furthermore, the result reveals a negative significant impact of real interest rates. the strength of this effect is, however, very weak in influencing the rate of change in price levels. this outcome reveals that although real interest rates significantly affect inflation in nigeria within the period studied, it is not a major factor to be considered when it comes to regulating the level of prices. an examination of this outcome buttresses the need for one to apply caution given that the weak impact of real interest rates (rint) on prices might have been as a result of the influence of funds from alternative sources of investment financing in nigeria. many investors are exploiting this to their benefit. notable among these sources of finance for investments are microfinance banks. these are banks created to meet the credit needs of a social segment for which the high cost of borrowing from the conventional banks (deposit money banks (dmbs)) does not adequately cater. credits offered by microfinance banks are often high-jacked by big time investors who now use it as means of getting funds at low rates of interest to compliment the high cost of funds available to them from dmbs. secondly, remittances constitute another alternative source of investment financing. nigeria is a country that both gives and receives remittances. greater proportions of remittance inflow are channelled into investments at little or no cost upon receipt, without necessarily having to pass through the banks. by this, more goods and services are produced at relatively low costs of production, which helps to reduce inflationary pressures at given levels of aggregate demand to the extent that the effect of interest rates on prices is weakened. apart from these variables (vat and rint), other variables are found to be insignificant in determining the rate of changes in the level of prices. among fd, grm2, and rexg, fiscal deficits as a percentage of gdp (fd) and the growth rate of money supply (grm2) are highly correlated in their individual effects on prices. from the theory, money supply is one means of financing deficits. degree of the impact of fiscal deficits on price level depends on the extent to which funds set aside for deficit financing are channelled to productive investments through the development of need and maintenance of existing social infrastructures. it is however unfortunate that rather than the development of new infrastructures and maintenance of existing ones, deficit funds are often diverted into private investments abroad, while some percentages of it are used mainly for external debt servicing. by these means, funds are drained away from the nigerian system. as a result, rather than stimulate the level of economic activities and possibly induce inflation given the level of aggregate demand, fiscal funds instead create a dampening effect on the level of economic activities, hence the negative impact of each of the macroeconomic aggregates on the level of prices in nigeria. in a similar development, the real exchange rate (rexg) is not significant in influencing the rate of changes in the price level. this is not unconnected with the influences of remittances already highlighted above, and the practice of quality trade-offs by nigerian importers in collaboration with their foreign producers. as a ikpe and nteegah ● value added tax and price stability in nigeria 145 way of getting over possible charges of money laundering activity, nigerians abroad often use foreign goods as a vehicle for the transfer of huge sums of foreign currency to nigeria. such goods add to the existing level of goods and services, and are often sold at “give away” prices, thereby neutralising the expected significant impact of rexg on level of prices. similarly, price is one factor that does not obey the law of gravity (“what goes up, must come down”) – prices when up seldom come down. in a market economy, price increases have the tendency of reducing profits for producers/sellers especially for products whose demand is elastic. the common trend among nigerian importers, in collaboration with their foreign producers, is the practice of successively reducing product quality as a way of relatively maintaining existing market prices and profits. over time, consumers are lulled into a false sense of security about the prices of products. little do they know that there has always been a downward trend in the quality of the same products they have been consuming. those that compute the cpi may not have taken this into consideration for the necessary adjustments, even if they are aware of the existing practice. conclusions it is perceived that the vat policy embraced by nigeria in 1994, which has ever since become a significant source of revenue for growth and development, has done more harm than good to the nation’s overall growth and development. the policy’s critics argue that vat induces an upward pressure on prices, the negative consequences of which outweigh whatever gains are derived from the revenue generated, especially as the management of these revenues by the federal government has been problematic. attempts to examine the validity of these claims have led to this study. findings from the empirical analysis reveal that vat has a strong positive significant impact on prices, as it shown by a very high coefficient. the findings support the results of the cge model employed by ajakaiye (1999), which has earlier discovered that vat is more deleterious when viewed as a cost. the implication of this is the instability that it introduces into the nigerian economic system through upward movements in prices. furthermore, when examined from a different perspective, the partial equilibrium analysis adopted herein, by means of a multiple regression model, allows us to explain the effect of vat in isolation from those of other control variables included in the model. besides, our partial equilibrium analysis has the advantage of providing simultaneously the short and long-run impacts of the variables included in the model. further analysis of these findings leads one into the discovery that the strong positive impact of vat policy on prices is in most cases due to multiple vat burdens exerted on individuals and corporate bodies in nigeria, through vat charges on intermediate outputs. the ugly development is one that the agency in charge of vat administration (firs) may not find easy to get over, considering the structure of the vat payment system in nigeria. as a result, it becomes difficult to draw a line between final and intermediate outputs, should one consider tax exemptions for intermediate outputs as a possible option for remedying the situation. such a development leads one into the conclusion that vat as a policy in nigeria, though able to generate much revenue for the government and reduce the problem of tax evasion to a great extent, is not without serious inflationary consequences. the consequence is one that the authorities cannot afford to ignore given the primary role of prices in the modern economic system. it is on the basis of these that the study, as a remedy, recommends further investigation into the macroeconomic effect of vat policy in nigeria. studies on post-vat cost-benefit analysis are needed to ascertain the social desirability of vat policy in nigeria. where vat is discovered to be socially desirable, the result from such a study is european journal of government and economics 2(2) 146 one that can further make provision for better management of adverse situations while consolidating its benefits. in the case of subsequent investigations into the area of macroeconomic problems, partial equilibrium analysis is preferred, in view of its feature of being able to disaggregate effects of given aggregates into short and long-run impacts, necessary for a more detailed evaluation of outcomes. furthermore, this paper advocates the inclusion of remittances in the inflation models of developing economies, from which they are mostly net recipients. remittances constitute an important factor in the inflation models of such economies. references african institute for applied economics (2010) data bank for nigeria's economics statistics, enugu. ajakaiye, dele olu (1999) 'macroeconomic effects of vat in nigeria: a computable general equilibrium analysis', african economic research consortium papers, n. 92. aruwa, suleiman a. s. 82008) 'the administration and problems of value added tax in nigeria' finance and accounting research monitor, 2(2) available at http://ssm.com/abstract=1418661. bleaney, michael; gemmell, norman and david greenaway (1995), 'tax revenue instability, with particular reference to sub-saharan africa', journal of development studies 31 (6): 883-902. bogetic, zeljko and fareed hassan (1993), “determinants of value-added tax revenue: a cross sectoral analysis” world bank working paper-series no. 1203. diallo, oumar (2009) “tortuous road, towards countercyclical fiscal policy: lessons from democratized sub-saharan africa”, journal of policy modelling 31(1): 36-50. ebeke, christian and helene ehrhart (2010) “tax revenue instability in subsaharan africa: consequences and remedies, cerdi working paper no.1192. fatás, antonio and iljan mihov (2003) “the case for restricting fiscal policy discretion”, quarterly journal of economics 118 (4): 1419-1447. fatukasi, bayo (2005) “determinants of inflation in nigeria: an empirical analysis”, international journal of humanities and social sciences 1(18): 262-271. federal inland revenue service (1993a) value added tax decree no. 102. federal inland revenue service (1993b) 'value added tax', firs information circular no. 9304. federal inland revenue service (1993c) 'vat on imports', firs information circular no 9305. gillis, makolm; shoup, carl and sicat, g. (eds.) (1989), value added taxation in developing countries. washington d.c.: the world bank. guillaumont, patrick; jeanneney, sylviane and jean-franciscois brun (1999) 'how instability lowers africa’s growth', journal of african economies 8 (1): 87-107 lim, daniel (1983) 'instability of government revenue and expenditure in less developed countries', world development report, 11(5): 447-450. loayza, norman; ranciere, romain; sirven, luis and jaume ventura (2007) 'macro economic volatility and welfare in developing countries: an introduction', world bank economic review 21(3): 343-357. ikpe and nteegah ● value added tax and price stability in nigeria 147 mclure, charles e., jr. (1989) 'income distribution and tax incidence under vat' in gillis, makolm, carl s. shoup and g. p. sicat (eds) value and taxation in developing countries. washington d.c.: the world bank. naiyeju, j.a. (1996), 'administration of vat in nigeria' firs enlightenment workshop paper, national theatre, lagos. owolabi, oyeleke a. and andy t. okwu (2011) 'empirical evaluation of contribution of value added tax to development of lagos state economy', journal of middle eastern finance and economics 1(9): 24-34. shalizi, z and lynd squire (1989) 'consumption taxes in sub-africa: building on existing instruments' in gillis, makolm, carl s. shoup and g. p. sicat (eds) value and taxation in developing countries. washington d.c.: the world bank. shoup (1989), 'changing among types of vats' in gillis, makolm, carl s. shoup and g. p. sicat (eds) value and taxation in developing countries. washington d.c.: the world bank. talvi, ernesto and carlos vegh (2005) 'tax base variability and pro-cyclical fiscal policy in developing countries', journal of development economics, 78(1): 156 – 190. thornton, john (2008), 'explaining procyclical fiscal policy in african countries', journal of african economies, 17(3): 451-464. unegbu, angus and david irefin (2011) 'impact of vat on economic development of emerging nations', journal of economics and international finance 3 (8): 492503. worlu, christian and emeka nkoro (2012), 'tax revenue and economic development in nigeria: a macroeconomic approach', academic journal of interdisciplinary studies 1(2): 211-23. cyclical synchronization in the emu along the financial crisis: an interpretation of the conflicting signals european journal of government and economics volume 1, number 1 (june 2012) issn: 2254-7088 86 cyclical synchronization in the emu along the financial crisis: an interpretation of the conflicting signals josé ramón cancelo, university of a coruña, spain* abstract we analyze how cyclical synchronization in the emu evolved since the onset of the current financial crisis. the standard measures of cyclical correlation suggest that while the cycle of the euro area became more aligned with the cycles of other developed economies, the emu itself apparently entered into a phase of cyclical divergence. we show that as a matter of fact the bulk of the member states remained closely aligned, and the seeming decline in synchronization is due to a few countries decoupling from the euro area. next we present empirical evidence that the foundations that explain the evolution of the national cycles against the emu aggregate through the crisis were already latent in 2007. greece and ireland deviate from the general pattern, the former because of its loose fiscal policy all along the period 2000-2007, and the latter due to the flexibility of its labor market. jel classification e32; f42; f44 keywords international business cycles; euro area; cyclical convergence; asymmetric responses * address for correspondence: josé ramón cancelo, university of a coruña, faculty of economics and business, campus de elviña, 15071 a coruña, spain. e-mail : jramon@udc.es. doi: https://doi.org/10.17979/ejge.2012.1.1.4278 european journal of government and economics 1(1) 87 introduction cyclical synchronization has always been regarded as a primary indicator to evaluate the running of the european monetary union (emu). since its very formation, the euro area congregated a bunch of countries with marked structural differences, heterogeneous institutional settings, and high risks of experiencing asymmetric shocks or displaying asymmetric responses to common shocks. in spite of that, they agreed to surrender monetary and exchange rate policies to a central authority, and hence to losing control of key instruments to stabilize their economies. it was thought that such loss would be compensated by the endogenous mechanisms of convergence of the currency area, the power of national fiscal policies to offset idiosyncratic shocks, and the adoption of structural reforms that would make the weaker economies more competitive. the first years of the emu witnessed some fluctuations in cyclical synchronization, but the crisis that originated in 2007 casts serious doubts on whether the emu will manage to survive in its current form. for that reason, in this paper we examine how cyclical synchronization in the euro area evolved since the onset of the crisis. more specifically, we address three issues. first, we compare output comovements within the euro area to international developments, to gauge whether the emu displayed some particular behavior in the period. second, we investigate to what extent the observed decline of a broad indicator of intra-euro-area synchronization may be due to a small group of countries decoupling from the aggregate cycle, while the bulk of member states remains closely aligned, or even is increasingly in phase. finally, we seek to identify the determinants of the observed differences across member states, in order to figure out why each country performed the way it did. the paper is organized as follows. after this introduction, section 2 reviews the literature on currency areas, to make clear why cyclical synchronization is so important for a monetary union, and to highlight the factors that strengthen the convergence of the national cycles of its members. section three sketches the methodology for extracting cyclical components from observed data, and to measuring cyclical synchronization. section four reports the empirical findings and discusses their implications for the euro area performance in recent years. section 5 concludes. literature review the theoretical foundations of the emu lie on the theory of optimal currency areas (mundell, 1961). the benefits of joining a currency area are the lower costs for international transactions and the explicit commitment to building long-term relationships with the other member states, while the major drawback is the loss of monetary and exchange rate policies independence. the final balance is casespecific, and must be assessed in an empirical way. the aftermaths of giving up policy autonomy depend on the degree of asymmetry of the shocks and of the transmission channels. if the shocks are common and propagate in a symmetric way, all the members will be at the same cyclical phase and the centralized management of monetary policy will be fully efficient to stabilize the national economies. if, on the contrary, there are idiosyncratic shocks, or common shocks that propagate in an asymmetric way, national cycles will diverge and the common monetary policy will be rather different from the one that an independent, national authority would have adopted. therefore, cyclical synchronization is a central issue to gauge the success of a currency area. even though some authors expressed their concerns on the success of the euro area because of the low level of ex ante synchronization (eichengreen, 1990 and 1993), more recent research pointed out that the formation of a currency area european journal of government and economics 1(1) 88 fosters output comovements across its members (de grauwe and mongelli, 2005). according to this endogeneity hypothesis, cyclical profiles need not be identical when the area is launched, as its operation will promote synchronization. however, some minimum level of output comovements seems to be required at the beginning, to avoid the costs of imposing a common monetary policy to countries that are not in the same phase of the cycle at the first stages of the union. the literature has analyzed in full detail the factors that strengthen cyclical comovements, both from the theoretical perspective and its relevance for the euro area. the most mentioned are trade intensity, financial integration and convergence of macroeconomic policies. price rigidities and labor market regulations are also pointed out, as more flexible economies are better prepared to cope with asymmetric shocks. trade integration is usually considered to be the most prominent factor leading to increased cyclical comovements. nevertheless, the theoretical effect of an increase in trade on the comovement of output is ambiguous, as it depends on the type of goods that are traded. frenkel and rose (1998), see also rose (2000), claims that higher bilateral trade leads to more correlated cycles, on the assumption that the increase in trade is mainly intra-industry trade. if this is the case, any demand or industry shock will have similar effects on the cycles of both countries, and they will move together. but krugman (1991) observed that openness to trade induces higher specialization, and in the medium term the increase in trade is mainly of the inter-industry type. in that event, the same demand or sectoral shock will have asymmetric effects, and trade integration will result in lower correlations across countries. as the final effect is an empirical matter, there has been a lot of research to determine the net contribution of the observed growth in trade within the euro area. most studies find that the association is positive and significant, but there is still an open debate on the actual impact on trade intensity on cyclical synchronization, see the survey by de haan et al (2008). currency unions promote financial integration across members, but its outcome on cyclical synchronization is theoretically undetermined. demand effects arising from savings or investment decisions in one country will affect the real economy in other member states if the links across financial markets are strong. on the other hand, increased bilateral financial flows allow for more efficient allocation of capital, and stimulate specialization of production according to each country’s comparative advantages. if demand effects prevail, financial linkages will propagate any given shock throughout, but if the currency area results in more specialized economies, asymmetric effects will dominate and output comovements will be lower. in the case of the euro area, there is no empirical evidence of a negative impact of financial integration on cyclical convergence, but it is also difficult to find a strong positive relationship between financial linkages and output correlation (de haan et al 2008, dees and zorelli 2011). convergence in macroeconomic policies is seen as another major force to inducing higher synchronization. but, once again, its actual contribution to cyclical convergence must be assessed in each situation, and in the euro area it seems that the outcomes were not as satisfactory as expected. in the 2000s the common monetary policy allowed for inflation differences amongst the member states that translated into differences in real interest rates, in a self-reinforcing process that was one of the major sources of decoupling of some faster growing economies. fiscal policies, which were managed independently by national authorities, were far from optimal, as they tended to be pro-cyclical and fueled divergence between overheating countries and the rest (european commission, 2004 and 2006). finally, the role of flexible product and labor markets has been stressed in recent years. if prices and wages are flexible, changes in the cyclical conditions translate european journal of government and economics 1(1) 89 immediately into changes in competitiveness, reducing the need of large variations in the policy instruments, the duration of the adjustment, and the risk of overshooting. on the contrary, when the markets are rigid and prices are sticky, large drops in quantities are needed to compensate idiosyncratic shocks and the adjustment is much more costly (european commission 2004 and 2005, artis et al 2008). methodological framework in the empirical analysis we apply well established procedures to facilitate the comparison of our results to those previously reported in the literature. we adopt the deviation-cycle approach, where the cyclical component is defined as the deviation of the observed gdp from its long-run trend. it assumes a structural model of the form )1(cpy ttt  where yt is logged gdp at t, pt its long-run trend, and ct the cycle. to carry out such decomposition we use the hodrick-prescott (hp) filter, which estimates the trend as   )2()p()py(minargp t 3t 2 t 2 t 1t 2 tt t 1tt           where t is the sample size,  is the difference operator and  is a penalty parameter that determines the degree of smoothness of the trend; with quarterly data, as we shall consider in section 4, the usual practice is to set =1600. once pt is known, the cyclical component is derived from (1); by construction, it is expressed as a percentage deviation from trend gdp. the properties of the hp filter have been extensively documented, see kaiser and maravall (2001) for a thorough discussion. from the perspective of signal extraction theory, the hp procedure relies on a lowpass filter that separates a low frequency component (the trend) from mediumand short-frequency components (the cycle); the cutoff point is set by . recent research opts for extracting the cycle by using bandpass filters, that assume a structural model of the form )3(ucpy tttt  where ut captures oscillations with periods too short to be considered part of the business cycle. to estimate ct the cyclical band should be defined ex ante, and it is typically assumed to lie between 1.5 and 8 years. some examples of this approach are the bk filter (baxter and king, 1999), the cf filter (christiano and fitzgerald, 2003), and the bandpass variant of the hp filter (artis, 2003). the theoretical properties of the hp filter and the bandpass alternatives are quite different, but there is empirical evidence that the qualitative conclusions on cyclical synchronization are invariant to the specific procedure used to extract the cyclical component. although different methods lead to different cyclical signals for a given time series, the measures of comovement are similar as long as the same procedure to estimate the cycle is used for all the series (altavilla 2004, de haan et al 2008). once the cyclical components are known, the next step is to measure to what extent the cycles move in phase. a variety of approaches have been suggested: dispersion statistics, correlation coefficients, concordance indices, factor analysis, european journal of government and economics 1(1) 90 spectral analysis, etc. the most popular procedure consists of computing bivariate correlations to quantify pairwise relationships, and calculating their mean to get a summary measure. yet, to execute this procedure some practical aspects have to be addressed. the first issue is whether there exists a reference cycle that national developments should be compared to. there has been a long debate on the existence of a euro area cycle, see for instance the review by konstantakopoulou and tsionas (2010), and for the moment no firm conclusion has been achieved. in view of that, some authors do not consider any reference and measure global synchronization by taking the unweighted mean of all the possible pairwise correlations between the member states (gayer 2007, artis et al 2008). another approach consists of selecting a reference cycle in an empirical way, by defining its value at t as the median of all the national cycles at that moment (mink et al, 2007). in this paper we opted for taking the cycle of the euro area as the benchmark, because this is the reference that the european central bank tracks to set its policy instruments. another decision has to be made concerning the time span of observations used to computing the correlation coefficients, usually referred to as the size of the window. this is an extremely relevant issue, as the conclusions may be sensitive to the final choice (european commission, 2006). long windows are to be avoided when the focus is on the changes in the very final part of the sample, as they miss the most recent developments. short windows, however, are known to be more volatile, and to produce artificial drops in the correlations near the turning points of the cycles if the size of the window is less than the duration of the cycle. the empirical literature has considered window sizes ranging from three to ten years (papageorgiou et al, 2010). in particular, the european commission monitors cyclical convergence in the euro area by using windows of 4, 6 and 8 years (european commission 2004, 2006 and 2010). we opted for a window size of four years, which appears to be the shortest span free from spurious drops in correlations. once the coefficient is computed, the result is assigned to the last t of the time interval that was used in its calculation, so the correlation at t measures comovement in the four years up to that point. the bivariate correlations between each member state and the euro area were calculated over a series of rolling windows with a fixed length of four years, to track the change in output comovements over time. synchronization for the area as a whole at each t is measured by the mean value of all bivariate correlations for that moment. empirical results and discussion we use data on quarterly real gdp for the aggregate of the euro area, eleven member states (belgium, germany, ireland, greece, spain, france, italy, the netherlands, austria, portugal and finland), three members of the european union that did not join the currency area (denmark, sweden and the united kingdom), and three external countries (switzerland, japan and the usa). all the data are obtained from eurostat. following the usual practice in empirical studies, the emu aggregate consists of the 12 countries that formed the currency union up to december 2006. quarterly gdp for greece is only available from 2000:1 onwards, so the working sample starts at this date. previous data on the other countries were used to improve the estimates of the cyclical component at the beginning of the sample. the sample information ends in 2011:4, with the exceptions of ireland (2011:3), greece (2011:1) and portugal (2011:3). in these countries the missing quarters of 2011 were forecasted with the restriction that the annual figure should be equal to the european commission forecast for the whole year 2011. figure 1 displays some raw measures of synchronization from 2004:1 to 2011:4. the line for the euro area represents the mean values of the bivariate correlations european journal of government and economics 1(1) 91 between each member state and the area as whole, and captures the degree of intra-euro-area synchronization. the line for the countries of the european union that do not belong to the euro area is computed as the mean of the bivariate correlations of the three countries within this group (denmark, sweden and the united kingdom) with the emu aggregate, and gives information about how the cyclical synchronization within the european union has evolved. the third line reports the mean correlation of switzerland, japan and the usa with the euro area, and is aimed to reflect global trends in economic integration. taken together, the three lines give insight into whether the changes in output comovements within the emu are a particular development of the currency union, or part of a more general european or world pattern. the figure shows that all types of synchronization fell until 2005, and then started to increase up to 2008. the values for 2005 were computed with data for the period 2002-2005, which included the recession of the beginning of that decade and the early stages of the subsequent recovery. national cyclical developments were rather heterogeneous in that period, but became more homogeneous as the expansion consolidated. as expected, cyclical synchronization was higher within the euro area than in the european union or the developed world. the onset of the crisis brought about substantial changes. aside from some transitory, idiosyncratic responses that lowered the correlations dated at the second half of 2008, the contraction in international trade and the financial contagion caused international synchronization to be especially high in 2009 and 2010, to the extent that the mean correlations of the euro area with the rest of the european union and with external countries attained their highest values in the sample period. figure 1. mean cyclical correlations with the euro area for a 4-year rolling window 0.0 0.2 0.4 0.6 0.8 1.0 2004 2005 2006 2007 2008 2009 2010 2011 intra-euro-area with the rest of the eu with third countries at the same time, the emu looked as if it had entered into a phase of cyclical divergence. the mean correlation within the area fell and became smaller than the correlations of the euro area with the rest of the european union and the rest of the world. to confirm that the fall in the mean correlation of the euro area is not a spurious drop due to using a window that is too short, figure 2 plots the results for a 6-year rolling window. despite some changes attributable to the different time span, the figure confirms that the mean correlation for the members of the euro area is falling since 2008, and that in the final part of the sample it is below the two other lines. european journal of government and economics 1(1) 92 figure 2. mean cyclical correlations with the euro area for a 6-year rolling window 0.0 0.2 0.4 0.6 0.8 1.0 2006 2007 2008 2009 2010 2011 intra-euro-area with the rest of the eu with third countries figure 3 corroborates the apparent euro area divergence. at each t it depicts the standard deviation of the eleven bivariate correlations between the cycle of each member state and the emu cycle. an increase of the spread of the correlations is a sign of divergence (gayer, 2007), and it can be seen that the dispersion has been increasing since 2009. figure 3. standard deviation of the bivariate correlations of the cycles of the member states with the euro area cycle, for a 4-year rolling window 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 2004 2005 2006 2007 2008 2009 2010 2011 actually, the features sketched in figure 1 are surprising. first, because the european and international upsurges in synchronization suggest that the current crisis is driven by common shocks that propagate worldwide through symmetric transmission channels, and the intra-euro-area increasing divergence does not match in this context. second, because figure 1 indicates that cyclical synchronization is higher between the emu as a whole and other currency areas european journal of government and economics 1(1) 93 than inside the euro area, an empirical finding that is in opposition to the primary theoretical foundations of monetary unions. a likely explanation to bring together the opposed evolutions of the correlation coefficients in figure 1 is that the decline within the euro area is not a general feature of the emu as a whole, but a particular trait of a small group of member states. if this is the case, one would find large, stable correlations with the euro area aggregate for most members, together will a few countries that are decoupling quite abruptly from the euro area cycle. figure 4 depicts the sequence of rolling correlations of the cycle of each member state with the euro area aggregate from 2004:1 to 2011:4. figure 5 highlights the changes in the correlations through the crisis. for each country, it concentrates on the correlations with the emu dated at 2007:3 and 2011:4; the first set was computed with data for the period 2004:4 to 2007:3, while the second set merges the observations from 2008:1 to 2011:4. to complete the picture, it includes the six countries in the sample that do not belong to the emu, to give an account of the change in the correlations of the euro area with the rest of the european union and the rest of the world. figures 4 and 5 confirm the existence of different cyclical patterns amongst the emu members. the correlations for belgium, germany, france, italy, the netherlands, austria and finland are high and do not exhibit any trend. these countries were closely aligned in 2007 and, except for some minor, transitory decoupling in 2008, have remained approximately in the same situation all through the crisis. the other four member states exhibit remarkable changes. spain and portugal entered into a phase of growing desynchronization, to the extent that in 2011:4 the six correlations of the non-member countries with the euro area were higher than the portuguese, and four were higher than the spanish. greece has totally decoupled from the euro area. ireland evolved in the opposite direction, as its correlation picked up and has been growing steadily since 2009. european journal of government and economics 1(1) 94 figure 4. bivariate cyclical correlations between the member states and the emu, for a 4-year rolling window: whole sequence from the working sample belgium 0.0 0.2 0.4 0.6 0.8 1.0 2004 2005 2006 2007 2008 2009 2010 2011 germany 0.0 0.2 0.4 0.6 0.8 1.0 2004 2005 2006 2007 2008 2009 2010 2011 greece -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 2004 2005 2006 2007 2008 2009 2010 2011 ireland 0.0 0.2 0.4 0.6 0.8 1.0 2004 2005 2006 2007 2008 2009 2010 2011 spain 0.0 0.2 0.4 0.6 0.8 1.0 2004 2005 2006 2007 2008 2009 2010 2011 france 0.0 0.2 0.4 0.6 0.8 1.0 2004 2005 2006 2007 2008 2009 2010 2011 italy 0.0 0.2 0.4 0.6 0.8 1.0 2004 2005 2006 2007 2008 2009 2010 2011 netherlands 0.0 0.2 0.4 0.6 0.8 1.0 2004 2005 2006 2007 2008 2009 2010 2011 austria 0.0 0.2 0.4 0.6 0.8 1.0 2004 2005 2006 2007 2008 2009 2010 2011 portugal 0.0 0.2 0.4 0.6 0.8 1.0 2004 2005 2006 2007 2008 2009 2010 2011 finland 0.0 0.2 0.4 0.6 0.8 1.0 2004 2005 2006 2007 2008 2009 2010 2011 european journal of government and economics 1(1) 95 figure 5.bivariate correlations between the member states and the emu, for a 4year rolling window: summary for relevant dates 0.0 0.2 0.4 0.6 0.8 1.0 bel ger ire gre spa fra ita net aus por fin den swe uk swi usa jap 2007:3 2011:4 these results offer a tentative explanation to harmonize the conflicting signals in figure 1, namely increased international synchronization and growing intra-euroarea divergence. on the whole, large symmetric shocks, worldwide economic integration and international spillovers led to relative highs in international synchronization. but in a few members of the euro area the common shocks launched powerful asymmetric effects, that induced quite idiosyncratic fluctuations. it can be shown that the decline in the intra-emu mean correlation reported in figure 1 is explained for the most part by the contribution of the bivariate correlations between greece and the euro area. when the sequence of mean correlations is computed without the greek data, it is found that the output comovements within the emu have not reduced during the crisis, and that the intra-euro-area synchronization has been higher than the synchronization with the rest of the european union or the rest of the world. the decline in the spanish and portuguese correlations has some influence on the average, but their contribution is not big enough to induce a false impression of divergence for the area as a whole. as a final point, we investigate the factors that may explain why member states behave differently. for doing so we analyze the relationships between the change in the cyclical correlation of the members of the euro area between 2011:4 and 2007:3, and a variety of indicators. the influence of each indicator is assessed individually, as there are only eleven observations and some of them are outliers, as we discuss below, so there are not enough degrees of freedom for a joint appraisal. the variables were selected on the basis of the literature review in section 2, including some that capture latent imbalances and policy management to account for the convergence of macroeconomic policies. all in all, nine indicators are considered: one is for trade intensity with the euro area (12 countries). for each member state, trade intensity in goods is obtained as the sum of exports and imports for 2007 with that partner, expressed in % of gdp. one for financial openness, the net international investment position in % of gdp for 2007. one for labor market rigidity, version 2 of the oecd’s employment protection index for 2007. european journal of government and economics 1(1) 96 two for discretionary fiscal policy: the cyclically adjusted net lending of general government in % of gdp for 2007, to capture the fiscal stance just before the beginning of the crisis; and its sum over the period 2008-2010, as an indication on how national authorities managed fiscal policy in the recent past. one for the loss of competitiveness between 2000 and 2007, the real exchange effective rate computed with the gdp deflator. two for the private credit dynamics, the 3-year average for 2005-2007 of the private credit flow in % of gdp, and the non-consolidated debt of the private sector in % of gdp for 2007. one for excess national demand, the 3-year average for 2005-2007 of the current account balance in % of gdp. all the data were taken from the eurostat web with the exception of the employment protection index, that was obtained from the oecd. most indicators refer to 2007 or the period 2005-2007, as we are interested in determining whether the factors that led to changes in the output comovements for the period of the crisis were already latent before it started. besides, the use of lagged values of the indicators reduces the endogeneity bias (imbs 2004, de haan et al 2008), and simplifies testing whether the relationship is statistically significant. to illustrate the type of association we focus on, figure 6 plots the change in the cyclical correlations between 2011:4 and 2007:3 against the indicator of trade intensity with the euro area. to measure the direction and strength of this relationship we compute the correlation coefficient between the two variables and report its value in table 1, as well as the p-value that tests its significance. figure 6.change in the bivariate cyclical correlation between 2011:4 and 2007:3 against trade intensity with the euro area for 2007 aus bel ita spa gerfra net fin gre ire por -1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0 20 40 60 80 100 120 trade intensity with the euro area in % of gdp c h an g e o f th e cy cl ic al c o rr el at io n . simple inspection of figure 6 reveals that greece is an outlier that distorts the underlying relationship, and a more detailed analysis shows that ireland is another outlier. this is not a special trait of the trade indicator, but a general characteristic of the set of potential explanatory variables that will help to assess the idiosyncratic behavior of these two countries. because of that, for each indicator reported in table 1 three variants of the correlation coefficient were computed: with the data of all the member states in the sample (eleven countries), without greece (ten countries) and without greece and ireland (nine). european journal of government and economics 1(1) 97 table 1. correlation coefficients between the change in output comovements and its potential determinants indicator trade intensity with the euro area 0.32 (0.331) 0.21 (0.561) 0.39 (0.296) net international investment position 0.62 (0.043) 0.70 (0.025) 0.86 (0.003) employment protection -0.34 (0.305) -0.84 (0.002) -0.74 (0.024) cyclically adjusted net lending of general government (2007) 0.77 (0.006) -0.02 (0.963) 0.19 (0.620) cyclically adjusted net lending of general government (2008-2010) 0.45 (0.161) -0.12 (0.740) 0.84 (0.004) real effective exchange rate with gdp deflator -0.10 (0.776) -0.21 (0.563) -0.71 (0.031) private credit flow -0.06 (0.855) -0.18 (0.616) -0.73 (0.024) private debt 0.42 (0.204) -0.20 (0.575) -0.53 (0.143) current account balance 0.56 (0.074) 0.48 (0.156) 0.79 (0.012) notes: see the main text for the definition of the variables; the figures in parentheses are the p-values to test the null hypothesis of no linear dependence all the members without greece without greece and (11 countries) (10 countries) ireland (9 countries) when greece and ireland are filtered out most relationships are statistically significant at the 5% level, and the coefficients have the expected signs. the results in table 1 show that the foundations that explain the evolution of most national cycles vis-à-vis the emu aggregate in the crisis were laid in 2007, in the form of the net international investment position, the level of employment protection, competitiveness developments, the growth of the credit for the private sector, and the current account balance. besides, the fiscal stance in the period 2008-2010 is also relevant, as loose discretionary fiscal policies in the first years of the crisis tended to lower national comovements with the rest of the emu. the only indicators that are not statistically significant are trade intensity and the private sector debt. both point estimates are high and have the expected sign, and it is quite likely that the null hypothesis of no linear relationship has not been rejected because of the low power of the tests due to the small size of the sample. table 1 also gives some hints on why greece and ireland deviate from the general pattern. the greek performance is the consequence of its fiscal stance and the ensuing public debt burden, as the yearly cyclically adjusted net borrowing of the greek government averaged 6.3% of gdp in the period 2000-2007. the current level of the public debt is a major structural weakness, its correction will take a long period where the greek cycle will be out of sync with the euro area, and all through that time greece will continue to be an outlier within the emu. in the irish case the imbalances of the economy in 2007 suggested that ireland would decouple in the course of the crisis, as spain and portugal did. quite the opposite, the irish cycle became more aligned with the euro area cycle, and that explains why the correlation coefficients with the excess demand and credit indicators are not statistically significant when ireland is included. in contrast, the correlation with the employment protection is higher in absolute value and much more significant than when ireland does not enter in its calculation. taken together, these results point at the irish recoupling being mainly explained by the high flexibility of its labor market. such flexibility may have allowed market forces to play a leading role in the adjustment process, reducing the asymmetric impacts of the common shocks that hit the euro area, and compensating the negative starting conditions induced by the overheating of the irish economy in 2007. conclusions cyclical synchronization within the emu has traditionally been a source of concern, but in recent years there are serious doubts whether the euro area will be able to cope with the powerful asymmetric responses to the shocks that launched the financial crisis in 2007. though the crisis is still on the run, it is essential to evaluate its potential consequences on the emu, and this paper aimed to give some tentative empirical evidence on this issue. european journal of government and economics 1(1) 98 as we centered on a short, particular period of time, the data were scarce, and such paucity limited the statistical techniques that could be applied. therefore, the empirical analysis has a number of limitations, and its conclusions should be interpreted with prudence. even so, the methodology developed in the previous sections provided some appealing results on the evolution of cyclical convergence, and on the factors that determined such evolution. in particular, we focused on three major issues. first, we compared synchronization in the euro area to international developments. we found that, on average, the cycle of the euro area became more aligned with the cycles of the rest of the european union and of other developed economies. this result supports the conventional view that the crisis was activated by common financial shocks that propagated worldwide along symmetric transmission channels, leading to growing international synchronization amongst the developed economies in 2009-2010. within the euro area, however, member states gave the impression of entering into a phase of cyclical divergence. furthermore, since 2009 the mean correlation within the emu is lower than the mean correlations of the area with the rest of the european union and the rest of the world, a result that challenges the theoretical foundations of a currency area. as a consequence, we concentrated on investigating the causes of the intra-euroarea performance. we found that the cycles of most member states remained closely aligned to the emu aggregate, while a few members, namely ireland, greece, spain and portugal, reported remarkable changes in their comovements. actually, the apparent decline in the intra-euro-area synchronization is mainly due to the contribution of the greek data. when the sequence of mean correlations is computed only with the data of the ten other member states, it displays no trend along the crisis, and its values are higher than the mean correlations with the rest of the european union and the rest of the world. this finding confirms that large symmetric shocks, economic integration and international spillovers resulted in higher synchronization, both inside the emu and across the developed economies all through the world. in some countries, however, the common shocks unleashed forceful asymmetric effects that induced quite distinctive fluctuations, and such fluctuations were influential enough to distort the general measures of comovement for the euro as a whole. finally, we examined the possible causes of the different cyclical performances of the members of the euro area. we compared the correlations between each national cycle and the emu aggregate in 2011:4 and 2007:3, and appraised to what extent the observed variation could be explained by a variety of potential determinants. most indicators referred to 2007 or the period 2005-2007, to assess whether the factors that led to changes in the output comovements in the course of the crisis were already latent before its inception. for the largest part of members, the foundations of the change in the cyclical correlations can be traced back to 2007: the position of each country in terms of its net international investment position, the level of employment protection, competitiveness developments, private credit dynamics, and current account balance, all of them are statistically related to its cyclical performance in the period 2007-2011. trade intensity and the private sector debt in 2007 were not found to be significant, although the point estimates were quite high and had the expected sign. we also investigated why greece and ireland deviated from the general pattern. the greek performance is the consequence of its loose fiscal policy all along the period 2000-2007, that resulted in a sharp increase of the public debt. the irish recoupling appears to be explained by the high flexibility of its labor market, that allowed market forces to play a leading role in the adjustment process. their contribution compensated the adverse starting conditions induced by the excessive european journal of government and economics 1(1) 99 private demand in 2007, and helped to offset more rapidly the shocks that hit the euro area. the major policy implication stemming from our work is the need that national authorities maintain policy discipline, not only in the current particular circumstances, but also as a general rule. whatever indicator is considered, we showed that most overheating countries in 2007 decoupled from the euro area cycle in the following years, with the consequence that the single monetary and exchange rate policies became exceedingly costly for the member states that reported large positive output gaps before the crisis. endogenous synchronization was not powerful enough to coping with the accumulated national disequilibria. this task has to be tackled by national macroeconomic policies, that should avoid discretionary pro-cyclical biases that fuel internal imbalances. references altavilla, carlo (2004) ‘do emu members share the same business cycle?’, journal of common market studies 42(5): 869-896. artis, michael. (2003) ‘is there a european business cycle?’, cesifo working paper no. 1053. artis, michael., jarko fidrmuc and johann scharler (2008) ‘the transmission of business cycles. implications for emu enlargement’, economics of transition 16(3): 559-582. baxter, marianne and robert g. king (1999) ‘measuring business cycles: approximate band-pass filters for economic time series’, review of economics and statistics 81(4): 575-593. christiano, lawrence and terry j. fitzgerald (2003) ‘the band pass filter’, international economic review 44(2): 435-465. de grauwe, paul and francesco p. mongelli (2005) ‘endogeneities of optimum currency areas: what brings countries sharing a single currency closer together?’, working paper series no. 468, european central bank. de haan, jakob, robert inklaar and richard jong-a-pin (2008): ‘will business cycles in the euro area converge? a critical survey of empirical research’, journal of economic surveys 22(2): 234-273. dees, stéphane and nico zorelli (2011) ‘business cycle synchronisation. disentangling trade and financial linkages’, working paper series no. 1322, european central bank. einchengreen, barry (1990) ‘one money for europe? lessons from the us currency union’, economic policy 5(1): 117-187. eichengreen, barry (1993) ‘european monetary unification’, journal of economic literature 31(3): 1321-1357. european commission (2004) ‘cyclical convergence in the euro area: recent developments and policy implications’, quarterly report on the euro area 3(2): 2738. european commission (2005) ‘growth differences in the euro area’, quarterly report on the euro area 4(2): 19-29. european commission (2006) ‘cyclical synchronisation within the euro area: what do recent data tell us?’, quarterly report on the euro area 5(2): 19-24. european commission (2010) ‘how has the financial crisis affected cyclical differences within the euro area?’, quarterly report on the euro area 9(2): 25-28. european journal of government and economics 1(1) 100 frankel, jeffrey a. and andrew k. rose (1998) ‘the endogeneity of the optimum currency area criteria’, economic journal 108(449): 1009–1025. gayer, christian (2007) ‘a fresh look at business cycle synchronisation in the euro area’, european economy – economic papers number 287. imbs, jean (2004) ‘trade, finance, specialization, and synchronization’, review of economics and statistics 86(3): 723–734. konstantakopoulou, ioanna and efthymios tsionas (2011)‘the business cycle in eurozone economies (1960 to 2009)’, applied financial economics 21(20): 14951513. kaiser, regina and agustín maravall (2001) measuring business cycles in economic time series, new york: springer-verlag. krugman, paul r. (1991) geography and trade, cambridge, ma: mit press. mink, mark, jan jacobs and jakob de haan, j. (2007) ‘measuring synchronicity and co-movement of business cycles with an application to the euro area’, cesifo working paper no. 2112. mundell, robert a. (1961) a theory of optimum currency areas, american economic review 51(4): 657–665. papageorgiou, theofanis, panayotis g. michaelides and john g. milios (2010) ‘business cycle synchronization and clustering in europe (1960-2009)’, journal of economics and business 62(5): 419-470. rose, andrew k. (2000) ‘one money, one market: the effect of common currencies on trade’, economic policy 15(30): 9–45. microsoft word ejge_03_01_010.doc european journal of government and economics volume 3, number 1 (june 2014) issn: 2254-7088 60 determinants of tax morale in spain and turkey: an empirical analysis cevat bilgin, cukurova university, turkey abstract tax morale is defined as the intrinsic motivation to pay taxes, and is closely related to tax compliance. determinants of tax morale need to be investigated for a more comprehensive understanding of tax compliance. in this paper, determinants of tax morale in turkey and spain are analysed on the basis of world values survey data. firstly, descriptive statistics of the variables used in the models are provided. since tax morale is an ordered categorical dependent variable, ordered probit models are estimated separately for turkey and spain to derive the relations between tax morale and relevant variables. marginal effects are computed since the coefficients of the models cannot be interpreted because of the nonlinearity of the estimated models. the marginal effects related to the top level of tax morale category are presented. the independent variables are combined by demographic factors, employment categories, economic status of the respondents and social capital variables. the findings from the estimated model suggest that social capital variables and some of the demographic factors have important effects on tax morale in turkey. confidence variables have positive effects; if taxpayers feel confidence in political entities they are willing to pay taxes. religion and national pride affect tax morale positively. on the other hand, the results are different for spain; social capital variables do not have effects on tax morale. specifically, confidence variables are found to be statistically insignificant. age, education level and the income level have significant effects on tax morale in spain. jel classification h26; c51; c52. keywords tax morale; tax evasion; ordered probit. bilgin ● determinants of tax morale in spain and turkey 61 introduction tax evasion is an important issue in almost all countries. while some taxpayers seek the ways of evasion, the others are not eager to evade. tax morale is, to large extent, to do with the physiological background of these behaviours. arguably, tax morale is concerned with why people do not evade. there has been much in common between tax morale and tax compliance. tax compliance is an observable action; that is most people pay their taxes. tax compliance is not only a function of tax ratios and probability of detection, but also a function of an individual’s willingness to comply with and to evade. as torgler (2007) pointed out, level of tax compliance is relatively high when tax morale is high; therefore tax morale is needed for providing on an account of the puzzle of tax compliance. determinants of tax morale need to be investigated for a much more comprehensive understanding of tax compliance. nevertheless, there is a limited work on the issue in the existing literature (torgler, 2004, 239). as feld and frey (2002, 88) suggest: most studies treat ‘tax morale’ as a black box without discussing or even considering how it might arise or how it might be maintained. it is usually perceived as being part of the metapreferences of taxpayers and used as the residuum in the analysis capturing unknown influences to tax evasion. the more interesting question then is which factors shape the emergence and maintenance of tax morale. indeed, few scholars have conducted research on tax morale in detail. by definition, tax morale is an intrinsic motivation to pay taxes (torgler, 2007, 4). morality could be defined as an individual’s internalisation of such concepts and legal rules to perform his or her social duties in a proper way. hence, individuals’ general attitude (or tax mentality) towards taxation and specific liabilities imposed by the related legislation is substantial to the debate. from this perspective, tax morale is largely framed in the general concept of tax mentality (schmölders, 1976: 107). for torgler (2004), tax morale measures taxpayers’ attitudes while tax evasion measures taxpayers’ behaviours. in other words, tax morale is not an outcome variable, like tax evasion. tax morale can, hence, be defined as a moral obligation of paying taxes; it is, in turn a belief of contributing to society by paying taxes. tax compliance and tax morale are affected by social and physiological factors. therefore increasing the level of tax morale and tax compliance depends heavily on these factors. legal infrastructure and state enforcement power, to some extent, raise the level of tax compliance. social and physiological factors are still decisive factors to change tax morale. social capital evokes individuals’ economic and cultural capitals; perceptions on income distribution, on fairness in society, trust in others and institutions, and confidence in government and in government policies are some of examples of social capital variables. socio-demographic variables affect tax morale substantially. the first of them is the variable of age. relatively older people are more vulnerable to threats of sanctions, suggested by the relevant studies. as torgler (2007) points out, the reason is that people are attaining new social characteristics, such as property, status, dependency on others’ behaviours as they get older. therefore the potential costs of penal sanctions for older people seem to be relatively greater. in consequence, there might be a significant relation between tax morale and age. furthermore, socio-physiological studies reveal that females are more compliant and less selfish than males. nevertheless, it should be noted that the traditional role of females is substantially different from the role of females in a modern society. moreover, females have more risk-averse behaviours than males have. marital status is another individualistic variable that might affect tax morale. the more social ties the individual has, the more restrictions imposed on her or his behaviour. thus married individuals are more prone to exhibit legal behaviours. european journal of government and economics 3(1) 62 for torgler (2007), employment status is another important factor for tax morale. it might be argued that self-employed persons have lower tax morale than full-time and part-time employees. this might be explained by the fact that the selfemployed have more opportunities to evade tax. the relation between education level and tax morale is not clear. according to torgler and schneider (2006), educated taxpayers are thought to have more information about tax regulations and fiscal relations. besides, they might be aware of civil services provided by state, and so they might have high level of tax compliance. on the other hand, they seemingly have knowledge of public corruption and thereby they might have critical perception on how tax revenues are used by government. moreover, they know a lot about the opportunities to evade tax. as a result of these factors, it is assumed that they have a low level of tax morale. consequently, there have been different kinds of relations between education level and tax morale. the relation between level of income and tax morale is a bit complicated and thus depends on some conditions. when people are not satisfied with their financial situation, they might tend to be evader. if a taxpayer feels a gap between his current and desired financial situation, he would be unwilling to pay taxes. moreover, they would be more reluctant to pay taxes if they feel they have less when they compare their income and their wealth with others’. on the contrary, duch, palmer and anderson (2000) claim that people who have low level of income are willing to pay taxes since they think they have benefit from public goods and services more than people having high level of income have benefit from. wealthy people, on the other hand, would be less willingly pay taxes by the perception of having benefited from public goods and services less than others. taxpayer confidence in parliament, government, justice system, tax administration has a valuable relation with tax morale. if the level of this confidence is high enough, individuals’ loyalty to public administration would increase and so they would be more willingly to pay taxes. in most of the empirical studies, these variables turn out to have significant relation with tax morale. montero and torcal, (2006) defines political disaffection as the subjective feeling of powerlessness, cynicism, lack of confidence in the political process, in politicians and in democratic institutions. in this context, political disaffection is expected to have negative effect on tax morale. in addition, importance of politics and perception on democracy are important factors for explaining tax morale. people seem to be complying more in democratic countries, as they have the ability to affect tax and expenditure policies in these countries. national pride is another interesting factor that should be taken into account on the analyses about tax morale. when people are happy with their national identity, they would be more loyal to their countries, and therefore tax morale would be high. religiosity is also affecting tax morale; indeed, positive relations between tax morale and religiosity have been found in some research. as frank (1996) points out; tax compliance is more common among the people whose perception depends on moral and ethic codes. religious people are so interested in what is right and what is wrong; therefore they believe that people have some duties to be performed: paying taxes is one of these duties. the aim of this paper is to derive a comprehensive framework of the determinants of tax morale in two countries. as outlined here, various socio-economic factors are related to the concept of tax morale. it is thought that they affect tax morale in different degrees. the previous empirical studies prove the existence of these effects on tax morale; yet the way and the degree of impacts differentiate across the studies. in this paper, the effects of these socio-economic factors on tax morale are evaluated for turkey and spain individually; then the findings are compared to picture the differences and similarities for each country. there is much that turkey and spain have common. they share a number of historic similarities which coupled with contemporary considerations (chislett, 2008). according to chislett (2008), both of the countries are at opposite ends of the mediterranean on the periphery of europe, both have a long islamic past, both have had large empires, both were significantly agricultural economies, both have undergone massive bilgin ● determinants of tax morale in spain and turkey 63 internal migration from rural areas to cities and towns, both have ‘exported’ hundreds of thousands of workers to elsewhere in europe, both countries have had strong statist economic policies until their economies began to be opened up, both countries were enlisted for geostrategic reasons during the cold war years by the us, both joined the organisation for economic co-operation and development (oecd) in 1961, both have problems in containing minority nationalisms, both spain and turkey have also suffered from real or imagined ‘black legends’ that even today affect the countries’ images abroad. this paper searches whether the effects of the independent variables on tax morale differentiates between these similar countries. the next section reviews the previous empirical literature about the determinants of tax morale. the third section is about the methodology and data; it gives essential information about the estimation method and defines the variable used in the estimation. the fourth section gives the estimation results; it starts with the descriptive statistics and ordered probit estimation results for the case of spain. the statistics and estimated parameters are explained in details. the same results and the interpretations are also presented for the case of turkey. finally, concluding remarks relating to the estimated results and the comparison of the countries are outlined. previous empirical literature studies on tax morale can be evaluated in two categories. the studies in the first group have focused on only one country and have analysed regional discrepancies and changes in time (torgler 2005; martinez-vazquez and torgler 2009; prieto et al 2006). a second group of studies have been conducted in a comprehensive perspective with more countries included (torgler and schneider 2006; alm and torgler 2006; cummings et al 2006), while torgler (2006) and alm and torgler (2006) have used a wider set of data with many countries. all studies on tax morale and its determinants used the international databases such as international social survey programme (issp), world values survey (wvs), european values survey (evs) and african opinion survey (afrobarometer). alm and torgler (2005) compared tax morale levels of usa with spain by using 1990 and 1995 wvs data that concluded that tax morale level in usa is higher. an explanation of their result might be that “compliance” as a social norm is better in usa when compared in spain. a further comparative study conducted by alm and torgler (2006) analysed tax morale in 14 european countries and the usa by using wvs data in 1990-1993; they still found that the highest tax morale is in the usa. in both of these articles, weighted ordered probit model was estimated to get the results. torgler and schneider (2006) have a similar research analysing spain, switzerland and belgium, by using the 1995-1997 wvs and 1999-2000 evs data. they estimated a weighted ordered probit model in which the variables of gender, age, marital status, education, employment status, social class, income level, attendance at church, direct democracy, national pride, confidence in political institutions and government, participation in democracy, income tax rate, fine rate and probability of detection are used as independent variables. the regional discrepancies in spain and switzerland affect tax morale, females have higher tax morale than males. they concluded that confidence in justice system, confidence in government, confidence in parliament, national pride, attitudes supporting democracy have positive effect on tax morale. torgler (2006) looked at the determinants of tax morale in 32 countries (including spain) by using the wvs data of 1995-1997. the included variables in the weighted ordered probit model are gender, age, marital status, education, employment status, social class, financial situation, risk averness, religiosity, corruption and credibility. the author found out that religiosity in particular for european journal of government and economics 3(1) 64 catholics, hindus, and buddhists increases tax morale. risk aversion and financial satisfaction positively affect tax morale. tax morale is low for the high-class, and it is high for the retired, housewives, and the part-time employed. in addition, females and married people have high tax morale. on the contrary, there is a negative relation between education and tax morale; perception of level of corruption decreases tax morale. similar research was conducted by cummings et al (2006) analysing botswana and south africa by using afronarometer data of 1999 and 2000, by gokbunar et al (2007) on turkey by using evs data of 2002, and by martínez-vázquez and torgler (2009) on spain by using wvs and evs data of 1981, 1990, 1995 and 1999-2000. these scholars provided similar results about the determinants of tax morale, whose levels heavily depend on socio-demographic and social capital factors. kaynar-bilgin (2011) searched for the determinants of tax morale in turkey by using the wvs data of 2005-2008. the included variables for probit model are gender, age, marital status, education, employment status, income level, financial satisfaction, religiosity, national pride, confidence in government, justice system and parliament, importance of politics and religiosity. the author found out that religiosity, importance of religiosity, importance of politics, national pride, and confidence in government, all positively affect tax morale. tax morale is low for the unemployed. methodology and data the methods used by the empirical studies are fairly similar since tax morale is a categorical variable. in general, ordered probit models were preferred for use in determining the relations and the interactions between tax morale and personal, socio-economic factors. ordered probit models are very useful to analyse dependent variables of tax morale containing ordering information. therefore, the same estimation method is used in this paper. the magnitudes of estimation are not interpreted, only the signs are analysed because equation in ordered probit model is in the nonlinear form. thus marginal effects should be derived to determine the effect of each variable on tax morale. marginal effect indicates the probality of specific tax morale category when an independent variable increases by one unit. in practice, only marginal effects related to the top level of tax morale category have been evaluated. for this paper, wvs database is used to analyse the level of tax morale and its determinants in turkey and spain. the fifth wave of the wvs is used for this aim. wvs is a survey which researched socio-cultural and political changes in a global base. the fourth and fifth waves have more than 50 countries representing approximately 80 percent of the world population. in this survey, individuals are asked to respond to the following question to evaluate level of tax morale: please tell me for the following statement whether you think it can always be justified, never be justified, or something in between: … ‘”cheating on tax if you have the chance”. the question leads to a ten-scale index of tax morale with the two extreme points “never justified” and “always justified”.the responses close to “1” can be thought as respectively high level of tax morale while the ones close to “10” indicate low level of tax morale. the ten-scale index of tax morale is transformed into four-scale index (0,1,2,3) by the same method used in the related studies. in the transformed scale “0” implies “always justified” and “3” implies “never justified”. the responses in the interval 4-10 in the original scale become “0” in the new scale since they imply that people justify tax cheating anyhow. besides “never justified” option “1” in the original scale now is “3”. the independent variables are classified as four categories: social capital variables; demographic factors; employment status; and economic status. bilgin ● determinants of tax morale in spain and turkey 65 variables of social capital are importance of politics, importance of religion, confidence in the justice system, confidence in government, confidence in parliament, confidence in civil services, religiosity, national pride and education level. since religiosity, national pride and education level are mostly defined as social capital variables in the empirical literature, they are evaluated as parts of the social capital group. gender, age and marital status are among the demographic factors that are included in the model. for the employment status, we have full-time employed, part-time employed, retired, housewife, student, unemployed, employed in public sector, or employed in the private sector. income level and financial satisfaction level are the indicators of economic status. the detailed definitions of the variables are presented in the appendix. estimation results first of all, the descriptive statistics of all variables used in the model for spain are derived. table 1 shows these statistics. the percentage rates of persons having specific properties in the whole population are as follows; female 50, married 58, the 30-49 age group 36, the 50+ age group 40, the 16-29 age group 24. the percentage rates for education level are as follows: level 2 is 20 percent, level 3 is 16 percent, and level 4 is 8 percent. of the respondents 3.9 percent are part-time employed, 7.7 percent are self-employed, 19 percent are retired, 17 percent are housewives, 7 percent are students, and 4.6 percent are unemployed. when it comes to the variable of tax morale, 63 percent of the individuals have the highest tax morale level. these individuals respond that cheating on tax is never justified. the rates of the levels 3 and 2 are 10 percent and 6 percent respectively. the rate of people saying cheating is always justifiable is 19 percent. the rates of income levels are 34 percent for level 1, 43 percent for level 2, 21 percent for level 3, 3 percent for level 4. the rates of financial satisfaction for levels 1, 2, 3 and 4 are 10, 30, 43 and 17 percent respectively. the variables of religiosity and national pride give the relatively high values of 44 and 92 percent. besides 14 percent of them thinks that religion is important. the ratio of respondents considering politics is an important issue is relatively low, 7.7 percent. other figures are as follows: confidence in justice system, 54 percent; confidence in government, 44 percent; confidence in parliament, 49 percent; and confidence in the civil service, 39 percent. among the social capital variables, national pride has the highest figure with 92 percent of respondents proud of their national identity. confidence in entities of the political system is relatively high from 39 to 54 percent. european journal of government and economics 3(1) 66 table 1: descriptive statistics of the variables for spain variables mean std. deviation minimum maximum tax morale (level 1) 0.195833 0.397006 0 1 tax morale (level 2) 0.064416 0.245152 0 1 tax morale (level 3) 0.102500 0.303431 0 1 tax morale (level 4) 0.637500 0.480923 0 1 1) social capital importance of politics 0.077500 0.267495 0 1 importance of religion 0.147500 0.354751 0 1 confidence in justice system 0.540000 0.498605 0 1 confidence in government 0.440833 0.496694 0 1 confidence in parliament 0.491667 0.500139 0 1 confidence in civil services 0.390000 0.487953 0 1 religiosity 0.440833 0.496694 0 1 national pride 0.920833 0.270111 0 1 education (level 1) 0.539167 0.498671 0 1 education (level 2) 0.206667 0.405083 0 1 education (level 3) 0.160833 0.367530 0 1 education (level 4) 0.076666 0.266173 0 1 2) demographic factors gender (male) 0.500000 0.500208 0 1 gender (female) 0.500000 0.500208 0 1 16-29 age interval 0.229167 0.420472 0 1 30-49 age interval 0.362500 0.480923 0 1 50-98 age interval 0.408333 0.491730 0 1 marital status (unmarried) 0.415000 0.492927 0 1 marital status (married) 0.585000 0.492927 0 1 3) employment status full-time 0.390000 0.487953 0 1 part-time 0.039166 0.194072 0 1 self-employed 0.077500 0.267495 0 1 retired 0.195833 0.397006 0 1 housewife 0.170833 0.376520 0 1 student 0.074166 0.262151 0 1 unemployed 0.046666 0.211012 0 1 private 0.565833 0.495854 0 1 4) economic status income level (level 1) 0.254167 0.435573 0 1 income level (level 2) 0.431668 0.495515 0 1 income level (level 3) 0.211668 0.408660 0 1 income level (level 4) 0.029167 0.168344 0 1 financial satisfaction (level 1) 0.091667 0.288675 0 1 financial satisfaction (level 2) 0.300833 0.458812 0 1 financial satisfaction (level 3) 0.430833 0.495399 0 1 financial satisfaction (level 4) 0.170000 0.375789 0 1 data source: world values survey database; http://www.worldvaluessurvey.org/ bilgin ● determinants of tax morale in spain and turkey 67 table 2 gives the results of the estimated ordered probit model for spain. in this estimation, the dependent variable is the tax morale variable as defined earlier. the independent variables are drawn from social capital, demography, employment status, and the economic situation. the second column indicates the estimated coefficient for each independent variable. the coefficients cannot be directly interpreted since the model is non-linear. yet the signs of each coefficient can be evaluated. in the third and fourth columns, there are associated standard errors and z-statistics for each variable respectively. the statistical significances of the variables are determined by using the z-statistics. in the last column, the marginal effects of the independent variables on the dependent variable are given. these effects are the ones related to the top level of tax morale category (y = 3). moreover, the specification test statistics are given at the end; the estimated model seems to be statistically significant. most of the social capital variables, importance of politics, importance of religion, confidence in justice system, confidence in government, confidence in parliament, and confidence in the civil service, appear to be statistically insignificant and do not have effect on tax morale in this sample level. the estimated coefficients of the variables of national pride and education level 4 are statistically significant at the 1 percent level while the one of religiosity is significant at the 5 percent level; besides they are all positive. these findings imply that national pride and religiosity have positive effects on tax morale. moreover, the most educated people have higher tax morale. the estimated coefficient of the highest level of education has the largest marginal effect among the significant social capital variables at 0.18 according to the estimated model, gender and marital status seem to have nothing to do with tax morale. age interval coefficients, on the other hand, are fairly significant and their signs are positive implying that tax morale is higher for elderly persons. the marginal effect belonging to the variable of the 30-49 age group is 0.12. being in the highest education category increases the probability of being at the top level of tax morale by 0.12 units comparing to the lowest level of education. when it comes to employment status, the results are not remarkable all of the variables in this category except students are not significant. students have higher tax morale than full-time employees have. interestingly, respondents who are at the top level of income turn out to have lower tax morale than the lowest group. in addition to this, the financial satisfaction variable has a negative significant effect on tax morale. the highest level of this category has a statistically significant estimated coefficient. european journal of government and economics 3(1) 68 table 2: ordered probit model estimation for spain independent variables coefficient standard error z-value marginal effects 1) social capital importance of politics importance of religion confidence in justice system confidence in government confidence in parliament confidence in civil service religiosity national pride education (level 2) education (level 3) education (level 4) 2) demographic factors female 30-49 age interval 50-98 age interval married 3) employment status part-time self-employed retired housewife student unemployed private sector 4) economic status income level (level 2) income level (level 3) income level (level 4) financial satisfaction (level 2) financial satisfaction (level 3) financial satisfaction (level 4) number of observations prob (chisqd>value) information criterion (aic) pseudo r2 -0.193061 0.176889 0.058499 -0.051011 -0.020400 0.076616 0.135098* 0.379701*** 0.060485 0.150077 0.552271*** -0.088738 0.349768*** 0.294453** 0.039771 0.151088 -0.229823 0.137709 0.181493 0.418436** 0.246105 0.111949 0.007230 -0.043904 -0.399906* -0.171399 -0.191946 -0.328749** 1200 0.000000 2.02991 0.026466 0.135398 0.115744 0.079132 0.084690 0.087950 0.081206 0.080430 0.133833 0.104411 0.120894 0.158983 0.082358 0.112433 0.133045 0.087424 0.194842 0.156199 0.131056 0.138894 0.175769 0.190259 0.091400 0.090271 0.111705 0.231603 0.141282 0.140196 0.157227 -1.426 1.528 0.739 -0.602 -0.232 0.943 1.680 2.837 0.579 1.241 3.474 -1.077 3.111 2.213 0.455 0.775 -1.471 1.051 1.307 2.381 1.294 1.225 0.080 -0.393 -1.727 -1.213 -1.369 -2.091 -0.0739 0.0644 0.0219 -0.0191 -0.0076 0.0285 0.0503 0.1475 0.0224 0.0549 0.1828 -0.0331 0.1276 0.1085 0.0149 0.0548 -0.0883 0.0506 0.0661 0.1434 0.0875 0.0419 0.0027 -0.0165 -0.1561 -0.0647 -0.0719 -0.1264 notes: dependent variable is tax morale on a four-point scale (0 to 3). the reference groups: the 16–29 age interval for the age variable, males, unmarried for marital status, full-time employed for employment status, public sector for the institution of occupation, education level 1 for education, income level 1 for income, financial satisfaction level 1 for the financial satisfaction variable. *, ** and *** refer to statistically significant parameter estimates at the 10, 5 and 1 percent levels respectively. data source: world values survey database; http://www.worldvaluessurvey.org/ table 3 shows descriptive statistics of the variables for the case of turkey. of the respondents 49 percent are female, 66 percent are married, 41 percent are in the 30-49 age interval, 17 percent are in the 50+ age interval and 42 percent are in the 16-29 age interval. rates of education level 1, 2, 3 and 4 are 52, 10, 27 and 11 percent respectively. the shares of the full-time, part-time and self-employed persons in all are 30, 2 and 13 percent respectively. the figures for the retired, students and the unemployed are 9, 8 and 6 percent. religiosity and national pride figures are relatively high at 80 and 89 percent. confidence in the entities of political system is lower compared to that in spain. income level rates indicate that the largest part of the population is in the lowest income level. 74 percent of the respondents think religion is important and 13 percent of them think politics is important in their life. when it comes to tax morale level, level 4 gives the highest rate which is that 80 percent of respondents find that cheating on taxes is never justifiable. besides, only 3 percent of them say that it is always justifiable. bilgin ● determinants of tax morale in spain and turkey 69 the ordered probit model is indicated by table 4. the dependent variable is the tax morale level, the independent variables are related to social capital, demographic factors, employment status and the economic situation. the model is statistically significant since the probability value of chi-square is much less than 0.01. the important part of the social capital variables appear to be statistically significant. importance of politics, importance of religion, religiosity, and national pride are all statistically significant at the 1 percent level. the estimated coefficients for the variables of confidence in government and confidence in the justice system are significant at the 5 and 10 percent levels. marginal effect of confidence in justice system on tax morale is 0.04 and is positive. those trusting the justice system have high tax morale. the same applies to confidence in government, which implies higher tax morale. taxpayers’ confidence in government means that they approve government’s taxation policies and its related decisions. the marginal effects of the importance of religion and religiosity are 0.12 and 0.08 respectively. in this case, it might be said that religion affects tax morale positively. as an explanation of this, religion extensively covers the beliefs about the right behaviour. according to hull (2000) religion has the ability to prevent illegal behaviours since it legitimises and reinforces social values. paying taxes is seen as a social norm and it is motivated by religion. the marginal effect of national pride is 0.13, so it is positive and among the largest marginal effects. it is clear that national pride supports tax morale. when people are satisfied with their national identities, they are usually devoted to their states and governments. none of the demographic factors are statistically significant. among the employment status factors, only unemployed and private sector have effect on tax morale. while the unemployed persons have less tax morale, private sector employees have higher tax morale than public sector employees. when it comes to the category of economic status, none of these factors can be evaluated as determinants of tax morale since the related estimations are not statistically significant at any level. the estimated model points out that the most effective factors on tax morale in turkey are the factors of social capital. when compared with the individualistic variables, the variables related to social capital have stronger relations with tax morale. the feelings of confidence, religiosity and national pride seem to be very important to understand the concept of tax morale in turkey. in other words what persons feel about themselves and how much they trust social entities are strongly related the level of tax morale. european journal of government and economics 3(1) 70 table 3: descriptive statistics of the variables for turkey variables mean std.deviation minimum maximum tax morale (level 1) 0.034201 0.181812 0 1 tax morale (level 2) 0.037175 0.189260 0 1 tax morale (level 3) 0.119703 0.324734 0 1 tax morale (level 4) 0.809822 0.393297 0 1 1) social capital importance of politics 0.131599 0.338180 0 1 importance of religion 0.748699 0.433923 0 1 confidence in justice system 0.353903 0.478358 0 1 confidence in government 0.260967 0.439325 0 1 confidence in parliament 0.203717 0.402911 0 1 confidence in civil service 0.099628 0.299615 0 1 religiosity 0.805204 0.396191 0 1 national pride 0.899628 0.300607 0 1 education (level 1) 0.504089 0.500169 0 1 education (level 2) 0.105576 0.307409 0 1 education (level 3) 0.278811 0.448581 0 1 education (level 4) 0.111524 0.314897 0 1 2)demographic factors gender (male) 0.501859 0.500183 0 1 gender (female) 0.498141 0.500183 0 1 16-29 age interval 0.402974 0.490678 0 1 30-49 age interval 0.418587 0.493511 0 1 50-98 age interval 0.178439 0.383024 0 1 marital status (unmarried) 0.337546 0.473049 0 1 marital status (married) 0.662454 0.473049 0 1 3) employment status full-time 0.228996 0.420343 0 1 part-time 0.027509 0.163623 0 1 self-employed 0.133829 0.340595 0 1 retired 0.094423 0.292526 0 1 housewife 0.343494 0.475051 0 1 student 0.088475 0.284091 0 1 unemployed 0.060964 0.239358 0 1 private 0.446840 0.497351 0 1 4) economic status income level (level 1) 0.609665 0.488007 0 1 income level (level 2) 0.180669 0.384887 0 1 income level (level 3) 0.088478 0.284091 0 1 income level (level 4) 0.101118 0.301593 0 1 financial satisfaction (level 1) 0.129368 0.335732 0 1 financial satisfaction (level 2) 0.231226 0.421774 0 1 financial satisfaction (level 3) 0.406691 0.491399 0 1 financial satisfaction (level 4) 0.228995 0.420343 0 1 data source: world values survey database; http://www.worldvaluessurvey.org/ bilgin ● determinants of tax morale in spain and turkey 71 table 4: ordered probit model estimation for turkey independent variables coefficient standard error z-value marginal effects 1) social capital importance of politics importance of religion confidence in justice system confidence in government confidence in parliament confidence in civil service religiosity national pride education (level 2) education (level 3) education (level 4) 2) demographic factors female 30-49 age interval 50-98 age interval married 3) employment status part-time self-employed retired housewife student unemployed private sector 4) economic status income level (level 2) income level (level 3) income level (level 4) financial satisfaction (level 2) financial satisfaction (level 3) financial satisfaction (level 4) number of observations prob (chisqd>value) information criterion (aic) pseudo r2 0.369703*** 0.435832*** 0.176320* 0.296404** -0.022028 -0.059884 0.299047*** 0.447546*** 0.040732 0.068301 0.271146 0.045841 -0.041882 0.038892 0.114222 -0.124043 -0.087781 0.040662 -0.121057 0.123917 -0.417013** 0.186067* -0.163385 -0.076305 0.083103 0.131735 -0.002190 0.008572 1345 0.0000000 1.27499 0.073878 0.133793 0.097435 0.105660 0.125291 0.134359 0.161653 0.105325 0.125907 0.142562 0.118135 0.167764 0.123619 0.106269 0.157216 0.110406 0.242470 0.142623 0.190237 0.166322 0.182094 0.171534 0.109411 0.108557 0.150657 0.158473 0.140117 0.131878 0.143839 2.763 4.473 1.669 2.366 -0.164 -0.370 2.839 3.555 0.286 0.578 1.616 0.371 -0.394 0.247 1.035 -0.512 -0.615 0.214 -0.728 0.681 -2.431 1.701 -1.505 -0.506 0.524 0.940 -0.017 0.060 0.0815 0.1213 0.0435 0.0699 -0.0056 -0.0155 0.0821 0.1318 0.0101 0.0170 0.0617 0.0116 -0.0106 0.0097 0.0294 -0.0331 -0.0229 0.0101 -0.0312 0.0298 -0.1232 0.0466 -0.0434 -0.0199 0.0204 0.0322 -0.0006 0.0022 notes: dependent variable is tax morale on a four-point scale (0 to 3). the reference groups: 16–29 age interval for the age variable, males, unmarried for marital status, full-time employed for employment status, public sector for the institution of occupation, education level 1 for education, income level 1 for income, financial satisfaction level 1 for the financial satisfaction variable. *, ** and *** refer statistically significant parameter estimates at the 10, 5 and 1 percent levels respectively. data source: world values survey database; http://www.worldvaluessurvey.org/ comparing these findings with the ones derived from spain’s model indicates that the determinants of tax morale in the two countries are not so similar. contrary to turkey case, confidence in political entities does not explain tax morale in spain. religion does not have such an important role as in turkey. under the social capital title, only national pride and education level 4 have a real effect on tax morale. tax morale in spain is more related to the individualistic factors while it is a social confidence phenomenon in turkey. age, education, income level and financial satisfaction are significant in spain. conclusion the determinants of tax morale were analysed by estimating ordered probit models for spain and turkey. for this aim, we estimated two models for each country. in the first model for spain, the variables of religiosity, national pride, education level 4, 30-49 age interval, 50+ age interval, student, income level 4, and financial satisfaction level 4 were found to be statistically significant at different significance levels. that is, all these variables have effects on tax morale in different degrees. in spain, mostly individualistic factors are explaining tax morale. as social capital european journal of government and economics 3(1) 72 variables, only national pride and one part of the education level have strong effects on tax morale. religiosity is significant at only the 10 percent level. the second model for turkey indicates that the variables of the importance of religion, importance of politics, confidence in the justice system, confidence in government, religiosity, national pride, unemployment, or private sector employment are statistically significant. the perceptions of religion and politics, confidence in the justice system, confidence in government, being religious, having national pride, and working for the private sector have positive effects on tax morale. the unemployed have lower tax morale. the findings in this paper suggest that the determinants tax morale in spain and turkey seem to be different. in other words, the first and second models give different results that suggest the different structures of tax morale in spain and turkey. the estimations based on the wvs data for spain and turkey indicates that tax morale in turkey can be seen as a social phenomenon where social capital variables have positive effects. personal factors such as gender, age, being selfemployed or retired, income level and financial satisfaction seem to be irrelevant. on the contrary, age, income level, financial satisfaction and education level have significant effects on tax morale in spain. it can be said that tax morale in spain is highly related to individualistic conditions when compared to turkey. from this point of view, increasing institutional credibility as a public policy might raise the level of tax morale in turkey leading to more tax compliance by taxpayers. on the other hand, the willingness of paying tax has nothing to do with the public institutional structure in spain. it should be found that the ways to increase the level of tax morale of the wealthy taxpayers by raising their perception of having benefited from public goods and services might give improving results. besides, increasing the general level of education and making younger people conscious of the benefits of public goods and services might increase the level of tax morale in spain. references alm, james and benno torgler (2005) ‘estimating the determinants of tax morale’, national tax association papers and proceedings, minneapolis, pp. 269274. alm, james and benno torgler (2006) ‘culture differences and tax morale in the united states and europe’, journal of economic psychology, 27(2): 224-246. chislett, william (2008) spanish trajectory: a source of inspiration for turkey, open society institute: istanbul. cummings, ronald g., jorge martinez-vazquez, michael mckee and benno torgler (2006) ‘effects of tax morale on tax compliance: experimental and survey evidence’, berkeley program in law and economics working paper series. duch, raymond m., harvey d. palmer and christopher j. anderson (2000) ‘heterogeneity in perceptions of national economic conditions’, american journal of political science, 44(4): 635-652 . feld, lars p. and bruno s. frey (2002) ‘trust breeds trust: how taxpayers are treated’, economics of govarnance, 3(3): 87-99. frank, robert h. (1996) ‘what price the morale high ground?’, southern economic journal, 63(1): 1-17. gökbunar, ali r., sibel selim and halit yanıkkaya (2007) ‘türkiye’de vergi ahlakını belirleyen faktörler üzerine bir araştırma’, ekonomik yaklaşım, 18(63): 69-94 . hull, brooks b. (2000) ‘religion still matters’, the journal of economics, 26(2): 3548. bilgin ● determinants of tax morale in spain and turkey 73 kaynar-bilgin, handan (2011) ‘türkiye'de vergi ahlakının belirleyicileri’, odtü gelişme, 38(2):167-190. martinez-vazquez, jorge and benno torgler (2009) ‘the evolution of tax morale in modern spain’, journal of economic issues, 43(1): 1-26. montero, jose r. and mariano torcal (2006) ‘political disaffection in comparative perspective’, in torcal, mariano and josé ramón montero (eds) political disaffection in contemporary democracies: social capital, institutions, and politics. london: routledge prieto, juan.; maría j. sanzo, and javier suárez-pandiello (2006) ‘análisis económico de la actitud hacia el fraude fiscal en españa’, hacienda pública española, 177:107-128. schmölders, günter (1976) genel vergi teorisi, i̇stanbul: fakülteler matbaası. torgler, benno (2004) ‘tax morale in asian countries’, journal of asian economics, 15(2): 237-266. torgler, benno (2005) ‘tax morale and direct democracy’, european journal of political economy, 21(2): 525-531. torgler, benno (2006) ‘the importance of faith: tax morale and religiosity’, journal of economic behavior & organization, 61(1): 81-109. torgler, benno (2007) tax compliance and tax morale: a theoretical and empirical analysis, cheltenham: edward elgar. torgler, benno and friedrich schneider (2006) ‘what shapes attitudes toward paying taxes? evidence from multicultural european countries’, berkeley program in law & economics, working paper series, no. 190. european journal of government and economics 3(1) 74 appendix definition of variables variable definition tax morale please tell me for the following statement whether you think it can always be justified, never be justified, or something in between: … ‘cheating on tax if you have the chance’ (3=never justified 0=always justified) 0 4,5,6,7,8,9,10 1 3 2 2 3 1 gender 0 male 1 female age how old are you? 18-29 30-49 50-98 marital status 0 unmarried (living together as married, divorced, separated, widowed, single/never married) 1 married education level 1 (no formal; inadequately completed elementary; completed elementary; incomplete secondary) level 2 (intermediate vocational; intermediate general) level 3 (maturity level; higher education) level 4 (university with degree) employment status are you employed now or not? 1 full-time 2 part-time 3 self-employed 4 retired 5 housewife 6 student 7 unemployed importance of religion how important is religion in your life? 0 not at all important; not very important 1 very important; rather mportant religiosity independently whether you go to church or not, would you say you are? 0 not a religious; a convinced atheist, other 1 religious importance of politics how important is politics in your life? 0 not at all important; not very important 1 very important; rather important national pride how proud are you to be (nationality)? 0 not at all; not very 1 very; quite confidence in justice system how much confidence do you have in justice system? 0 none at all; not very much; quite a lot 1 a great deal confidence in government how much confidence do you have in government? 0 none at all; not very much; quite a lot 1 a great deal confidence in parliament how much confidence do you have in parliament? 0 none at all; not very much; quite a lot 1 a great deal confidence in civil services how much confidence do you have in civil services? 0 none at all; not very much; quite a lot 1 a great deal scale of incomes scale of incomes? level 1 (lower step; second step, third step) level 2 (fourth; fifth) level 3 (sixth; seventh) level 4 (nineth; tenth) financial satisfaction how satisfied are you with the financial situation of your household? 0 1,2,3 1 4,5 2 6,7 3 8,9,10 institution of occupation 0 public sector 1 private sector microsoft word ejge_03_01_010.doc european journal of government and economics volume 3, number 1 (june 2014) issn: 2254-7088 47 interest group influence in micro-states: the role of networking skills direnç kanol, university of siena, italy abstract this paper argues that an interest group’s networking skills in micro-states may be as important, if not more important than other variables discussed in the interest group influence literature. this argument is based on the recent literature on democratisation in micro-states which shows that politics in these states is personalistic in nature. the argument is supported by expert interviews undertaken in the republic of cyprus and the turkish republic of northern cyprus. jel classification d72; d73, d74. keywords cyprus; interest groups; interest group influence; lobbying; micro-states; networking skills. european journal of government and economics 3(1) 48 introduction what determines interest group influence? this question is crucial to all who value democracy. in theory, one-person, one-vote rule should ensure that each citizen has an equal say in public policy. this is, however, far from the truth. organised interests try to influence policy and at times, they achieve their goals. hence, the public policy literature focuses on how influential organised interests are and why one group may be influential whereas another may not be. the predominant belief in the literature is that providing information and offering citizen-support to the policy-makers enable interest groups to exert influence. the level of influence also depends on the preferences of the policy-makers, public opinion and issue salience. interest group literature, however, does not pay enough attention to the role of networking skills. this paper argues that an interest group’s networking skills may be as important, if not more important than other variables discussed in the interest group literature. this argument is based on the recent literature on democratisation in micro-states which shows that politics in these states are personalistic in nature. personal ties are crucial for getting things done. the argument is supported by empirical evidence gathered from expert interviews in the republic of cyprus and the turkish republic of northern cyprus. the following section reviews the interest group literature and shows that the role of networking skills as a determinant of influence is critically under-researched. the section after that describes the nature of politics in micro-states and generates a proposition regarding interest group influence in these states. after discussing the method and presenting the findings from the in-depth interviews, the final part discusses the implications of this study. interest group influence: a literature review some authors argue that interest groups lobby ‘friendly’ legislators, those who already agree with them, and the legislators use the interest groups to acquire much needed information to attain their goals (bauer et al, 1963; milbrath, 1963). this view has been criticised by some who suggest that lobbying sympathisers serves only to counteract the effect of other groups trying to push the policy in the opposite direction, and lobbying ‘foes’ is not an exception but a norm (austensmith and wright, 1994). also, we should not forget that there are a significant number of scholars who argue that lobbying ‘swing’ legislators is also common (smith, 1984; wright, 1990; schlozman and tierney, 1986). if the first group of authors is right, this either means that interest groups are mere information conveyors to policy-makers and they do not exert much influence on policy-makers (hall and wayman, 1990) or they select to convey information to ‘friends’ in power in order to achieve their own objectives that is congruent with the public actors’ objectives (hall and deardorff, 2006). although the nature of interest group influence is still a puzzle, exploring the determinants of interest group influence is equally important. the most parsimonious theory that can be used to explain the relationship between interest groups and decision-makers to date is the resource dependence theory. the roots of this theory can be found in the work of the sociologists levine and white (1961). an important extension to the resource dependence perspective was presented by pfeffer and salancik (2003). studying health organisations, levine and white (1961) argued that no organisation is able to control all the resources it needs to achieve its goals. this is why organisations are dependent on other organisations to accomplish their tasks (levine and white, 1961). according to pfeffer and salancik (2003), interdependence is the key word for explaining exchange between organisations. dependence of one organisation on another can be measured by the importance of the resource that the organisation receives through interactions with the other, measured in turn by the relative magnitude and the nature of the resource (pfeffer and salancik, 2003). if an organisation absolutely needs a certain kanol ● interest group influence in micro-states 49 type of resource to attain its goals, then this resource is essential for that organisation (pfeffer and salancik, 2003). dependence on the environment refers to the importance of the resource to the organisation demanding that resource as well as the availability of the resource from other sources (jacobs, 1974; pfeffer and salancik, 2003). based on this understanding, one may argue that organisations are expected to be more responsive to other organisations that control the most problematic/critical resource (pfeffer and salancik, 2003). as a priority, we need to start the discussion about governmental organisations by acknowledging their considerable power when choosing which interest groups to contact and which ones not to contact. nevertheless, like any other organisation, governmental organisations do not possess all the resources they need to accomplish their tasks. so, it is inevitable that the criticality of the resources possessed by interest groups will have an effect on governmental authorities’ decision to engage in resource exchange with these groups. it should come as no surprise that scholars studying access and influence of interest groups to governmental actors have benefited from this theory. scholars working on the european union produced interesting research that strived to explain the logic of access and influence by using the resource dependence theory (bouwen, 2004; klüver, 2013). the vast majority of research on interest groups concentrates on the power of information as a determinant of influence regardless of the method or discipline. we can speak of two types of information: political information and technical information. plausibly, most technical information would also entail some political aspects but what matters is that technical information gives predictions about policy consequences in the technical sense. political information, on the other hand, is about signalling mobilisation consequences of the group or other groups as a result of an action that could be taken by a policy-maker (heitshusen, 2000, potters and van winden, 1992; austen-smith, 1998). governmental officials’ time is restricted and they are neither able nor willing to give access and influence to each and every interest group. in line with the resource dependence theory, one can argue that policy-makers grant access and influence to informative groups (reenock and gerber, 2008; crombez, 2002; bouwen, 2004; klüver, 2013). another crucial resource is citizen-support (klüver, 2013). policy-makers try to understand the magnitude of support for or opposition against a policy-proposal because if policy-makers enact laws that are highly unpopular, they pay for this in the next election (kingdon, 1995; fiorina, 1989; mayhew, 1974; arnold, 1990). with re-election prospects in mind, public actors look to have the endorsement of organisations with the support of a sizeable number of citizens (klüver, 2013). therefore, based on the resource dependence perspective, citizen support can be interpreted as a good for access and influence where electoral support is the causal mechanism that gives meaning to this relationship. citizen support does not only affect the politicians with the ambition to get re-elected but also the bureaucrats. despite the fact that bureaucrats may have more manoeuvring space as they do not run in the elections, they look for public endorsement and legitimacy (poppelaars, 2009). the higher the support of citizens an organisation has that gives its endorsement to a bureaucrat, the higher the perceived legitimacy of that bureaucrat will be. therefore, citizen support is also expected to affect bureaucrats as well as politicians. although resource dependence theory suggests a parsimonious framework for explaining influence, we cannot oversee the varying nature of political context and its impact on the opportunity to exert influence. political opportunity structures (kitschelt, 1986; meyer and minkoff, 2004) and political mediation (amenta et al, 1992; amenta et al, 1994; amenta et al, 2005) theories that were developed by scholars studying social movements took this aspect into account and suggested that the characteristics of the political system and the politicians have a considerable amount of impact on social movement outcomes. various studies european journal of government and economics 3(1) 50 show that interest groups are more likely to exert influence, for instance, when the politicians are friendlier towards the cause of the lobbyists (kriesi et al, 1995; giugni, 2004; 2007; soule and olzak, 2004; mcveigh et al, 2003). this finding suggests that interest group influence also depends on which politicians are in power and interest groups may have to adjust their strategies depending on the political context. public opinion is also important. re-election motivated politicians take what the public thinks about a certain issue and how strongly they feel about this issue into account (kingdon, 1995; fiorina, 1989; mayhew, 1974; arnold, 1990). there are mixed findings in the literature. some research found that policy-makers are not responsive to public opinion (jacobs and shapiro, 2000; 2002; cohen, 1997). however, the predominant belief in the literature based on empirical findings is that public opinion matters. politicians are more likely to pass laws that are popular (page and shapiro, 1983; burstein, 2003; erikson et al, 2002; monroe, 1998; lax and phillips, 2009). a lobbyist that advocates an issue that is clearly opposed by the public may not have much success. we should also take issue salience into account. baumgartner et al (2009) argues that most issues do not find a place on the agenda of the policy-makers. policymaking process does not resemble an incrementalist one as lindblom (1959) argued. according to lindblom (1959), the policy-making process involves many actors and moves in small steps. a rather recent major work shows that this argument could be false (baumgartner et al, 2009). baumgartner et al’s (2009) results are based on baumgartner and jones’ (1993) punctuated-equilibrium model which argues that most issues remain stable for most of the time, and where policy-change occurs, it follows a pattern that is contrary to the logic of incrementalism. policy-change occurs very rapidly in few issue areas (baumgartner and jones 1993). salience of an issue may have a positive impact on the likelihood of an interest group’s success in exerting influence on the policy agenda (burstein, 1981; page and shapiro, 1983; haider-markel, 1996; 2003). once an issue becomes very salient and is placed on the political agenda, we may observe a rapid change of policy. what is clearly lacking in the interest group influence literature is a discussion about the role of networking skills. the role of networking skills is only very indirectly mentioned in a few studies such as carpenter et al (1998), who argue that interest groups exist in a network. a group which possesses weak ties with a sizeable number of groups in this network is able to receive and convey information, which in turn, provides it access to the governmental actors. heaney (2006) shows that playing a brokerage role between disconnected lobbying coalitions and political parties enhances a group’s influence in the policy-making process. finally, beyers and braun (2014) argue that an interest group’s ability to bridge different coalitions increases its chances of gaining access to the policymakers. however, none of these studies directly deal with the capacity of the individuals within interest groups to establish direct relationships with the policymakers. the nature of politics in micro-states and its implications for interest group influence different authors used different population sizes to define which states can be defined as micro-states (anckar, 2010). using certain numbers, however, can be problematic. consider, for instance, that we use 500.000 people as a ceiling to determine if a state is indeed a micro-state or not. can we really assume that theoretical arguments that apply to a country of 490.000 people do not apply to a country of 510.000 people? this paper uses a more deductive approach to defining micro-states that serve the topical purpose of this paper. a micro-state is a very small country with a very small number of population size and with a very large kanol ● interest group influence in micro-states 51 number of people knowing a large part of the rest of the population. the proverbial ‘everyone knows everyone’ is a crucial definition of the social and political life in micro-states. this deductive understanding would corroborate with the classification schemes of scholars who keep fiji with a population of 780.000 within the discussion about micro-states but exclude papua new guinea, with a population of 4 million (anckar, 2002a). anckar (2003; 2008) uses the 1 million ceiling and suggests that there are 42 micro-states in the world. therefore, the small size of these states should not mean that careful inquiries about their society and politics can be neglected. unlike the earlier studies which suggested that smallness is good for democracy (dahl and tufte, 1973; hadenius, 1992; srebrnik, 2004), the recent literature suggests that the relationship between smallness and democracy is ambiguous at best and small size may, in fact, have a negative effect on the quality of democracy (veenendaal, 2013a; 2013b; 2013c; corbett, 2013). the earlier literature points to homogeneity, a sense of fellowship and community, a lack of complexity in solving social and political issues, and the proximity between the rulers and the citizens as mechanisms to establish a positive link between smallness and quality of democracy (dahl and tufte, 1973; ott, 2000; anckar, 2002a; 2002b). the recent literature, however, suggests that politics in micro-states is more ‘informal’ in nature. almost everything depends on personal relationships. obligations to family and kin precedes the obligations to the society as a whole (corbett, 2013). thus, civic culture and social capital, which are argued to be essential parts of embedded democracies are not found in micro-states. the proximity between the rulers and the citizens which is argued to be a boon can actually be a bane. consider, for instance, the decision-making process for public appointments. it is very hard for the elected officials to be impartial when family, kin and friends are extremely important in social life and when there are many individuals that could be classified as either of these three. it is, also, almost impossible to avoid people one falls apart with. therefore, elected officials try to live up to the expectations of their close ones and acquaintances and the citizens try to keep good relationships with their government at all times. politics is conducted outside of the public domain. this causes issues with nepotism and clientelism (corbett, 2013; veenendaal, 2013a; 2013c). if politics in micro-states is personalistic in nature, then the organised interests should master the art of establishing personal relationships, in order to exert influence on the policy-making process. in these states, who you know may be much more important than what you know (information), which runs counter to the decades of theorising in the interest group literature. networking skills, therefore, may be particularly important for exerting influence in micro-states. by networking skills, i mean the ability of an individual to meet and establish good contacts with the governmental actors. a person may have the intellectual resources to generate and provide information to the governmental actors. however, this does not mean that he/she has the skills to establish weak or strong ties with these governmental actors. once a relationship between an interest group and a governmental actor is established, interest groups can ask for ‘favours’ from their contacts in governmental posts which is shown to be the main form of policy-making in the highly personalistic and clientelistic political decision-making process in microstates. therefore, networking skills are expected to be a strong determinant of interest group influence in micro-states. method expert-interviewing is a valuable technique when it comes to discovering what affects interest group influence. influence is the primary goal of lobbying. by practicing lobbying for long years, experts learn what works, what does not work and why. therefore, they are in a good position to suggest what tactics work and what the exogenous factors that may affect their influence may be. different european journal of government and economics 3(1) 52 interest groups may have different opinions about these exogenous factors. the goal of expert-interviewing method is not to get as many interviews as possible, but to get as many interviews from people who have the most in-depth information as possible. therefore, a policy field is chosen first and the names of the organisations that have the most in-depth information about how to exert influence are obtained. the civil society organisations directory (2011) provides a good source to obtain the emails of a population of interest groups, both in the republic of cyprus and the turkish republic of northern cyprus on the island of cyprus. the republic of cyprus was established in 1960 as a partnership state between the greek cypriots and the turkish cypriots. after civil and political conflict intensified between these two communities, it has become a greek cypriot state in 1963. the turkish republic of northern cyprus was established in 1983. however, it is only recognised by turkey which makes it fall under the de facto state classification. these are micro-states with population sizes of 862,000 (statistical service of the republic of cyprus, 2011) and 294,906 (devlet planlama örgütü, 2011) respectively. therefore, concentrating on lobbying in these two states offers an opportunity to analyse the potential impact of networking skills for exerting influence in micro-states. i focused on the field of peacebuilding for the purposes of this paper since the experts in this field could be identified easily. a list of the population of organisations that potentially deal with peace related issues during the months of july and august 2012 is created. from august 2012 to october 2012, i conducted a survey that asked these organisations to name 3 well known peacebuilding organisations that are active in cyprus in order increase the number of observations. it should be stressed that an interest group in this paper refers to any non-governmental group that tries to influence public policy either by inside lobbying or outside lobbying tactics. therefore, non-governmental organisations (ngos) which engage in lobbying the governmental actors classify as interest groups. overall, 41 civil society organisations were found to be active in the field of peacebuilding with varying degrees of intensity. these organisations were emailed a questionnaire followed by a reminder email in case no response after a month. 25 organisations replied to the emails with a response rate of 61 percent. these organisations were asked if they were able to initiate contact with the decisionmakers at the governmental level face-to-face, via internet, phone or by other similar means in order to promote peace in the last year. out of these 25 organisations that responded to the survey, 14 of them answered ‘yes’ to this question. considering also the list of organisations that were named by other organisations as one of the 3 well known peacebuilding organisations, 6 peacebuilding organisations out of these 14 organisations were identified as true experts in the field of peace lobbying.1 i also included a turkish cypriot policymaker in the sample who was responsible for deciding the main aspects of the peace negotiations with the greek cypriots. kudret özersay, the chief turkish cypriot negotiator responsible for the negotiations with the greek cypriots from april 2010 to june 2012 was included in the sample as an expert policy-maker who is not a lobbyist but has expert knowledge on lobbying. özersay was lobbied by various organisations with respect to the reunification/peace issue. managers and/or project managers of these organisations and the policy-maker were interviewed face to face with the open-ended interview method. they were asked about the possible ways to gain influence and prompts and probes were posed depending on the discussion that took place. interviews lasted approximately 30 1 these organisations are: association for historical dialogue and research, the management centre of the mediterranean, ngo support-centre, cyprus academic dialogue, cyprus 2015 and the cyprus community media centre. kanol ● interest group influence in micro-states 53 minutes on average. the interviewees agreed to be recorded and identified for the academic purposes of this project. results in this section, the findings from the interviews are presented. evidence for the factors that were discussed in the literature review section are presented under separate sub-headings. the role of networking skills is discussed at the end of this section. information the experts suggested that the main factors discussed in the literature are all relevant. findings from the in-depth interviews provide evidence for the value of conveying information to the policy-makers. the common viewpoint of the interviewees is that technical information that could be of use to the policy-makers can make a big difference. in line with the resource dependence theory, the consensus is that the type of information matters. if peacebuilding organisations possess information that is valuable to the policy-makers and if it cannot be offered to them by other sources, the likelihood of influence increases. the experts suggested that providing information to the policy-makers is very important for gaining access. they also believe that it can increase the likelihood of exerting influence: even the policy-makers at the highest levels whom you might assume to have a network of people supplying them information, they are not aware of certain things… they do not know… so if you give them information that they did not know about, they may realise the usefulness of this information. let me give you an example... we did research on teachers’ perception on history teaching about three years ago and we found out that teachers were positive towards reform in history teaching. the policy-makers, on the other hand, thought on the contrary. so, they were afraid of something that did not exist. if you can bring new information in a rather scientific or objective way, you have the space to influence the policy-maker during the interaction process. (expert 1) from our experience, i think the more you contribute to the immediate interest of the decisionmakers, the more access and influence you will have. so if you are giving them something they can use and this is something they don’t have and they find this valuable, then the relationship becomes more of a mutual benefit kind. why do we have access as cyprus 2015? because we say listen; if you give up güzelyurt (morphou) or maraş (varosha), this is how much reaction you will get, or if you accept more than fifty thousand people of turkish origin to become citizens of a united cyprus, this is how much reaction you will get. how many greek cypriots will accept, not to be reinstated to their old properties? this is very valuable information... decision-makers need information. we try to bring expert knowledge to the attention of the policy-makers that they usually lack because they are surrounded by people who are not really experts… this can be technical or political information but information should be relevant with the needs of the policy-makers. (expert 2) citizen support information, however, is not the only thing the policy-makers need. politicians need votes. in other words, they need citizen support. bureaucrats need legitimacy and they get this via citizen support as well. how many members a peacebuilding organisation is representing or how many people can it mobilise? these are very important questions. the interviewees suggest that citizen support is pivotal for exerting influence: because the number of members an organisation is representing means votes for them, when the politicians are judging whether they should give you an appointment or take your ideas into consideration, they always ask themselves; ‘i am going to give him my half an hour or so; in return, what am i going to get from this guy? first, i can gain some information, but secondly and sometimes more importantly, it is very important for me to accept this guy because he may be representing 1,000 votes. i have to take him into consideration!. (expert 3) european journal of government and economics 3(1) 54 political allies although the exchange argument may be valid, we should also consider that influence is decided by exogenous political factors. the experts were of the same opinion that it is much more difficult to convince policy-makers that have a more ethno-nationalist approach to the cyprus problem. similarly, influence is limited when peace-building organisations lobby the policy-makers that are not favourably disposed toward civil society participation in the policy-making process. this argument is in line with the political opportunity structures and political mediation theories that argue that having political allies increases the likelihood of influence: naturally, the ‘leftist’ policy-makers that work on reconciliation are more inclined to listen to us. i’d lobby both friendly and non-friendly politicians though. because, in fact, you would need a good mix of people. the positive ones will most likely take you further. the negative ones, on the other hand, if you never approach them, then you would never have a chance to have an attempt to convert them. (expert 4) when you have a certain character who is negative towards civil society participation in policy-making and sees you as a nuisance and thinks that you are rocking the boat, he/she is going to shy away from you and it will be much harder to deal with him/her. (expert 5) public opinion the experts also mentioned the possible impact of public opinion. based on the findings in the literature, it is expected that if public opinion is not in line with the demands of the peacebuilding organisations, then these organisations are less likely to be able to exert influence. interviewees suggest that this may be the case. however, what is clear is that most issues that the lobbyists work on are more technical in nature and the preferences of the policy-maker himself/herself, irrespective of the public opinion, could be a more decisive exogenous factor that determines if influence takes place or not: of course, politicians, who want to be re-elected are not going to tell you ‘yes’ if you want something that a large number of voters are against. but there are ways around this. many times, we work on small technical issues that do not catch the eye of the public. therefore, politicians are less concerned with the public opinion in such cases. (expert 3) issue salience regarding issue salience and the likelihood of success, some interviewees suggested that lobbyists are more likely to be successful when there is a dynamic for resolving the problem at the highest political level. when there are some prospects with respect to the solution of the cyprus problem and the issue is salient, policy-makers are more likely to be willing to engage with the lobbyists: one very important issue is the general conjecture that you are living in. for example, if there is a situation when the reconciliation issue is becoming quite hot in the sense that we are at a stage of critical point in the negotiation process, it affects your work. in those times, peace issue occupies a very high spot on the agenda of the policy-makers and it is easier to influence those people because all of a sudden, they start thinking about reconciliation and peace and they want some ideas or some technical knowledge. when there is no possibility and everybody is very pessimistic about things, policy-makers just put the issue at the bottom of their agenda and they don’t want to hear anything about it. (expert 3) networking skills the experts, however, stressed that none of these variables may be as important as networking skills. in a small country, it is very important that people know the policy-makers. most individuals working for powerful interest groups have at least a few contacts, controlling the gates of political power. personal relationships make access and influence much more likely. it is much easier to establish long-term relationships with the governmental actors and ask for certain policies to be enacted if one possesses the skills to establish these contacts. interest group literature does not pay enough attention to the role of networking skills. the kanol ● interest group influence in micro-states 55 following quotations provide evidence for the critical nature of personal relationships and the skills to establish these relationships: personal contacts are very important. it is easier for the civil society representatives who know people to access the authorities and it is easier for the authorities to have access to civil society as well. (expert 6) i am an academic myself, and i happen to know the cyprus problem quite well, let’s say, since this is my research area and all that, i have a specific name that some people know, especially by the decision-makers. then, for example, i, as a member of a cso, if i want to have access, to want to go and see, to talk to a decision-maker, compared to somebody, let’s say an assistant at the eastern mediterranean university, of course, it makes a very big difference. (expert 2) i mean networking is an issue here ok… so, if an ex-policy maker establishes an ngo then obviously, he knows the channels or she knows the channels and she knows how to make a move and hence that ngo has … i’m giving an extreme situation… let’s say two academics and two politicians and two business advisors get together and form an ngo then that becomes a very strong structure immediately. because there is enough weight and networking substance that will increase access and influence. so by extension, networking is very important. (expert 4) i would stress the word capacity because you might have a hundred staff and not one of them may have the capacity to exert influence. you know when we talk about capacity you are also talking about people having good networks, not just their education and experience, but you know they might have good networks and you know they can pull the strings, this is quite important. (expert 3) discussion and conclusion this paper argues that networking skills are an important determinant of interest group influence in micro-states. since the role of networking skills is underresearched, the paper aimed to contribute to the literature on the determinants of interest group influence by providing evidence from the interviews undertaken in the republic of cyprus and the turkish republic of northern cyprus. the qualitative data obtained from peace advocacy experts in these two states provided some evidence for this hypothesis. a couple of points should be made for guiding future research on this topic. expert interviews conducted for this paper provided valuable evidence for the role of networking skills in the influence game. however, the absence of expert interview data from large states prevented testing a possible difference between interest group influence in micro-states and large states. networking skills may actually be more valuable for exerting influence in micro-states than large states when the highly personalistic nature of politics in micro-states is taken into consideration. future research could benefit from a most similar systems design (mssd) analysis and conduct a larger number of interviews both from a micro-state and a large state to see if networking skills are significantly more important for influencing political actors in micro-states than in large states. a careful reader may also question if the personalistic and clientelistic nature of politics in the republic of cyprus and the turkish republic of northern cyprus is indeed due to its smallness rather than other factors. after all, it is a fact that the countries in southern europe show similar political characteristics with these two micro-states when compared to the northern european countries. there is, however, much evidence that can suggest that smallness of these two states has an independent effect other than the geographical location of these micro-states. this is due to the opportunity available for us to compare the nature of politics in other micro-states with the two micro-states analysed in this paper. brilliant indepth research from micro-states all over the world suggest that similar phenomena exist in most micro-states in regard to the political process (see corbett, 2013; veenendaal, 2013a; 2013b; 2013c). at the expense of sounding tautological, it should be stressed that more research in different countries and other policy areas is needed to substantiate the argument european journal of government and economics 3(1) 56 put forward. nevertheless, this study aims to contribute to the literature on interest group influence and the nature of politics in micro-states. references amenta, edwin, neal caren, elisabeth chiarello and yang su (2010) ‘the political consequences of social movements’, annual review of sociology 36: 287-307. amenta, edwin, neal caren, and sheera joy olasky (2005) ‘age for leisure? political mediation and the impact of the pension movement on us old-age policy’, american sociological review 70 (3): 516-538. amenta, edwin, bruce g. carruthers and yvonne zylan (1992) ‘a hero for the aged? the townsend movement, the political mediation model, and us old-age policy, 1934-1950’, american journal of sociology 98 (2): 308-339. amenta, edwin, kathleen dunleavy and mary bernstein (1994) ‘stolen thunder? huey long's "share our wealth," political mediation, and the second new deal’, american sociological review 59 (5): 678-702. anckar, dag (2002a) ‘democratic standard and performance in twelve pacific micro-states’, pacific affairs 75 (2): 207-225. anckar, dag (2002b) ‘why are small island states democracies?’. the round table: the commonwealth journal of international affairs: 91 (365): 375-390. anckar, dag (2003) ‘direct democracy in microstates and small island states’, world develpment 32(2): 379-390. anckar, dag (2008). ‘microstate democracy: majority or consensus; diffusion or problem-solving?’, democratization 15(1): 67-85. anckar, dag (2010) ‘small is democratic, but who is small?’, arts and social sciences journal: 1-10. arnold, r. douglas (1990) the logic of congressional action. new haven: yale university press. austen-smith, david (1998) ‘allocating access for information contributions’, journal of law, economics and organization 14 (2): 277-303. austen-smith, david and john r. wright (1994) ‘counteractive lobbying’, american journal of political science 38 (1): 25-44. bauer, raymond a., ithiel de la sola pool and lewis a. dexter (1963) american business and public policy: the politics of foreign trade. new york: atherton press. beyers, jan and caelesta braun (2014) ‘ties that count: explaining interest group acces to policymakers’, journal of public policy 34(1): 93-121. baumgartner, frank r., jeffrey berry, marie hojnacki, david c. kimball and beth l. leech (2009) lobbying and policy change: who wins, who loses, and why. chicago: university of chicago press. baumgartner, frank r. and bryan d. jones (1993) agendas and instability in american politics. chicago: university of chicago press. bouwen, pieter (2004) ‘exchanging access goods for access: a comparative study of business lobbying in the european union institutions’, european journal of political research 43 (3): 337-369. burstein, paul (1981) ‘the sociology of democratic politics and government’, annual review of sociology 7: 291-319. burstein, paul (2003) ‘the impact of public opinion on public policy: a review and an agenda’ political research quarterly 56 (1): 29-40. kanol ● interest group influence in micro-states 57 carpenter, daniel p., kevin m. esterling and david m. j. lazer (1998) ‘the strength of weak ties in lobbying networks: evidence from health-care politics in the united states’, journal of theoretical politics 10(4): 417-44. civil society organizations directory. (2011). the management centre of the mediterranean and the ngo support centre. url (consulted on 05.07.2012) http://www.csodirectory-cyprus.eu/. cohen, jeffrey e. (1997) presidential responsiveness and public-policy making. ann arbor: the university of michigan press. corbett, jack (2013) ‘everybody knows everybody: practicing politics in the pacific islands’.democratization doi:10.1080/13510347.2013.811233. crombez, christophe (2002) ‘information, lobbying and the legislative process in the european union’, european union politics 3 (1): 7-32. dahl, robert alan and edward r. tufte (1973) size and democracy. stanford: stanford university press. devlet planlama örgütü (2011) kktc nüfus ve konut sayımı. url (consulted 09.03.2014) http://www.devplan.org/nufus-2011/nufus%20son_.pdf. erikson, robert, s., michael b.mackuen and james a.stimson (2002) the macro polity. new york: cambridge university press. fiorina, morris p. (1989) congress: keystone of washington establishment. new haven: yale university press. giugni, marco (2004) social protest and policy change: ecology, antinuclear, and peace movements in comparative perspective. lanham, md: rowman & littlefield. giugni, marco (2007) ‘useless protest? a time-series analysis of the policy outcomes of ecology, antinuclear, and peace movements in the united states, 1977-1995’, mobilization: an international quarterly 12 (1): 53-77. hadenius, axel (1992). democracy and development. cambridge: cambridge university press. haider-markel, donald p. and kenneth j. meier (1996) ‘the politics of gay and lesbian rights: expanding the scope of conflict’, the journal of politics 58 (2): 332-349. haider-markel, donald p. and kenneth j. meier, (2003) ‘legislative victory, electoral uncertainty: explaining outcomes in the battles over lesbian and civil rights’, review of policy research 20 (4): 671-690. hall, richard l. and alan v. deardorff, (2006) ‘lobbying as legislative subsidy’, american political science review 100 (1): 69-84. hall, richard l. and frank w. wayman (1990) ‘buying time: moneyed interests and the mobilization of bias in congressional committees’. american political science review 84 (3): 797-820. heaney, michael t. (2006) ‘brokering health policy: coalitions, parties, and interest group influence’, journal of health politics, policy and law 31(5): 887-944. heitshusen, valerie (2000) ‘interest group lobbying and us house decentralization: linking informational focus to committee hearing appearances’, political research quarterly 53 (1): 151-176. jacobs, david (1974) ‘dependency and vulnerability: an exchange approach to the control of organizations’, administrative science quarterly 19 (1): 45-59. european journal of government and economics 3(1) 58 jacobs, lawrence r. and robert y. shapiro (2000) politicians don’t pander: political manipulation and the loss of democratic responsiveness. chicago: chicago university press. jacobs, lawrence r. and robert y. shapiro (2002) ‘politics and policymaking in the real world: crafted talk and the loss of democratic responsiveness’, in jeff manza, fay lomax cook, and benjamin i. page (eds) navigating public opinion: polls, policy and the future of american democracy. oxford, oxford university press, pp. 54-75. kingdon, john w. (1995) agendas, alternatives, and public policies. new york: harper collins. kitschelt, herbert (1986) ‘political opportunity structures and political protest: antinuclear movements in four democracies’. british journal of political science 16 (1): 57-85. klüver, heike (2013) lobbying in the european union: interest groups, lobbying coalitions, and policy change. oxford: oxford university press. kriesi, hanspeter., ruud koopmans, jan willem duyvendak and marco g. giugni (1995) the politics of new social movements in western europe. a comparative analysis. london: university of minnesota. lax, jeffrey r.and justin h. phillips (2009) ‘gay rights in the states: public opinion and policy responsiveness’, american political science review 103 (3): 367-386. levine, sol and paul e. white (1961) ‘exchange as a conceptual framework for the study of interorganizational relationships’, administrative science quarterly 5 (4): 583-601. lindblom, charles e. (1959) ‘the science of "muddling through"’. public administration review, 9(2): 79-88. mayhew, david r. (1974) congress: the electoral connection. new haven, ct: yale university press. mcveigh, rory, michael r. welch and thoroddur bjarnason (2003) ‘hate crime reporting as a successful social movement outcome’, american sociological review 68 (6): 843-867. meyer, david s. and debra c. minkoff(2004) ‘conceptualizing political opportunity’, social forces 82 (4): 1457-1492. milbrath, lester w. (1963) the washington lobbyists. chicago: rand-macnally. monroe, alan d. (1998) ‘public opinion and policy, 1980-1993’. public opinion quarterly 62 (1): 6-28. ott, dana (2000). small is democratic: an examination of state size and democratic development. new york: garland. page, benjamin i. and robert y. shapiro (1983) ‘effects of public opinion on policy’, american political science review 77 (1): 175-190. pfeffer, jeffrey and gerald r. salancik (2003) the external control of organizations: a resource dependence perspective. stanford: stanford university press. poppelaars, caelesta (2009) steering a course between friends and foes: why bureaucrats interest with interest groups. delft: eburon. potters, jan and frans van winden (1992) ‘lobbying and asymmetric information’, public choice 74 (3): 269-292. kanol ● interest group influence in micro-states 59 reenock, christopher m. and brian j. gerber (2008) ‘political insulation, information exchange, and interest group access to the bureaucracy’, journal of public administration research and theory 18 (3): 415-440. schlozman, kay lehman and john t. tierney (1986) organized interests and american democracy. new york: harper collins. smith, richard a. (1984) ‘advocacy, interpretation, and influence in the u.s. congress’, american political science review 78 (1): 44-63. soule, sarah a. and susan olzak (2004) ‘when do movements matter? the politics of contingency and the equal rights amendment’, american sociological review 69 (4): 473-497. srebrnik, henry (2004) ‘small island nations and democratic values’, world development 32(2): 329-341. statistical service of the republic of cyprus (2011) new publication: demographic report, 2010-2011. url (consulted 09.03.2014): http://www.mof.gov.cy/mof/cystat/statistics.nsf/all/c6ece5795eac1ed8c2257ab 70038fcd4?opendocument&sub=1&sel=1&e=&print. veenendaal, wouter (2013a) ‘democracy in microstates: why smallness does not produce a democratic political system’. democratization doi:10.1080/13510347.2013.820710 veenendaal, wouter (2013b) ‘size and personalistic politics: characteristics of political competion in four microstates’, the round table: the commonwealth journal of international affairs 102 (3): 245-257. veenendaal, wouter (2013c) ‘size and institutional legitimacy: the case of st kitts and nevis’, commonwealth & comparative politics 51 (3): 243-361. wright, john r. (1990) ‘contributions, lobbying and committee voting in the u.s. house of representatives’, the american political science review 84 (2): 417438. sources of economic fluctuations in france: a structural var model european journal of government and economics volume 1, number 1 (june 2012) issn: 2254-7088 66 sources of economic fluctuations in france: a structural var model nabil ben-arfa, university of nice sophia antipolis, france* abstract this paper studies the economic fluctuations of an open economy such as the french economy. a system of variables containing output, price level, trade balance, real exchange rate and oil prices is analyzed by applying the structural vector autoregressive (svar) methodology initiated by sims (1980). this set of variables allows to evaluate the main sources of impulses of the french economy fluctuations. the results show that five structural shocks are identified using the long-run constraints implemented by blanchard and quah (1989). from the svar dynamic properties, impulse response functions and variance decomposition, the french economy is shown to be particularly vulnerable to supply and oil price shocks, where these two shocks respectively contribute to 40% and 35% of the economic disturbance. france is also hit by important external shocks which damage its trade balance position. finally, it is found that shocks related to economic policy (demand shocks) have a quite limited impact on the economic activity. jel classification e32; f41; c22 keywords economic fluctuations; external shocks; internal shocks; oil price shock; svar model * address for correspondence: nabil ben arfa, cemafi, university of nice sophia-antipolis, résidence les imperators, immeuble le constantin a, chemin de la lauve, 83700 saint raphaël, france. e-mail : nabil_ar@yahoo.fr. doi: https://doi.org/10.17979/ejge.2012.1.1.4277 european journal of government and economics 1(1) 67 introduction the 1980s have operated a methodological and a theoretical revival on the economic fluctuations analysis. the aim of this paper is to deal with empirical treatment of economic disturbances. sims (1980) was the pioneer of the fluctuations analysis within the vectorial autoregressive model, where impulses are apprehended as innovations in a statistical term. these var models were introduced as an alternative to the traditional econometric models. sims proposed a new form of modeling based on no a priori and where no distinction is made between exogenous and endogenous variables. since pioneer work of sims (1980), the main empirical work dealing with the sources of economic fluctuations lay on autoregressive vectorial model. these canonical var models however posed some problems related to the shocks identification, they faced a lot of criticisms, qualifying them as “atheoretical” models. these criticisms lead to the birth of structural var models, models in which shocks identification is conducted by the imposition of constraints drawn from economic theory. it is this methodology of structural var which will be applied to the french economy. we will apply a structural var model to the french economy in order to identify the main shocks which are the origin of the economic activity fluctuations. in the second section we will reconsider the theoretical and the methodological revival of fluctuations analysis. in the third and the fourth part of the paper we explore the data used and estimate the structural var model. finally, we interpret the results. the methodological and theoretical revival of the fluctuation analysis: the 1980s has operated a methodological and a theoretical revival on the analysis of economic fluctuations. the methodological revival was initiated by sims (1980); it was inscribed on the line of the impulse-propagation approach suggested by frisch (1933) and slutsky (1927). on a theoretical level, real business cycle theory constitutes a true theoretical revival on the fluctuations analysis: it proposes to explain the main part of the economic fluctuations within the neo-classic growth model disturbed only by shocks affecting the total factor productivity. this marks the abandonment of the debate on the relative importance of monetary versus fiscal shocks. the debate on the relative importance of supply and demand shocks emerges. real business cycle theory at the beginning of the eighties, the relevance of the equilibrium monetary theory was rejected in a theoretical as in an empirical level. it is in this context that appears the real business cycles theory, or rbc1, with the pioneers’ models of kydland and prescott (1982) and long and plosser (1983) in closed economy. the real business cycle theory considers economic fluctuations as the optimal response of economic agents to shocks on the total factor productivity. the models of real business cycle thus conceive the evolution of economic aggregates as the decision result of a great number of agents seeking to maximize their utility and only constrained by technological resource. the real business cycle theory attributes an insignificant role, even no role, to the monetary policy 1 for real business cycles. european journal of government and economics 1(1) 68 these basic models were followed by many extensions: extensions to open economies, with the international real business cycle of backus, kehoe and kydland (1992, 1994, and 1995). extensions to others shock in addition to the technological shock, by borrowing theoretical assumptions from the keynesian theory. criticisms addressed to the basic real business cycle models lead to the development of an abundant literature, with increasingly sophisticated models. results of these developments were not always satisfactory especially concerning the reproduction of the stylized facts. the methodological contribution of the real business cycles theory is however admitted by a large part of economists. parallel to this movement within the real business cycle theory, a new school of thought was emerging; it is the new keynesian macroeconomics. the new keynesian (nk) shares with the partisans of the real business cycle theory the fact that macroeconomic requires more microeconomic bases. however, nk economists believe that market imperfections are the key to understanding the real-world. the introduction of nk ideas into rbc models seems to make results definitely more satisfactory, in the sense that these models are accepted by economics profession and that their empirical results are more realistic. the introduction of the prices rigidity was sufficient to join again with the monetary policy, neutral and without effect in basic rbc models. some economists saw in this “marriage” between rbc and keynesian, the birth of “the new neo-classical synthesis” (goodfriend and king 1997). nowadays, macroeconomic models incorporate the principal theoretical elements of rbc models. they adopt their general structure; seek to identify the impulses response function of agent in a general equilibrium structure. on the other hand, the way in which the models define and identify the cycles is substantially different from the original contributions, various types of imperfections and rigidities are introduced. these imperfections proposed by new keynesian are related to the imperfect nature of competition on goods market, the specificity of financial market exchange, etc. during last decades, rbc initials disappeared gradually and those of dsge appear (dynamic stochastic general equilibrium). the methodological revival: var model sims (1980) proposed a tool for fluctuations analysis based on impulses, defined as statistical innovations. since sims contribution of 1980, the mains empirical work on the economic fluctuations sources lay on autoregressive vectorial methodology. the purpose of sims consists in evaluating the contribution of various innovations of a system to the dynamics of each variable. to distinguish the impulses response from the propagation mechanisms, he proposes the choleski method of orthogonalization. following criticisms and in particular those concerning the impossible interpretation of shocks economically through the choleski decomposition, many authors suggest to base the orthogonalization of shocks on structural model of innovations, the structural var model. shapiro and watson (1988), blanchard and quah (1989) and gali (1992), proposed to identify structural impulses, which are interpretable economically: supply shocks, demand, economic policy…their methods of identification are based on restrictions drawn from the economic theory. from an econometric point of view the structural impulses are estimated as a function of the canonical innovations, obeying to constraints resulting from the economic theory. the imposed restrictions can be of different kind and their economic implications european journal of government and economics 1(1) 69 diametrically opposite. one distinguishes two types of restrictions used in the recent literature: short term restrictions and long run restrictions. the short run constraints relate to the instantaneous answers of variable to shocks. long run restrictions are related to the long term shocks responses. those developments make the birth of the structural var model, i.e var models where it is possible to give economic definition to various shocks. data characteristics and var model estimation the purpose of this section is to analyze the economic disturbances in an open economy, the french economy. empirical study presented in this section is based on the var methodology incited by sims (1980). these recent developments on time series econometrics are applied to a system of variable including output, prices, trade balance, real exchange rate and oil price. this system of variables makes possible the evaluation of the main source of disturbance in the french economy. so, in an autoregressive vectorial model including these variables, five structural shocks are identified with the help of the blanchard and quah (1989) method of decomposition. long term characteristics of the data before the model estimation, we must preliminary check the order of integration and test the possible presence of cointegration relationship between variables. we use quarterly data extending from 1978q1 to 2007q4:2 y: gdp logarithm p: logarithm of consumer price index se : logarithm of trade balance tc: logarithm of the real effective exchange rate pp: logarithm of the oil price tests of stationarity to analyze the long-term properties of the data, we use three different methods: augmented dickey-fuller test (1979), phillips-perron test (1988) and kwiatkowskiphillips-schmidt-shin test (1992). 2 our data comes from the insee (institut national de la statistique et des etudes economiques) database and the ifs (international financial statistics) from the imf (international monetary fund). q for quarter. all series are seasonally adjusted. the oil price is in us dollars. the real effective exchange rate is computed with ulcs. european journal of government and economics 1(1) 70 table 1. unit root tests augmented dickey fuller (adf) phillips-perron (pp) kwiatkowski-phillips-schmidt-shin (kpss) variables statistics of the test critical value (5%) statistics of the test critical value (5%) statistics of the test critical value (5%) gdp 5.63 -1.95 13.17 -1.95 1.30 0.46 ∆ gdp -4.92 -2.89* -7.55 -2.89* 0.05 0.46 trade balance -0.17 1.95 -0.03 1.95 0.60 0.46 ∆ (trade balance) -5.35 -1.95 -10.60 -1.95 0.19 0.46 real foreign exchange rate -1.10 -1.95 -1.10 -1.95 1.20 0.46 ∆ (real foreign exchange rate) -9.66 -1.95 -9.66 -1.95 0.07 0.46 cpi -0.05 -1.95 -0.05 -1.95 0.54 0.46 ∆ (cpi) -8.72 -1.95 -8.72 -1.95 0.05 0.46 the oil price 1.05 -1.95 1.01 -1.95 0.87 0.46 ∆ (of the oil price) -8.57 -1.95 -8.60 -1.95 0.15 0.46 notes: * this critical value is relating to the model with constant and without trend. the character ∆, indicates the first difference of the variable. all the variables are in logarithm. according to unit root tests, it appears that all the variables of the model are nonstationary; they are integrated of order one. cointegration relationship to test the possible existence of cointegration between variables, we use the test implemented by johansen (1991) and johansen and juselius (1990).3 so we suppose the vector x of dimension (5×1): x =  pptcsepy ,,,, the general representation of the model in vecm4 form is given by the following expression:  tx = c + ttptpt xxx   11111 ... where matrices i  (i = 1,…, p) are of size (n×n). the method suggested by johansen and juselius is based on two assumptions: on one hand the vector x must be i (1) and in addition the vector of the residual  must be a white noise. the strategy of the test consists in analyzing the rank of 3 the advantage of this method is that it allows for the identification of multiple cointegrating vectors. the engle-granger cointegration methodology (engle and granger, 1987) is limited to testing only for one cointegrating vector. 4 vecm for vector error correction model. european journal of government and economics 1(1) 71 the matrix  . if the rank of  is zero then there is no cointegration between the variables. if the rank of the matrix  is r, there exist two matrices of dimension (n×r),  and  as:  =  ' ' is a matrix which contains the r vectors of cointegration.  is a matrix which contains the weights associated to each vector of cointegration. to determine the number of vectors of cointegration r, johansen proposes two statistics: the trace test and the maximum eigenvalue test. the trace statistic is the following: tr = t )1log( 1     n qi i the ho hypothesis is: r ≤ q, i.e. there are at least r vectors of cointegration. this test is equivalent to test the rank of the matrix  since testing the existence of r vectors is equivalent to test the following null assumption: rg (  ) = r three cases can be presented: rg (  ) = 0, this means that r = 0: there is no cointegration, in other words tx is integrated of order 1 but not cointegrated. it is then possible to estimate a var model on  tx . rg (  ) = r, with r<n: tx is cointegrated with r rank, thus r relations of cointegration exist. a vecm can be estimated. rg (  ) = n, in this case the matrix  is full rank, tx is stationary, and there is no cointegration. a var model can be estimated directly on t x . the maximum eigenvalue test statistic is: max 1 log(1 ) q vp t       the ho hypothesis is r= q, the alternative one is r= q+1. the results of these tests are conditional to the var estimation, and consequently to the lag choice. we have used aic criterion, the selected lag number is equal to 3. we carry out tests by supposing the absence of trend and constant in the relationship of cointegration and in the vecm model. european journal of government and economics 1(1) 72 table 2. cointegration test: trace test assumption eigenvalue trace statistic critical value: 5% probability r = 0 0.193010 48.02 69.81 0.7207 r ≤ 1 0.082414 23.15 47.85 0.9585 r ≤ 2 0.075934 13.17 29.79 0.8835 r ≤ 3 0.024574 4.01 15.49 0.9024 r≤4 0.009677 1.12 3.84 0.2882 according to the results appearing in the table 2, we accept the null hypothesis of absence of cointegration (48.02< 69.81). max-eigenvalue test (table 3) also indicates no cointegration at the 0.05 level. table 3. cointegration test: maximum eigenvalue test assumption eigenvalue max-eigen statistic critical value: 5% probability r = 0 0.193010 24.87 33.87 0.3935 r ≤ 1 0.082414 9.97 27.58 0.9852 r ≤ 2 0.075934 9.16 21.13 0.8193 r ≤ 3 0.024574 2.88 14.26 0.9540 r≤4 0.009677 1.12 3.841 0.2882 finally, the various tests carried out, we conclude by the rejection of the stationarity and cointegration of the five series in level, so we specify a model in first difference. the var model will be consequently built on the growth rate of gdp ( y ), on the first difference of real effective exchange rate ( )tc , on the first difference of trade balance rate ( se ), on the inflation rate ( p ) and on the first difference of oil price (∆pp). var model identification basing on results found below, the var model in matrix form is the following: tx = tit p i ixa    1 tx = (∆pp, se , y , tc , p ,) ' , the column vector of the explained variables which depends on its p lags. ia , are the square matrices of the coefficients to be estimated. t , is the vector of the residuals. t = ( pp , se , y , tc , p ,) ' represents at each moment t, the value of tx which is not explained by its past. these residuals are also regarded as innovations or impulses. from the vector of variables t x , we will define five shocks: a supply shock, a real demand shock, a nominal demand shock, an external shock (shock on the trade balance) and an oil price shock. we consider the residual resulting from the first equation as an oil price shock, the one resulting from the second equation as an external shock, that resulting from european journal of government and economics 1(1) 73 the gdp equation as a supply shock and finally residuals resulting from the fourth and the fifth equation are supposed to be demand shocks (real and nominal). however, this definition of the shocks is likely to be false since the residuals resulting from a canonical var model are often correlated. consequently, we will adopt the structural var method in which shocks identification is based on constraints resulting from the economic theory. identifying constraints we adopt the structural var methodology developed by blanchard and watson (1986), bernanke (1986), shapiro and watson (1988), blanchard and quah (1989). two types of restrictions are mentioned in the literature; short-run restrictions and long-run restrictions. to identify the structural shocks, we choose the identification of blanchard and quah (1989) imposing long run constraints.5 in other words we will constrain certain variables not to have long-term effects. we attempt to estimate the following structural var model:                      p tc y se pp = )(ld                        p tc y se pp      the left part of this equality describes the vector of variables entering into the var system. the right-hand side, is a mixture of the structural shocks,  (exogenous forces of the system), and of the matrix d (l) which describes the coefficients associated to these shocks. the identification of the structural shocks is done by imposing long run constraints using the matrix d (1). the long-term answers to shocks are defined by this matrix: )1(d =                 )1()1()1()1()1( )1()1()1()1()1( )1()1()1()1()1( )1()1()1()1()1( )1()1()1()1()1( 5554535251 4544434241 3534333231 2524232221 1514131211 ddddd ddddd ddddd ddddd ddddd the identification of shocks in a system of 5 variables requires 10 constraints: first constraints are drawn from the open economy assumption. it results from this hypothesis that domestic shocks do not affect the variables generating the external shocks: 0)1()1()1()1()1()1( 252423151413  dddddd . we can then identify 6 constraints. 5 our choice is justified; this kind of restriction is applied only in the case of integrated variable which is the case of our model. european journal of government and economics 1(1) 74 following constraints are drawn from the theoretical assumption commonly accepted since the work of blanchard and quah (1989). it is about the distinction between supply and demand shocks. indeed, economic theory supposes that supply shocks can affect economic activity on the long term. whereas demand shocks affect economic activity only on the short term. it results two additional constraints: 0)1()1( 3534  dd concerning the constraints that allow the distinction between the two demand shocks, real demand shock (generally assimilated to a fiscal shock or a foreign exchange rate shock) and the nominal demand shock (monetary shock for example). a real demand shock is supposed to have an effect on real foreign exchange rate whereas a nominal shock does not affect the foreign exchange rate. it results an additional constraint: .0)1(45 d finally the last constraint is related to the oil price: an oil price shock is supposed to be the only shock which can have long-term effects on the oil price. this assumption gives us a last constraint: 6 . thus the matrix representing the effects of structural shocks on the model variables is the following one: )1(d =                 )1()1()1()1()1( 0)1()1()1()1( 00)1()1()1( 000)1()1( 0000)1( 5554535251 44434241 333231 2221 11 ddddd dddd ddd dd d after the constraints identification, the estimation of the var model requires the determination of the lag. we use the criterion test of information. lag selection criteria the results of aic, sc and hq are exposed in the following table. table 3. lag selection criteria of the var model lag logl lr fpe aic sc hq 0 1497.285 na 1.45e-18 -26.88801 -26.76596* -26.83850* 1 1531.364 64.47411 1.23e-18 -27.05160 -26.31930 -26.75453 2 1559.340 50.40804* 1.17e-18* -27.10523* -25.76267 -26.56059 3 1570.737 19.50838 1.50e-18 -26.86013 -24.90732 -26.06793 4 1589.531 30.47622 1.70e-18 -26.74831 -24.18524 -25.70855 * indicates lag order selected by the criterion 6 this assumption allows the identification of these four constraints: 0)1()1()1()1( 15141312  dddd . we take the first one, 0)1(12 d , since the three remaining ones were already taken into account using the assumption of independence between internal shocks and external shocks. 0 ) 1( 12  d european journal of government and economics 1(1) 75 the results of aic tests, sc and hq, give different conclusions: the order of the var model is equal to 1 according to criteria sc and hq, it is equal to 3 according to the criterion of aic, fpe and lr the majority of lag length criteria suggest the use of a lag of 3 in the analysis. we then take p = 3. estimation of the structural var model: impulse response functions and variance decomposition impulse response functions and variance decomposition svar model estimation is conducted by estimating the ordinary var model7, then we apply the long term identifying constraints previously identified, and finally we determinate the structural shocks, their impacts and their contributions to the french economy fluctuations. sources of growth rate fluctuations chart 1 represents the response impulse functions of growth rate to the various shocks. it shows the effects of the five shocks on the growth rate. we notice a positive and significantly persistent effect of supply shocks in short-term us in the long run. however, the real and nominal demand shocks affect the economic activity only transitorily. 7 main validation tests of the var model are reported in the appendix. european journal of government and economics 1(1) 76 chart 1. impulse response functions of the growth rate -.006 -.004 -.002 .000 .002 .004 .006 .008 5 10 15 20 25 30 response of the growth rate to external shock -.006 -.004 -.002 .000 .002 .004 .006 .008 5 10 15 20 25 30 response of the growth rate to supply shock -.006 -.004 -.002 .000 .002 .004 .006 .008 5 10 15 20 25 30 response of the growth rate to real demand shock -.006 -.004 -.002 .000 .002 .004 .006 .008 5 10 15 20 25 30 response of the growth rate to nominal demand shock -.0002 .0000 .0002 .0004 .0006 .0008 .0010 .0012 5 10 15 20 25 30 response ot the growth rate to oil price shock indeed, as it was predicted by economic theory, a positive supply shock involves an improvement of the activity level, this improvement remains rather bearable in long-term. however, demand shocks have insignificant impact, their impacts tend to be equal to zero in long term. concerning the external shocks, the impulse response functions show a negative effect of these shocks on the trade balance. this negative effect can be explained by the degradation of price competitiveness of france resulting from the progressive appreciation of the euro compared to the dollar, which leads to a fall in exports and to an economic activity decrease. this degradation can also be explained by the rise of the oil price or other reasons. moreover and basing on the model results we notice the importance of the oil price effect on economic activity. the gdp impulse response function to shocks shows an important effect of oil price shock on the activity level. the growth rate responds negatively to oil price shock. the initial response is the largest one; in long run the european journal of government and economics 1(1) 77 effect tends to be insignificant. jalles (2009) adopts several oil price specifications and also found a significant impact of oil price shock on french economic activity. table 4. variance decomposition of the growth rate quarters oil price shock external shock supply shock real demand shock nominal demand shock 1 42.28251 22.08729 21.31262 2.140815 12.17676 4 39.02417 15.70284 34.68763 2.843572 7.741792 8 35.08653 14.36379 41.12939 2.342595 7.077686 12 34.60134 13.57045 43.22037 2.148490 6.459353 16 34.42554 13.13336 44.23477 2.048563 6.157772 20 34.33957 12.85764 44.77958 1.996534 6.026670 24 34.29383 12.67877 45.06698 1.968955 5.991462 28 34.25937 12.56120 45.22237 1.954872 6.002194 30 34.24477 12.51787 45.27105 1.950650 6.015659 the table above reveals the contribution of each shock to the growth rate fluctuations. we notice the prevalence of supply and oil price shocks in the explanation of the growth rate dynamics. indeed, whatever the chosen horizon, short or long run, oil price shock explains between 40% and 35% of the activity variability, the supply shock explains between 21 % and 45% of the variability. france, as an importer of oil energy, is particularly vulnerable to oil price shock. concerning demand shocks, it arises from the variance decomposition, that these shocks have a limited contribution on the long-term economic activity. this consolidates our theoretical assumptions, stipulating that demand shocks do not have a permanent effect on the gdp. demand shocks (real or nominal) contribute to less than 6 % in the economic activity variability. in addition, the introduction of the assumption of an open economy into our model enables us to evaluate the contribution of external shocks apprehended in this case by shocks on the trade balance. this shock has a considerable effect on the economic activity; its contribution turns around 12% in the long term and exceeds 22% in the short term. to summarize, the variance decomposition of gdp shows a prevalence of supply and oil price shocks in the economic fluctuation explanation. sources of price fluctuations chart 2 indicates a positive impact of nominal demand shocks. these nominal demand shocks reflect the evolution of the money supply and highlight the narrow correlation between the price level and the monetary aggregates. chart 2 highlights the fact that a nominal demand shock leads to an increase in the general prices level. the raising of prices remains constant on the long term. in addition, the impulse response functions reveal the importance of supply shocks contribution in the variation of the price level. a positive supply shock (technological shock for example) will make the production more efficient, leads to an increase in output and thus lower the price level as it shown in the chart below. the effects of supply shocks are also more important than those of the real demand shocks. this result can be explained by the limited effects of the french fiscal policy since the european pact of stability constraints the budget deficit to only 3% of the gdp. european journal of government and economics 1(1) 78 chart 2. impulse response functions of the inflation rate -.016 -.012 -.008 -.004 .000 .004 .008 .012 .016 5 10 15 20 25 30 response of inflation rate to oil price -.016 -.012 -.008 -.004 .000 .004 .008 .012 .016 5 10 15 20 25 30 response of inflation rate to external shock -.016 -.012 -.008 -.004 .000 .004 .008 .012 .016 5 10 15 20 25 30 response of inflation rate to supply shock -.016 -.012 -.008 -.004 .000 .004 .008 .012 .016 5 10 15 20 25 30 response of inflation rate to real demand shock -.016 -.012 -.008 -.004 .000 .004 .008 .012 .016 5 10 15 20 25 30 response of inflation rate to nominal demand shock european journal of government and economics 1(1) 79 table 5. variance decomposition of the inflation rate quarters oil price shock external shock supply shock real demand shock nominal demand shock 1 0.013192 1.025571 58.29633 14.97440 25.69051 4 4.960914 3.455207 48.21400 11.05525 32.31463 8 7.848685 5.708743 38.26513 8.535835 39.64161 12 10.09025 5.150766 36.00894 7.568884 41.18117 16 11.47424 4.805916 35.80208 7.048559 40.86920 20 12.38600 4.537079 36.00211 6.705005 40.36980 24 13.03210 4.340852 36.28109 6.471194 39.87476 28 13.48659 4.200097 36.54344 6.309716 39.46016 30 13.66247 4.145376 36.65760 6.247748 39.28680 the variance decomposition of inflation rate shows a very substantial contribution of impulses conducted by the economic policy. the contribution is more important for nominal demand shocks, about 40%. this prevalence of nominal demand shocks remains stable whatever the time horizon. in addition, as we have notice when dealing with impulse functions, supply shocks contribute to a significant part on inflation rate variation, a contribution which turns around 35%. finally, considering the importance of the french economy openness degree, it would be interesting to highlight the external shocks impact on the price level. through the variance decomposition, we notice a very weak contribution of the trade balance shock on prices disturbances. this contribution is approximately about 4% in the long term, less than 1% in the short term. we also notice that an oil price shock is accompanied by an increase in the price level essentially in long term. in the short term the relative contribution of the oil price shock is almost equal to zero, however in the long term it turns around 13%. this increase (even if it remains controlled enough) cuts down the purchasing power of households, decreases consumption and consequently the growth rate. the oil prices rise of these last years, combined with an unstable geopolitical environment, seems to be durable not temporally. one can expect a continuous rise of oil prices; the economic policies should take into account this new international evidence by defining more rigorous energetic policies. european journal of government and economics 1(1) 80 sources of foreign exchange rate fluctuations chart 3. impulse response functions of the foreign exchange rate -.015 -.010 -.005 .000 .005 .010 .015 5 10 15 20 25 30 response of the foreign exchange rate to oil price shock -.015 -.010 -.005 .000 .005 .010 .015 5 10 15 20 25 30 response of the foreign exchange rate to external shock -.015 -.010 -.005 .000 .005 .010 .015 5 10 15 20 25 30 response of the foreign exchange rate to supply shock -.015 -.010 -.005 .000 .005 .010 .015 5 10 15 20 25 30 response of the foreign exchange rate to real demand shock -.015 -.010 -.005 .000 .005 .010 .015 5 10 15 20 25 30 response of the foreign exchange rate to nominal demand shock european journal of government and economics 1(1) 81 table 6. the variance decomposition of the foreign exchange rate quarters oil price shock external shock supply shock real demand shock nominal demand shock 1 4.913600 8.474808 36.02216 50.33014 0.259295 4 6.114626 10.06832 34.76513 47.35129 1.700633 8 6.894016 11.43277 33.69233 45.72826 2.252634 12 7.018748 11.34274 33.99508 45.26362 2.379807 16 7.080580 11.33318 34.02144 45.18350 2.381303 20 7.098915 11.32942 34.04914 45.14051 2.382014 24 7.111069 11.32563 34.06474 45.11766 2.380897 28 7.117800 11.32325 34.07302 45.10537 2.380558 30 7.120032 11.32233 34.07584 45.10117 2.380622 from the table above, we notice a prevalence of domestic shocks in the explanation of exchange foreign rate fluctuations; particularly the real demand shock, which is assimilated in our model to a fiscal shock or to an adjustment of foreign exchange rate. indeed, they contribute to approximately 50 % of the foreign exchange rate disturbance. concerning the nature of the impact, theoretically a real demand shock due to the aggravation of budget deficit involves an appreciation of the real foreign exchange rate and a deterioration of the external position. our empirical results are in conformity with this theoretical assumption. impulses response functions show an appreciation of the real foreign exchange rate when the economy is hit by a real demand shock which is probably caused by the overvaluation of the euro/dollar exchange rate since the fiscal policy in france is relatively controlled (the european pact of stability). concerning the remainder of domestic shocks, we notice a quite high contribution of supply shocks and a very limited contribution of nominal demand shocks; they respectively contribute to 36% and 2% of disturbances. impulses response functions reveal that the effects of nominal demand shocks are unstable and close to zero. in other hand a positive supply shocks involves a depreciation of the real foreign exchange rate. finally concerning the contribution of external and oil price shocks to foreign exchange rate fluctuations; it appears from the variance decomposition that these two shocks have a significant contribution but still lower in comparison to internal shocks. indeed, the external shocks contribute to approximately 11% of the foreign exchange rate variability, oil price shocks contribute to 7%. taking into account these results, we can conclude that foreign exchange rate disturbance is due primarily to real demand shocks; they contribute to approximately 50%. european journal of government and economics 1(1) 82 sources of trade balance fluctuations chart 4. impulse response functions of the trade balance -.004 .000 .004 .008 .012 .016 .020 .024 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 response of the trade balance to oil price shock -.004 .000 .004 .008 .012 .016 .020 .024 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 response of the trade balance to external shock -.004 .000 .004 .008 .012 .016 .020 .024 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 response of the trade balance to supply shock -.004 .000 .004 .008 .012 .016 .020 .024 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 response of the trade balance to real demand shock -.004 .000 .004 .008 .012 .016 .020 .024 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 response of the trade balance to nominal demand shock european journal of government and economics 1(1) 83 table 7. variance decomposition of the trade balance quarters oil price shock external shock supply shock real demand shock nominal demand shock 1 0.482441 50.32980 6.364164 7.407492 35.41610 4 4.023561 46.26756 7.478640 10.91904 31.31119 8 6.074570 42.74174 8.056011 11.02374 32.10393 12 6.318011 42.39966 8.081979 11.24891 31.95144 16 6.328384 42.36155 8.091934 11.25460 31.96354 20 6.329172 42.35446 8.094050 11.25585 31.96647 24 6.329163 42.35283 8.093642 11.25604 31.96833 28 6.329101 42.35188 8.093429 11.25587 31.96971 30 6.329075 42.35161 8.093417 11.25587 31.97003 based on the response impulse functions and the variance decomposition table, one notices the importance of nominal demand shocks; they contribute to approximately 30% of the trade balance variation in short as in long term. the remainder shocks have an insignificant effect on the trade balance. however, it is important to underline that an increase in oil prices contributes to the appreciation of real exchange rate in the short term and to its depreciation in the long term. since the emu, appreciation of the euro/dollar exchange rate worsens the french external position. the improvement of the french external balance position should be made by the amelioration of terms of trade, by the diversification of its business partners especially by the acquisition of new market shares (emergent market), by reducing labour cost, or by investing in research and innovation, etc. conclusion the results founded in this paper underline the french vulnerability to internal as to external shocks. they especially highlight the importance of supply and oil price shocks in economic fluctuations. indeed, through the two var models instruments (impulse response function and variance decomposition), we clearly notice the prevalence of supply shocks in the explanation of gdp fluctuations (between 21% and 45% depending in time horizon). oil prices shocks explain between 40% and 35% of economic disturbance. france, as a net importer of oil energy, is particularly vulnerable to oil price shocks; oil shock has a negative and durable effect on the economic activity. so it is important to find alternative solutions to reduce the economy dependence on oil energy. concerning demand shocks, particularly those relating to monetary and fiscal policies. results show that their effects are quite limited; this is probably due to the restrictive european economic policies adopted since the 1990s, and which is strongly controlled since the 1st january 1999 with the establishment of the european monetary union. the improvement of the french economic activity requires a better coordination, a better governance of the european economic policies. it also requires the improvement of the energy policies in order to attenuate the french economy dependence. regarding the french external position, a position to be taken seriously into account, france must encourage firms to invest and innovate to improve the competitiveness. france should benefit from the strong growth of emergent countries like china or india by orientating its exports towards sectors in expansion. it should also follows the german example by encouraging investments in small and medium-size companies. european journal of government and economics 1(1) 84 references backus, david and patrick kehoe (1992) ‘international evidence of the historical properties of business cycles’, american economic review, 82(4): 864-888. backus, david, patrick kehoe and finn e. kydland (1992) ’international real business cycles’, journal of political economy, 100(4): 745-775, backus, david, patrick kehoe and finn e. kydland (1994) ‘dynamics of the trade balance and the terms of trade: the j-curve? ‘, american economic review, 84(1): 84-103. backus, david, patrick kehoe and finn e. kydland (1995) ’international business cycles: theory and evidence’, in thomas f. cooley (ed) frontiers of business cycle research, pp. 331-356. princeton, nj: princeton university press. bernanke, ben s. (1986) ‘alternative explanations of the money-income correlation’, carnegie-rochester conference series on public policy, 25: 49–99. blanchard, oliver j. and mark w. watson (1986) ’are business cycle all alike’, in robert gordon (ed.), the american business cycle: continuity and change, pp. 123-156. chicago: university of chicago press. blanchard, oliver j. and danny quah (1989) ‘the dynamic effects of aggregate demand and supply disturbances’, american economic review, 79(4): 655-673. blinder, alan and stephen m. goldfeld s (1976) ’new measures of fiscal and monetary policy, 1958-73’, american economic review, 66(5): 780-796. dickey, david and wayne fuller (1979) ‘distribution of the estimators for autoregressive time series with a unit root,’ journal of the american statistical association, 74(366): 427-431. engle, robert f. and clive w. j. granger c. (1987) ‘cointegration and error correction representation, estimation and testing’, econometrica, 55(2) :251-276. frisch, ragnar (1933) ’propagation and impulses problems in dynamic economics’, in economics essays in honour of gustav cassel, pp. 171-205. london: allenunwin georges. gali, jordi (1992) ‘how well does the is-lm model fit post war u.s data?’, quarterly journal of economics, 107(2): 709-738. goodfreind, marvin and robert g. king (1997) ’the new classical synthesis and the role of monetary policy’, nber macroeconomics annual, cambridge, mit press. jalles, joao t. (2009) ‘do oil prices matter? the case of a small open economy’, annals of economics and finance 10(1): 65-87 johansen, soren (1991) ‘estimation and hypothesis testing of cointegration vector in gaussian vector autoregressive models’, econometrica, 59(6): 15511580. johansen, soren and katarina juselius. (1990) ‘maximum likelihood estimation and inference on cointegration-with applications for the demand for money’, oxford bulletin of economics and statistics, 52(2): 169-210. keating, john w. (1992) ‘structural approaches to vector autoregressions’, federal reserve bank of st louis journal review, 74(4): 37-57. kwiatkowski, denis, peter c.b. phillips, peter schmidt and yongcheol shin(1992) ‘testing the null hypothesis of stationarity against the alternative of a unit root,’ journal of econometrics, 54(1-3): 159-178. kydland, finn e. and edward c. prescott (1982) ‘time to build and aggregate fluctuations’, econometrica, 50(6): 1345-1370. european journal of government and economics 1(1) 85 kydland, finn e. and edward c. prescott (1991)’ the econometrics of the general equilibrium approach to business cycles’, scandinavian journal of economics, 93(2): 161-178. long, john b. and charles plosser (1983) ‘real business cycle’, journal of political economy, 91(1): 39-69. mccallum, bennett t. (1989) ’real business cycles models’, in robert j. barro (ed) modern business cycles theory, pp. 16-50. oxford : basil blackwell. phillips, peter c.b. and pierre perron (1988). ‘testing for unit roots in time series regression,’ biometrika, 75(2), 335-346. rebelo, sergio (2005) ‘real business cycle models: past, present, and future’, nber working paper, n°11401. shapiro, mattew and mark w. watson (1988) ‘sources of business cycle fluctuations ‘, cowles foundation discussion paper, n°870. sims, christopher a. (1980) ‘macroeconomics and reality’, econometrica, 48(1): 1-48. slutsky, eugen (1927) ’the summation of random waves as the sources of cyclic processes’, in problems of economic conditions, ed, conjuncture institute, moskva, 3(1). revised english version, 1937, in econometrica, 5(2): 105-146. sin título european journal of government and economics volume 2, number 1 (june 2013) issn: 2254-7088 79 social capital in spain: are there gender inequalities? celia muñoz-goy, university of a coruña abstract social capital is an asset for individuals because it grants access to important resources embedded in their social networks. but social capital is not evenly distributed among different groups. gender groups are analysed in this paper in order to examine if there are differences in diverse indicators of social capital and whether these possible differences remain when control variables are considered. the data used in this paper come from a representative sample of 3,400 people in spain. the main results show gender differences in the access, mobilisation and type of social networks, as well as in the extent and type of social participation. however, these differences are mostly reduced for the groups in more advantageous social positions, which have the possibility to contact with greater and more varied groups, or which have been educated in less traditional gender roles. in general, gender inequalities in social capital remain for the other groups. jel classification z13; j16 keywords social capital; social networks; civic participation; gender inequalities muñoz-goy ● social capital in spain 80 introduction over the last few years, there has been a growing interest in social capital in the fields of sociology and economics. some of the more salient authors have considered social capital either as potential or actual resources linked to the presence in networks of relationships (bourdieu, 1985) or as aspects of the social structure that facilitate certain actions of the individuals within that structure (coleman, 1988) or as features of the social organisation, that is to say networks, norms and social trust, which facilitate connections among individuals as well as coordination and cooperation for mutual benefits (putnam, 1995). even if there still is an open debate about the definition and measurement of this wide concept (dasgupta and serageldin, 2001), social capital can be understood as a resource available to individuals derived from their location on a structure of social relations (adler and kwon, 2002: 18). the importance of this resource is that it improves the chances of obtaining a very wide variety of benefits, ranging from instrumental rewards, such as faster promotions or better jobs, to expressive rewards such as better mental health and even an increased subjective feeling of well-being or life satisfaction (adler and kwon, 2002; lin, 2000; kroll, 2011). but access to social capital and the benefits derived therein is not evenly distributed among all individuals or social groups. as lin (2000: 786-787) explains, depending on the historical processes and institutional construction of societies, some groups defined by race, gender, religion, caste, and other ascribed or constructed characteristics, are provided with unequal opportunities compared with the members of other social groups. and this phenomenon is more prevalent when combined with another principle, named homophily, which points out that individuals tend to interact more frequently with members in their own group, or in groups with similar socioeconomic characteristics. as a consequence of this tendency, members of disadvantaged social groups will share a lower variety of information and influence than members of resource-rich networks. it is precisely women who make up a social group with a disadvantaged socioeconomic status compared to men, and who tend to establish links with other peers or similar groups. as follows from the work of gwen moore (1990), there are differences in the composition of male and female social networks in the united states in the 1980’s. although many of these differences decrease when controlling variables related to employment status, family and age, some variations still remain, especially regarding the type of social networks, because women tend to connect mainly with the family, while men extend their networks of relationships beyond parental ties. maxine molyneux (2008: 68) has also found gender differences, shown by the fact that women’s social capital is located more so at home rather than in the public environment of the workplace, and involves exchanges of time and money as opposed to capabilities. it includes a significant proportion of voluntary work and undertaking the role of a carer and usually involves affective or ethical issues, a degree of altruism and often mobilises feelings associated with motherhood. so, this social capital creates strong ties (bonding social capital) more so than weak links (bridging social capital). these differences imply that women's networks are located in areas different to those of men’s capital. while men’s networks are traditionally associated with the public world of the workplace and politics, women’s networks focus more on solving domestic problems and less on economic and employment issues. this situation reflects the fact that, despite the changes that have occurred in recent decades, women are still in an unequal power situation, and thus continue to carry out the majority of family duties, having fewer resources and less power than men. other studies note the gender inequality in relation to the mobilisation of social capital, or the potential use of the resources embedded in the network. as pointed muñoz-goy ● social capital in spain 81 out by lin (2000: 791), in the specific area of the labour market, men have greater advantages than women, either because women do not use or do not mobilise the adequate social capital, or because they mobilise the adequate social links but these links are reluctant to invest in their favour, or even because there are different responses from the labour market itself depending on whether candidates sought for a job or promotion are male or female. timberlake (2005: 43) also concludes in his analysis that women are less able to mobilise social capital to get better jobs and seek promotion in organisations where they work. furthermore, pippa norris and ronald inglehart (2006) analyse the participation in community life, as an indicator of social capital, since this participation facilitates the establishment of networks and the achievement of individual benefits, such as opportunities in the workplace and the availability of support networks that encourage collaboration channels to solve local problems. these authors distinguish two types of inequality on civic engagement: horizontal segmentation and vertical segmentation. vertical segmentation refers to the differences in the intensity of organisational participation of men and women, while horizontal segmentation takes into account the differences in the type of organisations to which men and women belong. it is in this latter type of horizontal segmentation that norris and inglehart (2006) have found differences according to gender, in the u.s. and in most countries they have analysed. on the one hand, male participation is clearly superior in recreational associations, unions, political parties and professional associations, while, on the other hand, women tend to participate more in voluntary associations related with education, religious organisations and groups devoted to help the disabled or the elderly, as well as women's groups. regarding vertical segmentation, men participate in organisations to a higher degree than women, even when controlling variables related to structural factors (age, education) and cultural values (ideology, religion), but vanish when controlling agency factors, or the impact of relationships with others who can encourage participation (time spent with family, friends or co-workers). as shown by the previous studies, there are social capital inequalities according to gender, although some differences may be reduced or even disappear if certain control variables are taken into account. this research topic has a theoretical interest since it elucidates the relationships between social capital and structural and socioeconomic factors. it also has a social interest because knowledge in this area can contribute to the decision-making in policies to reduce gender inequalities. in this paper, i analyse individual social capital inequalities according to gender in spain, to test if significant differences occur and whether these differences are maintained or not in the presence of several control variables. the control variables -education level, age, occupational status, employment status, marital status and having or not dependantsreflect several structural aspects that could affect civic engagement and the establishment of social networks, promoting or restraining the availability of a range of resources such as time, money, knowledge and skills. to carry out this analysis i consider whether there are gender differences in several social capital indicators: network variety, possible use or mobilisation of resources, type of network and social participation. in a more detailed manner, i test the following hypotheses: h1. the more advantaged gender group (men) will have more social capital than the less advantaged gender group (women): h1.1. women are expected to have less network variety than men. h1.2. women are expected to have fewer possibilities of use or mobilisation of resources from their networks than men. muñoz-goy ● social capital in spain 82 h2. gender groups are expected to differ on the type of networks: women are expected to have more internal or family link while men are expected to connect with more external groups. h3. gender groups are expected to have different patterns of social participation: h3.1. women are expected to have lower levels of social participation than men (vertical segmentation). h3.2. women and men are expected to participate in distinctive types of social organisations (horizontal segmentation). after testing these hypotheses for the whole sample under analysis, i create separate subgroups, using the aforementioned control variables, to confirm whether or not the expected relationships between gender and social capital indicators remain when considering the effect of structural factors. data and measures in this paper i use the data base “social capital and inequality in spain”, from the research group osim (social organisations, institutions and markets) of the university of a coruña, spain. data collection took place between november and december of 2011, with telephone interviews (cati) to 3,400 people aged 18 or over, residing in spain. the total error estimated for this sample size is ± 1.7% for global data, assuming a confidence level of 95.5% and p=q. the sample was stratified according to autonomous communities (the spanish regions) using a mixed procedure: half of the sample size was assigned proportionally according to population size of the autonomous community, and the other half of the sample size was divided disproportionally to ensure a minimum of 100 interviews in each one of the 17 autonomous communities. in each autonomous community, there was a proportional distribution of the sample according to the size of municipalities. weighting based on the national distribution of gender, age groups and size of autonomous communities, was introduced to adjust sampling data. measures of social capital not only is there a plethora of definitions of social capital, but there are also many different ways of measuring the concept. in this paper i analyse various indicators of individual social capital, accounting for diverse aspects that may facilitate a person attaining the resources embedded in its net of social relations. as stated in the hypotheses, our interest lies in the variety and potential use of networks, the type of networks and the social participation. the variety of network, or accessibility, considered as the diversity of contacts that a person can access, is an indicator of social capital, since the larger the network size the greater the likelihood of achieving various resources. accessibility or the variety of network was measured using the data of a question with 14 items. respondents were asked to report if among their family, friends or acquaintances, there was someone with certain characteristics included in a list of the survey as shown in table 1. should the respondent answer affirmatively that he or she has a relative with one of the mentioned characteristics, the response is collected not recording whether the person also has friends and/or acquaintances with those characteristics. to summarise the information of this question we added up the number of different characteristics each respondent knows, regardless of whether they are relatives, friends or acquaintances, and expressed such amount in percentages. muñoz-goy ● social capital in spain 83 table 1. list of items included in the measures of variety of network (colum a) and the network mobilisation (colum b) variety of network: is there anyone, among your relatives, friends or acquaintances, with the following characteristics? network mobilisation: is there anyone, among your relatives, friends or acquaintances, who could help you out in the following situations? an university professor finding a job for a family member a person working in the administration of the education system giving advice in a labour dispute a person working in the legal system helping to move a person working in the tax office giving advice or help in educational matters a person working in local government (but not as a politician) helping with the shopping when is sick a person working in the banking system giving medical advice when the respondent is dissatisfied with a doctor a doctor lending a large amount of money (e.g. € 5,000) a person working in the health service (but not a doctor) lending a place to live while the respondent cannot use his or her home a policeman/policewoman giving advice on tax issues a person holding a political office giving advice on financial issues a journalist or someone having influence on the media giving advice on legal matters a person having the opportunity to hire people providing good references when looking for a job a person earning over € 3,000 a month helping to take care of children a person having more than one million euros, or that the respondent thinks is a very rich person helping to take care of the disabled or the elderly source: osim survey on social capital in spain, 2011 another indicator of social capital is network mobilisation, understood as the possibility of effectively using the social contacts to obtain resources embedded in the net. mobilisation was measured using the data of a question with 14 items. respondents were asked to report if among their family, friends or acquaintances, there was someone that might help him or her in different situations as shown in table 1. the situations of the list are hypothetical ones, meaning that there is no need for the respondent to be actually in the situation, but must answer as if the situation could happen, so, for example, people without children or elderly to their charge are asked to answer as if he or she would be in such case. to summarise the information of this question, we proceeded in the same way as explained for the variety of network or accessibility. analyzing social capital, as aforementioned, different contributions (moore, 1990; molyneux, 2008) found differences according to gender in the type of social networks, in the sense that men’s networks tend to be extra parental or placed in a public environment (bridging social capital) while women’s networks tend to be more focused on parental or domestic areas (bonding social capital). to substantiate these claims, i analyse the information from the question about the variety of social network, creating three variables to express in percentages the type of network composition, taking into account whether the contacts mentioned by the respondents are mainly focused on family, friends or acquaintances. finally, participation in community life is often used as an indicator of social capital, since such participation facilitates the establishment of networks. specifically, robert putnam (2000) uses the downward trend of civic participation in the united states as an indicator of the decline of social capital in that country. to measure social participation, i use the information from the question based on the voluntary organisations to which respondents belong, from a total of eight different categories: religious organisations; sports organisations; art, music or educational organisations; trade unions; political parties; associations related to ecology and environmental associations; professional associations; ngos (social welfare, health, human rights, humanitarian). this information was treated from a double perspective, to analyse the vertical and horizontal segmentation. as a measure of vertical segmentation, we added up the total number of organisations to which muñoz-goy ● social capital in spain 84 each respondent belongs, and so as to explore horizontal segmentation i compare the specific type of organisations to which men and women adhere. to test the hypotheses outlined in the previous section, i compare the summary measures of the different indicators of social capital by gender, using an analysis of variance (anova) or a chi-square test, depending on whether the summary is a mean or a percentage. after this first comparison, i shall explore whether or not gender differences are still significant among groups formed by introducing the control variables education level, age, occupational status, employment status, marital status and having or not dependants. some of these variables have been recoded to avoid comparisons among an excessive number of categories and low sampling sizes. the distributions of sample sizes for independent variables are shown in table 2. as for education, the group named as low level corresponds to primary education or less, the group named as moderate level corresponds to secondary education and vocational training, and the group named as high level corresponds to university-level education. a special comment deserves the grouping of age; we have decided to use three groups in line with other research strategies and the youngest group (under 35) corresponds to the grouping of the original groups of 18-24 and 25-34. regarding the variable about having dependants or not, there is no distinction in the original wording of the questionnaire among those having children and those taking care of elderly or other dependent adults. table 2. description of the sample by independent variables women men all 1736 1663 high 548 556 moderate 772 814 education low 399 282 under 35 479 502 35-64 855 864 age groups 65 or more 401 297 manager/professional 123 197 middle range supervisors 196 202 skilled working 198 387 occupational status unskilled working 204 123 in paid work 698 894 work status not in paid work 1038 769 married or cohabiting 1021 1026 marital status single 384 508 yes 581 543 dependants no 1155 1120 source: author, based on data from osim survey on social capital in spain, 2011. data analysis accessibility and gender results for the network variety show gender differences as expected and in line with previous analyses (table 3). there are significant differences in the mean of accessibility by gender, supporting the hypothesis that states that men have more diversified social networks than women. however, the network variety differences by gender are modified in some cases when controlling other structural factors. the level of education has an evident impact on network variety, since the higher the level of education, the greater the accessibility to a more diversified social network for both men and women, in accordance with previous analysis that established the crucial role of education in social capital generation (huanga, et al. 2009). but when controlling this variable, we found that among people with a higher level of education, gender differences are not statistically significant, while at the other levels of education, gender inequity in social capital persists. muñoz-goy ● social capital in spain 85 in terms of age, there is no such direct relationship with network accessibility as in the case of the level of education, but we can see that such accessibility is lower among the elderly than among the younger and middle age group. we also observe that among younger people there are no gender differences in the size of the social network. table 3. mean of accessibility according to gender and control variables women men difference sig.1 all 32.93 36.79 -3.86 *** high 45.43 47.21 -1.79 n.s. moderate 31.21 34.86 -3.64 ** education low 19.57 22.93 -3.36 * under 35 36.36 37.50 -1.14 n.s. 35-64 36.29 39.29 -3.00 * age groups 65 or more 21.71 28.50 -6.79 *** manager/profe ssional 49.21 49.29 -0.07 n.s. middle range supervisors 44.43 46.07 -1.64 n.s. skilled working 33.07 30.36 2.71 n.s. occupational status unskilled working 20.14 25.86 -5.71 * in paid work 41.21 41.07 0.14 n.s. work status not in paid work 27.43 31.86 -4.43 *** married or cohabiting 33.71 38.64 -4.93 *** marital status single 37.14 34.00 3.14 n.s. yes 38.21 41.64 -3.43 * dependants no 30.29 34.43 -4.14 *** source: author, based on data from osim survey on social capital in spain, 2011. 1 level of statistical significance of anova: n.s. = not significant, *: p ≤ 0.05; **: p ≤ 0.01; ***: p ≤ 0.001 higher occupational status seems related to more network variety, but it is also important to note that in most of the groups defined by occupation no gender differences were found. the only exception appears in the group of unskilled workers, where men have significantly higher network accessibility than women. with reference to the labour market, people having paid work show higher accessibility means than unemployed people. it is important to highlight the fact that the average social network variability is almost equal between men and women who are in paid employment, suggesting that either being employed helps people to expand their network and makes gender differences vanish, or it is precisely those women with high social capital who are part of the labour market and for that reason gender inequality in network accessibility disappears. in terms of marital status, married men have higher accessibility than married women, while among those who are single there is a slight difference in favour of women although such difference is not statistically significant. in other words, accessibility differences by gender vanish among single people. moreover, people who have children or dependants have higher network accessibility than people with no dependants, but gender differences continue to be significant in both groups, showing more variety of social networks for men than for women. in summary, the network accessibility differences according to gender are significant in all groups except among people with a higher level of education and those who are young, single and with a medium or high level of occupational status. the disappearance of gender differences in these cases could be due to the fact that it is precisely the younger women who have higher levels of education and are therefore more likely to join the labour market -even at intermediate or higher level occupationsthat gives them access to a public sphere where they can muñoz-goy ● social capital in spain 86 establish a wider range of contacts. in this way, they overcome the phenomenon of homophily described by lin (2000), and so they participate in the conditions in which men have traditionally established their social networks. mobilisation of social network and gender as shown in table 4, men have a higher average of resource mobilisation than women, but such differences are no longer significant for some groups formed when controlling structural factors. table 4. mean of network mobilization according to gender and control variables women men difference sig.1 all 58.71 63.21 -4.50 *** high 71.86 73.50 -1.64 n.s. moderate 59.64 63.21 -3.57 * education low 39.71 44.21 -4.50 * under 35 71.50 70.64 0.86 n.s. 35-64 60.57 65.21 -4.64 ** age groups 65 or more 39.57 44.79 -5.21 * manager/profe ssional 74.43 74.00 0.43 n.s. middle range supervisors 68.21 68.93 -0.71 n.s. skilled working 61.50 56.07 5.43 * occupational status unskilled working 47.36 54.07 -6.71 * in paid work 67.86 69.21 -1.36 n.s. work status not in paid work 52.57 56.21 -3.64 ** married or cohabiting 58.93 62.93 -4.00 ** marital status single 69.00 66.36 2.64 n.s. yes 64.64 65.29 -0.64 n.s. dependants no 55.79 62.21 -6.43 *** source: author, based on data from osim survey on social capital in spain, 2011. 1 level of statistical significance of anova: n.s. = not significant, *: p ≤ 0.05; **: p ≤ 0.01; ***: p ≤ 0.001 the higher the level of education, the greater is the mobilisation of resources. and it is precisely in the group of people with a high level of education where gender differences vanish. the same happens with age; the mobilisation of resources in the network is higher when we consider younger groups, and among the youngest people there are no differences by gender in this indicator of individual social capital. the mobilisation of resources in the network is higher as we move to upper positions in the occupational status scale. and for the groups of managers/professionals and middle range supervisors the differences of mobilisation between men and women are not statistically significant. people in paid work have more possibilities to use their network resources in comparison to unemployed people. among the first group there are no clear differences according to gender, showing that access to the labour market opens up the possibility to establish contacts that will expand the available span of resources. the mobilisation of resources in the network is lower for married people than for single people and among the latter there are no significant gender differences on mobilisation. the group of people having dependants show a greater resource mobilisation than the group without dependants, which may reflect that the need to take care of others leads to generating a stronger network where to extract resources from. among those with dependants, no differences by gender were found in the mobilisation of the network. muñoz-goy ● social capital in spain 87 in summary, in general terms, the findings on the relationship of the mobilisation of resources in the network and gender are similar and consistent with those for network accessibility: gender differences are not significant among those with higher levels of education, those who are young, single and with high or medium occupational status, yet it remains significant in the other cases. type of network and gender the analysis of type of network (table 5) demonstrates that links with family members are more common for women than for men, but the difference is not significant. furthermore, considering the groups formed in accordance with the control variables, we also observe that, in most of the cases, women have higher rates of family networks than men, but there are practically no cases with statistically significant differences. the only exception is the group of single people. distinct results are found for the network of friends as notable differences are appreciated. women have a lower percentage of network composition based on friends than men. and this difference in favour of men holds and remains significant in the presence of most of the control variables. however, gender inequality vanishes in some cases that coincide with those that were mentioned when analyzing network accessibility, i.e. those groups with a higher level of education, youngest in age, in a high or medium occupational status, who have paid work and who are single people. in addition, there are also no differences in the network of friends among people who have to take care of children or dependants. muñoz-goy ● social capital in spain 88 table 5. mean of type of network according to gender and control variables family network friends network acquaintance network w om en m en d if. s ig 1 w om en m en d if. s ig 1 w om en m en d if. s ig 1 a ll 15.22 14.73 0.49 n.s. 11.40 14.15 -2.75 *** 6.33 7.93 -1.60 *** h ig h 19.15 19.28 -0.14 n.s. 18.68 18.74 -0.05 n.s. 7.63 9.23 -1.60 n.s. m od er at e 14.75 13.60 1.16 n.s. 10.29 13.91 -3.62 *** 6.20 7.35 -1.15 n.s. e du ca tio n lo w 11.01 9.28 1.73 n.s. 3.80 6.38 -2.59 ** 4.77 7.30 -2.53 ** u nd er 3 5 15.28 14.67 0.61 n.s. 14.48 15.01 -0.53 n.s. 6.59 7.82 -1.23 n.s. 35 -6 4 16.03 15.35 0.68 n.s. 13.30 15.66 -2.36 ** 6.99 8.26 -1.28 n.s. a ge g ro up s 65 o r m or e 13.41 13.03 0.38 n.s. 3.68 8.28 -4.61 *** 4.63 7.17 -2.54 ** m an ag er / pr of es si on al 18.03 19.80 -1.77 n.s. 24.00 21.11 2.88 n.s. 7.20 8.34 -1.13 n.s. m id dl e ra ng e su pe rv is or s 20.32 19.08 1.24 n.s. 17.77 16.99 0.78 n.s. 6.32 10.02 -3.70 ** o cc up at io na l s ta tu s s ki lle d w or ki ng 14.60 12.60 2.00 n.s. 10.76 10.97 -0.20 n.s. 7.70 6.75 0.95 n.s. muñoz-goy ● social capital in spain 89 u ns ki lle d w or ki ng 9.82 10.49 -0.67 n.s. 5.92 10.29 -4.37 ** 4.43 5.09 -0.66 n.s. in p ai d w or k 16.49 15.91 0.58 n.s. 17.27 17.31 -0.03 n.s. 7.43 7.85 -0.42 n.s. w or k st at us n ot in p ai d w or k 14.36 13.35 1.00 n.s. 7.45 10.48 -3.03 *** 5.59 8.03 -2.44 *** m ar rie d or co ha bi tin g 15.93 15.81 0.13 n.s. 11.50 14.15 -2.65 *** 6.29 8.68 -2.39 *** m ar ita l s ta tu s s in gl e 15.74 12.95 2.80 * 14.09 14.49 -0.40 n.s. 7.28 6.58 0.69 n.s. y es 16.51 16.21 0.31 n.s. 14.82 16.65 -1.84 n.s. 6.90 8.81 -1.92 * d ep en da nt s n o 14.56 14.01 0.55 n.s. 9.68 12.93 -3.25 *** 6.05 7.51 -1.46 ** source: author, based on data from osim survey on social capital in spain, 2011. 1 level of statistical significance of anova: n.s. = not significant, *: p ≤ 0.05; **: p ≤ 0.01; ***: p ≤ 0.001 regarding the last type of networks, women have significantly fewer links with acquaintances than men. however, this difference is somehow modified by taking into account the control variables in a similar way as with the network of friends. in other words, in most of the cases it holds true that men have a network of acquaintances significantly greater than women but there are some exceptions. specifically, no significant differences appear in the network of acquaintances among people with higher or medium levels of education, those younger or middle aged, employed, and single. in relation with occupational status a slight variation was found, since in this case there are no significant differences in any of the groups defined by this variable, except for those who work as middle range supervisors. in summary, our data partially support the claim of moore (1990) that there are gender differences in the type of social network: the network of the family type is more common among women than among men, although in our data this difference is not statistically significant, and the networks based on friends and acquaintances are most common among men. furthermore, for these last two types of networks, although some differences in favour of men hold true in the presence of the control variables, in other cases similar to those mentioned when analyzing network accessibility or network mobility, these differences disappear. muñoz-goy ● social capital in spain 90 social participation and gender the first salient result for this indicator of social capital is that, according to the data obtained in spain, participation levels are low (table 6) in comparison with the results obtained from the world values survey, 2001 (norris and inglehart, 2006: 86) for post-industrial societies. on average the number of organisations to which both men and women belong in spain is inferior to one, because more than half of interviewees claimed not to be members of any of the organisations included in the survey list. regarding our hypothesis, data show the existence of vertical segmentation in spain, since there is a significant difference in the mean of membership to voluntary organisations in favour of men. moreover, once the various control variables are taken into account, in almost all cases women have a lower average of civic participation than men and most of these differences are significant, with the exceptions of the groups with low education, an older age, intermediate and lower occupational status, which are those with lower levels of participation. that is, men generally have higher levels of civic participation than women and, unlike the data observed with regard to network accessibility or network mobility, the effect of structural factors do not follow the same direction and have less power in diminishing gender differences. table 6. mean of organisational membership according to gender and control variables women men difference sig.1 all 0.75 0.94 -0.19 *** high 1.12 1.29 -0.17 * moderate 0.61 0.87 -0.26 *** education low 0.49 0.47 0.02 n.s under 35 0.61 0.89 -0.28 *** 35-64 0.87 1.04 -0.17 ** age groups 65 or more 0.64 0.74 -0.10 n.s manager/profe ssional 1.21 1.61 -0.40 * middle range supervisors 1.25 1.32 -0.07 n.s skilled working 0.64 0.78 -0.14 n.s occupational status unskilled working 0.48 0.63 -0.15 n.s in paid work 0.96 1.10 -0.14 * work status not in paid work 0.60 0.76 -0.16 ** married or cohabiting 0.81 1.02 -0.21 *** marital status single 0.65 0.80 -0.15 * yes 0.91 1.09 -0.18 ** dependants no 0.67 0.87 -0.20 *** source: author, based on data from osim survey on social capital in spain, 2011. 1 level of statistical significance of anova: n.s. = not significant, *: p ≤ 0.05; **: p ≤ 0.01; ***: p ≤ 0.001 one possible explanation for differences in the level of participation could be found in the type of organisations included in the list because of the so called horizontal segmentation that is reflected in the gender inequality of the membership of different kinds of organisations. as shown in table 7, in most organisations there are significant differences between the percentages of male and female membership. on the one hand, there is a negative balance for women in trade unions, professional associations, associations related to ecology and the environment and, especially, in sports organisations. on the other hand, the balance for women is positive in religious muñoz-goy ● social capital in spain 91 organisations and humanitarian or charitable ngos. there are also two types of organisations, political parties and cultural and educational associations, in which, although the balance is negative for women, the difference is not significant. table 7. membership percentage of voluntary organisations according to gender women men difference sig.1 religious organisations 10.00 8.00 2.00 * sports organisations 8.30 19.80 -11.50 *** art. music or educational organisations 13.10 15.10 -2.00 n.s. trade unions 8.50 13.30 -4.80 *** political parties 3.90 4.10 -0.20 n.s. associations related to ecology and environmental associations 4.00 6.00 -2.00 ** professional associations 5.60 9.30 -3.70 *** ngos (social welfare. health. human rights. humanitarian) 19.90 17.30 2.60 * source: author, based on data from osim survey on social capital in spain, 2011. 1 level of statistical significance chi-square: n.s. = not significant, *: p ≤ 0.05; **: p ≤ 0.01; ***: p ≤ 0.001 our results are consistent with those obtained by mcpherson and smith-lovin (1982), norris and inglehart (2006), lowndes (2006) and caiazza and gault (2006), which found that predominantly male organisations are those related with economic matters that offer opportunities for advancement, and also those related with sports. meanwhile women tend to adhere to organisations focused on the household, on community problems and helping others, as well as religious organisations, generally related to traditional feminine roles. nevertheless, we have to clarify some of the above differences. since certain types of organisations, in which the balance is negative for women, are clearly related to the labour market, employment status has to be taken into account as a control variable. in fact, it has been found that when considering only the people who are in paid employment, although there is still a slight negative balance for women’s membership in trade unions and professional organisations, such balance is no longer significant (table 8). regarding membership of associations related to the environment, ecology, animal rights and non-governmental organisations, gender differences diminish in intensity when considering control variables, for example, among younger people where these differences are no longer significant. gender differences in terms of membership of religious organisations among young people are neither significant, and the balance is even reversed, as the percentage of men belonging to these organisations is slightly higher than the percentage of women. these results seem to indicate that the changes in the last decades in the gender role expectations are being reflected in the new generations. table 8. membership percentage of voluntary organisations according to gender, among selected categories of several control variables women men difference sig.1 trade union membership among those with paid work 15.2 16.9 -1.7 n.s. professional associations membership among those with paid work 10.6 13.3 -2.7 n.s. membership of associations related to ecology and environmental associations among young people (under 35) 3.1 5.6 -2.5 n.s. religious organisations membership among young people (under 35) 4.6 6.6 -2.0 n.s. source: author, based on data from osim survey on social capital in spain, 2011. 1 level of statistical significance chi-square: n.s. = not significant, *: p ≤ 0.05; **: p ≤ 0.01; ***: p ≤ 0.001 finally, in relation to sports organisations, it is noteworthy that gender differences in favour of men remain and are significant even when considering all the control muñoz-goy ● social capital in spain 92 variables (table 9) since men have, for all groups, higher membership percentages to these organisations than women. neither the fact of participating or not in the labour market nor the level of education affects the different membership of men and women of these organisations; variables that in other cases have reduced gender inequality. table 9. membership percentage of sports organisations according to gender and control variables women men difference sig.1 all 8.30 19.80 -11.5 *** high 4.3 12.4 -8.1 *** moderate 7.5 19.4 -11.9 *** education low 12.2 23.9 -11.7 *** under 35 7.1 25.7 -18.6 *** 35-64 10.4 19.6 -9.2 *** age groups 65 or more 5.0 10.4 -5.4 *** manager/profession al 9.0 27.9 -18.9 *** middle range supervisors 13.7 26.6 -12.9 *** skilled working 6.6 15.2 -8.6 *** occupationa l status unskilled working 4.4 20.3 -15.9 *** in paid work 10.3 22.7 -12.4 *** work status not in paid work 6.9 16.4 -9.5 *** married or cohabiting 9.6 19.0 -9.4 *** marital status single 7.6 21.5 -13.9 *** yes 12.2 20.3 -8.1 *** dependants no 6.3 19.6 -13.3 *** source: author, based on data from osim survey on social capital in spain, 2011. 1 level of statistical significance chi-square: n.s. = not significant, *: p ≤ 0.05; **: p ≤ 0.01; ***: p ≤ 0.001 in summary, we have found that there is a horizontal segmentation in terms of civic participation in line with other studies, since the rates of participation of men and women vary according to the type of organisations under consideration. however, it is true that the segmentation is reduced in most cases by introducing control variables, except when considering membership of sport organisations. conclusions in this analysis of social capital in spain, we have found clear gender differences in diverse measures of social capital, supporting our hypotheses. as for the extension and use of social capital, there are gender inequalities, in favour of men on the accessibility and possible use or mobilisation of resources embedded in social networks. regarding the type of social capital, the family network density is slightly more common among women and networks based on friends and acquaintances are more common among men. civic participation is also higher for men than for women, and the differential types of organisations to which men and women belong show the existence of a gendered horizontal segmentation. however, the differences in accessibility, mobilisation, type of network and horizontal segmentation are affected by the introduction of structural factors. in this way, inequality between men and women disappears when we consider the groups in more advantageous social positions: that is the highly educated and those with higher occupational status; those in situations that allow contact with greater and more varied groups, which are related to the fact of having paid employment; or the younger age groups that have been educated in less traditional gender roles. in general, gender inequalities remain in all the other groups. it is only with regards to civic participation that control variables do not reduce gender differences in the same direction as in the above cases. one possible explanation for the persistence of this vertical segmentation could be related with the time restriction derived from the fact that women still continue to do most of the housework, a variable not muñoz-goy ● social capital in spain 93 included in the dataset analysed, since time is an unavoidable factor to participate in social organisations. the impact of the time distribution of housework by gender in the inequalities in social capital could open new lines of inquiry. future research may also focus on an in-depth multivariate analysis of the relationships found between social capital and various structural factors, as well as the extension of the analysis to the international comparison to confirm if results in other countries are similar to those found in spain. finally, we might wonder whether our findings of a lower level of social capital among women could also be due to the fact that part of women’s social capital is invisible to the standard measurements. perhaps we need to explore other forms of political participation and civic engagement, as noted by dieltlind stolle and michele micheletti (2006) when analyzing the behaviour, motivations and consumer decisions for political reasons, and explore other areas of relationships, as proposed by maxine molyneux (2008), since women tend to develop their links and networks in fields different to those of men. bibliography adler, paul s. and seok-woo kwon (2002) ‘social capital: prospects for a new concept’, academy of management review 27(1): 17-40. bourdieu, pierre (1985) ‘the forms of capital’, in john g. richardson (ed.) handbook of theory and research for the sociology of education. new york, ny: greenwood press, pp. 241-258. caiazza, amy and barbara gault (2006) ‘acting from the heart: values, social capital and women’s involvement in interfaith and environmental organizations’, in brenda o’neill and elisabeth gidengil (eds) gender and social capital. new york, ny: routledge, pp. 99-126. coleman, james (1988) ‘social capital in the creation of human capital’, american journal of sociology 94(supplement): 95-120. dasgupta, partha and ismail serageldin (eds.) (2001) social capital, a multifaceted approach. washington, d.c.: the world bank. huanga, jian, henriëtte maassen van den brinka and wim groota (2009) ‘a metaanalysis of the effect of education on social capital’, economics of education review 28(4): 454-464. kroll, christian (2011) ‘different things make different people happy: examining social capital and subjective well-being by gender and parental status’, social indicators research 104(1) 157-177. lin, nan (2000) ‘inequality in social capital’, contemporary sociology 29 (6): 785795. lowndes, vivien (2006) ‘it´s not what you’ve got, but what you do with it: women, social capital and political participation’, in brenda o’neill and elisabeth gidengil (eds) gender and social capital. new york, ny: routledge, pp. 213-240. mcpherson, j. miller and lynn smith-lovin (1982) ‘women and weak ties: differences by sex in the size of voluntary organizations’, american journal of sociology 87 (4): 883-904. molyneux, maxine (2008) ‘la política de desarrollo y la dimensión de género del capital social’, papeles 101: 64-79. moore, gwen (1990) ‘structural determinants of men´s and women’s personal networks’, american sociological review 55(5): 726-35. muñoz-goy ● social capital in spain 94 norris, pippa and inglehart, ronald (2006) ‘gendering social capital. bowling in women’s leagues?’, in brenda o’neill and elisabeth gidengil (eds) gender and social capital. new york, ny: routledge, pp. 73-98. putnam, robert d. (1995) ‘bowling alone: america’s declining social capital’, journal of democracy 6(1): 65-78. putnam, robert d. (2000) bowling alone: the collapse and revival of american community. new york, ny: simon and schuster. stolle, dietlind and michele micheletti (2006) ‘the gender gap reversed: political consumerism as a women-friendly form of civic and political engagement’ in brenda o’neill and elisabeth gidengil (eds) gender and social capital. new york, ny: routledge, pp. 45-72. timberlake, sharon (2005) ‘social capital and gender in the workplace’, journal of management development 25(1): 34-44. microsoft word ejge_04_2015-011.docx european journal of government and economics volume 4, number 2 (december 2015) issn: 2254-7088 118 bed capacity and surgical waiting lists: a simulation analysis manel antelo, universidade de santiago de compostela francisco reyes santias, universidade de vigo adela martinez calvo, universidade de santiago de compostela abstract waiting time for elective surgery is a key problem in the current medical world. this paper aims to reproduce, by a monte carlo simulation model, the relationship between hospital capacity, inpatient activity, and surgery waiting list size in teaching hospitals. inpatient activity is simulated by fitting a normal distribution to real inpatient activity data, and the effect of the number of beds on inpatient activity is modelled with a linear regression model. analysis is performed with data of the university multi-hospital complex of santiago de compostela (santiago de compostela, spain), by considering two scenarios regarding the elastiticity of demand with bed increase. if demand does not grow with an increase on bed capacity, small changes lead to drastic reductions in the waiting lists. however, if demand grows as bed capacity does, adding additional capacity merely makes waiting lists worse. jel classification i10; i12. keywords hospital beds; inpatient activity; length of stay; monte carlo simulation; surgery waiting lists. acknowledgements the authors thank two anonymous reviewers for useful comments and suggestions. they also acknowledge discussions with seminar participants at xv applied economics meeting held in a coruña (spain) on june 7-8, 2012. ma acknowledges funding from the galician regional government (xunta de galicia) through grant gpc 2013-045. the work of am-c was supported by the spanish ministry of science and innovation (project mtm2008-03010), the galician regional government (pgidit07pxib207031pr), and the spanish ministry of economy and industry (10mds207015pr). european journal of government and economics 4(2) 119 1. introduction a waiting list for healthcare is a queue of patients who have been given a care procedure but, due to reasons beyond their control, must wait to be served within a variable time period (sampietro and espallargues, 2001). though waiting lists are common in different healthcare fields (both primary and specialty care), healthcare levels (outpatient and hospital care), and therapeutic procedures (surgical and nonsurgical), diagnostic and rehabilitative (churruca, 2000), surgical waiting lists are those commonly discussed. these are often studied due to their major problems of morbidity and mortality, as well as their greater economic impact (richards, 1999; silber et al., 1996). with the aim of assessing the influence of waiting lists on survival rates, richards (1999) reviewed 87 studies published in different countries, and showed that survival of patients with over a three-month delay in surgical treatment of breast cancer was reduced by 10 per cent at 5 years when compared to patients who benefited from earlier operations. in the same line, silber et al. (1996) examined waiting list-related risk, and pointed out that the risk of mortality in patients awaiting coronary by-pass was 1.3 per cent per month, and that by-pass should be performed within the first week after coronary angiography diagnosis to minimize death risks in the waiting list. elective surgery in spain works through waiting lists to such an extent that a public opinion barometer identified waiting time for elective surgery as the leading source of public dissatisfaction with inpatient services. one of the main reasons behind waiting lists for elective surgery is the fact that spanish hospitals face serious problems of productive capacity (siciliani and hurst, 2003). although productive capacity usually refers to resources such as staff, beds, operating theatres, and community-based health centers, just to name a few, the two main resources in hospital production function are personnel and number of beds (often considered a rough proxy for capital endowment).1 this paper is focused on analysing the situation in one of these hospitals, namely the university multi-hospital complex of santiago de compostela2 (santiago de compostela, spain) specifically, we examine the impact of bed capacity—a scarce and expensive input in healthcare—on daily inpatient activity, patients’ length of stay and, consequently, waiting lists in a teaching hospital like the above mentioned. the high cost of academic health centres and other teaching hospitals is largely attributed to the unique missions pursued by these institutions—including graduate medical education, biomedical research, and the maintenance of standby capacity for highly specialized patients (commonwealth found, 1997). medicare is often viewed as the primary payer of graduate medical education in view of its size and use of explicit payment adjustments for teaching hospitals (koening et al., 2003). however, experimentation with the real system would cause a lot of trouble both for patients and staff. for that reason, we are obliged to perform a simulation approach, which represents the system and can be manipulated with no daily healthcare practice disruptions. indeed, one of the often-mentioned reasons for using simulation as a tool is the experimentation with non-existing systems (law and kelton, 1991). once validated, the simulated model can yield accurate estimates of the behaviour of the real system and help to understand and clarify complex dynamic processes (yamaguchi et al., 1994). finally, simulating a process such as admission to elective surgery can also help to identify bottle-neck and congestion points. 1 the common wisdom that the lack of hospital resources other than beds (equipment, for example) may determine waiting lists rather than beds themselves is considered here, by assuming a direct relationship between beds and equipment in such a way that beds represent roughly the amount of capital input of the hospital. 2 throughout the paper, we will maintain the galician name of “complexo hospitalario universitario de santiago de compostela” and its chus acronym. antelo, reyes santias, martinez calvo ● bed capacity and surgical waiting lists 120 besides, the simulation model can be useful to monitor hospital system performance and assess the relative effectiveness of alternative policies aimed at coping with historical or statistically-generated patient load. in sum, simulation is a recommended tool to solve the problems created by complex systems where mathematical models are not operational. for this reason simulation is widely used to analyse hospital problems, as these problems are considered a complex system comprising many variables and different random events. for example, in surgical services, everett (2002) developed a decision support tool to evaluate various policies on surgey waiting lists and bed occupancy. akkerman and knip (2004) used simulation to allocate beds to cardiac surgery in order to reduce waiting times. denton et al. (2007) applied simulation to examine optimal timing of surgery.3 likewise, vanberkel and blake (2007) built a discrete event simulation model to evaluate surgical waiting times and support capacity-planning decisions. although the optimization approach is different in each case, it is aimed at improving all services through optimal resource use. to examine the pattern of waiting lists size in programmed surgery and reproduce the behaviour of daily inpatient activity, the length of stay and, consequently, waiting lists, a known distribution was fit to each variable. such distribution then allows us to generate new values for daily inpatient activity and patient length of stay by means of the monte carlo method. finally, after generating new observations of inpatient activity and length of stay, the corresponding simulated waiting list and daily percentage of occupied beds (occupancy rate) can also be created. in this context, waiting list variations with increased number of hospital beds (a rough proxy for capital input) can also be studied by examining the impact of the number of beds on inpatient activity, length of stay and, consequently, waiting lists. with this purpose, the simulation process was replicated for various increased percentages in the number of available beds in two alternative scenarios. first, the increased number of beds is assumed to lead to no modification of the inpatient activity pattern (no beds effect). then, alternatively, a change in the number of beds was assumed to modify the behaviour of inpatient activity in the amount given by the inpatient activity-beds elasticity estimated by kroneman and siegers (2004) in a comparative study for 10 european countries. all computational programming was performed with free statistical software r. the current research provides two main results. firstly, if there is no beds effect, i.e., if the number of beds affects the admission pattern, even remarkable extensions in the mumber of beds lead to no significant difference in hospital occupancy rates or waiting lists. secondly, if the elasticity of the beds-inpatient activity relationship, which is over 1 (kroneman and siegers, 2004), is taken into account, then no significant differences in terms of occupancy rates and surgery waiting lists are observed, as the potential number of beds in the hospital increases. in other words, when elasticity is included in the simulation model, waiting lists are found not to drop when the hospital disposes of a higher amount of physical capital (beds) in its production function. our findings suggest that, under certain conditions, the number of hospital beds is the driver of waiting lists in galician hospitals like chus. this, obviously, has a key consequences at both policy and managerial levels: hospital configurations (evaluation of bed usage policies, creation of new services, revision of elective admissions…) allocation plans, new view of measures of performance, etc. 3 in spite of the fact that the use of simulation models in healthcare is not new, a survey on 200 healthcare simulation models proves that their results were implemented in only 16 cases, showing limited acceptance (wilson, 1981).the primary reason for the healthcare industry reluctance to accept simulation was managerial reluctance to reduce complex healthcare processes to a model representation (alvarez and centeno, 1999). european journal of government and economics 4(2) 121 finally, it is worth to note that our results are close to those of kroneman and siegers (2004) and zeraati et al. (2005), among others. in their analysis of the effect of hospital beds on their use for 10 european countries, kroneman and siegers (2004) found that admission rates seem sensitive to bed supply, and show a positive and over-1 elasticity (in particular, 1.44). this means that admission rates are higher in those countries whose hospitals have a high number of beds, but the amount of hospital beds itself seems to have no significant impact on average length of stay. in the same line, zeraati et al. (2005) suggested that an increase in the number of beds tends to generate additional healthcare demand, either in the form of higher patient admission, longer-treated patients, or some combination of both. this fact reflects the so-called roemer’s law of demand (shain and roemer, 1959; roemer, 1961), indicating that a sudden increase in in the amount of hospital beds in a given country, with no changes in other factors, leads to a sharp increase in usage rates. the rest of the paper is laid out in four sections. section 2 outlines the model, while simulation analysis and the main results of the paper are presented in section 3. the results achieved are discussed in section 4. finally, section 5 concludes the paper. 2. the model 2.1. data on inpatient activity and length of stay our approach is applied to the university multi-hospital complex of santiago de compostela (chus), a teaching hospital-complex located in the city of santiago de compostela (nw spain). the chus is composed of three hospitals with 1,100 beds, 29 surgical theatres and 705 full-time physician equivalents. in 2008 the number of chus-treated inpatients was 34,953 vs. 352,930 inpatient days that correspond to 9,525 first-time visits and 149,406 emergencies.4 our working variables are daily inpatient activity and length of stay for all patients admitted in chus in 2007. inpatient or residential activity is the number of hospital patients who, daily, receives lodging and food as well as treatment divided by the number of beds, the length of stay, on the other hand, refers the number of days that a patient is treated in hospital, including readmissions. to fit an inpatient activity pattern from real data and select adequate fitting distribution, data were split into two groups: working days (i.e. monday to friday, except july, august, and december), and holidays (i.e. saturdays and sundays plus july, august and december). the reason behind this splitting is that, as plotted in figure 1, clear differences in inpatient activity values were observed between working days and holidays. 4 consellería de sanidade, xunta de galicia (2008), memoria 2007 sistema público de saúde de galicia. available at www.sergas.es/publicaciones/detallepublicacion.aspx?idpaxina=40008&idcatalogo=1732. antelo, reyes santias, martinez calvo ● bed capacity and surgical waiting lists 122 figure 1. box-plot (left panel) and histogram (right panel) of daily inpatient activity. in fact, quartiles are 96.5 (first quartile), 116 (median) and 126 days (third quartile) for working days, while they are 53 (first quartile), 80.5 (median) and 94 days (third quartile) for holidays. a two-sample kolmogorov-smirnov test applied to data shows that the statistic value is 0.5667 and the associated p-value is below 0.05, so the null hypothesis that inpatient activity for working days and holidays is drawn from the same distribution of probability can be rejected. hence, we decided to analyze inpatient activity in working days and holidays separately. both the box-plot and the histogram of patient length of stay are shown in figure 2. here, most data can be observed to correspond to short stays, as the first quartile is 3 days, the median is 6 days, and the third quartile is 12 days, although some outliers correspond to longer hospital stays. figure 2. box-plot (left panel) and histogram (right panel) of length of stay. 2.2. the monte carlo simulation method the monte carlo simulation method allows generating new values for daily inpatient activity and patient length of stay. for the former, data were considered independent observations of a continuous variable and then fitted a normal distribution for working days holidays 4 0 6 0 8 0 1 0 0 1 2 0 1 4 0 working days 40 60 80 100 140 0 .0 0 0 0 .0 0 5 0 .0 1 0 0 .0 1 5 0 .0 2 0 holidays 40 60 80 100 140 0 .0 0 0 0 .0 0 5 0 .0 1 0 0 .0 1 5 0 1 0 0 2 0 0 3 0 0 0 100 200 300 0 .0 0 0 .0 1 0 .0 2 0 .0 3 0 .0 4 european journal of government and economics 4(2) 123 working days and holidays separately.5 in other words, the two parameters (the mean, , and the standard deviation, ) that determine a normal distribution for working days and holidays were determined. after the fitting procedure, the normal distribution )45.20ˆ,02.112ˆ(  wwn  , (1) was selected for inpatient activity in a working day (denoted by subscript w), and the normal distribution )08.24ˆ,72.76ˆ(  hhn  , (2) was chosen for inpatient activity in a holiday (denoted by subscript h). to decide whether the behaviour of the inpatient activity variable comes from a normal distribution, a kolmogorov-smirnov test was completed. this offered 0.0972 as the value of the statistics for working days (p-value=0.0503), and 0.1047 as the value of the statistics for holidays (p-value=0.0481). data are then accepted to be normally distributed for significance level 01.0 . regarding the length of hospital stay, a normal and other distributions were fitted like a poisson distribution, but none of them rendered good fitting. a possible cause could be the presence of outliers corresponding to large stays, which leads the distributions to not have heavy enough tails to fit real data adequately. hence, an alternative approach based on the kernel density estimator was chosen, for which the length-of-stay variable is implicitly assumed to be continuous. denote the real observations of the length-of-stay variable in 2007 by sample ),...,,( 21 nxxx drawn for some distribution with an unknown density f, where n represents the sample size. since we are interested in estimating the shape of the density function of the length-of-stay variable, f can be estimated by the following kernel density estimator (wand and jones, 1995)             n i i n i ih h xx k nh xxk n xf 11 11 )(ˆ , (3) where k is a kernel (i.e. a non-negative real-valued integrable function, satisfying the following two requirements:     1)( dxxk (4) and )()( xkxk  , for all values of x.6 (5) on the other hand, h is a positive number called bandwidth related to the obtained estimator's smoothness. specifically, the standard normal density function was adopted as the kernel function, and the bandwidth related to the obtained estimator’s smoothness was estimated as 74.0ˆ h . 5 although we have tried to fit distributions other than normal distribution, the normal distribution rendered the best fit. 6 the first requirement ensures that the kernel density estimation method results in a probability density function, and the second one ensures that the mean of the corresponding distribution equals that of the sample used. k is usually a unimodal symmetric probability density function. antelo, reyes santias, martinez calvo ● bed capacity and surgical waiting lists 124 2.3. generating new observations once the distributions for daily inpatient activity and patient length of stay were chosen, data were generated for both variables. on one hand, a new observation for inpatient activity is drawn from the normal distribution stated in (1) on a working day, and from the normal distribution postulated in (2) on a holiday. on the other hand, the new observations for patient length of stay were obtained from the kernel estimator given in (3). this was carried out by means of a threestage method. in the first stage, the real length of stay in 2007 was denoted as (x1, x2,..., xn), and an element x from dataset },...,,{ 21 nxxx was randomly selected. in the second stage, z was generated from the standard normal distribution )1,0(nz  . finally, in the third stage, a new length of stay, x*, was built by using the rule )ˆ(* zhxroundx  , (6) where ĥ stands for the bandwidth estimated for the kernel density estimator (3), and )(round rounds the simulated values x* to zero decimal places. 3. simulating inpatient activity and patient length of stay the activity of the chus can now be simulated for 2007, when the total number of beds (roughly speaking, the amount of physical capital) was 1,100. to avoid starting with an “empty” system (i.e. a hospital without patients), the simulation process begins on august 1st, 2006 (i.e. before the period of analysis).7 then, for each day of 2007, the simulation process followed a three-stage procedure. in the first stage, an inpatient activity value was generated taking into account both new and waitinglist patients. in the second stage, we detect the number of free beds in the hospital and we decide to occupy them with patients for which generate the length of their stays. finally, in the third stage, if daily inpatient activity exceeds the number of available beds, the remaining patients are included in the waiting list. the results of this 3-step model are depicted in figure 3, which plots the hospital's actual inpatient activity in 2007 (black line), and the 500 runs of model-simulated inpatient activity (grey lines). 7 in the simulation literature, this is called the start-up problem (law, 1983). european journal of government and economics 4(2) 125 figure 3. actual inpatient activity (solid black line) and simulated inpatient activity (grey lines) in 2007. on the other hand, figures 4 and 5 depict, respectively, the 500 replications of simulated daily waiting lists and occupancy rate. antelo, reyes santias, martinez calvo ● bed capacity and surgical waiting lists 126 figure 4. simulated daily waiting list (grey lines) in 2007 waiting list quartiles are highlighted: 25 per cent (dashed black line), 50 per cent (solid black line) and 75 per cent (dotted black line). figure 5. simulated daily occupancy rate (grey lines) in 2007 occupancy rate quartiles are highlighted: 25 per cent (dashed black line), 50 per cent (solid black line), and 75 per cent (dotted black line). the simulated values can be concluded to fit well the real-data pattern for this period. besides, the hospital waiting list grows until june, disappears in july and august, and rises again until december. there are then two critical moments before summer and christmas with very high peaks. a similar pattern is observed for daily occupancy rate. the results obtained for the simulated daily waiting list data and the simulated daily occupancy rate can be summarized as follows. thirty-eight days out of a hundred days a year show no waiting list, while 62 days show a variable-size surgical waiting list. this size ranges from 1 to 100 patients (21 per 100 days), from 100 to 200 patients (14 per cent of the analysed period), from 200 to 350 patients (13 per cent of the time considered), and over 350 patients (14 per cent of the time). the differences observed in waiting list time and size would be explained by the seasonal trend observed in hospital admissions. for instance, the admissions of chronicdisease patients in autumn has a strong impact on hospitals' waiting lists, as well as the appearance of flu outbreaks from november to january. likewise, the impact of spring on some patients with respiratory or allergic disorders can also explain these waiting list differences. on the other hand, the simulation allows us to conclude that, bed occupation rate ranges between 70 and 80 per cent of hospital capacity in 7 out of 100 days, during 12 per cent of the days this rate ranges between 80 and 90 per cent, and during 19 per cent of the days it ranges between 90 and 99 per cent. that is, 28 out of 100 days the hospital is working below its capacity, while 62 out of 100 days the hospital generates a widely variable-length waiting list. thus, wide variability is observed in the use of hospital capacity. the fact that bed occupancy rate shows a strong seasonal behaviour may be due to increased healthcare pressure in some months due to the impact of some climate conditions on certain disorders. 3.1. beds-inpatient activity elasticity in this subsection we examine what happens in the simulation analysis if the number of hospital beds increases. to this end, two alternative scenarios are assumed. first, in scenario 1 the number of beds has no impact on inpatient activity and the stays pattern. this assumption is then removed in scenario 2. in both cases, we consider the actual number of beds (1,100), as well as successive increases: 55 beds more european journal of government and economics 4(2) 127 (5% capacity increase), 110 beds more (10%), 165 beds more (15%), 220 beds more (20%), 330 beds more (30%), 440 beds more (40%) and 550 beds more (50%). 3.1.1. scenario 1 here daily inpatient activity is simulated as described above, i.e. w̂ and w̂ ( h̂ and h̂ ) are estimated using the inpatient activity sample of working days (holidays). this implies that no increase in the number of hospital beds, irrespective of the magnitude of the increase, modifies the generation process of new values for inpatient activity or length of stay. in this context, figures 6 and 7 show, respectively, both the median of the 500 simulated waiting lists and the median of the 500 simulated occupancy rates for various amounts of beds. figure 6. median of simulated waiting lists. no beds effect figure 7. median of simulated daily occupancy rate. no beds effect as shown in figure 6, increased number of beds, although slightly increased, would lead to significantly reduced waiting lists. for instance, a 5 per cent increase in the number of available beds would double the period with no waiting lists (from 38 to 76 per cent). besides, the remainding waiting list would also be considerably smaller. particularly, waiting lists comprising 1-100 patients would prevail only 18 per cent of the time (vs. 21 per cent), 100-200 patients would correspond to 5 per cent of the time (vs. 14 per cent), and those comprising over 200 patients would disappear. if the number of beds increased by 10 per cent, the period with no waiting list would extend up to 95 per cent, as there would be a below-100 waiting list during 4 per cent of the time. finally, if the increase in the number of beds were 15 per cent, there would be no days with waiting lists in the analysed period. in short, a below 15 per cent increase in hospital production capacity would be enough to eliminate waiting lists. the data shown by figure 7 allow deducing that a 5 per cent increase in the number of hospital beds would lead to: (i) the number of days of full hospital occupancy (therefore involving waiting lists) would be reduced from 62 to 25 per cent; and (ii) extended periods in which the occupancy rate is below 100 per cent. at the same time, a 10 per cent increase in the number of beds would reduce the number of days in which hospital occupancy rate is 100 per cent up to only 5 per cent per year and would significantly increase the number of days in which occupancy rate remains below 100 per cent. for instance, while the current number of beds leads to hospital occupancy rates between 90 and 99 per cent during 19 per cent of the year, this occupancy rate would extend up to 40 or 42 per cent with either a 5 or a 10 per cent increase in the number of beds, respectively. if the number of hospital beds is increased by 20 per cent, maximum occupancy would not exceed 99 per cent antelo, reyes santias, martinez calvo ● bed capacity and surgical waiting lists 128 throughout the year, while a 30 or a 40 per cent increase would lead maximum occupancy not to exceed 90 or 70 per cent. the results obtained under scenario 1 can be formally recorded as follows. proposition 1. if bed capacity has no impact on inpatient activity, even a minor increase in the number of beds leads waiting lists to decrease, and occupancy rate to drastically reduce. 3.1.2. scenario 2 in this case we take the median of daily inpatient activity in working days (holidays) and the number of beds in working days (holidays) to fit a linear regression. it is well known that, if the number of hospital beds increases, inpatient activity tends to adapt itself to the hospital’s new productive capacity. this is the so-called roemer's law of demand (shine and roemer, 1959; roemer, 1961). in our case, this effect between capacity and utilization is taken into account by adopting the value that kroneman and siegers (2004) obtained for a set of hospitals from 19 european countries. these authors found that a 1 per cent increase in the number of beds leads inpatient activity to increase 1.44 per cent. thus, inpatient activity seems sensitive to bed supply. this value is taken for the simulations completed in scenario 2 with the analysed hospital. since we are modeling inpatient activity as a normal distribution, the pattern of the variable is determined by mean and standard deviation. then we examine whether both parameters, mean and standard deviation, are related to the number of beds. to avoid pernicious effects from outliers, median and median absolute deviation (mad) are considered as a robust estimator of dispersion.8 the fitted regression model, where the covariate is the number of hospital beds and the response is the median of daily inpatient activity, is given by       holidaysin ,0643.02362.4 days in working ,0972.09619.3 activity) (inpatientmedian b b (7) where b denotes the number of beds. hence, there is a reasonable linear relationship between the median of inpatient activity and beds. indeed, the determination coefficients for both fittings are over 0.9. in addition, the fitted regression models, where the covariate is the number of hospital beds and the response is the mad of daily inpatient activity, is       holidaysin ,0181.02984.2 days in working ,0165.03747.2 activity) (inpatient mad b b (8) where, once more, a reasonable linear relationship can be observed between mad of inpatient activity and the number of beds. the determination coefficients for both fittings are over 90 per cent. therefore, we can use a modified simulation process where the inpatient activity values for working days are drawn from the normal distribution )ˆ,ˆ( wwn  , where bw 0972.09619.3ˆ  and bw 0165.03747.2ˆ  (9) 8 the mad is the median of the absolute deviations from the data’s median. for example, for a dataset as {2,2,3,4,12}, the median is 3, so the absolute deviations from the median are {1,1,0,1,9} (reordered as {0,1,1,1,9}) with a median of 1, in this case unaffected by the value of the outlier 12. hence, the mad is 1. european journal of government and economics 4(2) 129 in turn, inpatient activity values for holidays are drawn from the normal distribution )ˆ,ˆ( hhn  , where bh 0643.02362.4ˆ  and bh 0181.02984.2ˆ  (10) figures 8 and 9 sum up the main results provided by the validated model in scenario 2. figure 8. median of simulated waiting list with a beds effect figure 9. median of simulated daily occupancy rate with a beds effect figure 8 shows that now waiting lists cannot be eliminated, not even when the increase in the number of beds is high. in this scenario in which the admission rate adjusts itself to the number of available beds, a 5 per cent increase in the number of beds is observed not to reduce but to increase waiting lists. from here onwards, waiting lists are reduced if the number of beds keeps growing over 5 per cent. although the reduction is not proportional, every 5 per cent increase in the number of beds can be said to lead to a 1 per cent waiting list reduction. waiting list increases are due to the fact that an increase in the hospital’s inputs leads to an increased number of patients included for admission. besides, given that the elasticity is positive and over-1, greater input amounts lead to greater demand and therefore to longer waiting lists. though consecutive increases in the number of beds do not shorten waiting lists at the same pace, they do show some effect in this sense, probably due to the appearance of growing scale performances from a particular hospital size which compensate for the effect of (over-1) admissiondemand elasticity relative to inputs. the simulation results achieved in scenario 2 can be summarized in the following proposition. proposition 2. if we consider the beds effect on inpatient activity, an increase in the number of beds leads to no significant differences in waiting list and occupancy rate (even for huge increases of beds). 4. discussion the expansion of hospital physical capacity (building new surgical units, for example) is a long-run policy that may require time to be implemented. the increase of the health workforce may be even slower, since physicians and specialists need several years' training before becoming active. although staff can be recruited from abroad, such staff may face assimilation difficulties and such a policy can therefore antelo, reyes santias, martinez calvo ● bed capacity and surgical waiting lists 130 also take time. this means that the different ways of increasing supply will generally involve different costs and require different time scales. in the short run, purchasing extra activity from public facilities at low marginal cost may be possible if there is spare capacity. however, if public facilities are already working close to full capacity, purchasing extra activity in the short run will only be possible at high marginal costs. in the medium to longer term, it may well be cheaper to expand activity by expanding public capacity. for example, denmark adjusted its public capacity to respond to the upsurge in demand for coronary revascularisation procedures more rapidly than england in the 1990s. consequently, waiting times for revascularisation fell in denmark, whereas they rose steeply in england (siciliani and hurst, 2003). it is argued that, in principle, waiting times can be reduced through supply-side policies, if the volume of surgery is not considered adequate, or through demandside policies, if the volume of surgery is considered adequate. supply-side policies include raising production capacity by increasing the number of beds and specialists, or by using the available capacity in other (private) hospitals. they also include increasing productivity by funding extra activity, fostering day-surgery, and linking doctors' and hospitals' remuneration system to their performance (hurst and siciliani, 2006). however, it is common to take measures aimed at reducing waiting times by increasing activity, and then find that, after a brief period, demand has increased and waiting times have reverted to levels similar to those before the application of measures. such responses may be hard to overcome, since demand responds positively to reductions in waiting times. this is the result rendered by the present study. by means of simulation analysis, we observed that if the demand pattern is not modified relative to the increased number of beds, a (slight) increase in the number of beds would remarkably help to reduce surgical waiting lists. particularly, a 10 per cent increase in the number of available beds would reduce variable-size surgical waiting lists from 62 to 5 per cent of the studied period. in this context, this production capacity increase would be highly effective. however, if the demand responds positively to increased supply, then every increase in the number of beds (no matter how large) would have scarce impact on waiting list reduction. the outflow (supply) of elective surgery depends on both public and private surgical capacity, and the productivity with which capacity is used. econometric evidence (cross-sectional and at national level) suggests that higher capacity —in terms of increased numbers of beds and physicians— is associated with lower waiting times. evidence on the impact of capacity is provided by martin and smith (1999) through an english database from the hospital episode statistics in 1991/92. these authors showed that waiting time is negatively associated with the number of available beds. they particularly found that elasticity equals -0.242. similarly, lindsay and feigenbaum (1984) found out that waiting times are negatively associated to both the number of available doctors and beds. furthermore, álvarez and centeno (1999) used a simulation analysis for the washington adventist hospital to evaluate the impact of an expansion in the number of beds in the emergency room. an expansion in the number of beds was found to result in a 0.6-hour reduction of average length of stay. kirtland et al. (1995) used simulation to improve performance by reducing patient time in the system and determining appropriate staffing levels. eleven alternatives were studied and resulted in a reduction of 38 minutes on average. however, larger increases in capacity may have a different impact on waiting times according to the level of excess demand and initial waiting time. countries with low supply and high initial waiting times are likely to have elastic demand to waiting-time variations. for this reason, the effect of even larger increases in capacity on waiting times may be rather modest (hurst and siciliani, 2006). in general, supply-side policies may well succeed in their aim of raising the rate of elective surgery, but they may be disappointing in their effects on waiting times. that european journal of government and economics 4(2) 131 is because an increase in supply may follow rather than lead an increase in demand, or may be overtaken by fresh increases in demand. moreover, any reduction in waiting times may encourage an increase in admission rates to lists due to lowered clinical thresholds (hurst and siciliani, 2006). moreover, many commentators suggested that an increase in the supply of hospital beds tends to generate additional demand either in the form of more admitted patients or patients treated for longer time periods, or some combination of both (zeraati et al., 2005). formerly, shain and roemer (1959) found very close correlations between the availability of short term general hospital beds per 1,000 population, and rates of use as measured by hospital days per 1,000 population. later, roemer (1961) also reported on a natural experiment where a sudden increase in hospital beds in a country—with no changes in other factors—led to a sharply increased utilization rates. using data from 10 european countries hospitals, kroneman and siegers (2004) found out that inpatient activity increases 1.44 per cent for every 1 per cent increase in the number of hospital beds. taking into account this beds-inpatient activity elasticity, the results regarding the impact of beds on waiting times offered by our study widely differ from those obtained without considering the impact of bed capacity on inpatient activity. now, an increase in bed capacity leads to no significant differences in waiting lists and occupancy rates, even for huge bed-capacity increases. our simulation model then reveals the small effect that supply policies may have on waiting lists when healthcare demand adapts itself to the new supply conditions. 5. concluding remarks waiting time for elective surgery is a significant problem in the current medical world. this paper aims at reproducing, by means of a monte carlo simulation, how the number of beds (a rough measure of a hospital’s physical capital) affects inpatient activity, length of stay and, consequently, waiting lists in teaching hospitals like the university multi-hospital complex of santiago de compostela (chus). inpatient activity is simulated by fitting a normal distribution to the real impatient activity data observed in 2007 and the effect of the number of beds on inpatient activity is modelled with a linear regression model. analysis is performed firstly assuming that the number of beds has no impact on inpatient activity or length of stay (absence of beds capacity effect), and then assuming that the number of beds has certain impact on inpatient activity by adapting itself to the new supply conditions. this research allows us to evaluate drops in waiting lists due to a potential increase in the number of beds. we add empirical evidence showing that if the effect of the number of beds on hospital admission rates is neglected, then an increase in the number on hospital beds, even the slightest increase, drastically reduces waiting lists. by contrast, if the hospital’s admission patterns become affected by the number of beds, every extension in the number of beds, even remarkable extensions, leads to no significant differences in hospital occupancy rates or waiting lists. references akkerman, renzo and marrig knip (2004) ‘reallocating of beds to reduce waiting time for cardiac surgery’, health care management science 7(2): 119-126. alvarez, adriana m. and martha centeno (1999) enhancing simulation models for emergency rooms using vba, winter simulation conference, 1685-1693. churruca, silvia (2000) ‘los líderes en gestión de listas de espera advierten: un suceso no puede condicionar la estrategia’, diario médico, 15/06/2000. available at http://www.diariomedico.com/sanidad/listas/debate.html (last accessed september 2000). antelo, reyes santias, martinez calvo ● bed capacity and surgical waiting lists 132 commonwealth fund (1997), leveling the playing field: financing themissions of academic health centers, report of the commonwealth fund task force on academic health centers new york: commonwealth fund, may. denton, brian, james viapiano and andrea vogl (2007) ‘optimization of surgery sequencing and scheduling decisions under uncertainty’, health care management science 10(1): 13-24. everett, jeffrey e. (2002) ‘a decision support simulation model for the management of an elective surgery waiting system’, health care management science 5(2): 8995. hurst, jeremy and luigi siciliani (2003) tackling excessive waiting times for elective surgery: a comparison of policies in twelve oecd countries, oecd health working paper, no. 6. kirtland, anthony, karen poisker, linda stamp and patricia wolfe (1995), simulating an ed ‘is as much fun as?’, proceedings of winter simulation conference, c. alexopoulos, k. kang, w.r. lilegdon and d. goldsman (eds.), institute of electrical and electronics engineers, washington, 1039-1042 koenig, lane, allen dobson, silver ho, jonathan m. siegel, daniel s. blumenthal and joel s. weissman (2003) ‘estimating the mission-related costs of teaching hospitals’, health affairs 22(6): 112-122. kroneman, madelon and jacques j. siegers (2004) ‘the effect of hospital bed reduction on the use of beds: a comparative study of 10 european countries’, social science & medicine 59(8): 1731-1740. lapierre, sophie d. and angel b. ruiz (2007) ‘scheduling logistic activities to improve hospital supply systems’, computers and operations research 34(3): 624641. law, averill m. (1983) ‘statistical analysis of simulation output data’, operations research 31(6): 983–1029. law, averill m. and w. david kelton (1991) simulation modelling and analysis, mcgraw-hill, new york, 2nd ed. lindsay, cotton m. and bernard feigenbaum (1984) ‘rationing by waiting lists’, american economic review 74(3): 404-417. martin, stephen and peter c. smith (1999) ‘rationing by waiting lists: an empirical investigation’, journal of public economics 71(1): 141-64. r development core team, r (2010), a language and environment for statistical computing, r foundation for statistical computing, vienna, austria. (available at <http://www.r-poject.org>.) roemer, milton i. (1961) ‘bed supply and hospital utilization: a natural experiment’, hospitals 35, 988-993. sampietro, laura and mireia espallargues (2001) ‘nuevas fórmulas para dar solución a las listas de espera’, el médico, 15 june of 2000: 6064. http://www.diariomedico.com/sanidad/listas/debate.html shain, max and milton i. roemer (1959) ‘hospital costs relate to the supply of beds’, modern hospital 92(4): 71-73. siciliani, luigi and jeremy hurst (2003), explaining waiting times variations for elective surgery across oecd countries, oecd health working papers 7. silber sigmund, h. mühling, r. dörr, g. zindler, a. preuss and a. stümpfl (1996) ‘waiting times and death on the waiting list for coronary artery bypass operation. experiences in munich with over 1,000 patients’, herz 21(6): 389-396. european journal of government and economics 4(2) 133 street, andrew and stephen duckett (1996) ‘are waiting lists inevitable?’ health policy 36(1): 1-15. vanberkel, peter t. and john t. blake (2007) ‘a comprehensive simulation for wait time reduction and capacity planning applied to general surgery’, health care management science 10(4): 373-385. wand, m.p. and m.c. jones (1995), kernel smoothing, chapman & hall, london. wilson, j.c. tunnicliffe (1981) ‘implementation of computer simulation projects in health care’, journal of the operational research society 32(9): 825–832. yamaguchi naoito, tomohide tamura, tomotaka sobue, suminori akiba, megu ohtaki, yoshinobu baba, shigeto mizuno and shaw watanabe (1994) ‘evaluation of cancer prevention strategies by computerized simulation model: methodological issues’, environmental health perspectives 102, suppl. 8, 64-71. zeraati, hojjat, farid zayeri, gholamreza babae, navid khanafshar and fatemeh ramezanzadeh (2005) ‘required hospital beds estimation: a simulation study’, journal of applied sciences 5(7): 1189-1191. the effect of subsidising firms on voting behaviour: evidence from flemish elections european journal of government and economics volume 1, number 1 (june 2012) issn: 2254-7088 30 the effect of subsidising firms on voting behaviour: evidence from flemish elections caroline buts, vrije universiteit brussel, belgium* marc jegers, vrije universiteit brussel, belgium dimi jottier, vrije universiteit brussel, belgium abstract despite an international consensus on the importance to limit state aid spending, large amounts of resources are still devoted to a wide variety of subsidies to firms. a sizable literature studies the relationship between general government spending and the proximity of elections, mostly documenting a positive link. in addition, other studies verify whether this strategy of increasing government expenditure pays off in terms of number of votes. we focus on one type of government spending that can be quite vulnerable to becoming ‘targeted spending’, i.e. subsidies to firms. we empirically test the relationship between the amount of subsidies granted to firms at the local level and local support for incumbent parties in the regional government. to that end, we make use of subsidy data derived from financial statements on 2008 and flemish election results of 2004 and 2009. we find that the total amount of subsidies as well as subsidies per capita granted in 2008 positively correlate to support for incumbent parties 2009, meaning that voters appear to reward subsidy granting politicians. jel classification h25; d72; l50 keywords subsidies; voting behaviour; industrial policy * address for correspondence: caroline buts, vrije universiteit brussel, department of applied economics, pleinlaan 2, be-1050 brussel, belgium. e-mail: caroline.buts@vub.ac.be. doi: https://doi.org/10.17979/ejge.2012.1.1.4275 european journal of government and economics 1(1) 31 introduction governments spend a substantial amount of resources, allocating subsidies to private firms, seemingly in order to correct market failures or to support specific regions or sectors. however, there also seems to be a consensus that (taking into account a few exceptions) state aid should be forbidden as it can lead to costly subsidy races between countries and in the long run can create inefficient companies (hancher et al. 2006). furthermore, in practice, we see that these subsidies are often ineffective or inefficient in a sense that goals are not (fully) reached or that the benefits achieved do not justify the costs incurred. therefore, it is argued that mechanisms should be implemented to control or restrict wasteful spending on subsidies. dewatripont and seabright (2006) suggest that domestic political control mechanisms are not the best option. in theory, political accountability works as follows: citizens vote as a function of their evaluation of government performance. incumbent parties are electorally punished for a ‘bad’ performance, and a ‘good’ performance is rewarded with additional support in the ballot box. in doing so, incentives are created for politicians to implement a policy perceived to be ‘good’ in order to remain in office. as already mentioned, subsidies are not the most efficient way to allocate government’s resources, but are perceived by voters as “evidence of effort on the part of the politicians” (dewatripont and seabright, 2006, p. 514). if voters reward this effort with additional votes, the political control mechanism creates a perverse effect: it then becomes rational for politicians to spend money on wasteful subsidies as this would “improve their chances of re-election” (dewatripont and seabright, 2006, p. 514). the aim of this paper is to empirically test whether subsidies indeed are related to electoral outcome, a relationship which, to the best of our knowledge, has not yet been directly tested. it serves as a further specification of the broader literature on pork-barrel politics that studies politicians who direct spending in order to win additional votes. subsidies are chosen as they are probably more sensitive to become ‘targeted’ spending projects than many other types of government spending. the relationship is tested at the local level. the economic voting literature shows that electoral support for national governments is greater in local jurisdictions where economic prosperity is higher (pattie et al., 1997; johnston et al., 2000, 2002). hence, if subsidies have an electoral effect, the support for governments should be higher in local jurisdictions where the amount of allocated subsidies is higher. we compare the 2009 electoral results of the incumbent parties of the flemish government between the different electoral cantons and hypothesize that a high amount of subsidies allocated to a specific region increases local electoral support for the incumbent parties. the remainder of this paper is organized as follows: in section 1 the ineffectiveness of many state aid measures is discussed as well as the obvious international desire to diminish or even abolish this kind of spending. furthermore, we look at literature on the determinants of election outcome and the importance of a local context. the last part of this section reviews the literature on pork-barrel politics and thus discusses the relationship between the level of government spending and upcoming elections as well as the influence of this spending on vote shares of incumbent parties. the second section specifies our model and describes the data. the results of the empirical analysis are presented in section 3. a conclusion and discussion can be found in section 4. literature subsidies are granted for a variety of reasons such as support to r&d and aid to firms in difficulty. for many of these objectives, the effectiveness and efficiency of different measures has been studied, often resulting in quite negative findings. european journal of government and economics 1(1) 32 frequently, goals are not reached, or when they are, the costs are out of proportion. examples of this are the crowding out effect of r&d subsidies1, the ineffectiveness of many rescue and restructuring measures2 and the hugely costly aid to boost employment.3 next to this wide evidence of inefficiencies, an international consensus seems to exist among politicians and organizations about the desire to diminish state aid measures. this becomes evident in the european union’s state aid policy and the world trade organization’s agreement on subsidies and countervailing measures. from a theoretical point of view, collie (2000 and 2002) makes a well-reasoned plea for a serious reduction of state aid over time in the eu, based on welfare grounds. we then may ask why governments keep spending resources to the current extent in this often inefficient way. while searching for explanations, we find several possibilities. a first one is provided by baldwin and robert-nicoud (2007). governments support inefficient firms simply because these firms have a strong lobby. in a way, the process of integration in the european union stimulates this demand for government support. integration increases market performance but, at the same time, higher competition threatens to force non-efficient firms out of the market. these firms will then ask for aid from their national governments. furthermore, penalties for acting against eu state aid rules are not always severe enough, possibly leading to situations in which, despite welfare being reduced, granting aid is an equilibrium outcome (martin and valbonesi 2008). another explanation is offered by dewatripont and seabright (2006) and represents the theoretical foundation for our empirical analysis: subsidies are seen by voters as an effort of politicians. voters will reward politicians for this effort in the ballot box. in their turn, politicians are aware of this and grant subsidies to show their commitment and thereby gain support for future elections. normally, the mechanism of domestic political accountability would control politicians, but in this case it does not and it even provides an incentive for wasteful spending. political accountability builds on the ‘carrot and stick’ model: a good performance (as perceived by voters) leads to electoral gain for incumbent parties, contrary to a bad performance. this hypothesis has been intensively investigated in the economic voting literature. from this literature, we conclude that economic prosperity – generally measured by variables such as unemployment rate, inflation and economic growth has positive effects on electoral results for incumbent parties (for a review see mueller, 2003 and nannenstad and paldam, 1994). as wasteful spending is shown to be a sign of rather bad governance, we would expect the accountability mechanism to punish politicians for this. however, here the mechanism works in the opposite way. subsidies are not evaluated as being wasteful but as an effort of politicians which generates extra votes. this encourages politicians to continue subsidising. economic prosperity as measured in the voting literature can be perceived at different levels. voters can assess the performance of the national economy (voting socio-tropically) and they can look at the prosperity of their own household (voting ego-tropically). research has shown that both levels are important although voters seem to be more socio-tropic than ego-tropic (lewis-beck and paldam, 2000). furthermore, it has been suggested that the local context wherein these evaluations are made also plays an important role (books and prysby, 1999). 1 for a review on the econometric literature on crowding out of r&d subsidies, see david et al. (2000). in addition, lach (2002) and gelabert et al. (2009) find that these kinds of subsidies are only effective when granted to small firms or firms with low levels of appropriability. 2 london economics (2004), chindooroy (2007) and glowicka (2008). 3 bergström (1998) and tannenwald (2002). european journal of government and economics 1(1) 33 through the local media, social interaction and personal experiences, voters in states with low economic prosperity would be more confronted with negative information, which affects their assessment of the government’s economic performance. not only assessments but also voting behaviour is affected by the local context. controlling for national and personal assessment, pattie et al. (1997) find that, for the 1992 uk elections, voters who thought that their region was worse off were less likely to vote conservative (the incumbent party at that time) and more likely to vote labour (the main opposition party). their results are confirmed by johnston et al. (2000, 2002) who find that, controlling for national, personal and regional assessments, economic prosperity in a region (measured by the unemployment rate) increased support for incumbent parties in that specific region. however, berry and howell (2007) state that evidence of retrospective voting in national elections seems to be steadier than in local settings. from duch and stevenson (2006) we learn that economic voting is not found to influence all elections, but a clear reason for this has not yet been found. they find varying evidence for economic voting depending on national context and time. the accountability mechanism has also been tested with a wider range of variables. hagerty (2006) adds measures for the quality of life to this ‘responsibility hypothesis’ and finds that crime rates are important in predicting election outcome. however, the influence of crime rates tends to be smaller than that of the economic condition. finally, the relationship between government spending and vote shares has been discussed in the literature. there is evidence suggesting that governments indeed seem to believe that subsidies positively impact on voting behaviour. in addition, it has been discussed whether this kind of spending to win additional votes actually pays off. the phenomenon is referred to as pork-barrel politics. verdier (1995) explains that politicians grant subsidies in order to create a (stable) network of supporters. kwon (2005) documents the fact that the level of government expenditure in south korea depends on the proximity of future elections. also, it is known that in developing countries, white elephants (funded projects with a negative social surplus) are used in an attempt to influence election outcome. robinson and torvik (2005) show that certain politicians are able to derive very large political benefits from this kind of projects. keeping the above findings in mind, keefer and knack (2007) make an interesting addition. they find that public investment is higher in regimes with little political checks. however, they do say that further research is necessary to determine the cause: is it to compensate for incompetence of the regime or is the money spent on ‘preferential’ projects? also manzetti and wilson (2007) state that nations with weaker democratic regimes are more likely to have a high amount of targeted spending to win votes. important to note is also that smaller regions are believed to be more sensitive to pork-barrelling. hauk and wacziarg (2007) provide evidence that infrastructure spending is disproportionately allocated to smaller states in the us. previously, herron and shotts (2003) already documented that certain funds or projects which are claimed to attribute electoral benefits were allocated to the smaller states. thus, politicians seem to believe that ‘targeted’ spending might earn them extra votes and often act accordingly. it is off course important to study whether incumbents really benefit in the ballot-box of this kind of spending. several studies such as the ones by feldman and jondrow (1984) and stein and bickers (1994) failed to find general evidence. stein and bickers (1994) argue that redefining the general model is necessary and show that it are mainly politicians in office that do not feel confident about re-election that engage in this kind of spending, and more importantly that it are mostly politically attentive voters that respond to it. moreover, european journal of government and economics 1(1) 34 alvarez and saving (1997), levitt and snyder (1997) and leigh (2008) find that high spending results in more votes. the second team finds that it takes about $14 000 in federal funding to win an additional vote. the last author distinguishes between types of spending and finds the strongest relationship between funding and additional votes in the roads to recovery program, about the same amount that was found by levitt and snyder (1997). specification and data in the literature review, we find evidence that state aid is often ineffective and that it is accepted that it should mostly be forbidden. nevertheless, huge amounts of state aid are spent each year by national governments. for example, in 2010 the eu-27 spent 0.6% of aggregated gdp on state aid.4 this, together with the evidence from the literature on pork-barrelling, leads us to believe that in many cases there could be political motives to government spending. in this research we want to look at one specific form of spending, namely subsidies to firms as we believe that they could be especially sensitive to becoming ‘targeted’ spending in order to win votes. in a way, it boils down to the fact that politicians grant subsidies even though overall believe is that these subsidies should only be allowed in exceptional circumstances. therefore, keeping in mind that a link exists between subsidies and electoral competition, we think that a realistic explanation is presented by dewatripont and seabright (2006): politicians grant subsidies to show their commitment and in this way try to gain more support in next elections. in this theory subsidies are perceived by voters as an effort of politicians, signalling a caring government. this is rewarded with electoral support in next elections. the voting decisions are made on a point in time when voters are aware of the subsidy, but not of its effect, which in most cases can only be evaluated after a few years. in the present paper we want to empirically investigate whether subsidies indeed affect voting behaviour and hypothesize that differences in electoral support for incumbent parties between the different regions can partly be explained by differences in the amount of subsidies granted to firms located in these different regions. we thus start from the theoretical model presented by dewatripont and seabright (2006) as we believe that voters reward politicians for their effort. subsidies to firms are used to test this as they are a form of spending likely to be used for pork-barrel politics. people working in the aid receiving firms are aware of the fact that subsidies were granted to these firms. this may not always be true, but it will be in the majority of cases. some types of subsidies are namely more likely to be communicated towards the employees than others. for example, aid for r&d or rescue and restructuring aid will usually be known in the entire firm, whereas several smaller subsidies may be not. the employees of the receiving firm are likely to inform family and close friends and thus in this way make sure the information spreads. the more firms receive subsidies, the more inhabitants of a certain area are aware of the ‘caring’ incumbent politicians. also, as pointed out in the literature review, pork-barrelling is observed more in smaller states as described by hauk and wacziarg (2007). indeed, the effect of pork-barrelling will logically be larger were local communities are small and social interaction is often quite high. where there are many contacts with the neighbourhood and within recreational organizations, information will spread more easily. moreover, press in flanders is very local and helps spreading these facts by reporting all kinds of local news, including economic news that is locally relevant. for the empirical analysis, we use election data of the flemish region for 2004 and 2009. flanders represents a typical example of a western democracy, with a proportional multiparty system, located within the european union. it provides for a 4 european commission (2010). this percentage excludes support to railways and crisis measures. european journal of government and economics 1(1) 35 good test case as data on subsidies can be calculated per firm (see below). flanders is one of the three belgian regions besides wallonia and the (smaller) brussels region. the belgian regions have considerable autonomy. their major competences are in the field of economic policy and education. every five years, elections are held to choose representatives for the flemish parliament. within this parliament, a majority forms the government. after the 2004 elections, the government was formed out of three cartels: cd&v-n-va (cartel of the christian democrats and a nationalist party), vld-vivant (a liberal cartel) and sp.a-spirit (a left wing cartel). the next elections for the flemish government in 2009 resulted in a new coalition of cd&v, sp.a and n-va.5 flanders (13 682 km²) is divided into five electoral districts. each of these districts consists of several cantons (103 in total). in 2009 there lived, on average, 59 821 people in a canton with a minimum of 3 672 and a maximum of 490 492.6 to analyze the impact of subsidies, we study the electoral results of parties that made up the government between 2004 and 2009. these results differ substantially between cantons as can be seen in figure 1. vote share changes are calculated for every canton. on average, incumbent parties lost 1 percentage point of their electoral support. however, in one canton they lost 14 percentage points of their vote shares, whereas they also won 8 in another. figure 1: kernel density plot of vote change of incumbent parties (per canton) 0 .0 2 .0 4 .0 6 .0 8 .1 d e n s ity -15 -10 -5 0 5 10 change vote share kernel density estimate 5 cartel partners cd&v and n-va decided to go separately to the 2009 elections. the two other cartels making up the flemish government after 2004, chose a new name for the 2009 elections. 6 the difference in size of the cantons implies that the perception of localness differs for voters within different cantons. a small canton is much more ‘local’ than a larger canton. johnston et al. (2000), however, demonstrate that the response of voters to local unemployment levels is scale invariant. whether unemployment was measured at a very small scale (around 500 people) or at the constituency scale (around 70 000 people on average) it still had a negative effect on the electoral support of incumbent parties. we see that including a dummy variable for cantons containing a big city does not impact on our results (see below). all in all, all cantons can be labeled ‘small’ compared to the small units of observations found in the literature. also, we include voting results of previous elections as an independent variable. local dimensions are in this way incorporated on the ‘independent’ side. and, despite the large variance in canton size, they all are small comparing to other countries. including a population variable in the analysis does not lead to significance. furthermore, it does not change the other results. european journal of government and economics 1(1) 36 empirical model we hypothesize that these differences in electoral results between cantons can be (partly) explained by differences in subsidies granted to firms located in these cantons. we expect that in cantons where private firms received more subsidies, the electoral support for incumbent parties will be higher than in other cantons. this leads to the following function, estimated at the canton level: votes2009 = α + β1 votes2004 + β2 subsidy + β3 x + ε where votes2009 stands for the vote share of all the incumbent parties at the 2009 elections, votes2004 is the vote share of these parties at the 2004 elections. subsidy is the amount of subsidies or in a second step the subsidies per capita granted to firms in the canton in 2008. x is a set of socio-economic parameters ranking all cantons. in a second step we also look at relative change in vote share. subsidies. we will focus on all subsidies to firms in flanders, excluding other measures such as loans or guarantees. in belgium, subsidies are granted by several levels of government and through different organizations under their supervision. the subsidies are linked to the elections of the regional governments, which grant the bulk of the subsidies. a small proportion of the subsidies is provided by the federal government (also directly going to the firms). however, from limosani and navarra (2001) we learn that voters can reward politicians for spending that occurs at a different level of government. we assume that voters do not really differentiate between resources coming from different levels of government. through personal experience, their social network or local press, they are informed about the subsidies and relate this to the politicians that are in office. most of the subsidy granting organizations are not willing to provide detailed information on this topic, the amount of subsidies they award and to whom, except for iwt (agency for innovation by science and technology). therefore, we estimated the subsidies per firm (and subsequently calculated subsidies per canton) from the firms’ annual accounts.7 we include two tests, one with the absolute level of subsidies for which the variable is scaled by a factor 100 000 and one with subsidies per capita. the method of calculation of subsidies leads to an inclusion of all capital grants to firms conditionally upon being subsequently invested by the firm. it concerns subsidies provided by all levels of government for a variety of objectives such as research and development, start-up aid and sustainable development. subsidies granted as a result of aid schemes8 as well as ad hoc types are included. the purpose is to investigate the joint influence of all these subsidies to firms. flemish firms received subsidies for a total amount of €829 million in 2008. this represents on average a subsidy of €80 per capita. however, there are quite some differences between the cantons. in one canton, we find no subsidies at all. in another canton, subsidies amount to €2 622 per capita. in our analysis we include only subsidies and subsidies per capita of 2008 instead of total subsidies over the four years between the two elections because, as was mentioned in the literature review, it has been shown that governments seem to increase their spending, including subsidies, in the year prior to elections. additionally, voters can be assumed to have short memories, rather recalling last years’ subsidies than last five year period’s subsidies. we expect that subsidies will positively impact on incumbent support following the mechanism explained above. 7 the method of calculation of subsidies can be found in appendix 1. 8 on one hand, aid schemes provide the possibility for multiple firms to apply for a subsidy. they usually have to fulfill specified criteria in order to receive the subsidy. they are however not available to all firms. they can be selective, for example, in a geographical or sectoral manner. on the other hand, there are also ad hoc types of aid where only one company receives an aid for a certain reason. european journal of government and economics 1(1) 37 socio-economic condition. we control for the socio-economic condition in a canton. as suggested in the literature, the economic condition and quality of life in a specific region influences the evaluation of government performance made by voters in that region. to control for these effects we use a socio-economic canton rank as proposed by sanderson and eggerickx (2010). a low value for the index represents a high ranking and thus a ‘better’ canton. this index is an overall performance indicator and includes a canton’s scores for different parameters, measuring the general well-being of inhabitants. to control for economic performance, income per capita and the unemployment level are taken into account. to have a broader picture, also measures of more general well-being are included such as quality of life, living environment and the availability of public services. these aim to quantify certain topics that are important in the daily life in local communities. the first two are based on quantifiable dimensions such as the quality of houses (measured amongst others by the number of bathrooms), built surface, proximity and surface of green and wooded areas, health, life expectancy and environmental concerns such as local emission rates. availability of public services will typically measure the accessibility of several kinds of services such as public schools, administrative services, public nursing homes, public health care institutions, doctors, and public transport. here, it is the proximity and quantity that is measured, as well as the availability of public buses. each time, the partial scores are added and cantons are ranked according to the total score. we expect better socio-economic conditions to result in better electoral results for incumbent parties. results by means of a classical ols regression, we explain the number of votes that incumbent parties of the 2004-2009 period receive at the flemish elections of 2009. regression results can be found in tables 1 and 2.9 in table 1 we look at the absolute value of subsidies as one of the independent variables. table 2 shows results when we change to subsidies per capita. the second column of each table explains the joint vote share of all incumbent parties. in column three the relative change in vote share each time is the dependent variable.10 first, it is clear that there is a very strong and positive link between the election outcome of 2004 and results of 2009. incumbents of the 2004-2009 period are more likely to have many votes in a canton at the 2009 elections when they had a high vote share at previous elections, despite some ‘regression’ in the sense that high shares in 2004 tend to be followed by a loss of votes. next, we take a look at subsidies and subsidies per capita going to firms. throughout the four estimations, we find that there is a significant positive relationship between subsidies and the vote share in 2009, meaning that cantons that receive high subsidies the year previous to the elections reward incumbent 9 including a dummy variable for cantons containing one of the five province capitals does not alter results significantly. one could argue that this kind of variable should be included as it is not unusual for firms to have their headquarters in a larger city, but their main activity somewhere else. also, cities typically host more workers living somewhere else. subsidies might enter the calculations of the bigger cantons, but employees are from another region. including a dummy variable for ‘undecided’ cantons, i.e. cantons where the largest party changed between the 1999 and 2004 elections or cantons were vote share for incumbents and opposition was close, does not alter the results.we also estimated our regressions applying robust regression techniques. the results do hardly differ from the ones presented (results can be obtained from the authors upon request). including a variable to control for size of the cantons does not change the results. the size variable does not reach significance. an overview of all variables included and their sources can be found in appendix 2. 10 by relative change in vote share we mean the percentage change in vote share of the incumbent parties between the 2009 and 2004 elections: (vote share 2009-vote share 2004) /vote share2004. european journal of government and economics 1(1) 38 parties with more votes than cantons that receive less subsidies. an increase of €1 subsidy per capita, increases vote share for incumbent parties with 0.0021 percentage points (table 2). €80 subsidy per capita is granted on average. for the canton with the highest subsidies, this represents a change in vote share of 6 percentage points, which is substantial given the number of parties participating at the elections. the found effect confirms expectations. the subsidies taken into account are the ones going to firms. these matter because they are observed by the voter public in the following way: many people work close to home or at least have many relatives and/or friends working in that region. if more subsidies are awarded to firms in a specific canton, we can expect that they are ‘experienced’ by more voters as more employees will be aware of the subsidies. voters are informed by personal experience, but can also learn about the subsidies through their social network or local press. then, we continue with the reasoning by dewatripont and seabright (2006) that voters indeed reward politicians for subsidies. the subsidies are perceived as a kind of effort of politicians. the economic impact of the spending decision can often only be evaluated after the elections. therefore, voting support is given on the basis of the spending decision itself and not on the actual effectiveness of the subsidy which can only be observed at a later moment in time and is then implicitly incorporated in the variable measuring general well-being.11 third, following the literature, we control for the socio-economic condition of the cantons. we expect that a good economic condition and quality of life would be rewarded with more votes. this is confirmed by the results for the variable measuring the socio-economic condition. the sign observed is negative, remembering that the variable is an ordinal variable, with higher values pointing at worse socio-economic conditions. cantons were inhabitants have a high feeling of general well-being, measured as economic condition, but as well as quality of life and availability of public services, award more votes to incumbent parties.12 table 1: results with subsidies as an absolute variable incumbents 2009 relative change in vote share incumbents 2004 0.5520*** -0.0067*** subsidies 0.0024** 0.000041** socio-economic index -0.0153*** -0.0002*** constant 33.9927*** 0.4974*** n 103 103 r² 0.6223 0.5308 *** significant at 1% level; ** significant at 5% level; * significant at 10% level 11 this paper focuses on a type of spending that is likely to be sensitive to becoming ‘targeted’ spending. building on existing literature, it could be interesting to look at the effect of more general types of public spending. this however falls outside the scope of this paper. following the method proposed by petrarca and padovano (2011), we also test whether there is an influence of the level of subsidies in neighbouring cantons. we calculate per canton the level of subsidies relative to the subsidies received in neighbouring cantons. this however does not seem to have an effect. 12 substituting the socio-economic index by the variables income and unemployment does not substantially change the found effect of subsidies on voting outcome. the variable income is positively correlated to voting outcome as is found in the literature. the variable unemployment shows the expected negative sign, but does not reach significance. european journal of government and economics 1(1) 39 table 2: results with subsidies per capita incumbents 2009 relative change in vote share incumbents 2004 0.5345*** -0.0070*** subsidy per capita 0.0021* 0.0001** socio-economic index -0.0143*** -0.0002*** constant 35.0201*** 0.5136*** n 103 103 r² 0.6122 0.5176 *** significant at 1% level; ** significant at 5% level; * significant at 10% level most usual regression diagnostics do not raise concerns. when checking multicollinearity, we find no variance inflation factors that exceed 2. as the normally used threshold is 10, we conclude that there are no concerns with regard to multicollinearity. the augmented partial residual plots do not raise concerns about non-linearity. when plotting residuals versus fitted values, we see that the data cloud becomes somewhat thinner towards the ending which might raise concerns about heteroskedasticity. these are however only minor as there is no real pattern to be found in the plot. however, subsidy per capita has a few outliers. in order to check whether these influence the results, we run regressions with and without them and find no significant differences. robust regression was also used, which provided similar results (see also footnote 9). finally, one might be critical about the assumed direction of causality between subsidies and election outcome. instead of higher subsidies leading to better election outcome, one could argue that more subsidies are awarded to regions where incumbent support was rather low in the past. theoretically, this cannot be a problem in the present case as election results of 2009 are explained by subsidies of 2008. nonetheless, we check endogeneity by means of a durbin-wu-hausman test (as one could say that subsidies are dependent on previous election results and that these are highly correlated to future election outcome), but conclude that there are no problems of that kind. in addition and perhaps most convincingly, when the opposite direction is tested, we find no evidence of a correlation between subsidies and 2004 vote share. considering these diagnostics, results can be confidently interpreted. conclusion and discussion we study the impact of subsidies to firms on election outcome in flanders (belgium). to that end, we look at the election outcome for the incumbent parties at the flemish level in the 2009 elections for all 103 cantons. we find a significant positive relationship between the amount of subsidies and subsidies per capita granted to a canton’s firms and the vote share of the incumbent parties, meaning that voters seem to reward politicians for spending resources on subsidies. the motive for this paper is to uncover a possible explanation for granting subsidies. apart from the overall consensus that state aid should be forbidden, literature provides evidence that many of the subsidies that are still in place for a variety of reasons are not efficient. the question then remains why governments keep on investing such large amounts of resources in different kinds of subsidies. following the theoretical work of dewatripont and seabright (2006) who explain that subsidies are a by-product of political accountability, we show empirically that voters seem to reward politicians for subsidies as higher amounts of subsidies result in more support for the incumbent parties. we do however not judge the effectiveness of the subsidies. we also provide a better understanding of voting behaviour in general, adding an index containing the usual control variables that we find in the existing literature. up to now, economic voting is more persistently found in research on national european journal of government and economics 1(1) 40 elections than on the local level, as is explained by berry and howell (2007). the present study shows that there can be retrospective voting at the local level. we add the possibility that the accountability mechanism can create undesired effects as well when voters make a ‘wrong’ assessment on a government decision under the limited information that they observe as will often be the case with regard to subsidies. the literature on pork-barrelling is specified further as we distinguish one specific type of spending, namely subsidies to firms. even in stable democracies and multi-member electorates, both usually less sensitive to porkbarrel spending, awarding subsidies can improve the incumbent’s chances of reelection. however, this is not always confirmed in existing literature. so, specific conditions can be defined further for this kind of spending to work. probably, the small size of the cantons and the organization thereof is an important factor. having relatively dense social networks and a truly local press, for example, helps politicians to spread information among the voter public. this makes it easier to bring the message across that resources were spent, and therefore, as dewatripont and seabright (2006) pointed out in their theoretical model, that incumbents ‘care’, resulting in extra support during upcoming elections. for future research it would be interesting to look at this type of effect in other countries and especially to verify whether the ideology of the standing government matters for the effect of subsidies on voting outcome. two remarks still need to be made: as we studied flemish election outcomes, one could argue that only flemish subsidies should have been taken into account. however, we included all subsidies received by firms. this is justified by the fact that first, most of these subsidies come from the flemish government or an organization under its responsibility. second, most voters do not distinguish between regional and federal funds in their evaluation of government performance. and even when they do, literature provides proof that it is possible for voters to reward politicians at one level of government for spending stemming from another level. a second remark, as mentioned earlier: flanders is a very specific case and further research is thus necessary to check the extent of the found relationship in other countries. quite substantial policy implications can be derived from the results obtained. as politicians are rewarded for subsidies by voters, they will probably put a rather high effort into granting subsidies. from this point of view, we can thus conclude that a control on state aid is absolutely essential. this control will need to be organized at the national as well as at the supranational levels. the european commission, for example, has the jurisdiction to decide on the authorization of state aid measures planned by eu member states. however, not all subsidies fall under the notification obligation for a variety of reasons such as no effect on trade between member states, block exemptions, and the de minimis regulation. for this rather considerable amount of financial resources that is spent on subsidies to firms, there should be an independent control system in place at the national level as well, to ensure that there are no harming consequences stemming from subsidies and to control for possible misallocation as a result of political motives. references alvarez, michael and janson l. saving (1997) ‘deficits, democrats and distributive benefits’, political research quarterly, 50(4): 809-831. baldwin, richard e. and frédéric robert-nicoud (2007) ‘entry and asymmetric lobbying: why governments pick losers’, journal of the european economic association, 5(5): 1064-1093. bergström, fredrik (1998) ‘do capital subsidies to firms increase employment?’ in eliason gunnar and nils karlson (eds.), 2001, the limits of government: on policy competence and economic growth, city university press:stockholm. european journal of government and economics 1(1) 41 berry, christopher r. and william g. howell (2007) ‘accountability and local elections: rethinking retrospective voting’, the journal of politics, 69(3): 844-858. books, john and charles prysby (1999) ‘contextual effects on retrospective economic evaluations, the impact of the state and local economy’, political behaviour, 21(1): 1-16. chindooroy, rohan, patrice muller and giovanni notaro (2007) ‘company survival following rescue and restructuring state aid’, european journal of law and economics, 24(2): 165-187. collie, david r. (2000) ‘state aid in the european union: the prohibition of subsidies in an integrated market’, international journal of industrial organization, 18(6): 867-884. collie, david r. (2002) ‘prohibiting state aid in an integrated market: cournot and bertrand oligopolies with differentiated products’, journal of industry, competition and trade, 2(3): 215-231. david, paul a., bronwyn h. hall and andrew a. toole (2000) ‘is public r&d a complement or substitute for private r&d? a review of the econometric evidence’, research policy, 29(4-5): 497-529. dewatripont, mathias and paul seabright (2006) ‘“wasteful” public spending and state aid control’, journal of the european economic association, 4 (2-3): 513-522. duch, raymond m. and randy stevenson (2006) ‘assessing the magnitude of the economic vote over time and across nations’, electoral studies, 25(3): 528-547. european commission (2010) ‘studies and reports: total state aid by member state as a percentage of gdp’, url (consulted on 12 dec. 2011): http://ec.europa.eu/competition/state_aid/studies_reports/expenditure.html. european union (2008) ‘consolidated versions of the treaty on european union and the treaty on the functioning of the european union’, official journal c 115 of 9 may 2008. feldman, paul and james jondrow (1984) ‘congressional elections and local federal spending’, american journal of political science, 28(1): 147-164. gelabert, liliana, andrea fosfuri and josep a.tribo (2009) ‘does the effect of public support for r&d depend on the degree of appropriability?’, the journal of industrial economics, 57(4): 736-767. glowicka, elzbieta (2008) state aid and competition policy: the case of bailouts in the european union, dissertation, humboldt-universität berlin. hagerty, michael r. (2006) ‘quality of life from the voting booth: the effect of crime rates and income on recent u.s. presidential elections’, social indicators research, 77(2): 197-210. hancher l., t. ottervanger t. and j. p. slot (2006) ec state aids. london: sweet and maxwell. hauk, willian r. and romain wacziarg (2007) ‘small states, big pork’, quarterly journal of political science, 2: 95-106. herron, m.c. and shotts k.w., 2003 ‘winners, losers and the congressional pork barrel’, working paper, northwestern university. jegers, marc and hilda theunisse (2007) ‘elementen van boekhouden en analyse van jaarrekeningen’ (elements of accounting and financial statement analysis). brussel: vubpress. johnston, ron, charles pattie, daniel dorling, iain macallister, helena tunstall and david rossiter (2000) ‘local context, retrospective economic evaluations, and european journal of government and economics 1(1) 42 voting: the 1997 general election in england and wales’, political behavior 22(2): 121-143 johnston, ron and charles pattie (2002) ‘geographical scale, the attribution of credit/blame, local economic circumstances, and retrospective economic voting in great britain 1997: an extension of the model’, environment and planning c: government and policy, 20(3): 421-438. keefer, philip and stephen knack (2007) ‘boondoggles, rent-seeking, and political checks and balances: public investment under unaccountable governments’, the review of economics and statistics, 89(3): 566-572. kwon, hyeok y. (2005) ‘targeting public spending in a new democracy: evidence from south korea’, british journal of political science, 35(2): 321-341. lach, saul (2002) ‘do r&d subsidies stimulate or displace private r&d? evidence from israel’, the journal of industrial economics, 50(4): 369-390. leigh, andrew (2008) ‘bringing home the bacon: an analysis of the extent and effects of pork-barreling in australian politics’, public choice, 137(1-2): 279-299. levitt, steven d. and james m. snyder (1997) ‘the impact of federal spending on house election outcomes’, the journal of political economy, 105(1): 30-53. lewis-beck, michael s. and martin paldam (2000) ‘economic voting: an introduction’, electoral studies,19: 113-121. limosani, michele and pietro navarra (2001) ‘local pork-barrel politics in national pre-election dates: the case of italy’, public choice, 106(3-4): 317-326. london economics (2004) ‘ex-post evaluation of the impact of rescue and restructuring aid on the international competitiveness of the sector(s) affected by such aid’, final report to the european commission, enterprise directorate general. manzetti, luigi and carole j. wilson (2007) ‘why do corrupt governments maintain public support?’, comparative political studies, 40(8): 949-970. martin, stephen and paola valbonesi (2008) ‘equilibrium state aid in integrated markets’, the be journal of economic analysis and policy, 8(3) article 33. mueller, dennis c. (2003) public choice iii. cambridge university press :cambridge. nannenstad, peter and martin paldam (1994) ‘the vp-function: a survey of the literature on vote and popularity functions after 25 years’, public choice, 79(3-4): 213-245. pattie, charles, daniel dorling and ron johnston (1997) ‘the electoral geography of recession: local economic conditions, public perceptions and the economic vote in the 1992 british general elections’, transactions of the institute of british geographers, new series, 22(2):147-161. pattie, charlie and ron johnston (2008) ‘positional issues, valence issues and the economic geography of voting in british elections’, journal of economic geography, 8(1):105-126. petrarca, ilaria and fabio padovano (2011) ‘from taxes to politics, from politics to taxes: evidence of yardstick competition in the italian municipalities’, condorcet center working paper. url (consulted 24 may 2012) : http://crem.univrennes1.fr/wp/2011/2011-01-ccr.pdf. robinson, james a. and ragnar torvik (2005) ‘white elephants’, journal of public economics, 89: 197-210. sanderson, jean-paul and thierry eggerickx (2010) ‘des outils d'aide à la décision : les indicateurs de condition de vie et de mixité socio-démographique des european journal of government and economics 1(1) 43 communes et des quartiers en belgique’, cahiers de démographie locale, 2: 115158. stein, robert m. and kenneth n. bickers (1994) ‘congressional elections and the pork barrel’, the journal of politics, 56(2): 377-399. tannenwald robert (2002) ‘are state and local revenue systems becoming obsolete?’, national tax journal, 55(3): 467-489. verdier, daniel (1995) ‘the politics of public aid to private industry-the role of policy networks’, comparative political studies, 28(1): 3-42. appendix 1: calculating the amount of subsidies received to calculate the amount of subsidies that each firm received, we follow jegers and theunisse (2007). they propose the following formula: investment subsidies = difference in book value of investment subsidies (∆15) + investment subsidies recognized as revenues (proportional to depreciation of subsidized asset) (9125) +difference in book value deferred taxes (∆168)-transfer to deferred taxes (680)+transfer from deferred taxes (780)13 as subsidies increase later taxes, part of the subsidy obtained is booked as deferred tax. the last three terms allow us to estimate this part. the first two terms calculate the net subsidy received. appendix 2: variable description and sources variable name description source incumbents 2009 independent variable 1: vote share of incumbent parties at the 2009 elections per canton (in%) http://www.binnenland.vlaander en.be/verkiezingen relative change independent variable 3: growth of vote share per canton own calculation from: http://www.binnenland.vlaander en.be/verkiezingen incumbents 2004 vote share of incumbent parties in the 2004 elections (in%) http://www.binnenland.vlaander en.be/verkiezingen inhabitants number of inhabitants per canton (only used to calculate per capita variables) http://statbel.fgov.be/nl/modules/ publications/statistiques/bevolki ng/ subsidy and subsidy per capita amount of subsidies and subsidies per capita going to each canton calculated as described in appendix 1 socio-economic index ranks municipalities according to their socio-economic performance. (http://knack.rnews.be/ last consulted: 25. march 2010) sanderson and eggerickx, 2010 13 numbers between brackets refer to the codes in the belgian annual accounts. corruption and growth: evidence from the italian regions european journal of government and economics volume 1, number 2 (december 2012) issn: 2254-7088 126 corruption and growth: evidence from the italian regions nadia fiorino, university of l’aquila, italy emma galli, ‘la sapienza’ university of rome, italy ilaria petrarca, university of verona, italy * abstract this paper investigates the impact of corruption on economic growth in the italian regions. we estimate a dynamic growth model for the period 1980-2004 addressing both the potential bias of the measures of corruption and the endogeneity between corruption and economic development. we find strong evidence of a negative correlation between corruption and growth. moreover, since government intervention has been traditionally used to reduce income differentials between the northern and the southern regions, we also analyse the interaction between corruption and government expenditure. our results indicate that corruption undermines the positive impact that public expenditures have on economic growth. jel classification h11; o40; o38 keywords corruption; associative crimes; economic growth; dynamic estimation * address for correspondence: ilaria.petrarca@univr.it. european journal of government and economics 1(2) 127 introduction does corruption ‘sand’ or ‘grease the wheels’ of economic development? for a long time, scholars have investigated the economic consequences of corruption, drawing an ambivalent picture: on the one hand, corruption promotes investments that would have been otherwise stalled by regulations and bureaucratic procedures; on the other, it reduces the incentives to invest in productive activities. therefore, the effect of corruption on growth remains an empirical question. we contribute to this debate by estimating the effect of corruption on economic growth in a panel dataset for the 20 italian regions during the period 1980-2004 to verify whether corruption played a role in the differentiated growth path of southern italy. italy is an interesting case in this perspective because regional inequalities still persist although different kinds of public policies have tried to reduce the per capita income differentials between the northern and the southern regions since the end of world war ii (see padovano, 2007). the distribution of corruption and of social capital across the country is not homogeneous even though the institutions and the policies aimed at punishing and preventing corruption are centralized at the national level, and this may contribute to explain the differences in the economic growth rates of the italian regions. so far the literature has not paid much attention to the italian case, mainly due to the low quality of available data until the very recent years. del monte and papagni (2001) investigated the link between corruption and economic growth in the italian regions for the period 1963-1991. they show that the efficiency of public investments is lower in regions where corruption is higher which in turn negatively affects economic growth. we re-address this issue for a more recent period of the italian history (1980-2004) characterised by high variability in both growth rates and corruption crimes. we use a newly assembled dataset which has the advantage of collecting economic, socio-demographic and politico-institutional variables at regional level and provide a methodological solution to the shortcomings of the commonly used measures of corruption. we also move a step forward with respect to the existing literature by using an estimation technique which reduces the endogeneity bias of the coefficients. the rest of the paper is organized as follows. section 2 reviews the literature on the nexus between corruption and economic growth; section 3 describes the institutional context of the italian regions and shows the time dynamics of our key variables, namely economic growth and corruption. in section 4 we formulate our empirical strategy, present the empirical model and discuss the results. the last section provides some concluding remarks. literature review many economists consider corruption as a major obstacle to economic growth (see, among others, myrdal, 1989; andvig and moene, 1990; shleifer and vishny, 1993; blackburn et al., 2006). the main argument is that a government official that controls the supply of an individually-demanded service may abuse his arbitrary power to restrict the supply, for example, denying or delaying permissions. the elimination of these barriers requires an extra-price of the service, i.e. a bribe that increases the bureaucrats' rent. nonetheless, the bribe removes also any incentive to invest and defines a sub-optimal rent-seeking equilibrium of human capital that hampers growth. mauro (1995), keefer and knack (1997), hall and jones (1999), la porta et al. (1999), li et al. (2000) and gyimah brempong (2002) estimate the impact of corruption on growth for a wide cross section of countries. they verify that higher levels of corruption significantly reduce both investment and economic growth. interestingly, larger levels of corruption are associated to a misallocation of public resources. mauro (1998), tanzi and davoodi (1998), gupta et al. (2001), baldacci et al. (2004) find that corruption distorts the composition of government european journal of government and economics 1(2) 128 expenditure towards less productive activities and creates large public sectors where resources are wasted through rent seeking. some scholars, on the other hand, argue that corruption is not a totally inefficient activity because in the short run it solves some government failures (leff , 1964; huntinghton, 1968). this ‘greasing the wheels’ hypothesis, however, limits the growth-enhancing effect of corruption to those situations where governance is lacking and/or economic policy is inefficient. lui (1985) formalizes this argument into a model where firms value the time to waste in a queue. the more productive firms want to waste as little time as possible in the queue; therefore they are willing to buy the priority of their activities by paying a bribe. along this line of research shleifer and vishny (1994) develop a model of bargaining between politicians and enterprises and show that corruption can facilitate an efficient allocation of resources. this is because bribes are a way to distribute wealth between politicians and agents in the private sector. in other words, corruption increases efficiency by allowing private sector agents to buy their way out of the inefficiencies that would otherwise be introduced by the politicians. in this perspective, the existence of a negative linear relationship between corruption and growth is challenged in favour of a non-linear one, which predicts a positive growth effect at low levels of corruption incidence (see, among others, kurrild-klitgaard, 1988 and acemoglu and verdier, 1998). the ‘greasing the wheels hypothesis’ also implies that the relationship between corruption and economic growth can be affected by both the quality of the institutions and the size of the public sector. ehrlich and lui (1999) develop an endogenous growth model that analyzes the effect of corruption on economic growth in different politico-institutional settings. they predict that the balanced growth in a democracy (or competitive regime) and in an autocracy (or monopolistic regime) is the outcome of interaction between accumulation of human capital (socially productive) which engenders growth, and accumulation of political capital (socially unproductive) which mainly assures bureaucratic power and potential corruption. a non-linear relationship between corruption and growth is empirically found only in democratic regimes. méndez and sepulveda (2006) distinguish between ‘free’ and ‘not-free’ countries and include a measure of government expenditures to capture its interaction with corruption. their findings show that in ‘free’ countries corruption results beneficial for economic growth at low levels of incidence and detrimental at high levels of incidence. this relationship is not modified by the size of government. economic growth and corruption in the italian regions: some stylized facts the institutional framework italy is divided into 20 regions, that represent the upper tier of sub-state government. five of them, established in the years between 1948 and 1963, enjoy a special statute (regioni a statuto speciale, or rss) because of their multilingual status and peculiar geographical and economic position. the other 15 regions, featuring an ordinary statute (regioni a statuto ordinario, or rso), were established in the 1970s. until mid-1990s, however, the regions heavily depended on the central government. in particular, they have expenditure autonomy but lacked tax autonomy; regional resources were represented by transfers from national taxes and grants from the central government, whose amounts were not modifiable by the regions. since the 1990s, several legislative and constitutional reforms changed the institutional framework and increased both tax autonomy and expenditure competences. currently regional governments levy taxes of their own (about 24% of total national fiscal revenue), as well as shares of national taxes and transfers (about 53%) (giardina et al, 2009), and are responsible for health care european journal of government and economics 1(2) 129 expenditure plus a share of social services, education, environment, local transportation, housing, culture and tourism. differences in competences between the rso and rss have been reduced. economic growth, corruption and associative crimes in the italian regions figure 1: time dynamics of gdp growth and per capita corruption crimes yearly data are averaged over the full sample. gdp growth is measured as the percentage change from the past years' gdp growth; crimes are measured as per capita prosecutions for corruption crimes. source: italian institute of statistics (istat). figure 1 illustrates an opposite trend in gdp growth and per capita prosecutions for corruption crimes. overall economic growth decreased in italy, with a significant fall in the early 90s. the growth rates always were under 5% after 1997 while corruption crimes increase steadily between the mid-1970s and the first half of the 1990s and slightly decrease after 1993 as a consequence of the so-called mani pulite (clean hands) campaign undertaken by the judicial system. european journal of government and economics 1(2) 130 figure 2. gdp growth (average annual data) north: piedmont, val d'aosta, lombardy, trentino-alto adige, veneto, friuli-venezia giulia, liguria and emilia romagna; centre: tuscany, umbria, marche, latium; south: abruzzo, molise, apulia, basilicata, sardinia. figure 2 shows that the level of gdp growth is quite homogeneous across the macro-areas, and displays a decreasing pattern during the period 1980 1995.1 within the south an important difference between the regions characterized by a pervasive presence of criminal organizations and the others emerges, which seems to account for 10%. 1 recently daniele and malanima (2007) describe the mezzogiorno gap in gdp per capita between 1861 and 2004. while uniformity characterizes the pre-industrial period, since the 1880s a long divergence phase starts between the industrial areas and those which were not able to create a manufacturing industry. this phase ends in 1951 when the gdp per capita in the southern regions was only 47% of that of the rest of italy, then the convergence process continued until the first half of the 1970s when the relative gdp per capita reached about 66%. during the 1980s a new phase of a divergence process begins until 2002. european journal of government and economics 1(2) 131 figure 3. corruption crimes (average annual data) note: north: piedmont, valle d'aosta, lombardy, trentino-alto adige, veneto, friuli-venezia giulia, liguria and emilia romagna; center: tuscany, umbria, marche, latium; south: abruzzo, molise, apulia, basilicata, sardinia. figure 3 shows that the number of corruption crimes decreases in the 1980s; a significant increase is recorded from 1991 to 1998, where the number of crimes jumps from around 600 to around 2400; finally, after a decrease in 2000, it increased again. sicily and campania appear as the most corrupted regions of italy, followed respectively by the northern, the central and the southern ones. european journal of government and economics 1(2) 132 table 1. gdp and prosecutions per capita (1980-2004, average annual data) region gdp pc region associative crimes region corruption crimes valle d'aosta 21.147 sicily 42.1 latium 961 trentino-alto adige 20.159 calabria 31.1 molise 901.3 lombardy 19.715 campania 30.6 valle d'aosta 787.9 emiliaromagna 19.030 apulia 21.4 liguria 775.1 piedmontpied mont 17.53 basilicata 18 calabria 699.8 veneto 17.22 liguria 15.6 sicily 622 tuscany 16.54 latium 15.2 sardinia 617.2 friuli-venezia giulia 16.1875 abruzzo 13.2 friuli-venezia giulia 607.7 latium 16.07 friuli-venezia giulia 13.1 abruzzo 601.2 liguria 15.79 emiliaromagna 12.7 campania 558.2 umbria 14.79 umbria 12.6 basilicata 494 marche 14.47 trentino-alto adige 11.7 tuscany 494 abruzzo 12.54 lombardy 11.6 apulia 483.6 sardinia 11.44 valle d'aosta 11.4 trentino-alto adige 459.8 molise 11.001 molise 11.1 umbria 456.7 sicily 10.42 veneto 10.9 piedmont 426.3 basilicata 9.68 tuscany 10.8 marche 393.8 apulia 9.61 piedmont 10 lombardy 375.3 campania 9.56 marche 8 veneto 374.6 calabria 8.71 sardinia 6.8 emiliaromagna 349.5 note: data are reported by descending order; per capita gdp is measured in thousands of euro; per capita crimes are measured per million of inhabitants. source: italian institute of statistics (istat) overall, gdp growth as well as corruption crimes change both over time and across regions. table 1 provides a ranking of the regions according to their average gdp and corruption crimes per capita. using prosecution data as a measure for corruption bumps against the circumstance that in corrupt regions the judicial system is itself corrupt and fewer people will be charged with corrupt practices. the effectiveness of a legal system is rooted not only in the formulation of laws but also in the ‘legal culture’, that is the expectations and practices that inform the way they are enforced (treisman, 2000). although the legal system is the same in all the italian regions, its degree of legitimacy is not. moreover, such a measure reflects only the ‘revealed’ corruption, most likely by leaving part of the phenomenon hidden. table 1 highlights this problem. the northern regions are less corrupt than the central and southern regions; however, the ranking is not completely in line with people’s common sense about the real distribution of corruption in italy. indeed, prosecutions for corrupt practices in the appeal court district of reggio calabria, one of the major towns of calabria, in the last twenty years resulted in two convictions only. nevertheless, similar conditions characterize the districts of other ‘perceived’ corrupt regions, like sicily, campania and sardinia (davigo and mannozzi, 2007). to take into account the hidden corruption and avoid potential bias between official statistics and ‘true’ data, we consider the existing link between corruption and associative crimes (crimes ex art. 416 and 416 bis of the italian criminal law). this european journal of government and economics 1(2) 133 implies that, as the so-called mani pulite criminal trials confirmed, corruption emerges not only as corrupt practices but also as associative crimes in the most ‘perceived’ corrupt regions. empirics empirical strategy and model specification there are several issues related with the characteristics of the dataset that give reason for the choice of the estimator. first, the literature on corruption and growth generally estimates cross sectional regressions by averaging the effect of temporary shocks and smoothing the cycling pattern of gdp. although apparently straightforward, cross-country analyses make the implicit assumptions that countries are positioned on their steady state equilibria values for both the level of corruption and growth rate of output. hence, averaging out data into a single observation for each region involves a loss of information and may also distort the analysis of the relationship between the two. since the gdp growth rate as well as the corruption rate are not homogeneously distributed across regions and change over time, we employ a dynamic panel regression accounting also for the time variability of the data. secondly, our dependent variable, gdp growth, reasonably follows an autoregressive trend and requires a dynamic specification. the small size of the dataset, limited to at most 20 observations, reduces the efficiency of the gmm estimators (arellano and bond, 1991; blundell and bond, 1998) and requires a correction (bruno, 2005a and 200b). another concern is related to data on prosecutions against corruption. this measure is problematic because a low rate of prosecutions may signal either a low effective incidence of corruption or a widespread hidden corruption. moreover, it hits against the circumstance that in corrupt regions the judicial system may be itself corrupt and consequently fewer people would be charged with corruption crimes. further, potential endogeneity may affect the relationship between corruption and growth. an extensive literature originated by lipset (1960) considers that low levels of income generally determine corruption, i.e. less developed regions are endemically more corrupt. if this is the case, corruption would be correlated with the error term in the ols regression and the estimates would be biased. to control for the problem of a two-way causality between corruption and growth, we estimate an equation of determinants of corruption through ols and insert the estimated fitted values of the parameters of interest in our dynamic growth equation (kelejian, 1971; petterson-lidblom and dahlberg, 2003).2 this procedure also allows us to take into account possible problems related to the quality of the legal system and the under-reporting. indeed, the corruption equation controls for the degree of social capital which captures the existence of regional differences in people’s general attitude towards corruption. based on these considerations we develop a two-step procedure. the first step estimates an equation of the determinants of corruption (see on this issue fiorino and galli, 2010). the fitted values obtained from this equation reduce the potential bias due to the heterogeneous distribution of social capital and quality of the legal system at regional level; moreover, the ols estimation of this equation allows for 2 many authors have also worked with five-year averages for similar purposes. the use of five-year averages reduces short run fluctuations and allows to concentrate on the relationships between corruption and growth. see, for example, li et al. (2000), paldam (2002), glaser and saks (2006), méndez and sepulveda (2006). european journal of government and economics 1(2) 134 removing endogeneity in the growth model.3 the second step estimates a growth equation and substitutes the corruption crimes with the fitted values obtained in first step. to control for the dynamic bias induced we follow the literature and apply a least squares dummy variables corrected model (lsdvc, bruno 2005a and 2005b). this estimator corrects the lsdv estimator4 for the small size of the sample and provides a significant reduction of the bias, performing as well as the gmm estimator properly identified.5 a slight limitation of this methodology is the requirement of exogenous right hand side variables. sample data and description of variables our dataset collects economic, socio-demographic and politico-institutional variables for the 20 italian regions during the period 1980-2004 and consists of 500 observations. the source, if not differently specified, is the italian institute of statistics (istat). the variables are summarized in table 2. 3 petterson-lidblom and dahlberg (2003) show in fact that the use of the ols estimates in the first stage allows us to obtain consistent estimates of the parameters of interest without the need to resort to the full blown functional form of the first stage. 4 that is an ols regression including regional dummies. we estimated also a set of lsdv uncorrected for the dynamic bias and obtain results consistent with the ones presented. 5 an alternative dynamic estimator is the system gmm developed by blundell and bond (1998). this estimator adds to the equation in levels instrumented with differences (arellano and bond, 1991), a second equation in differences, instrumented with the variables in levels. when the gmm estimators are applied to small samples, the number of instruments outnumbers the observations, and overfit the lagged dependent variable. instrument proliferation generates false positive results, reducing the reliability of the estimates. roodman (2009) proposes to collapse the matrix of instruments to decrease their number. a rule of the thumb, however, suggests that to obtain robust test statistics one needs a number of instruments not larger than the number of groups. the gmm estimation of equation 2 never satisfies the rule of thumb, as in the most parsimonious specification we use 23 instruments for 19 groups. european journal of government and economics 1(2) 135 table 2. descriptive statistics obs mean std. dev. min max gdp growth 484 0.084 0.051 -0.003 0.257 variables of interest: corruption cor, individual crimes per pop(*1000) 500 0.572 0.308 0.10 1.939 ascr, associative crimes per pop(*1000) 520 0.016 0.015 0 0.226 expenditure/gdp 456 0.46 6.127 0.003 130.992 current expenditure/gdp 444 -2.507 0.359 -3.355 -1.306 capital expenditure/gdp 444 -3.719 1.03 -5.870 -1.199 investments/gdp lag 460 0.067 0.024 0.029 0.197 public consumption/gd p 480 0.217 0.057 0.118 0.358 gini index 440 0.33 0.035 0.236 0.479 school attainment 454 0.046 0.007 0.02 0.065 labor force units 500 1150.13 971.99 56.8 4508.7 population 576 2874227 2259821 112262 9742676 number of laws 460 50.25 26.40 3 165 fragmentation 460 0.668 0.13 0.128 0.880 voluntary organizations 460 449 555 11 5362 diffusion of newspapers 580 231811 221249 5687 1098279 referendum voters 460 1428645 1283230 31059 6177641 our first step consists in estimating an equation of the determinants of corruption. the equation is defined as follows: [1] corruptionit = f(xit, eit) for i=1,...,20 and t=1980,...,2004, where x is a vector of explanatory variables and e is the error term. we measure corruption in two different ways: 1) the number of regional government officials prosecuted for corrupt practices relative to the population (cor). the crimes that we consider are based on the libro ii, titolo ii (crimes against the public administration) of the italian criminal law as reported in the annali di statistiche giudiziarie of the istat (various issues). 2) a composite index annually computed per each region as the sum of per capita prosecutions and per capita associative crimes (cor+ascr). this because the most important criminal trials against corruption in italy (the so-called mani pulite and maxi trial of the sicilian mafia) have confirmed that corrupt activities may emerge also in the form of other typologies of crimes like the associative crimes (crimes ex art. 416 and 416 bis of the italian criminal law) that cannot be strictly considered crimes of corruption. the explanatory variables are: european journal of government and economics 1(2) 136 a) population in millions of inhabitants, a proxy for the size of the region. if highlypopulated regions exploit economies of scale in supplying of public goods (alesina and wacziarg, 1997) and have a low ratio of public service outlets per population, individuals might revert to bribes to 'get ahead of the queue'. b) gdp growth is the annual growth of gdp per capita calculated starting from the yearly gdp data released by crenos (2004). the growth is defined as the ratio between the first difference and the lagged gdp, representing the percentage of shift from the previous year's aggregate output. thus, gdpgrowthit = (gdpit gdpi,t-1) / gdpi,t-1. data are in constant terms. this variable, as well as education, is included to investigate the so-called lipset hypothesis: voters with higher income (and education) are expected to be both more willing and capable to monitor public employees and to take action when the latter violate the law. then, we expect a negative sign associated to both the coefficients of these variables. c) school attainment is a proxy for the level of education in the regions, measured as the share of high school enrolment over labour force. d) gini index is the regional inequality level, built using micro-data on the households’ disposable income. these data come from the survey of household income and wealth (shiw) conducted by the bank of italy (several years). the rationale is that as voters become more diverse along the income line, they will focus on redistribution rather than on the honesty of government officials (mauro, 1995; alesina et al., 1996). we then expect that an increase in income inequality will positively affect the degree of corruption. e) current expenditure/gdp and capital expenditure/gdp capture the role of government size on corruption (and indirectly on growth).6 a larger government size may generate a potential for corruption by producing more resources to be stolen and more rules to be exploited or subverted. this can be the case for the italian regions where the public sector plays a quite relevant role in the economy. corruption alters the composition of government expenditures towards less productive activities and thus the greater the government expenditures the greater the negative effects of corruption (mauro, 1998, tanzi and davoodi, 1998; gupta et al., 2001). f) number of laws enacted by the region is an alternative way to capture the impact of government size on corruption (weingast et al., 1981). g) fragmentation of regional government. when governments consist of large coalitions characterized by a certain number of parties with conflicting interests, the members of the coalition face a prisoner’s dilemma with respect to expenditures decisions. each of the partners within the coalition has different distributional objectives and consequently an incentive to protect the budget share which may favor their own clientele (roubini and sachs, 1989a; 1989b). political fragmentation may then increase the distribution of rents among politicians and engender a higher level of corruption. the use of this variable is also suggested by a change of the regional electoral system that occurred in 1995. the mechanism by which the members of the regional council are elected switched from a pure proportional representation to a mixed one. a top-up number of seats for the winning coalition is also introduced, so that the absolute majority of the legislators will be held by the coalition linked to the regional list that has obtained the relative majority of the votes. furthermore, the law reduced the tenure length of the council from five to two years if the relationship of confidence between the council and the regional government breaks down during the first two years. this reform was completed in 1999 when it was established that the president of the region is 6 since until the late 1990s regional expenditure was financed through transfers from the central government, we do not include transfers among the independent variables. nonetheless, we estimated a set of regressions with the inclusion of this variable and the results do not change. european journal of government and economics 1(2) 137 elected by universal and direct suffrage. we measure government fragmentation with the herfindahl index for concentration. the index is built by using the seats of the majority supporting the regional government with respect to the overall legislature and ranges from 0 (a legislature in which each legislator belongs to a different party) to 1 (when all members belong to the same party).7 data come from the ministero dell’interno. on this variable we expect a negative coefficient. h) the share of voluntary organizations over the population, the local diffusion of newspapers and the share of voters that participate in referendums on the total of voters, referendum voters. these variables proxy the degree of civicness of italian regions as propensity of citizens to be politically involved and as general attitude towards corrupt practices. these three variables control for the degree of corruption generally ‘accepted and tolerated’ in each regional environment. fivol (federazione italiana per il volontariato) is the source of data on voluntary organizations and the ministero dell’interno on the referendum voters. data on the diffusion of newspapers come from ads (agenzia diffusione stampa). the second step consists in estimating the following growth equation: [2] gdpgrowthit = h(gdpgrowthit-1,yit, corruption_fit ,uit) for i=1,...,20 and t=1980,...,2004, where y is a vector of standard economic growth models explanatory variables and u is the error term. equation [2] substitutes the variables on corruption with the fitted values obtained in step 1, cor_f and cor+ascr_f. the dependent variable of equation [2] is gdpgrowth, the annual growth of gdp per capita as already defined. as measure of corruption we use the fitted values estimated in equation [1] (corruption_f). the vector y includes a number of socio-economic and socio-demographic variables: i) the lagged growth level, gdpgrowthit-1. the coefficient of this variable indicates the average regional trend of growth, that is not predictable a priori. j) fixed gross public and private investments, investments/gdp. to avoid reverse causality, we introduce this variable with a one year lag and expect a positive correlation with the gdp. k) public consumption/gdp and private consumption/gdp are expected to be negatively correlated with economic growth. l) expenditure/gdp is the total expenditure over the gdp, is expected to be positively correlated with economic growth, if productive. m) the first difference of the gini index to capture the effect of a variation of inequality on growth. an unequal distribution of income is a barrier to growth because it generates a pressure to adopt redistributive policies that have an adverse effect on investment (persson and tabellini, 1994); present wealth, moreover, may depend on past wealth. therefore, the more unequal a region is, the lower its growth rate. 7 to calculate this index, we sum the seats of each party i of the majority, calculate the percentage s that these represent on the total number of seats of the council and compute the herfindahl index:   n i sionfragmentat 1 2 , where n is the total number of seats of the council. we then use the normalized herfindahl index that ranges from 0 to 1 and is computed as follows: h*= (h-1/n)/(1-1/n), where again, n is the total number of seats of the council and h is the usual herfindahl index, as above. european journal of government and economics 1(2) 138 n) school attainment is a proxy for the level of human capital in the regions, as previously defined. o) labour force is the size of the labor force, that is to say the share of units of labor over the regional population. while labor force is an indicator of the efficiency of the input labor, school attainment measures the quality of the input. we expect a positive sign associated to both these coefficients. results table 3 presents the results of the estimation of equation [1]. consistently with our predictions, high levels of corruption are associated with low levels of gdp growth and civicness, as the negative coefficients of voluntary organizations, diffusion of newspapers and referendum voters show. the positive sign of the diffusion of newspapers t-1 variable suggests that corruption is sensitive only to current information; in other words, the diffusion of newspapers is not an effective tool against corruption. this outcome seems to be in line with the positive sign on school attainment. contrary to the prediction of the literature, our estimates show that education does not play a role in reducing corruption. instead, as it clearly emerged in the so-called mani pulite investigation that signed the passing from a system of political patronage to a system of corruption that involved legislators, bureaucrats and businessmen, corruption in the 1980s and 1990s was typically a ‘white collar’ phenomenon. table 3. estimation of equation 1 cor cor+ascr population -0.05*** -0.017 gdpgrowth -0.28*** -0.31*** school attainment 0.3* 0.35** gini index -0.09 0.46 current expenditure/gdp -0.04 0.16 capital expenditure/gdp 0.08 0.053 number of laws 0.13** 0.12** fragmentation 0.58*** 0.63*** voluntary organizations -0.11** -0.13*** diffusion of newspapers -0.33*** -0.36*** diffusion of newspapers t-1 0.45*** 0.48*** referendum voters -0.06 -0.07 ascr, associative corruption crimes 0.17*** constant 2.88** 3.35*** observations 396 399 r2 0.485 0.413 note: ols regression, robust option specified. cor = individual corruption crimes; cor+ascr = sum of all the crimes. continuous variables in natural log. significance level: * p<0.05; ** p<0.01; *** p<0.001 the number of laws and fragmentation are, as predicted, positively correlated with corruption. finally, the presence of associative crimes (ascr) increases the level of individual crimes, bridging the two types of corruption. european journal of government and economics 1(2) 139 table 4. estimates of equation 2 model 1 model 2 model 3 model 4 model 5 model 6 gdp growth t-1 0.386*** 0.313*** 0.665*** 0.599*** 0.391*** 0.335*** expenditure/gdp 0.002 0.107 investments/gdp lag 0.05 0.138 0.577 0.131 0.036 0.136 public consumption/gdp -1.22** -1.009** 0.007 -0.830 -1.235* -0.991* ∆ gini index -0.28 -0.009 0.512 0.496 -0.199 0.160 school attainment 0.59** 0.75*** 0.065 0.749 0.679 0.886* labour force -2.33** -2.48** -1.979 -2.481 -2.32* -2.462** cor_f -8.87*** -8.36*** cor_f2 -0.50 -0.47*** (cor+ascr_f) -2.3 -2.20*** (cor+ascr_f) 2 -0.64*** -0.58*** expenditure/gdp *cor_f -0.254 expenditure/gdp *(cor+ascr_f) -4.51*** note: dependent variable, natural log of gdp growth. lsdvc estimation initialized with ab estimator, 50 bootstrap repetitions. 396 observations. continuous variables in natural log. significance level: *p<0.05; ** p<0.01; *** p<0.001 table 4 presents the results of the growth equation using the lsdvc estimator, including the fitted values of the estimation of the corruption equation.8 the six models differ with respect to the explanatory variables they consider: models 1 4 include the lagged value of investments, while models 5 6 also analyze the amount of public expenditure as a share of the gdp. finally, models 3 4 interact the proxies for corruption with public expenditure to control for their combined effect on growth.9 this effect turns out to be negative and significant, suggesting that the presence of corruption nullifies the positive impact that public expenditures, when productive, have on growth. this result emphasizes the 'sanding' impact of corruption. the variables of interest, i.e. the measures of corruption, are negative and significant as expected. in particular, cor_f and cor+ascr_f are the elasticity of growth to corruption. a marginal variation of cor_f is associated with an opposite variation of economic growth of about 8%; the effect reduces to 2.2% for the sum of the crimes. the smaller coefficient associated to cor+ascr_f indicates that the two types of corruption interact with the economic environment in a way that is complementary and not substitute to the economy itself. associative crimes, in this perspective, seem to mitigate the impact of corruption on growth. the hypothesis of a non-linear relationship between corruption and growth has been tested by including the squared variables of corruption. the coefficients, however, do not show a growth-maximizing effect and rather describe a stable negative impact of corruption on growth. in other words, our results suggest that italy is located on the negative slope of the non-linear relationship after the maximum point as the incidence of corruption is persistently high. the coefficients associated with the lagged dependent variable indicate a pattern of positive growth that is robust across the estimations. the regions have not yet 8 the lsdvc estimates are robust to the application of the system gmm estimator and the estimation of a first difference iv regressions, instrumenting the lagged dependent variables with the lagged independent variables, and assuming corruption to be exogenous. as already said, the gmm estimation of equation 2 never satisfies the rule of thumb, as in the most parsimonious specification we use 23 instruments for 19 groups. 9 the results are robust to the introduction of time effects. european journal of government and economics 1(2) 140 reached a long-term equilibrium path of growth; full convergence is far from being reached. the coefficient on investments/gdp lag is never significant, probably because the lack of disaggregated data on public and private investment hides large inefficiencies in public investment and generates this unexpected result.10 expenditure/gdp, similarly, is never statistically significant but shows the expected positive sign; public consumption negatively impacts on growth, but the coefficient is significant only in the models excluding the interaction between expenditures and corruption. the first difference of the gini index, ∆gini, is never significant and changes the sign across the models. interestingly, school attainment is positive and labor force is negative; both these covariates, however, are significant when lagged investments are included in the specification. the sign of these coefficients is motivated by a larger importance given to the quality of the labor force with respect to its size. since government intervention has been the major policy to reduce income differentials between the north and the south of the country, we further investigate the role of public expenditures on economic growth in the italian regions.11 in table 5 we present the estimation of a set of regression where total expenditure has been disaggregated into its main components12, i.e. current and capital expenditure.13 the effects of the control variables are consistent with the results of table 4. the variable expenditure/gdp is never significant and also its disaggregation is not a significant determinant for growth. in particular, capital expenditure/gdp fosters growth when controlling for corruption (model 3), but it is not significant when controlling also for associative crimes (model 4). this result is unexpected but suggests that the presence of criminal associations in some regions nullifies the productive content of capital investments.14 since local governments have a certain degree of discretion to direct public investments, the efficiency of capital expenditure reasonably changes according to the economic environment where it is implemented. as matter of fact, the composition of crimes varies across observations and some regional economies are more affected by criminal infiltrations than others. current expenditure/gdp, on the other hand, is usually more rigid as it includes mainly personnel wages, transfers to municipalities and local health units (called asl). these items are not expected to stimulate growth but to face everyday needs; therefore, the negative but not significant signs we find in models 3 and 4 do not contradict any theoretical prediction in the literature. in models 5 8, where we use the lagged values of expenditure to overcome an eventual simultaneity of expenditure and growth, this pattern is confirmed. 10 the disaggregated series of data on infrastructure expenditure, that better proxies public investment expenditure, is available only until 1991 (del monte and papagni, 2001), and it has not been included in the analyses to avoid such a huge loss of information. 11 on the nexus between the composition of public expenditure, corruption and growth see, among others, goel and nelson (1998), mauro (1998), tanzi and davoodi (1998), pieroni and d'agostino (2009). 12 the results are robust to the introduction of time effects. 13 to avoid collinearity issues we exclude the lagged investments. 14 caruso (2009) shows that in the italian regions in the period 1997-2003 investments in real estate sector, public investments and health expenditures are positively correlated with corruption, while social protection expenditure and private investments are negatively correlated with corruption. european journal of government and economics 1(2) 141 table 5. estimates of equation 2, disaggregated expenditure model 1 model 2 model 3 model 4 model 5 model 6 model 7 model 8 gdp growth t-1 0.397*** 0.352*** 0.352*** 0.307*** 0.374*** 0.327*** 0.377*** 0.316*** expenditure /gdp 0.002 0.110 current expenditure /gdp -0.412 -0.253 capital expenditure /gdp 0.130* 0.093 total expenditure /gdp t-1 -0.104 0.012 current expenditure /gdp t-1 -0.040 -0.013 capital expenditure /gdp t-1 0.115 0.118* public consumpt. -1.231** -0.960* -0.942 -0.818 -1.329** -1.026* -1.263** -1.048* ∆ gini index -0.186 0.185 -0.376 -0.059 -0.304 0.023 -0.196 0.103 school attainment 0.691 0.906** 0.567** 0.748*** 0.633 0.849** 0.593** 0.765*** labour force -2.258** -2.286** -2.231** -2.31*** -2.037* -2.22** -2.329** -2.40*** cor_f -8.56*** -8.55*** -9.4*** -8.39*** (cor_f) 2 -0.48*** -0.48*** -0.53*** -0.47*** cor+ ascr_f -2.22*** -2.26*** -2.32*** -2.26*** (cor+ ascr_f) 2 -0.58*** -0.62*** -0.63*** -0.61*** note: dependent variable: ln gdp growth. lsdvc estimation initialized with ab estimator, 50 bootstrap repetitions. 396 observations. continuous variables in natural log. significance level: * p<0.05; **p<0.01; *** p<0.001 the coefficients on cor_f and cor+ascr_f (table 5) are consistent with the prediction of the theory and with our previous estimations. they are significantly negative across all the models and show similar coefficients. in particular, as in table 4, the effect of corruption crimes (models 1, 3, 5 and 7) is always larger than the effect of the overall crimes (models 2, 4, 6 and 8). furthermore, the non-linear terms (cor_f)2 and (cor+ascr_f)2 remain negative and significant as well and smaller than the linear ones. the empirical analyses indicate a sound negative effect of corruption on growth which is robust to different specifications of the model. the results do not verify the growth-maximizing hypothesis. concluding remarks this paper investigates the effects of corruption on economic growth in the italian regions during the period 1980 2004. using a newly assembled data set that include economic, socio-demographic and politico-institutional variables, we address the potential bias of judicial measure of corruption and the endogeneity issue between corruption and growth by developing a two-step empirical strategy, our results show a negative correlation between corruption and economic growth that is robust to different specifications of the model and econometric techniques. we further investigate the role of public expenditure on economic growth since government intervention has been traditionally the major policy implemented to reduce income differentials between the north and the south of the country. total expenditure as well as its main components never turn out to be significant, suggesting that the presence of corruption undermines the positive impact that public expenditure generally has, if productive, on economic growth. european journal of government and economics 1(2) 142 references acemoglu, daron and thierry verdier (1998) ‘property rights, corruption and the allocation of talent: a general equilibrium approach’, economic journal 108(450): 1381-1403. alesina, alberto and romain wacziarg (1998) ‘openness, country size and government’, journal of public economics 69(3): 305-321. alesina, alberto, sule ozler, nouriel roubini and phillip swagel (1996) ‘political instability and economic growth’, journal of economic growth 1(2): 189-212. andvig, jens c. and karl o. moene (1990) ‘how corruption may corrupt’, journal of economic behaviour and organization 13(1): 63-76. arellano, manuel and stephen bond (1991) ‘some tests of specification for panel data: monte carlo evidence and an application to employment equations’, review of economic studies 58(2): 277-297. baldacci, emanuele, arye l. hillman and naoko c. kojo (2004) ‘growth, governance, and fiscal-policy transmission channels in low-income countries’, european journal of political economy 20(3): 517-549. blackburn, keith, niloy bose and m.e. haque (2006) ‘the incidence and persistence of corruption in economic development’, journal of economic dynamics and control 30(12): 2447-2467. blundell, richard and stephen bond (1998) ‘initial conditions and moment restrictions in dynamic panel data models’, journal of econometrics 87(1): 115143. bruno, giovanni s.f. (2005a) ‘approximating the bias of the lsdv estimator for dynamic unbalanced panel data models’, economics letters 87(3): 361-366. bruno, giovanni s.f. (2005b) ‘estimation and inference in dynamic unbalanced panel data models with a small number of individuals’. università bocconi-cespri wp no. 165. caruso raul (2009) ‘spesa pubblica e criminalità organizzata in italia, evidenza empirica su dati panel nel periodo 19972003’, economia e lavoro 43(1): 71-88. crenos (2004) regio-it 1970-2002. data-base on the italian regions, university of cagliari. daniele, vittorio and paolo malanima (2007) ‘il prodotto delle regioni e il divario nord-sud in italia (18612004)’, rivista di politica economica 97(2): 267-316. davigo, piercamillo and grazia mannozzi (2007) la corruzione in italia. percezione sociale e controllo penale. bari: editori laterza. del monte, alfredo and erasmo papagni (2001) ‘public expenditure, corruption and economic growth: the case of italy’, european journal of political economy 17(1): 1-16. del monte, alfredo and erasmo papagni (2007) ‘the determinants of corruption in italy: regional panel data analysis’, european journal of political economy 23(2): 379-396. elrich, isaac and francis t. lui (1999) ‘bureaucratic corruption and endogenous economic growth’, journal of political economy 107(s6): s270-s293. fiorino, nadia and emma galli (2010) ‘an analysis of the determinants of corruption: evidence from the italian regions’, polis working papers no. 171. giardina, emilio, marina cavalieri, calogero guccio and isidoro mazza (2009) ‘federalism, part competition and budget outcome: empirical findings on regional health expenditure in italy’, mpra paper no. 16437. european journal of government and economics 1(2) 143 goel, rajeev k. and michael a. nelson (1998) ‘corruption and government size: a disaggregated analysis’, public choice 97(1-2): 107-20. golden, miriam and lucio picci (2005) ‘proposal for a new measure of corruption, illustrated with italian data’, economics & politics 17(1): 37-75. gyimah-brempong, kwabena (2002) ‘corruption, economic growth, and income inequality in africa’, economics of governance 3(3): 183-209. gupta, sanjeev, luiz de mello and raju sharan (2001) ‘corruption and military spending’, european journal of political economy 17(4): 749-777. hall, robert e. and charles i. jones (1999) ‘why do some countries produce so much more output per worker than others?’, quarterly journal of economics 114(1): 83-116. huntington, samuel p. (1968) political order in changing societies. new haven, ct: yale university press. knack stephen and philip keefer (1997) ‘does social capital have an economic payoff? a cross-country investigation’, quarterly journal of economics 112(4): 1251-1288. klitgaard, robert (1988) controlling corruption. berkeley: university of california press. la porta, rafael, florencio lopez-de-silanes, andrei shleifer and robert vishny (1999) ‘the quality of government’, journal of economics, law and organization 15(1): 222-279. leff, nathaniel h. (1964) ‘economic development through bureaucratic corruption’, american behavioral scientist 8(3): 8-14. lui, francis t. (1985) ‘an equilibrium queuing model of bribery’, journal of political economy 93(4): 760-781. li, hongyi, lixin c. xu and heng-fu zou (2000) ‘corruption, income distribution and growth’, economics and politics 12(2): 155-182. mauro, paolo (1995) ‘corruption and growth’, quarterly journal of economics 110(3): 681-712. mauro, paolo (1998) ‘corruption and the composition of government expenditure’, journal of public economics 69(2): 263-279. méndez, fabio and facundo sepulveda (2006) ‘corruption, growth and political regimes: cross country evidence’, european journal of political economy 22(1): 82-98. myrdal, gunnar (1989) ‘corruption: its causes and effects’, in arnold j. heidenheimer, michael johnston and victor t. levine (eds) political corruption: a handbook, pp. 953-962. new brunswick, nj: transaction books. padovano, fabio (2007) the politics and economics of regional transfers. cheltenham: edward elgar. persson, torsten and guido tabellini (1994) ‘is inequality harmful for growth?’, american economic review 84(3): 600-621. pettersson-lidbom, per and matz dahlberg (2003) ‘an empirical approach for evaluating soft budget constraints’, uppsala university, department of economics working paper series no. 28. pieroni, luca and giorgio d'agostino (2009) ‘military spending, corruption and economic growth’, peace economics, peace science and public policy 14(3). european journal of government and economics 1(2) 144 pigliaru, francesco (2009) ‘persistent regional gaps and the role of social capital: hints from the italian mezzogiorno’s case’. crenos working paper no. 4. putnam, robert d. (1993) making democracy work: civic traditions in modern italy. princeton, nj: princeton university press. roodman, david (2009) ‘a note on the theme of too many instruments', oxford bulletin of economics and statistics 71(1): 135-158. roubini, nouriel and jeffrey d. sachs (1989a) ‘political and economic determinants of budget deficits in the industrial democracies’, european economic review 33(5): 903-933. roubini, nouriel and jeffrey sachs (1989b) ‘government spending and budget deficits in the industrialized countries’, economic policy 4(8): 99-132. shleifer, andrei and robert w. vishny (1993) ‘corruption’, quarterly journal of economics 108(3): 599-617. tanzi, vito and hamid davoodi (1998) ‘corruption, public investment and growth’, in hirofumi shibata and toshihiro ihori (eds) the welfare state, public investment and growth, pp. 41-60. tokyo: springer-verlag. weingast barry r., kenneth a. shepsle and christopher johnsen (1981) ‘the political economy of benefits and costs: a neoclassical approach to distributive politics’, journal of political economy 89(4): 642-664. european journal of government and economics 12(1), june 2023, 58-78 this work is licensed under a creative commons attribution-noncommercial 4.0 international license. european journal of government and economics issn: 2254-7088 territorial diagnostics and citizen perception of municipal public management, towards an efficient reform of local administration manuel octavio del campo villares a *, francisco jesús ferreiro seoane b, eladio jardón ferreiro c, miguel molina picazo d a department of economics, univeridade da coruña, spain b universidad de santiago de compostela, spain c instituto internacional de marketing y comunicación, iimc, spain d instituto mediterráneo de protocolo. universidad miguel hernández, spain * corresponding author at: moctadcv@udc.es abstract. spain has a population distribution dispersed in small population centres where 60% of municipalities have less than 1,000 inhabitants. this situation generates a financial and functional incapacity to guarantee the successful and efficient provision of local public services. in order to fulfil its competences and improve services, a territorial diagnosis of the investigated area is necessary to adapt the size and structure of its administration. however, the social superstructure is reluctant to change the form of administrative action, despite being perceived as slow and bureaucratic by citizens. for this reason, this work proposes a reform to improve local economic and financial management by redesigning its administrative structure, thus achieving citizen recognition of the advantages of change. the proposal is developed through a computerised reporting model for public decision-making, the result of which is a systematic spatial report of administrative-financial decisions, which optimises decision-making and makes public management more visible. keywords. local development, municipality, public provision. jel codes. h11, h41, h73 doi. https://doi.org/10.17979/ejge.2023.12.1.9345 1. introduction although the main task of any public administration is to "administer", this cannot be understood as an end but rather as a service in the common interest. to this end, all administrations, regardless of their size, must concentrate their efforts on seeking the best possible organisation, which will enable them to provide their own services as efficiently and as fairly as possible for the benefit of their citizens. for this reason, the position put forward is the defence of the "adaptation and organisational modernisation of the administration". in this sense, the organisational structure -administrative form"must be" the one that best suits the characterisation of the territory under analysis https://creativecommons.org/licenses/by-nc/4.0/ mailto:moctadcv@udc.es https://doi.org/10.17979/ejge.2023.12.1.9345 del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 59 (rodríguez, 2006; bel, 2011). to this end, it is necessary for the parties involved (institutions, companies, citizens) to know the socio-economic state of their territory through the diagnostic of their present situation and future expectations. therefore, we speak of governance (administration) as a concept linked to the idea of innovating in order to improve. any administrative change must involve the introduction of improvements in the provision of public services, in the regulation of spaces for citizen participation and in territorial development. for this reason, innovation should be seen as synonymous with learning, adaptation and the involvement of all the agents that form part of the administration to achieve the most appropriate administrative organization for each spatial and demographic reality. so, the study is based on two questions: if the structure of the local administration in spain is the most convenient to fulfil its functions, and how does the citizen interpret the management of this administrative level closest to the citizen. these questions introduce the objective of the study. as a result, the main objective of this research is to propose a reform of the economic-financial management of local administrations, a change that will increase the efficiency of local authorities' resource management and improve the provision of public services through a redesign of their administrative structure. also, it offers a proposal based on a systematic spatial reporting of administrative-financial decisions that demonstrates the possibility of achieving a greater adaptation of municipal size to the socio-economic reality, as well as the optimisation of local decision-making and the obtention of a more effective and efficient public function model. for this reason, the contribution of the work is located in the elaboration of an automatic and objective comprehensive scorecard (cmi) that allows us to know the efficiency in the management of municipal public services. regarding the structure of the study, it begins by exposing the regulatory framework that regulates municipal economic-financial management in spain. next, the functions to be carried out by each municipality and the current municipal structure in spain are identified. the applied part of the work begins with the study of the perception of the citizen in relation to the management of municipal services. the study concludes with the presentation of the proposed automatic territorial diagnosis system in relation to the provision of local public services and the result that is expected from it, and that is materialized in a technical-administrative-financial report where the effectiveness of public management municipal is evaluated. 2. theoretical framework in this section, a specific analysis of the situation of local administrations in spain is presented. through a study of the theoretical context at a regulatory and demographic level, at the same time as a sociological analysis of the opinions of the citizens of these localities is developed. and del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 60 therefore, on the economic, administrative and efficiency impact of this public organisation and management. 2.1. regulatory framework and context. the general socioeconomic situation, the demographic dynamics as well as the current sociopolitical picture make the complexity of guaranteeing an optimal provision of local public services (lps), in time and form together with the economic-financial sustainability of the local administration (la) one of the most important challenges of the public administration in spain. this is compounded by the crisis situation in which we have found ourselves, which began in 2008, prolonged by the complexity and instability of international relations in general, the crisis resulting from covid-19 and the redistribution of economic forces on the world map. all this comes together, giving rise to a growing interest and concern for the profitability obtained through the use given to public resources and, in particular, the concern to preserve the welfare state achieved (welfare, education and health). the immediate effect of the described reality is the intensification of the search for a more efficient, accessible and financially sustainable public management as a political urgency (bel, 2011; elizalde, 2020). for the first time, we ask ourselves what the "gain" obtained from the public resources employed is. to address this dual problem: "a growing financial need and greater efficiency in the use of public resources", the reform of article 135 of the spanish constitution in 2011, endorsed by organic act 2/2012 on budgetary stability and budget sustainability, established the need to ensure "budgetary stability" as a principle that will govern the work of all administrations. the application of this constitutional precept to the local sphere requires a major regulatory adaptation to guarantee the application of the principles of budgetary stability, financial sustainability and efficiency in its management, given its heterogeneity in terms of size, population and socio-political dimension. therefore, it is necessary to adapt the basic aspects of la's functioning and organisation to space and time. the administrative adaptation of which required legal sanction through act 27/2013, on the rationalisation and sustainability of local administration, whose objectives include: 1. establish municipal powers, avoiding duplication with respect to those exercised by other administrations in the same area. 2. rationalise the local organisational structure in order to comply with the principles of efficiency, stability and financial sustainability. 3. guarantee rigorous and effective financial and budgetary control. 4. promote and favour private economic initiatives by reducing the administrative bureaucracy that presides over the management of this administrative level. the second of these objectives, set out in the preamble of act 27/2013, is the subject of this paper. del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 61 2.2. status and situation. spanish municipal structure dates to a royal decree of 1833, which established the economic and political competences of the local entities together with the design of the local administration at two basic levels: province and municipality. since that date, changes in the municipal map have been extremely limited, especially when compared to those in the dynamics of settlement, distribution, management and economic production, as well as the effects of these on any territory. thus, the institutional architecture shows a growing mismatch between municipal structure and geoeconomic evolution (rodríguez, 2011; del campo and ferreiro, 2013). therefore, it is difficult to understand how the public institutions responsible for defending the common interest can remain unchanged in the face of a rapidly changing socio-economic scenario. even more, bearing in mind that the origin of the municipal structure that arose as a result of the aforementioned royal decree stems from a centralist conception where provinces and municipalities were instruments at the service of central power, their functions being to improve tax collection and control citizens' movements. thus, to the question of whether these are the functions that the la should perform in the future, the answer should be negative. simply because of the mere passage of time and the technical progress inherent to it, municipal functions have grown disproportionately from the mid19th century to the present day (rodríguez, 2011). consequently, it is obligatory to refer to what the municipal functions are: a. representative body of the democratic will and political conception for the citizen → administration that serves as the basis for the organisation of political power and generates an identification of the citizen with that territory. b. organisation that provides and offers "public" services to the citizen → a form of "company" that offers and provides services of general interest and cannot be replaced by the market. c. promoter of socioeconomic development → acting as a sociocultural, productive or touristic dynamiser and serving general interest beyond the municipal borders. from these functions, it can be deduced that a basic function of the municipality and, by extension, its governing body, the city council, is to act as a political-administrative nucleus in the lives of its neighbours. in light of this, it is worth asking whether this will be its main role in the future or whether it will be to attend to the needs and demands of citizens in a reality that is not only social but also spatial, and which is changing with unusual speed. the answer to this question requires identifying the most convenient municipal structure at a spatial, functional and political level (de la mora, 1997; del campo y ferreiro, 2013). del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 62 moreover, identifying a spatial demarcation is not only a question of geographical dimension. in fact, it is possible to identify up to three dimensions linked to the concept of territory and which must converge in the same administrative space: a. institutional: establishing the political relations of individuals and defining the capacity to decide their public representatives. b. functional: coverage in the provision of different collective services, acquiring a dimension beyond the traditional municipal framework. c. relational: sphere in which to establish social and economic relations between individuals: labour and housing. the coincidence of these three dimensions in the same physical space is a factor that generates economies of scale in local public provision (rodríguez, 2006). having reached this point, it is worth asking what the current structure of the spanish local administration is. information is presented in tables 1 and 2, where a comparative analysis of the municipal size by population and autonomous community is made, respectively, in the decade between 2021 and 2012. with regard to the population distribution of the municipalities, it is worth noting that more than 60% of them have less than 1,000 inhabitants. this reflects the fact that the spanish administrative map is a large area populated by a large number of small population centres with little capacity in terms of effective demand and socio-productive structure. a reality where municipalities with more than 50,000 inhabitants represent less than 2% of the total, and where, separating the municipalities into those with more and those with less than 5,000 inhabitants, the former have seen their weight in the total reduced over the decade analysed, with no significant process of concentration being detected. table 1. municipal distribution of spain by population group, 2012-2021. segment-population 2012 2021 nº % % accumul. nº % % accumul. <101 1.193 14,70 14,70 1.137 14,01 14,01 101-500 2.670 32,89 47,59 2.697 33,24 47,25 501-1.000 1.033 12,73 60,32 1.052 12,96 60,21 1.001-2.000 912 11,24 71,56 922 11,36 71,57 2.001-5.000 991 12,21 83,77 1.000 12,32 83,89 5.001-10.000 560 6,90 90,67 553 6,81 90,70 10.001-20.000 355 4,37 95,04 361 4,45 95,15 20.001-50.000 257 3,17 98,21 250 3,08 98,23 50.001-100.000 83 1,02 99,23 82 1,01 99,24 100.001-500.000 57 0,70 99,93 56 0,69 99,93 >500.000 6 0,07 100,00 6 0,07 100,00 note. own elaboration based on ine data. del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 63 accordingly, the size of the territory and its population are related. in terms of population density, three groups of communities can be distinguished, which are shown in figure 1: 1. underpopulated: this makes the provision of spl very difficult and limited (lack of market and dispersion). these communities have an average population density of 40 inhabitants/km2, with more than 90% of their municipalities having <10,000 inhabitants and suffering from distressing population and economic desertification. these are: aragon, castile and leon, castile-la mancha, navarre, la rioja and extremadura. 2. intermediate group: with an average density of 105 inhab/km2, it maintains a high-risk status characterised by ageing and dispersed settlement. its threat is the lack of productive fabric. these are: andalusia, asturias, cantabria and galicia. 3. sufficient average population size: it has a service sector of considerable size and diversity. its average density is 400 inhabitants/km2 and its average population size is capable of sustaining the necessary spl. these are: balearic islands, canary islands, catalonia, valencia, madrid, basque country and murcia. the most revealing fact in table 2 is the large difference between the number of spanish municipalities with ≤10,000 inhabitants (91%) and their population (20%). this shows the structural weakness of the majority of local corporations in spain. in thirteen communities, the percentage of municipalities with ≤10,000 inhabitants exceeds 75%, while in ten, the population of these municipalities does not reach 25%. del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 64 figure 1. population density of the autonomous communities in spain, 2021. table 2. municipal size of spain by autonomous community 2012-2021. autonomous community number mun. population/nº municipalities population density (inhab/km2) % popu. in mun. ≤ 10.000 % mun. < 10.000 popu. mun. ≤10.000 / nº mun. ≤ 10.000 2021 2012 2021 2021 2021 2021 2012 2021 andalusia 785 10.960 10.793 108 19% 81% 2.738 2.592 aragon 731 1.846 1.814 28 30% 98% 578 547 asturias 78 13.812 12.972 105 15% 76% 2.514 2.503 balearic i. 67 16.708 17.508 292 15% 64% 3.973 4.041 canary i. 88 24.072 24.693 428 10% 52% 4.805 4.747 cantabria 102 5.822 5.730 115 35% 90% 2.171 2.255 cast-león 2248 1.133 1.060 25 43% 99% 506 466 cast-man. 919 2.309 2.230 26 44% 96% 1.070 1.023 catalonia 947 7.995 8.198 259 18% 87% 1.712 1.735 valencia 542 9.464 9.332 247 17% 81% 2.027 1.986 extremad. 388 2.878 2.731 26 50% 97% 1.521 1.418 galicia 313 8.830 8.612 98 29% 82% 3.244 3.066 madrid 179 36.305 37.716 1038 6% 72% 2.861 3.027 murcia 45 32.766 33.744 216 45% 31% 4.052 4.095 navarre 272 2.370 2.432 64 42% 96% 1.121 1.067 basque c. 251 8.837 8.821 330 19% 82% 2.015 2.017 la rioja 174 1.860 1.838 64 33% 97% 700 632 total 8.131 5.824 5.828 99 20% 91% 1.343 1.301 own elaboration based on ine data. notes: mun=municipalities; popu=population del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 65 if the observed reference variable is the average municipal population of municipalities with ≤10,000 inhabitants, six communities did not reach 1,500 inhabitants/municipality in 2021, one more than in 2012. in the decade considered, eleven regions reduced their average population size. the number of autonomous communities that do not reach 10 municipalities >50,000 inhabitants is 15 in 2012 and 16 in 2021. meanwhile, the number of communities that do not reach 25 municipalities with >20,000 inhabitants in the same years is 12 and 14, respectively, with dispersed settlement increasing. in addition, this picture of the municipal structure in spain was reinforced by a series of sociopolitical factors (de la mora, 1997; ramió and salvador, 2012). these aggravated the negative effects caused by the expansion of municipal activity derived from the displacement and relocation of productive factors: a. the growth and modernisation of the country means that any municipality wants to match the competencies of other municipalities in administratively more advanced countries. b. the democratic system requires bringing the "administration vs. administered" closer together; in this line, the municipality goes from being an administration that serves the citizen demand to taking on competencies that are not its own due to its proximity to the citizenry. c. the municipal "interest" in satisfying citizen demand led to an increase in the demands of its citizens, generating a circular process of sustained growth in the demand for new spl. 2.3. study approach: the administrative perception of citizens. after the overview above, a scenario of socio-political debate on the sustainability of the basic structure of the local corporations is opening up. this debate arises between two antagonistic positions on the management of the lps: absolute globalism and maximum localism. this does little to help in identifying the desired municipal model: a system organised under a theoretical and legal nominal autonomy, although with an evident incapacity to execute it for many of the spanish municipalities; or a flexible system, capable of adapting to the needs of socio-economic and geospatial evolution, fully assuming its competences. furthermore, and in view of the magnitude of the tasks that the local administration serves, a question immediately arises: are the municipalities in spain, with their current structure, in a position to carry out these functions, or even to expand them, or on the contrary, are they unable to provide an effective response to their basic competences as entities of political representation, providers and suppliers of collective services? to answer this question, it is necessary to have adequate and sufficient information on the general state of the territory under diagnosis, a comprehensive territorial diagnosis adjusted to the characteristics of the space investigated. the technical aspect and the socio-economic reality del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 66 mean that this knowledge has a more practical than political character and origin (guy, 2011; durán, 2016, del campo et al, 2021) and, where demagogy has no place, these issues are as varied as those listed below (bonnefoy and armijo, 2005; alfaro and gómez, 2016; ine, 2018) and whose common characteristic is their continuous modification: • state, evolution, movements, demographic projection and population. • socio-economic structure, activity and productive settlement. • provision and management of collective services: distribution and accessibility. • basic demands of the population: economic, identity and social. • transfer of competences from the environment. • municipal financial and budgetary situation. therefore, if society and its economy are immersed in a continuous process of change (modernity and progress), the institutions that serve the collective interest should not remain static over time (bosch and solé-ollé, 2012). for instance, two antagonistic processes: inframunicipalism and urban mega-congestion, escape the current conceptualisation of municipality (de la mora, 1997; bel, 2011), exemplifying the mismatch between the current local administrative structure, the socio-economic dynamics and the new models of spatial occupation. however, experience shows how the historical, sociocultural and geopolitical superstructure conditions any initiative to modify either the current administrative boundaries or the way of providing lps, maintaining the primacy of the idea of the classic municipality as the "only" criterion for this purpose, regardless of its limitations. a classic municipality is understood to be one that was designed following the municipal administrative structure included in rd 1833. in fact, it is only in the current socio-economic situation of crisis and financial and social urgency to maintain the welfare state that a certain awareness seems to emerge regarding the profitability and use given to public resources and which administrative level is best able to provide certain services. but what is the public's perception of the administration's performance? this is a key question for assessing the expected aptitude in the face of a transformation of la in size and form. this information will allow a generic evaluation of many of the problems and obstacles of a social nature derived from a change in the way public services are approached and provided by the administration. this information is summarised in table 3, where up to six argumentative constructions can be distinguished regarding the population's perception of its administration. in these, it is worth noting that the general view transmitted by citizens with respect to the actions and function of government is "traditional", that is, it defends a normative conception of public action and is averse to change. the administration is seen as an instrument of guarantee and protection, while the private sector is associated with the idea of profit and inequality. the documentary basis for the results obtained comes from the information collected in the "survey on the quality of public services" and the "survey on public opinion and fiscal policy" conducted by the sociological research centre (cis) in the period 2015-2020, considering 2015 as the base year of study. the analysis was completed with information on periodicity and del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 67 compliance from the ministry of public administrations (map) and indicators of subjective wellbeing, obtained through a survey by the national statistics institute (ine). the appendix shows the list of questions considered to assess citizen perception of government activity in a broad sense, summarised schematically in table 3. table 3. citizen perception of the activity of public administrations, 2015. general perception the citizen gives a negative assessment when asked abstract or generic questions about the administration and its employees (bureauphobe citizen). perception of management areas in contrast, when asked about specific areas of government or public policy, they respond positively (bureaucophile citizen). general public-private perception better general evaluation of private management (agility + efficiency) than public management (bureaucracy + delays), it would be positive to incorporate private management techniques in the administration. perception of social effect publicprivate provision when choosing between public vs. private management for the provision of basic services, the majority choose public management, as it is associated with satisfying the common interest and being a guarantee of equality. institutional perception the la is the administrative level with the least bureaucratic connotation, its actions are more visible and it creates a sense of belonging. perception of interadministrative management results while, in terms of the management of public resources, it is the autonomous communities that are most highly valued, the city council is associated with identity more than with functionality. note. compilation based on data from: cis, map, ine, accumulated results 2015-2020. table 4. evolution of citizen perceptions of administration, 2016-2021. evolution(δvar.2021/2016) general perception constant +1,6% management areas perception increasing +9,6% general public-private perception constant +1,2% social perception public-private provision decreasing -5,6% institutional perception constant -1,0% inter-administration results perception increasing +3,2% own elaboration based on data from: cis, map, ine, accumulated results 2016-2021. moreover, perception is a subjective issue with great variability in terms of space and time, and the period analysed is 6 years. table 4 shows the evolution (trend): increasing, constant or decreasing followed by each of the six arguments described in table 3, and also includes the average variation rate observed in the 2016-2021 period with respect to 2015-2020 regarding the degree of satisfaction (trust) or dissatisfaction (distrust) conveyed by the administration in its relationship with citizens. this variation was obtained from the identification and selection of those questions (annex) with significance in relation to each of the arguments developed in the previous table. the trend observed was classified according to the following criteria: increasing ≥2%; constant <2% and >-2%; and decreasing ≤-2%. according to the data in table 4, it can be affirmed that beyond a general perception of slowness (waiting times) and administrative bureaucracy (documentary requirements), when del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 68 looking deeper into the management of public services, there is a prevailing defence of public intervention without changing its basic form of action. more management and less bureaucracy in the public sector are something desired by all, but its implementation generates doubts and mixed feelings. citizens show a general interest in an agile and efficient public activity. however, change in public management is viewed with suspicion (concern). only as social interaction grows and the comparison with other territories is visualised, the subject realises that certain changes in the provision of basic (collective) services are those that facilitate an improvement in their living conditions, whether these are of an economic nature or in the form of greater satisfaction by perceiving a higher quality in the provision of those services (lópez doblas, 2018; elizalde, 2020). for that reason, only through persuasion and practical conviction of the collective and individual benefits (making these visible) that a reform or adaptation of the municipal size to the socio-economic reality entails is it possible to achieve social and political fruition of the need for this administrative change, without this entailing a social or identity crisis in the face of a municipal merger, creation of commonwealths, consortiums, metropolitan areas or cooperation agreements (guy, 2011; durán, 2016). in this respect, political pedagogy plays a transcendental role, conveniently showing what is gained and lost with a change in the management and provision of any basic service. the complexity and dimension of the problems faced by all administrations, especially la, due to its heterogeneity, means that they cannot be solved exclusively through regulatory changes (ramió and salvador, 2012; del campo, 2014); a change of mentality is needed in search of formulas to better provide lps. the search for an effective and efficient public service model must be seen as a necessity, and for this it is necessary to start from a correct knowledge of the analysed space in all its areas (guy, 2011). communication based on knowledge and management of the treated environment constitutes the support for this change of mentality. the search for the best administrative structure for each territory should be an objective in order to provide the best possible provision of those services that are essential in the daily work of any person. except for certain general services of exclusively national scope, such as defence, justice, infrastructures or foreign relations, no administration is better than any other for exercising a given competence in terms of basic territorial services. it can only be considered as such if it is the one that best adapts to the specificity of the environment, its surroundings and the socioeconomic circumstances of the space and time analysed. del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 69 table 5. outsourcing or privatisation vs. innovation or empowerment in public management. under the impression that it is impossible for the administration to have the capacity to maintain quality services in a context of spending restrictions, it is decided to defer the management of certain services to the private sector, while maintaining their public nature. outsourcing ≠ privatisation • outsource, the responsibility remains public, the administration directs and controls and the private agency manages. • privatise, the public responsibility for the service ceases to be public. is outsourcing a negative option? • it is not always synonymous with dismantling the public sector or reducing the public services provided. • it may be the only possible strategy to maintain the welfare state in a context of diminishing public resources. what services are outsourced? it is not true that only welfare state services are outsourced: care, health and education; they are also outsourced: economic, cultural and administrative services. necessary condition for the private operator to provide quality public services: that the administrations exercise their planning, control and evaluation functions. private organisations are not always more efficient than public organisations in the provision of public services, because of: • suffering from bad management. • the need for immediate profit. considering the above, might it not be thought that the most correct option at times would be to improve the functioning of public organisations from within, without resorting to outsourcing or privatisation? focusing on the updating and training of their staff in a general sense: values and functions. is it possible to see outsourcing as a sign of the failure of public organisations to provide quality public services? note. own elaboration. going deeper into the initial idea of innovation and public modernisation, table 5 shows a flexible and innovative characterisation of two ways of acting in the search for optimal administration in the provision of lps adapted to the characteristics of the territory, and whose distinction is necessary to know. on the one hand, we have the traditional formulation represented by the concepts of outsourcing and/or privatisation (working with or as the private sector outward vision); and on the other hand, administrative adaptation and modernisation (working from within to improve the public sector), where innovation and training are the references for the development of a better public function. precisely, the aim of this work is to contribute from a technical approach to disseminate and extend the effective possibility that an internal adaptation of the municipal size to the changes due to the mobility of goods and factors is possible. this would be a way of contributing to the improvement in the provision of lps (optimising citizen welfare), increasing efficiency in the management of local resources, without forgetting the cost and equity in the access and location of such services (galera, 2019). the issue of the unsustainable dimension (economic, financial, human, technical...) of local corporations has been recurrent for several decades. (bosch y solé-ollé, 2012; durán, 2016). del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 70 these deficits prevent them from fulfilling their main objectives: the provision of basic services and political representation (bosch and solé-ollé, 2012; del campo, 2014; galera, 2019). on the basis of the established objective, the work aims to serve as a guide to embark on a path aimed at optimising the local administrative structure, stressing the need to provide the necessary technical information in all the transcendental areas: demography, socio-economic structure, location, size and provision of collective services, as well as that derived from their financial-budgetary situation. in this way, to help those who are responsible for making decisions to opt for the most convenient solution in order to increase the well-being of the citizen obtained from the provision of lps. below, an automatic instrument for diagnosis and proposal for improvement in the economicfinancial management of local services is presented, based on the adaptation and redesign of the established municipal administrative structure. the starting point of the developed design is the selection of the basic and transcendent indicators to evaluate the municipal capacity in the provision of those public services that are proper (compulsory) to its administrative size. 3. diagnostic proposal to rationalise the provision of local public services through the management (ge) and knowledge (co) of the environment (me). the proposal is based on an application that will facilitate decision-making by those government structures responsible for configuring the optimal administrative size in the provision of lps (blasco et al, 2013; del campo et al, 2021). being aware that municipalities do not have a common pattern of behaviour or the same characteristics in basic aspects: size, socio-economic capacity or demographics. therefore, the objective is to offer a tool that evaluates and organises the necessary qualitative and quantitative information to facilitate decision-making on the ideal municipal size and to explain this decision. the instrument is configured as an automatic and periodic reporting model of the demographic, socio-economic, provisional and financial situation of the municipalities under study, which will allow us to detect not only financial problems but also social and sustainability problems that condition the survival and viability of these municipalities, as well as facilitating their comparability. thus, the resulting output is a management system based on the provision of relevant information on a computer tool, the ultimate result of which is a diagnostic report and a proposal for economic-financial improvement and sustainability in the provision of lps. this is based on the rationalisation of its competences and structure, based on the information obtained from the management and knowledge of the territory analysed. the informatics support used is represented graphically in figure 2, which takes as a documentary basis all the relevant technical and situational information of the municipality(ies) under study in the areas of geo-demography, labour structure, socioeconomic level, public provision and financial-budgetary situation, for the three complete years prior to the analysis. the del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 71 system is fed back each year (blasco et al, 2013; del campo et al, 2021), eliminating the oldest year and incorporating the most recent (phase 1 of action). once the information referred to in the previous paragraph has been collected and entered into the system, the system offers three types of output variables (phase 2 of action): a. individual indicators of provision or service, where the direction followed by the indicator and the intensity of the variation observed are taken into account. they are obtained through official statistics and ministerial websites, being selected based on the characteristics of the investigated territory. b. combined indicators of provision or service, made up of the integration of several indicators, or else put in reference to a dependent variable. indicators are valid for all municipalities with a minimum population size capable of generating the requested information (more than 1,000 inhabitants). c. relationships of sustainability in the provision of lps, based on the situation with its demand/supply nexus. the alerts to be considered will be obtained from these relationships. finally, the application offers qualitative results: a list of those policies that should be implemented, the most appropriate administrative categorisation for the investigated area, and what would be the recommended implementation proposal (phase 3 of action), collected in a "systematic administrative-financial report". the system is expressed schematically, by means of the following list of actions: initial data (level_1) → basic indicators and data ordering (level_2) → evolution and analysis of variation of basic indicators (level_3) → identification of alerts detecting problems (level_4) → recommended measures/policies (level_5) del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 72 figure 2. proposed model to rationalise the provision of spl. own elaboration. the information in figure 2 shows independently the three levels of action in which the information management and processing model is materialised. three interrelated levels, where the success of each one is a function of the previous one: level 1: design, analysis and selection of indicators. level 2: measurement and evaluation of indicators, it development. level 3: diagnosis, strategic proposal and organisational decision. the necessary leadership to carry out any administrative reform, guaranteeing its sustainability, as well as the undeniable combination of the double political objective of "efficiency vs. equity" requires making decisions based on relevant and responsible information in the double sense of quality and quantity. therefore, it is about political leadership and management based not only on the capacity and ability of the politician but also on knowledge and, above all, on the most convenient information in relation to the service to be provided. politicians must know the reality of the territory they govern and manage, its needs and the consequences of their activity, which is why the dissemination action based on the management (ge) and knowledge (co) of the environment (me) is essential if the aim is to modify the way in which the lps are provided. this requires a clear understanding of the relevant parameters when del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 73 making such a decision, only then will it be possible to explain to the different interest groups (citizens, social groups, etc.) the reasons and criteria that motivated them. 4. systematic administrative-financial reporting of municipal finances. a way of transmitting a public reform. according to the previous point, this report is the result of the application developed, which is configured as an automatic reporting of periodical information, supporting decision-making in the provision of spl and self-supported by the administration analysed. the report has been created on the basis of a computerised support and aims to establish an automated decision-making model based on the socio-economic and financial capacity of the analysed environment. the designed application uses excel as computer support, which through the visual basic language for applications (vba) allows us to generate custom forms with text boxes and drop-down lists. its objective is to facilitate the detection of financial problems, the control of public income and expenditure, the perspective of vital sustainability and the management of municipal services, and its comparability. its characteristics are easiness of obtaining and simplicity; completeness and relevance; transparency and agility; and updating and participation. as a result, the report allows a more systematic, comprehensible and transparent presentation, greater convenience in its layout, and its regular review will contribute to its continuous improvement. in addition, the integral vision of local problems facilitates the commitment of all the agents involved in its management, their motivation and orientation towards an efficient use of the resources available to the municipal finance. for this purpose, table 6 shows by "case" the diagnosis, results and actions to be implemented, of the "systematic municipal administrative-financial report", or output of the model. the study covers four areas of action: demography and population; socio-labour structure; living conditions and provision of spl; and financial-budgetary capacity. for each area, a partial situation proposal is obtained and the actions to be implemented are listed, distinguishing between (alfaro and gómez, 2016; del campo et al, 2021): • dac actions (direct administrative control): local capacity to carry them out. • iac actions (indirect administrative control): outside local competence. in addition, the report presents a partial proposal for each area, providing guidance on its immediate sustainability and the most desirable direction to take. the merger of the partial proposals converges in an overall proposal aimed at showing the way forward if the level of spl provision is to be improved in the medium and long term. del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 74 table 6. proposal for action and improvement of local administration (hypothesis). population control and regeneration capacity result reduced survival capacity, unsustainable structure dac providing incentives to encourage births dac subsidise public transport during the busiest times for business and education. dac promote the development of the traditional local community business. proposal set out measures to encourage a merger by integration state and evolution of the labour market result small domestic market and low labour dynamism dac granting of advantageous land for new economic activities dac create an official and standardized contracting office dac reduction of the ivtm (tax on motor vehicles) for new economic activities, bonuses for creating and maintaining employment. dac promote the development of the traditional business of the area. proposal examine the viability of administrative size: merger by integration or selective merger living conditions and infrastructures report result risk of provision and equipment due to reduced density dac grant building licences adjusted to the available environment and equipment. iac aggregation of population centres, elimination of unsustainable ones due to lack of population dac develop cooperation policies with other local corporations to manage basic facilities and services. iac redistribution of students in schools according to level and installed capacity proposal examine the viability of administrative size: merger by integration or selective merger management control and per-capita co-responsibility result efficient and inequitable (inequitativa) municipal management dac increase the economic performance derived from own heritage iac renegotiate the interest rate of the debt according to market conditions dac reduce non-basic current transfers granted dac reduction of urban property tax (ibi) according to the size of the family unit. proposal reducing direct taxation vs. other own revenues general proposal: adopt measures for a municipal integration in the short and medium term. note. own elaboration. the technical maintenance and updating of the information that feeds the proposed application recommend that it be located at the administrative level with the necessary capacity and personnel (province, municipalities with more than 10,000 inhabitants, ...). 5. conclusions and the need for change. this paper discusses two different but intrinsically related issues. on the one hand, the identification of a problem in the provision of lps. the origin of this situation lies in the lack of capacity of most municipalities in spain to meet the basic needs of their neighbourhood in an efficient and accessible way in space and time, which is apparent in: • lack of internal market, lack of population and dispersed settlement. • lack of a developed productive fabric with the capacity to attract people. del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 75 • dependent financial structure, preventing any management and political autonomy. on the other hand, after identifying the problem to be solved, "how to improve the provision of lps through an optimal local government in size and shape", the work moves on to how this problem should be communicated. besides, made known to all parties concerned, so that they understand and accept it as something globally good. the work moves on to how this problem should be communicated and brought to the attention of all affected parties, so that they comprehend it and take it as something globally good. so, being political pedagogy and the exposition of the expected results through the identification of the benefits and costs derived from the proposed administrative reform the way to make people see the need to modify the management framework at the local level, changing the mentality of the social agents. therefore, the starting point for the success of the proposed change is a good knowledge of the management (ge) carried out to date and the knowledge (co) of the environment (me) or territory being explored. in this sense, the next study step is to decide if the conclusions of the resulting technical report should be advisory or binding. in this sense, the spatial evolution, both demographic and socioeconomic, leaves us with little doubt that if we do not take immediate measures, we will be able to do little to avoid the abandonment and relocation of most of the national territory. finally, and as a social justification for the proposal presented, there are several arguments in favour of this administrative change, including the following: 1. the size and complexity of public administrations makes their adaptation very costly, making them obsolete in terms of the effectiveness of their proposed organisational solutions and even more so in a society in constant change. 2. the competitiveness of a country and the quality of life of its citizens is a function of the efficiency of its administration. having a public administration that does not create dysfunctions in private activity and efficiently performs its tasks: regulation, control and management of services and stimulation of socio-economic activity, is a necessary condition for the country's growth and development. 3. all public resources have the same origin: productive activity and, within this, mainly private activity. for this reason, the administration, more than anyone else, must be responsible for the use and profitability of the funds placed at its disposal. and as the first function of any administration is precisely to "administer" and not to produce, if the administrative size implies duplicities and rigidities, which are the origin of a waste of resources, this is something that we cannot consent to by sitting back and waiting. del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 76 references alfaro, c., y gómez, j. (2016). un sistema de indicadores para la medición, evaluación, innovación y participación orientado a la administración pública. methaodos, social science journal, 4(2), 274-290. https://doi.org/10.17502/m.rcs.v4i2.124 bel, g. (2011). servicios locales: tamaño, escala y gobernanza. barcelona institute of economics, ieb report on fiscal federalism, ed. ieb, barcelona, 12-20. blasco, n., cuairán, r., y twal d. (2013). sistema automático de diagnóstico y propuestas de mejora económico-financiera para universidades públicas. proceedings of the xxiii conference of the economics of education association (aede). bonnefoy, j.c., y armijo, m. (2005). indicadores de desempeño en el sector público. latin american and caribbean institute for economic and social planning (ilpes). manuals series nº 45. bosch, n., y solé-ollé, a. (2012). una valoración preliminar de la reforma de la administración local en españa. barcelona institute of economics, ieb report on fiscal federalism, ed. ieb, barcelona, 80-87. centro de investigaciones sociológicas (cis) (2015-2020). calidad de los servicios públicos xiii. report, "study 3229". http://www.cis.es/cis/export/sites/default/-archivos/marginales/ 3220_3239/3229/es3229mar.pdf de la mora, l. (1997). los retos de las ciudades en el umbral del siglo xxi. los nuevos retos del sector público ante la unión monetaria europea. publishes 5 days newspaper and official credit institute foundation, 12. del campo, m.o., miguéns, v., y cid, a. (2021). el diagnóstico territorial: un instrumento en defensa de la provisión de los servicios públicos locales. administration & citizenship, galician school of public administration journal, 16(2), 161-180. https://doi.org/10.36402/ac.v16i2.4774 del campo, m.o. (2014). la reforma de la administración local: una aproximación práctica al caso español. criteria res publica fulget, journal of political and social thought, (13), 3242. del campo, m.o., y ferreiro, f.j. (2013). the reform of the local administration in spain in terms of population. journal of us-china public administration, 10(10), 945-957. durán, f.j. (2016): la fusión coactiva de municipios en españa. chronicler of the social and democratic state under the rule of law, 57, 44-51. elizalde, b. (2020). la diversidad familiar ante el reto de los cuidados. economists without borders. dossiers esf, 36, 34-38. galera, a. (2019): razones para una reforma federal del modelo territorial. administration & citizenship, galician school of public administration journal, 14(1), 29-39. guy, g. (2011). más allá de las asociaciones intermunicipales hacia municipios de dos niveles de gobierno: el caso francés barcelona institute of economics, ieb report on fiscal federalism, ed. ieb, barcelona, 32-42. real decreto sobre la división civil de territorio español en la península e islas adyacentes en 49 provincias y estableciendo los subdelegados de fomento en las provincias del reino. boletín oficial del estado, 154, de 3 de diciembre de 1833. https://www.boe.es/buscar/doc.php?id=boe-a-1833-1241 statistics national institute (2018-2020). indicadores de calidad de vida. in https://www.ine.es/ss/satellite?l=es_es&c=inepublicacion_c&cid=1259937499084&p=125 4735110672&pagename=productosyservicios%2fpyslayout&param1=pysdetallegratuit as&param2=1259944522579&param4=mostrar#top law 27/2013, of rationalization and sustainability of the local administration. lópez doblas, j. (2018). formas de convivencia de las personas mayores. spanish journal of sociological research, 161, 23-40. http://dx.doi.org/10.5477/cis/reis.161.23 ministry of public administration (mpa) (2016-2020). encuesta nacional satisfacción de la calidad de los servicios públicos en la administración pública general. file in https://observatorioserviciospublicos.gob.do/publicaciones/encuestas/institucionales/cuestio nario_encuestas.pdf organic law 2/2012, on budgetary stability and financial sustainability. ramió, c., y salvador, m. (2012). provisión de servicios públicos en el contexto de la administración local de españa: el papel de los factores políticos institucionales y la externalización de los gobiernos locales. management and public policy, 21(2), 439-474. https://doi.org/10.17502/m.rcs.v4i2.124 http://www.cis.es/cis/export/sites/default/-archivos/marginales/3220_3239/3229/es3229mar.pdf http://www.cis.es/cis/export/sites/default/-archivos/marginales/3220_3239/3229/es3229mar.pdf https://doi.org/10.36402/ac.v16i2.4774 https://www.boe.es/buscar/doc.php?id=boe-a-1833-1241 https://www.ine.es/ss/satellite?l=es_es&c=inepublicacion_c&cid=1259937499084&p=1254735110672&pagename=productosyservicios%2fpyslayout&param1=pysdetallegratuitas&param2=1259944522579&param4=mostrar#top https://www.ine.es/ss/satellite?l=es_es&c=inepublicacion_c&cid=1259937499084&p=1254735110672&pagename=productosyservicios%2fpyslayout&param1=pysdetallegratuitas&param2=1259944522579&param4=mostrar#top https://www.ine.es/ss/satellite?l=es_es&c=inepublicacion_c&cid=1259937499084&p=1254735110672&pagename=productosyservicios%2fpyslayout&param1=pysdetallegratuitas&param2=1259944522579&param4=mostrar#top http://dx.doi.org/10.5477/cis/reis.161.23 https://observatorioserviciospublicos.gob.do/publicaciones/encuestas/institucionales/cuestionario_encuestas.pdf https://observatorioserviciospublicos.gob.do/publicaciones/encuestas/institucionales/cuestionario_encuestas.pdf del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 77 rodríguez, r. (2006). el territorio local en europa. reestructuración de su base organizativa y posibilidades para españa. geography, territory and environment, nº6, 115-132. rodríguez, r. (2011). oportunidades de la crisis. debate sobre reestructuración de la administración territorial. administration & citizenship, galician school of public administration journal, 6(2), 21-34. del campo villares et al. / european journal of government and economics 12(1), june 2023, 58-78 78 appendix. questions on citizens’ perception of the administration. note. the related questions have been taken from the "quality of public services" and "public opinion and fiscal policy" surveys, both prepared by the cis. these questions were completed and corrected in those cases where the question was altered or modified in its design or configuration during the period under study (2016-2020) with the subjective welfare indicators obtained through a survey by the ine and the information published by the map on periodicity and compliance in the provision of the public services surveyed. microsoft word ejge_03_01_010.doc european journal of government and economics volume 3, number 1 (june 2014) issn: 2254-7088 5 new party parliamentary entry in western europe, 1960-2010 niklas bolin, mid sweden university, sweden abstract although the number of studies of new political parties is gradually increasing, we still lack a comprehensive understanding of when new parties manage to enter national parliaments. the objective of this article is to explain the circumstances under which new parties enter national parliaments for the first time. unlike earlier research, this study does not focus on individual party families. instead, generally applicable explanations are sought. this is achieved through an examination of the importance of the political opportunity structure, that is, the external environment new parties face in their quest for parliamentary representation. using data collected for 18 western european countries for the period 1960-2010, the analysis shows that institutional factors are important to understand new party parliamentary entry. the sociological factors analysed in the study, however, do not seem to be of equal importance. jel classification d72. keywords new parties; western europe; institutions; representation; political opportunity structure. european journal of government and economics 3(1) 6 introduction although the number of studies of new political parties is gradually increasing, we still lack a comprehensive understanding of when new parties manage to enter the most important political assembly, namely national parliaments. since only very few new parties emerged during the first 70 years of the 20th century, scholars showed little interest in the area. according to the frozen party system theory of lipset and rokkan (1967), the 1960s’ party systems reflected the cleavage structures of the 20th century, with the result that the party systems of the 1960s were virtually the same as those of the 1920s. during the last couple of decades, however, new parties have more frequently succeeded in entering national parliaments. accordingly, scholarly interest has also risen. due especially to the pioneer contributions of hauss and rayside (1978), harmel and robertson (1985) and the more recent studies by hug (2001), meguid (2008) and hino (2012), a new party theory is slowly starting to emerge. nevertheless, these studies, and most others as well, focus either on new party formation or on new party electoral success. although a new party must attain some electoral success to enter parliament, parliamentary entry and electoral success are not synonymous. the objective of this article is to explain the circumstances under which new parties enter national parliaments for the first time. this is achieved through an examination of the importance of the political opportunity structure, that is, the external environment new parties face in their quest for parliamentary representation. since the entry of new parties into parliament is a subject related to research on both party formation and electoral success, i will make use of explanatory factors tested in prior studies of these specific issues. in short, two different explanatory perspectives are employed. firstly, an institutional perspective postulates that a new party’s prospects for successful parliamentary entry are influenced by how the political rules of the game are designed. primarily, attention has been given to the electoral system and its impact on new parties. however, there are also other institutions of relevance. rules on public party funding as well as regulations on parties’ access to different forms of media potentially facilitate or hamper new party possibilities. also, basic structures of the political system have been hypothesised as being significant. hence, federalism and parliamentary government have been argued to be friendlier to newcomers than a unitary presidential political system (harmel & robertson, 1985; hauss & rayside, 1978; hino, 2012; willey, 1998). secondly, from a sociological perspective it is emphasised that political parties arise as a result of conflicts between different groups in society (ware, 1996). however, as major societal changes such as industrialisation, urbanisation and economic growth have taken place, social group affiliation no longer necessarily determines voting patterns. the strict divisions into social groups were loosened when citizens’ opinions and values changed. new dimensions of conflict brought new political issues. since there is a time lag between voters and party movement, new niches open up for new political parties (rydgren, 2003). from a sociological perspective, new party formation and ultimately entry to parliament are therefore a response to social change. this article will go on to survey theories about new parties in order to find out what explanatory factors should be tested in the analysis. in the first part of the empirical section the development of new party parliamentary entry, both temporally and spatially, will be mapped out. this will be conducted using data collected for 18 western european countries for the period 1960-2010. in the second part of the empirical section the explanatory factors will be statistically tested using multivariate statistical methods. finally, the conclusions are discussed and problematised. bolin ● new party parliamentary entry in western europe 7 how can new party parliamentary entry be explained? prior research on new parties is limited in at least two respects. firstly, it focuses on explaining the formation or the varying degrees of electoral success of new parties. while party formation and party parliamentary entry are obviously separate events and thus potentially explained by different factors, new party parliamentary entry and new party electoral success are more adjacent concepts. however, while electoral success is an arbitrary concept to some extent, parliamentary entry is hard to misinterpret. entry includes representation and consequently formal influence on decision-making. secondly, most of the literature focuses on specific party families, and consequently much attention has been given to radical right parties, green parties and regional parties. treating new parties as one homogeneous group of parties has not been very common, although there are a number of important studies which, to different extents, have done just that (harmel & robertson, 1985; hauss & rayside, 1978; hino, 2012; hug, 2001; meguid, 2008). this study aims to go beyond party-family-specific explanations for new party parliamentary entry. although previous explanatory studies on new parties have primarily dealt with formation and electoral success and not parliamentary entry, this study is guided by research from these adjacent areas of research. the results of these studies, so far, are rather mixed. while some argue that the institutional setting is of minor importance to understanding why new parties develop (hauss & rayside, 1978), others argue that is does. hug (2001), for instance, finds that the costs of forming a party do matter. still others have shown that different aspects of the electoral system are of importance in order to explain the electoral success of new parties (hino, 2012). in regard to sociological explanations, harmel and robertson (1985) fail to find any significant effect of various social variables such as population size, religious and linguistic heterogeneity, income equality and levels of post-material sentiments within the population. hino (2012), on the other hand, shows how different socio-economic factors do affect different types of new parties in different ways. in essence, it is possible to identify two dominant theoretical perspectives from which new party research has been conducted: an institutional perspective and a sociological perspective. together these two perspectives contribute to the understanding of what causes new parties to emerge and enter the parliamentary arena. some use the concept political opportunity structure as an illustration of how hard or easy it is for outsiders to enter the political system. this concept originates from research into social movements and is a way to express the degree of ‘openness’ or ‘accessibility’ of a political system for political entrepreneurs (arzheimer & carter, 2006, p. 422). while some have a rather narrow definition of what should be included, others define it as a broader concept which includes a number of factors. here the concept is used to collect both institutional factors and sociological factors under the same heading in order to illustrate the conditions under which new parties attempt to enter parliament. the new party’s chances of parliamentary entry are consequently dependent on a number of factors outside the party. in extreme cases, the political opportunity structure is very unfavourable. one obvious example of such a barrier is a high electoral threshold. under other circumstances the political opportunity structure can be ‘a perfect breeding ground’ for new parties (mudde, 2007, p. 202). favourable possibilities for new parties arise when the institutional barriers are low, or when there is a widespread view that the established parties no longer represent the voters. a benign political opportunity structure can therefore be assumed to be a necessary condition for new parties to be elected to the national parliament. a word of caution is needed here. even though this article focuses on an analysis of the political opportunity structure, it is important to note that this factor alone european journal of government and economics 3(1) 8 does not determine whether a new party succeeds or fails. for a new party to succeed it needs to capitalise on a favourable political opportunity structure, an aspect that research has largely neglected so far. just as new parties are not entirely free to determine their own fate (lucardie, 2000, p. 180), friendly external conditions do not automatically translate into new party parliamentary entry. data and measures in order to better understand the extent to which the political opportunity structure influences the chances of new parties, this study aims to explain the variations present in new party parliamentary entry in elections to the national parliament in 18 western european countries between 1960 and 2010. the dependent variable, i.e. the number of new party parliamentary entries in an election, is defined as a first-time entry into the national parliament by a party that was not originally a member of the once-consolidated party system, defined here as the period prior to 1960 (cf. mair, 1999, p. 210). excluded from this population are merger parties insofar as at least one of the parties included was once a parliamentary party. the reason for this exclusion is that mergers differ in a significant way from split parties and genuinely new parties. while the latter are additional contestants in the electoral race, mergers can be seen as established parties that have simply been reorganised; in other words, old contestants in a new guise. hence, the products of mergers arguably have an easier passage than the split parties and the genuinely new parties in getting elected for the first time. institutional factors the institutional perspective highlights the rules of the political game. primarily, various aspects of the electoral system have been emphasised as being of great importance. in studies of new party success, the electoral system is also a reoccurring predictor that is included in the analyses (e.g. hino, 2012; hug, 2001; willey 1998). as early as the 1950s, duverger (1964) formulated what has since become known as duverger’s law, in which he stated that ‘the simple-majority single-ballot system favours the two-party system’ and ‘the simple-majority system with second ballot and proportional representation, favour multi-partism’ (pp. 217, 239). this would accordingly lead us to expect new parties to do better in countries with proportional electoral systems than in countries with majoritarian systems (harmel & robertson, 1985). however, since only two countries within the data set of this study, namely the uk and france, have majoritarian systems, a desirable level of variation would not be obtained if only a dichotomised variable had been used. empirically, it has also been noted that it is not necessarily the case that proportional electoral systems are more favourable than majoritarian systems from the perspective of small parties (taagepera, 2002). since the total number of votes required for a seat in a country with single-member constituencies can be rather small, a dichotomisation might be misleading. it is also conventional wisdom today that the nature of the electoral system is not solely dependent on the electoral formula (gallagher, 1991; lijphart, 1994; rae, 1967; taagepera & shugart, 1989). in particular, it has been emphasised that the district magnitude can be considered to be as important as explicit thresholds when evaluating the openness of a political system (lijphart, 1994, p. 12). there are also studies that have found that the district magnitude is positively related to the electoral success of new parties (willey, 1998). in other words we cannot, a priori, infer that a country with an explicit threshold has a more closed electoral system than one without an explicit threshold without also taking into account the district magnitude. furthermore, thresholds could be set both nationally and at constituency level. this might be of importance since, for instance, regionally based parties have better chances than parties with electoral bolin ● new party parliamentary entry in western europe 9 support evenly distributed across the country if the seat distribution is mainly based on electoral results at constituency level (bochsler, 2011). in order to circumvent these technicalities, various electoral system measurements have been developed in order to scrutinise their openness (ruiz-rufino, 2007, 2011; taagepera, 2002). in this study, taagepera’s (2002) nationwide threshold of representation, t, will be employed. this measure indicates the percentage of votes a party must obtain in order to have a 50 per cent chance of winning at least one seat. the threshold is calculated according to where m is the district magnitude and s the parliament size. since a country may have an explicit electoral threshold, this must of course be taken into account. thus, the effective threshold is set at the higher of these two values.1 a couple of additional institutional factors have been identified as potentially important for explaining new party success. firstly, it has been argued that the legislature–executive relations of a country matters (hauss & rayside, 1978; willey, 1998). in a presidential system the winner-takes-all character of the presidential election tends to spill over to the parliamentary elections. hauss and rayside (1978, p. 37) argue, for instance, that when ‘attention is focused on the single office of presidency, its zero-sum nature encourages the bipolarisation of the party system and makes it hard for weak parties … to compete effectively’, while meguid (2008, p. 8) asserts that ‘voters do not want to support a candidate whose party is perceived to have no reasonable chance of winning the presidency’. no presidential system exists in the data presented in this study; there are, however, some cases of semi-presidential systems. to test whether this influences the prospects for new parties, a dichotomous variable is included in the analysis to indicate whether the election is held in a semi-presidential system or not. there is also a reason to analyse whether the vertical separation of powers is important. willey (1998, p. 660) argues, for instance, that a new party needs less resources to succeed sub-nationally compared to nationally. in addition, local or regional electoral success may lead to a decreased psychological effect on voters. that is to say, the risk of casting a wasted vote becomes less prominent to the voters if the new party has a record of sub-national electoral success that shows that there is a real chance of parliamentary entry nationally as well (see also müller-rommel, 1998). to avoid losing too much information, the vertical separation of powers will not be measured according to the commonly applied dichotomy of unitary versus federal government. since it is generally acknowledged that both unitary states and federations may vary in the extent to which their political systems are decentralised, the level of decentralisation is measured according to the regional authority index (hooghe, marks, & schakel, 2010).2 1 in this context it is important to emphasise that electoral systems are complex systems and comparisons between countries are difficult. there are several different measurements available to estimate the properties of electoral systems. firstly, there are different measures of electoral system proportionality (gallagher, 1991; loosemore & hanby, 1971; rae, 1967). however, since these measures are indirectly dependent on whether a new party is elected or not, they are not suitable for this study. secondly, since seats are allocated based on the number of votes at the constituency level, it has also been suggested that the analysis should primarily be conducted at this level (bischoff, 2009; selb & pituctin, 2010). as the focus of this study is on national parliamentary entry, neither of these measures is suitable in this context. 2 schakel (2008) shows that the regional authority index is highly correlated with other measures of decentralisation. european journal of government and economics 3(1) 10 finally, two political system factors are also included in the analysis: turnout and voter volatility. regarding turnout, there are well-grounded reasons to expect the level to be of importance. there are, however, mixed opinions about how it might matter. some argue that small parties benefit from low turnout (kestilä & söderlund, 2007; van der eijk, franklin, & marsh, 1996), the reason being that low turnout is a consequence of widespread discontent. such discontent could be expressed either through abstention or a vote for a non-established party (kestilä & söderlund, 2007, p. 785). mathematically, low turnout also decreases the absolute number of votes needed to overcome the electoral threshold (cf. second-order elections, reif & schmitt, 1980). others argue the opposite (bernhagen & marsh, 2007; o’malley, 2008; cf. finseraas & vernby, 2014). this line of argument does, however, depart from the notion that abstention is a strategic choice exercised when the voter is not expecting his/her preferred party to win a sufficient numbers of votes (jackman, 1987). consequently, high turnout might signify that voters are expressing their political discontent (poguntke, 1996, p. 328). electoral volatility is also expected to promote new party parliamentary entry. this is perhaps best explained by a counterfactual. new parties will not win any votes if the established parties do not lose some votes. however, this expected correlation needs to be interpreted with some caution since the direction of correlation is not easily decided. in short, it might be hard to establish whether volatility causes new party parliamentary entry or whether it is a cause of the emergence of new parties. regardless of the direction of the correlation, it seems to be a factor that is of interest. to test it, pedersen’s (1979) index of net volatility, v, is employed: where pi,t is the share of votes for party p at election t and n is the total number of parties. sociological factors from a sociological perspective, political parties are regarded as a result of different groups requiring societal representation (harmel & robertson, 1985, p. 502). all other things being equal, it might be asserted that big countries therefore have a greater number of societal groups with political demands. hence, we might expect there to be a correlation between the size of the country and new party parliamentary entry (cf. tavits, 2006, p. 108). to test this claim, both population size and country area will be analysed. due to the skew distribution, both these variables were transformed using the natural logarithm (ln) (tabachnick & fidell, 2006, pp. 86-88). a second set of sociological factors deserving interest might be labelled socioeconomic or socio-cultural variables. there are, for instance, well-grounded arguments suggesting that new parties are facilitated by transformative events and societal unease. such events, it is believed, cause discontent among voters, who spawn a demand for something new. to test this assertion, the analysis also includes economic indicators such as unemployment rates, inflation rates and economic growth rates (e.g. arzheimer, 2009; müller-rommel, 1998). changes in the demographic composition might also increase the attraction of new parties. there is, for example, some support for the claim that a high level of immigration explains radical right party success (arzheimer, 2009; golder, 2003). the basic variables that were included in the statistical analyses, as well as references to the sources from which the information was taken, are listed in the appendix, in table a1. bolin ● new party parliamentary entry in western europe 11 new party parliamentary entry across space and time as this study deals with democratic politics in western europe, elections in greece, portugal and spain prior to 1980 are excluded from the analysis. in all, 18 countries are included in the study. in these countries, 238 elections were held between 1960 and 2010. the distribution of the dependent variable is shown in table 1. table 1. distribution of dependent variable, number of new party parliamentary entries in election number of new party entries number of cases share of cases, per cent 0 128 53.8 1 65 27.3 2 31 13.0 3 11 4.6 4 1 0.4 5 1 0.4 6 1 0.4 total 238 100 sources: mackie and rose (1991, 1997), political data yearbook 1993-2010 (katz et al., 1993-2010), parties and elections in europe (2011), nohlen and stöver (2010). the most common outcome is that no new party gained representation. new parties entered parliament in less than 50 per cent of the elections. in about 27 per cent of the elections, one new party entered the highest decision-making body, and there are an additional 13 per cent of cases in which two new parties passed the threshold of representation. the table also shows that it is extremely rare that more than three new parties entered the parliament in the same election. notably, six new parties entered the italian lower chamber in 1994.3 the other two cases were spain in 1986 (five new parties) and belgium in 1978 (four new parties). the number of new parties viewed in a comparative perspective is presented in table 2. overall, there were 175 new party parliamentary entries in the 238 elections held. in other words, on average, in three out of four elections just one new party was elected to parliament. considering the number of parties without previous experience of representation that were actually running for parliament, the chances for the average party must be considered slim. 3 this explosion of new parties in italy was a result of the implosion of the old party system, which was caused by serious corruption allegations in the so-called tangentopoli affair. the italian party system was more or less replaced by a new one over the course of a few elections (cotta & verzichelli, 2007, pp. 49-65). european journal of government and economics 3(1) 12 table 2. new party parliamentary entries per country, 1960-2010 country number of elections number of new party entries average number of new party entries italy 13 21 1.62 spain 8 11 1.38 belgium 16 21 1.31 netherlands 15 18 1.20 switzerland 12 14 1.17 uk 13 10 0.77 finland 13 10 0.77 greece 11 8 0.73 ireland 14 10 0.71 luxembourg 10 7 0.70 france 12 8 0.67 portugal 10 6 0.60 iceland 14 7 0.50 denmark 19 9 0.47 norway 13 6 0.46 sweden 16 4 0.25 austria 15 3 0.20 germany 14 2 0.14 total 238 175 0.74 note: correlation eta = 0.41 (p = 0.00) this result shows significant differences between the countries in this study. while there were 21 new party parliamentary entries in the lower chambers of both italy and belgium, corresponding events were extremely rare in the german bundestag. pds, together with die grünen, were the only two german parties who fought their way into the german lower house during the period 1960-2010. a measure of association was calculated in order to statistically test the relationship between country and the number of new party parliamentary entries. with an eta-value of 0.41 there is evidence of a medium-strong correlation, indicating that there is an independent country effect. there is also evidence of temporal variation (see table 3). while there was about one new party parliamentary entries in every second election in the 1960s, this increased to almost one new party per election in the 1980s. during the last decade, however, there has been a significant change in this trend and we are now almost back to the same levels as at the beginning of the period. compared to the spatial variation, the temporal variation is rather small (eta = 0.15). table 3. new party parliamentary entries per decade, 1960-2010 decade number of elections number of new party entries average number of new party entries 1960-69 38 21 0.55 1970-79 48 36 0.75 1980-89 53 49 0.92 1990-99 48 40 0.83 2000-10 4 51 29 0.57 total 238 175 0.74 note: correlation eta = 0.15 (p = 0.28) if the decrease in new party parliamentary entries is a trend or a coincidence remains to be seen. it should be noted, however, that the high levels in both the 1980s and the 1990s were, in part, the consequence of new party family formations. while the green parties were part of the 1980s’ wave of new parties (e.g. müller-rommel, 1998), the disparate family of anti-immigration parties won electoral success during the period 1990-2000. possibly, therefore, a completely new party family needs to be established if we are to see the same levels of new 4 since data were collected up until 2010, the last period is one year longer than the previous periods. bolin ● new party parliamentary entry in western europe 13 party parliamentary entries again. on the other hand, the green and antiimmigration parties make up only a minority of all new parties. from descriptive inferences, i now turn to the matter of explaining new party parliamentary entry. explaining new party parliamentary entry it has not been possible to collect data for all independent variables during the whole period of the study. as long as missing data are scattered randomly in the data matrix the generalisability is not affected to any great extent (tabachnick & fidell, 2006, p. 62). however, since the missing data largely pertain to specific years or countries and for a particular period of time, some measures have had to be introduced. for this reason, missing data regarding the variables for the regional authority index, unemployment, economic growth, inflation and immigration have been replaced with values for the closest available period. if two values have occurred equally close in time then the mean of these was used. to test whether these replacement values have had an impact on the results, all analyses were also conducted on the original data set. no relevant differences were observed. since no new parties reached the threshold for being admitted to parliament entries in more than 50 per cent of the elections, the dependent variable is transformed into a dichotomised variable where 0 indicates no new party elected and 1 indicates that at least one new party was elected. because of this, the analysis was carried out using multivariate logistic regression.5 since the data are time-series cross-section with a binary dependent variable, there is a risk that the outcome of the dependent variable is not independent of previous outcomes. such serial correlation might underestimate the true standard errors and thus may give rise to an overestimation of the strength of any correlation (beck, katz, & tucker, 1998, pp. 1260-1261). to capture this, a first lag of the dependent variable was included in the analysis. there seems to be no consensus about which measures best evaluate a logistic regression model (garson, 2012). however, in order to provide sufficient information to evaluate the plausibility of the interpretations made, this study follows the recommendations of peng et al. (2002). firstly, information on whether each model performs better than a model with no predictors, the so-called null model, is presented. this is done by presenting a -2 log likelihood and associated chi-square values. a significant chi-square value signals that the model is significantly better than the null model (tabachnick & fidell, 2006, p. 448). secondly, information is provided on how well the model performs using the nagelkerke r square. although this measure is not equivalent to the r-square value which is usually presented in ols regression, it is often used to provide an intuitive picture of how well the model explains the phenomenon under study. the nagelkerke r square is also supplemented with data on what proportion of the outcomes is correctly predicted. finally, the individual independent variables are evaluated through the presentation of coefficients, significant tests and odds ratios in order to give an idea of how much each factor affects the probability of new party 5 an alternative to this would be to use a count model in which the dependent variable is the number of times something has occurred (long, 1997, p. 217). since new party entrances are rather rare events, the average of the dependent variable is close to 0 and similar to a poisson distribution. however, a poisson regression model assumes that each event must be independent of other events (king, 1998, p. 50) and that the variance of the dependent variable is equal to its mean (dunteman & ho, 2006, p. 23; hoffmann, 2004, p. 104). since these requirements are not met, the negative binomial distribution is a more appropriate statistical tool (hoffmann, 2004, p. 12). in order to test the robustness of the logistic regressions, this regression model was also estimated. the result from this analysis provides no reason to change the overall conclusions drawn in this article. european journal of government and economics 3(1) 14 parliamentary entry. to illustrate the probabilities, the presentation of the analysis is also illustrated with two graphs. table 4 presents the results of three logistic regressions. in the first model, the institutional factors are tested. the second model tests the sociological factors, while the third model includes all independent variables. the first aspect that is worth noting is that while both the institutional and the full models are significantly different from the null model, the sociological model is not (chi square = 10.639, df = 7, p = 0.155). for this reason, the following presentation therefore focuses on the other two models. with nagelkerke r-square values of 0.16 and 0.18 and correctly predicted outcomes of 67.5 per cent (compared to 53.6 per cent in the null model) and 70 per cent (54.1 per cent) respectively, one might argue that the overall performance of the two models is rather moderate. to fully understand new party parliamentary entry, we might therefore conclude that other important factors exist, factors which are not included in the models. the effective threshold and volatility both have significant and independent effects on new party parliamentary entry. while this is true for both the institutional model and the full model, it is also possible to conclude that turnout is significant in the latter. with a negative coefficient, support is given to the argument that increased turnout reduces the likelihood of new party parliamentary entry. it is also important to note that none of the sociological predictors reach the level of significance. the odds ratios illustrate the importance of the individual explanatory factors for the probability of a new party entering parliament. in both the institutional and the full models the odds ratio for the effective threshold is about 0.7. this means that the odds of at least one new party entering parliament are reduced by almost 30 per cent and there is an increase in the effective threshold of one percentage point. the odds ratios for volatility and voter turnout indicate that the effect of these variables is smaller. the odds for new party parliamentary entry are expected to increase by about 8 per cent if volatility is increased by one unit. the corresponding change in the odds is less than minus 3 per cent units for a 1 per cent unit increase in turnout. small numbers, however, are not necessarily the same as marginal importance. in order to capture fully the extent to which these factors influence the chances of new party parliamentary entry, graphical presentation is helpful. bolin ● new party parliamentary entry in western europe 15 table 4. logistic regression: new parliamentary entry institutional model sociological model full model b (s.e.) odds ratio b (s.e.) odds ratio b (s.e.) odds ratio effective threshold -0.326** (0.138) 0.722 -0.307** (0.155) 0.735 executive -0.141 (0.487) 0.868 0.278 (0.541) 1.321 regional authority index 0.001 (0.017) 1.001 0.024 (0.025) 1.025 turnout -0.020 (0.013) 0.980 -0.024* (0.014) 0.976 volatility 0.076*** (0.020) 1.079 0.076*** (0.021) 1.079 population (ln) 0.086 (0.122) 1.090 -0.115 (0.173) 0.891 area (ln) -0.210 (0.135) 0.811 -0.144 (0.163) 0.866 unemployment rate 0.055 (0.034) 1.057 0.042 (0.036) 1.043 economic growth rate 0.016 (0.050) 1.016 0.040 (0.053) 1.041 inflation 0.023 (0.018) 1.023 0.022 (0.019) 1.023 net migration 0.001 (0.033) 1.001 -0.001 (0.035) 0.999 lag dependent variable 0.114 (0.292) 1.121 0.523* (0.272) 1.687 0.123 (0.299) 1.130 constant 1.208 (1.089) 1.151 (1.316) 3.336* (1.975) -2 log likelihood 296.710 312.043 286.721 chi2 30.622*** 10.639 34.735*** nagelkerke r2 0.162 0.059 0.185 correct predicted (intercept only) 67.5 (53.6) 59.4 (54.3) 70.0 (54.1) n 237 234 233 note: *** p<0.01 ** p<0.05 * p<0.10 perhaps the easiest way to grasp an understanding of the significance of odds ratios is to convert them to probabilities and illustrate them in line graphs. figure 1 and figure 2 present the predicted probabilities that at least one new party enters parliament following the election. the graphs are derived from estimates in the full model, and each variable, apart from the two analysed in each figure, is held constant at its mean value. figure 1 shows the plots for the predicted probability of new party parliamentary entry for three different levels of electoral volatility as well as for the effective threshold. the graph shows that the predicted probability of new party parliamentary entry when the electoral volatility is held at its mean (12 per cent) is about 70 per cent if no electoral threshold exists at all. with a mean effective threshold of 2.1 per cent the predicted probability of a new party parliamentary entry is about a 56 per cent chance. the figure also presents the predicted probabilities for the minimum and maximum values of electoral volatility. european journal of government and economics 3(1) 16 figure 1. predicted probabilities of new party parliamentary entry; effective threshold and volatility in figure 2, three levels of turnout are plotted against effective thresholds. the line for the mean turnout is identical to the line for mean electoral volatility in figure 1. the graph illustrates that low turnout is expected to increase the chances of new party parliamentary entry. actually, with a minimum turnout (42 per cent) and an effective threshold below 1.5 per cent, there is a predicted chance of more than 80 per cent for a new party parliamentary entry. however, these low levels of turnout are rare. since turnout is somewhat unevenly dispersed (median = 82.8 per cent) it might therefore be interesting to compare the lines of the mean and the maximum turnout. here, it can be observed that the differences between these lines are rather small. this indicates that the actual impact of turnout, albeit significant, is rather marginal. bolin ● new party parliamentary entry in western europe 17 figure 2. predicted probabilities of new party parliamentary entry; effective threshold and turnout the overall impression of the statistical analysis is that the institutional perspective can, in part, explain new party parliamentary entry, while the sociological perspective is less supported in this study. in the final section these results are discussed and problematised. concluding remarks the party systems of western europe are no longer frozen. ever since the 1960s, new parties have been making inroads into national parliaments. the situation, however, is not the same in all countries. whereas countries such as italy and belgium have experienced a veritable explosion of new parties in their national parliaments, other countries, most notably germany, almost never experience new party parliamentary entry. while there might be many reasons for why this variation exists, this article has primarily dealt with the environment in which new parties attempt to win representation. under the epithet of political opportunity structure, theoretically derived explanatory factors have been tested from both an institutional and a sociological perspective. the results are mixed. while the institutional perspective provides us with some explanatory power, the sociological perspective contributes less to our understanding. the finding that the electoral system is important is hardly surprising and is well in line with prior research on related research questions such as what accounts for new party formation and electoral success (e.g. hino, 2012; willey, 1998). this finding is also of practical importance for policymakers. however, since constitutional politics, like any other policy area, is decided by the established parties, perhaps we should not expect this knowledge to be of much help for fledgling political parties. much less so if we are to believe the abundance of literature on party cartelisation (e.g. katz & mair, 1995, 2009). as expected, there is also a strong relationship between electoral volatility and the occurrences of new party parliamentary entries. perhaps more revealing is the fact that new parties seem to prosper when there is low turnout. while this has been suggested in previous studies, there are also many that have argued the opposite. from a new party perspective this finding might open up avenues of potential success, since european journal of government and economics 3(1) 18 low expected turnout, typical in so-called second-order elections, would enthuse full mobilisation. there are several potential reasons for the poor results from the sociological perspective. firstly, there might of course be methodological issues of concern: perhaps important explanatory factors have been omitted. secondly, there is always a risk that secondary data fails to meet the strongest criteria of comparability. however, and perhaps most importantly, in the light of this study, the weak support for the sociological perspective suggests that there are few such factors that influence all new parties in the same way. while high levels of immigration might have an impact on the vote for anti-immigration parties, the same might not be true for, say, green parties. also, while many argue that far right parties would prosper during an economic downturn, recent analysis suggests that they have not experienced any uniform electoral upswing despite the major financial crisis from 2008 onwards (mudde, 2010). it can be ascertained that, to some extent anyway, one of the aims of this paper, namely to find generic explanations for new party parliamentary entry, proved to be difficult to achieve. therefore, one of the conclusions of this study is that although new parties share some similarities, we still need to differentiate between different groups in order to fully understand when and why they manage to gain representation. furthermore, and regardless of the findings in this article, the political opportunity structure is just one side of the story. for new party parliamentary entry to occur, agency is also necessary and should therefore be taken into account (bolin, 2012; bolleyer 2013). recent studies have, for instance, suggested that new party success is also dependent on both the actions taken by the established parties (e.g. meguid, 2008) and the resources available to the new party (e.g. lucardie, 2000). of course, it is also important to note that new parties differ in terms of the extent to which they actually aim for parliamentary entry. while some parties are intrinsically vote-seeking and regard parliamentary entry as crucial, others primarily aim to put new or non-politicised issues on the agenda (cf. strøm, 1990). although there seems to be little to suggest that such goals do vary systematically between different countries, it is important to acknowledge that strategic considerations on behalf of new parties are also of relevance if we are to fully grasp why specific parties do or do not attain parliamentary representation. so, while this article has furthered our understanding of the importance of the external environment, more work needs to be done in order to gain systematic knowledge of the actions taken by new parties and to what extent these parties can be masters of their own destiny. references armingeon, klaus, david weisstanner, sarah engler, panajotis potolidis, marlène gerber and philipp leimgruber (2011) ‘comparative political data set i 19602009’, url (consulted 16 november 2011): http://www.ipw.unibe.ch/content/team/klaus_armingeon/comparative_political_data _sets/index_eng.html. arzheimer, kai (2009) ‘contextual factors and the extreme right vote in western europe, 1980–2002’, american journal of political science, 53(2): 259–275. arzheimer, kai and elisabeth carter (2006) ‘political opportunity structures and right-wing extremist party success’ european journal of political research, 45(3): 419-443. beck, nathaniel, jonathan n.kat and richard tucker (1998) ‘taking time seriously: time-series-cross-section analysis with a binary dependent variable’, american journal of political science, 42(4): 1260-1288. bolin ● new party parliamentary entry in western europe 19 bernhagen, patrick, and michael marsh (2007) ‘the partisan effects of low turnout: analyzing vote abstention as a missing data problem’, electoral studies, 26(3): 548-560. bischoff, carina s. (2009) ‘national level electoral thresholds: problems and solutions’, electoral studies, 28(2): 232–239. bochsler, daniel. (2011) ‘it is not how many votes you get, but also where you get them. territorial determinants and institutional hurdles for the success of ethnic minority parties in post-communist countries’, acta politica, 46(3): 217–238. bolin, niklas (2012) målsättning riksdagen. ett aktörsperspektiv på nya partiers inträde i nationella parlament. umeå: umeå university. bolleyer, nicole (2013) new parties in old party systems. persistence and decline in seventeen democracies. oxford: oxford university press. cotta, maurizio, and luca verzichelli (2007) political institutions in italy. oxford: oxford university press. dunteman, george. h., and moon-ho r ho (2006) an introduction to generalized linear models. thousands oaks: sage. duverger, maurice (1964) political parties. their organization and activity in the modern state. london: methuen. finseraas, henning and kåre vernby (2014) ’a mixed blessing for the left? early voting, turnout and election outcomes in norway’, electoral studies, 33: 278-291. gallagher, michael (1991) ‘proportionality, disproportionality and electoral systems’, electoral studies, 10(1): 33-51. garson, g. david (2012) logistic regression: binomial and multinomial. asheboro, nc: statistical associates publishers. golder, matt (2003) ‘explaining variation in the success of extreme right parties in western europe, comparative political studies, 36(4): 432-466. harmel, robert, and john. d. robertson (1985) ‘formation and success of new parties a cross national analysis’, international political science review, 6(4): 501-523. hauss, charles, and david rayside (1978) ‘the development of new parties in western democracies since 1945’, in louis maisel and joseph cooper (eds) political parties: development and decay. beverly hills: sage. hino, airo (2012) new challenger parties in western europe. a comparative analysis. london: routledge. hoffmann, john p. (2004) generalized linear models. an applied approach. boston: pearson education. hooghe, liesbeth, gary marks and arjan. h. schakel (2010) the rise of regional authority: a comparative study of 42 democracies (1950-2006). london: routledge. hug, simon (2001) altering party systems strategic behavior & the emergence of new political parties in western democracies. ann arbor: the university of michigan press. jackman, robert w. (1987) ‘political institutions and voter turnout in the industrial democracies’. american political science review, 81(2): 405-424. katz, richard s., hans keman, ruud koole, peter mair, edward. c. page and ingrid van biezen, (eds) (1993-2010). political data yearbook: 1993-2010. european journal of government and economics 3(1) 20 katz, richard s., and peter mair (1995) ‘changing models of party organization and party democracy. the emergence of the cartel party’, party politics, 1(1): 528. katz, richard s., and peter mair (2009) “the cartel party thesis: a restatement”, perspectives on politics, 7(4): 753-766. kestilä, elina and peter söderlund (2007) ‘subnational political opportunity structures and the success of the radical right: evidence from the march 2004 regional elections in france’, european journal of political research, 46(6): 773796. king, gary (1998) unifying political methodology.the likelihood theory of statistical inference. ann arbor: university of michigan press. knutsen, oddbjørn (2011) ‘western europe: parties, voters and elections’, url (consulted 17 november 2011): http://folk.uio.no/stvok1/. lijphart, arend (1994) electoral systems and party systems. oxford: oxford university press. lipset, seymour m., and stein rokkan (1967) ‘cleavage structures, party systems, and voter alignments: an introduction’, in seymour. m. lipset and stein rokkan (eds), party systems and voter alignments. new york & london: free press, pp. 1-64. long, j. scott (1997) regression models for categorical and limited dependent variables. thousand oaks: sage. loosemore, john, and victor. j. hanby (1971) ‘the theoretical limits of maximum distortion: some analytic expressions for electoral systems’, british journal of political science, 1(4): 467-477. lucardie, paul (2000) ‘prophets, purifiers and prolocutors’, party politics, 6(2): 175-185. lundell, krister and lauri karvonen (2011) a comparative data set on political institutions. åbo: åbo akademi university. mackie, thomas t. and richard rose (1991) the international almanac of electoral history. third edition. london: macmillan. mackie, thomas t. and richard rose (1997) a decade of election results: updating the international almanac. glasgow. centre for the study of public policy, university of strathclyde. mair, peter (1999) ‘new political parties in established party systems: how successful are they?’ in erik beukel, kurt k. klausen and poul e. mouritzen (eds) elites, parties and democracy. odense: odense university press, pp. 207-224.. meguid, bonnie m. (2008) party competition between unequals. strategies and electoral fortunes in western europe. cambridge: cambridge university press. mudde, cas (2007) populist radical right parties in europe. cambridge: cambridge university press. mudde, cas (2010) ‘the populist radical right: a pathological normalcy’, west european politics, 33(6): 1167-1186. müller-rommel, ferdinand (1998) ‘explaining the electoral success of green parties: a cross-national analysis’, environmental politics, 7(4): 145-154. nohlen, dieter and philip stöver (eds) (2010) elections in europe: a data handbook. baden-baden: nomos. bolin ● new party parliamentary entry in western europe 21 o’malley, eoin (2008) ‘turn out to turf out?: effects of changes in election participation rates on election outcomes’, the open political science journal, 1(1): 31-37. oecd (2010a) ‘oecd employment and labour market statistics’, url (consulted 14 november 2011): http://www.oecd-ilibrary.org/employment/data/oecdemployment-and-labour-market-statistics_lfs-data-en. oecd (2010b) oecd factbook 2010: economic, environmental and social statistics. oecd publishing. oecd (2011) ‘employment and labour markets: key tables from oecd’, url (consulted 16 november 2011): http://www.oecdilibrary.org/employment/unemployment-rate-2011_unemp-table-2011-1-en. parties and elections in europe (2011), url (consulted november-december 2011): http://www.parties-and-elections.de/. pedersen, mogens n. (1979) ‘the dynamics of european party systems: changing patterns of electoral volatility’, european journal of political research, 7(1): 1-26. peng, chao-ying j., kuk. l. lee and ingersoll, gary m. (2002) ‘an introduction to logistic regression analysis and reporting’, journal of educational research, 96(1): 3-14. poguntke, thomas (1996) ‘anti-party sentiment conceptual thoughts and empirical evidence: explorations into a minefield’, european journal of political research, 29(3): 319-344. rae, douglas w. (1967) the political consequences of electoral laws. new haven: yale university press. reif, karlheinz and hermann schmitt (1980) ‘nine second-order national elections a conceptual framework for the analysis of european election results’, european journal of political research, 8(1): 3-44. ruiz-rufino, rubén (2007) ‘aggregated threshold functions or how to measure the performance of an electoral system’, electoral studies, 26(2): 492-502. ruiz-rufino, rubén (2011) ‘characterising electoral systems: an empirical application of aggregated threshold functions’, west european politics, 34(2): 256-281. rydgren, jens (2003) the populist challenge: political protest and ethnonationalist mobilization in france. new york: berghahn books. schakel, arjan h. (2008) ‘validation of the regional authority index’, regional & federal studies, 18(2-3): 143-166. selb, peter and sandrine pituctin, (2010) ‘methodological issues in the study of new parties’ entry and electoral success’, party politics, 16(2): 147-170. strøm, kaare (1990) ‘a behavioral theory of competitive political parties’, american journal of political science, 34(2): 565-598. taagepera, rein (2002) ‘nationwide threshold of representation’, electoral studies, 21(3): 383-401. taagepera, rein, and matthew s. shugart (1989) seats & votes. the effects & determinants of electoral systems. new haven & london: yale university press. tabachnick, barbara g. and linda s. fidell, (2006) using multivariate statistics. fifth edition. boston: allyn and bacon. tavits, margit (2006) ‘party system change. testing a model of new party entry’, party politics, 12(1): 99-119. european journal of government and economics 3(1) 22 van der eijk, cees, mark franklin and michael marsh (1996) ‘what voters teach us about europe-wide elections: what europe-wide elections teach us about voters’, electoral studies, 15(2): 149-166. ware, alan (1996) political parties and party systems. oxford: oxford university press. willey, joseph (1998) ‘institutional arrangements and the success of new parties in old democracies’, political studies, 46(3): 651-668. world bank (2011) ‘world development indicators’, url (consulted 16 november 2011): http://data.worldbank.org/data-catalog/world-development-indicators. bolin ● new party parliamentary entry in western europe 23 appendix table a1. variables and sources variable sources number of new party parliamentary entries based on election results presented in mackie and rose (1991, 1997), political data yearbook 1993-2010 (katz et al., 1993-2010), nohlen and stöver (2010), parties and elections in europe (2011) effective threshold lundell and karvonen (2011), own calculations executive lundell and karvonen (2011) regional authority index hooghe et al. (2010) turnout lundell and karvonen (2011) volatility knutsen (2011) population lundell and karvonen (2011) country area lundell and karvonen (2011) unemployment rate armingeon et al. (2011), oecd (2010a, 2011) inflation world bank (2011) economic growth world bank (2011) net migration oecd (2010b) european journal of government and economics volume 5, number 2 (december 2016) issn: 2254-7088 104 switching costs in the european postal service. are there any solutions? carlos pateiro-rodríguez, universidade da coruña javier prado-domínguez, universidade da coruña jesús m. garcía-iglesias, universidad de extremadura josé m. barreiro-viñán, universidade da coruña abstract this article examines the costs of switching that may exist in the european postal sector, where it is carried out an ambitious process of opening to competition since 1997. inadequate regulation of the access to some elements of postal infrastructure or services within the scope of the universal postal service exists. this article proposes adaptations to ensure transparent and non-discriminatory access conditions to elements of postal infrastructure in line with the sectorial directives aimed at strengthening competition in the long term in the postal market. the proposed adaptations focus on services such as postcode systems, address databases, post office boxes, delivery boxes, re-direction and return to sender services. all of them can help reduce the switching cost and thus strengthen competition. keywords liberalization; universal postal service; switching costs; postal network. jel classification l87; m31; l32; l51. european journal of government and economics 5(2) 105 introduction prior to its liberalization, the european postal sector was characterized by typical monopolistic characteristics: it was a market where a dominant provider (usually publically owned) controlled close to 100 per cent of the market share. in response to this situation, three directives were introduced between 1997 and 2008. the three directives were aimed at promoting the opening of the european postal market. the three postal directives maintain the universal postal service (ups), from which the universal service obligations (usos) are derived, beyond the full market opening (fmo). keeping the usos may well put the universal service provider (usp) economic equilibrium in danger, and hence, the directives design mechanisms in order to finance the additional costs of such usos: (i) a mechanism to compensate the undertaking concerned from public funds or (ii) a mechanism for the sharing of the net costs of the universal service obligations between providers of services and/or users. the ups extends to a set of high-quality postal services with which all users are permanently provided at an affordable price throughout the territory. the usp must assume the usos. these can work as a retention mechanism on the part of providers, and can strengthen switching costs because many of the customers wishing to switch providers need to return to their incumbent provider for some aspect of their mail services. this is due to the potentially incomplete territorial network coverage of an entrant who has not offered ups or due to inefficiencies in the access regulations of the postal network. eighteen years after the first directive, the opening of the postal market in the main eu states has not reached the levels expected in the ambitious liberalization process. the usps that existed before the liberalization process had still retained a high market share, approximately 90 per cent, in terms of main postal products. furthermore, as pointed out by jonsson and selander (2006) and pateiro et al (2013a; 2013b), some entry attempts have only reached very low market shares or even failed. though the markets will be open to competition, the lack of legal restrictions to competition does not mean that competition will be present (okholm et al 2010: 80). for example, although the markets of estonia, finland, germany, spain, sweden, and the united kingdom (uk) are fully liberalized legally, the actual competition level in these countries is low or has been undisclosed. the dominant provider continues to hold dominance in correspondence and direct mail segment (more than 90 per cent) in most of the european markets: germany, hungary, iceland, luxembourg, netherlands, spain, portugal, slovenia, and slovakia. the most competitive markets are unaddressed delivery and parcel (about 50 per cent). historically, these are the markets where competition has been allowed for the longest period of time. are there any exceptions? a parliamentary decision of 1992 ended with the letter mail monopoly of the incumbent operator swedish post (posten ab). according to jonsson and selander (2006: 364), the entry of citymail, in 1991, was an important trigger for the liberalization. city mail’s bumpy road towards being established as the world’s first entrant with a significant portion of a domestic letter mail market has included two bankruptcies and several changes in ownership. according to the findings of cohen et al (2004), citymail would not have been able to attract investors if its original business plan had been analyzed correctly. the reasons for this outcome may stem from the impact of new communication technologies on traditional postal communication (fève et al 2010) and the current economic crisis (martin et al 2012; trinkner and grossmann 2006). in this context, a declining traditional postal market will not attract a large number of new entrants. in view of the introduction of substitute electronic communication and the opening of the market, the council of the european union recommended diversifying the activities of ups providers by providing electronic business services or other information services. many european ups providers, undisputed leaders in the pateiro-rodríguez, prado-domínguez, garcía-iglesias, and barreiro-viñán ● switching costs in the european postal service 106 declining traditional post, have directed their strategies toward the parcel sector and e-commerce, where its market share was relatively low. such providers are moving towards a wider range of not strictly postal products to make ensure the profitability of postal network and their human and technical resources. in addition to the above factors, particularly the impact of new communication technologies on traditional postal communication and the current economic crisis, which have made entering the postal sector less attractive, the authors can also include provider switching costs as an entry barrier. it is difficult for customers to switch providers due to increasing switching costs and a lack of information on existing alternatives (patterson and smith 2003; sharma and patterson 2000; white and yanamandram 2007). furthermore, an established relationship, which is inherent in a historically monopolized postal model, may generate shared values, a stronger identification between the parties, and added profits. these factors act as an entry barrier to competitors (reinartz and kumar 2003; deligonul et al 2006). finally, the benefit of ups demands conditions of permanence, ubiquity and frequency, which accentuate the consumer attraction, as opposed to the potential weakness of an entrant who offers incomplete services in the market. this particular characteristic of the regulated postal market, with universal service obligations, encourages customers to stay with their present provider. there is a set of elements of the postal network and some services to which access can present limitations. among others, the post office boxes, delivery boxes, postcode system, address database, information on change of address, redirection service and return to sender service. the member states shall ensure that transparent, non-discriminatory access conditions are available. access to these elements of the postal infrastructure or services represents real switching costs. the fourth section addresses each and solutions to reduce costs are proposed. after this introduction, the paper is structured as follows: the second section present a summary of the general regulatory framework for the postal sector in the european union since 1997. the third section addresses the issue of the switching costs due to its potential impact on competition in the postal sector. in the fourth section, the authors analyze access to specific postal network elements, such as access to po (post office) boxes, access to postcodes, redirection of mail service, change of address, return to sender service, and access to letterboxes. for each of them the authors propose answers that can help mitigate the switching costs. in the fifth and sixth sections, in this order, the costs of information and search for available choices and termination of a long-term relationship with the incumbent are discussed. finally conclusions and references are presented. liberalization regulatory framework in the european postal sector three postal directives regulate the process of liberalization of the european postal market, as follows: the first postal directive is 97/67 ec stated that measures to ensure the gradual and controlled liberalization of the market and to secure a proper balance in doing so were necessary to guarantee the obligations and rights of universal service providers (usp), and the free provision of services in the postal sector. the universal service obligations consist of the permanent provision of a service of specified quality at all points in the national territory at affordable prices for all users. quality, ubiquity, permanence and affordability are the characteristics of ups7. to the extent necessary to ensure the maintenance of ups, the directive 7 for other features of the us see d 97/67, articles 5-6. european journal of government and economics 5(2) 107 (see article 7) creates an area reserved to universal service provider on a part of the postal activity that includes a high proportion of letters. the parameters in terms of weight and price were successively reduced until they disappeared in 2011. the second is the 2002/39 ec directive. according to this directive, member states may continue to reserve services to a universal service provider. at the same time it proposes, if appropriate, the date of 2009 for the full accomplishment of the postal internal market. the third is the 2008/6 ec directive. this directive then stated that an fmo would occur by 2009 (this actually occurred in 2011). it also removed the market share (the reserved area) that directive 97/67 ec had exclusively ascribed to usp8 and stated that the progressive and gradual opening of postal markets to competition had provided usp with sufficient time to implement the necessary modernization and restructuring measures required to ensure their long-term viability under new market conditions. the directive also required member states to adapt their regulatory systems to a more open environment, in order to improve social welfare (crew and kleindorfer 2006). each member state has adapted its internal regulations based on laws of their parliaments and provisions of the respective governments. in turn, the universal service providers adapted their organizational structures and operational frameworks. provider switching costs customer dissatisfaction diminishes a postal service provider’s customer base, forces the operator to rely on a more volatile customer mix, and erodes the firm’s reputation (levesque and mcdougall 1996). this is particularly true in network industries, as the postal service. while some customers take no action at all when dissatisfied, others may take action such complaining directly to the provider about the service or switch suppliers. customers can feel compelled to continue their relationship with a service provider due to the user’s perceptions of high switching costs (porter 1980) even if the relationship is not a satisfactory one. the may incur three types of costs if they switch: i) financial costs derived from the switching process; ii) information and search costs on available alternatives, and iii) the termination cost of ending a long relationship with a regular provider. switching costs are defined as the customer’s perceptions of the additional costs of terminating the present relationship and finding another provider (patterson and smith 2003: 108). switching costs constitute any factor that makes it difficult to or increases the price of a customer switching providers (valenzuela et al 2005: 243). when the customer leaves their usual provider, they incur two types of loss: i) the loss of the advantages the company had created with its marketing strategy of relationships producing social and economic benefits and empathy, and customization costs and ii) the assumption of direct financial, time and effort costs. these are the two types of positive and negative barriers to switching as stated in the literature on switching costs (jones et al 2007; valenzuela et al 2005). table 1 summarizes the switching cost classifications of burnham et al (2003) and jones et al (2002). the authors have adapted this table assuming that the customer may change the postal service provider. 8 an operator such as this will be a designated usp or an incumbent; this term has become widespread in regulatory literature. pateiro-rodríguez, prado-domínguez, garcía-iglesias, and barreiro-viñán ● switching costs in the european postal service 108 table 1. classification of switching costs burnham, frel, mahajan (2003) examples financial costs loss of volume or length of relationship discounts (+)a, payments for breaking the contract with the present operator (-)b, cost of new contracts and guarantees (-), mail redirection costs (-), return to sender costs (-). process costs time cost to find a new postal operator (-), and learning effort to adapt to a new system of identification, containerization, deposit, collection and invoicing of the postal deliveries (-). costs to learn new routines reconfigure hardware and software to be compatible (-). relationship costs breakdown of the affective bonds created between the customer management and employees and the postal operator employees or loss of the brand relationship (+). loss of the positive effects on our brand generated by a job well done by the incumbent (+). costs to reestablish communication networks with other users (-) jones, mothersbaugh, beatty (2002) examples continuity costs loss of the profits guaranteed by the length of the relationship with the present postal provider: discounts in volume and/or the composition of deliveries destination (+), permanence (+), perception of a probable worsening of the postal service provided by the entrant operator (-), perception of the damage which a deficient postal service can cause to our postal communications with our own customers (-). risk of loss of customers, both current and potential (-). learning costs loss of searching time of other attractive operators (-), adaptation costs to new preparing, packing and deposit systems of postal deliveries (-), adaptation costs to new computing supports for the identification of the postal deliveries and management costs of the new operator virtual office (-). adaptation costs to the opening hours (-). adaptation costs in our resources to transport logistics of the new postal operator (-). sunk costs previous costs generated to establish the relationship with our present provider: acquisition of containerization, load and unload and delivery storage elements, computer programs for invoicing, documents adapted to the operator methodology (+). adaptation costs in transport elements (-). adaptation costs to loading and unloading systems of the new operator (-). other costs (-). (+) positive barrier to switching; (-) negative barrier to switching. source: burnham et al (2003) and jones et al (2002); modify and adapted by authors part of the economic literature assumes that switching costs are anti-competitive. klemplerer (1995) argues that switching costs generally raise prices and create deadweight losses of the usual kind in a closed oligopoly and may also discourage new entry and so further reduce the market’s competitiveness. because switching costs tend to reduce competition, firms may dissipate more social surplus in costly activities to create them. in the same vein, armstrong and sappington (2006: 350) state that reduce customer switching and search costs is the purpose of a policy of liberalization that “can stimulate vibrant, enduring competition that may ultimately substitute for regulatory oversight”9 insofar as consumers are able to identify and secure postal service provision by another provider, the usp or incumbent will be compelled to offer the lowest price and/or the highest quality, and competition will be reinforced. however, the presumption that switching costs are anti-competitive is misplaced as a general statement. fabra and garcía (2015), in an analysis based upon a continuous-time dynamic equilibrium model in which switching costs are independent and identically distributed across consumers and over time, find that when firms cannot price-discriminate between old and new consumers, the effects of switching costs on prices critically depends on the degree of market share asymmetries. in the case that the market shares become sufficiently symmetric, price competition turns fiercer, and in the long-run, switching cost have a procompetitive effect. however, this result can hardly be in the postal sector, where 9 see prado and pateiro (2010) for the application of policies to the postal sector as recommended by armstrong and sappington (2006). european journal of government and economics 5(2) 109 the usp that existed before the liberalization process have still retained a high market share, as indicated above. in response to the entry of competitors in this sector, the usp can adopt different strategies: (i) the incumbent tries to defend its absolute market power by creative renegotiation of terms of agreements with its customers or by offering price cuts in the competitive segment of the market,10 (ii) the incumbent intends to finance price cuts in the competitive area by increasing prices in the non-competitive area;11 (iii) advantages bound to exclusive provider contracts; (iv) a pricing policy in profitable areas to better combat cream skimming practices.12 the costs derived from such maintenance strategies can be considered as customer retention costs. thus, the usp will support retention costs in the same way that the customer or entrant support the switching costs. in the third section the authors analyze typical provider switching costs. a clear example of a provider switching cost in telephone service is the cost of not being able to transfer one’s current telephone number where portability13 is not guaranteed. ‘absent such number portability, a consumer might be reluctant to switch suppliers because the switch would require the consumer to inform all friends and associates of her new number or reprint business cards, for example’ (armstrong and sappington 2006: 351). shi et al, (2006) studied the effects of number portability in the cellular phone industry. viard (2007) studied the effect of portability on competition in the phone market. similarly, in the postal service, switching costs could be charged if each new entrant adopted a different postcode system, or if the incumbent and the competitor did not have some form of cooperation (a reciprocal access) for the delivery of mail to recipients that have signed a po box with any of the operators or for delivery in the same home delivery boxes. in the postal service there is a series of matters which would probably cause important switching costs, both in terms of financial resources and time spent. in addition to access to postcode databases or access to po boxes, there are other issues that can generate switching such as information on change of address, redirection of mail service, return to sender service or access to letterboxes. network and databases access this section analyzes access to some elements of the postal network, as follows: access to po boxes, access to postcodes, redirection of mail service, change of address, return to sender service, and access to letterboxes. access to po boxes delivery to po boxes is an alternative to home delivery. clients choose this delivery either because they want to have their mail delivered in the morning earlier than at the regular postman’s visit, or because they do not want it delivered at home for whatever reason. the rental of the box is charged to the client-recipient. 10 the sweden usp posten ab and other european usps followed this strategy at the beginning of the 1990s. many of these contracts were annulled or modified by competition courts. 11 this strategy can lead a dynamic process of graveyard spiral. see crew & kleindorfer (2005), prado & pateiro (2012). 12 cream skimming practices in the postal sector are common in profitable urban areas. 13 portability is the guarantee that the customer will keep the same telephone number when they switch service provider. pateiro-rodríguez, prado-domínguez, garcía-iglesias, and barreiro-viñán ● switching costs in the european postal service 110 the address on the envelope specifies the name of the addressee and the number of the box, as well as the postcode to identify the delivery unit of destination. if the consignor changes the provider, the new operator needs to enter the incumbent´s premises in order to leave the deliveries into the box appointed for the addressee. the competitor cannot inject its mail anywhere in the entrance of the delivery unit: this would imply problems with regard to contracting and transferring responsibility. access for all competitors and the incumbent to the physical space of the po boxes is a complex issue. in france, political advisors expressed the idea about building a private corridor behind the po boxes locked with a key, which would be made available to all licensees as well as to the incumbent. this proposal was abandoned because of the great technical difficulty and prohibitive costs. therefore, the most practical solution is handing over the mail to the incumbent for loading the po boxes. figure 1 represents the case in which an entrant injects the postal items in the incumbent distribution center for delivery to po boxes. in this case the entrant does not install po boxes in their locale. figure 1. entrant access to p.o box of the incumbent source: the authors competitors can place po boxes in their offices in the same way as the incumbent, but there is no sense in addressees signing the po box service with each competitor. access to postcodes access to postcodes is not identified by most national regulatory authorities (nras) as a bottleneck issue calling for regulatory intervention. thanks to new technological means, the use of gps coordinates coding each address is probably a smarter way to proceed (fratini et al 2010). however, the basic discount appears when the clients agree to have to present their mail sorted by postcode (work-sharing discounts in the upstream access), allowing the incumbent to avoid sorting. if the client changes the service provider, he could obtain a similar work-sharing discount. but if the incumbent changes the postcode system, the client incurs switching cots because the adaptation of his sorting system by postcode is necessary. to defend the interests of customers and to strengthen long-term competition, the mandatory access to postcodes could be imposed in order to allow competitors to rightly deliver. it is a question of avoiding the postcode operator in each member state can freely modify the postcode system. in sweden, postcode changes are handled by a postcode council with representatives of posten ab, city mail, the confederation of private postal colection sortingadmission sorting transport transport distribution p.o box  delivery colection admission incumbent network entrant network access downstream e1 european journal of government and economics 5(2) 111 operators and government agencies. the regulator can put system changes on hold. in the uk, royal mail is committed to a policy of no change wherever possible. postcode changes are only made if it results in a major benefit to the service they provide and new postcodes work in tandem with the old ones for an overlapping 12-month period. in 2015 the partnership on transport and logistics companies working in spain submitted a report to the ministry for public works in order to modify the spanish postcode (from 5 digits to 8 digits). the companies argue the economic and environmental profits stemming from the new postcode. the switching costs in the postcode to users and operators must be weighed up against the expected profits. in any case, it is necessary that the postcode be unique. in that respect, the change of the code would be neutral in terms of switching costs. redirection of mail the information on redirection service is undoubtedly an important issue that can cause high switching costs if there is not a perfect coordination among operators. traditionally letters, postcards, direct mail were redirected at the request of the addressee, without costs. this situation has changed in many states where postal operators have established redirection services that allow redirecting postal items to any new national or international address. so, in spain, france and the uk, the forwarding is done at the request of the addressee for the time period stipulated after having paid the agreed price.14 if a competitor has no access to information about customers of the incumbent redirections, the switching costs are evident: the addressees would have to enter into a redirection contract with each operator. and the senders of the forwardings would lose some communications, which would have a negative effect on their business. just like in the case of the return to sender service, an additional problem arises when an entrant covering part of the territory may need to deliver mail outside its area (see figure 3). figure 2 represents an ideal redirection service. consider a postal item from a to b, addressee mr. x. the sender entrusts the postal item to any of the operators: incumbent, entrant 1 or entrant 2. if mr. x moves to the city c, with which of these operators would mr. x hire the redirection service? it no longer really makes sense that a client temporarily changing his address should be obliged to give the information to all licensees. the addressee (in our case mr. x) hires the redirection service with the redirection service center (rsc) shared by all operators, and he pays a fee for administrative costs. the rsc transmits this information to all providers in real time. the financial costs and time costs are lower for the user. in summary, if there is an rsc, the switching costs are reduced when a customer changes the supplier and thus competition is promoted. 14 spain: contracts: 1, 2 or 6 months: national: €33.28, €49.90, €66.09. international: €50.19, €75.65, €99.86. france: contracts 6 or 12 months: national €24.50, €44. international: €69, €124. uk: 3, 6, or 12 months from £24.99 for each last name (in all cases prices in 2015). pateiro-rodríguez, prado-domínguez, garcía-iglesias, and barreiro-viñán ● switching costs in the european postal service 112 figure 2. centralized redirection service source: the authors. green=information redirection; red=postal delivery route; dashed line=redirection route. change of address access to the change of address is a more important issue than access to the postcode database for delivering mail (fratini et al 2010). when someone changes his address, the information is given to the incumbent, which has the most reliable database, when compared with banks, telecom operators or energy providers. in france, the information is centralized in a database that traces the old and the new addresses. if the new provider has not immediate access to the change of address database, the client will incur switching costs since he needs to communicate his change of address to each operator. as in the case of redirection service, it does not really make sense that a client should be obliged to hire the change of address service to give this information to all competitors. that is why sharing information on address changes could be required by law. in france, new entrants have a cnil15 authorization, on the same terms as la poste, to maintain a file containing both the old and new addresses. the following step is about stating the mandatory access to the change of address database. return to sender service consider a postal mailing deposited in a and destined to b, both within the territory of the entrant (figure 3). the sender printed the address c on the envelope for return. the incumbent obligation to provide access to a return to sender service reflects the idea that an entrant covering part of the territory may need to deliver mail outside its area depending on where the sender is located (c in our case). thus the entrant would need to use the incumbent’s network to return undeliverable mail. the directive 2008/6 ce says that where several universal service providers with regional postal networks exist, member states should also assess and, where necessary, ensure their interoperability in order to prevent impediments to the prompt transport of postal items. as the legal and market situation of these elements or services is different among the member states it is appropriate to only require member states to adopt an informed decision on the need, extent and choice of the regulatory instrument, including where appropriate on cost sharing. 15 the commission nationale de l’information et des libertés protects citizens’ personal information to prevent any general cross-filing of the population. european journal of government and economics 5(2) 113 this provision is without prejudice to the right of member states to adopt measures to ensure access to the postal network under conditions of transparency and nondiscrimination. figure 3. return service outside area of the entrant source: the authors cases like those in figure 3 are not very frequent, but a decision must be adopted. according to ecorys (2008) the main challenges for the nras include arranging interoperability in a multi-operator market. in france, uk, spain, and italy different procedures are in place. the more elegant solution has been adopted in sweden: the total cost of the return to sender service has been estimated and shared by all operators. thus, the interoperability of networks is secured for this service. we propose a solution in this area, in line with that adopted in sweden. the nra estimates the cost of return to sender service of postal items that are to be returned to locations outside the territory of the first operator, when he is working in a limited geographical area. this cost will be shared by each of the postal operators in proportion to their volume of mail. this solution reduces the three common types of switching costs: procedural, financial and relational. access to letterboxes the matter about the access to letterboxes depends on issues such as its owners, location and access to them from the outside of the buildings. in the most of countries such as spain, france, portugal, uk, etc., the residents are owners of the letterboxes. as regards its access, there is no problem when it is outside (this happens in portugal and single-family homes in many countries). a problem arises when the access is from the inside of the buildings or when the incumbent is their owner because it is necessary to authorize the access to the property. in some countries, the access is restricted to the incumbent by law (united states of america, or austria). in france, poland, hungary, slovakia, germany, inter alia, the access to the private mailbox has been subject to discussion, regulation and litigation. in most cases, the keys or codes of the entrance slots held by the incumbent are not shared with competitive operators for reasons of safety, privacy, exclusive property and liability. there have been many discussions regarding the ownership of the letterboxes. it can be argued that these infrastructure elements are not essential facilities or actual bottlenecks in the sense of stable entry barriers, but there may be common ground to assert that the competitive development of the market may be hindered if access to the mentioned elements is refused, according to plaut economics (2007: 16). to avoid switching costs such as those described above and to promote competition in the postal sector, directive 2008/6/ec states that whenever necessary to protect the interest of users and/or to promote effective competition, territory of the incumbent territory of the entrant a b c pateiro-rodríguez, prado-domínguez, garcía-iglesias, and barreiro-viñán ● switching costs in the european postal service 114 and in the light of national conditions and national legislation, member states shall ensure that transparent, non-discriminatory access conditions are available to elements of postal infrastructure or services provided within the scope of the ups, such as delivery boxes, among others ecorys (2008) states that access to the postal infrastructure consists of access to, among others, the letterboxes of individual consumers and businesses, po boxes, address databases and postal codes. here we have another reason why sharing information for letter boxes access could be required by law, provided that security rules are complied with. this is our proposal for access to letterboxes. information costs and the search for available choices varela et al (2009) found that a lack of attractive choices in the market or perceiving the present provider as more attractive than others can reduce the likelihood of customer abandonment. when a customer is exposed to negative experiences with his regular provider, he leaves his provider and seeks a more suitable alternative (sharma and patterson 2000). however, if alternatives do not exist or are not well known, the customer maintains the relationship with the provider even though it is unsatisfactory. the search costs and the quality information provided by the firms is analyzed by ghosh and galbreth (2013). competition can compel providers to deliver high-quality products to consumers at low prices if consumers can easily identify and secure service from the firms that offer the best products at the lowest prices (armstrong and sappington 2006: 350). in this sense, liberalization policies and national regulatory authorities (nras) will have to ensure truthful, transparent and objective low-cost information so that consumers are aware of the available alternatives and, where possible, can switch providers. measures recommended on this point include i) fast access to information on the existence of competitors, including accessibility, schedules, prices and other supply conditions; ii) cost reductions for the consumer when he switches provider (i.e., to retain the same po box number and postal code); and iii) a reduction in asymmetric costs that the consumer incurs when he chooses different providers. directive 2008/6/ec highlights the importance of information about universal postal services as well as about the characteristics of specific services and their access. article 6 states that member states will adopt the necessary measures to ensure that users and postal service providers regularly receive up-to-date information and with sufficient accuracy from ups providers regarding their universal services. furthermore, special reference must be made to the access conditions regarding these services as well as to prices and quality levels. the information must be published in an appropriate manner. in the process of provider switching, the postal user makes a comparative analysis about the quality provided by the new supplier against the previous one. taking into account this matter, directive 97/67 ce states that the quality of service expected by users constitutes an essential aspect of the services provided; the evaluation standards for this quality of service and the levels of quality achieved must be published in the interest of users. although the legislation enforces the duty to provide information about ups by the usp, this measure would have to extend to every postal service provider, both within the scope of the universal service and including all other services. thus, it would ensure that the consumer can analyze and compare the conditions of all alternative services, including deliveries, prices, packaging, quality, claims, indemnification, schedules, access conditions, bonuses, and territorial scope of application. european journal of government and economics 5(2) 115 the termination of a long-term relationship with the incumbent some service providers have enjoyed their market power for many decades, operating as monopolies or with a high market share. the eu postal sector possessed monopolistic characteristics when the liberalization process began 15 years ago and even today most providers still operate above the market power threshold. the conventional workings of the postal sector have ensured relationships of extraordinary longevity. long links with a service provider result in a relationship that is more complex and produces larger commercial deals (reinartz and kumar 2003). long-term relationships contribute to shared values, identification between the parts, mutual information and certainty regarding behavior (palmatier et al 2006). in so far as the provider offers a quality service and satisfactorily remedies any failures, the length of service in the relationship reinforces brand loyalty. empirical studies, such as woistschläger et al (2011), reveal that satisfaction, economic switching barriers, social ties, and habits are the drivers of customer loyalty. empirical support for inter-temporal dependencies in brand choices, also known as state dependence effects, has been obtained in various contexts (seetharaman 2003; abramson et al 2000; seetharaman et al 1999). the role of the informational advantage is studied by villas-boas (2004; 2006). this advantage may work as a barrier to entry because consumers tend to be loyal to the pioneering brands. white and yanamandram (2006) explore the mediating effects of dependence and commitment on the relationship between switching costs and behavioral loyalty. loyalty to brand is considered one of the factors behind consumer reluctance to abandon the usp (jonsson and selander 2006). brand loyalty reduces the vulnerability of the dominant operator against competition and acts as an entry barrier. if entrants into the market offer greater quality services, loyalty delays customer decisions to separate from their present provider and, at the same time, the incumbent has time to introduce quality improvements oriented to maintain customer portfolios. therefore, brand loyalty constitutes an essential element of entry barriers in the postal sector. along the same lines, stigler (1968), dijl et al (2006), and mcafee et al (2004) maintained that economies of scale would constitute an entry barrier only if consumers were loyal to the incumbent. that is to say, only where economies of scale are accompanied by a strong inertia on the demand side one can speak of authentic entry barriers in the postal sector. thus, scale economies alone do not constitute an entry barrier. discomfort experienced by customers of a new supplier when adapting to the change are an unquantifiable cost that requires the estimator’s best judgment. while this is an important factor, it must not be overemphasized. conclusions a part of provider switching costs are related to the access to some incumbent infrastructures such as the postcode system, address database, post office boxes, delivery boxes, information on change of address, re-direction service and return to sender service. this provision shall be without prejudice to the right of member states to adopt measures to ensure access to the postal network under transparent, proportional and non-discriminatory conditions. directive 2008/6 states that member states shall ensure that transparent, non-discriminatory access conditions are available to these elements of postal infrastructure or services. parties can best define among themselves the most appropriate way to ensure interoperability. the examples in the postal sector show that ex ante soft regulation, where the nra intervenes only in the case of disputes, seems to be the emerging model. pateiro-rodríguez, prado-domínguez, garcía-iglesias, and barreiro-viñán ● switching costs in the european postal service 116 we propose solutions that can help to reduce the problems of access to the postal network elements studied in this paper. such solutions contribute undoubtedly to strengthen competition in the european postal market. first, the access to postcodes is not identified by the nras as a bottleneck issue that calls for regulatory intervention. however, we assume that to defend the interest of the customers and to strengthen long-term competition, a mandatory access to postcodes could be imposed in order to allow competitors to deliver properly. second, with respect to the access to po boxes, we propose a downstream access to the distribution center of the incumbent operator, as shown in figure 1. in this case, the entrant does not install po boxes in their locale. the senders of postal items do not need to subscribe to po boxes in each operator, thereby reducing the switching cost. third, regarding the redirection of mail service and the change of address service, we propose an ideal redirection service, which consists in sharing the rsc by all operators, as it is shown in figure 2. the addressee hires the redirection service with the rsc and pays a fee for the administrative costs. given that the financial and time costs are lower for the user, the switching costs are reduced when a customer changes the supplier and thus competition is promoted. fourth, the solution proposed here for the return to sender service is in line with that adopted in sweden. the cost of return to sender service of postal items that have to be returned to locations outside the territory of the first operator (see figure 3), when this operator is working in a limited geographical area, will be shared by each of the postal operators in proportion to the volume of mail. this solution reduces the three common types of switching costs: procedural, financial and relational costs. fifth, regarding the access to letterboxes, it is difficult to reach an optimal solution because the access to this element depends on issues such as its owners, location and access to them from inside or outside the buildings. in this case, the optimal solution is to pass a law that forces the postal operators to share the information on access to letterboxes, provided that security rules are complied with. the proposed solutions reduce the switching costs and enhance the long term competition in the postal sector. regulation on upstream and downstream access to the postal network is not homogeneous across states and, moreover its development has not reached a sufficient level so far. competition in the postal sector has experienced a limited progress compared to the initial proposals. the incumbents still retain a high market share. the causes of limited competition in the postal market lie in the insufficient and overly slow access regulations, the evolution of communication technologies to the detriment of classical postal communications, the economic crisis, as well as switching costs to a lesser extent. references abramson, charles, rick l. andrews, imram s. currim and morgan jones (2000) ‘parameter bias from unobserved effects in the multinomial logit model of consumer choice’, journal of marketing research 37(4): 410–26. armstrong, mark s. and david e. sappington (2006) ‘regulation, competition and liberalization’, journal of economic literature 44(2): 326-66. burnham, thomas a., judy k. frels and vijay mahajan (2003) ‘consumer switching costs: a typology, antecedents, and consequences’, journal of the academy of marketing science 31(2): 109-26. european journal of government and economics 5(2) 117 crew, michael a. and paul r. kleindorfer (2005) ‘competition, universal service and the graveyard spiral’, in michael a. crew and paul r. kleindorfer (eds) regulatory and economic challenges in the postal and delivery sector. new york, ny: kluwer, pp. 1-30. crew, michael a. and paul r. kleindorfer (2006) ‘the welfare effects of entry and strategies for maintaining the uso in the postal sector’, in michael a. crew and paul r. kleindorfer (eds) progress toward liberalization of the postal and delivery sector. new york, ny: springer, pp. 3-22. dijl, paul, eric van damme and pierre larouche (2006). ‘regulating access to stimulate competition in postal markets? ’, in michael a. crew and paul r. kleindorfer (eds) progress toward liberalization of the postal and delivery sector. new york, ny: springer, pp. 153-62. deligonul, seyda, daekwan kim, anthony s. roath and erin cavusgil (2006) ‘the achilles’ heel of an enduring relationship: appropriation of rents between a manufacturer and its foreign distributor’, journal of business research 59(7): 802810. directive 97/67/ec on common rules for the development of the internal market of community postal services and the improvement of quality of service. official journal of the european communities 21.1.98. l15/14-25. directive 2002/39/ec amending directive 97/67/ec with regard to the further opening to competition of community postal services. official journal of the european communities 5.7.2002. l176/21-25. directive 2008/6/ec amending d/ec with regard to the full accomplishment of the internal market of community postal services. official journal of the european union 27.2.2008. l52/3-20. ecorys nederland bv (2008) ‘main developments in the postal sector (20062008) ’, report for the ec, september. fabra, natalia and alfredo garcía (2015) ‘dynamic price competition with switching costs’, dynamic games and applications 5(4): 540-567. fève, fréderique, jean-pierre florens, frank rodriguez and soterios soteri (2010) ‘forecasting mail volumes in an envolving markete invironment’, in michael a. crew and paul r. kleindorfer (eds) heightening competition in the postal and delivery sector. northampton, ma: edward elgar publishing limited, pp. 116-134. fratini, alessandra, bernard roy and joost vantomme (2010) ‘access to infrastructure and service elements in the postal sector’, in michael a. crew and paul r. kleindorfer (eds) heightening competition in the postal and delivery sector. northampton, ma: edward elgar publishing limited, pp. 22-37. ghosh, bikram and michael r. galbreth (2013) ‘the impact of consumer attentiveness and search costs on firm quality disclosure. a competitive analysis’, management science 59(11): 2604-2621. jones, michael a., david l. mothersbaugh and sharon e. beatty (2002) ‘why customers stay: measuring the underlying dimensions of services switching costs and managing their differential strategic outcomes’, journal of business research 55(6): 441-450. jones, michael a., kristy e. reynolds, david l. mothersbaugh and sharon e. beatty (2007) ‘the positive and negative effects of switching costs on relational outcomes’, journal of service research 9(4): 335-355. jonsson, per, and sten selander (2006) ‘the real graveyard spiral. experiences from the liberalized swedish postal market’, in michael a. crew and paul r. kleindorfer (eds) progress toward liberalization of the postal and delivery sector. new york, ny: springer, pp. 359-366. pateiro-rodríguez, prado-domínguez, garcía-iglesias, and barreiro-viñán ● switching costs in the european postal service 118 klemperer, paul (1995) ‘competition when consumers have switching cost: an overview with applications to industrial organization, macroeconomics, and international trade’, review of economic studies 62(4): 515-539. levesque terrence j., and gordon h. mcdougall (1996) ‘customer dissatisfaction: the relationship between types of problems and customer response’, canadian journal of administrative sciences 13(3): 264-76. martin vance l., chris paterson and jessie x. wang (2012) ‘forecasting letter volumes: augmenting econometric baseline projections’, in michael a. crew and paul r. kleindorfer (eds), multi-modal competition and the future of mail, edward elgar publishing limited, northampton, massachusetts, pp. 60-76. mcafee preston, hugo mialon and williams, michael a. (2004) ‘what is a barrier to entry?. american economic review 94(4):461-65. okholm h., winiarczyk m., möller a. and nielsen c. (2010) main developments in the postal sector (2008-2010), copenhagen economics. www.copenhageneconomics.com palmatier robert w., rajiv p. dant, dhruv grewal and kenneth r. evans (2006) ‘factors influencing the effectiveness of relationship marketing: a meta-analysis’, journal of marketing 70(4):136-53. pateiro rodríguez carlos and javier prado domínguez (2010) ‘un análisis de la transformación del servicio universal y el ámbito reservado en las políticas para la competencia del sector postal en la unión europea’, gestión y política pública 19, 187-237. pateiro rodríguez carlos, garcía iglesias jesús m. and josé m. barreiro viñán (2013a) ‘las dimensiones territoriales urbana e interurbana de la liberalización del sector postal y cuestiones de ineficiencia del acceso a la red’, urban public economics review 17, 78-105. pateiro rodríguez carlos, josé m. barreiro viñán and garcía iglesias jesús m. (2013b) ‘efectos de los costes de cambio y de retención sobre el bienestar social en el proceso de apertura del servicio postal europeo’, anales de economía aplicada 27, 209-230. prado domínguez, javier and carlos pateiro rodríguez (2012) ‘la prestación del servicio postal universal ¿conlleva un riesgo inexorable de quiebra?’, revista de ciencias sociales 83 (1):1-9. patterson paul g. and tasman smith (2003) ‘a cross-cultural study of witching barriers and propensity to stay with service providers’, journal of retailing 79(2): 107-20. plaut economics (2007) ‘opening postal markets in switzerland. monopolistic bottlenecks, technical co-ordination and social regulations’, olten, january. porter, michael e. (1980) competitive strategy: techniques for analysing industries and competitors, free press, new york. reinartz, werner j. and vinod kumar (2003) ‘the impact of customer characteristics on profitable lifetime duration’, journal of marketing 67(1):77-99. seetharaman, p.b. (2003) ‘probabilistic versus random-utility models of state dependence: an empirical comparison’, journal of research in marketing 20(1): 87-96. seetharaman, p.b., andrew ainslie and pradeep k. chintagunta (1999) ‘investigating household state dependence effects across categories’, journal of marketing research 36(4):488-500. european journal of government and economics 5(2) 119 sharma, neeru and paul g. patterson (2000) ‘switching costs, alternative attractiveness and experience as moderators of relationship commitment in professional, consumer services’, international journal of service industry management 11(5):470-90. shi, mengze, jeonweng chiang and byong-duk rhee (2006) ‘price competition with reduced consumer switching costs: the case of wireless number portability in the cellular phone industry’, management science 52(1), 27-38. stigler, george j. (1968) ‘barriers to entry, economies of scale, and firm size’, in george j. stigler (ed.) the organization of industry , homewood, il: irwin, pp. 6770. trinkner, urs and martin grossman (2006) ‘forecasting swiss mail demand’, michael a. crew and paul r. kleindorfer (eds), progress toward liberalization of the postal and delivery sector. springer, new york, pp. 267-80. valenzuela, fredy, david pearson and roger epworth (2005) ‘influence of switching barriers on service recovery evaluation’, journal of service research, special issue, december: 239-57. varela, concepción, rodolfo vázquez and victor iglesias (2009) ‘comportamiento de abandono de la relación de un cliente con la empresa en un contexto de fallo y recuperación del servicio’, cuadernos de economía y dirección de la empresa 12(40):143-70. viard, v. brian (2007) ‘do switching costs make markets more or less competitive? the case of 800-number portability’, rand journal of economics 38(1): 146-63. villas-boas, j. miguel (2004) ‘consumer learning, brand loyalty, and competition’, marketing science 23(1): 134-45. villas-boas, j. miguel (2006) ‘dynamic competition with experience goods’, journal of economics and management strategy 15(1):34-66. white, lesley and venkata k. yanamandram (2006) ‘exploring the switching costsbehavioural loyalty relationship amongst dissatisfied customers in the b2b services sector’, research online, university of wollongong. library. available at: http://ro.uow.edu.au/commpapers/235/ white, lesley and venkata k. yanamandram (2007) ‘a model of customer retention of dissatisfied business services customers’, managing service quality 17(3):298-316. woisetschläger, david m., patrick lentz and heiner evaschitzky (2011) ‘how habits, social ties, and economic switching barriers affect customer loyalty in contractual service setting’, journal of business research 64(8): 800-8. microsoft word ejge_03_02_014.doc european journal of government and economics volume 3, number 2 (december 2014) issn: 2254-7088 104 institutional quality and private sector participation: theory and empirical findings rahel schomaker, cologne business school and german research institute for public administration speyer abstract through several conduits, sound institutional quality is pivotal for economic development, as there is evidence that stable democratic institutions, rule of law and sound governance structures in the administration are highly conducive to promote growth. therefore, a high institutional quality is not only the end point, but also the starting point of a more sustainable development. in this paper we provide some theoretical considerations as well as empirical evidence, based on several regression analyses, that the quality of institutions in a wider sense, and governance, which includes not only the level of “politics” itself, but also the administrative level, is relevant not only for the macro-level of development (i.e. the increase of the national welfare and foreign investment), but also on a micro-level: a stronger participation of private enterprises in public service provision and the introduction of public-private partnerships depends to a high degree on the institutional quality. this is even more relevant as the improvement of public services and of core infrastructures can be seen as crucial multipliers for future growth. jel classification a12; a30; p27. keywords institutional quality; good governance; institutional economics; public-private partnerships; public goods. schomaker ● institutional quality and private sector participation 105 introduction in several ways, institutional quality is pivotal for economic development. there is much evidence that democratic institutions, the absence of corruption, rule of law, and sound governance structures in the country’s administration are conducive to promoting growth in terms of gross domestic product (gdp), or to attracting foreign direct investment (fdi), to mention just some of its most relevant determinants (see for the discussion of the role of institutions e.g. acemoglu and robinson, 2012). democratic governance and accountability are not the end point after a country has undergone economic and social development, but rather the start point of a more sustainable development. in our paper, we provide some theoretical insights as well as empirical evidence that the quality of institutions, which includes not only the level of “political institutions” itself, but also the administrative level, is relevant not only for achieving the standard macro-level development objectives (e.g. the increase of gdp and fdi). also on the micro-level – the provision of infrastructure and other public services – institutions matter. in other words, a stronger participation of private enterprises in service provision and the introduction of public-private partnerships depend to a high degree on the institutional quality of a country. this is even more relevant as the improvement of public services and of core infrastructures can be seen as a multiplier for further growth, as theoretical considerations and a substantial number of empirical studies have clearly demonstrated. (efficient) investment in public services and infrastructure provides positive growth impulses for the overall economy by fostering entrepreneurship, providing necessary infrastructure for businesses or sending signals to foreign investors (for an overview e.g. hartwig, 2005). therefore, as conventional wisdom has it, given that private firms may provide much-needed financial resources as well as superior management know-how and technical expertise for infrastructure provision and public services, the stronger inclusion of private enterprises may be one very promising development “tool” (e.g. grimsey and lewis, 2005; ziekow, 2003). the important role of private enterprises can play in the provision of infrastructure and services is in particular given for all countries that face severe budget constraints in the public sector. while this applies generally to less developed countries, industrialised countries in europe and the us also face increasing public budget restrictions, triggered not least by the financial crisis of 2008/2009. therefore, as the general effect of institutions on the overall economic wellbeing of a country or economic growth rates has been subject to scientific research before (e.g. acemoglu and robinson, 2012; obinger, 2001; wagener, 2004), our contribution to the existing literature is new in two dimensions. by analysing the “micro-level” of development, focusing on private sector participation, for the first time we provide empirical evidence in how far institutional quality influences the involvement of private firms in the provision of public services. additionally, by tying the link between institutional quality and the nature of private sector participation, we contribute to the ongoing debate in particular on transaction costs related to private sector participation and public-private partnerships. our paper is structured as follows: in the next section, we first apply the theory of “new institutional economics” to explain why sound governance, especially the quality of bureaucracy, and not least of regulatory oversight, and of anti-corruption policies, is a crucial factor in fostering a potentially welfare-increasing stronger inclusion of the private sector. transaction costs are of specific relevance in this context, as it is reasonable to assume higher transaction costs will, ceteris paribus, always increase the price of cooperations and partnerships (assuming that transaction costs are an integral part of the full costs of contract conclusion and contract enforcement) (hart, 2005). based on this, we discuss the economics of private sector involvement more detailed, with a specific focus again on the role of transaction costs. european journal of government and economics 3(2) 106 after setting up the theoretical framework, we will provide some empirical evidence for the role sound institutions play in the context of the establishment of publicprivate partnerships in infrastructure provision, focusing on a view to the world’s less developed countries. we will finish our analysis with a brief conclusion of our main findings and some policy recommendations. theoretical background: “new institutional economics” and the “economics of private sector participation” key insights from the “new institutional economics” the main hypothesis of institutional economics is that institutions strongly influence human behaviour and therefore also have a strong relevance for the growth and development of countries (or lack thereof) (acemoglu and robinson, 2012; obinger, 2001). while an exclusive and universally accepted definition of institutions is still missing, a rather broad consensus has emerged in the literature on what constitutes institutions and what their principal functions and effects are (for a comprehensive overview see hodgson, 1998 and williamson, 2000). following north (1991 and 1992), institutions are interpreted as ‘humanly devised constraints that structure political, economic, and social interactions’ (north, 1991). they constitute the framework of a society, which to a high degree determines the individuals’ activities by providing crucial information and therefore reducing uncertainty (voigt, 2002). this framework does not only comprise the so-called material institutions, but also all mechanisms that are able to enforce these very institutions (erlei et al., 2007). in particular, institutions that determine the rules of the game and shape governance structures are the focus of nie and the quantitative approaches that are applied in this context. institutions at these levels are often seen as vital determinants for economic wealth/welfare (or the lack thereof). at the same time it is relatively easy to identify – in a normative, theory-based approach – how these institutions should be structured to reach the overall goal of “economic growth” and the intermediate goal of “good governance” as a necessary precondition for achieving economic wealth/welfare. the role of institutions is of specific importance in a setting of incomplete information and uncertainty, as is inevitably – due to prohibitive costs of gathering and processing information – the case in every real-world economic system. incomplete information or asymmetric information between actors, as well as bounded rationality and the – by nature – limited mental capacities of human beings lead to additional costs, the so-called “transaction costs” (e.g. coase, 1937). transaction costs relate to each single market and non-market transaction, may it be with regard to goods or services, or, in what constitutes a broader application of this concept, to the definition, transfer and enforcement of property rights (richter and furubotn, 1999). these costs arise due to the fact that in order to perform any of these transactions information on potential counterparts has to be obtained, checked for correctness and assessed in terms of counterparty and other forms of economic risks, and that, eventually, contracts have to be negotiated, monitored and, if necessary, enforced or renegotiated. transaction costs therefore occur both ex ante, i.e. before a contract is created, and ex post, after the contractual arrangements have been finalised. effective and generally respected institutions can help to reduce – though they will never completely eliminate – these transaction costs in several ways by providing some crucial information and some kind of security in an overall framework which is unavoidably characterised by uncertainty about future developments in an essentially unpredictable, dynamic, evolutionary world. the greater degree of schomaker ● institutional quality and private sector participation 107 certainty that the contractual partner will heed the contract provisions will, in turn, enhance the incentives (for individuals and enterprises alike) to engage in a contract in the first place because of the much reduced risks of falling into “hidden traps”. in other words, the knowledge itself that one is in the legal position to take a case to court or mediation (e.g. in case of the counterparty’s real or alleged breach of contract or for unforeseen renegotiations within the contract duration) will tend to discourage each contract party from acting opportunistically or in outright breach of contract, as this will give rise to substantial costs (including loss of reputational capital etc.). a strong legal system which provides for effective sanctions will therefore be substantially conducive to contract compliance. it will, in turn, lower transaction costs for contractual arrangements in the first place, resulting in more transactions occurring, and, ceteris paribus, in the welfare-enhancing productivity gains which can be harnessed through from the widening and deepening of the division of labour. this is primarily due to the beneficial effect of lower individual costs of control which stem from the existence of efficient institutions which at least partly even out the information asymmetry between (potential and actual) contractual partners. to sum up, in this context, a crucial function of (good) institutions is their signaling to act as stand-ins for the contract partner’s trustworthiness and reliability. for efficiently and effectively fulfilling these functions, good institutions can be regarded as a conditio sine qua non for economic development and a sound longrun economic performance of a country (e.g. recently acemoglu and robinson, 2012; see also apolte, 2004; north, 1991; sachs and warner, 1997; wagener, 2004). as klein and luu (2003) state, “[a] key to understanding economic development, then, is institutional development”. consequently, within the last few decades, a whole new branch of literature endeavoured not only to provide for the deeper theoretical understanding of the relevance of institutions, but also to seek robust empirical evidence on the impact of the institutional framework for development. most of these empirical studies measure the impact of institutional quality on the economic wealth/welfare of a country, commonly measured in terms of gross national product (gnp) or gross domestic product (gdp) figures (per head in us$ and/or based on purchasing power parities), or the rate of change of these indicators, or use different proxies for economic wealth/welfare. “institutional quality” in these studies is defined in different ways, and not exclusively as the absence of corruption, good regulatory quality, democratic participation and high accountability of the government, political stability, the secure property rights, and/or efficient public administration. to recapitulate here the main results of an meta-assessment of several seminal empirical studies, independent of their respective definition (and the data sets) used, it can be safely concluded that there is substantial evidence for a significant positive correlation between (high) institutional quality and (positive) rates of economic growth and/or wealth. as, for instance, obinger (2001) is able to show, while the regime-type itself (democracy vs. dictatorship) does not show a significant curvilinear influence, sound institutions – in the sense of the absence of corruption or a high quality level of the administration – have a significant positive effect on economic growth. furthermore, and often linked to an overall sound institutional framework, there is some evidence that in the long run especially democratic regimes experience a high level of wealth (acemoglu and robinson, 2012). klein and luu (2003) do not focus directly on gdp/gni data, but on productivity trends in a country, and were able to show that differences in technical efficiency in a country sample can be explained by the specific institutional framework. in our own analysis, focusing not on the macro-, but on the micro-level, we assume that (good) institutions are important for economic growth as they facilitate privatesector investments in infrastructure and the private sectors contributions to public services. good institutions provide reliable signals for the private sector to invest, european journal of government and economics 3(2) 108 as contracts can be secured without prohibitively high transaction costs. if the administration works efficiently, is not corrupt, and transparency as well as reliability on existing contracts can be assumed to be given, it is much more likely that private partners will invest in joint projects, which may result in a better supply of public goods and infrastructure, and therewith in the long run higher economic growth. this is even more important as contracts between the public and the private sector in its different forms arise within the context of incomplete information and uncertainty (parker and hartley, 2005). these contracts are “necessarily incomplete“ (erlei et al., 2007). not all future developments and contingencies can be foreseen by the contract parties, let alone fixed by adequate contract provisions ̶ a fact further compounded by the bounded rationality of the prospective partners, which could result in future opportunistic behaviour from either side (coase, 1937 and williamson, 1975/1985). transaction costs are the logical result of this incompleteness and play a pivotal role for the successful or unsuccessful initiation and longer-term implementation of partnerships (klein et al., 1996). to be more specific, transaction costs in these partnerships include ex ante the costs of the bidding process, negotiations and the establishment as well as ex post costs for re-negotiations and compliance (dudkin and välilä, 2005). especially for the private partner the reduction of transaction costs may be decisive: a profit-oriented enterprise will invest in public services only if the anticipated profit will at least cover its costs (plus yield a “reasonable” rate of return on its investment). with transaction costs often being a large percentage of the full project costs, excessive transaction costs may render the whole project unprofitable as a result. a decrease of the (anticipated) transaction costs therefore will likely enhance the probability that contracts conducive to development between the public and the private partner will be realised in the first place. another important role of institutions in the context of ppps lies in the signal they send out to (international) development organisations: many projects related to development-driven investment in public services and infrastructure are assisted by these development agencies financially, technically and/or through management support (hammami et al., 2006). in detail, the assistance typically takes place in specific technical support and investment loans as well as through guarantees against political risk, currency risk and (partly) credit risk. this assistance – as well as “conventional” development aid – is usually linked to “good governance” in the meaning of existing democratic structures, the adherence to human rights and the rule of law as well as the existence of (effective) anti-corruption measures (nuscheler, 2005). by having established sound institutions, a necessary precondition is therefore fulfilled for the public partner to gain direct access to additional funding for the project from international donors. moreover, for the private partner this also increases the likelihood to obtain financial support or specific warranties from development agencies – a fact which seems to be very important due the high risks of a partnership and/or for the enterprise. political risks like expropriation or civil unrest, substantial exchange rate risks and additional risks of doing business may then be covered by the development agencies’ warranties, so the availability (or lack thereof) of some independent outside protection against said risks seems to bear potentially strong influence a private sector company’s penchant to engage in a project. additionally, the existence of sound institutions can be seen as a proxy for a government's reputation and stability and, as a result, will prove helpful in attracting more private enterprise activity in that country. this is even more important as any incomplete contract – as outlined above – is inevitably linked to high transaction costs, which, however, can be effectively lowered by mutual trust between the potential partners. every credible signal of a government’s trustworthiness will allow more such partnerships to come to fruition. summarised, “ppps cannot be found in areas where institutional failure and governance gaps are exceptionally pronounced” (schäferhoff et al., 2007: 10). schomaker ● institutional quality and private sector participation 109 the economics of private sector involvement in public goods and infrastructure provision due to shrinking tax revenues, or rising governmental expenditures (i.e. for social security), or a combination of both, more and more state and local governments face severe budgetary restraints. accordingly, there is a global trend for governments trying to improve their fiscal stance, especially on the expenditure side. at the same time, on the grounds of demographic change as well as resulting from economic growth, the pressure on public goods, particularly on existing infrastructures is raising.1 the situation is even more exigent in the less developed parts of the world. still rising rates of urbanisation, high rates of population growth and rising standards of living have for years increased the stress on public services and infrastructure to the point where demand greatly exceeds supply. private investment, or as a broader concept, private sector involvement can be assumed to be one potential solution for the problems outlined above. this investment can take place in different guises – as full or in-part privatisation, or as joint projects in the form of public-private partnerships (ppp) between the public administration and private enterprises, especially international companies. as privatisation may not be the first best solution from an economic theory perspective as far as public goods – i.e. market failure – are concerned or if the privatisation process might result in merely swapping a state-run for a private monopoly, alternative forms of public-private partnerships exist which may ensure adequate control rights for the public sector over the crucial aspects of service provision. many of these “new” partnership models are still lacking a precise definition (budäus and grüb, 2007). therefore, in this paper, we use the term public-private partnerships for a whole portfolio of different partnership models which range from full ownership by the public sector to material privatisation (grimsey and lewis, 2005). the prevalent definitions of ppp typically focus either on the players involved or on procedural aspects of these partnerships. linder (1999) broadly defines the term ppp as ‘rubric for describing cooperative ventures between the state and private business’. grimsey and lewis (2005) see ppps as ‘arrangements whereby private parties participate in, or provide support for, the provision of infrastructure, and a ppp project results in a contract for a private entity to deliver public infrastructure-based services’. ziekow (2003), by contrast, defines ppp more broadly as the junction of rationalities of actors relevant for action, and therewith refers to the, probably, most important factor in the decision whether or not to pursue a ppp: the interest of both partners. regardless of the specific form it may take in practice, any ppp-type contractual agreement between a private company and the public sector – whether at the state or at the municipal level – is typically characterised by a risk-sharing arrangement with the private partner taking over (at least some) financial responsibility. the duration of ppp projects varies between one and thirty years, with mere service and management contracts being of relatively short-term duration, while ppp designs which include the construction of an asset and which are refinanced by user fees are usually based on longer contract durations so as to ensure full cost recovery for the private partner. the commercial risk of failure is mainly borne by the public sector in (short-term) projects that do not affect the ownership of the asset (which remains with the public sector). in ppp where a direct contact between the private company and the customer/user exists (i.e. concessions and build-operate-transfer/build-own-operate/build-own-operate-transfer ppp variants), the private partner has to shoulder the main portion of the commercial 1 this paper covers – in line with the world bank’s definition of infrastructure – telecommunications, transport, energy and water supply/sanitation infrastructures. european journal of government and economics 3(2) 110 risk, e.g. deficits in payments, because of the high upfront costs he must refinance over extended periods of time. the expectations related to the socio-economic outcomes of ppp differ substantially among participants and stakeholders, but are usually very high among all participants compared to their assessment (or perception) of the outcomes the institutional status quo ante. the public partner focuses on its need to procure additional capital as well as to attract managerial competences and technical skills – which are of special relevance in the case of technologically complex infrastructures like water supply, sewage systems, energy, and telecommunications – without losing the political control over infrastructure provision. on the contrary, the private company the profit motive is the dominant one (hammami et al., 2006). in addition to maximizing its profit in the specific projects at stake, the private partner typically pursues a long-term, strategic goal, tool. to gain at least indirect access, by committing to a specific ppp in a specific country, to a market which is not open for full privatisation (yet) – an investment, in turn, in a potential first mover advantage in the eventuality of a later privatisation (provided the company has gained a reputation as a dependable and fair partner in the ppp period). moreover, the likelihood of winning future tenders for similar ppp projects in other countries will increase with the specific knowledge gained. additionally, with the related concepts of corporate social responsibility (csr) and stakeholder activism becoming more and more relevant for multinational companies, in some special cases the decision to enter into a ppp project may not exclusively follow a short-term profit maximisation motive (narrowly defined). it may rather be intended as a signal of a high(er) degree of stakeholder orientation to customers, the public, the media, governments and ngos from all countries where the company is doing business (unido, 2002). in other words, under such circumstances a ppp activity may convince the public partner of the company’s goodwill and may accordingly have influence on considering the company of being the government’s preferred partner in future (case-by-case) decisions on upcoming ppp projects or privatisation programmes – thereby giving rise to another first mover advantage by raising potential rivals’ costs of market entry. beyond the interests of the public and private partner, a third party, the (international) organisations engaged in development cooperation like the world bank have a specific self-interest in boosting ppp. the emergence of new challenges in development cooperation, e.g. “nation building” in failed states like afghanistan and somalia, rises additional tasks, and the budgets of international development agencies are not keeping up with their steadily growing expenditures requirements. a stronger involvement of the private sector, especially in expensive and technologically complex infrastructure provision, may positively contribute to narrowing or even closing that gap and may also enhance the – so far often dubious – quality of the assistance (moyo, 2009 and schäferhoff et al., 2007). the potentially pivotal role of private enterprise in promoting economic development has therefore rightly been highlighted by key institutions of development cooperation, e.g. in the united nations’ “global compact”, which has been established to involve the private sector (annan, 1999). even the declaration of the united nations’ millennium development goals emphasises the crucial role of private companies as stakeholders in development cooperation to achieve a substantial reduction of global poverty by 2015. as a consequence, more and more ppps have emerged in developing countries, and it appears from anecdotal evidence as if the peak has not been reached yet, despite comprehensive data still lacking. but from the number of ppp in infrastructure projects which is a good proxy for overall private-sector investment in public services, we can observe an increase of both the investment volume itself and the sheer numbers in all regions worldwide since the 1990s. also additional projects in countries which had not been covered before have been implemented in schomaker ● institutional quality and private sector participation 111 the last decade (world bank ppi data base).2 in many developing countries, the political and public awareness of their potential merits as a toll on development strategies is rising. political initiatives like “national strategies” and specific ministries have been established to integrate more private partners in the provision of public goods and infrastructure, and more efficiently and effectively (smith et al., 1997). model and results model and variables one of the main challenges in testing the impact of “good governance” or “institutional quality” in private sector involvement is not only to define what a “sound” or “good” institution” is, but also how to adequately operationalise the concept of “institutional quality” for quantitative research. several issues have to be addressed and solved, with the conceptual difference between the material institution itself (the content dimension) and the question whether this institution is also truly enforced (or perceived to be) (the trust dimension) being of pivotal importance (voigt, 2002). generally speaking, the assessment of public policy or public institutions as well as the assessments of the public administration is built on a limited selection of indicators. as for the political level, accountability and democratic structures are popular variables, while for the administrative level, effectiveness of the bureaucracy or control of corruption are often utilised. this approach in many cases may be misleading, as e.g. the selection/composition of indicators may be biased by the research design or data-availability, or the comparability of different administrations may not be given (see van de walle, 2006). consequently, a number of different indicators and measurement methods are used in the respective economic, administrative or political science literature. there is a number of arguments against or in favour of using a specific indicator, depending on the goal and/or range of the respective work (see for the discussion in detail e.g. bovaird and löffler (2003) or van de walle (2006). as for our study, many of these popular indicators are either too specific, as they focus on the output or outcome of the bureaucracy, too wide (focusing on the general business environment or the political system), or do not cover the necessary range of countries which are included in our empirical assessment. another problem which arises in this context is the question of how to get information on the institutional quality. in many cases the quality cannot be observed directly, so sophisticated extrapolations or estimates have to be applied. another option is measuring the perception of institutional quality among citizens, officials and companies. using this method, the construction of the indicator relies on different peoples’ evaluation of one reality, but there is no guarantee that these evaluations truly reflect reality, or are at least remotely representative. it is therefore safe to assume that there is always a bias, not least as the people who were interviewed may have an own interest in a specific outcome so that they attempt to create a systematic bias by their willfully deceptive answers. a further possibility is that the bias occurs by accident, but remains unnoticed. this is particularly true in cases where different people are asked, who are subject themselves to an unequal bias due to their deviating respective interests, their different abilities to judge and intellectual capabilities. this simple example is suitable to document the main problem in the construction of reliable indicators on 2 a ppp is “established” – according to the world bank’s definition – once the respective project has reached the stage of contractual or financial closure, irrespective of later modifications in the contract or a complete failure of the ppp. european journal of government and economics 3(2) 112 institutional quality, and could be easily extended to cover a broad range of other governance indicators as well. additionally, even where a quantitative approach to constructing indicators can be reasonably applied, as for those indicators or their components no (substantial) measurement problems on the country level exist (e.g. regarding the number of patents), the questions remain how reliable these statistics really are and whether the pertinent national data are comparable across countries. another caveat results from the fact that there may be no significant difference with respect to outcomes between those cases where the institution itself is identified as “weak” and those other cases where it is just being perceived as being weak by the actors involved, like enterprises or individuals. in this case, there may be another specific kind of bias: the sheer existence of an institution may lead to the (factually erroneous) subjective judgment that institutional quality is good without interviewees taking into consideration that in reality the institutional quality is indeed bad. an example might be the inability to properly enforce the – formally existing – institution, for instance for a chronic failure to protect (intellectual) property rights where the existence of a law does not mean that violators are actually prosecuted and/or adequately punished for their infringements. but, despite of the manifold analytical limitation outlined above, using a combination of these disaggregated indicators does, in our view, provide an acceptable – for being broad-based – approach to measure institutional quality, without losing too much information due to too much aggregation. therefore, we hold that the set of governance indicators generated by kaufmann et al (2008), which measure the perception of the quality of different institutions in all countries worldwide, are an appropriate tool to measure the quality of institutions for the purposes of our study. originally we planned to use the full set of institutional variables (voice and accountability, government effectiveness, rule of law, control of corruption, political stability, regulatory quality), as provided by kaufmann et al. additionally, variables like population size, inflation and the gross national income (gni) per capita per year, and regional dummies which we consider as exogenous and which we use to control for other effects have been tested for. the choice of the variables is in full conformity with our theoretical considerations above: the variable voice and accountability influences the involvement (financial and/or technical) of international development agencies due to political and economic conditionality, the indicators political stability and government effectiveness function as a signal for the potential private partner of how risky a commitment might become, of how high the credibility of the government and the administration is and of how efficiently the public services work. the absence of corruption or at least a strong control of corruption gives a signal on the presumable transaction costs, and the indicator regulatory quality provides information on the regulatory framework which determines (especially in naturally monopolistic infrastructures like water supply) the day-to-day operation of the ppp. testing the exogenous institutional variables for multicollinearity, we found coefficients near 1 for the indicators rule of law, control of corruption, political stability, regulatory quality and government effectiveness. owing to the high correlation between these indicators and the probable endogeneity induced by the latter we decided to remove the indicators rule of law, control of corruption, political stability and regulatory quality because some of the determinants covered by these indicators may be assumed to be also covered by the two remaining ones. to be more precise, a high quality of public services normally means that the administration is not corrupt, rule of law is given and an overall quality of political regulation can be assumed as being given. to include both relevant institutions, the quality of the administrative institutions as well as the political institutions, we use the indicator government effectiveness, which proxies for the overall quality of the public administration, while voice and accountability proxies for the existence of a stable democracy. schomaker ● institutional quality and private sector participation 113 government effectiveness (ge): this indicator measures the “perceptions of the public services’ quality, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies” (kaufmann et al., 2008). voice and accountability (va): this indicator measures the “perceptions of the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media” (kaufmann et al., 2008). according to the theory of institutional economics, our hypothesis is that the incidence of private sector investment and ppp projects in a country may strongly depend on the quality of local institutions. private-sector investment in public services and infrastructure or partnership regimes between the private and the public sector on the micro-level, as outlined above, comprise several different governance regimes concerning the key elements project duration, organisational structure, and “quality” of the risk-sharing and/or the control rights for the public administration. as data on the overall volume of private investment on the microlevel is hard to obtain, we use a sound and statistically valid proxy — the number of ppp projects in infrastructure projects — instead. accordingly, we propose some regressions of the “number of ppps” variable, considered to be endogeneous, by using the ordinary least squares (ols) method as well as a poisson regression model and a negative binomial regression model, respectively, as they seem to be more suitable due to the nature of the data which appear not to completely fulfil ols requirements (long, 1997). table 1: descriptive statistics n minimum maximum mean standard deviation number of ppps 724 0.00 686.00 20.35 55.39 gni2 80.00 11150.00 1553.64 1669.47 va1 -2.19 1.21 -.4484 .77632 gove2 -2.25 1.39 -.4830 .59855 bev 71079.00 1311020000.00 40541783.31 149814932.48 inflation -24.00 5400.00 29.0127 254.19555 using the variables discussed above, we ran a cross-sectional model with data for up to six years and for 118 countries (unbalanced panel; see the annex for the complete list of countries). the descriptive statistics can be drawn from table 1. results and discussion as can be drawn from table 2, the results from the different models used show a high degree of consistency in terms of the sign of the respective coefficient and the significance level. additional tests for robustness (not displayed), using different indicators for institutional quality, validate the findings of the regression models used. in all cases, the fisher-test (f-test) and the omnibus-test indicate that the model is significant at 1 per cent level; also the goodness of fit (for the non-ols models pearson's chi-squared statistic and log-likelihood, as well as r²/r² adjusted for ols) is high for the models displayed. the indicator voice and accountability (va) displayed a significant negative correlation with the number of ppp projects in a country, as the coefficient is negative for the ols-regression and beyond 1 for the non-ols regressions. this implies that a higher degree of democratic participation inhibits partnerships with private enterprise and decreases the odd that a large number of ppps exists. this result, at first glance, seems to be inconsistent with the theoretical explanation that democratic institutions will foster the implementation of ppp. on closer inspection, however, it can be explained through the governments’ willingness to use private european journal of government and economics 3(2) 114 sector participation. it might be the case that democratic governments would prefer full privatisation because they have no fear of a loss of political control over the affected sector. in these cases, they will not resort to ppp solutions, but will rather liberalise the complete sector and open it completely to the private sector (which might result in a mixed economy setting of public suppliers competing with private firms in the same sector). on the other hand, semi-democratic or autocratic regimes (characterised by a relatively low value for voice and accountability), which are not willing to hand over control of vital infrastructure sectors, prefer to use ppp projects as opposed to full-blown privatisation. table 2: results of the regression analysis independent variable ols negbin poisson intercept 14,427 (2,967)** 3,502 (0,055)** 16,624 (0,0903)** 3,349 (0,009)** population 2,503e7 (25,551)** inflation (%) 0.000 (-0,079) real gni per capita (lagged by one year) 0,007 (6,229)** 1,000 (3,1331e-005)** government effectiveness (index) 10,945 (2,668)** 1,819 (0,104)** 4,139 (0,1072)** 1,293 (0,015)** voice and accountability (index) -10,945 (-3,916)** -0,473 (0,076)** 0,633 (0,0688)** -0,545 (0,013)** dummy east asia and pacific -7,829 (-1,466) dummy europe and central asia -4,300 (-0,797) dummy sub-saharaafrica -19,983 (-4,590)** dummy mena -37,404 (-6,070)** -1,438 (0,141)** -1,743 (0,048)** dummy south asia (-5,474)** observations 714 695 695 695 r²/r² adjusted 0,574/0,567 t-statistics in parentheses: ** significant at 1 percent sources: author’s compilation, data sources: world bank ppi-date base, kaufmann et al 2008. the indicator government effectiveness has, in all models, the expected positive sign as well as a significant impact. this result is consistent with the theoretical analysis from an institutional economics perspective. it also substantiates our assumption that the existence – or at least the perception – of a high quality of the public service and a highly credible bureaucracy foster the implementation of ppp. if the quality of the civil service and the credibility of the government’s commitment is high, the odd increases that ppps are implemented. this might be caused by the direct signalling function of government effectiveness to the private sector, and to the international development agencies alike, which are more likely to support ppps if “good” governance exists. while the overall macroeconomic development, proxied by economic wealth and the inflation rate of the respective country does not matter, the size of the country in terms of population does. further studies should include this factor, whether by standardisation of the number of ppps on population or through using other dependent variables as e.g. average investment volumes per capita. first empirical tests, standardizing the number of ppps on population, nevertheless underpin the outcomes discussed above. furthermore, there are significant differences between the regions of the world, which cannot be explained by the institutional or economic conditions tested for. these regional differences may be explained by the missing political will to include the private sector in service provision at all. also “time-lags” may be an explanation, as some regions are lagging behind in terms of only recently opening up towards private sector participation, such that private companies may lack the will to invest in politically unstable regions like the middle east and north africa. schomaker ● institutional quality and private sector participation 115 concluding remarks the results of our research provide strong evidence that a significant positive relationship exists between the indicator government effectiveness and the number of ppp projects in a country. as ppp numbers can be used as a reliable proxy for the total involvement and investment of private enterprises in public services and infrastructure, our results can be extended to assess the overall impact of institutions on this kind of private sector involvement. therefore, our findings stress the importance of a sound institutional framework for more private sector involvement, which is likely to lead to economic growth. amongst other explanations, such as the lack of political will to attract private capital, a low institutional quality may therefore provide a powerful explanation for the lack of private investment in many countries. from the perspective of prospective private sector partners, weak institutions increase uncertainty and, as a some kind of “collateral damage” also the project-related transaction costs, which may thus explain the private sector’s lack of will or its inability to engage in ppp projects in a specific country. this finding is even more important against the trivial insight that in particular large or international private companies are able to decide relatively independently where to invest their resources in a ppp because of the fast growing demand for private capital and expertise in public services and infrastructure worldwide. the creation of sound and trusted institutions, especially on the micro-level, in administration, to “cure” the incompleteness of public-private contracts and to reduce transaction costs therefore is a crucial first step to attract private enterprises whose investment may substantially contribute to economic growth and development. therewith, our work gives some hints on a “second institutional channel of development” – sound institutions do not only influence foreign direct investment in the narrow sense, but also private sector activities in the provision of public services. this seems to be important as the private enterprises included in our study come from industrialised “foreign” countries as well as from the respective country itself. improving framework conditions for both kinds of enterprises to invest in public infrastructure may be an important instrument of the political level, but also the administration itself to foster long-term growth. references acemoglu, daron and james a. robinson (2012) why nations fail. new york: crown business. apolte, thomas (2004) ‘discussion on wagener: buon governo – mal governo‘, in thomas eger (ed) erfolg und versagen von institutionen. berlin: duncker & humblot, pp. 141-145. annan, kofi (1999) ‘address at the world economic forum in davos’, un press release sg/sm/6881. http://www.un.org/news/press/docs/1999/19990201.sgsm6881.html (consulted 19.03.2013). bovaird, tony and elke löffler (2003) ‘evaluating the quality of public governance: indicators, models and methodologies’, international review of administrative sciences 69(3): 313-328. budäus, dietrich and birgit grüb (2007) ‘anhaltspunkte und hypothesenbildung für eine theorie der public private partnership’, in dietmar bräunig and doeothea greiling (eds) stand und perspektiven der öffentlichen betriebswirtschaftslehre ii. berlin: berliner verlagsgesellschaft, pp. 421-431. coase, ronald h. (1937) ‘the nature of the firm”, economica, 4(16): 386-405. european journal of government and economics 3(2) 116 dudkin, g. and välilä, t. (2005) ‘transaction costs in public private partnerships: a first look at the evidence’, european investment bank economic and financial report 2005/03. erlei, mathias, martin leschke and dirk sauerland (2007) neue institutionenökonomik, 2nd edition, stuttgart: beck. grimsey, darrin and mervyn k. lewis (2005) ‘introduction’ in darrin grimsey and mervyn k. lewis (eds) the economics of public private partnerships. cheltenham: edward elger, pp. xiii-xl. gschlößl, susanne and claudia czado (2008) ‘modelling count data with overdispersion and spatial effects’, statistical papers 49:531-552 hammami, mona, jean-françois ruhashyankiko and etinne b. yehoue (2006) ‘determinants of public private partnerships in infrastructure’, imf working paper wp/06/99. hartwig, karl-hans (2005) ‘infrastrukturpolitik in der diskussion’, in karl-hans hartwig and andreas knorr (eds) neuere entwicklungen in der infrastrukturpolitik. beiträge aus dem institut für verkehrswissenschaften an der universität münster. heft 157. göttingen, pp. 8-30. hart, oliver (2005) ‘incomplete contracts and public ownership: remarks, and an application to public-private partnerships‘, in darrin grimsey and mervyn k. lewis (eds) the economics of public private partnerships, cheltenham: edward elgar, pp. 295-314. hodgson, geoffrey m. (1998) ‘the approach of institutional economics’, journal of economic literature 36(1): 166-192. kaufmann, daniel, aart kraay and massimo mastruzzi (2008) governance matters viii: worldwide governance indicators 1996-2008’, policy research working paper 4654, world bank development research group. klein, michael, jae so and ben shin (1996) ‘transaction costs in private infrastructure: are they too high?’, worldbank private sector development department viewpoint note no. 95. klein, peter and hung luu (2003) ‘politics and productivity‘, economic inquiry 41(3): 433-447. linder, stephen h. (1999) ‘coming to terms with the public-private partnership: a grammar of multiple meanings’, american behavioral scientist 43(1): 35-51. long, scott j. (1997) regression models for categorical and limited dependent variables (advanced quantitative techniques in the social sciences), thousand oaks: sage. moyo, dambisa (2009) dead aid. why aid is not working and how there is a better way for africa, new york: farrar, straus and giroux. north, douglass c. (1991) ‘institutions‘, journal of economic perspectives, 5(1): 97-112. north, douglass c. (1992) institutionen, institutioneller wandel und wirtschaftsleistung, tübingen: mohr siebeck. nuscheler, franz (2005) entwicklungspolitik, 5th edition. bonn: bpb obinger, herbert (2001) ‘demokratie, institutionen und ökonomische entwicklung: eine replik auf christian martin und thomas plümper’, swiss political science review 7(3): 81-96. organisation for economic co-operation and development (oecd) (2007) statistical annex of the 2007 development cooperation report, paris,http://www.oecd.org/ dataoecd/52/9/1893143.xls (consulted 13/12/2013) schomaker ● institutional quality and private sector participation 117 parker, david and keith hartley (2005) ‘transaction costs, relational contracting and public private partnerships: a case study of uk defence’ in darrin grimsey and mervyn k. lewis (eds) the economics of public private partnerships, cheltenham and northampton: edward elgar, pp. 303-314. richter, rudolf and eirik. g. furubotn (1999) neue institutionenökonomik, 2nd edition, tübingen: mohr siebeck. sachs, jeffrey d. and andrew m. warner (1997) ‘natural resource abundance and economic growth’, center for international development and harvard institute for international development discussion paper, nber working paper 5398. schäferhoff, marco, sabine campe and christopher kaan (2007) ‘transnational public-private partnerships in international relations: making sense of concepts, research frameworks and results’, sfb-governance working paper series 6. smith, graham r., n. shafik, p. guislain and j. a. reichert (1997) getting connected: private participation in infrastructure in the middle east and north africa, world bank middle east and north africa economic studies, washington d.c.: world bank. united nations industrial development organization (unido) (2002) unido business partnerships for industrial development, vienna. van de walle, steven (2006) ‘the state of the world’s bureaucracies’, journal of comparative policy analysis 8 (4): 437-448. voigt, stefan (2002) institutionenökonomik, paderborn: fink. wagener, hans-jürgen (2004) ‘die bedeutung guter regierung für wohlfahrt und transformation’, in thomas eger (ed.) erfolg und versagen von institutionen, berlin: duncker & humblot, pp. 119-140. williamson, oliver e. (1975) markets and hierarchies: analysis and antitrust implications. a study in the economics of internal organization. new york: free press. williamson, oliver e. (1985) the economic institutions of capitalism, cambridge: cambridge university press. williamson, oliver e. (2000) ‘the new institutional economics: taking stock, looking ahead’, journal of economic literature 38(3): 595-613. world bank ppi data base (ongoing) private participation in infrastructure database, http://ppi.worldbank.org (consulted 26/12/2013). ziekow, jan (2003) ‘verankerung verwaltungsverfahrensrechtlicher kooperationsverhältnisse’, in jan ziekow (ed) public private partnership – projekte, probleme, perspektiven, speyer: speyer university, pp. 25-78. european journal of government and economics 3(2) 118 annex table a1: countries included in the empirical analysis albania cuba laos somalia algeria djibouti lesotho south africa albania dominica liberia sri lanka angola dominican republic madagascar sudan argentina east timor malawi surinam armenia ecuador malaysia swaziland azerbaijan egypt, arab rep. maldives syria bangladesh el salvador mali tadzhikistan belarus eq. guinea mauretania tanzania belize eritrea mauritius senegal benin fiji mexico seychelles bhutan gabon moldavia sierra leone bolivia gambia mongolia thailand botswana georgia morocco togo brazil ghana mozambique tonga burkina faso grenada namibia tunisia burundi guatemala nepal turkey cambodia guinea nicaragua turkmenistan cameroon guyana niger uganda cape verde haiti nigeria ukraine central african republic honduras oman uruguay chad india pakistan uzbekistan chile indonesia panama vanuatu china iran, islam. rep. papua new guinea venezuela colombia ivory coast paraguay vietnam comoros jamaica peru west bank and gaza congo jordan philippines yemen congo, dem. kazakhstan poland zambia costa rica kenia russian federation colombia kiribati ruanda comoros kirgizstan samoa european journal of government and economics volume 2, number 1 (june 2013) issn: 2254-7088 41 government vs opposition voting in the finnish parliament eduskunta since world war ii antti pajala, university of turku abstract in a parliamentary system it is by definition justified to assume the government parties voting almost always in a unitary manner in plenary votes. in a multiparty system it is, however, hard to predict how the opposition groups vote. few studies analysing government-opposition voting in the finnish parliament eduskunta were published during the 1960s and 1970s. this study provides similar analyses regarding the parliamentary years of 1991-2012. combined the studies provide an insight into the government-opposition relations since world war ii. the results show that before the 1990s the government-opposition division in plenary votes appeared rather clear and the political party groups’ positions followed the traditional left-right dimension. since the 1990s, the government-opposition division has become greater. the governing coalition acts almost as a bloc while the opposition groups are divided into moderate and hard opposition. the opposition groups, however, appear in a more or less random order. consequently, since the 1990s the left-right dimension has disappeared with respect to plenary voting. jel classification d70; d72 keywords voting; parliament; opposition; finland acknowledgements the author wishes to thank the three anonymous referees for helpful ideas and suggestions. this work is supported by the academy of finland. european journal of government and economics 2(1) 42 introduction in parliamentary systems it is rather obvious to assume that the government groups almost always vote together in plenary votes. in such multi-party systems it is much harder to predict how the opposition groups vote. for example, some groups might act as support parties for government coalitions while some groups might nearly always oppose the coalition for tactical or political reasons. this study analyses opposition and government groups’ plenary voting behaviour in the finnish parliament ‘eduskunta’. in the analyses below the data cover the parliamentary years of 1991-2012. together with previous finnish plenary voting studies published earlier in the late 1960s and early 1970s we are able to provide an insight into cooperation between government and opposition in eduskunta since world war ii. the context of parliamentary politics in finland has changed considerably over time. nousiainen (2000, 2006) divides finnish parliamentary history into three distinctive eras. the first of them lasted from the beginning of the country’s independence in 1917 to the late 1930s. representative of the time were short lived bourgeois minority coalitions. after the exceptional years of the war, distinctive to the second parliamentary era were majority coalitions which were formed around the social democratic party (sdp) and the finnish agrarian union (ml, later renamed as the centre party kesk). later in the 1960s and onwards the communist finnish people’s democratic league (skdl) also participated from time to time in government. these majority coalitions were still short lived. the party groups were somewhat inflexible with their governmental policies and negotiating a solution during governmental crisis was impossible more often than not. the second parliamentary era continued to the early 1980s. the prolonging of this era was caused by “issues of foreign policy”, i.e. relations with the soviet union (nousiainen 2006, 294). consequently, the national coalition (kok), a bourgeois party, was not considered as a plausible coalition partner even though it had grown in popularity over the decades. the third parliamentary era can be seen to have started after sorsa’s fourth cabinet (1983-1986). governments lasting for the whole electoral period have been the standard almost without exceptions since then. what is distinctive to the third parliamentary era was also the dismissal of the old triangle of sdp, skdl and kesk as the backbone of the coalitions. the following the holkeri government (1987-1990) had sdp and kok as the main coalition parties. after the holkeri government basically any majority coalition could have and has been possible as ideological issues have not been an obstacle. a new triangular phenomenon took place during 1991-2010: out of the three largest parties (kesk, kok, sdp) two were the main coalition partners and one was left in opposition. the 2011 elections resulted in a sudden success for the populist true finns (ps) and the party became the third largest party in eduskunta. previous studies together with the applied data and analyses below will provide a rough picture of two parliamentary eras since world war ii. in the previous context plenary votes are at the core of political decision-making, however, the mass media are not interested in the votes unless there are notable dissidents within party groups or there are dissident government groups, for example. what the mass media is publishing very frequently is discussion which highlights the division between government and opposition. a weakly justified belief might well be that the opposition always votes against the government for political and tactical reasons. the previous finnish studies, however, provide evidence that this is not the case in eduskunta. also the analyses below lend support to this observation. moreover, i show that the government-opposition relations have changed considerably between the last two parliamentary eras. pajala ● government vs opposition voting in the finnish parliament eduskunta 43 while eduskunta has its own peculiarities and nuances, it can still be regarded as a rather typical mainstream parliamentary legislature. the main research setting, which is elaborated later on, is the following: first, most probably the government groups act in a unitary manner in plenary votes while the opposition groups do not. there is no systematically coordinated opposition. moreover, it is often the case that the opposition is comprised of parties in opposite ends of the traditional leftright dimension. second, the opposition groups vote with the government in varying degrees while an extreme opposition always opposing the government is not likely to exist. this setting leads to the main research questions: how united is the government? how united is the opposition? into what extent do the opposition groups vote with the government? what can we say about cooperation among the party groups during the last two parliamentary eras? the remaining step in the analysis is the theoretical question of what explains the party groups’ observed behaviour. the theoretical framework presented in arter (2006, 180-2) suggests parties exercising various strategies in parliamentary activities. the office-seeking, policy-seeking and profile-seeking (vote-seeking) strategies refer to opposition, although they can be used with respect to the governing parties as well. while the strategies are not mutually exclusive, they can be used as an aid in explaining the voting behaviour of the party groups. this work draws heavily on pajala (2011) published in finnish. the data regarding the modern years in pajala (2011) were limited to 1991-2006. the applied data below include six additional parliamentary years and now cover the 2007-2010 electoral term as well as the first two years of the 2011-2014 term. here i also apply a variation of the cooperativeness illustration method by laakso (1972a) instead of the original version used in pajala (2011). following the introduction is a review of the previous finnish studies and their main results concerning the second parliamentary era. subsequent to this i introduce the theoretical framework together with an account on finnish parliamentary opposition and its changing role in eduskunta. the next chapter starts by presenting the data, which are followed by the yearly analyses of government-opposition voting. next, a variation of the cooperation measure developed by laakso (1972a) is introduced and the votes are pooled and analysed per electoral terms. in order to get a comprehensive picture between the two parliamentary eras, i compare the results with the earlier findings of laakso and others. a short discussion concludes. previous and related research the political dimensions constructed below are explicitly interpreted as the government–opposition dimensions. as such they cannot be treated as “ideological” dimensions, but rather as “practical” dimensions apparent in parliamentary systems. recently pajala (2012) analysed plenary votes in eduskunta using the optimal scaling (oc) method developed by poole (2000; 2005). oc and other scaling methods are able to provide the ideal points of the mps in a number of political dimensions. as in latent variable analysis, the political dimensions have to be interpreted by the researcher. one of pajala’s (2012) main results is that during the last few decades the dimension having the most explanatory power is the government–opposition dimension. higher, possibly ideological, dimensions had only very marginal explanatory power and could not be sensibly interpreted. put another way plenary votes seem to reflect ideological dimensions rather poorly. ideological dimensions colour the background while plenary voting is everyday politics. setting aside plenary votes, political dimensions and parties’ ideal points have been studied by other means as well. use of expert interviews by benoit and laver (2006) is one such possibility while the textual analysis of party programmes by klingemann et al. (2006) is another. these data have also been gathered regarding finland, however there is slight variation in the positioning of some of the european journal of government and economics 2(1) 44 parties between the expert interviews and textual analyses. recently paloheimo (2008, 54), using multidimensional scaling in conjunction with opinion poll data, concluded that the traditional left-right dimension is still the most important ideological dimension in finland. while plenary votes no longer highlight the left-right dimension, this was not the case in the past. regarding previous decades some pioneering plenary vote analyses were carried out by risto sänkiaho (1969), markku laakso (1972a; 1972b) and pekka nyholm (1969; 1972). this promising array of analyses seems, however, not to have continued afterwards. the data regarding the above studies concern the 1950s and 1960s and provide us with a rather good view on the second parliamentary era of finland. as below, the historical analyses were carried out in the ppg level. however, instead of having the government majority fixed to the extreme-right the studies had the national coalition fixed to the right (in a technical sense). the methods applied in the laakso, sänkiaho and nyholm studies varied, although the basic idea in all of them was to measure and evaluate ppg cooperation and distances by comparing group majorities vis-à-vis each other in plenary votes. sänkiaho also compared individual members of parliament (mps) somewhat along the lines of modern scaling methods. the results in the studies are rather similar regardless of the method used. the cooperation or distance measure introduced by laakso (1972a) together with a variation of his graphical presentation method is applied below. pekka nyholm (1972) relied on older technique and used a slightly simpler cooperation measure proposed by stuart rice (1928). although the research of sänkiaho (1969) is limited in data, it is methodologically the richest. he starts his account by finding out how the individual voting decisions of the mps correlate over the votes. in order to find out factors affecting the voting decisions of the mps the correlation matrix is then used for factor analysis. the most important factor thus obtained was the party affiliation of the mps. laakso, sänkiaho and nyholm studied various pre-defined ppg combinations over the votes as well. deviating from other papers sänkiaho reports an interesting detail according to which the mps voted but few times against their respective ppg majority. this result complements the earlier voting cohesion analysis of nyholm (1961) by showing that deviations from complete ppg voting unity are not a result of the same rebellious mps. two common denominators in the historical studies are: (1) plenary votes highlight the difference between government and opposition ppgs. as said above, this is a feature parliamentary systems, however compared with the results below, the distance between government and opposition now appear to be greater (2) plenary votes highlighted the ppgs appearing according to the traditional left-right dimension as well. here, however, the second and third parliamentary eras differ in one important aspect. previously, the main coalition partners were always adjacent groups in the left-right dimension. in more recent times (since the holkeri government 1987-1990), this has only once been the case. if the cabinet is not connected, this affects the plenary voting of the opposition as well. below we shall treat the ppgs as having just one voice. this assumption is realistic and justified as already the historical studies showed that the most important factor behind the voting decisions of the mps was found to be the party affiliation. indeed, intra-party voting cohesion in finland has been very high throughout the two latest parliamentary eras. over the decades, the voting cohesion has increased even further (nyholm and hagfors 1968; pajala and jakulin 2007). among the nordic countries voting cohesion in finland has been the lowest (jensen 2000). during the 2007-2010 electoral term, some of the ppgs had perfect voting unity, so the difference nowadays is likely to be hairbreadth. internationally, ppgs in parliamentary systems typically have very high internal voting cohesion. the rice cohesion index ranges from zero to one, and typically pajala ● government vs opposition voting in the finnish parliament eduskunta 45 the respective values are well over 0.9 (rice 1928, sieberer 2006). systems showing low ppg voting cohesion are usually non-parliamentary. the usual examples are the european parliament and the u.s. congress, for which the cohesion values are around 0.6-0.7. opposition in eduskunta finally, as the assumption of ppgs in the governing coalition voting similarly is at the very heart of parliamentary systems the main interest lies in the behaviour of the opposition. it seems there is rather little systematic research on parliamentary oppositions (for references see pajala 2011, 216). mainly, the literature focuses in defining and studying the nature of opposition and distinguishing different types of opposition in various countries. regarding finland the chapters in arter (2006) and the monograph by rantala (1982) are probably the most recent and comprehensive accounts. the standard finnish textbooks review the opposition only very briefly (nousiainen 1998; paloheimo and wiberg 1996; wiberg 2008). the book series published in the honour of the 100-year-old eduskunta include some articles (jyränki 2006; nousiainen 2006; ollila 2007). parliamentary opposition in finland is defined here to consist of those ppgs and mps who are not in the government coalition. the most important tasks of the opposition usually found in the literature are listed for example by helms (2008): (1) criticising the government, (2) scrutinising and checking governmental actions and policies, and (3) representing a credible ‘alternative government’. two kinds of opposition are identified by sartori (1971), which are relevant here: first there is the responsible constitutional opposition, which includes ppgs who are aware of a realistic possibility of being in the government in the future. the behaviour of these parties is usually rather modest and realistic in parliaments and in parliamentary elections. the second type is a constitutional but non-responsible opposition. parties belonging to this category are aware that their probability to govern is very low. these irresponsible opposition parties tend to be “promising wildly and outbidding” as sartori (1971, 35) puts it. in the newest i.e. the third finnish parliamentary era the opposition parties can all be categorised being responsible opposition parties. basically any of the ppgs could have been in government responsibility. in the preceding second era, at least two right-wing parties (including the national coalition kok) were in permanent opposition for some decades, however these parties still acted more or less as responsible oppositions. during this era, the strong left-right dimension limited the number of possible government coalitions, however the gradual disintegration of the dimension opened up new avenues. according to nousiainen (2000; 2006, 297) after the 1999 parliamentary elections any majority coalition could have been possible. ideological restrictions were not obstacles any more. in fact, probably the same would hold for at least two previous elections as well. as finland is not a two-party system the opposition cannot represent a credible alternative government, but its main task remains to criticise the government and to some extent scrutinise and check governmental actions and policies. deviating from finland the scandinavian neighbours have a long tradition of minority governments, which often need support from opposition parties in order to pass legislation. hence, the supporting parties might be in “opposition” in varying degrees (christensen and damgaard 2008). summing up the previous, opposition ppgs in eduskunta will present policy alternatives and hence will distinguish itself from the governing coalition. nousiainen (2006) characterises the current role and choice space of the opposition: as the finnish parliamentary system is currently a true majority one the opposition groups can be regarded as powerless spectators while the governmental parties negotiate and decide upon major political issues. the most important political decision making and negotiation arena is the cabinet negotiations and especially the writing of the government programme. this process lasts few weeks after the elections, however, the most important policy formulation european journal of government and economics 2(1) 46 takes place during this short period of time. the most visible arena the opposition is left with is the plenary hall (ollila 2007). during plenary sessions, the opposition has the opportunity to criticise the actions and policies of the government and provide their own alternatives to government bills by votes. also parliamentary interpellations as well as government reports and announcements (which can include the votes of confidence regarding a single minister or the whole cabinet) are handled in plenary sessions. the role of the opposition has not always been as limited. during the second parliamentary era, the postponement rule and especially two-thirds qualified majority requirement guaranteed the opposition, if united, the possibility to delay an ordinary law proposal to the next annual parliamentary session when it had to be adopted unchanged in order to become a law. should this happen it would have been a defeat for the government. sometimes only the threat to use the postponement possibility guaranteed the united opposition (minimum of 67 mps) negotiation leverage. the current “true” majority system has been seen being established along with the 1992 partial constitutional reform when the postponement rule and the qualified majority requirement regarding ordinary legislation were removed from the old 1906 constitution and the 1928 parliamentary act. previous partial reforms in the 1980s to the 1928 parliamentary act had changed the postponement of a law proposal only to the next annual parliamentary session instead of postponing it to the next electoral term (helander 1990; jyränki 2006, 102-105). the old regulations can be seen as being rather efficient as laws were very rarely postponed. according to helander (1990, 57) on average only 1.5 law proposals were postponed yearly during 1917-1986. modern finnish society in general does not resemble much of what it was during the 1950s, 1960s or even the 1970s. in the past, the class cleavages were substantially wider. since world war ii finland gradually became a very wealthy country and at the same time the class cleavages became much thinner. the vast majority of the finnish population can be seen belonging to the upper or lower middle class. at the same time also political parties have changed and their political programmes have significantly converged (paloheimo and raunio 2008; paloheimo 2008). parties have adopted catch-all strategies which aim at maximising votes in general elections. paloheimo and raunio (2008) call modern parties “election parties” (vaalipuolue). this progress continued more or less undisturbed for decades. only after the 2011 elections the party system experienced a major shock. the true finns (ps), a radical populist protest party, won the elections and suddenly became the third largest party in eduskunta. compared with the second parliamentary era the governing coalition can nowadays be regarded as a true bloc. instead of the short lived cabinets of the second era, which nousiainen (2000; 2006, 294) characterises as politically fast pulsing, overall rather unorganised and only weakly predictable, the governments have remained in power for the whole electoral periods since 1983. now the government programmes are long and detailed thus requiring a strong commitment of the coalition partners. in the 1970s, the government programmes were few pages in length while the current programme of the katainen government contains over 100 pages and is the result of intense negotiations after the 2011 elections. the coalition partners also sign a set of written rules guiding their behaviour in the parliament. hence, inside the coalition the ppgs or mps are not allowed much room to move and the bloc acts almost in a unitary manner. the opposition, in turn, is not systematically coordinated. its position in the parliament is hard and the main public working arena is the plenary hall. the role of the opposition is narrowed to criticise the actions of the government in speeches and providing alternatives to government bills (creating votes). chances having an effect on major political decisions or strategies are virtually non-existent. in order to predict how the opposition parties vote we shall turn into the basic framework of ppg strategies in parliamentary systems. accordingly, ppgs can adopt three main pajala ● government vs opposition voting in the finnish parliament eduskunta 47 strategies: first, an office-seeking strategy, second, a policy-seeking strategy, and finally, a profile-seeking (vote-seeking) strategy. the strategies are not mutually exclusive, but rather complimentary. (arter 2006, 181-182.) these strategies lead us to the following rank order prediction of opposition ppgs. the largest ppgs (kesk, kok, sdp and ps since 2011), when in opposition, will adopt mainly an office-seeking strategy. these parties will remain in moderate opposition as they do not risk the chance of being considered too far from the mainstream policy consensus. in opposition they will not irritate the governing coalition too much as this might have negative consequences in future government formation. other, smaller ppgs, while also interested in stepping into office, have lower chances of succeeding. these parties have a stronger need to appeal to their voters and thus need to exhibit more profile-seeking strategies when in opposition. therefore the distances of the smaller ppgs from the government majority are likely to be greater than the above large parties. the hardest (but not necessarily extreme) opposition is likely to consist of (small) radical parties (arter, 2006, 182). in finland these would include the radical populist ps and possibly vas, which is the leftmost ppg regarding the left-right dimension. these parties probably exhibit the most active policy-seeking strategy. finally, in the following section the voting patterns are studied per parliamentary year as well. when elections approach in the last year of an electoral term, parties need to stand out. with respect to plenary voting opposition parties can act in two ways: vote more frequently with the government or against it. the former would indicate a party getting closer to the mainstream political consensus presenting itself as a viable coalition partner. the latter would indicate a party presenting itself as a true alternative to the governing coalition. both strategies would be carried out in order to attract voters. however, as plenary votes are mostly a product of opposition activity and opposition parties support their own initiatives, intuitively it should be the case that opposition parties move apart from the government during the last year of an electoral period. data and analyses the applied data is collected by pajala and jakulin (2012) and include detailed information about all 12269 plenary votes taken during 1991-2010 parliamentary years. pajala (2013) has gathered 1077 votes for the 2011 and 2012 parliamentary years. roughly half of the votes are budget amendment votes. these votes take place in december when eduskunta decides upon the state budget for the next fiscal year. for more details on the votes see pajala (2006). as i shall consider aggregate level votes instead of individual mp vote decisions, two definitions are needed for the analyses below: first, the voting choice of a ppg is the one supported by the majority of the ppgs members. consequently, if the majority of the members of a ppg voted “yes” then the voting choice of the whole ppg is also “yes”. otherwise the ppgs voting choice is “no”. i shall not consider abstentions or absent mps. second and likewise, the voting choice of the government is the one supported by the majority of the government coalition mps. one person groups have been disregarded. for example, the true finns exist only since 2003 even though the party had one mp (raimo vistbacka) during 1995-2002. government-opposition voting per parliamentary year comparing ppg majorities with government majorities over plenary votes in a parliamentary year let us see in relative terms how often a ppg cooperates with the government. table 1 shows the results in columns 3-12. the second column indicates the number of plenary votes in the parliamentary year and the third column shows the share of votes where the government groups were not in european journal of government and economics 2(1) 48 complete unison. as can be seen the government groups have nearly always (in well over 90 percent of the votes) been in complete unison. on average only some 5 percent of the votes are such that one or more government groups voted against the government majority. since 2007 the disunity of the government has been less than 1 percent and during the past two parliamentary years the cabinet has been in complete unison. in this sense the last six years in table 1 deviate from preceding times. during 1994 and 2002 cabinet disunity is exceptionally high: regarding the former year the christian democrats (kd) resigned from the cabinet, as did the green league (vihr) regarding the latter year 2002. also in 1996 the government disunity is rather high as in 12.4 percent of the votes the government coalition was not in complete unison. while no obvious reason for this phenomenon is apparent the disunity can be seen throughout the lipponen ii government (1999-2002) coalition, however the sdp seems to toe the government line better than others. the same applies to 2002a, however this time it is an election year. in the other columns of table 1 we can see the cooperation scores. the bold and underline style government groups deviate clearly from the opposition groups as their cooperation scores are always very close to the maximum value 100. once again the change in 2007 and onwards is clear as the maximum value appears more often than not in the cabinet ppg cells. resignation from the cabinet substantially lowers the cooperation scores as can be seen in the cases of kd and vihr in rows 1994b and 2002b, respectively. at least as interesting are the opposition ppgs cooperation scores. an extreme opposition group, which would have cooperation score zero does not exist in table 1, however, after the 2011 parliamentary elections the true finns (ps) were nearly there in 2011 when their score was only 2.0 out of 100. indeed, the hardest opposition politics has been exercised by the ps, especially after the 2007 elections. also left-wing alliance vas (when in opposition) has shown similar behaviour, most visibly during the 2007-2010 term. the agreement score of the kd has been on the rise throughout their opposition period and was already over 50 in 2010. however, the most moderate group has been kok during 2003-2006. well over 50 percent of the votes were such that the majority of kok mps voted in line with the government. for other times the same holds for the young finns (nuors) and to some extent also vihr. whenever one of the largest groups (sdp, kesk or kok) was in opposition, the ppg exercised rather modest voting behaviour against the government, especially in the later years. a notable exception is ps during the last parliamentary term: ps is now the third largest group; however it is almost an extreme opposition party. only the swedish people’s party (sfp) has been continuously in the cabinet. an interesting detail is a cycle where opposition parties tend to get closer to government during the last year of an electoral term. this observation is against the prediction stated above. nyholm (1961, 124-125) defines two aspects with respect to matters processed in eduskunta. first, there are matters for which the technical contents are very important. second, there are matters for which the political significance is high. nyholm (1961, 124) continues to propose a dimension where one extreme would denote matters of pure technical interest. in the middle are matters with rather balanced political and technical importance. in the other extreme are matters of utmost political importance. these are votes of confidence such as parliamentary interpellations, government reports and announcements. nyholm (1961) observed that ppgs voting unity is higher in the votes of confidence as did pajala (2010, 1415) regarding the current data. keeping in mind the results in table 1 the ppgs seem to approach the vast majority of the votes considering the technical contents of the proposals. it would seem that the political importance of the votes is not very high as otherwise the scores in table 1 would be lower than they appear. following the idea of nyholm (1961) pajala (2011) separated and analysed the votes of confidence. the hypothesis was that compared with the results in table 1 the government groups should now show higher agreement scores and the opposition groups lower. while the prediction for the former was correct the latter pajala ● government vs opposition voting in the finnish parliament eduskunta 49 groups did not show lower scores, but in some cases even higher. the ppgs internal voting unity is higher regarding votes of confidence, however the opposition groups do not vote more often against the government in these votes as one might have assumed. table 1. government groups’ voting unity and shares (%) of plenary votes during 1991-2012, where other ppgs voted with the government majority year vot. gov . sdp kes k ko k vih r sfp kd vas ps vr var nu or s sm p 1991 621 2,6 51,2 99,8 100, 0 40,6 98,9 98,4 13,2 34,1 1992 834 4,9 26,5 99,6 99,4 26,1 98,3 97,2 17,4 24,1 1993 897 6,5 28,8 98,6 99,0 25,4 97,1 97,8 16,6 17,2 1994a 179 12,8 22,9 96,1 98,3 25,1 95,5 92,2 19,0 32,4 1994b 795 5,0 46,2 97,5 98,6 32,1 98,9 55,0 21,6 28,3 1995 273 1,8 100, 0 19,4 100, 0 98,5 100, 0 16,5 99,6 27,1 52,0 1996 315 12,4 98,1 24,8 95,6 95,2 93,0 26,3 97,5 48,9 53,3 1997 279 6,1 97,1 28,3 99,3 96,8 99,3 25,1 97,1 54,8 50,9 1998 372 7,5 98,7 34,7 98,9 95,2 97,8 26,3 96,8 58,1 62,4 1999 249 4,0 98,4 45,8 99,2 98,4 98,8 31,3 98,0 2000 253 5,9 98,0 34,0 98,8 95,7 98,4 20,9 96,0 2001 271 5,9 99,3 36,9 99,3 97,8 99,3 30,6 97,4 2002a 25 16,0 100, 0 24,0 96,0 84,0 92,0 24,0 96,0 2002b 456 3,7 98,7 48,7 99,3 61,4 98,9 37,7 97,6 2003 491 2,9 98,8 100, 0 68,2 51,9 98,4 45,6 25,7 15,7 2004 723 4,3 97,9 99,7 66,0 52,6 98,1 47,7 24,6 22,3 2005 815 1,3 99,8 100, 0 56,8 39,8 98,9 37,8 14,7 14,8 2006 1002 2,0 99,2 99,8 64,5 43,1 99,0 37,7 11,7 10,9 2007 668 0,2 65,6 100 99,9 99,9 100 51,5 4,2 9,6 2008 722 0,1 49,7 100 100 99,8 100 48,9 4,2 9,0 2009 924 0,1 50,3 100 100 100 99,9 49,6 4,5 8,5 2010 1099 0,9 57,6 99,7 99,8 99,5 99,9 54,8 8,2 7,6 2011 448 0 100 62,1 100 100 100 99,8 99,8 2,0 9,8 2012 629 0 100 60,3 100 100 100 100 100 9,2 8,3 notes: vot: number of plenary votes; gov: share (%) of votes, in which the government coalition did not vote complete unison; 1994b and 2002b: changes in government composition; party abbreviations not in text: vr and var are small defected factions from vas, the finnish rural party smp is the predecessor of ps; ppgs in governments are bolded and underlined. source: pajala and jakulin (2012) and own computations. turning further into the opposition results in table 2 provide us with an understanding how united the opposition ppgs are in plenary votes. the most important finding is the large variance in how many groups (group majorities) voted against the government. the range is from all opposition parties down to no opposition parties. in the latter case, the votes were the result of proposals by only one mp or a minority of mps from one or more opposition groups. votes like these appeared especially during the lipponen government (1999-2002) after which they seem to have disappeared almost completely. why this is the case remains an open question. during the aho (1991-1994) and lipponen ii governments the most frequent case was the whole opposition voting against the government. the number of opposition groups is at a minimum during the lipponen ii (kesk, kd) and katainen (kesk, ps, vr) governments yet only in roughly half of the votes the opposition has been united. preceding the katainen administration (2011-2012) kesk lost the elections while ps was the winner. both parties ended up in the opposition. apparently kesk lost votes especially to ps which would explain the reluctance of kesk to cooperate with ps. perhaps the same applies to the era of european journal of government and economics 2(1) 50 the lipponen ii government as to some extent the kd and kesk appeal to the same voters. for other times the opposition seems to be rather evenly scattered. since 2005 cases where one opposition group would not have been backed up by at least one other opposition group are rather seldom. why the opposition is so scattered is probably due to the fact that votes are created as a result of proposals from opposition groups. one opposition group might be interested in some topic and sees it important or potentially advantageous to register their opinion to the plenary minutes while other opposition groups might show no interest to the matter at hand. after all, opposition in eduskunta is not systematically coordinated. table 2. shares (%) of how many opposition groups voted against the government during 1991-2012 year 0 1 2 3 4 5  (%) 1991 0,6 21,7 21,7 27,9 28,0 100 1992 2,5 10,2 14,3 24,9 48,1 100 1993 2,2 9,7 14,8 20,3 53,0 100 1994a 1,7 14,0 11,7 27,4 45,3 100 1994b 2,5 8,2 21,0 25,8 23,3 19,2 100 1995 1,5 12,8 18,7 33,3 33,7 100 1996 4,4 18,7 21,9 35,6 19,4 100 1997 7,2 18,6 19,4 35,8 19,0 100 1998 9,9 19,4 23,9 35,8 11,0 100 1999 26,1 24,9 49,0 100 2000 18,2 18,6 63,2 100 2001 23,6 20,3 56,1 100 2002 22,2 23,7 28,5 25,6 100 2003 0,4 18,1 21,0 24,2 21,2 15,1 100 2004 1,1 16,3 24,3 24,2 20,9 13,1 100 2005 0,0 6,6 22,7 22,3 24,7 23,7 100 2006 0,6 5,9 23,9 22,5 24,9 22,4 100 2007 0 6,7 40,4 29,8 23,1 100 2008 0 4,4 34,1 30,3 31,2 100 2009 0 5,5 34,8 26,7 32,9 100 2010 0,2 6,9 40,3 26,1 26,5 100 2011 0 7,6 58,7 33,7 100 2012 0,1 8,7 59,8 31,3 100 notes: for example in 1991 four opposition groups voted against the government in 28 percent of the votes; 1994a: kd in government; 1994b: kd not in government. source: pajala and jakulin (2012) and own computations. government-opposition voting per electoral term so far we know the opposition groups are voting against the government with varying intensities. there are no extreme opposition groups which would always vote with or against the government. this is hardly surprising as there are no antiestablishment parties in eduskunta; moreover, minority governments (with their possible support parties) have not existed for decades. in what follows the analysis focuses on electoral terms instead of single parliamentary years in order to provide a more general picture on the cooperation among the ppgs. government majority, as previously, is assumed to be an ‘actor’ among the party groups. for the analyses, i shall use a variation of a measure of group cooperation (or group distance) defined by markku laakso (1972a; 1972b). this measure has a very intuitive vector presentation. basically, laakso’s measure is a more sophisticated version of the previous cooperation measure of rice (1928). the measures are, however, not comparable and rice’s measure does not have a vector interpretation (laakso 1972a, 9). from previous finnish literature only laakso’s results can and will be compared with the ones presented below. the rice (1928) and laakso (1972a) measures are basically just simple measures of distance between two voters over some set of votes. first we assume the voting choice of a ppg being the choice favoured by the majority of the ppg. the majority assumption is in our view rather justified as the voting minorities of the pajala ● government vs opposition voting in the finnish parliament eduskunta 51 ppgs, if any, are typically marginal (pajala 2010). next we assume the voting choice of the government being the one supported by the majority of government groups’ mps. there are four possibilities how two groups ai and aj can vote: both can vote “yes” (yy) or “no” (nn) or the groups can disagree (yn or ny). so, the more there are yy and nn cases thus lowering the number of yn and ny cases the closer the groups are. the difference between the voters’ cooperation and disagreement is then divided by the number of votes v. formally, laakso’s distance c in a vote can be obtained as     v nyynnnyy c ji aa   , where index ji aa c can have values in the range of [-1, 1]. value 1 denotes complete agreement and -1 complete disagreement between two voters over the votes. at zero the voters (dis)agree on half of the votes. the computation over the votes will result in a distance matrix. the closeness or cooperation between two groups can now be illustrated geometrically by representing the groups as unit vectors and computing the angle between the vectors by using the values of ji aa c . if we consider the ppgs as vectors in a space, their relation to the government majority can be visualised in the upper half of a unit circle (the length of the vectors is irrelevant). the government vector is fixed to the rightmost position i.e. the positive x-axis. starting from origin the end point of the government vector is thus at (1, 0). a ppg vector always disagreeing with the government and having an index value of -1 would be mirroring the government in the negative x-axis ending at (1-, 0). a voter having an index value of 0 would be (dis)agreeing with the government in exactly half of the votes having a vector equal to the positive y-axis ending at (0, 1). the index value is simply the angle between the unit vectors. in laakso’s original visualisation, the index value is the projection of a voter’s vector to the x-axis. now, it is of course a matter of taste which version is applied. we like to apply the simpler visualisation and highlight the closeness of the government parties by using the angle as the index value. the projection version diagrams would instead boost the differences with respect to the government parties due to the underlying non-linear trigonometry. for details on laakso’s original method see pajala (2011). as an example consider groups kok and the agrarian union (ml) in figure 1 having ji aa c index value 0.83. converted to degrees we have 90*0.83 = 75 degrees (to the right of y-axis). likewise kok and sdp have ji aa c = -0.36 in figure 1. converted to degrees we get 90*-0.36 = -32 degrees (to the left of the zero point i.e. the y-axis). instead of having the government majority as the rightmost voter laakso (1972a; 1972b) put kok as the rightmost vector. the choice was quite understandable as at the 1960s kok was considered the right-wing extreme in the technical sense that there was nothing to the right of kok. thus, all other groups could be measured against kok. this resulted in a sort of pre-defined left-right dimension. in order to shed light to the second parliamentary era of finland we turn to the three governments analysed in laakso (1972a). the oldest of these was lehto’s caretaker cabinet followed by virolainen’s (kok, ml, sfp, kp) right-wing coalition and finally the subsequent paasio government (sdp, skdl, kesk) which was a centre-left-wing coalition. figure 1 shows the political landscape during the virolainen government 1964-1966. the basic party setting and left-right dimension is almost identical regarding all three previous governments as it is in figure 1. although lehto’s preceding caretaker cabinet was not responsible politically, practically the only difference with regard to figure 1 was ml and vm being close together roughly where ml is in figure 1. during the paasio government, the leftwing coalition partners (sdp, skdl) together with tpsl were close together roughly where tpsl is in figure 1. also kesk was close to the left-wing coalition european journal of government and economics 2(1) 52 partners being only a hair to the right. the right-wing parties considerably resemble the respective setting in figure 1. the movement of ml from one side of the y-axis to the other was the largest ppg movement during these three governments of the second parliamentary era. all in all the division into socialist and non-socialist parties was very clear as figure 1 shows. figure 1. government and opposition voting during the virolainen government (1964–1966) notes: party abbreviations not in text: tpsl = social democratic league, vm = liberal league, kp = liberal people’s party. source: nyholm (1972a) and own computations. moving to the third parliamentary era figures 2a-2f shows the political landscapes of the aho (1991-1994), lipponen i (1995-1998), lipponen ii (1999-2002), vanhanen i (2003-2006) and vanhanen ii / kiviniemi (2007-2010) governments and the first two years of the katainen (2011-2012) governments. the government majority (gov) is always located as the rightmost vector. compared with laakso’s (1972a, 1972b) result the most obvious difference is the closeness among the government groups: with respect to every government in the third era the coalition partners virtually show a unitary voting behaviour regardless of the composition of the government. the only old cabinet which resembles the modern ones is at some extent paasio’s centre-left coalition. nowadays the vectors of the coalition partners are hardly distinguishable and opposition groups are very clearly apart from the cabinets. compared with the previous decades another important difference is that the left-right dimension cannot be seen any more. the government is a separate tight cluster and the opposition parties differ from the cabinet in a more or less random order. in figures 2a-2f, the y-axis (not drawn in the figures) for which the cooperation measure is zero can be interpreted as a divider: groups to the right of the positive y-axis are more likely to vote with the government than against it and on the left side of the y-axis the groups are more likely to oppose the government than to vote with it. the ppgs seem to form three clusters: one is the cabinet on the right. second is the moderate opposition. a good example is kd, vihr and kok in figure 2d, or kd and sdp in figure 2e. it appears every government has at least one opposition party which is more likely to vote with it than against it. examples are kok in figure 2d and kesk in figure 2f. the third cluster are the less moderate or hard opposition. examples are ps and vas in figures 2d-2e. the hardest opposition is also the most recent as is shown in figure 2f (vr and ps). in fact, the opposition has become harder over time in figures 2d-2f. only if we set the resigned kd (resignation took place almost at the end of the 1991-1994 electoral period) aside in figure 2a the political landscape during the aho government is perhaps the most polarised when compared with the other times. the christian democrats resigned from the cabinet in 1994 and the greens of pajala ● government vs opposition voting in the finnish parliament eduskunta 53 vihr in 2002. the effects can be seen in figures 2a and 2c. after the resignations both parties deviate significantly from the cabinet, but only became moderate opposition parties. during every government, the opposition is rather scattered lending support to the observation that the opposition is not systematically organised. figure 2a. government and opposition voting during the aho government (19911994) figure 2b. government and opposition voting during the lipponen i government (1995-1998) european journal of government and economics 2(1) 54 figure 2c. government and opposition voting during the lipponen ii government (1999–2002) figure 2d. government and opposition voting during the vanhanen i government (2003-2006) pajala ● government vs opposition voting in the finnish parliament eduskunta 55 figure 2e. government and opposition voting during the vanhanen ii and kiviniemi governments (2007-2010) figure 2f. government and opposition voting during the first two years of the katainen government (2011-2012) discussion to recap, the purpose of the paper was to measure cooperation among ppgs in plenary votes. more precisely, the idea was to measure cooperation between government and opposition groups using information obtained from the comparison of group majorities to government majorities over parliamentary votes during 19912012. by comparing these results with previous literature the aim was to map out the patterns of ppg cooperation in finland since world war ii. two main results could be found in the previous literature published in the late 1960s and early 1970s. first, plenary votes divided the government groups and the opposition groups into two separate and distinctive camps. second, the votes also showed the ppgs following the traditional left-right dimension. during the 1950s nearly half of the plenary votes were of type that pitted communists (skdl) against others (nyholm 1961, 134). the previous studies provide us with a rough picture on parliamentary dynamics until the mid-1980s. using the terminology of nousiainen (2000; 2006) the previous literature is about the second parliamentary era of finland. in comparison the above results provide us with a picture on the subsequent third era of majority parliamentarism. the most important result has continued to be the clear division into government and opposition groups as in european journal of government and economics 2(1) 56 previous times. moreover it is now the case that government groups are a bloc voting virtually always in a unitary manner. the difference with the second era governments is clearly observable. also, during the second parliamentary era the polarisation of the groups was rather high. the opposition groups were very far from the governing coalition. it seems there was less polarisation at the beginning of the third era, though since 2007 the polarisation seems to have been on the rise. a second important result was the absence of the left-right dimension with respect to the ppgs. this result is not entirely unexpected as for example the lipponen i and ii ‘rainbow’ coalitions practically included the whole dimension while kesk was in opposition. the same of course applies to katainen’s ‘six pack’ coalition in office at the time of writing. looking at the plenary votes it seems that ideological differences or variety among the political parties and hence also the ppgs have almost entirely disappeared. the former ‘ideological’ opposition has been replaced with its modern version which consists of ppgs that were left out of the coalition in the government negotiations. exacerbating the situation we could perhaps talk about a more or less ‘technical’ opposition. this, however, applies also to the governments as ideology was a strong factor in government formulation after world war ii and almost up to the 1990s. in those days, the lifespan of a government was considerably shorter in comparison with the modern ones lasting for the whole four-year electoral period. during the second parliamentary era, the parties were rather inflexible ideologically and politically causing frequent government crisis. since the 1990s basically any party combination including two out of the three (or four) largest parties has proven to be able to work. ideological issues have not been the main obstacles. the best examples of this are the oversized coalitions of lipponen and katainen. the rank order prediction of opposition ppgs was rather successful. the largest ppgs (kesk, kok, sdp), while in opposition, were found in the modest opposition and sometimes voted more likely with the government than against it. an exception to this was ps in the current electoral period. after the 2011 elections the party became the third largest ppg, however, adopted a completely different voting pattern being almost in extreme opposition. this is a new feature in finnish politics. as a small party, ps was predicted to be in the hardest opposition together with vas, which appeared to be the case. finally, other small parties were found to be farther away from the government as the above three large ones, as expected. against the somewhat intuitive prediction, the opposition parties moved closer to governments during the last year of an electoral period. details of this rather interesting observation are left for further research. what was not visible any more in the latest parliamentary era was the left-right dimension which was still so obvious in the preceding times. it is of course the case that above i have specifically analysed the government-opposition dimension. however, according to the scaling results in pajala (2012) this dimension has the most explanatory power with respect to plenary voting. higher dimensions were hardly interpretable and at the best showed only weak traces of a possible left-right dimension. it is of course possible to order the parties from left to right and several data sources provide estimations for such positions. still, the difficulty is that only vas is unanimously seen as the leftmost party, but for the rest there is no consensus. a further thing is that government coalitions are not comprised of ideologically adjacent parties in the left-right sense. this is probably the main reason why the left-right dimension is nowadays virtually non-existent regarding plenary voting. as a concluding statement, this study has shown that (with the possible exception of the most recent electoral term) eduskunta is not at all the divided and extremely polarised public arena that one might suspect by following the arguments in plenary popularised by the mass media. pajala ● government vs opposition voting in the finnish parliament eduskunta 57 references arter, david (2006) democracy in scandinavia: consensual, majoritarian or mixed? manchester: manchester university press. benoit, kenneth and laver, michael (2006) party policy in modern democracies. london: routledge. christiansen, flemming and damgaard, erik (2008) ‘parliamentary opposition under minority parliamentarism: scandinavia’, journal of legislative studies 14(12): 46-76. helander, voitto (1990) ‘lepäämäänjättämismekanismi: tutkimus vj 66.7§:n käytöstä itsenäisyyden aikana’, studies in political science 45: university of turku. helms, ludger (2008) ‘studying parliamentary opposition in old and new democracies: issues and perspectives’, journal of legislative studies 14(1-2): 619. jensen, torben (2000) ‘party cohesion’, in esaiasson, peter and knut heidar (eds.), beyond westminster and congress: the nordic experience. columbus: ohio state university press. jyränki, antero (2006) ’kansanedustuslaitos ja valtiosääntö 1906-2005’, in suomen eduskunta 100 vuotta series, part 2 eduskunnan muuttuva asema. helsinki: edita, pp. 1-179. klingemann, hans-dieter, andrea volkens, judith bara and ian budge (eds.). (2006) mapping policy preferences ii: estimates for parties, electors and governments in central and eastern europe, european union and oecd 19902003. oxford: oxford university press. laakso, markku (1972a) ‘eräitä eduskunnan päätöksenteon rakenteellisia piirteitä’. research report c: 21, department of political science, university of turku. laakso, markku (1972b) ‘william h. rikerin poliittisesta koalitioteoriasta: peliteoreettinen tarkastelu sekä empiirinen sovellutus eduskunnan äänestyskäyttäytymiseen vuosina 1964, 1965 ja 1966’. research report n 24/1972, department of political science, university of helsinki. nousiainen, jaakko (2006) ’suomalainen parlamentarismi’ in series suomen eduskunta 100 vuotta, part 2 eduskunnan muuttuva asema. helsinki: edita, pp. 180-335. nousiainen, jaakko (2000) ’suomalaisen parlamentarismin kolmas kehitysvaihe: konsensuaalinen enemmistöhallinta, vireytyvä eduskunta’, politiikka 42(2): 83-96. nousiainen, jaakko (1998) suomen poliittinen järjestelmä, 10th updated edition. porvoo: wsoy. nyholm, pekka (1972) parliament, government and multi-dimensional party relations in finland. commentationes scientarum socialium 2. fennica: helsinki. nyholm, pekka. (1969) ’eduskuntaryhmien kannanottojen keskinäisestä vertaamisesta’, politiikka 11(1): 6-15. nyholm, pekka (1961) suomen eduskuntaryhmien koheesio vuosien 1948-51 vaalikaudella ja vuoden 1954 valtiopäivillä. helsinki: societas scientiarum fennica. nyholm, pekka and hagfors, carl (1968) ryhmäyhtenäisyyden kehityksestä eduskunnassa 1930-1954. research report no. 14/1968, department of political science, university of helsinki. ollila, anne .(2007) ’ammattina kansan edustaminen’, in suomen eduskunta 100 vuotta series, part 5 kansanedustajan työ ja arki. helsinki: edita, pp. 10-173. european journal of government and economics 2(1) 58 pajala, antti (2013) ’plenary votes in the finnish parliament during 2011-2012: electronic vote data’, mimeo, university of turku. pajala, antti (2012) ’eduskunnan ristiriitaulottuvuudet täysistuntoäänestysten valossa vuosien 1991-2010 valtiopäivillä’, politiikka 54(2): 103-118. pajala, antti (2011) ’hallitusja oppositioryhmien suhde eduskunnassa ii maailmansodan jälkeisellä ajalla’, politiikka 53(3): 214-226. pajala, antti (2010) ‘plenary votes and voting cohesion in eduskunta: a descriptive analysis of the 1991-2006 parliamentary years’, acta politica aboensia, b2. pajala, antti (2006) ’eduskunnan täysistuntoäänestykset vuosien 1945 2005 valtiopäivillä’, politiikka 48(1): 64-75. pajala, antti and jakulin, aleks (2012) ‘plenary votes in the finnish parliament during years 1991-2010: electronic vote data’. finnish social science data archive fsd, data #2117. pajala, antti. and jakulin, aleks (2007) ’eduskuntaryhmien äänestyskoheesio vuosien 1991-2006 valtiopäivillä’, politiikka 49(3): 141-154. paloheimo, heikki (2008) ’ideologiat ja ristiriitaulottuvuudet’, in paloheimo, heikki and raunio, tapio (eds.) suomen puolueet ja puoluejärjestelmä. helsinki: wsoy, pp. 27-59. paloheimo, heikki and raunio, tapio (2008) ’puolueiden rooli ja tehtävät demokratiassa’, in paloheimo, heikki and raunio, tapio (eds.) suomen puolueet ja puoluejärjestelmä. helsinki: wsoy, pp. 11-25. paloheimo, heikki and wiberg, matti (1996) politiikan perusteet. porvoo: wsoy. poole, keith t. (2005) spatial models of parliamentary voting. cambridge: cambridge university press. poole, keith t. (2000) ‘non-parametric unfolding of binary choice data’, political analysis 8(3): 211-32. poole, keith and rosenthal, howard (1997) congress: a political-economic history of roll call voting. oxford: oxford university press. rantala, onni (1982) ‘enemmistövalta vai konsensus: parlamentaarinen oppositio isossa-britanniassa, ruotsissa ja suomessa’, studies in political science #41: university of turku. rice, stuart (1928) quantitative methods in politics. new york: knopf. sartori, giovanni (1971) ‘opposition and control: problems and prospects’, in barker, rodney (ed) studies in opposition. london and basingstoke: macmillan, pp. 31-38. sieberer, ulrich (2006) ‘party unity in parliamentary democracies: a comparative analysis’, journal of legislative studies 12: 150-78. sänkiaho, risto (1969) ‘eduskunnan äänestysdimensioista vaalikaudella 1962-66’, research report no. 17/1969, department of political science, university of helsinki. wiberg, matti (2006) politiikka suomessa. porvoo: wsoy. european journal of government and economics volume 2, number 1 (june 2013) issn: 2254-7088 59 ceausescu’s population policy: a moral or an economic choice between compulsory and voluntary incentivised motherhood? florin s. soare, university of bucharest and institute for the investigation of communist crimes and the memory of the romanian exile (iiccmer) abstract the purpose of this paper is to explain why, in 1966, the romanian leadership adopted a wholly restrictive pronatalist policy, based on the strict limitation of abortion, instead of one based on socioeconomic incentives to families, as suggested by technocrats. previous literature shows disagreement on whether the choice was motivated by moralistic or economic considerations. in order to find an answer to this question, hundreds of pages of archival material unpublished so far have been analysed, including the minutes of the central committee of the communist party, statistics, documents identified in the ministry of health archive, and the technical reports that were on the table at the time of the decision. the conclusion of this study, drawn on the basis of these documents, indicates that at the time of 1966, regardless of the suggestions of the technocrats, a decision had already been taken by ceausescu himself. this decision was influenced directly by economic considerations, namely the wish to obtain the maximum pronatalist effect at a minimum budgetary cost. jel classification j10; j13; j18 keywords pronatalist policy; abortion; romanian communist party; birth rate european journal of government and economics volume 5, number 2 (december 2016) issn: 2254-7088 120 hidden costs of cuts: austerity, civil service management and the motivation of public officials in central and eastern europe after the crisis jan-hinrik meyer-sahling, university of nottingham barbara janta, rand europe iveta reinholde, university of latvia christian van stolk, rand europe abstract the implementation of austerity measures presents a dilemma for governments. while austerity measures such as cutbacks aim to reduce costs and enhance public sector efficiency, the same measures might undermine the motivation of employees and, consequently, the prospects of effectively implementing austerity programmes. based on a survey of ministerial officials in poland and latvia, this article finds that the scale of cutbacks explains a larger decline of staff motivation in latvia than in poland. the article further shows that motivation was more likely to decrease after the crisis if austerity measures involved cutbacks such as staff reductions, recruitment freezes, and a reduction of training opportunities. keywords economic crisis; austerity; cutbacks; civil service reform; motivation; central and eastern europe. jel classification h50; j30; d73. european journal of government and economics 5(2) 121 introduction the global financial crisis has provoked a new debate over the status and contribution of public administration research in the age of austerity (kelly and dodds 2012; lodge and wegrich 2012; potter 2012). at the macro-level, research has concentrated on the vulnerability of the state in member states of the organisation for economic co-operation and development (oecd) (lodge and hood 2012), the type of responses that governments have selected to tackle the crisis (armingeon 2012), and the political and economic determinants of fiscal consolidation (lodge and rodríguez-vives 2013; kickert et al 2015). with regard to the organisation of public administration, research has explored the impact of the crisis on administrative reform (randma-liiv and kickert 2016), decision-making and coordination in public administration (peters et al 2011; savi/randma-liiv 2015), human resources management practices (parrado 2010; demmke 2016), compensation packages (oecd 2012) and leadership competencies (leslie and canwell 2010; lodge and hood 2012). much less is still known about the position of public officials vis-à-vis the economic crisis and the austerity measures that have since been passed to varying extent in european democracies. this is especially true for the motivation of public officials after the crisis. the motivation of employees is widely recognised as a key determinant of organisational performance in the public and private sector (huselid 1995; hondeghem and perry 2009; brewer and brewer 2011). the motivation of officials and hence their willingness to exert effort is therefore an important condition for the successful implementation of austerity programmes. however, governments that seek to implement austerity programmes face a dilemma, in that public officials are simultaneously agents and objects of reform. on the one hand, austerity measures such as cutbacks, which are the focus of this article, tend to be associated with staff reductions, wage and pension cuts, hiring and promotion freezes, and fewer resources for training and development (see, for instance, parrado 2010; undp 2010; oecd 2012; raudla et al 2015; demmke 2016). austerity measures might therefore involve hidden costs, in that they have an inherently de-motivating effect on public officials. at the same time, governments have to rely on public officials to implement austerity measures that target public administration and public policy programmes. in the worst case, the efficiency gains from austerity measures are offset by motivational losses trapping government in a vicious circle cutting costs and motivation at the same time. this article addresses this dilemma. it builds on the literature on human resource management, motivation and performance in the public and private sector to examine the impact of post-crisis cutbacks in the area of civil service management on the motivation of public officials. the article focuses on the impact of human resource management practices that follow the enactment of cutback measures. it examines five areas of civil service management including post-crisis changes in recruitment, promotion, dismissal, salary management and training policy in order to identify which of these areas have had an effect on the motivation of officials. in addition, the article assesses the extent to which the wider context such as the scale of a country’s austerity programme and the type of ministry as the immediate work context affect the motivation of officials. empirically, the article is based on a survey of ministerial officials in two countries from central and eastern europe: latvia and poland. latvia belongs the group of european countries that was hardest hit by the global financial crisis. latvia had to apply for support from the international monetary fund (imf) and the european commission in order to avoid default. the international loans were followed by a large-scale restructuring of the public sector including major cutbacks in the civil service. poland, by contrast, is among the european union (eu) member states that was least affected by the crisis insofar as growth of gross domestic product (gdp) remained positive during the post-crisis period. consequently, public sector meyer-sahling ● hidden costs of cuts 122 restructuring efforts have been far more moderate. the comparison of poland and latvia therefore provides an opportunity to disentangle the impact of country-level austerity measures and individual-level experience of changing management practices on the motivation of public officials after the global financial crisis hit these two countries. the analysis shows that latvian officials perceive a much larger decline of motivation than polish officials. this difference is likely to reflect the scale of cutback measures in latvia. at the same time, no effect is found within countries for officials who work in finance and economics ministries. with regard to differences between areas of civil service management, the analysis reveals that motivation among ministerial officials was likely to decrease if they experienced hiring freezes, staff cuts and a reduction of training opportunities. by contrast, promotion freezes and salary cuts are not found to have a consistent effect on the motivation of officials. austerity and motivation: what to expect for public officials after the crisis the motivation of employees is an important determinant of organisational performance in the public and private sector (huselid 1995; guest 1997; hondeghem and perry 2009; brewer and brewer 2011). most generally, motivation refers to a personal disposition, a psychological trait to act towards a desired goal. it is typically associated with the willingness to exert effort. in human resource management, motivation is widely regarded as a critical outcome of human resource management practices and one of the key mechanisms to generate firm performance (rainey 2001). more specifically, it ‘consists of an individual’s direction, intensity, and duration of effort. motivation manifests itself in the individual’s choices to exert effort, choices of how much effort to exert, and choices of how long to exert the effort’ (lepak et al 2006: 232).16 research on human resource management has paid particular attention to the impact of human resource management strategies and practices on organizational performance. approaches differ with regard to the scope of management practices that they examine and the type of performance outcome they seek to observe (wright and boswell 2002). broad, inclusive perspectives assess the impact of human resource management systems, that is, a combination of human resource management functions and their relation to performance (huselid 1995). by contrast, narrow approaches focus on individual management practices, for instance, the impact of incentive pay schemes on performance in public and private sector organisations (marsden 2010; dahlstroem and lapuente 2010). second, performance outcomes are either observed at the level of organisations or at the level of individuals. the former focuses on indicators such as the financial performance of firms. by contrast, at the individual level studies examine the job satisfaction, commitment, turnover and personal health and wellbeing. the fourfold distinction of approaches to the study of human resource management and organizational performance provides a helpful foundation for assessing the impact of austerity measures on the motivation of public officials, 16 the difficulty to define motivation or more specifically ‘work motivation’, which focuses on work-related behaviour, is widely recognised (rainey 2001, wright 2001). yet definitions tend to find common ground in their focus on effort exerted by the employee and the reference to intensity, direction and persistence/duration of effort. note also that our understanding of motivation differs from the notion of ‘public service motivation’. the latter is a specific type of motivation defined as ‘an individual predisposition to respond to motives grounded primarily or uniquely in public institutions’ (perry/wise 1990: 368, see hondeghem/perry 2009 for a recent review). however, the insights of this body of literature are relevant for the present article and will be referred to below. european journal of government and economics 5(2) 123 which is the focus of this article. first, among austerity measures we focus on cutback measures in relation to civil service management. cutbacks in the area of civil service management primarily fall into the category of reducing operational expenditure (raudla et al 2015). in this article, we focus on five areas of human resources management, including austerity-driven changes in recruitment, promotion, dismissal, salary management and training (see demmke 2016 for a similar approach). we develop hypotheses for each of these human resource management functions and assess the relation to individual perceptions of motivation. second, the research on work motivation in the public and private sector directs attention at other factors that might affect change in the context of austerity. for this study, we will later control for basic contextual parameters such as the severity of cutback measures in a given country and the position of finance and economics ministries within each country. hiring freezes recruitment policy refers here to the process of hiring new staff. this may involve the expansion of an organisation following the creation of new positions or simply the replacement of staff who have departed and hence the filling of vacancies. in the context of austerity, hiring freezes have been the main change in the area of recruitment policy (parrado 2010; undp 2010; demmke 2016). governments have stopped to expand the civil service and they have stopped to replace staff and hence to fill vacancies. hiring freezes may be associated with a cut of positions, while vacancies are simply maintained for a definite or indefinite time in others. for existing staff, hiring freezes should not directly affect their motivation. after all, these officials do already have a job in the civil service and they do no longer have to compete for a position. however, hiring freezes have an indirect effect in that they affect the workload of officials. if vacancies are not filled, the remaining officials will have to cover and hence do a fair bit of extra work. as a result, hiring freezes have been argued to have negative effects on the job satisfaction of officials (demmke 2016). we should therefore expect that hiring freezes are associated with a decline of motivation among public officials. h1: the motivation of public officials is more likely to decrease if post-crisis recruitment policy has changed including hiring freezes (recruitment hypothesis). staff cuts dismissal policy refers here to the process of firing officials from the civil service. generally, it might include transfers and relocations in the civil service, but dismissals are clearly the most serious of these options in that they involve a termination of the public service relationship. in the context of austerity, dismissal policy plays a very important role for government. mass work force cuts, quotas to reduce the number of staff, early retirement plans, the abolition of positions and terminations in the wake of administrative re-organisations are key instruments for governments to reduce fiscal costs and enhance the efficiency of public administration (lodge and hood 2012; raudla et al 2015). for public officials, a change in dismissal policy might not have a direct effect on their motivation at work. however, it has considerable threat potential and might undermine staff morale, as officials might fear to lose their job in the future. moreover, it may be associated with higher workload comparable to the impact of hiring freezes because the same amount of work will have to be done by fewer people. we should therefore expect a negative effect of staff cuts on the motivation of public officials. meyer-sahling ● hidden costs of cuts 124 h2: the motivation of public officials is more likely to decrease if post-crisis dismissal policy has changed including an increase in workforce cuts (dismissal hypothesis). promotion freezes promotion policy refers to the upward mobility and career advancement of officials within an organisation. it might involve automatic promotions, competitions and simply nominations to higher ranks and positions. promotions are usually associated with higher salary levels and hence tend to have direct effect on the reward levels of officials. in the context of austerity, promotion policy might simply lead to a freeze for upward mobility comparable to hiring freezes. vacant positions at the higher level might also be kept open or they might even be cut, as a result of which promotion prospects narrow for officials in lower ranks. for public officials a change in promotion policy should have a direct effect on their motivation, as it reduces opportunities for career advancement and salary increases. in rationalist terms, there are fewer incentives to work hard because there will be no reward. in addition, it might affect the motivation of officials because opportunities for the recognition of good performance and contributions to the organisation are no longer available. we should therefore expect that postcrisis promotion freezes should have a negative effect on the motivation of officials. h3: the motivation of public officials is more likely to decrease if post-crisis promotion policy has changed including a narrowing of promotion opportunities (promotion hypothesis). salary cuts salary policy is primarily concerned with the monetary compensation of officials. in remuneration terms this includes typically a fixed salary plus discretionary and nondiscretionary salary elements. the former include performance bonuses of various kinds, while the latter refers to rank-specific supplements, age-related supplements etc. in addition, one might consider non-monetary rewards and rewards that are paid after the end of the public service relations, in particular, pensions in this category (brans and peters 2012). in the context of cutbacks, most elements of salary management tend to be affected (demmke 2016). fixed salaries might be frozen or even reduced. similarly, bonuses might be frozen or cut. non-monetary rewards also tend to be on the chopping board during periods of crisis. public sector pensions are among the key areas in which governments aim to make savings, not less because the cuts in reward levels are not immediately felt by public officials. for public officials, a change in salary policy should have a direct effect on their motivation (guthrie 2008). salary cuts, in particular, undermine the material incentives for public officials to work hard. bonus cuts, pension cuts etc should have the same kind of effect. to be sure, public officials might be happy to have a job at all when considering that unemployment might go up in the private sector. yet compared to the pre-crisis period, public officials are still experiencing a lower level of compensation for the same or even a higher level of workload. we therefore expect that austerity-driven changes in salary policy are associated with a decrease in motivation among public officials. h4: the motivation of public officials is more likely to decrease if post-crisis salary policy has changed including salary cuts (salary hypothesis). cutting training opportunities training policy refers here to the development of skills and competencies of public officials in the context of their employment relation. it differs from pre-service european journal of government and economics 5(2) 125 training such as university education. in-service training can take a large number of forms such as short and long courses funded and provided by ministries and agencies, national schools and institute for the training of officials, universities, international organisations and the private sector. it might also include support for university study at home and abroad, exchanges and increasingly online education. cutback measures in the area of training policy most naturally involve the reduction in the provision of training opportunities (metsma 2014). this may range from a reduction of budgetary resources to the closure of public training institutes. moreover, training budgets tend to be soft budgets in the sense that governments find it less difficult to cut funding in this area during a period of crisis (demmke 2016). for public officials, we should expect that a cut in the provision of training opportunities lowers the motivation of officials. training provides an opportunity to develop skills and hence to perform well on the job. participation in training courses also tends to provide an incentive for staff, in particular, when it involves travel abroad or the acquisition of higher-level qualifications such as via study abroad programmes. we therefore expect cutbacks in the area of training policy after the crisis to have a negative effect on the motivation of officials. h5: the motivation of public officials is more likely to decrease if post-crisis training policy has changed including a reduction in training opportunities (training hypothesis). post-crisis civil service reforms in latvia and poland the analysis is based on a survey of ministerial officials that was conducted in 2010/2011 in latvia and poland. latvia and poland are two new member states from post-communist central and eastern europe that joined the eu in 2004. with regard to the impact of the global economic crisis, the two countries differ significantly (bideleux 2011). latvia belongs to the eu members that was hardest hit by the crisis, while poland belongs to the member states that was least affected. in latvia, in 2009 economic output declined by 17.7 per cent, the highest slump in economic growth in the eu. the government deficit rose to 9.8 of gdp in and unemployment went from 6.5 per cent in 2007 to 18.2 per cent in 2009 and 19.8 per cent in 2010.17 in the winter of 2008/2009, latvia asked the imf and the eu for financial support in order to avoid default following the nationalisation of the latvian bank parex. the international loans were linked to a clear commitment from the latvian government to reform its public finance by means of fiscal measures, social welfare reform, economic restructuring and specific measures for the reform of the financial sector. the programme for economic stabilisation and growth included specific measures to reform public administration by means of reorganisation and expenditure cuts (government of latvia 2008). in the context of the so-called optimisation plan for the reform of public administration, the government passed a range of civil service reform measures most of which aimed to cut operational expenditures. they included:  staff cuts by over 10 per cent (25.000 out of 205.000 officials were to be cut) primarily in the context of the re-organisation of public administration (leta 2009). 17 for growth and unemployment figures, please see the official eurostat figures available at http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home. meyer-sahling ● hidden costs of cuts 126  the government did not take an explicit decision on recruitment. however, due to need to downsize staff, it became impossible for ministries and agencies to hire new staff.  promotion freezes and formal downgrades in the context of the structural reorganisation of ministries and agencies in many ministries, while other ministries chose to dismiss officials. for heads of units, for instance, this meant that over a short period of time they became so-called senior officers and, as a result, lost their managerial attributes. promotions were not formally frozen but in practice they took no longer place.  salary cuts by 15 per cent in january 2009 and again by around 20 per cent for top and middle staff in june 2009. managers were given discretion to decide whether they would prefer to cut salaries at the top or mid-level. this led to considerable differences in the way salary cuts were experienced by civil servants (memorandum 2009; darzina 2009).  the central government cut the funding for training institutions and training activities. the latvian school of public administration lost 99 per cent of its funding (lspa 2011). training had to be paid for by ministries, agencies or personally by civil servants, leading to a major decline in training activities. in contrast to latvia, poland experienced a softer landing after the global financial crisis hit europe (bideleux 2011). economic growth remained positive for the entire post-crisis period reaching a low point of 1.6 per cent of gdp in 2009 but accumulating 17 per cent during the period from 2008 to 2012; the highest growth rate among eu member states. in 2008 and 2009, the unemployment rate varied between 7 and 9 per cent and until the end of 2012 it never rose above 10.5 per cent. despite these positive figures, poland experienced a high government deficit of 7.4 per cent of gdp in 2009 and public debt has continuously risen since the beginning of the global economic crisis towards its constitutional limit (see rae 2013). given the far more moderate impact of the global economic crisis, the government of poland did not embark on any major public administration reform. the civil service law was amended in november 2008 but the change was not related to the looming crisis in the region. yet several measures were still taken to address the changing context of public administration.  the area of recruitment was affected in two ways. on the one hand, bida (2009) argues that the number of vacancies that was publicly advertised increased. moreover, he argues that both the number and quality of applicants per post increased compared to the pre-crisis period. on the other hand, the government reduced the quota of civil servants who were given the status of ‘nominated civil servant’, poland differs from other countries in central and eastern europe in that it distinguishes ‘nominated civil servants’ and ‘civil service employees’, the former have to undergo a lengthy recruitment and selection procedure, a preparatory service, they enjoy full tenure and significantly higher salary levels. currently, just under 5 per cent of all civil servants (6.000 out of 122.000) are ‘nominated civil servants’, initially the government aimed to raise this proportion to 10 per cent of all civil servants. however, in the context of austerity the government admitted a declining proportion of candidates who had successfully passed the nomination exam and even reduced the quota for new nominations to merely 200 in 2013 and 2014 (gazeta prawna 2011). european journal of government and economics 5(2) 127  the government did not establish specific targets to reduce the staff numbers in central government ministries and agencies. measures were taken to facilitate dismissals by means of disciplinary proceedings that were brought in line with the labour code but no efforts were made to downsize the civil service.  the government did not pass specific measures to reduce promotion prospects for civil servants. however, following lengthy discussion the government decided that nominated civil servants would not be granted an automatic promotion if they pass two performance reviews successfully. this measure can be considered as a way of narrowing the promotion prospects for higher and senior civil servants (gazeta prawna 2013a).  in the area of salary management, the government reviewed the salary bands shortly after the economic crisis emerged (zieliński 2009). even if this measure required additional government funds for some ministries, it was also decided that civil service salaries would be frozen from 2008. since then they have increased but below the level of inflation, implying real wage decline for civil servants (gazeta prawna 2013b).  with regard to training policy the government reviewed the process of selecting training providers. at the same time, training provision for civil servants was maintained at similar levels compared to the pre-crisis period. the comparison of austerity-driven civil service reform strategies in the two countries suggests that human resource management practices were likely to change to a much larger extent in latvia than in poland. yet in both cases, reforms are associated with a ‘negative’ development in that staff levels were cut, fewer officials were hired, promotion prospects narrowed, salaries were frozen or even cut and the provision of training was reduced. we would expect these developments to be reflected in the survey results and we would certainly expect that the motivation of officials in latvia decreased to a larger extent than in poland. data, operationalization and descriptive results the empirical analysis is based on a survey of public officials that was conducted in the winter of 2010/2011 in latvia and in the spring of 2011 in poland (see also meyer-sahling and mikkelsen 2016). it targeted civil servants employed at central government ministries. the survey was conducted in local languages as an online survey. it generated 1520 responses, including 972 from poland and 547 from latvia. the reliance on a web-based survey implies that we had no perfect control over the population of respondents, that is, we do not know with certainty who precisely was invited to participate in the online survey and whether officials who were invited also had a chance to complete the survey. in order to maximise the consistency of the data across the two countries, we applied the same sampling procedure. in a first step, personal meetings were arranged with senior officials from the civil service department in poland and the state chancellery in latvia in order to explain the nature and purpose of the survey. next, we sent the survey link together with a detailed explanation to our partners at the central institutions who then distributed the link to the heads of personnel in the ministries. in latvia, this role is performed by the state secretary. in poland, the director general is responsible for personnel affairs. heads of personnel then sent the survey link to all civil servants employed in the core structure of their ministry. as to the representativeness of the sample, we were able to check it in poland against the population of officials in civil service ranks. it suggests that our sample meyer-sahling ● hidden costs of cuts 128 is reasonably representative. men are slightly over-represented in the sample (42 per cent as opposed to 35 per cent in the polish civil service) and – as one might expect when conducting a web-based survey – young civil servants are overrepresented (29 per cent as opposed to 23 per cent in the polish civil service). we assume a similar level of representativeness for the latvian sample but have not been able to secure population-based data that would have allowed for a valid comparison against our sample data. for the analysis below we address potential biases by controlling for demographic variables such as sex, age and experience in public administration. the survey primarily asked questions with regard to the implementation of civil service policy and the attitudes of officials towards principles of civil service management. a subset of questions directly addressed the experience of respondents with post-crisis civil service management. answers were measured on the likert scale, ranging from 1 (strongly disagree) to 5 (strongly agree). respondents were given the option ‘don’t know’ if they could not or did not want to answer a question. for the analysis ‘don’t know’ responses were re-coded as ‘neutral’ responses.18 ideally, we would be able to measure the motivation of officials by means of panel data that compares the preand post-crisis situation in the civil service in the two countries. unfortunately, we do not have directly comparable data for such two points in time. in order to address this limitation, the survey included several questions that directly addressed the experience with civil service management since the onset of the global economic crisis. for instance, we asked ‘the practice of promoting staff in my ministry has not changed since the beginning of the global financial crisis and its repercussions for my country’, it should be noted that we asked for ‘non-change’ therefore assuming that civil service management practices might have persisted since the pre-crisis period. for the analysis we reversed the coding of the variable for ease of interpretation. throughout the analysis in this article, a higher value therefore indicates more change in the respective area of human resource management. second, asking for change does of course not tell us ‘what kind of change’ nor ‘what direction of change’, we addressed this issue by asking a follow-up question in which respondents could specify what, according to them, had changed, for instance, in the practice of promoting staff. a large proportion of respondents completed the open questions and has provided rich insight into the perception of officials vis-à-vis post-crisis civil service reforms. most answers were short but they would usually be unambiguous specifying ‘salary cuts’, ‘bonus cuts’, ‘no recruitment of new staff’, ‘no more promotions’, ‘no more trainings’, or in many cases simply ‘no change’, the open answers have allowed us to interpret the likert scale questions and to assume relatively confidently that ‘change’ is by and large synonymous with ‘negative change’, ‘decline’ or ‘cuts’, for each of the five areas of civil service management, we have been able to identify patterns that allow us to associate change with ‘hiring freezes’ in the case of recruitment policy, ‘a growing number of dismissals’ for dismissal policy, ‘promotion freezes’ for promotion policy, ‘salary cuts’ for salary management and a ‘reduction of training opportunities’ for training policy. these patterns apply to both countries. they simply differ in the extent to which respondents report change of this kind (see below, table 1). the survey also included one question that asked for the change in motivation of officials. the motivation question explicitly asked ‘officials in my ministry are as 18 the analysis below was also conducted without including ‘don’t know’ responses. substantively, the results are the same. it should be noted that the survey contains selective non-response, leaving up to 15 per cent of some of the variables missing. european journal of government and economics 5(2) 129 motivated to do their job as they were before the global financial crisis and its repercussions for my country.’ asking with regard to the departmental level rather than the individual level has the advantage that answers might be subject to less social desirability bias, as respondents might not have wanted to indicate openly that their own motivation level has declined since the onset of the crisis.19 for the question on the motivation of officials we did not ask an open follow-up question in the survey. we can therefore not rely on a second, open-ended survey response to ascertain that a change in motivation among ministerial officials is equivalent to a decrease in motivation. however, before and after conducting the survey we were able to conduct personal conversations with managing and nonmanaging civil servants in the two countries.20 they indicated that a negative connotation is plausible in that officials were – to varying degrees – disappointed, frustrated and over-worked after the austerity measures hit the civil service.21 we therefore assume for the empirical analysis that change in motivation is equal to a decline in motivation after the crisis. table 1 lists the means and standard deviations for the dependent variable and the main independent variables. as mentioned earlier, a higher score indicates a higher degree of change, while a score of 1 indicates no change at all. for motivational change, the two-country mean is close to a neutral response of 3. the higher mean for latvia suggests that the austerity measures had a much greater impact on the motivation of public officials in latvia than in poland. table 1. descriptive statistics poland latvia total mean std.dev. mean std.dev. mean std.dev. motivation change 2.79 0.91 3.28 0.98 2.96 0.97 recruitment change 2.79 0.86 2.69 0.85 2.75 0.86 promotions change 2.71 0.77 2.74 0.83 2.72 0.80 dismissals change 2.71 0.75 2.92 0.78 2.79 0.76 salaries change 2.65 1.05 3.31 0.99 2.88 1.08 training change 2.76 0.82 3.54 0.97 3.04 0.96 table 1 also shows important differences with regard to the independent variables, in particular, the experience with post-crisis civil service management. the values for recruitment and promotion policy, for instance, do not differ much, and in both countries, they indicate similar developments. by contrast, in the areas of dismissals and, in particular, salary and training policy the differences between latvia and poland are larger. in these cases, the open answers echo the austerity measures outlined above. a large proportion of latvian respondents simply answered, ‘salary cut by 30 per cent’, ‘salary cut by 40 per cent’, ‘no more 19 while the survey question provides a general indicator of the degree of motivation among ministerial staff and a first attempt to address the problem of post-crisis change in motivation, we are acutely aware that motivation is ideally measured by more than one item (beulens/van den broeck 2007, wright 2001). 20 we did not conduct systematic interviews. however, the regular conversations with staff in the context of the preparation and implementation of the survey have given us valuable insights for the interpretation of the data. 21 it should be recognised of course that for many there was also a sense of relief in that they could hold on to their job while unemployment rates rose. meyer-sahling ● hidden costs of cuts 130 bonuses’, ‘no more training’ etc. by contrast, for polish respondent, a much larger proportion suggested ‘no change’ or merely ‘no salary increase’, ‘salaries have been frozen’ etc. in other words, the cutback measures are clearly reflected respondents’ statements. one of the major merits of our survey is that it captures how public officials appear to experience cutbacks in different ways. indeed, it is likely that cutbacks in the area of civil service management are not uniformly implemented across public administration, as it is more than common that certain institutions and jobs are sheltered while others are earmarked for change (see parrado 2010). moreover, even if a much larger proportion of latvian officials evidently ‘complained’ about salary cuts, the open survey responses indicated that there were considerable differences in the depth of the cuts, ranging from 5 – 50 per cent. this clearly reflects the government’s post-crisis policy, whereby senior managers were given discretion to allocate the salary cuts of the second stage of reforms in the summer of 2009. for the assessment of our hypotheses, we include several control variables. first, we include basic demographic variables such as sex, age, experience in public administration and education in order to control for potential biases in our sample and to take into account the literature on work motivation in the public and private sector (for example, buelens and van den broeck 2007). for sex we include a dummy variable for ‘female’, both age and experience are measured in bands and dummy variables are included accordingly. with regard to the level of education it is worth mentioning that the survey distinguishes degrees that have been completed and degrees that are still in progress. for the analysis, we code finished and unfinished degrees in the same category (e.g. ‘finished and unfinished phd degree’, which acts as the reference category below), as we consider participation in an ma programme to be closer in educational experience to the completion of an ma than to a completed ba programme. further, the rank of respondents is included, as managers with more responsibilities and control within an organisation are likely to be more motivated. they might also be more optimistic in their assessment of the motivational levels of their staff (rainey 2001; buelens and van den broeck 2007). we therefore include a dummy variable for ‘manager’ in our models. finally, we control for the country of origin and the ministry in which the official works. as outlined above, we expect that motivational change is greater in latvia than in poland due to the severity of the crisis and the scale of the subsequent austerity measures. finally, we include a dummy variable for officials who work in finance and economics ministries. we expect that they remain more motivated after the crisis because they might be less affected by the cutbacks. many of the austerity measures – outlined above – target social policy, while officials in finance and economic affairs are more likely to be sheltered from negative effects. moreover, their status may even be elevated in that they might see themselves as the ones who solve the economic crisis. results and discussion table 2 presents the results of the analysis for the explanation of motivation among public officials. the table consists of four models. model 1 shows the impact of five human resource management practices on motivation without controlling for country and ministry context and without taking into account demographic confounders. model 2 adds the country and the position of finance and economics ministries in order to take into account broad features of the work context. model 3 presents the main results of the linear regression analysis. it shows the five main variables together with the contextual and the demographic variables. model 4 is primarily meant as a robustness check. it presents the results of a european journal of government and economics 5(2) 131 logistic regression analysis showing the odds that a change in motivation occurs. the presentation of the logistic regression analysis is limited to the model that includes the main variables and the control variables. looking at the results, model 3 shows that changes in recruitment, dismissal and training policy decrease motivation among public officials. the three variables are significant at the 1 per cent level and confirm the hypotheses that hiring freezes, staff cuts and a reduction of training opportunities reduce the motivation of ministerial staff. in relative terms, changes in the provision of training have the largest effect (b = 0.16, t = 4.48, p < 0.001). the magnitude of the effect of hiring freezes (b = 0.11, t = 2.90, p < 0.004) and staff cuts (b = 0.11, t = 2.41, p < 0.016) is slightly smaller. table 2. change of motivation since the beginning of the global economic crisis model 1 model 2 model 3 model 4 b b b exp(b) (constant) 1.604*** 1.626*** 0.506 0.434 recruitment policy change 0.094*** 0.107*** 0.112*** 1.254** promotion policy change 0.001 -0.012 -0.014 1.075 dismissal policy change 0.069** 0.11** 0.105*** 1.396*** salary policy change 0.094*** 0.047 0.045 1.117 training policy change 0.206*** 0.158*** 0.155*** 1.251*** latvia 0.352*** 0.301*** 1.49** finance ministries 0.061 0.042 0.958 manager 0.022 0.993 female -0.035 1.129 age (ref. cat. ‘under 30 years’) 30 to 40 years -0.142* 0.841 40 to 50 years -0.094 0.922 50 years and older -0.345*** -0.643* experience in public admin (ref.cat. ‘< 1 year’) 1 to 4 years -0.069 0.207*** 5 to 10 years 0.071 0.262*** 11 and more years 0.048 0.225*** education (ref.cat. ‘phd degree’) ma degree 0.125 1.349 ba degree 0.123 1.405 no higher education 0.184 1.781 r square 0.099 0.125 0.133 nagelkerke r square 0.139 note: *p<.1; **p<.05; ***p<.01 by far the largest significant coefficient belongs to the country dummy variable and hence the differences between latvia and poland (b = 0.30, t = 4.06, p < 0.001). it suggests that even if the five human resource management variables are likely to absorb a great deal of the differences in officials’ experience with cutback measures, a range of wider country-level factors must be taken into account when seeking to understand differential change in motivation among officials. by contrast, employment in finance and economics ministries does not have an effect on motivation. country differences and differences in the way cutbacks are meyer-sahling ● hidden costs of cuts 132 experienced appears to be more relevant for motivational change than the ministerial work context within countries. model 4, which presents the results of the logistic regression analysis, confirms the significant effect of changes in recruitment, dismissals and training policy on motivation. the odds of observing a change in motivation are 39.6 per cent higher for officials who have experienced major staff cuts in their department. for officials who have experienced hiring freezes and a cut in training provision the odds of perceiving a change in motivation are slightly lower at 25 per cent. model 4 also confirms the major effect of the country context and hence the scale of the cutback measures. for latvian officials the odds of having experienced motivational change in their ministry are 49 per cent higher than for polish officials. model 4 indicates that officials from finance and economics ministry do not differ in their perception of motivation after the implementation of the cutbacks. table 2 further suggests that salary cuts and promotion freezes are not associated with a change in motivation. the effect of changes in salary policy shrinks and loses significance when the country and ministerial contexts are included in the analysis (compare models 1 and 2). promotion freezes, by contrast, do not have any significant effect on motivational change among public officials. the structure of the civil service systems in poland and latvia is likely to be responsible for the irrelevance of promotion freezes. both countries operate a position-based system that does not provide much room for promotions (meyer-sahling 2009; demmke and moilanen 2010). career advancement tends to require participation in several rounds of competition procedures rather than any prospect of automatic promotion. the relative importance of changes in recruitment policy, which refers to all levels in the hierarchy rather than just the entry level, captures this aspect of the civil service systems in the two countries very well. the secondary role of salary policy might be more surprising, as conventional wisdom would initially point to the detrimental effect of salary cuts for the motivation of employees. however, research that compares the motivational basis of private and public sector employees tends to argue that public sector employees are less motivated by monetary rewards (boyne 2002; beulens and van den broeck 2007). they tend to value job security, a supportive work environment and a better work-life balance more than their private sector peers (chen and hsieh 2015). to be sure, the lower importance of mechanisms of extrinsic motivation such as salaries and promotions also resonates closely with the research on ‘public service motivation’ which stress that public officials are motivated by working for a ‘good cause’ and not just for monetary reward (for a recent review, see perry et al 2010). the importance of training, dismissal and recruitment policy relative to salary and promotion policy resonates closely with this line of argumentation. training budgets tend to be one of the first items that are cut when savings have to be made (demmke 2016). yet the analysis supports the view that public officials value the opportunity to develop their skills and competences to better perform their job. both recruitment freezes and staff cuts also relate closely to the quality of the work environment and hence the working conditions. they inevitably increase the workload of officials and, in addition, one should not underestimate the negative impact on staff morale in the departments following staff cuts and re-organisations. model 3 and 4 also show the role of demographic factors on motivation among officials in latvia and poland. model 3 and 4 suggest that older officials are less likely to perceive motivational change within their institution. moreover, according to model 4 officials with more years of experience are less likely to perceive a change of motivation. the results suggest that the older generation has responded less negatively to cutbacks in the civil service. older as well as more experienced officials have fewer job opportunities outside the administration and they are more likely to seek (to continue) a long-term career in the civil service given their european journal of government and economics 5(2) 133 experience so far. they might therefore be more willing to bear the consequences of the cutbacks and they appear to be more likely to accept the need to get on with the job even under adverse conditions. conclusion this article has examined the impact of cutbacks in the area of civil service management on the motivation of public officials in latvia and poland. based on a survey of ministerial officials, it has shown that latvian officials are more likely to perceive changes in motivation than their peers from poland. the differences clearly reflect the scale of the austerity-driven cutbacks in latvia in comparison to poland. with regard to different areas of civil service management, the article has shown that changes in recruitment, dismissals and training policy undermine the motivation of staff in central government ministries. in the context of cutback management, these changes tend to refer to hiring freezes, staff cuts and a reduction in the provision of training. by contrast, salary cuts and promotion freezes did not negatively affect the motivation of public officials. the results suggest that public officials in latvia and poland are relatively less motivated by monetary rewards and prospects of career advancement. this finding resonates with research on employee motivation in the private and public sector. extrinsic motivation, which focuses on material incentives, tends to be less relevant for public sector employees (boyne 2002; buelens and van den broeck 2007, chen and hsieh 2015). by contrast, recruitment freezes, staff cuts and cuts in training provision are more closely related to workload considerations, the quality of the working conditions and interest in self-development. these factors tend to be valued highly by public sector employees. the findings of this article suggest that these differences also apply in the context of austerity programmes. the article relied on the analysis of post-crisis survey data rather than a comparison of data from before and after the crisis hit the two central and eastern european countries. inevitably there is some uncertainty regarding the findings. moreover, for the purpose the analysis we had to rely on comparably simple measures of motivation and motivational change. however, the differences between the two countries and the perception of austerity-driven civil service reforms as reported in quantitative and qualitative answers are reasonably plausible and provide a first glimpse at the trade-offs that governments face when seeking to implement austerity-oriented reforms. cutbacks in the area of civil service management have been and are likely to remain key instruments for governments to reduce costs and increase efficiency in public administration during times of crisis. this article has shown that the implementation of these kinds of measures entails additional, hidden costs for government, in that they appear to undermine the motivation of public officials. however, the costs of reform depend on the scale of the cutbacks and they are not uniform across areas of civil service management, giving governments some discretion over the choice of instruments. it remains to be seen to what extent the results for latvia and poland hold up to the inclusion of more countries and a longer-term comparison over time. references armingeon, klaus (2012) ‘the politics of fiscal responses to the crisis of 2008– 2009’, governance, 25(4): 543–565. bida, a, (2009) ‘problemy motywacji zatrudnienia w służbie cywilnej (problems with civil servants job motivation)’ in w mikułowski and a jezierska (eds) wyzwania rozwoju zasobów ludzkich administracji publicznej w dobie kryzysu ekonomicznego meyer-sahling ● hidden costs of cuts 134 (challenges of public administration human resources development at the time of economic crisis, conference proceedings, warszawa (warsaw), 10-11 december 2009, pp. 109 – 113. bideleux, robert (2011) ‘contrasting responses to the international economic crisis of 2008–10 in the 11 cis countries and in the 10 post-communist eu member countries’, journal of communist studies and transition politics 27(3-4): 338-363. boyne, george a. (2002) ‘public and private management: what’s the difference?’, journal of management studie, 39(1): 97–122. brans, marleen and b. guy peters (eds) (2012) rewards for high public office in europe and north america. london: routledge. brewer, gene a. and gene a. jr brewer (2011) ‘parsing public/private differences in work motivation and performance: an experimental study’, journal of public administration research and theor, 21(2): 347–362. buelens, mark and herman van den broeck (2007) ‘an analysis of differences in work motivation between public and private sector organizations’, public administration review, 67(1): 65–74. chen, chung-an and chih-wei hsieh (2015) ‘does pursuing external incentives compromise public service motivation? comparing the effects of job security and high pay’, public management review, 17(8):1190-1213. dahlström, carl and victor lapuente (2010) ‘explaining cross-country differences in performance-related pay in the public sector’, journal of public administration research and theory, 20, pp. 577600. darziņa, lidija (2009) ‘nosaka robežsummas atalgojuma samazināšanai valsts pārvaldē (ceiling for salary cuts in public administration has been defined)’, latvijas vēstnesis, 01.07.2009. available at http://www.lvportals.lv/print.php?id=194174. demmke, christoph (2016) ‘effects of budgetary constraints on hr reforms in central public administrations and the importance of institutional context’, international journal of public administration, early online 7 nov 2016. demmke, christoph and timo moilanen (2010) civil services in the eu of 27: reform outcomes and the future of the civil service, frankfurt: peter lang. gazeta prawna (2011) służba cywilna: niewielu kandydatów do awansu w urzędach (civil service: not many candidates to be nominated), gazeta prawna online version. available at http://praca.gazetaprawna.pl/artykuly/507642,sluzba_cywilna_niewielu_kandydato w_do_awansu_w_urzedach.html. gazeta prawna (2013a) ‘podwyżek dla urzędników nie ma. i nie będzie (no salary increases for public officials)’, gazeta prawna online version. available at http://serwisy.gazetaprawna.pl/praca-ikariera/artykuly/712547,podwyzek_dla_urzednikow_nie_ma_i_nie_bedzie.html. gazeta prawna (2013b) ‘rząd utrudnia awans urzędnikom. kto może liczyć na wyższą pensję i stabilną pracę? (government makes promotions of public officials more difficult. who can expect higher salary and job stability?)’, gazeta prawna online version. available at http://serwisy.gazetaprawna.pl/praca-ikariera/artykuly/708324,rzad_utrudnia_awans_urzednikom_kto_moze_liczyc_na_w yzsza_pensje_i_stabilna_prace.html. government of latvia (2008) par ministru kabineta 2008.gada 9.decembra sēdes protokollēmumu (prot. nr.89 1.§) "likumprojekts "grozījumi likumā "par valsts budžetu 2009.gadam"", un latvijas ekonomiskās stabilizācijas un izaugsmes atjaunošanas programma" (on the decision of the cabinet of ministers made during the meeting on 9 december 2008 – “amendment to the state budget law for european journal of government and economics 5(2) 135 2009” and “programme of economic stabilisation and growth”). available at http://www.mk.gov.lv/lv/mk/tap/?pid=40102497&mode=mk&date=2008-12-09 guest, david e. (1997) ‘human resource management and performance: a review and 
research agenda’, international journal of human resource management 8(3): 263276. guthrie, james p (2008) ‘remuneration: pay effects at work, in peter boxall’, john purcell and patrick wright (eds), the oxford handbook of human resource management, oxford: oxford university press, pp.344-363 hondeghem, annie and james l. perry (2009) ‘egpa symposium on public service motivation and performance: introduction’, international review of administrative sciences 75(1), pp. 5–9. huselid, mark a. (1995) ‘the impact of human resource management practices on turnover, productivity, and corporate financial performance’, academy of management journal 38(3): 635−672. kelly, josie and anneliese dodds (2012) ‘public administration in an age of austerity: the future of the discipline’, public policy and administration 27(3):199211. kickert, walter, and tiina randma-liiv (2016) ‘the politics of cutback management in thirteen european countries: statistical evidence on causes and effects’, public management review, 19(2):175-193. kickert, walter, tiina randma-liiv and riin savi (2015) ‘politics of fiscal consolidation in europe: a comparative analysis’, international review of administrative sciences 81(3): 562–584. lepak, david p. hui liao, yunhyun chung and erika e. harden (2006) ‘a conceptual review of human resource management systems in strategic human resource management research’, research in personnel and human resources management 25, 217–271. leslie, keith and adam canwell (2010) ‘leadership at all levels: leading public sector organisations in an age of austerity’, european management journal, 28(4): 297– 305. leta, (2009) ‘valdība apņemas ierēdņu skaitu samazināt līdz 8% no iedzīvotāju skaita (the government decided to cut employees in public administration by 8% of total number)’, september 15, 2009. available at http://www.tvnet.lv/zinas/latvija/195494valdiba_apnemas_ierednu_skaitu_samazinat_lidz_8_no_iedzivotaju_skaita. lodge, david and marta rodríguez-vives (2013) ‘how long can austerity persist? the factors that sustain fiscal consolidations’, european journal of government and economics 2(1): 5-24. lodge, martin and christopher hood (2012) ‘into an age of multiple austerities? public management and public service bargains across oecd countries’, governance 25(1):79-101. lodge, martin and kai wegrich (eds) (2012) executive politics in times of crisis, basingstoke: palgrave. marsden, david (2010) ‘the paradox of performance-related pay systems: why do we keep adopting them in the face of evidence that they fail to motivate?’, in christopher hood, helen margetts and perri (eds) paradoxes of modernization: unintended consequences of public policy reforms, oxford: oup, pp. 185-202. memorandum (2009) memorandum of understanding between the european community and the republic of latvia, 29.01.2009. available at www.ec.europa.eu/latvija/documents/pievienotie_faili/29.01.09.mou.doc meyer-sahling ● hidden costs of cuts 136 metsma, merilin (2014) ‘the impact of cutback management on civil service training: the case of estonia’, administrative culture 15(1):58-79. meyer-sahling, jan-hinrik (2009) the sustainability of civil service reform in central and eastern europe five years after accession. sigma paper nr 44. paris: oecd publications. meyer-sahling, jan-hinrik and kim sass mikkelsen (2016) ‘civil service laws, merit, politicization, and corruption: the perspective of public officials from five east european countries’, public administration, 94(4):1105-1123. ministry of finance (2012) finanšu ministrija. dati par ekonomikas izaugsmi 2011.gadā turpina iepriecināt (the ministry of finance of the republic of latvia. data on economic growth in 2011 continues to please). available at 2012 http://www.fm.gov.lv/?lat/aktualitates/jaunumi/50908. oecd (2012) public sector compensation in times of austerity, paris:oecd publications. parrado, salvador (2010) sustainability of human resources in central public administration in the eu member states, brussels: european public administration network. perry, james l. and lois r. wise (1990) ‘the motivational bases of public service, public administration review 50(3):367–373. perry, james l., annie hondeghem and lois r. wise (2010) ‘revisiting the motivational basis of public service: twenty years of research and an agenda for the future’, public administration review 70(5): 681-690. peters, b. guy, jon pierre and tiina randma-liiv (2011) global financial crisis, public administration and governance: do new problems require new solutions?, public organization review 11(1):13-27. potter, michael (2012) ‘still learning to speak and still not being heard: public administration and the latest financial crisis’, administration & society 44(3):367373. rae, g, (2013) ‘avoiding the economic crisis: pragmatic liberalism and divisions over economic policy in poland’, europe-asia studies 64(3):411-425. rainey, hal g. (2001) ‘work motivation’, in r.t. golembiewski (ed.) handbook of organisational behaviour, 2nd edition, , new york: marcel dekker, pp. 19 – 42. raudla, ringa, riin savi and tiina randma-liiv (2015) ‘cutback management literature in the 1970s and 1980s: taking stock, international review of administrative sciences 81(3): 433 – 456. savi, riin and tiina randma-liiv (2015) ‘decision-making in time of crisis: cutback management in estonia’ international review of administrative sciences 81(3): 479-497. undp (2010) challenges for public sector human resources management in the recent economic downturn, bratislava: regional centre for public administration reform of undp. wright, bradley e. (2001) ‘public-sector work motivation: a review of the current literature and a revised conceptual model’, journal of public administration research and theory 11(4):559-586. wright, patrick m, and wendy r. boswell (2002) ‘desegregating hrm: a review and synthesis of micro and macro human resource management research’, journal of management 28(3):247–276. zieliński, wojciech (2009) ‘modernizacja zarządzania zasobami ludzkimi w administracji publicznej (modernisation of human resources management in public european journal of government and economics 5(2) 137 administration)’, in w. mikułowski and a. jezierska (eds) wyzwania rozwoju zasobów ludzkich administracji publicznej w dobie kryzysu ekonomicznego (challenges of public administration human resources development at the time of economic crisis), conference proceedings, warszawa (warsaw), 10-11 december 2009, pp. 99-106. european journal of government and economics 12(1), june 2023, 79-101 this work is licensed under a creative commons attribution-noncommercial 4.0 international license. european journal of government and economics issn: 2254-7088 panel data analysis of internal conflict and income inequality brandon parsons a*, shahdad naghshpour b a pepperdine university, united states b university of southern mississippi, united states * corresponding author at: brandon.parsons@pepperdine.edu abstract. the study determines how worsening internal and external conflict affects income inequality. the paper accounts for contributing variables and analyzes panel data in an unbalanced panel of 106 countries from 1988 to 2018— the panel data model groups by development status. the econometric model uses driscoll and kraay standard errors to account for heteroscedasticity, cross-sectional dependence, and autocorrelation. worsening internal conflict increases income inequality in developing countries but not in developed countries. worsening of internal conflict by one standard deviation increases income inequality by 0.068 in developing counties. external conflict does not noticeably affect income inequality in developed or developing panels. keywords. income inequality, gini coefficient, internal conflict, external conflict doi. https://doi.org/10.17979/ejge.2023.12.1.9283 1. introduction1 for centuries, income inequality has been a topic of interest (sahota, 1978). plato discusses income inequality and its effects on the polis in the republic. income inequality has increased in many countries over the last forty years (united nations, 2021). its growth and persistent is an important subject because of its adverse effects economically, socially, and politically (posner, 1997; barry, 2005; karklins, 2005; dorling, 2011; dabla-norris et al., 2015; ariely and uslaner, 2017). additionally, studying income inequality is vital because current income inequality can lead to future income inequality. specifically, intergenerational transmission of income inequality can lead to future undesirable economic, social, and political effects (ermisch and smeeding, 2012). many studies on the conflict-inequality nexus focus on income inequality as a driver of conflict (bircan, brück, and vothknecht, 2017). some researchers claim income inequality can cause conflict (feirarbend and feierabend, 1966; gurr, 1968; huntington, 1968; dobson and romlogan, 2009; haggard and kaufman, 2012). de tocqueville (1835) claims that most uprisings and 1 all data used in the study are publicly available and accessible. we want to acknowledge funding for the icrg dataset from pepperdine university and helpful suggestions and comments from david smith, jared ashworth, blake withall, and the anonymous referee of the european journal of government and economics. any remaining shortcomings are those of the authors. https://creativecommons.org/licenses/by-nc/4.0/ mailto:brandon.parsons@pepperdine.edu https://doi.org/10.17979/ejge.2023.12.1.9283 parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 80 revolutions are instigated because of high income inequality. in addition, theoretically, the greater the income inequality in a country, lower income individuals are worse off and have a greater incentive to rebel (haggard and kaufman, 2012). there is less research on the effects of conflict on income inequality, and findings are mixed (alesina and perotti, 1996; collier, 1999; bircan, brück, and vothknecht, 2017). one claim is civil wars affect short-run economic performance but not fundamental drivers of longer-term economic performance (blattman and miguel, 2010). thus, blattman and miguel (2012) claim income distribution remains persistent regardless of conflict, including civil war. on the other hand, other researchers claim conflict increases income inequality through its effects on economic growth and investment (alesina and perotti, 1996; bircan, brück, and vothknecht, 2017). this study examines the effects of conflict on income inequality measured by the net gini coefficient (income distribution after tax and transfer). the gini coefficient is an index between (0) and (100), with the former representing perfect income equality while the latter shows the utmost inequality. the study proposes that an increase in internal conflict causes higher income inequality. the study's premise is that conflict affects different segments of a society differently and causes changes in income distribution among these segments. firstly, conflict is less likely to disrupt upper income individuals' incomes than middleand lower-income individuals. middleclass and lower income groups are more likely to feel the adverse effects of economic disruptions, e.g., they are more likely to lose their jobs (alesina and perotti, 1996). affluent production owners can safeguard their wealth and income by changing production to military goods or by moving abroad and continuing to earn income (pugh, 2003). secondly, since conflict disrupts economic activities, it reduces tax revenue (personal income, business, and tariffs on imports), which reduces the amount that can be redistributed to lower income groups, thus increasing income inequality (pugh, 2003). thirdly, not only does government revenue decline when there is conflict, but the government also allocates the reduced receipts to the military and police instead of redistributing it, especially away from education (milanovic, 2016). subsequently, low income individuals that have the potential to increase their incomes through education may not have the opportunity. the effects of conflict on income inequality can happen quickly or over time. low income individuals may lose their job as soon as conflict disrupts the economy, impacting income inequality immediately. at the same time, a generation of lower income individuals may have less access to subsidized education if there is either a reduction in gross tax revenue or the allocation of tax revenue is used on the military instead of education. the study explores the persistence of income inequality by lagging the gini coefficient for up to five years. the research extends the literature on income inequality by analyzing more comprehensive conflict measures, extending the analysis length, and using data as recent as 2018. this study also improves the econometric model, controls for important covariates, and analyzes differences between developed and developing countries. finally, the study finds worsening internal conflict causes an increase in income inequality in developing countries but not developed ones. the finding is unique to this study and supports kuznets's theory of the impact of economic parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 81 development, economic growth, and income inequality. the literature review focuses on the relationship between income inequality and conflict, while the data section discusses the sources of variables in the study. the design of the panel data analysis is in the methods section. the findings, discussion, and conclusion sections offer insight into the results and consider the study's contributions and limitations. 2. literature review – conflict as a determinant of income inequality internal and external conflict can lead to instability through coups, constitutional crises, terrorism, war, and others (posner, 1997). research finds economic effects of conflict and instability may lead to changes in income inequality (nagel, 1974; hardy, 1979; weede, 1981; alesina and perotti, 1996; cederman, weidmann, and gleditsch, 2011). for example, alesina and perotti (1996) claim that conflict increases instability, which affects income inequality by hindering economic growth and discouraging foreign investment. alesina and perotti use a panel of 70 countries from 1960-85 and measure political instability through an index based on the number of politically motivated assassinations, coup d’états, and regime type. this study extends the literature by analyzing more comprehensive measures of conflict, including "perceived" risk. the international country risk guide (icrg) measure of internal conflict includes the risk of civil war/ coup d'état threat, terrorism/political violence, and civil disorder. although conflict can increase economic uncertainty and disrupt economic activity, its effect on income inequality is not certain. economic growth's impact on income inequality depends on the level of economic development. kuznets (1955) and kaldor (1957) find that as a country’s income grows, inequality initially worsens and then improves later. they posit that when a country is underdeveloped, the per capita income is low for most people. consequently, measures such as the gini coefficient indicate low income inequality. as the country begins to develop, economic growth begins, which makes the associated economic sector and the region experience higher per capita income and income inequality. it will result in an increase in the gini coefficient for the country. as the country continues to develop and more sectors and regions receive a higher income, it reduces income inequality, hence the gini coefficient. thus, the effects of conflict on income inequality through economic growth may partially depend on a country's place on the kuznets curve. in addition, foreign direct investment and free trade may lead to growth and expansion in industries that lead to higher income inequality. on the other hand, what if conflict lead to economic turmoil, recession, and broad economic despair regardless of whether a country is in the highor low-income category? in this scenario, conflict could lead to greater income equality. war is a subcomponent of both the internal and external icrg conflict measures. evidence suggests wars, especially civil wars, adversely affect gross national income (gni) and income distribution (collier and hoeffler, 2007). also, studies find the emergence of a minority class of war profiteers can increase the gini coefficient (pugh, 2003; bircan, brück, and vothknecht, 2017). if the upper income group is immune to conflict, while the middle and lower classes lose parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 82 income due to the destruction of the economy and job opportunities, then conflicts cause income inequality. collier (1999) researches the consequences of civil wars on gdp and the economy's composition and finds that gross domestic product (gdp) per capita declines by 2.2%, primarily through a reduction in production and loss of capital stock. collier's (1999) research is limited by its small sample size and focus on the extreme cases of full-blown civil wars. this research analyzes more comprehensive measures of internal and external conflict, which allows a larger panel of countries. the long run implications of conflict are there may be fewer public funds for education and social welfare programs because of less gni and subsequent tax revenue (deininger and olinto, 2000). additionally, the need for military funds reduces resources available for education and social wellness programs which worsens income inequality (collier and hoeffler, 2002). bircan, brück, and vothknecht (2017) use panel data from 161 countries from 1960-2014 to analyze the effects of civil wars on income inequality and find an increase in income inequality ranging from 1.9 to 2.5 gini points during a civil war and it continues up to ten years after a civil war. bircan, brück, and vothknecht (2017) fail to control for important covariates, such as the dependency ratio (ratio of elderly and children to labor force), and their model does not control for the presence of cross-sectional dependence or autocorrelation, which impact large scale cross-sectional panels (driscoll and kraay, 1998). this study adds important covariates, improves the model to account for cross-sectional dependence and autocorrelation, and explores more comprehensive measures of conflict. an additional consideration is some conflicts have increased gni. for example, the united states entering world war ii (wwii) spurred the united states economy and is broadly viewed as the catalyst that ended the great depression. the outcome of the engagement of the united states in world war ii seems to be an exception to the norm. the income inequality in the united states declined immediately after wwii until around 1967 (duquette, 2018). another contributing factor is that the united states did not have any damages to its production facilities or infrastructure, apart from the shipyard facilities in hawaii. instead, the united states increased its output in almost every area, partly to provide goods, services, and weapons to europe, which had lost substantial production capacity due to damages ((duquette, 2018). the evidence suggests that when a country is not invaded, it can continue to increase its production capacity to get ahead of war-torn countries. one reason for england's ability to rise to global supremacy, despite its size and lack of substantial resources, was that it was rarely invaded, unlike other european countries (von schulze-gaevernitz, 1915). additionally, although there may be some economic growth cases from war, they come with high costs. war casualties and the need to retool factories for consumer goods have adverse shortand long-term effects. there may be few transferable skills employees can use once the economy shifts away from war-based manufacturing. war-driven economies can persist postconflict and lead to high levels of military spending that continue to reallocate funds from education and social programs to the military (pugh, 2003). parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 83 3. methods and data 3.1 data description and variable selection appendix a provides the name, source, and summary statistics of variables. the dependent variable is the net gini coefficient as measured by the standardized world income inequality database (swiid) (solt, 2015). the net gini measures income inequality after tax and transfer and is on a scale between (0) equal distribution to (100) most unequal distribution. the gini coefficient is derived from the lorenz curve that measures income distribution across households (lorenz, 1905). the more evenly income is distributed across a population, the smaller the gini coefficient. table 1 shows differences in the net gini coefficient between developed and developing countries. the mean net gini is (10.2) points less in developed countries than in developing countries, which signifies lower income inequality. the minimum and maximum for developed countries are (16.8) for slovakia and (51.6) for chile. the range for developing countries is (22.6) for belarus and namibia (65.4). table 1. net gini coefficient by panel. full panel developed countries developing countries countries in panel 106 42 64 observations 2,744 1,132 1,612 mean 38.5 32.0 42.2 standard deviation 8.72 7.02 7.35 min-max 16.8-65.4 16.8-51.6 22.6-65.4 internal conflict measures the sum of the three subcomponents of risk of civil war/coup d'état threat, terrorism/political violence, and civil disorder. a score of (12) signifies the absence of conflict, no opposition to the government, and a government not engaging in arbitrary violence against its people. a score of (0) denotes an active civil war. as discussed in the literature review, the expectation is worsening internal conflict leads to an increase in the net gini (alesina and perotti, 1996). table 2 shows differences in internal conflict by panel. the mean internal conflict is (2.17) points higher in developed countries than in developing countries, which reflects less internal conflict. the minimum scores for developed countries are (3.0) for chile and israel during periods of severe internal conflict. many developed countries have had the highest possible score of (12). for developing countries, the minimum is (0) for lebanon, sri lanka, and el salvador during periods of active civil war. several developing countries have had the highest score of (12). parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 84 table 2. internal conflict by panel. full panel developed countries developing countries countries in panel 106 42 64 observations 2,744 1,132 1,612 mean 9.02 10.4 8.23 standard deviation 2.23 1.51 2.22 min-max 0-12 3-12 0-12 external conflict measures the three subcomponents of the risk of an external war, crossborder conflict, and foreign pressure (e.g., sanctions and withholding of aid). a score of (12) indicates very low risk, while (0) signifies an active cross-border war. the researchers expect worsening external conflict will have less of an effect on income inequality than internal conflict for two reasons. first, external conflict, which includes nonviolent subcomponents as well as lesser conflicts including cross-border tension, is less likely to destroy production facilities or disrupt the production of goods and services. second, the external conflict measure includes nonviolent factors such as sanctions and the withholding of aid which might not affect income inequality as much as violent conflict. table 3 shows differences in external conflict by panel. the mean external conflict (1.11) points higher in developed countries, showing less external conflict. iran and lebanon have the minimum score of (0) in the developing panel of countries, representing an active cross-border war. the minimum for developed countries is (3) for cyprus and israel. many countries for both developed and developing panels have the max score of (12). the econometric model includes covariates accounting for demographics, economic development, trade/globalization, political economy, investment risk, economic growth, and unemployment. the covariates are based on the relationship with conflict or the need to account for confounding variables that otherwise could lead to spurious results. first, conflict by nature, is the crystallization of economic, social, and political problems. when there is a large discrepancy in income, conflict can manifest through economic, social, and political factors. therefore, the model includes the covariates of per capita gdp, economic growth, political economy, unemployment, investment risk, institutional quality, trade, and the human capital index. second, the model includes important covariates to account for the economic structure and population distribution. table 3. external conflict by panel. full panel developed countries developing countries countries in panel 106 42 64 observations 2,744 1,132 1,612 mean 9.82 10.5 9.39 standard deviation 1.84 1.42 1.93 min-max 0-12 3-12 0-12 parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 85 the natural log of per capita gdp accounts for differences in income and economic development (heston et al., 2012). the economic growth rate is the annual gdp growth rate. kuznets (1955) and kaldor (1957) find economic growth increases income inequality when a country is in earlier stages of development, while economic growth can decrease income inequality as countries become richer. therefore, the expectation is increases in the natural log of per capita gdp will increase income inequality for developing countries, but decrease income inequality for developed countries. the human capital index scores a country's average schooling years and returns to education (feenstra, inklaar, and timmer, 2015), as conflict can impact both. a country experiencing conflict may have fewer resources for education. additionally, returns to education may be reduced because of economic disruptions, including loss of job opportunities. the expectation is a decrease in the human capital index will increase income inequality in most cases (parsons, 2023). the effects of human capital on income inequality are partly determined by the dispersion of education in labor markets. the composition effect increases the wage of the smaller segment of the population with more human capital, which increases income inequality (knight and sabot, 1983). as the dispersion of human capital spreads more widely across a population, more of the population has higher wages, and wages compress since the supply of educated workers increases (knight and sabot, 1983), decreasing income inequality. polity data evaluates a country's regime. conflict may be less in regimes where the government is responsive and held accountable, and citizens have a part in selecting the regime. the polity indicator ranges from (0) for strongly autocratic to (6) for strongly democratic regimes. the score is based on competitiveness, openness, political participation, and checks on executive authority. the effects of increases in democratization on income inequality are indeterminant (olson, 1965; acemoglu et al., 2013). the study controls for institutional strength and quality of bureaucracy, and it is on a scale of (0) low institutional strength and bureaucracy quality to (4) high institutional strength and bureaucracy quality. countries with better institutions and bureaucracy may have less conflict since government services have fewer disruptions. additionally, better institutions and a quality bureaucracy can help cushion the effects of some forms of conflict. for example, although riots were at the united states capitol, the united states electoral college and the legislative branch prevented a larger conflict. the expectation is that increasing institutional strength and bureaucracy quality will reduce income inequality (huber, 2002). trade and globalization is measured through the gdp-adjusted sum of imports and exports. globalization and trade can lead to conflict. trade, especially in the form of cheaper imports from multinational enterprises (mne), affects domestic markets, which could lead to greater unemployment and subsequently cause conflict (stiglitz, 2013). the effects of trade on income inequality are inconclusive (heckscher, 1919; ohlin, 1933). if economic growth through trade increases the income of low income groups disproportionally higher than higher-income groups, income inequality will decrease (stolper-samuelson, 1941). on the other hand, if trade increases incomes of high income groups more than low income groups, income inequality will increase. parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 86 the investment risk profile is on a scale of (0) high risk to (12) low risk and is based on the subcomponent measures of expropriation, profit repatriation, and payment delays. high investment risk can lead to conflict through its impact on the economy and foreign investment. a country with high risk, where foreign investors fear expropriation, will have less foreign investment, adversely affecting the economy. in this case, conflict can arise, and poorer economic performance may lead to higher income inequality (alesina and perotti, 1996). the unemployment rate is the percentage of the labor force not working or seeking employment. unemployment can lead to conflict (stiglitz, 2013). higher levels of unemployment increase income inequality since a larger percentage of the population receive no labor income (furceri and ostry, 2019). the age distribution of a population affects working-class versus non-working-class percentages, leading to income inequality variations among countries (burtless, 2009). the age dependency ratio is the percentage of people younger than 15 and older than 64 compared to the working-age population. it measures the burden of the working-age population caring for both the young and old. the larger the ratio, the greater the burden for the working class to support the young and old. additionally, as the segment of the population outside the workforce increases, the larger the segment of the population without a working income, which increases income inequality. the percentage of the labor force employed in manufacturing accounts for the economic structure of a country. the labor force transition from agriculture to manufacturing can decrease income inequality as low income rural households obtain higher incomes in urban manufacturing. young (2013) finds that urban-rural income inequalities may account for 40 percent of intercountry income inequality. 3.2 empirical framework the study includes 106 countries in the following panels: full panel, developed countries, and developing countries. using different panels isolates differences based on development status, and variables, such as per capita gdp, will have different relationships based on development status (kuznets, 1955). appendix b lists the countries in each specific panel. the data is unbalanced, with 2,744 observations in the full panel with country-level data from 1988 to 2018. although balanced panels are preferred for analysis, the dataset is more extensive and representative, with more countries and observations. also, more extensive country representation increases observations, and the larger sample reduces selection bias. model (1) borrows from barro (2000) and lundberg and squire (2003), who study economic growth and income inequality determinants. the panel model regresses the net gini coefficient on the determinants of internal conflict, external conflict, and the previously explained covariates. parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 87 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝑖𝑖𝑖𝑖 = 𝛼𝛼 + 𝐼𝐼𝐺𝐺𝐺𝐺𝐼𝐼𝐼𝐼𝐺𝐺𝐼𝐼𝑖𝑖𝑖𝑖 + 𝐸𝐸𝐸𝐸𝐺𝐺𝐼𝐼𝐼𝐼𝐺𝐺𝐼𝐼𝑖𝑖𝑖𝑖 + 𝑋𝑋𝑖𝑖𝑖𝑖 + 𝜇𝜇𝑖𝑖 + 𝜆𝜆𝑖𝑖 + 𝜀𝜀𝑖𝑖𝑖𝑖 𝑎𝑎𝐺𝐺𝑎𝑎 (𝐺𝐺 = 1, … 𝐺𝐺; 𝐺𝐺 = 1, … 𝑇𝑇) (1) 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝑖𝑖𝑖𝑖 is the measure of income inequality for country (i) and time (t). 𝐼𝐼𝐺𝐺𝐺𝐺𝐼𝐼𝐼𝐼𝐺𝐺𝐼𝐼𝑖𝑖𝑖𝑖 is the measure of internal conflict that varies across time and country. 𝐸𝐸𝐸𝐸𝐺𝐺𝐼𝐼𝐼𝐼𝐺𝐺𝐼𝐼𝑖𝑖𝑖𝑖 is the measure of external conflict that varies across time and country. xit is the vector set of control variables used in the model that vary across time and countries. the parameter 𝛼𝛼 contains a constant and individual-specific variable invariant over time. the 𝜇𝜇𝑖𝑖 captures unobservable individual-specific effects and 𝜆𝜆𝑖𝑖 captures unobservable time-specific effects. 𝜀𝜀𝑖𝑖𝑖𝑖 is the error term. see appendix d for specification testing results. model specification analysis leads to selecting fixed effects models for both country and time. heteroskedasticity, autocorrelation, and crosssectional dependence are also evident in the data. to account for heteroskedasticity, autocorrelation, and cross-sectional dependence, the study uses driscoll and kraay (1998) standard errors which use cross-sectional averages of nonparametric standard errors to adjust for all three. the newey-west (1987) modifications to cross-sectional averages while adjusting the standard error estimates are used to ensure the covariance matrix estimators remain consistent and independent of the cross-sectional dimensions. although the lengths of the periods range from 18 to 31 years in this study, and driscoll and kraay (1998) standard errors rely on large-t asymptotics, the data set (panel) is not too short. lags of one, three, and five years are used to account for correlations and endogeneity. using longer lags, such as five years, analyzes the extent conflict leads to longer-lasting effects on income inequality. pugh (2013) claims internal conflict can have an enduring impact on income inequality by reducing tax revenue, reducing funds available to redistribute, and reallocating resources from education to the military. a potential analytical concern is the assumption of the exogeneity of conflict variables. omitted variable bias is possible if an unobserved variable jointly determines conflict and income inequality. the issue is mitigated through the fixed effects estimations, which control for unobservable factors (baltagi, 2001). the structure of panel data analysis accounts for omitted variables. a second potential issue is reverse causality due to the possibility of higher income inequality leading to internal and external conflicts. although high income inequality can be synonymous with deprivation, political protest, and violence (feirarbend and feirarbend , 1966; gurr, 1968; huntington, 1968), many cross-national studies consistently find they do not increase risks of conflict (fearon and laitin, 2003; collier and hoeffler, 2004; buhaug, et al., 2014). to eliminate this possibility, the dependent variable is lagged up to five years which mitigates the endogeneity and reverse causality issues. selection bias is a potential issue if certain countries are underrepresented because of sparse data. the large panel sizes for developing and developed countries help reduce the problem. a tradeoff is the larger grouping reduces generalizability. for example, since the developing country panel include low income through upper middle income countries, some caution should be used when generalizing the finding across an entire panel group. parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 88 4. results 4.1 panel regressions table 4 provides three different models utilizing different groups of countries when the dependent variable is lagged 3 years. appendix e and f does the same while changing the lag length to 1 and 5 years. the results are consistent across the models with different lags, suggesting the persistence and stickiness of income inequality (ermisch and smeeding, 2012; pugh, 2013; bircan, brück, and vothknecht, 2017). the results show worsening internal conflict causes an increase in income inequality in developing countries. the decrease of one unit of internal conflict, for example worsening internal conflict from (9) to (8), will increase the net gini by (0.133) for developing countries. a one standard deviation worsening of income inequality will increase the net gini by about (0.068). for a specific example, cameroon has a 2018 internal conflict score of around 6, while the united states has a score near 10. if cameroon had the united states' lower conflict level while controlling for all other variables, cameroon's net gini coefficient would have been lower by (0.798). the results also show worsening internal conflict causes a statistically significant increase in the net gini in the full and developing countries panels but not for the developed country panel. an important question is why is there a difference in statistical significance between developing and developed countries. as discussed earlier, kuznets (1955) indicates that as developed economies grow, their income inequality declines. consequently, developed countries have lower income inequality than developing countries (see table 1). furthermore, their income inequalities are close once adjusting for outliers. finally, they have less internal conflicts than developing countries (see table 2). lack of internal conflict means that it cannot change income inequality. to demonstrate causality, it is necessary for the "cause" to change the "affected" or the anticipated outcome. it is clearly evident in table 4, where none of the variables depicting different indicators of conflict are statistically significant for developed countries, even though the model, as a whole, is significant. only "trade and globalization" and "age dependency ratio" are statistically significant, which could be due to random outcome. in addition, developed countries tend to have better institutions and bureaucracy, which may help absorb minor internal conflict shocks. other possibilities include that an increase in trade causes an increase in exporting and importing sectors more than other sectors, increasing income inequality. table 4 also provides the results of external conflict. external conflict is not statistically significant for any of the development stages. we offer two explanations for this outcome. first, although theoretically, an external conflict should adversely affect many social and economic measures of a country, and hence, income inequality, however, there are not enough of them to allow a meaningful impact on income inequality. to test this hypothesis, it is necessary to only consider cases where there are significant changes in external conflict and assess its impact. second, much literature focuses specifically on war, while the icrg external conflict measure considers the subfactors of diplomatic pressures, including sanctions, withholding of aid, and trade restrictions. therefore, the distinctive differences in the measures, especially between a parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 89 cross-border war and diplomatic pressures, may also explain the statistical insignificance compared to the literature (bircan, brück, and vothknecht, 2017). table 4. internal and external conflict – 3 year lag. full panel developed countries developing countries no. in group 106 42 64 obs. 2,744 1,132 1,612 f 1.35e+09 5233819 1.14e+07 r2 .234 .196 .308 internal conflict -.129*** (.055) -.120 (.130) -.133** (.054) external conflict .071* (.041) .056 (.053) .017 (.071) per capita gdp (log) 2.23*** (.683) -1.18 (.730) 3.47*** (.692) investment profile .005 (.035) .074 (.050) .015 (.047) political economy .088 (.071) .123 (.102) .105 (.086) institutional strength and quality of bureaucracy -.617*** (.147) -.323 (.292) -.733*** (.164) industry % of economy -.049** (.020) .009 (.041) -.045* (.023) trade and globalization .005 (.003) .011*** (.003) -.003 (.005) human capital index -1.76*** (.492) .570 (.378) -3.82*** (.848) gdp growth rate .016 (.018) .051 (.038) .001 (.013) unemployed rate .041** (.020) .024 (.022) .025 (.027) age dependency ratio .110*** (.018) .081*** (.017) .086*** (.015) note: *** p <0.01, ** 0.01<p<0.05, * 0.05<p<0.10. dependent variable is the net gini coefficient. standard errors in parenthesis. 4.2 results – panel regressions with low, medium, and high internal conflict as indicator variables the study also examines the effects of different internal conflict risk levels on income inequality. we create three groups of indicator variables based on risk categories. the categories include high risk countries with an internal conflict score between (0) to (4), the medium risk group has internal conflict between (5) to (8), and the low risk group has internal conflict between (9) to (12). table 5 provides three different models utilizing these 3 groups when the dependent variable is lagged 3 years. the base group is the medium risk countries, and the results show the effects of a country moving from medium risk to high risk or medium risk to low risk. the results indicate a decrease in the net gini of (0.431) when a country moves from the medium risk category to the parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 90 low risk category. the results further support the literature's claim that lower internal conflict reduces income inequality. as noted previously, the lack of statistical significance for developed countries relates to a small variance in internal conflict and income inequality after accounting for outliers. an interesting finding is the movement from medium risk to high risk is statistically insignificant. an explanation for this outcome is the distribution of internal conflict is rightward skewed, and most observations are in the medium and low risk categories. the small subset of high internal countries are outliers. see appendix g for internal conflict distribution. therefore, a reason for the lack of statistical significance is we are comparing the medium risk countries to a group of outliers. table 5. internal conflict as high, medium, and low risk – 3 year lag. full panel developed countries developing countries no. in group 106 42 64 obs. 2,744 1,132 1,612 f 1.35e+09 60857 9460780 r2 .234 .196 .309 high internal conflict (scores of 0 to 4) -.347 (.262) .209 (.489) -.412 (.300) medium internal conflict (scores 5 to 8) base comparison group low internal conflict (scores 9 to 12) -.315** (.140) .459 (.325) -.431*** (.147) external conflict .028 (.043) .028 (.050) -.021 (.076) per capita gdp (log) 2.26*** (.693) -1.13 (.710) 3.50*** (.687) investment profile .002 (.033) .079 (.053) .005 (.049) political economy .065 (.071) .101 (.084) .091 (.083) institutional strength and quality of bureaucracy -.632*** (.154) -.509 (.345) -.739*** (.166) industry % of economy -.055** (.021) .004 (.051) -.049* (.024) trade and globalization .005 (.003) .011*** (.004) -.004 (.005) human capital index -1.71*** (.471) .632* (.361) -3.75*** (.811) gdp growth rate .014 (.018) .051 (.040) -.001 (.013) unemployed rate .045** (.019) .030 (.021) .035 (.027) age dependency ratio .113*** (.018) .087*** (.020) .085*** (.015) note: *** p <0.01, ** 0.01<p<0.05, * 0.05<p<0.10. dependent variable is the net gini coefficient. standard errors in parenthesis. parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 91 5. conclusion the study investigates the impact of internal and external conflict on the net gini coefficient. the study finds that worsening internal conflict causes a statistically significant increase in income inequality in developing countries, but not developed countries. the findings support kuznets's theory (1955) that explains smaller gini coefficients in low income developing countries, larger gini coefficients at the intermediate levels of development, and then smaller gini coefficients in high income developed countries. there is less internal conflict in developed countries, and developed countries have better institutional buffers, which leads to the lack of statistical significance. external conflict is not a statistically significant determinant of income inequality in developed or developing countries. the authors propose that since the icrg external conflict measure includes nonviolent subcomponents of withholding of aid, trade restrictions, and sanctions, the broadness of the measure may partly explain the lack of statistical significance. additionally, since there is little variation in external conflict, studies must focus on countries where external conflict changes, and then assess the effects on income inequality. this article expands the current literature in several ways. first, as noted earlier, we find the effects of internal conflict are greater in developing countries than developed ones, a point that other studies have missed. second, in developing countries, the study finds improvement in risk from medium to low reduces a country's income inequality. third, it uses more comprehensive measures of conflict. the icrg conflict data include a minimum of three subcomponents. the broadness of the conflict measures has advantages and disadvantages. the benefit is analyzing a more extensive set of factors of conflict. the broader lens of conflict improves the breadth and depth of the internal and external conflict measures. on the other hand, the broader measures limit the generalizability of specific subfactors. thus, it could be the case that civil war matters, but civil disorder matters less. alternatively, cross-border wars matter, but diplomatic pressures do not matter as much. in other words, as the subcomponents of each internal or external conflict measure get compiled into one overall rating, one needs to be thoughtful and careful with generalizations. the fallacy of division would lead to a faulty conclusion that because the broader external conflict measure is statistically insignificant, each of the three subcomponents must also be insignificant. additionally, it is a mistake to conclude that since the internal conflict measure is statistically significant for developed countries, it must mean all three subcomponents are significant, as well. other contributions to the literature include the model. it accounts for cross-sectional dependence, which may cause biased estimators in cross-national income inequality studies. the research also includes important covariates, such as the dependency ratio, which is missing in some models in the literature. the study also includes recent data and covers the last 30 years in 106 countries. the researchers note the limitations of the study. potential omitted-variable bias exists, but the two-way fixed effects and the panel data structure mitigate the problem. missing data and selection bias always cause some concern, but it is mitigated through the panel structure and parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 92 examining groups based on development status. future research should explore other mechanisms which affect income inequality through conflict and stability. also, measures isolating the three subcomponents of internal and external conflict could lead to important insights. acknowledgments all data used in the study are publicly available and accessible. we want to acknowledge funding for the icrg dataset from pepperdine university and helpful suggestions and comments from david smith, jared ashworth, blake withall, and the anonymous referee of the european journal of government and economics. any remaining shortcomings are those of the authors. references acemoglu, d., naidu, s., restrepo, p., and robinson, j. (2013). democracy, redistribution and inequality. national bureau of economic research working paper 19746. https://doi.org/10.3386/w19746 alesina, a., and perotti, r. (1996). income distribution, political instability, and investment. european economic review, 40(6), 1203-1228. https://doi.org/10.1016/0014-2921(95)00030-5 ariely, g., and uslaner, e. (2017). corruption, fairness, and inequality. international political science review, 38(3), 349-362. https://doi.org/10.1177/0192512116641091 baltagi, and badi, h. (2001). econometric analysis of panel data. wiley, john and sons. barro, r. (2000). inequality and growth in panel of countries. journal of economic growth, 5, 5-32. https://doi.org/10.1023/a:1009850119329 barry, b. (2005). why social justice matters. cambridge: polity press. bircan, c., brück, t. and vothknecht, m. (2017). violent conflict and inequality. oxford development studies, 45:2, 125-144. https://doi.org/10.1080/13600818.2016.1213227 buhaug, h., cederman, l., and gleditsch, k. s. (2014). square pegs in round holes: inequalities, grievances, and civil war. international studies quarterly, 58, 418-431. https://doi.org/10.1111/isqu.12068 burtless, g. (2009). demographic transformation and economic inequality, ch. 18 in w. salverda, b. nolan, and t. m. smeeding (eds), the oxford handbook of economic inequality, oxford, oxford university press, 435-454. cederman, l., weidmann, n. b., and gleditsch, k. s. (2011). horizontal inequalities and ethnonationalist civil war: a global comparison, american political science review, 105, 478-495. https://doi.org/10.1017/s0003055411000207 collier, p. (1999). on the economic consequences of civil war. oxford economic papers, 51, 168183. https://doi.org/10.1093/oep/51.1.168 collier, p., and hoeffler, a. (2002). military expenditure: threats, aid and arms races (world bank policy research working paper no. 2927). washington, dc: world bank. https://doi.org/10.1596/1813-9450-2927 collier, p., and hoeffler, a. (2004). greed and grievance in civil war. oxford economic papers, 56, 563-595. https://doi.org/10.1093/oep/gpf064 collier, p., and hoeffler, a. (2007). civil war. in t. sandler and k. hartley (eds.), handbook of defense economics (pp. 711-739). elsevier. https://doi.org/10.1016/s1574-0013(06)02023-0 dabla-norris, e., kochhar, k., suphaphiphat, n., ricka, f. and tsounta, e. (2015). causes and consequences of income inequality: a global perspective. imf staff discussion note sdn/15/13. washington, dc: imf. https://doi.org/10.5089/9781513555188.006 deininger, k., and olinto, p. (2000). asset distribution, inequality, and growth (world bank policy research working paper no. 2375). washington, dc: world bank. https://doi.org/10.1596/18139450-2375 https://doi.org/10.3386/w19746 https://doi.org/10.1016/0014-2921(95)00030-5 https://doi.org/10.1177/0192512116641091 https://doi.org/10.1023/a:1009850119329 https://doi.org/10.1080/13600818.2016.1213227 https://doi.org/10.1111/isqu.12068 https://doi.org/10.1017/s0003055411000207 https://doi.org/10.1093/oep/51.1.168 https://doi.org/10.1596/1813-9450-2927 https://doi.org/10.1093/oep/gpf064 https://doi.org/10.1016/s1574-0013(06)02023-0 https://doi.org/10.5089/9781513555188.006 https://doi.org/10.1596/1813-9450-2375 https://doi.org/10.1596/1813-9450-2375 parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 93 deininger, k., and squire, l. (1996). a new data set measuring income inequality. the world bank economic review. 10(3), 565-591. https://doi.org/10.1093/wber/10.3.565 dobson, s., and ramlogan, c. (2009). is there an openness kuznets curve?" kyklos. 62(2), 226238. https://doi.org/10.1111/j.1467-6435.2009.00433.x dorling, d. (2011). injustice and the 1%. london and new york, ny: verso. driscoll, j., and kraay, a. (1998). consistent covariance matrix estimation with spatially dependent data. review of economics and statistics, 80, 549-560. https://doi.org/10.1162/003465398557825 duquette, n. (2018). inequality and philanthropy: high-income giving in the united states 1917-2012. explorations in economic history, 70, 25-41. https://doi.org/10.1016/j.eeh.2018.08.002 ermisch, j, and smeeding, t.m. (2012). from parents to children: the intergenerational transmission of advantage, new york: russell sage foundation. fearon, j. d., and laitin, d. (2003). ethnicity, insurgency, and civil war. american political science review, 97, 75-90. https://doi.org/10.1017/s0003055403000534 feenstra, r., inklaar, r., and timmer, m. (2015). the next generation of the penn world table. american economic review, 105(10), 3150-3182. https://doi.org/10.1257/aer.20130954 feierabend, k., and feierabend, r. (1966). aggressive behavior within polities. journal of conflict resolution, 10, 249-271. https://doi.org/10.1177/002200276601000301 furceri, d., and ostry, j. (2019). robust determinants of income inequality. oxford review of economic policy, 35(3), 490-517. gurr, r. (1968). a causal model of civil strife: a comparative analysis using new indices. american political science review. 62, 1104-1124. https://doi.org/10.2307/1953907 haggard, s., and kaufman, r. (2012). inequality and regime change: democratic transitions and the stability of democratic rule. american political science review, 106(3), 1-22. https://doi.org/10.1017/s0003055412000287 hardy, m. (1979). economic growth, distributional inequality, and political conflict in industrial societies. journal of political and military sociology, 5, 209-227. heckscher, e. (1919). the effect of foreign trade on the distribution of income. a translation is provided by h. flam and m. j. flanders, eds., heckscher-ohlin trade theory (cambridge, ma: mit press, 1991). this article originally appeared in swedish in ekonomisk tidskerift, 21, 497512. heston, a., summers, r., and aten, b. (2012). penn world table version 7.1. center for international comparisons of production, income and prices at the university of pennsylvania. huber, j. (2002). deliberate discretion? japanese journal of political science, 4, 157-159. https://doi.org/10.1017/cbo9780511804915 huntington, s. (1968). political order in changing societies. new haven, ct: yale univ. press. kaldor, n. (1957). a model of economic growth. the economic journal, 67(268), 591:624. https://doi.org/10.2307/2227704 karklins, r. (2005). the system made me do it: corruption in post-communist societies. armonk, n.y: m.e. sharpe. knight, j., and. sabot, r. (1983). educational expansion and the kuznets effect, american economic review. 73 (5), 1132-1136. kuznets, s. (1955). economic growth and income inequality. the american economic review, 45(1), 1-28. lorenz, o. (1905). methods of measuring the concentration of wealth. publications of the american statistical association, 9(70), 209-219. https://doi.org/10.1080/15225437.1905.10503443 lundberg, m., and squire, l. (2003). the simultaneous evolution of growth and inequality. the economic journal, 113(487), 326-344. https://doi.org/10.1111/1468-0297.00127 milanovic, b. (2016). global inequality: a new approach for the age of globalization. cambridge, ma: harvard university press. https://doi.org/10.4159/9780674969797 nagel, j. (1974). inequality and discontent: a nonlinear hypothesis. world politics. 22, 453-472. https://doi.org/10.2307/2010097 newey, w., and west, k. (1987). a simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix. econometrica, 55, 703-708. https://doi.org/10.2307/1913610 ohlin, b. (1933). interregional and international trade. cambridge, ma: harvard university press. olson, m. (1965). the logic of collective action: public goods and the theory of groups. cambridge: harvard university press. parsons, b. (2023). panel data analysis of the human capital index and income inequality. applied econometric and international development, 23(1), 5-32. https://doi.org/10.1093/wber/10.3.565 https://doi.org/10.1111/j.1467-6435.2009.00433.x https://doi.org/10.1162/003465398557825 https://doi.org/10.1016/j.eeh.2018.08.002 https://doi.org/10.1017/s0003055403000534 https://doi.org/10.1257/aer.20130954 https://doi.org/10.1177/002200276601000301 https://doi.org/10.2307/1953907 https://doi.org/10.1017/s0003055412000287 https://doi.org/10.1017/cbo9780511804915 https://doi.org/10.2307/2227704 https://doi.org/10.1080/15225437.1905.10503443 https://doi.org/10.1111/1468-0297.00127 https://doi.org/10.4159/9780674969797 https://doi.org/10.2307/2010097 https://doi.org/10.2307/1913610 parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 94 plato. republic. books i, ii, iv and "the myth of the cave: from book vii." morality and the good life: an introduction to ethics through the classical sources. 5th ed. eds. robert c. solomon, clancy w. martin, and wayne vaught. trans. g.m.a. grube. boston: mcgraw-hill, 2009. 81-104. posner, r. (1997). equality, wealth, and political stability. journal of law, economics, and organizations, 13(2), 344-364. https://doi.org/10.1093/oxfordjournals.jleo.a023387 pugh, m. (2003). protectorates and spoils of peace: political economy in south-east europe. in d. jung (ed.), shadow globalization, ethnic conflicts and new wars. london: routledge. https://doi.org/10.4324/9780203216965 sahota, g. (1978). theories of personal income distribution: a survey. journal of economic literature, 16(1), 1-55. solt, f. (2015). economic inequality and nonviolent protest. social science quarterly, 96(5), 13141327. https://doi.org/10.1111/ssqu.12198 stiglitz, joseph. (2013). the price of inequality. new perspectives quarterly. 30(1). https://doi.org/10.1111/npqu.11358 stolper, w., and samuelson, p. (1941). protection and real wages. review of economic studies, 9(1), 58-73. https://doi.org/10.2307/2967638 tocqueville, a. (1835). democracy-in america, volume ii. new york: schocken books. united nations development program. (2021). human development report 2020. new york: oxford press. von schulze-gaevernitz, g. (1915). origins of british supremacy of the seas. current history, 3(3), 560-563. https://doi.org/10.1525/curh.1915.3.3.560 weede, e. (1981). income inequality, average income, and domestic violence. journal of conflict resolution, 25, 639-653. https://doi.org/10.2307/2600358 young, a. (2013). inequality, the urban-rural gap, and migration. quarterly journal of economics, 128(4), 1727-1785. https://doi.org/10.1093/qje/qjt025 https://doi.org/10.1093/oxfordjournals.jleo.a023387 https://doi.org/10.4324/9780203216965 https://doi.org/10.1111/ssqu.12198 https://doi.org/10.1111/npqu.11358 https://doi.org/10.2307/2967638 https://doi.org/10.1525/curh.1915.3.3.560 https://doi.org/10.2307/2600358 https://doi.org/10.1093/qje/qjt025 parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 95 appendix a. summary statistics variable source observ. mean st. dev. min max net gini coefficient swiid 2,744 38.12 8.81 19.5 66.5 external conflict icrg 2,744 10.2 1.56 2 12 internal conflict icrg 2,744 9.02 2.05 0 12 age dependency ratio world bank 2,744 61.9 18.1 27.0 117 employment in manufacturing world bank 2,744 21.6 7.85 2.54 46.0 gdp growth rate world bank 2,744 2.23 4.09 -40.7 24.0 human capital index penn world tables (10.0) 2,744 2.52 .700 1.05 3.97 imports + exports % gdp world bank 2,744 77.8 50.74 11.1 437.3 investment risk profile icrg 2,744 7.94 2.31 0 12 natural log of gdp per capita world bank 2,744 8.68 1.49 5.21 11.6 quality of bureaucracy and institutions icrg 2,744 2.4 1.10 0 4 unemployment rate world bank 2,744 8.27 6.33 .1 38.8 parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 96 appendix b. panel list, by country full panel: albania, algeria, angola, argentina, armenia, australia, austria, bangladesh, belgium, bolivia, botswana, brazil, brunei, bulgaria, burkina faso, cameroon, canada, chile, china, columbia, costa rica, cote d'ivoire, croatia, cyprus, czechia, denmark, dominican republic, ecuador, egypt, el salvador, estonia, finland, france, gambia, germany, ghana, greece, guatemala, guyana, honduras, hong kong, hungary, iceland, india, indonesia, iran, ireland, israel, italy, jamaica, japan, jordan, kazakhstan, kenya, latvia, lithuania, luxembourg, madagascar, malawi, malaysia, mali, mexico, moldova, mongolia, morocco, mozambique, namibia, netherlands, new zealand, nicaragua, niger, nigeria, norway, pakistan, panama, paraguay, peru, philippines, poland, portugal, qatar, romania, russia, senegal, sierra leone, singapore, slovakia, slovenia, south africa, south korea, spain, sri lanka, sudan, sweden, switzerland, tanzania, thailand, tunisia, turkey, uganda, ukraine, united kingdom, united states, uruguay, venezuela, yemen, zambia, zimbabwe. developed countries: australia, austria, belgium, brunei, canada, chile, croatia, cyprus, czechia, denmark, estonia, finland, france, germany, greece, hong kong, hungary, iceland, ireland, israel, italy, japan, latvia, lithuania, luxembourg, netherlands, new zealand, norway, poland, portugal, qatar, romania, singapore, slovakia, slovenia, south korea, spain, sweden, switzerland, united kingdom, uruguay, and united states. developing countries: albania, algeria, angola, argentina, armenia, bangladesh, bolivia, botswana, brazil, bulgaria, burkina faso, cameroon, china, columbia, costa rica, cote d'ivoire, dominican republic, ecuador, egypt, el salvador, gambia, ghana, guatemala, guyana, honduras, india, indonesia, iran, jamaica, jordan, kazakhstan, kenya, madagascar, malawi, malaysia, mali, mexico, moldova, mongolia, morocco, mozambique, namibia, nicaragua, niger, nigeria, pakistan, paraguay, peru, philippines, russia, senegal, sierra leone, south africa, sri lanka, sudan, tanzania, thailand, tunisia, turkey, uganda, ukraine, venezuela, yemen, zambia, and zimbabwe. parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 97 appendix c – correlation matrix internal conflict external conflict gdp per capita depend. ratio invest. profile employed industry% imp + exp (% gdp) human capital gdp growth unempl. internal conflict 1.00 external conflict .568 1.00 gdp per capita .500 .260 1.00 depend. ratio -.412 -.197 -.726 1.00 invest. profile .411 .218 .524 -.399 1.00 employed industry% .352 .184 .596 -.679 .213 1.00 imp + exp % gdp .320 .188 .298 -.322 .298 .170 1.00 human capital .461 .202 .817 -.781 .496 .549 .274 1.00 gdp growth .082 .019 -.039 -.141 .096 .048 .100 .038 1.00 unempl. -.087 -.004 -.032 .040 -.117 .012 -.071 -.058 -.136 1.00 parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 98 appendix d. specification testing 1. hausman test for fixed versus random effects=fixed effects 2. joint test for time fixed-effect=indicator variable for time. 3. wald test for heteroscedasticity = presence of heteroskedasticity 4. pesaran (cd) test for cross-sectional dependence = presence of crosssectional dependence 5. woolridge test for autocorrelation = presence of autocorrelation 6. variance inflation factor (vif) test for multicollinearity=1.87 parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 99 appendix e. table 2. internal and external conflict – 1 year lag full panel developed countries developing countries no. in group 106 42 64 obs. 2,744 1,132 1,612 f 4.99e+09 239496 2.11e+07 r2 .234 .200 .301 internal conflict -.129*** (.044) -.120 (.108) -.134*** (.043) external conflict .071* (.037) .056 (.047) .017 (.064) per capita gdp (log) 2.23*** (.526) -1.18* (.628) 3.43*** (.562) investment profile .005 (.030) .074 (.045) .015 (.041) political economy .088 (.055) .123 (.098) .105 (.066) institutional strength and quality of bureaucracy -.617*** (.119) -.323 (.266) -.733*** (.133) industry % of economy -.049*** (.015) .009 (.041) -.045*** (.019) trade and globalization .005* (.003) .011*** (.003) -.004 (.004) human capital index -1.76*** (.382) .570* (.317) -3.81*** (.669) gdp growth rate .016 (.017) .051 (.037) .001 (.013) unemployed rate .041** (.016) .024 (.018) .025 (.024) age dependency ratio .110*** (.015) .081*** (.017) .086*** (.012) note: *** p <0.01, ** 0.01<p<0.05, * 0.05<p<0.10. dependent variable is the net gini coefficient. standard errors in parenthesis. parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 100 appendix f internal and external conflict – 5 year lag full panel developed countries developing countries no. in group 106 42 64 obs. 2,744 1,132 1,612 f 1.10e+09 913616 1.68e+07 r2 .234 .196 .308 internal conflict -.129*** (.055) -.120 (.138) -.133** (.058) external conflict .071* (.040) .056 (.052) .016 (.071) per capita gdp (log) 2.23*** (.746) -1.18 (.720) 3.47*** (.745) investment profile .005 (.034) .074 (.049) .015 (.042) political economy .088 (.079) .124 (.093) .105 (.094) institutional strength and quality of bureaucracy -.617*** (.166) -.323 (.271) -.733*** (.187) industry % of economy -.049** (.022) .009 (.051) -.045 (.027) trade and globalization .005 (.003) .011*** (.004) -.003 (.005) human capital index -1.76*** (.835) .570 (.378) -3.82*** (.939) gdp growth rate .016 (.017) .051 (.037) .001 (.011) unemployed rate .041** (.020) .024 (.024) .026 (.026) age dependency ratio .110*** (.020) .081*** (.022) .086*** (.017) note: *** p <0.01, ** 0.01<p<0.05, * 0.05<p<0.10. dependent variable is the net gini coefficient. standard errors in parenthesis. parsons and naghshpour / european journal of government and economics 12(1), june 2023, 79-101 101 appendix g. internal conflict distribution 18 25 36 50 96 170 294 511 722 902 883 900 0 20 0 40 0 60 0 80 0 10 00 fr eq ue nc y 0 1 2 3 4 5 6 7 8 9 10 11 12 internal conflict 0=worst 12=best internal conflict distribution 1. introduction0f 2. literature review – conflict as a determinant of income inequality 3. methods and data 3.1 data description and variable selection 3.2 empirical framework 4. results 4.1 panel regressions 4.2 results – panel regressions with low, medium, and high internal conflict as indicator variables 5. conclusion acknowledgments european journal of government and economics 12(1), june 2023, 39-57 this work is licensed under a creative commons attribution-noncommercial 4.0 international license. european journal of government and economics issn: 2254-7088 assessing the fairness of the eu council qualified majority voting. a voting power critical perspective of the liberal intergovernmentalist accounts oana andreea ion a * a affiliation: national university of political studies and public administration (snspa), romania. * corresponding author at: oana.andreea.ion@dri.snspa.ro abstract. the qualified majority voting (qmv) used by the council of the european union developed to a high degree of complexity from one modifying treaty to another, until the latest definition stipulated in the treaty of lisbon. this paper analyses this eu intra-institutional voting method using a rational choice approach and emphasizes that there are situations when not even the institutions, as rational actors, can avoid a collective irrational outcome even when they are addressing subjects such as voting power distribution. it also addresses several shortcomings of the liberal intergovernmentalist explanatory framework focusing on the insufficiently developed level of credible institutional commitments. the core part of the article consists in investigating several types of eu council internal decision-making options, proposing how they can be designed to be considered in the same time fair and efficient, and in analysing how close this voting power ideal type configuration is to the current decisional system. keywords. eu council; input and output legitimacy; qualified majority voting; rational choice; voting power. jel codes. d7, d8, o2 doi. https://doi.org/10.17979/ejge.2023.12.1.9335 1. introduction 1.1 input and output legitimacy in the eu council: a voting power analysis various crises experienced by the european union (refugees, brexit, reaction to the ukrainian conflict, etc.) have invigorated those criticisms of the european union (eu) that underline the difficulty of creating or operating with an inter-institutional or intra-institutional decision-making system that is both representative and efficient, but mainly fair for the multiple actors involved. the importance of the eu on the international stage and the special place that the eu council occupies in the institutional architecture of the union are two arguments to justify the need for this study which offers a political science perspective on a subject usually approached only from the political practitioners’ perspective. establishing as the unit of analysis the rational agent defined here as any member state of the european union, the focus of this paper is therefore on the https://creativecommons.org/licenses/by-nc/4.0/ mailto:oana.andreea.ion@dri.snspa.ro https://doi.org/10.17979/ejge.2023.12.1.9335 oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 40 decision-making system of the european union council, more precisely, the qualified majority voting (qmv), in order to describe this system and to prove that there are situations when not even the institutions can avoid a collective irrational outcome. the specific case of providing a new set of institutions for promoting coordination of activities by finding a commonly agreed set of rules (ostrom, 1990) reflects the very wide spectrum of voting rules. scholars have tried to offer a systematic approach to this field, classifying them according to different criteria broadly connected to the inputs, the processes and the outputs of these voting systems (shepsle, 2010). one voting method can observe only a part of the criteria stated for all the categories and if several actors have different opinions on this subject, reaching a consensus becomes a tough job, as revealed by the european union’s experience in this field. the present article, recognizing the merits of liberal intergovernmentalism (li) against its classic state-centred intergovernmentalist predecessors, aims to address some of the very shortcomings of the li (moravcsik 1993; 1997; moravcsik and schimmelfennig, 2018) and strengthening the rational choice component of this theoretical approach, it focuses on the criticisms connected to its third explanatory level, that of credible institutional commitments, which i consider as insufficiently developed, especially in terms of daily politics decisions analysed through voting power lenses. the paper refers to the broader literature on eu’s decision-making process and it is focused on the eu council internal decisional framework, being conceived on two interconnected research questions: firstly, what kind of fair decision-making system can be designed to be considered in the same time representative and efficient (input and output legitimate, in other words) according to a rational choice theory based on a li logic? and secondly, how close is this ideal type to the current decisional system? one central concept is the fairness of the decision-making process in the council. following verba’s seminal contribution (2006), i also agree that fairness is an essential attribute of a democracy and that the important features of fairness in politics are always connected to ensure an “equal voices” base for the decisional process, therefore augmenting its input legitimacy, as well as – even if it is difficult to accomplish them simultaneously – equal outcomes (to be understood, in fact, as outcomes that are responsive for its members). indeed, the above understanding could be applied to various decision-making bodies, and in the case of the eu it can be applied either to the logic of inter-institutional decisions or to that of intra-institutional decisions. thus, although at the eu level, the political game of the major institutional actors is extremely important, i believe that, in order to understand the bigger picture, which represents a whole greater than the sum of its parts, its constitutive units, i.e. each individual institution, must be carefully analysed. and the case of the council is a special one, considering the central role it played in the history of the eu. therefore, as indicated below, within the fairness framework, i emphasize in this paper the equal distribution of power criterion and i have opted to start my investigation by considering penrose’s voting system (1946) as an example of the fair rule and applying it to the eu council’s case, by analysing the intricate relation between voting power and voting weights. oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 41 even if in the case of the european union it is very important the inter-institutional decisional dynamics, the purpose of this paper is to provide an in-depth picture of some aspects specifically related to the council's decision. it is important to understand the mechanisms leading to a specific common position of the council because that particular design may influence its negotiations with the european parliament when the ordinary legislative procedure, for example, is in place; moreover, the council is still the main voice in the other special legislative procedures and their more tied relation with the consensus practice, which is a logic that informally affects also the ordinary legislative procedure framework (anonymous 2017). in order to offer pertinent answers to the above questions, after a brief description of the eu council decision-making architecture, this study will be developed with a particular interest in the nice and lisbon configurations and implications, in the context of a voting power analysis. the findings of the paper indicate the distance between the ideal and current eu council decisional system and the conclusions add to the existing debates several arguments on the chances the ideal type has for being implemented in the near or medium future. 1.2 liberal intergovernmentalism and rational choice theory, or from individual to institutions li was elaborated by andrew moravcsik (1993; 1997) based on the model offered by robert putnam (1988), being a justification of the european construction process from the perspective of the simultaneous existence of a so-called demand and supply for this integration phenomenon. the representation of the demand highlights the preferences of the various rational actors present in the internal political process and whose interactions determine the appearance of the political agenda of the state, according to the neoliberal international theory of the formation of state preferences. the offer is instead interested in how these states behave on the international stage as unitary actors engaged on the basis of their respective agendas in a series of intergovernmental negotiation processes. therefore, is underlined the presence in the li of a strong influence of the rational choice theory, manifested both at the level of internal political groups and at the level of the state engaged as a unitary whole in negotiation processes (ion, 2013). in fact, moravcsik's intergovernmentalism can be considered not only a two-level (demand and offer) game, but a three-level one, given the process of institutional choice (pollack, 2020). however, contrary to the impact that liberal intergovernmentalism has had (and still has) on the study of the european union, the most important criticisms it has received have been aimed at an insufficient role accorded to the same institutions that are barely recognized by the classic intergovernmental discourse. the role of creating and ensuring effective institutional mechanisms would be, on the one hand, to guarantee compliance by states with the commitments made during the negotiation, and, on the other, to provide a satisfactory motivation for the continuity and development of the cooperation practice. however, unlike his followers, who connected rationalist or historical institutionalism with intergovernmentalism, moravcsik gave little interest to the oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 42 supranational level in the european construction process. in a 2018 contribution (together with schimmelfennig), he argued that in the absence of a complete harmonization of the preferences of the member states (ms), none of the post-maastricht treaties has fundamentally innovated the decisional process, not even the constitutional treaty or the lisbon treaty (moravcsik and schimmelfennig, 2018). in this respect, the paper challenges this perspective by focusing on the day to day politics. the basic assumptions in the before mentioned rational choice theory can be summarized as follows: one individual is said to act rational if, taking into account the fact that she possesses ordered preferences, complete information and a perfect internal device, she chooses the action that will satisfy her preferences in such a manner that her anticipate utility would be maximized (see suzumura, 2016). the discrepancies observed between individual rationality and collective rationality determined scholars to search for solutions of what became the classic issue of collective action. one of the attempts to surmount this obstacle is the rational choice approach to institutions, which can also be found in the before mentioned liberal intergovernmentalist assumptions. in this light, in order to correct collective irrationality that may occur from the simple aggregation of individual preferences, institutions are conceived as a sum of rules and incentives, positive and negative motivations planned to produce collectively rational outcomes (miroiu, 2007, pp. 164-172). the incentive to connect to an institution can be found at different levels of the social structure. peters advances the example of european countries who decided to form and later join eu in order to constrain the behaviour of the other member states interested in maximizing their own utility (see peters, 2019). these theoretical assumptions will be investigated in the context of the eu council qmv case. 2. materials and methods 2.1 the importance of vote weighting and vote power in the qmv in the eu council, the actual interest of a state is its real voting power in the general decisional process, and the qmv definition (constantly refined from rome eec treaty) is just an expression of the result of the negotiations of the states interested in maximizing their share. one’s voting weight is different from its voting power (leech and aziz, 2011; kirsch, 2011; nurmi, 2011; warntjen, 2017, p. 675), therefore – before lisbon – the weighting of votes in the council was actually connected to the voting power that each of the members of the council possessed in the decisions adopted by qm, involving each states level of influence in shaping the results of the decision: “voting weight refers to the relative voting strength accorded to any individual member state under a system of weighted votes, that is, the percentage of the total vote held by each member of the council. voting power refers to the ability of any individual member of the council to cast a decisive vote for adopting or blocking a decision” (galloway, 2001: 59). in a voting power analysis, one should remind that one of the democratic principles requires, oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 43 under the well-known “one person, one vote” slogan, formal equality of the a priori voting power of all citizens. the a priori voting power is defined as a constituent part of a posteriori (or actual) voting power, deduced by the voters only from the decision regulation and the type of issues submitted to vote. in other words, it is a conventional power foreseen by collective constitutive norms, and the analyses should concentrate on this very constitutional architecture of a specific decision-making structure. in this theory, founded by penrose in the ‘40s, a priori voting power is conceived as “a voter's degree of influence over the outcome under a specified decision rule of a division of a decision-making body: […] the a priori probability a that a decision-making body acting under a given decision rule will adopt a bill rather than blocking it” (felsenthal et al., 2003, p. 476). but what about those decision-making processes involving states instead of individuals? in the light of the rational choice assumed approach, should one apply the same voting power principles? “the voting power of each nation in a world assembly should be proportional to the square root of the number of people on each nation's voting list” wrote penrose in 1946 when analysing majority voting and representation in the un (penrose, 1946, p. 57). in fact, penrose’s square root law is considered the ideal type of democratic formula (see van der ploeg, 2008 for an exhaustive list of the scholars supporting penrose’s voting system as a fair rule). basically, when applying it to today’s eu, it means that the vote of any european citizen, irrespective of its member state provenience, should count equally in the general power game, on the basis of establishing each state’s input proportionally to the square root of its population (see also pukelsheim, 2011). that is why in the contemporary approaches of penrose’s ideas, the attention was usually held by the weighted voting systems where the constitutional design caused, by different weights and rules, a different degree of influence of the decision-makers, quantified in power indices, more specifically in a priori power indices. defined as a “statistical measure for summarizing certain properties of a given voting game” (felsenthal et al., 2003, p. 487), power indices are very useful instruments in conceiving weighted political systems or in determining the fairness of the existing procedures and offering solutions for a possible equalizing process of the voting power. their role is extremely important as the inequalities in the distribution of voting power are disturbing both agenda-setting and decision outcomes in favour of the actors with great voting power. in this respect, especially in cooperative games, “power indices, in general, represent the probability that each voter will determine the outcome of a particular voting game” (passarelli and barr, 2007, p. 43). two observations here: firstly, the influence of an agent is only measurable when there is no other agent able to reach by itself a majority (no matter what kind of majority) of votes; secondly, to underline that a winning coalition means that it has reached the threshold to approve a decision. in fact, the penrose method and the penrose square root law were not accepted immediately by the academic community. the principles became famous later, when they were rediscovered by banzhaf, and, after that, by coleman (see leech and aziz, 2011; machover, 2011; slomczynski and zyczkowski, 2011); in fact, the index that banzhaf developed is known either as the penrose-banzhaf index or simple as banzhaf index. nowadays, the most well-known and oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 44 used indices (see table 1) – despite some limitations such as blindness towards any intervening factors (kirsch, 2011) – are the before mentioned penrose-banzhaf (pb) index and the shapleyshubik (ss) index. besides them, van der ploeg (2008, pp. 13-14) also mentions other indexes such as deegan-packel index and holler-index. slomczynski and zyczkowski (n.d.) also introduce – connected to banzhaf index – coleman preventive power index and coleman initiative power index. table 1. various descriptions of the main used indexes penrose-banzhaf index shapley-shubik index “it calculates the number of swing possibilities of each country. a swing possibility is the number of times that a representative can have a pivotal position. this means that if the representative leaves the winning coalition side, the remaining coalition becomes a losing coalition. it considers each coalition equally likely”1. “it deals with so called sequential coalitions. (…) this index shows the fraction of the coalitions in which an actor is pivotal. a pivotal actor is the first voter whose vote makes a coalition a winning coalition”1. “the penrose measure of voter v's voting power (under a given decision rule) is the a priori probability of v being decisive; that is, the probability of the other voters being so divided that v is in a position to determine the outcome of the division”2. “the shapley-shubik index is a measure of the relative frequency with which a member country is in a pivotal position, i.e., in the position of ``swinging'' a losing coalition into a winning one, where all possible coalitions of a fixed number of member states are equally likely to occur. this measure is, in general, some function of the number of votes and the majority threshold”4. “the banzhaf index […] aims to calculate the power of individual players by finding the ratio between the coalitions an individual player can make to win and all winning coalitions”3. “the shapley-shubik index calculates the share of coalitions, which are winning due to the presence of party i in all coalitions, and prescribes a weight to a coalition in these calculations depending on its size”3. source: 1. van der ploeg, 2008, pp. 12-13; 2. felsenthal et al., 2003, p. 477; 3. aleskerov et al., 2002, p. 382; 4. barr and passarelli, 2009, p. 340. therefore, an analysis of how voting power considerations influenced the latest nice and lisbon treaty contexts in terms of drafting the final texts of the treaties and implementing their wordings will be further presented. 2.2 nice, qmv and voting power in light of the previous arguments, one better understands why, at the beginning of the 2000s, when preparing the union’s institutional architecture for the enlargement challenges, the older eu members feared that the newcomers would disturb to such an extent the existing distribution of power that the usual balances and the functioning of the decision-making procedures would have been weakening their particular national interests. the simple reapportionment of votes would have led the newcomers, small or medium-sized countries, to an over-weighted status, accumulating nearly 40% of the total power, a situation unfavourable to the ‘big players’. so, the question of how to adjust the existing distribution of power in such a manner that each actor would consider it has reached an optimal balance received a solution in the so-called nice triple majority criteria (simple majority of the member states, qualified majority of the weighted votes, demographic clause). many scholars, inspired by the voting power theory, were interested in learning how is affecting their new power distribution in the council the outcome of the decision-making. in this respect, using the shapley-shubik and banzhaf indices (see table 2), by determining the number of possible winning coalitions under the new nice stipulations, they proved that the possibility of a oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 45 decision to pass was almost zero and if the threshold of the qmv remained untouched, the council would be in fact blocked (felsenthal et al., 2003, p. 476). other areas of research were the equal voting weights of similar member states, deriving from the principle of a priori voting power, but also the correlation of this issue with the idea of equalizing the a priori voting power of the eu citizens, as a criterion of fairness (a purpose that would have led to an alternative decisionmaking design). the principle of fairness requires the before-described idea of having weighted votes’ distribution in accordance with a proportional correspondence between one country’s power index and its squared root of the population, in order to equalize the eu citizens voting power. analyses of the nice and, later, post-nice distribution of weights revealed that it has serious shortcomings in the fairness problem, as the constitutional treaty was also criticized (by the so-called “mathematician protest”) for not respecting the same criteria of fair weights. following the method of a priori voting power analysis, another research aim was to propose a standardized procedure of easily and fairly establishing voting weights when new enlargement waves would have to occur; votes for newcomers, but also for older members, as it implied a recalculation of their influence in the new extended formula (leech, 2002, p. 438). table 2. power distribution in the council from 1995 until nice and in case of enlargement (eu27). countries shapley-shubik index (1995) banzhaf index (1995) shapley-shubik index (eu27) banzhaf index (eu27) germany 0.119 0.112 0.0872 0.0778 united kingdom 0.119 0.112 0.0870 0.0778 france 0.119 0.112 0.0870 0.0778 italy 0.119 0.112 0.0870 0.0778 spain 0.093 0.092 0.0800 0.0742 poland 0.0799 0.0742 romania 0.0399 0.0426 netherlands 0.056 0.059 0.0368 0.0397 greece 0.056 0.059 0.0340 0.0368 czech republic 0.0340 0.0368 belgium 0.056 0.059 0.0340 0.0368 hungary 0.0340 0.0368 portugal 0.056 0.059 0.0340 0.0368 sweden 0.044 0.049 0.0281 0.0309 bulgaria 0.0281 0.0309 austria 0.044 0.049 0.0281 0.0309 slovakia 0.0195 0.0218 denmark 0.033 0.036 0.0195 0.0218 finland 0.033 0.036 0.0195 0.0218 ireland 0.033 0.036 0.0195 0.0218 lithuania 0.0195 0.0218 latvia 0.0110 0.0125 slovenia 0.0110 0.0125 estonia 0.0110 0.0125 cyprus 0.0110 0.0125 luxembourg 0.021 0.023 0.0110 0.0125 malta 0.0082 0.0094 source: adapted from aleskerov et al., 2002, pp. 384-385 oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 46 figure 1. power distribution in the council as reflected by the two well-known competing indices, before and after eu enlargement. source: own production. figure 1, based on table 2, offers a clearer image of the power distribution in the council as reflected by the two well-known competing indices. after comparing the two situations, eu 15 and eu 27, it is emphasized that, even if the power indices of the previous eu members were decreased after enlargement, the proportion between their levels of influence continued to be similar and the acceptance of the new members was counterbalanced by the big players with significant less vote shares in the power distribution. this is why nice was also dubbed as a “broadly equitable” system (leech and aziz, 2011). moberg (2011) argued that the swedish team in charge with nice negotiations proposed even back then a new voting configuration based on penrose’s formula, an idea rejected due to the increased weight it would have offered germany, while the rest of the large ms preferred to fight for their increased influence. in the end, nevertheless, moberg sustained that nice was the system as closest possible to penrose’s one. the advocates of nice would dismiss the criticisms pointing towards (a) the voting weights lacking a direct proportional link to populations (as the underrepresentation of larger states is, in fact, a constitutive principle of the late communities), (b) the high thresholds (despite them, effective qmv voting was not impeded due to the so strong culture of consensus), or (c) the impossibility to replicate it in case of future enlargement waves. the latter idea was, in fact, an accepted criticism as an opening towards the jagiellonian compromise proposal, as it will be later presented (leech and aziz, 2011). oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 47 2.3 lisbon, qmv and voting power. from voting weights to “fair enough”? it is simple to understand why “[w]hat a voting system `should` be is a political choice” (moberg, 2011). generally, small states are in favour of the weighted votes architecture, while the large ones, tending to capitalize on their population, support the double majority system. in fact, moberg argues that the lisbon treaty offers large countries the same weight they had in the eu12 configuration. different comparisons of the impact that different voting rules (pre-nice, nice, lisbon, penrose’s law) would have (van der ploeg, 2008) indicate this previous weighted vote bias favouring the smaller states, a situation changed by lisbon, also considering the big states’ interests in the context of the latest and future enlargements; that is why they were so eager to preserve the trump card of the population criteria, while the small states became interested on the threshold aspects. one of the main critics addressed the idea of supermajority voting methods following the argumentation line in favour of the simple majority rule. if the probability that a majority is right increases exponentially, then, obviously, the probability that the minority is wrong becomes very high. a supermajority rule demands that a specific level of the minority can block the process of decision-making, meaning that the higher the supermajority threshold required, the lower the minority that can veto the course of the action (dahl, 1991). however, the defenders of the supermajority frame claim that there are no permanent majorities or permanent minorities. the medium states – and here is a larger debate about properly identifying this cluster – were also advantaged by the previous nice system and, as some subsequent debates revealed, even argued for a different type of eu council voting. conveniently, “the code words for these demands have often been `democratic legitimacy` or `efficient institutions`” (moberg, 2011). the leader figure of the medium states asking for a revision of the constitutional treaty – and, later, reform treaty – stipulations on the qm definition was poland. the progressive eurosceptic attitudes of the late 2005 new polish government and the stalemate it induced in the 2007 attempts to renegotiate the late constitutional treaty are detailed in phinnemore (2013, pp. 82-84, 121-124), where the attention is also directed towards the polish concerns on the impact that the new double majority voting within the council would have on warsaw’s role in the european power game, as well as on supporting the jagiellonian compromise, also known as the equal influence system, considered to be more compatible with article i-45 requirements which foreseen “[t]he principle of democratic equality. in all its activities, the union shall observe the principle of the equality of its citizens, who shall receive equal attention from its institutions, bodies, offices and agencies”; the german council presidency's role in completing the negotiation on the final draft of the treaty, while assuring the polish support through several concessions on the double majority entering into force (a sort of a new ioannina compromise), is also widely presented by phinnemore (2013). on the polish position, the threat of not ratifying the reform treaty settlement and the ten years de facto postponement of the new qmv enforcement, slapin (2011, p. 119) also has a welldocumented input. a few words about this so-called jagiellonian compromise (after the name of its first supporters, scholars at the jagiellonian university of krakow). as i previously stated, the voting oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 48 power and the voting weights of any country are not identical notions. while the voting weights are easy to understand, when one has the formula that determines them, the voting power means “the extent to which it may influence decisions taken by the council when all possible coalitions between different countries are taken into consideration” (slomczynski and zyczkowski, 2011). as the authors are arguing, 51% of the shares of a company mean 51% of the votes (as weight) but 100% decisional power. the same idea can be found in plurality electoral systems which grants as winner the person receiving the highest number of votes even if, in a fierce competition involving more than two competitors, the total number of votes not received by this candidate could have been overwhelming. in the eu’s case, due to the increased number of member states and the number of coalitions which is in the order of millions, the voting power of a specific actor is calculated using one of the before mentioned power indexes and one of the most commonly used is the penrose-banzhaf index. one starts from penrose’s arguments that “the a priori voting power of a country is proportional to the probability that its vote will be decisive in a hypothetical ballot: should this country decide to change its vote, the winning coalition would fail to satisfy the qualified majority condition” (slomczynski and zyczkowski, 2011); its jagiellonian upgraded form stipulates country indices whose “sum is equal to unity it is easy to show that the voting power held by a given country depends not only on its voting weight but also on the distribution of the weights among all the remaining member states of the eu” (slomczynski and zyczkowski, 2011). for example, let’s imagine another fictional international organization with 5 member states which applies in one of its institutions the same voting rule as the council of the eu (population share data) and which has the following configuration of the votes: ms1 = 9; ms2 = 4, ms3 = 9; ms4 = 16; ms5 = 25. in this case, ms2 has 6.35% of the votes, and if the square root is applied one has: ms1 = 3; ms2 = 2, ms3 = 3; ms4 = 4; ms5 = 5. ms2 has now 11.76% of the votes. let’s see another configuration of the same imagined international organization, with a different distribution of weights, for the same total amount of the population: ms1 = 4; ms2 = 4, ms3 = 4; ms4 = 9; ms5 = 42. here, ms2 still has 6.35% of the vote and, if the square root is applied, one has: ms1 = 2; ms2 = 2, ms3 = 2; ms4 = 3; ms5 = 6.49. in this case, ms2 has 12.91% of the vote (see table 3 and figure 2). table 3. power distribution in two configurations of the votes for a virtual international organization. member state configuration 1 configuration 2 distribution of weights percent of votes sqrt percent of votes distribution of weights percent of votes sqrt percent of votes ms1 9 14.29 3 17.65 4 6.35 2 12.92 ms2 4 6.35 2 11.76 4 6.35 2 12.92 ms3 9 14.29 3 17.65 4 6.35 2 12.92 ms4 16 25.40 4 23.53 9 14.29 3 19.38 ms5 25 39.68 5 29.41 42 66.67 6.5 41.86 total 63 100.00 17 100.00 63 100.00 15.5 100.00 oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 49 figure 2. graphical example of the voting power held by a given country (ms2) showing how it depends not only on its voting weight but also on the distribution of the weights among all the remaining member states. in other words, “one should choose the weights to be proportional to the square root of the population and then find such an optimal quota that would produce the maximally transparent system, that is, a system under which the voting power of each member state would be approximately equal to its voting weight” (slomczynski and zyczkowski, n.d.). that is why the lisbon image of the double majority system as a result of a simultaneous support for the equal influence of the member states and of the citizens was rejected by some analysts due to the effects that would have brought benefits to the large (on a population basis) and small (on the simple majority quota basis) countries, on the expense of the medium-sized ones; these countries, and especially poland, were promoting instead the jagiellonian compromise: an equal influence power for each citizen, “transparent, easy to implement, efficient to use, and will readily accommodate any future extensions of the eu” (slomczynski and zyczkowski, 2011). the supporters of a direct link between the weights and the total population figures were dismissed by the appeal to the constitutive treaties, and the original degressive proportionality system stipulated there (moberg, 2011), as it was considered that “the idea of dividing votes proportionally to the square root of population (…) is in fact the simplest mathematical implementation of the principle of degressive proportionality and lies exactly between two extremes: ‘one country-one vote’ (…) and votes proportional to population” (slomczynski and zyczkowski, 2011). the jagiellonian scholars also dismissed, in fact, the implementation of the original penrose proposal of connecting a country’s voting power to the blunt square root of the population, especially in a weighted votes context where the allocation of weights should be associated with the setting out of a threshold for qm. instead, they proposed that these weights be allocated so that they reflect proportionally themselves the square root of the population (rounded to the oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 50 nearest integer), while the discussions about where to set the threshold became subsequent: „the optimal quota enabling the computed voting power of each country to be practically equal to the attributed voting weight, and so to be proportional to the square root of the population” (slomczynski and zyczkowski, 2011; see also pukelsheim, 2011). in other words, jagiellonian compromise “consists of a single criterion only, and it is determined by the following two rules: a. the voting weight attributed to each member state is proportional to the square root of its population. b. the decision of the voting body is taken if the sum of the weights of members of a coalition exceeds a 61.6 per cent quota”; adopting an act by using this system was praised by its supporters as “simple, objective, representative, transparent, easily extendible, moderately efficient and moderately conservative” (slomczynski and zyczkowski, 2011). the authors (and also kirsch, 2011 who speaks of a 61.4 per cent quota when mentioning 2004 and 2006 older contributions of slomczynski and zyczkowski) also suggested a modified system introducing the simple or qualified majority of the member states as a secondary criterion; it would not have altered the objective of the square root law, but it would have reinforced the double “union of people” and “union of states” eu nature, also being in favour of the less populous states. nevertheless, in other opinions, “[t]he choice of a quota is a technical means suitable for attaining a given political end” (sozanski, 2011). in this interpretation, the quota is not influencing the power distribution, but the efficiency of the decisional system in terms of a possible number of majorities able to pass a piece of legislation. therefore, it is simpler to understand the interest that the political spectrum has for blocking coalitions. the supporters of the jagiellonian system also underlined that it would succeed to harmonize the eu citizens power shares so that they have an – even if indirectly – equal influence on the eu council decisions. the direct voting power of a citizen is, of course, the one reflected in the domestic elections. leech and aziz (2011) argue that the total voting power of an eu citizen – or the personal penrose power index – represents the product of the power his/her country has in the eu council and his/her power at the national level. when applying the jagiellonian formula to different eu scenarios, the results indicated that the relative citizen voting powers had only minor variations, contrary to the constitutional / lisbon treaty. for this reason, pukelsheim, for example, saw jagiellonian proposal as a “rather sophisticated idealisation of democratic equality” (pukelsheim, 2011). comparative to the double majority system (praised mainly for its capacity to increase the decisiveness of the council), several other analyses also pointed jagiellonian compromise as “remarkably equitable” (especially for the medium-sized countries, not favoured by the current settlement) irrespective of several future enlargements considered by the authors (2011). machover (2011) reminded that poland’s 2007 efforts to support a decisional structure based explicitly on the jagiellonian compromise failed, while the new lisbon system – as data indicated – was even more distant than nice when one refers to the square root law as an ideal standard. therefore, machover insisted that any further negotiation of the square root theme to be held separately on the application of the rule, on the one hand, and the issue of establishing a specific quota, in the other. oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 51 nevertheless, sometimes the arguments of the jagiellonian supporters tend to be rather ideologically influenced than scientifically based. as many of these arguments are elaborated by polish scientists and disseminated by other non-polish scholars in collective works coordinated by the members of the polish academia as is the case of cichocki and zyczkowski volume (2011) -, they seem strongly biased for supporting its cause even if, sometimes, they add spain in the same category in order to be able to refer to a broader “medium-sized countries” case, as van der ploeg (2008) argues that spain also tried to block the convention talks due to the council decision provisions. in the aspects regarding the jagiellonian arguments, on the one side, it is underlined eu’s necessity to get closer to the democratic benchmark by offering each citizen the same decisional influence. as a consequence of this argument, one seems (only seems, as in reality, they are not connected) to also find the idea that one state’s impossibility to split its votes accordingly to various national positions on a specific issue would qualify the weight votes allotment on a population basis to be unfair and favourable to large states (kirsch, 2011). on the other side, nor in the jagiellonian system the votes are split, and this would be possible only if each citizen were able to vote directly on each eu-level decision, which is utopian. the wording of the theme is, most of the time, confusing. as previously indicated, some argue that qmv debates are about the equal distribution of power within the eu council: “it is a fundamental principle of the eu that all citizens should have equal rights, whatever country they happen to live in”, and the arguments are constructed by assuming the citizens’ equality axiomatically right as “a benchmark against which to compare the fairness of the distribution of voting power” (leech and aziz, 2011). but is it true? in fact, the broad mathematical views on the subject are simple to understand: (a) should each citizen have the same power input irrespective of its member state provenience or (b) allotting one vote per each citizen should transform into an increased power quota for larger states? nevertheless, beyond mathematics, various criteria have been considered when analysing voting formulas. among them, van der ploeg (2008) notes equity, efficacy and comprehensibility or, in other words, a fair distribution of power in comparison with a member state’s total population, the capacity of a specific voting option to encourage a fluent decision-making process and, respectively, an open to public scrutiny and easy to understand system. according to her analysis, a square root law-based system or one built on the jagiellonian compromise would indeed better observe the before-mentioned criteria in comparison with the lisbon one. the political choices, however, are different, and there is no sign of a concrete dialogue between the parts. one cause of the misunderstandings accompanying the subject is the mutual contempt between mathematicians and politicians. for example, sozanski (2011) taxes as amateurish the approach of politicians to support one rule or another, arguing that the mathematicians are those really carrying the burden "by translating given voting rules from the legal language used by politician into the set-theoretical language of mathematics" and analysing these mathematical models as various voting games. i consider that there is more behind the political choices than that unfair and reductionist oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 52 “amateurship” label. indeed, this is an important question: if it is so providential, when considering each citizen’s input and the possibility of extrapolating its mechanisms to future eu enlargements, why the other states do not intend to switch towards using the jagiellonian formula, not even those who seem to have the same voting power in the lisbon context when compared to the jagiellonian simulations? as revealed by the tables, the number of states for whom the jagiellonian proposal is not only fair, but also favourable compared to lisbon, is close to 2/3 of the members. so, why are they not supporting this change, both due to net benefits and fairness of the results? and if is so ideal, so to speak, why do the majority of its supporters still favour additional conditions, such as the agreement of the simple or qualified majority of the member states? arguing in favour of the jagiellonian compromise and claiming that “[t]he shifts of seats and power would seem trivial compared to the significant gain in democratic substance – a consequence of putting citizens first” (pukelsheim, 2011) might seem rather a political and not a scientific approach, if one cannot find proper answers. in my opinion, this jagiellonian issue reflects the li power politics in the eu and one could argue that the compromise might be ideal for everybody, and that is why not “ideal enough” for the big players. then why all the fuss? follow the money, as one example (among many others) could be found in the context of the solidarity/cohesion discourse and relocation of the supporting fund. in fact, the situation is more nuanced, and it remains to be seen where one can draw the line between discussing the justice of a system, whatever it may be, and the differentiated impact that system could have in the event of a fluctuation of the member states. for example, kirsch (2016) reveals brexit’s impact on the eu, both in a 27 members’ scenario (without uk) and in a 28 one (with scotland). his research indicates, using the banzhaf index on the current lisbon amended framework, that small members’ states (under 4.5 million citizens) will be the losers of a simple no-uk configuration, where the qmv requires 15 states and “[t]he blocking minority must include at least four council members representing more than 35% of the eu population” (european council, 2022). middle-sized countries, like poland, would strongly benefit, alongside the larger ones. a scenario that would contain scotland would lead to different results, as the first seven most populous countries would see their influence reduced, while the over 2/3 remaining member states would be the main beneficiaries of the new power equilibrium. hence, a system that could be considered fair regardless of these fluctuations of the eu componence could represent a solution. the post-brexit eu power distribution – also calculated on a square root basis – is said to be in favour of the most populous member states (significant for the first five and satisfactory for the next two), due to the decrease in the number of states with a population beyond the eu average. so, the role of the larger states is set to be strengthened due to their future increased influence on the success of a coalition (see the results of kirsch et al., 2018, pp. 24, 27). in corollary, due to the diminishing of the number of states threshold for passing a decision, the role of the less populous ms will be further diminished (kleinowski, 2019). oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 53 figure 3. comparison between banzhaf indices for lisbon system and jagiellonian compromise indices before and after brexit. source: own production employing data from kirsch et al. (2018). nevertheless, the results of kirsch et al. (2018), graphically represented in figure 3, show that a possible use of the jagiellonian compromise would be in benefit of all countries in a post-brexit context (kirsch et al., 2018). here one can mention again the delicate issue of the number of residents used in population statistics relevant for the eu decisional process, as the “old union” (and not exactly in the most / medium populous states, such as poland) is getting advantages from this flux (kleinowski, 2019). oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 54 3. discussions and conclusions conceived as key points in the institutional development of the eu, the treaty of nice and, later, the lisbon treaty (via its constitutional treaty inheritance) proved finally to be extremely contested for their provisions regarding the structural changes envisaged for an enlarged union. institutional arrangements for deciding the best frame for collective decision should take into account the context of the decision process and the outcomes coming up from the political game. qmv, depending on its definition, can imply (a) privileges for the status-quo; the status-quo, as dahl (1991) proves, is not a neutral alternative not for the simple majority, (b) the exiting of a constant majority that can dominate the system or, (c) by contrary, a strong minority that can abusively use its blocking power despite the collective interest. finally, one can draw some conclusions referring to the initial research questions about the institutional dimension (the third li level) and the issue of rational collective output. various changes in the regulations may have occurred, but sometimes they are, in reality, marginal. “the institutions frequently becom[e] reified as rational actors themselves, rather than the reflections of the collective actions of the individuals within them” (peters, 2019, p. 63). if one compares the negotiation process in both nice and constitutional/lisbon treaty, one notices that the alternatives envisaged by the legislators were minimum, and the degree of difference between the final outcomes was not very high, justifying the idea that the final objectives were not enough clear from the beginning and that the change of the status quo was, in fact, incremental if one thinks at the values that would have had to support this important process. actually, more than 60 years later after arguing it, it is still valid that “incrementalism in the large becomes potentially a major political orientation” (lindblom, 1958, p. 312). this problem of collective action transferred into the game theory would face some challenges in describing the type of game played by the council’s members. if it is common sense to agree that one should speak about coordination games (the repetition of the game being a factor that could lead to an optimal equilibrium between the parts), the reality confronts us with a de facto “prisoner’s dilemma” (summing up the individual results offers a lower figure than the one that would have been obtained by a collective action). the difficulty of the cooperation between all the players could have been influenced by the labels that each actor inevitably had (axelrod, 1984). in the eu negotiations, the rival labels “major power” – “minor power” negatively influenced the whole process indeed, enforcing one part’s status and constantly trying to disadvantage the other. nevertheless, cooperation was intense between the two playing parts. the small players and also the medium-sized spain and poland succeeded in improving their condition by joint continuous actions designed to sanction the defection. therefore, a rational collective outcome of the eu council is indeed far away from being reached, and that future institutional arrangements (a consequence of a new treaty, of the withdrawal of some members or of a new enlargement wave) should be treated with more consideration regarding the power distribution into the voting system. oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 55 so, what are the chances for the ideal type to be implemented in the near or medium future? politics is a never-ending story, the political issues being discussed and reviewed constantly accordingly to some given principles. however, the issue of power distribution in a voting system should be treated with more consideration for the idea of a rational collective outcome. nevertheless, the current divisions between the member states (various dichotomies as old versus new member states, northern europe versus southern europe, western europe versus eastern europe, larger versus smaller member states, supranationalist versus intergovernmentalist supporters, etc.) amplified during the latest crises (financial aspects, migration, populism, foreign policy, uk withdrawal, coronavirus disease, russia’s invasion of ukraine) are a strong impediment for the willingness of the leaders to embark on a trip towards a new treaty (stratfor, 2018), irrespective of the fairness it might bring, as the possible spill-back (niemann, lefkofridi and schmitter, 2018) consequences are considerable higher. so, should we just try to limit ourselves to coping with the current lisbon framework, even if this third li level needs serious updates in order to ensure democratic legitimacy when respecting the assumed engagements? in the end, one should mention that between april 2021 and may 2022, the eu organized the conference on the future of europe, a pan-eu democratic exercise where citizens expressed their vision regarding the priorities to be set and challenges to be overcome in a common future. considering the attributes of each major institution involved within this initiative (the european commission, the european parliament and the council of the european union), as well as the aim of this approach to give “europeans a greater say on what the union does and how it works for them” (european commission, 2020), even in this context little can be expected to be translated in concrete measures in the strictly intergovernmental nature of the voting power discussions. besides a vague call to „reopening the discussion about the constitution”, the citizens courageously asked for „reassessing decision-making and voting rules in the eu institutions” in an attempt to strengthen the qualified majority voting to the detriment of unanimity while ensuring a fair calculation of voting 'weights' so that small countries' interests are protected” (art. 7, proposal 39, eu, 2022). nevertheless, alternatives such as the jagiellonian compromise do not seem to have immediate future success, considering that their general fairness in terms of voting power is contradictory to the current stronger influence of the larger states, which would not generate their support for a future decisional framework change. acknowledgements the author thanks professor adrian miroiu for his careful reading of the initial version of the manuscript and for his insightful suggestions regarding a more detailed explanation of the effects of the distribution of the weights. the author is also grateful to the anonymous reviewer whose valuable comments and suggestions substantially contributed to an improved and clearer version of the manuscript. oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 56 references anonymous. (2017). not dead yet. revisiting the 'luxembourg veto' and its foundations. european constitutional law review, 13(1), 1-12. https://doi.org/10.1017/s1574019617 000013 aleskerov, f., avci, g., iakouba, v., and umut türem, z. (2002). european union enlargement: power distribution implications of the new institutional arrangements. european journal of political research, 41 (3), 379-394. https://doi.org/10.1111/1475-6765.t01-1-00016 axelrod, r. (1984). the evolution of cooperation. new york: basic books. barr, j., and passarelli, f. (2009). who has the power in the eu? mathematical social sciences, 57 (3), 339-366. https://doi.org/10.1016/j.mathsocsci.2008.12.007 cichocki, m.a., and życzkowski, k., eds. (2011). institutional design and voting power in the european union. 1 ed. london: routledge. dahl, r. (1991). democracy and its critics. yale university press. european commission. (2020). shaping the conference on the future of europe. communication from the commission to the european parliament and the council. brussels, 22.1.2020 com(2020) 27 final. european council / council of the european union. (2022). qualified majority. https:// www.consilium.europa.eu/en/council-eu/voting-system/qualified-majority/ last reviewed on 13 october 2021. accessed on january 2022. european union. (2022). conference on the future of europe. report on the final outcome (may 2022). felsenthal, d., leech, d., list, c., and machover, m. (2003). in defence of voting power analysis. responses to albert. european union politics, 4 (4), 473 497. https://doi.org/10.1177/1465116503004004005 galloway, d. (2001). the treaty of nice and beyond. realities and illusions of power in the eu. sheffield: sheffield academic press. ion, o.a. (2013). guvernanta uniunii europene. abordari actuale. iasi: polirom. kirsch, w., slomczynski, w., stolicki, d., and zyczkowski, k. (2018). double majority and generalized brexit: explaining counterintuitive results. arxiv:1812.07048 [physics.soc-ph]. accessed on october 2021. kirsch, w. (2011). the distribution of power in the council of ministers of the european union. in m.a. cichocki and k. zyczkowski (eds.). institutional design and voting power in the european union (pp. 93-109). london: routledge. kirsch, w. (2016). brexit and the distribution of power in the council of the eu. centre for european policy studies. available at: https://www.ceps.eu/ceps-publications/brexit-anddistribution-power-council-eu/ accessed on september 2021. kleinowski, m. (2018). the impact of brexit on the voting power in the council of the european union. przegląd europejski, 4, 95-117. https://doi.org/10.5604/01.3001.0013.3456 leech, d., and aziz, h. (2011). the double majority voting rule of the eu reform treaty as a democratic ideal for an enlarging union: an appraisal using voting power analysis. in m.a. cichocki and k. zyczkowski (eds.). institutional design and voting power in the european union (pp. 59-74). london: routledge. leech, d. (2002). designing the voting system for the council of the european union. public choice, 113 (3), 437 464. https://doi.org/10.1023/a:1020877015060 lindblom, c.e. (1958). policy analysis. the american economic review, 48 (3), 298-312. machover, m. (2011). penrose's square-root rule and the eu council of ministers: significance of the quota. in m.a. cichocki and k. zyczkowski (eds.). institutional design and voting power in the european union (pp. 35-42). london: routledge. miroiu, a. (2007). fundamentele politicii. rationalitate si actiune colectiva. 2nd volume. iasi: polirom. moberg, a. (2011). is the double majority really double? the voting rules in the lisbon treaty. in m.a. cichocki and k. zyczkowski (eds.). institutional design and voting power in the european union (pp. 19-34). london: routledge. moravcsik, a., and schimmelfennig, f. (2018). liberal intergovernmentalism. in a. wiener, t.a. börzel and t. risse (eds.). european integration theory (pp. 64-84). 3rd edition. oxford: oxford university press. https://doi.org/10.1093/hepl/9780198737315.003.0004 moravcsik, a. (1993). preferences and power in the european community: a liberal intergovernmentalist approach. journal of common market studies, 31 (4), 473-524. https://doi.org/10.1017/s1574019617000013 https://doi.org/10.1017/s1574019617000013 https://doi.org/10.1111/1475-6765.t01-1-00016 https://doi.org/10.1016/j.mathsocsci.2008.12.007 http://www.consilium.europa.eu/en/council-eu/voting-system/qualified-majority/ https://doi.org/10.1177/1465116503004004005 https://www.ceps.eu/ceps-publications/brexit-and-distribution-power-council-eu/ https://www.ceps.eu/ceps-publications/brexit-and-distribution-power-council-eu/ https://doi.org/10.5604/01.3001.0013.3456 https://doi.org/10.1023/a:1020877015060 https://doi.org/10.1093/hepl/9780198737315.003.0004 oana andreea ion / european journal of government and economics 12(1), june 2023, 39-57 57 https://doi.org/10.1111/j.1468-5965.1993.tb00477.x moravcsik, a. (1997). taking preferences seriously: a liberal theory of international politics. international organization, 51 (4), 513-553. https://doi.org/10.1162/002081897550447 niemann, a., lefkofridi, z., and schmitter, p.c. (2018). neofunctionalism. in a. wiener, t.a. börzel and t. risse (eds.). european integration theory (pp. 43-63). 3rd edition. oxford: oxford university press. https://doi.org/10.1093/hepl/9780198737315.003.0003 nurmi, h. (2011). on the relative unimportance of voting weights: observations on agendabased voting procedures. in m.a. cichocki and k. zyczkowski (eds.). institutional design and voting power in the european union (pp. 171-180). london: routledge. ostrom, e. (1990). governing the commons: the evolution of institutions for collective action, political economy of institutions and decisions. cambridge university press. https://doi.org/10.1017/cbo9780511807763 passarelli, f., and barr, j. (2004). preferences, the agenda setter and the distribution of power in the eu. social choice and welfare, 28 (1), 41-60. https://doi.org/10.1007/s00355-006-01556 penrose, l.s. (1946). the elementary statistics of majority voting. journal of the royal statistical society, 109 (1), 53-57. https://doi.org/10.2307/2981392 peters, g.b. (2019). institutional theory in political science: the new institutionalism. edward elgar publishing. 4th edition. isbn: 978 1 78643 792 1. phinnemore, d. (2013). the treaty of lisbon. origins and negotiation. palgrave macmillan. https://doi.org/10.1057/9781137367877 pollack, m.a. (2020). theorizing eu policy-making. in h. wallace, m.a. pollack, c. roedererrynning and a.r. young (eds.). policy making in the european union (pp. 13-42). 8th edition. oxford university press. isbn: 9780198807605. https://doi.org/10.1093/hepl/ 9780198807605.003.0002 pukelsheim, f. (2011). putting citizens first: representation and power in the european union. in m.a. cichocki and k. zyczkowski (eds.). institutional design and voting power in the european union (pp. 235-253). london: routledge. putnam, r.d. (1988). diplomacy and domestic politics: the logic of two-level games. international organization, 42 (3), 427-460. https://doi.org/10.1017/s0020818300027697 shepsle, k.a., and boncheck, m.s. (2010). analyzing politics. rationality, behavior and institutions. 2nd edition. new york: w.w. norton & company. slapin, j.b. (2011). veto power. institutional design in the european union. the university of michigan press. https://doi.org/10.3998/mpub.2012704 slomczynski, w., and zyczkowski, k. (2011). jagiellonian compromise an alternative voting system for the council of the european union. in m.a. cichocki and k. zyczkowski (eds.). institutional design and voting power in the european union (pp. 43-58). london: routledge. slomczynski, w., and zyczkowski, k. (n.d.) jagiellonian compromise an alternative voting system for the council of the european union. available at: https://chaos.if.uj.edu.pl/~karol/pdf/jagcom07.pdf. accessed on august 2021. sozanski, t. (2011). the voting power in the voting systems. in m.a. cichocki and k. zyczkowski (eds.). institutional design and voting power in the european union (pp. 75-92). london: routledge. stratfor. (2018). the eu and the unanimity trap. available at: https://worldview.stratfor.com /article/eu-and-unanimity-trap. accessed on november 2021. suzumura, k. (2016). choice, preferences, and procedures. a rational choice theoretic approach. london: harvard university press. https://doi.org/10.4159/9780674726307 van der ploeg, c. (2008). the distribution of power in the council of the european union. bwi werkstuk (vrije universiteit amsterdam). available at: https://www.semanticscholar.org/ paper/the-distribution-of-power-in-the-council-of-the-werkstuk-ploeg/1d1b04803dc1ada2a 58a12f90449e8d080225661 accessed in december 2021. verba, s. 92006). fairness, equality, and democracy: three big words. social research: an international quarterly of social sciences, 73(2), 499-540. https://doi.org/10.1353/ sor.2006.0029 warntjen, a. (2017). do votes matter? voting weights and the success probability of member state requests in the council of the european union. journal of european integration, 39 (6), 673-687. https://doi.org/10.1080/07036337.2017.1332057 https://doi.org/10.1111/j.1468-5965.1993.tb00477.x https://doi.org/10.1162/002081897550447 https://doi.org/10.1093/hepl/9780198737315.003.0003 https://doi.org/10.1017/cbo9780511807763 https://doi.org/10.1007/s00355-006-0155-6 https://doi.org/10.1007/s00355-006-0155-6 https://doi.org/10.2307/2981392 https://doi.org/10.1057/9781137367877 https://doi.org/10.1093/hepl/%0b9780198807605.003.0002 https://doi.org/10.1093/hepl/%0b9780198807605.003.0002 https://doi.org/10.1017/s0020818300027697 https://doi.org/10.3998/mpub.2012704 https://chaos.if.uj.edu.pl/%7ekarol/pdf/jagcom07.pdf.%20accessed%20on%20august%202021 https://doi.org/10.4159/9780674726307 https://www.semanticscholar.org/%0bpaper/the-distribution-of-power-in-the-council-of-the-werkstuk-ploeg/1d1b04803dc1ada2a%0b58a12f90449e8d080225661 https://www.semanticscholar.org/%0bpaper/the-distribution-of-power-in-the-council-of-the-werkstuk-ploeg/1d1b04803dc1ada2a%0b58a12f90449e8d080225661 https://www.semanticscholar.org/%0bpaper/the-distribution-of-power-in-the-council-of-the-werkstuk-ploeg/1d1b04803dc1ada2a%0b58a12f90449e8d080225661 https://doi.org/10.1353/%0bsor.2006.0029 https://doi.org/10.1353/%0bsor.2006.0029 https://doi.org/10.1080/07036337.2017.1332057 1. introduction 2. materials and methods 3. discussions and conclusions references the gains from early intervention in europe: fiscal surveillance and fiscal planning using cash data european journal of government and economics volume 1, number 1 (june 2012) issn: 2254-7088 44 the gains from early intervention in europe: fiscal surveillance and fiscal planning using cash data* andrew hughes hallett, george mason university and university of st andrews moritz kuhn, university of bonn thomas warmedinger, european central bank** abstract the use of real-time cash data allows us to make accurate intra-annual forecasts of an economy’s fiscal position, and to issue early warning signals for the need to correct fiscal imbalances. this paper shows how those signals should be used to design the necessary fiscal corrections, and discusses the gains that can be achieved by such interventions. examples from germany and italy show that large corrections are often necessary early on to make the later adjustments acceptable in size and to keep debt ratios from escalating. there is a credibility issue here; we find the differences between front-loaded and back-loaded adjustment schemes are likely to be vital for the time consistency and hence credibility of fiscal policymaking. we also show that, without early interventions, the later deficit reductions typically double in size – meaning governments become subject to the excessive deficit procedure and significant improvement tests more often. thus the budget savings from early intervention and the use of cash data are significant. in our examples they are similar in size to the operating budget of the department of housing and urban development in germany. similar results apply in other eurozone countries. jel classification e62; h50; h68 keywords fiscal surveillance; early warning; cash data; additive vs. slope adjustments; fiscal credibility * the views expressed in this paper are the authors’ and do not necessarily reflect those of the european central bank (ecb). we thank j. paredes for valuable inputs, and members of the ecb’s fiscal policies division for comments. ** address for correspondence: thomas warmedinger, european central bank, kaiserstr. 29, 60311 frankfurt am main, germany. e-mail : thomas.warmedinger@ecb.int. doi: https://doi.org/10.17979/ejge.2012.1.1.4276 european journal of government and economics 1(1) 45 introduction the past few years, especially since the expanded debt and fiscal deficits that followed the 2007-09 financial crisis and recession, have given rise to an emerging literature on the credibility of fiscal policies and the anchoring of (fiscal) expectations.1 it matters a great deal that expectations of future policy should be anchored; that is, fiscal decisions and their financing need to be predictable, easily understood and credible in the sense of being both plausible and likely to be sustained into the future. but it is equally important that the necessary corrections be undertaken to return fiscal policies to their intended path following a shock or slippage. only then can we regain the full effectiveness of fiscal policy that leeper and others associate with appropriately anchored expectations.2 the goal of this paper is to use early the warning signals generated by cash data on the state of government finances. to do this we extend the results of perez (2007), pedgregal and perez (2008), and onorante et al. (2008), who show how intra-annual data can be used to derive accurate forecasts for end-of-year fiscal outcomes. these forecast can then be used to issue “early warning” signals about the corrections that need to be made in order to bring public finances (both deficits and debt) back on their intended track – as may be required by the stability and growth pact (sgp) from time to time. we show that such early warning signals can be highly valuable because they allow us to start an adjustment process earlier and spread the effort over a longer time period. that makes the size of each adjustment a smaller and less contentious issue; and therefore less likely to create opposition in government or its electorate. second, we also examine whether budget corrections are better frontloaded or back-loaded – we find that different adjustment mechanisms have different size and timing profiles. these are all relevant questions from a policy perspective. it is important that the plans submitted or announced are actually time-consistent, so that governments stick to their published targets after an unplanned departure from the officially agreed stability programme (sp).3 we highlight this point because, as figure 1 shows in the case of germany and italy, there seems to be considerable evidence that the time consistency in sp plans has been violated on a regular basis. the figure highlights how sequential multi-period sp plans are set at each point in time (bottom left of each line), and that there was a deterioration of the starting position in the following year in most cases. some analysis of how these situations can be avoided is therefore necessary. 1 this literature is principally due to eric leeper in a series of papers conveniently summarized in leeper (2009). the conditions under which expectations can be anchored in such a way as to be consistent with what both the policymakers and what the private sector expect and intend to happen are set out in hughes hallett et al (2012a). 2 see hughes hallett et al (2012b). woodford (2005) makes the same point for monetary policy. 3 governments are obliged to submit a stability programme every year, which contains a timetable for the deficit to return to the defined medium term objectives (mtos) for budgetary balance. based on the sp, the european commission reviews the national fiscal policies and can issue early warnings to member states if it considers the developments in the programme to be too optimistic or too ambitious. however, the assessment of the submitted sp is done ex ante and is based only on the information available at the point of submission. contingency plans are not included (except for some mechanical scenarios); and there is no provision to use real time or cash data to make a projection of the plan’s realisation so that monitoring and subsequent adjustments can be undertaken during the plan’s life time. in this paper, we consider ways to correct those omissions – and why it is important to do so. european journal of government and economics 1(1) 46 figure 1. announced deficit plans for germany and italy intra-annual and cash data: it has long been emphasized in the fiscal forecasting literature, that data on government deficits are only available with a long time lag.4 at the time when the data becomes available, the deficit has already realized and no policy measures can be implemented to avoid drifting away from the intended target values. however pérez (2007), pedregal and pérez (2008), and onorante et al. (2008), have shown that intra-annual data can be used to derive an accurate picture of the likely year-end fiscal outcomes with much shorter time lags. we extend their results by introducing cash data into that process. we then go one 4 see, for example, pérez (2007), onorante et al. (2008) or pedregal and pérez (2008). european journal of government and economics 1(1) 47 step further and ask how much a government can actually gain by using early warning signals from this procedure and taking immediate action to correct a fiscal slippage. this question has received rather little attention in discussions on the prudential surveillance of fiscal policy. the reasons are two-fold. on the one hand, the question requires setting an objective function for the government in order to relate departures from a proposed plan to the adjustment costs inherent in making a correction. we discuss that issue in this paper and review some alternative measures. on the other hand, this question raises the problem of time consistency in fiscal policy. we highlight the potential for time inconsistency, and discuss the trade-off between adjustment costs and time inconsistency. at that stage it becomes necessary to draw out the connection between deficit and debt surveillance within the sgp rules. both sgp components need to be monitored if we are to fulfil the purpose behind the sgp – and create fiscal policies that are sound in the long run. we have set our analysis within the framework of the existing sgp system because that is still the standard framework for monitoring and control of fiscal policies in the euro-zone. however, while early intervention may have at best only mitigated the outbreak of the fiscal crises in 2009-10, our distinction between additive and slope correction schemes (ie between the frontloading and backloading of deficit corrections) has now been pushed to centre stage given that preventing further debt escalations has necessarily become the prime focus of attention. back-loading, as we shall show, allows debt ratios to rise slowly but surely during the consolidation period and have had to be ruled out for that reason. it seems likely that these results will lead to debt target rules being formally included within the sgp process (european commission 2011), but the implementation remains to be seen. these developments all serve to highlight the importance of including both early interven-tions and cash data monitoring in any realistic fiscal surveillance programme.5 it would be nice to evaluate these questions in the context of the choice of fiscal austerity vs. growth debate which has become a feature of the european debt crisis, to check that the gains from early interventions, or frontloading vs. backloading those interventions, are not larger than their costs in a wider welfare sense (we do check for political acceptability and market credibility). clearly the economic environment and timing of interventions matter, as do the fiscal multipliers and impacts on gdp growth of different implementations or choices of fiscal consolidation measures. indeed, this involves a major debate debate with opposing positions taken by delong and summers favouring not too drastic corrections in order to avoid double dip recessions and killing off greenshoots, and neumann (2012) arguing for recovery through austerity and reduced fiscal imbalances; with corsetti (2012) and alessandrini et al (2012) emphasising the more subtle tradeoffs between growth, market credibility, and competitiveness and financial sector imbalances that lie between these two positions. however, important as those issues are, they are not directly at issue here because we are concerned with the most effective and credible way to recover a previously agreed fiscal (sp, mto) path once the budget deviates from it – not whether that path was optimally chosen in the first place. we presume that path to have been chosen taking full account of the relevant fiscal multipliers, policy preferences, market discipline, and credibility/risk premia. those choices are a separate issue from the best way to recover the path that incorporates them after a deviation or shock. it is therefore 5 there is a small literature that uses real time fiscal data (hughes hallett et al 2012; bernoth et al 2012; beetsma et al 2009; cimadomo 2007; von hagen and wolf 2006; golinelli and momigliano 2008). this literature has been concerned with the ability of such data to pick up budget failures, whether fiscal policies have been counter-cyclical, and whether governments are systematically overoptimistic in their budget projections. it does not look at using real time data to help correct unforeseen deficits. nevertheless, it shows up the unreliability and revisions in such data. for that reason, we work with cash data instead: it is real time and accurate. european journal of government and economics 1(1) 48 beyond the scope of our present analysis to assess how economic recovery itself should be achieved and if the policy implementation may be hampered in the case of a severe economic crisis.6 data the data used in this paper come from three different data series. first, since we are interested in the deficit of the general government, we use the annual series of government deficits according to esa95 accounting standards. we then augment this series with data collected using the esa79 standards in order to construct a longer time series. this data comes at annual frequency and provides the official deficit figure when it comes to the assessment of compliance with the sp plans. second, starting in 1995, there is also a series at quarterly frequency of government deficit data. this also follows esa95 accounting standards. we use this data as intra-annual information to forecast the end-of-year government deficit. finally, we use the data series of the public accounts (cash series) that comes at monthly intervals. in addition, we use quarterly nominal gdp data. these data are required to normalize all other variables as ratios of gdp. thus the data we use come at three different frequencies. however, we can reduce the frequency of the cash data by aggregating it to quarterly observations if need be. timeline of events our goal is to study the gains that can be obtained from early intervention in fiscal policy by governments. to do that, we have to specify the sequence of events of the government’s action. in period t-1, before the current budget year starts, the government submits a sp plan to the european commission. then at the start of quarter q3 of year t, the first year covered by the sp plan, a deficit forecast for the entire year is made.7 if the forecast predicts a slippage of the government deficit below the sp target, the government can consider putting early intervention measures into place immediately in order to avoid a deficit realization that is too far away from their sp target. independent of whether early intervention measures have been implemented or not, the government also has to adjust its plan for the three remaining years of the plan to satisfy the debt targets of the initial sp plan by the end of the plan period. we illustrate the timing of these events in figure 2: 6 the choice of fiscal instruments is discussed in alesina and ardagna (2009). a more critical view of austerity measures in crisis times is presented in delong and summers (2012). 7 this is the earliest period to make a reasonable prediction of the year-end deficit, given the data, model, and information restrictions in the problem. european journal of government and economics 1(1) 49 figure 2. timeline of events n tg denotes the growth of nominal gdp in year t; td̂ denotes the debt-to-gdp ratio at the end of period t, and t δ is the deficit-to-gdp ratio in period t. the time line set out in figure 2 is conceptually straightforward, but perhaps difficult to implement. it puts a lot of faith in the effectiveness of fiscal activism, and in the “costless” production and pursuit of sp plans. many governments may find that hard going in practice, and that mid-year is a bit late to adjust current (and future) budget plans which may have been in preparation for some time. nevertheless, using real time data, beetsma and guiliodori (2008) show there is considerable evidence that governments do in fact adjust their budgets mid-year. we may therefore assume that the time line in figure 2 is feasible, if uncomfortable, at least for governments that are sufficiently determined to correct any budgetary failures before they run out of control. that is not to say that all governments do make fiscal corrections in good time. recent experience in the euro-zone shows very clearly that, while some do, many do not. in an extension to figure 2’s timeline, we also discuss the case where no changes to the original plan are made and calculate the deviations in the debt ratio that then appear at the end of the sp plan. correction plans when there has been a one-time deviation in fiscal policy such that the deficit exceeds the sp plan, there are at least two ways to correct the deficit and meet the debt target at the end of the sp. one method we label the constant slope plan, and the other an additive constant plan.8 the additive constant plan takes the original plan and adds a constant correction to all deficits planned under the original sp agreement. this constant d therefore describes a level shift. this plan will have large adjustments between q3 of period t, when the corrections start if there are early interventions (or from the end of period t if not), and period t+1 when the corrections can continue at the rate originally planned. either way, these adjustments will be enough to eliminate the extra debt caused by the deficit slippage. we sketch this correction process in figure 3. 8 both plans have the property that they can be described by a single parameter. in general, a correction plan is not uniquely determined because we have three degrees of freedom to define the plan but only one target to match. but once we concentrate on plans that can be described by a single variable, they are uniquely identified by the final debt target of the sp plan. european journal of government and economics 1(1) 50 figure 3. constant additive adjustments there a two correction plans: one with early interventions (dashed line), and one without early interventions (dotted line). we also plot the original sp/mto plan (solid line). these corrections are based on the original sp plan plus an additive constant chosen to meet the same debt target at the end of the plan. the constant slope plan, by contrast, does not have this front-loading property. instead, it creates a constant change in the deficit each year. the burden of adjustment in this plan is therefore spread more equally over the remaining periods of the plan. this time, the constant d describes a constant change in the deficit from year to year, whereas d in the additive case described a constant shift in the deficit compared to the original sp plan. we sketch this correction plan in figure 4: note that the sp path is identical in both cases, so that we can easily compare the correction paths (see figure 5). we see that the constant slope plan has much smaller corrections in the deficit in the periods t to t+1. the larger corrections are postponed to later periods where, compared to the additive case, the adjustments relative to the original sp plan are plainly larger. they are back-loaded therefore.9 in that sense these two correction schemes are polar opposites in terms of where the adjustments fall. the frontloaded, additive constant case represents a rapid correction (“cold shower”) strategy and risks stirring up political opposition. 9 both correction plans include early interventions, and are calculated so that the sp/mto debt target is reached at the end of the plan horizon. european journal of government and economics 1(1) 51 figure 4. constant slope adjustments there a two correction plans: one with early interventions (dashed line) and one without early interventions (dotted line). we also plot the original sp/mto plan (solid line). all plans have a constant slope and meet the same debt target at the end of plan. by contrast, the back-loaded, constant slope version is easier to implement. but it risks allowing the policymakers to backslide and will therefore lack credibility if the markets doubt that it will be carried through to the end. the potential for time inconsistency here underlines the importance of leeper’s literature on anchoring expectations (ensuring the credibility of fiscal corrections), especially if this route is taken. on the other hand, the usual fear that once a forecasting relationship is in use the underlying behaviour upon which it is based will change (a form of the lucas critique), may be less severe here than in the monetary policy arena. monetary rules often breakdown because market behaviour changes. but people have little freedom to change the taxes they owe even if deficits are forecast to change, and governments likewise have little chance to change their spending rules since most are “contractual”. in that case, private sector responses to a forecast budget deviation from plan are likely to be limited in the short term. only in extreme cases, where the long term sustainability of the debt target is threatened, would we expect to see a breakdown of our forecasting and correction rules. that could be a possibility in the second constant slope correction plan; but not in the first, additive adjustments plan – which may be a good reason to favour the latter. european journal of government and economics 1(1) 52 figure 5. the constant slope and constant additive adjustments compared the constant slope (dashed line) and constant additive adjustments (dotted line) compared in the same problem (the early intervention strategies in figures 3 and 4 respectively). the solid line shows the original sp/mto plan. example 1: the case of germany in 2002 to give concrete examples of the differences between the two correction schemes we have just described, we first consider the case of german fiscal policy in 2002. the german government submitted the following plan (see table 1) in december 2001 to the european commission: table 2. german government deficit plan, starting in 2002, as submitted in december 2001 2002 2003 2004 2005 deficit -2.0% -1.0% 0.0% 0.0% nominal gdp growth 2.77% 4.04% 4.04% 4.04% debt 60.38% 59.04% 56.75% 54.55% deficit and growth rates are taken from the plan submitted by the government. the debt figures follow from our own calculations based on a debt ratio of 60% in 2001. recall figure 1 where we plotted this plan together with the plans that followed this one. as can be seen immediately, this plan had to be revised in the following year because the realised deficit did not coincide with the planned deficit of -2.0% of gdp. hence, early interventions would indeed have had the potential to avoid further fiscal slippages. for this plan, we take the deficit numbers and the nominal growth rates as given. the debt level in 2001 is taken to be 60 % of gdp. we update the debt ratio according to the following rule: 1 ˆ ˆˆ 1 t t tn t d d g     (2) european journal of government and economics 1(1) 53 where td̂ denotes the debt ratio at the end of period t, t δ is the deficit in period t, and n tg is the nominal growth rate of gdp between periods t and t-1.10 the deficit figure, ,ˆ t contains interest payments on the accumulated stock of debt: 1 ˆ tdi .11 for the purposes of illustration, we abstract from changes in the interest rates over time in this paper. it is however straightforward to extract the interest payments component and analyse it separately from the primary deficit. using the model proposed in onorante et al. (2008), we forecast the outcomes for germany based on june/july 2002 information.12 we expect a deficit for 2002 of 3.88%.13 we can then derive the actual debt ratio of the german government using the realization for 2002 assuming that this is a one-time deviation from the sp plan (see table 2). this case is constructed to resemble a situation in which no intraannual interventions are made, and the full deficit is realized at the end of 2002. table 3. german government deficit plan after a one-time deviation in 2002 2002 2003 2004 2005 deficit -3.65% -1.0% 0.0% 0.0% gdp growth 2.77% 4.04% 4.04% 4.04% debt 62.03% 60.62% 58.27% 56.01% debt (planned) 60.38% 59.04% 56.75% 54.55% deficit and growth rates are taken from the plan submitted by the government in december 2001, and no corrections are taken with respect to these numbers. the debt follows from our own calculations based on a debt ratio of 60% for 2001. all gdp growth rates are nominal. if the german government were simply to return to the original sp plan after 2002, the deficit corrections would be rather large (2.65% and 1% in 2003 and 2004 respectively), and there would be a permanent rise in the debt burden of 1.5% for ever – increasing the interest payments by 0.075% of gdp every year – all from one deficit slippage of 1.65% of gdp in 2002. corrections of this size are unlikely to be undertaken. next we consider a situation in which early intervention measures are taken after the deficit forecasts are made. we make an arbitrary assumption that these intervention measures are effective to the extent that, at the end of the year, the deficit becomes a convex combination (with equal weights) of the sp target and the realization for that year; thus the deficit for 2002 in the case of early intervention new 2002̂ becomes: %82.2%)0.2%65.3(5.0ˆ 2002  new (3) this step is used to provide a start to our calculations for the additive and constant slope corrections with early interventions. we replace it with a less arbitrary, but rather more difficult to implement assumption for the early interventions in section 6.3. by contrast, where there are no early interventions, we start with the realised deficit at the end of period t. 10 t is negative if the government runs a budget deficit; positive if it runs a surplus. the planned debt ratios correspond to the ratios submitted by the german government, except for 2005 where the government reported a debt ratio of 55.5% but the updating procedure gives a ratio of 54.55%. 11 i denotes the nominal interest rate on debt from period t-1 to t. 12 details of these forecasts are available from the authors on request. 13 it will turn out that, due to favourable shocks, the actual deficit was 3.66% for 2002. european journal of government and economics 1(1) 54 for simplicity we abstract from any legal complications in changing the budget. the procedures will vary by country. typically tax changes must be legislated. but spending rules, especially as regards the timing and speed of that spending, mostly do not once the spending allocations have been made. thus, for the size of corrections reported here, the changes could be introduced at will. the additive correction approach for the correction of a one time deficit slippage, we look first at the approach with a level shift for the remaining years up to the end of the planning horizon, in this case to 2005. the level shift is chosen such that the government can still satisfy its originally announced debt target.14 we want to find deficits 2003 2004 ˆ ˆ,new new  and 2005 ˆ new such that we meet the sp debt target of 54.55% in 2005. since many plans can satisfy this target, we look for a simple plan with a constant additive shift: d d d spnew spnew spnew    20052005 20042004 20032003 ˆ:ˆ ˆ:ˆ ˆ:ˆ it is easy to solve for d using the law of motion for the debt ratio in (2). we get                                  3 2 1 3 3 3 2 3 2 1 3 1 3 1 )1( 1 1 1 ˆ )1( ˆ )1( ˆ )1( ˆ )1( ˆˆ t ts n sn t sp tn t sp t t ts n s sp t t ts n s t t ts n s t g g g ggg d d d where 1 ˆ td denotes the initial debt before the sp plan starts; t̂ denotes the deficit realized in the first year covered by the sp plan; and d̂ denotes the target debt ratio at the end of the sp plan. if we evaluate d for germany in 2002, we get d = 0.0025. given the policies of 2002, this means the government has to decrease its deficit in each year, for the following three years, by 0.25% of annual gdp. the new plan can be seen in table 3. notice that the deficit corrections going into 2003 and 2004 (2.1% and 1% of gdp) are smaller than in table 1, and involve no extra debt or interest payments. table 4. german government deficit plan after a one-time deviation and revision in july 2002 2002 2003 2004 2005 deficit -2.83% -0.75% 0.25% 0.25% gdp growth 2.77% 4.04% 4.04% 4.04% debt 61.21% 59.58% 57.01% 54.55% debt (planned) 60.38% 59.04% 56.75% 54.55% deficit and growth rates are taken from the plan submitted by the government in december 2001, and no corrections are taken with respect to these numbers. the debt follows from our own calculations based on a debt ratio of 60% in 2001. 14 recent literature has emphasized the importance of targeting debt, rather than deficits, as a means of restraining fiscal policy: hughes hallett (2008a,b), , hughes hallett and jensen (2011, 2012). in view of the effects of the 2007/09 recession, policymakers have also considered the possibility of adopting explicit debt targets (blanchard, 2010; european commission 2011). european journal of government and economics 1(1) 55 the alternative would be not to take early intervention measures and to let the deficit take its realized value for 2002. in this case, the debt at the end of 2002 would be 62.03%. based on this, we can again calculate the shift value, d, necessary to reach the 54.55% debt target in 2005. we get d=-0.0051. this implies that the government has to reduce its deficit for the next three years by an additional 0.51% of gdp each year, compared to 0.25% if early intervention measures had been taken. the necessary annual corrections would have doubled in size therefore. against this, it must be kept in mind that the government already had to intervene in mid-2002 in the early intervention case. it reduced the deficit by 0.83% of gdp: from 3.65% with no early interventions, to 2.83% of gdp under early interventions (thereby avoiding the need to undergo the sgp’s excessive deficit process and the significant improvement test). the difference of 0.83% is spread as net expenditure cuts over the remaining three years if there are no early interventions – matching the 0.25% per year of early interventions, plus the additional interest charges. by contrast, the 0.83% difference in the early interventions case had to be corrected through public spending cuts in 2002.15 that may be a tough call, but it does allow the german government to avoid the sgp’s excessive deficit procedure and it is the kind of correction the german government will impose upon itself in its own new balanced budget legislation. the slope correction approach the second approach for correcting the one time deficit slippage would be to apply a constant slope adjustment path for the remaining years up to the end of the planning horizon, in this case 2005. the slope has to be chosen such that the government can still satisfy its original debt target. we need to find deficits new 2003 , new 2004 and new 2005 such that we meet the debt target of 54.55% in 2005. since there are many plans that can satisfy this target, we look for a simple plan such that: dd dd d newnew newnew new 3ˆˆ:ˆ 2ˆˆ:ˆ ˆ:ˆ 200220042005 200220032004 20022003    given that, it is easy to solve for d based on the law of motion for the debt ratio in (2)                                3 2 1 3 3 2 1 3 1 1 3 1 )1( 1 2 3 1 1 1 )1()1(ˆ )1( ˆˆ t ts n sn t t ts n s n s t ts n stt ts n s t g g g gg g d d d where 1 ˆ td denotes the initial debt before the sp plan starts, t̂ denotes the deficit realized in the first year of the sp plan, and d̂ denotes the target debt ratio at the end of the plan. if we evaluate d for germany in 2002, we get d=0.0131. this 15 notice however that the total budget cuts with no early interventions are slightly smaller than those with early interventions: 1.53% vs. 1.58%, despite extra interest charges. this is because of the effect of higher gdp growth on the debt/deficit ratios later in the plan. european journal of government and economics 1(1) 56 means that the government, under early intervention, has to decrease its deficit in each year, for the following three years, by 1.31% of annual gdp. as a result, the budget contractions are 0.46% and 0.35% of gdp smaller in 2003-4, but 1% larger in 2005. the new plan can be seen in table 4. table 5. german government deficit plan after a one-time deviation and revision in july 2002 2002 2003 2004 2005 deficit 2.83% 1.46% 0.10% 1.26% gdp growth 2.77% 4.04% 4.04% 4.04% debt 61.21% 60.30% 58.06% 54.55% debt (planned) 60.38% 59.04% 56.75% 54.55% deficit and growth rates are taken from the plan submitted by the government in december 2001, and no corrections are taken with respect to these numbers. the debt follows from own calculations based on a debt ratio of 60% for 2001. if we consider the case of no early interventions measures, then the corrections under a constant slope regime needed to meet the debt target in 2005 would require a slope parameter d=0.0182 and a period by period budget contraction of 1.82% of gdp. this is a large number: 0.5% larger in each period than with early interventions. on the other hand, the corrections here reduce the net spending cuts (or any revenue increases) to only 0.83% and 0.3% of gdp in 2002 and 2003, but then increase them by 2.1% of gdp in 2004-5. this adjustment plan is set out in table 5. the extent of the softening of the early budget contractions in 2002-3, and then the back-loading of them in 2004-5, is large and clearly visible: table 6. german government deficit plan after a one-time deviation and revision in july 2002 2002 2003 2004 2005 deficit -3.66% 1.76% 0.14% 2.04% gdp growth 2.77% 4.04% 4.04% 4.04% debt 62.04% 61.39% 58.87% 54.55% debt (planned) 60.38% 59.04% 56.75% 54.55% deficit and growth rates are taken from the plan submitted by the government in december 2001, and no corrections are taken with respect to these numbers. the debt follows from own calculations based on a debt ratio of 60% for 2001. altering the impact of early intervention for our numerical example, we assume that, at the point at which the slippage is first detected, it is still possible to achieve a deficit at the end of the year that is a convex combination of the planned and the realized deficit. to overcome possible concerns regarding this particular approach, we provide a flexible sensitivity formula. instead of assuming equal weights, we tried introducing a weighting parameter  such that sp ttt  )1( ~ˆ  where t  ~ denotes the realized deficit in period t without intervention. it is easy to verify that the adjustment rules for d under both rules are linear in  . the derivative with respect to  therefore provides a measure of the flexibility and advantages of this adjustment rule (relative to our bench-mark with equal weights). constant slope adjustment in the case of constant slope adjustments, the derivative is european journal of government and economics 1(1) 57 ) ~ ( )1( 1 2 3 1 1 1 )1()1( 3 2 1 3 3 2 1 3 1 1 sp ttt ts n sn t t ts n s n s t ts n s g g g gg d                              the change in d is     d where  denotes the difference in  from 0.5, our benchmark. a simple estimate of that change can be obtained by setting nominal growth rates to zero. in this case the formula reduces to ⅔ ( )spt t   which, in the case of germany, would imply a sensitivity of 1.1 %. if we set  equal to zero, i.e. a complete correction as soon as the slippage is first detected, we would get a slope coefficient of 1.85 % which is almost exactly equal to the numerical value of 1.83 % used earlier. for the numeric example in this section, we assume that for the remaining six months of the year after the forecast has been made, the government can implement policy measures, e.g. a budget freeze, so that the deficit remains in accordance with the submitted sp plan. in the case of germany, every month of slippage from the sp plan will increase the slope coefficient by approximately 0.09.16 this shows that there are quantitative effects from altering the impact range of early intervention. but, compared to not intervening, the gains always remain substantial. additive constant adjustment in the case of the additive constant adjustment the derivative becomes ) ~ ( )1( 1 1 1 )1( 3 2 1 3 3 1 1 sp ttt ts n sn t t ts n s g g g d                   . if we set nominal growth rates to zero as before, we get ⅓ ( )spt t   reflecting the equal spread of the corrections over the three adjustment periods. for germany, the sensitivity in our example would be 0.55 %, i.e. we would get an adjustment parameter of 0.53 % if there were a complete correction in the period in which the slippage were first detected, instead of 0.51% as in our calculations. once again there is sensitivity with respect to the impact range of early interventions; but, as in the case of the constant slope adjustment scheme, the gains of intervening early are always substantial. example 2: the case of italy in 2002 as a second case, we take italy in 2002. the italian government had submitted the following plan (see table 6) to the european commission in november 2001: 16 slippage in this case is measured relative to our assumption of six months of compliance. european journal of government and economics 1(1) 58 table 7. italian government deficit plan starting in 2002, submitted in november 2001 2002 2003 2004 2005 deficit -0.5% 0.0% 0.0% 0.2% gdp growth 4.76% 4.85% 4.54% 4.54% debt 103.12% 98.35% 94.07% 89.78% deficit and growth rates are taken from the plan submitted by the government. the debt follows from own calculations based on a debt ratio of 107.5% for 2001. again, as figure 1 showed, the plan had to be revised in the year after implementation due to additional fiscal slippage; so early interventions would again have been beneficial. for this plan, once again we take the deficit numbers and the nominal growth rates as given. the debt level in 2001 is taken to be 107.5 % of gdp, and we update the debt ratio according to the rule given in (2).17 based on the forecast for italy made in june/july 2002, we expect a deficit for 2002 of 3.88%.18 we now derive the debt ratio of the italian government using the realization for 2002 and assume that this is a one-time deviation from the sp plan (see table 7). this is intended to resemble a situation in which there are no intraannual interventions and the full deficit is realized. next, we consider the situation where, after the forecast is made, early intervention measures are taken. we make the same assumption as before; that the measures taken are effective to the point that, at the end-of-year, the deficit is the convex combination with equal weights of the sp target and the realization for that year. in that case, the deficit for 2002 new 2002̂ becomes %76.1%)5.0%01.3(5.0ˆ 2002  new table 8. italian government deficit plan after a one-time deviation in 2002 2002 2003 2004 2005 deficit -3.01% 0.0% 0.0% 0.2% gdp growth 4.76% 4.85% 4.54% 4.54% debt 105.63% 100.74% 96.37% 91.98% debt (planned) 103.12% 98.35% 94.07% 89.78% deficit and growth rates are taken from the plan submitted by the government in november 2001, and no corrections are taken with respect to these numbers. the debt follows from own calculations based on a debt ratio of 107.5% for 2001. the additive correction approach first, we derive again the correction under the level shift as in the german example above. if we solve for d we get d=0.0038. this means that the italian government would have to cut the deficit by about 0.4% of gdp for each of the remaining years. this plan can be seen in table 8. in this scenario, with early interventions the government would escape both the sgp’s excessive deficit scrutiny and the commission’s significant improvement test. however, the early deficit reductions are severe: 1.24% of gdp in 2002, and 2.14% in 2003, but very small thereafter. 17 the updated debt ratios are lower than the debt ratios from the plan submitted by the italian government. however, to get a consistent benchmark case, we allow debt to evolve according to the proposed sp rule. 18 it will turn out that the actual deficit will be 3.01% for 2002. details are available upon request. european journal of government and economics 1(1) 59 table 9. italian government deficit plan after a one-time deviation and revision in july 2002 2002 2003 2004 2005 deficit -1.76% 0.38% 0.38% 0.58% gdp growth 4.76% 4.85% 4.54% 4.54% debt 104.38% 99.16% 94.47% 89.78% debt (planned) 103.12% 98.35% 94.07% 89.78% deficit and growth rates are taken from the plan submitted by the government in november 2001, and no corrections are taken with respect to these numbers. the debt follows from own calculations based on a debt ratio of 107.5% for 2001. the alternative would be not to take early intervention measures and to let the deficit take its course for 2002. in that case the debt at the end of 2002 would be 105.63%. based on this, we can calculate the level shift, d, that would be necessary to reach the 89.78% debt target in 2005. we get d=-0.0076. this implies that the government would have to double its deficit reductions to 0.76% of gdp, each year for three years, instead of only 0.38% had early intervention measures been taken. however, it must be kept in mind that the government already had to reduce the deficit by a large margin in 2002 in the early interventions scenario. the deficit in 2002 with early interventions is 1.76%, whereas it is 3.01% without such interventions; the difference of 1.25% being spread over the remaining three years. on the other hand, the deficit reductions of 0.38% for three years in the early interventions case are less than the 1.25% of additional cuts imposed after 2002 when there are no early interventions – but not by much. those late cuts are used to pay for extra spending in 2002. thus, in this plan, the government avoids the savage cuts in the first two years of the early interventions solution by trading cuts of 1.24% in net spending saved in 2002, and 1.38% of gdp saved in 2003, for larger cuts (of 0.76% and 0.56%) in 2004-5. the difference in the cuts required under the two plans being made up by the growth in gdp during the life of the plan. the slope correction approach the second approach is the constant slope adjustment path taken to the plan’s horizon. the slope is chosen such that the government can still satisfy the original debt target in 2005. we need to find deficits new 2003̂ , new 2004̂ and new 2005̂ such that we meet the debt target of 89.78% by 2005. if we evaluate d for italy in 2002, we get d=0.0105 with early interventions. this means the government has to decrease its deficit from year to year, for the next three years, by 1.05% of annual gdp. the new plan can be seen in table 9. the back-loading is more obvious here than in the german example; and, with an extra 1% of gdp in budget cuts in 2005, and a correspondingly larger gain in frontloading relief, the temptation for time inconsistent behaviour compared to the early intervention solution in table 7 will be large. this is guaranteed to raise doubts about the credibility of this as a consolidation plan. table 10. italian government deficit plan after a one-time deviation and revision in july 2002 2002 2003 2004 2005 deficit -1.76% -0.67% 0.42% 1.51% gdp growth 4.76% 4.85% 4.54% 4.54% debt 104.38% 100.21% 95.44% 89.78% debt (planned) 103.12% 98.35% 94.07% 89.78% deficit and growth rates are taken from the plan submitted by the government in november 2001, and no corrections are taken with respect to these numbers. the debt follows from own calculations based on a debt ratio of 107.5% for 2001. european journal of government and economics 1(1) 60 if, instead, we consider the case of no early interventions, then the constant slope regime would require d=0.0183 to meet the 2005 debt target. the resulting plan can be found in table 10. this time the budget corrections are substantially larger than those with early interventions. similarly, the back-loading element is large: the budget would have to be cut by 2.2% more of gdp in 2005 than in the scheme with additive corrections, and by 2.4% more than with both additive corrections and early interventions. the frontloading relief is equally large: 1.24% in 2002 and 1.3% in 2003. it is hard to believe that time inconsistent behaviour would not appear in such a case. as a result this plan is unlikely to have much credibility in the markets. table 11. italian government deficit plan after a one-time deviation and revision in july 2002 2002 2003 2004 2005 deficit -3.01% -1.12% 0.78% 2.67% gdp growth 4.76% 4.85% 4.54% 4.54% debt 105.63% 101.86% 96.65% 89.78% debt (planned) 103.12% 98.35% 94.07% 89.78% deficit and growth rates are taken from the plan submitted by the government in november 2001, and no corrections are taken with respect to these numbers. the debt follows from our own calculations based on a debt ratio of 60% for 2001. measuring the gains from early intervention directly it is relatively easy to derive a monetary measure of the gains to be had from early interventions. here we use the difference in the debt burden at the end of the current sp plan starting with or without early interventions. that takes out any differences in the subsequent fiscal corrections which depend on the type of correction method chosen. the gains in monetary terms a) for germany: we assume that, after the slippage, the government returns to the fiscal contractions in its original sp plan, first having made an early intervention and then without. the difference in outcomes is easily read off from table 3. we see that, for germany, the gain of early intervention would have been a difference in debt ratios in 2005 of 1.46%. if we take a nominal interest rate of 5%, this would increase the government deficit for all future periods by 0.073% of gdp. for germany, this would mean additional interest payments every year of about 1.64 billion euros at 2005 prices. this is equivalent to the entire central government budget for housing, urban development, and regional planning (1.794 billion euros) being lost forever.19 b) for italy: we follow the same approach and compare the debt ratio at the end of the sp plan in 2005 in the case where early intervention measures have been taken, to the case where they have not been taken. the difference can be read off from table 8, and we see that for italy the difference in debt ratios in 2005 would have been 2.20%. again, assuming a nominal interest rate of 5%, this means a permanent raise in interest payments of 0.11% of gdp. for italy, this is equivalent to a loss in public spending of 1.57 billion euros each year for ever. the gains in terms of budget management the budgetary execution is easier when large corrections can be avoided. in the case of the additive correction approach, the gains from early intervention can be read off from the adjustment factor d that captures the value of reducing the fiscal 19 this number is taken from http://www.bundesfinanzministerium.de/bundeshaushalt2005/pdf/vorsp/zyubfkt.pdf. european journal of government and economics 1(1) 61 contractions in the following years of the sp plan. in the constant slope approach, the change in the fiscal impulse can be derived as the difference of the corrected plan and the original sp plan. we set out the net fiscal contractions or expansions implied for germany, relative to the original sp plan, in table 11. these figures show that the two approaches offer different schedules for correcting fiscal slippages. both allow quite a large amount of extra spending in the first year of the plan. but then they differ. the constant slope plan offers two additional years of extra spending, but then demands a large cut in net spending. the additive constant approach, by contrast, offers small cuts spread evenly over the three correction years. for italy, the net fiscal contractions or expansions implied, relative to her original sp plan are set out in table 12. qualitatively the results resemble those for germany. they imply small but equally spread fiscal contractions under the additive approach; and but positive impulse in the first two periods, followed by a small contraction in 2004 and a sharp contraction in the last period under the constant slope approach. table 12. change in the fiscal impulse of the german in reaction to a additive constant and constant slope revision of the original sp plan to meet the debt target in 2005 2002 2003 2004 2005 deficit planned -2.00% -1.00% 0.0% 0.0% additive constant -2.82% -0.75% 0.25% 0.25% constant slope -2.82% -1.46% -0.10% 1.26% fiscal impulse additive constant +0.82% -0.25% -0.25% -0.25% constant slope +0.82% +0.46% +0.10% -1.26% change in the fiscal impulse of the german in reaction to a additive constant and constant slope revision of the original sp plan to meet the debt target in 2005. table 13. change in the fiscal impulse of the italian in reaction to a constant slope and constant slope revision of the original sp plan to meet the debt target in 2005 2002 2003 2004 2005 deficit planned -0.5% 0.0% 0.0% 0.2% additive constant -1.76% 0.38% 0.38% 0.58% constant slope -1.76% -0.67% 0.42% 1.51% fiscal impulse additive constant +1.26% -0.38% -0.38% -0.38% constant slope +1.26% +0.67% -0.42% -1.31% change in the fiscal impulse of the italian in reaction to a constant slope and constant slope revision of the original sp plan to meet the debt target in 2005. elsewhere in the eurozone up to now, we have looked only at two countries in two specific time periods. in this section we do the same analysis for the eurozone countries in all years for which sp plans exist and are publicly available. to get a comprehensive measure, and to avoid an overload of individual country detail, we average the fiscal impulses of the different adjustment plans over all the cases back to 2000 where forecasting deficit slippages demanded early intervention. the results are presented in table 13 for both additive and constant slope approaches. these results confirm that what we saw above for germany and italy in their 2002 plans does in fact hold more generally. the differences between the left and right european journal of government and economics 1(1) 62 panels show that there are clear and substantial advantages, in terms of both lower debt levels and permanent interest savings, in every case to instituting early corrections. the changes in the overall run of fiscal policies required to make the necessary budget corrections is almost always smaller – often substantially smaller – with early interventions; most obviously in germany, italy, the netherlands and belgium. in most cases the changes are halved if early action is taken; with those changes bunched in the final year in the slope adjustment method is used, but evenly spread out if the additive method is used. table 14. the average changes in the fiscal impulse relative to the sp plan for the additive constant and the constant slope approaches with and without early interventions with early intervention without early intervention country intervention t t+1 t+2 t+3 t t+1 t+2 t+3 belgium slope 0.49 0.17 -0.17 -0.43 0.97 0.35 -0.31 -0.88 additive 0.49 -0.15 -0.15 -0.15 0.97 -0.30 -0.30 -0.30 germany slope 0.51 0.30 -0.11 -0.62 1.02 0.48 -0.26 -1.10 additive 0.51 -0.16 -0.16 -0.16 1.02 -0.31 -0.31 -0.31 spain slope 0.13 0.04 0.01 -0.15 0.26 0.08 -0.03 -0.27 additive 0.13 -0.04 -0.04 -0.04 0.26 -0.08 -0.08 -0.08 france slope 0.38 0.08 -0.11 -0.30 0.75 0.22 -0.22 -0.66 additive 0.38 -0.12 -0.12 -0.12 0.75 -0.23 -0.23 -0.23 italy slope 0.99 0.44 -0.26 -1.02 1.98 0.80 -0.54 -1.94 additive 0.99 -0.30 -0.30 -0.30 1.98 -0.60 -0.60 -0.60 netherlands slope 1.08 0.35 -0.38 -0.90 2.15 0.74 -0.68 -1.90 additive 1.08 -0.33 -0.33 -0.33 2.15 -0.65 -0.65 -0.65 austria slope 0.26 0.06 -0.09 -0.19 0.51 0.15 -0.17 -0.43 additive 0.26 -0.08 -0.08 -0.08 0.51 -0.16 -0.16 -0.16 portugal slope 0.14 0.11 0.27 -0.47 0.29 0.16 0.23 -0.60 additive 0.14 -0.04 -0.04 -0.04 0.29 -0.09 -0.09 -0.09 the average changes in the fiscal impulse relative to the sp plan for the additive constant and the constant slope approaches with and without early interventions. similarly, the required changes are almost always much smaller (even in earlier years) if the additive adjustment method is used. in fact the changes are typically 3 to 5 times smaller with additive rather than slope adjustments, most notably in spain, germany, italy and portugal (possibly belgium and the netherlands). it is important to bear in mind that, although these results are qualitatively the same as those for the actual budget corrections discussed in sections 6 and 7, the figures in table 13 show the changes in overall fiscal policy which those budget corrections cause when superimposed on the sp/mto plans. and those are the changes in policy which the public sees and judges the policymakers by. table 15. the additional interest payments when no corrections are made, using the additive constant approach country t t+1 t+2 t+3 belgium r∆d -0.0243 % -0.0307 % -0.0370 % -0.0430 % germany r∆d -0.0255 % -0.0324 % -0.0391 % -0.0455 % spain r∆d -0.0065 % -0.0081 % -0.0096 % -0.0110 % france r∆d -0.0188 % -0.0238 % -0.0287 % -0.0335 % italy r∆d -0.0494 % -0.0623 % -0.0746 % -0.0864 % netherlands r∆d -0.0538 % -0.0676 % -0.0810 % -0.0940 % austria r∆d -0.0128 % -0.0163 % -0.0196 % -0.0227 % portugal r∆d -0.0071 % -0.0089 % -0.0105 % -0.0121 % the additional interest payments when no corrections are made, using the additive constant approach. the term r�d gives the government spending, expressed as a share of gdp that would need to be devoted to extra interest payments if no adjustments at all were taken. in this case, debt targets are not met and higher interest payments would be necessary for ever. european journal of government and economics 1(1) 63 table 16. the additional interest payments when no corrections are made, using the constant slope approach country intervention t t+1 t+2 t+3 belgium r∆d -0.0243 % -0.0147 % -0.0224 % -0.0430 % germany r∆d -0.0255 % -0.0096 % -0.0149 % -0.0455 % spain r∆d -0.0065 % -0.0043 % -0.0037 % -0.0110 % france r∆d -0.0188 % -0.0139 % -0.0189 % -0.0335 % italy r∆d -0.0494 % -0.0250 % -0.0369 % -0.0864 % netherlands r∆d -0.0538 % -0.0337 % -0.0510 % -0.0940 % austria r∆d -0.0128 % -0.0095 % -0.0137 % -0.0227 % portugal r∆d -0.0071 % -0.0015 % 0.0120 % -0.0121 % the additional interest payments when no corrections are made, using the constant slope approach. the term r∆d gives the government spending, expressed as a share of gdp, that would need to be devoted to extra interest payments if no adjustments at all were taken. debt targets are not met and higher interest payments would be necessary for ever. looking at the figures in tables 14 and 15, we can see that the interest payment consequences of not making early corrections are indeed small (justifying our having left them out of consideration until this point) – just a fraction of a percent in each case, even in italy and the netherlands. moreover the extra interest payments are not different between the two correction methods. again it was reasonable to ignore them. however, they build up over time and last for a long time since the corrections are sufficient only to get us back to the planned debt levels. conclusions in this paper we have accomplished two things. firstly, we have investigated the gains to be made, in terms of monitoring and correcting excessive deficits, by using cash data rather than accruals data to monitor the current fiscal position; and, given that information, by computing the early interventions needed to head off any excess deficits as they emerge; and secondly, we have also examined and compared two different strategies for correcting excess deficits that may have already emerged, such that the debt ratio returns to some pre-specified level at the end of the designated planning period. independently of the measure used, our results show that the gains from early intervention are certainly not negligible for governments committed to reducing their debt. what is different between the different plans is the allocation of the corrections over time. both the constant slope and the additive constant plans require a lot of effort at the moment a fiscal slippage is detected in order to avoid further slippages in the remainder of the year and in subsequent years. this means that an important part of the adjustment has to take place in the first year. after that, the two approaches differ sharply in the timing of the corrections. the additive approach typically requires a second costly adjustment after the early intervention. one could however argue that this would be a less serious problem if those corrections could be implemented in a package together with the early intervention measures and therefore avoid further discussion in the political process. the advantage of the constant slope approach is that it spreads the adjustment steps equally across the horizon of the sp plan. that approach may therefore be politically easier to implement. however, it also requires an especially strong and committed government to overcome the (political) temptation to use the surplus that occurs towards the end of the plan for opportunistic spending instead of debt reductions; for example, close to elections or as debt or deficit consolidation fatigue begins to set in among the politicians. in our discussion of the different adjustment paths available to a fiscally consolidating government, we have emphasised the gains of early intervention. in that context we have stressed the importance of accounting for the interaction between deficit and debt targets, and the danger of time consistency in the european journal of government and economics 1(1) 64 associated consolidations. the time consistency problem in particular seems to be empirically relevant and strategically important. but it has received very little attention in the literature on the monitoring and control of fiscal policies. references alesina, alberto f. and silvia ardagna (2009) ‘large changes in fiscal policy: taxes versus spending’, nber working paper, 15438 [published in tax policy and the economy, 24, nber 2010]. alessandrini, pietro, michele fratianni, andrew h. hallett and andrea f. presbitero (2012) ‘external imbalances and financial fragility in the euro area’, mofir discussion paper, 66, polytechnic university delle marche, italy. beetsma, roel and massimo giuliodori (2008) ‘on the relationship between fiscal plans in the european union: an empirical analysis based on real time data’, journal of comparative economics, 36(2): 221-241. beetsma, roel, massimo giuliodori and peter wierts (2009) ‘planning to cheat: eu fiscal policy in real time’, economic policy, 24(60): 753–804. bernoth, k., andrew hughes hallett and john lewis (2012) ‘the cyclicality of automatic and discretionary fiscal policy: what can real time data tell us?’, macroeconomic dynamics (forthcoming) blanchard, olivier (2010) ‘imf survey on “rethinking macroeconomic policy’, url: www.imf.org/external/pubs/ft/survey/so/2010/int021210a.htm cimadomo, jacopo. (2008) ‘fiscal policy in real time’, ecb working paper series, 919. corsetti, giancarlo (2012), ‘has austerity gone too far?’ voxeu (voxeu.org), (consulted 2 april 2012) delong, j. bradford and lawrence h. summers (2012) ‘fiscal policy in a depressed economy’, paper presented at the spring 2012 brookings panel on economic activity, 20 march 2012. european commission (2011) ‘public finances in emu-2011’, european economy 3/2011, dgii (ecfin), european commission, brussels, september 2011. golinelli, roberto and sancro momigliano (2008) ‘the cyclical response of fiscal policy in the euro area. the cyclical reaction of fiscal policies in the euro area: the role of modelling choices and data vintages’, fiscal studies, 30(1):39–72. hughes hallett, andrew (2008a). coordination without explicit cooperation: monetary-fiscal interactions in an era of demographic change. economic papers 305, ecfin, european commission, brussels, february 2008. hughes hallett, andrew (2008b). debt targets and fiscal sustainability in an era of monetary independence. international economics and economic policy, 5, 165187. hughes hallett, andrew and svend h. jensen (2011) ‘stable and enforceable: a new fiscal framework for the euro area’, international economics and economic policy, 8, 225-245. hughes hallett, andrew, rasmus kattai and john lewis (2012) ‘how reliable are cyclically adjusted budget balances in real time?’, contemporary economic policy, 30(1): 75-92 hughes hallett andrew and svend h. jensen (2012) ‘fiscal governance in the euro area: institutions vs. rules’, journal of european public policy, 19(5): 646664. european journal of government and economics 1(1) 65 hughes hallett, andrew, giovanni di bartolomeo and nicola acocella (2012a) ‘a general theory of control-ability and expectations anchoring for small open economies’, journal of international money and finance, 31(2): 397-411. hughes hallett, andrew, nicola acocella and giovanni di bartolomeo (2012b) ‘expectations dynamics: policy announcements and limits to dynamic inconsistency’, studies in nonlinear dynamics and econometrics, 16(2). leeper, eric (2009) ‘anchoring fiscal expectations’, reserve bank of new zealand bulletin, 72(3): 7-32. morris, richard, hedwig ongena and ludger schuknecht (2006) ‘the reform and implementation of the stability and growth pact’ ecb occasional paper series, 47, june 2006. neumann, manfred (2012) ‘too early to sound the alarm’, voxeu. url (consulted 17 april 2012) : www.voxeu.org. onorante, luca, diego pedregal, javier pérez, and sara signorini (2008) ‘the usefulness of infra-annual government cash data for fiscal forecasting in the euro area’, ecb working paper series, 901, may 2008. pedregal, diego and javier pérez (2008) ‘should quarterly government finance statistics be used for fiscal surveillance in europe?’, ecb working paper series, 937, september 2008. pérez, javier (2007) ‘leading indicators for euro area government deficits’, international journal of forecasting, 23(2): 259 – 275. von hagen, jürgen and guntram wolff (2006) ‘what do deficits tell us about debt? empirical evidence on creative accounting with fiscal rules in the eu’, journal of banking and finance, 30(12): 3259–3279. woodford, michael (2005). central bank communication and policy effectiveness, in the greenspan era: lessons for the future. kansas city fed, kansas city, mo. microsoft word ejge_03_01_010.doc european journal of government and economics volume 3, number 1 (june 2014) issn: 2254-7088 24 collective action problems: disentangling possible feedback loops between government policies and the public’s value-change eivind hoff-elimari, common cause network, norway anat bardi, royal holloway university of london, united kingdom simon matti, luleå university of technology, sweden kristina östman, kth royal institute of technology, sweden abstract solving collective action problems, such as poverty reduction or climate change, depends on interactions between governments' and voters' preferences regarding pro-social actions. this paper examines whether the overall direction of change in pro-social public policy precedes public value-change, rather than the other way around. we examine change in the public’s pro-social values in six european countries, as measured by the european social survey (ess) during 2002-2012. in these countries, we conducted an expert survey to rate governmental policy that expresses these values over the same period, thereby examining value-change in governmental policy. the chronological comparison of value-change of the public with that of respective governments suggests that changes in pro-social government policies may drive public value-change rather than vice versa. this complements previous studies focused on the opinion-policy connection. possible political implications are discussed. the promising findings of this initial study point to the importance of conducting larger-scale future studies. jel classification z18. keywords values; policy feedback; democracy. acknowledgements we would like to thank wwf-uk, in particular tom crompton, for the financial support and advice that enabled this research. we are also grateful to ela polek of university college dublin for valuable advice and encouragement. last but not least, we thank the anonymous political scientists who filled in the survey on governments' political goals. hoff-elimari, bardi, matti and östman ● collective action problems 25 introduction this research addresses the feedback loop between national political agendas and value-priorities of the mass public in an attempt to further our understanding of how political space for addressing large-scale collective action problems evolves. characterised by a temporal and spatial mismatch between costs and benefits, as well as between problem causes and problem effects, a range of large-scale collective action problems (e.g. duit, 2011; ostrom, 2000; hodge & mcnally, 2000) or bigger-than-self problems (crompton, 2010) exist as consistent challenges for modern societies. for example, deficits of public pension regimes reward the present beneficiaries at the expense of future tax-payers, and the impact of co2 emissions today will be felt fully through climate change only in a few decades. addressing these problems present a significant challenge for contemporary democratic governments. they cannot be addressed by appeals to individual (or national) self-interest alone but rather require an appeal to, and an activation of, the public’s moral-normative concerns to trigger both public policy support and subsequent large-scale cooperative behaviour. the interaction between public policy and public opinion has been a long standing interest within social science research. as a key characteristic of democracy (e.g., dahl, 1989), an abundance of previous research has focused on the effects of opinion on policy, conceptualised as democratic responsiveness. although the magnitude and stability of these effects are still unknown, most scholars agree that policy-makers, particularly with regard to high-salience issues, do not allow policy decisions to flow too far away from public preferences (page & shapiro, 1983; stimson, mackuen & erikson, 1995; glynn et al., 1999; burstein, 2003; wallner, 2008). however, when policy matches the opinions of the mass public, is this match a sign of a responsive policy or of a responsive public? addressing the latter, researchers have demonstrated how political decision-makers regularly attempt to impact public opinion by emphasising certain values (feldman, 1988; caprara, schwartz, capanna, vecchione & barbaranelli, 2006); framing their messages (gilbert & lindzey, 1998; rein & schön, 1993); and making “emotive appeals” believed to increase legitimacy (wallner, 2008) when presenting policy proposals. hence, although changes in mass-opinions give rise to new policy suggestions by responsive decision-makers, public opinion may also be affected by previous policy decisions. indeed, an emerging literature on this interaction argues that the public policy – public opinion interaction, rather than focusing on a single direction of causality, should be thought of as a two-way system of feedback loops, comprising both a dynamic policy representation and a dynamic public responsiveness (e.g. the thermostatic model of responsiveness, cf. wlezien, 1995, 1996, 2004; soroka & wlezien, 2004, 2010). drawing on easton’s (e.g. 1953) traditional model of the political system, in which public reactions to policy outcomes constitutes new inputs to the system, these feedback loops can be both positive (self-reinforcing policy change) or negative (leading to policy reversal) (skocpol, 1993; soss & schram, 2007; soroka & wlezien, 2010). for example, pierson (1993) categorised these feedback effects between public policies and the mass public as resource and incentive effects and interpretive effects. the former have to do with the direct material impacts of public policies, which may create vocal constituencies that will defend existing policies or trigger opposition from those who lose out as a result of the policies. this is akin to research on retrospective voting (e.g., fiorina, 1981) suggesting that past performances is a significant factor for evaluating political alternatives and candidate support in upcoming elections. the interpretive effects, on the other hand, change the public’s own cognitive processes. soss (1999) has demonstrated how one type of interpretive effect is political learning through individuals’ direct experience with government programmes. svallfors (2010) added that public policies may also trigger a normative feedback mechanism, which may be european journal of government and economics 3(1) 26 independent of direct experience of public policies. seen this way, public policy may impact on publicly established views on how the world ought to be and thereby contribute to creating or expanding political space for addressing also the moral-normative issues and long time-horizons inherent in large-scale collective action problems. in short, new policy may indeed be conducive to new politics (e.g., schattschneider, 1935). however, although the notion of a causal effect from policy to opinion has received increased attention during the past decades, research has primarily focused on how specific policies give rise to specific changes in opinion on the particular issue addressed in policy (soss & schram, 2007; soroka & wlezien, 2010). in most of the empirical literature, therefore, the broader political effects of policy – opinion interactions have been largely overlooked. recognising the link between large-scale collective action problems and human values and value change as documented by e.g. schwartz (2006) or schultz et al. (2005), the primary aim of this article is to explore whether the value-priorities expressed through national policy are associated with subsequent changes in the value-priorities of the mass public, in the case of large-scale collective-action problems. thereby, this article contributes to further exploring one of the empirical links between public policy and public opinion: public responsiveness. to fulfil this aim, we use a combination of ess data and expert surveys to compare how national policy goals and mass public values have changed in six european countries during 2002-2012. we do not seek to explain differences in the absolute levels of value priorities across countries but focus on changes in value scores. in the next section, we further theorise the proposed feedback mechanism between national political agendas and mass public values, and outline a framework for mapping and comparing the two on the same canvas. the following section describes our method, survey and measurement strategies. the final two sections present our results and discuss their implications. policy feedback and values if there are strong correlations between public policies and voters’ preferences, how can the directions of effects between the two be established? it is tempting to consider policy and opinion as changing through “mutual adjustment, subject to a never-ending endogenous feedback loop” (svallfors, 2010, p. 121). although this may be true in many cases, in particular when viewed in a long-term perspective, it does not help much in understanding the drivers of changes to public policy and mass public opinion. this requires that each mechanism is studied independently. therefore, in this paper, we explore the suggestion that changes in the value priorities reflected through governmental policy are associated with later changes in the public’s value-priorities, implying that governments might have the ability to consciously influence the values of the public. what is the basis to expect that value emphases of national policy would be associated with subsequent changes in the value-priorities of the mass public? as mentioned above, recent developments in political science research on responsiveness have demonstrated how the public indeed reacts to changes in policy. although these reactions, in part, can be due to the real life effects of a policy (e.g. pierson, 1993), public reactions to policy can also be a factor of the political information surrounding implementation processes, allowing the public to form opinions even without being familiar with the specifics of a policy change (jacobs & shapiro, 2000; mackuen, erikson & stimson, 1992; zaller, 1992). according to, for example, the thermostatic model of responsiveness (wlezien 1995 & 1996; soroka & wlezien 2010), the public continuously gauge the difference between their preferred level and direction of policy and the reality of political decision-making, resulting both in short-term demands for policy hoff-elimari, bardi, matti and östman ● collective action problems 27 adjustments as well as in long-term preference-modification in reaction to policy change. the most prominent psychological process of value change to date is the process of adaptation (see detail and review in bardi & goodwin, 2011). that is, personal values adapt to life circumstances such that for most values, those values that can be readily pursued and fulfilled become stronger, and those values whose pursuit is blocked become less important. this mechanism has been used in the past to explain the value profiles of citizens of former communist countries in europe as an adaptation to life under communism (schwartz & bardi, 1997). furthermore, examining sub-populations, the value profiles of polish migrants to the united kingdom have become more similar to the values of united kingdom residents the longer these migrants have remained in the country, probably as part of a process of adaptation (bardi, buchanan, goodwin, slabu, & robinson, 2014). a similar process of adaptation may lead values of the public to change and adapt to the values that governments pursue in their policies. hence, it is plausible that values, as expressed implicitly in governments’ policies, actions, and discourse, would later become more important in the public as part of adaptation to the current regime. in order to explore and compare policy feedback loops, the primary task is to translate public policies and public opinion into something comparable across countries and over time. basic human values offer such an object as both mass opinion and governmental policy can be conceptualised as expressing a coherent set of value-priorities. public policy, defined broadly as the output of the political system (e.g. dror, 1973; premfors, 1989; cochran & malone, 1995; easton, 1953; hjern, 1987), is to its essence constructed by a system of values specifying its ultimate goals and guiding the choice of strategies for reaching them (cf. amara, 1972; jenkins-smith & sabatier, 1993; kingdon, 1995). values are thereby to be considered the “backstop” (tetlock et al., 1996) of public policy, and the way in which value-conflicts and value trade-offs are handled throughout the political system thereby determining its content (stewart, 2009; thatcher & rein, 2004). similarly, we know from both social psychology and public opinion research that people's opinions constitute a function of their general values (cf. rokeach, 1973; converse, 1964; glynn et al., 1999) and that value-priorities serve as a shortcut for the formation of preferences on a range of political issues (e.g. zaller, 1992; jacoby, 2006; altemeyer, 1998; rasinski, 1987; brewer & gross, 2005; feldman, 1988; hurwitz & peffley, 1987). schwartz (e.g., 2011) has shown that both individuals and cultures on all continents share a common structure of values, understood as guiding principles in life, arranging a set of ten motivational value-types. the proposed structure of individuals’ values has been examined in 75 nations worldwide (schwartz, 2011) and is widely referred to as a theoretical starting point in research on a number of socio-political issues (e.g., davidov, schmidt & schwartz, 2008; caprara et al., 2006; barnea & schwartz, 1998; rohan & zanna, 1998 & 1996; sagiv & schwartz, 1995; stern et al., 1995). according to schwartz (1992), basic human values are organised in ten value types whose reciprocal relations can be represented as a circumplex (see figure 1), where proximity on the circumference indicates that values are mutually compatible and that strengthening a value will strengthen neighbouring values, whereas diametrical opposition indicates the opposite: strengthening a value on one side of the circle will weaken the value on the opposite side. this representation of basic values as a circle allows the identification of four higher-order value types according to two oppositions: openness to change versus conservation (otc/c), focusing the conflict between willingness for change and the motivation to keep things as they are, and self-enhancement versus selftranscendence (se/st), focusing the conflict between prioritising selfish interests and prioritising the interests of others or one’s group (schwartz, 1992, p. 43). european journal of government and economics 3(1) 28 figure 1: schwartz value types source: holmes, blackmore, hawkins & wakeford (2011) priorities amongst the basic values vary from individual to individual, from society to society and over time. the aggregate value priorities across societies form the very heart of culture (e.g., hofstede, 1980; schwartz, 1994) and are correlated with the public’s political preferences (e.g., caprara et al., 2006). for instance, selftranscendence values such as equality and unity with nature are closely related to pro-social and cooperating behaviour (e.g. schwartz, 2006; de groot & steg, 2008; stern & dietz, 1994) as well as to environmental concern (schultz et al., 2005). similarly, the values that prevail in society are used by political leaders to set policies. for example, welfare laws are likely to prevail in countries where values of self-transcendence, such as justice and equality, are emphasised (bardi & sagiv, 2003). although the otc/c-dimension has been suggested as closely associated with general political-ideological reasoning, thereby predicting the formation of support for political parties and programmes primarily on matters concerning the stateindividual relationship, e.g. between conservatism and liberalism (cf. schwartz, 1992; barnea & schwartz, 1998; caprara et al., 2006), the focus of this article is on how values of the se/st-dimension are materialised in public policy and through public opinion. as this paper focuses on policies addressing large-scale collective action or bigger-than-self problems, which require for their amendment that people prioritise the good of others rather than personal utility maximisation, the st/se focus on priorities concerning individual or collective benefits is the appropriate choice. in the next section we shall therefore examine empirically how six european countries moved in different directions on the se/st-dimension in the early 2000s and how their governments’ corresponding policy goals evolved over the same time period. hoff-elimari, bardi, matti and östman ● collective action problems 29 method and data method value-priorities expressed through public opinion the longest time series for regular measurements of schwartz values at national level is the european social survey (ess). it is conducted every second year since 2002 (2003 for some countries) across europe (including russia, turkey and israel). each national survey consists of representative samples of between 1200 and 2800 respondents. a core module of questions has been included in all rounds. this module includes schwartz’ shortened 21-item portrait values questionnaire (pvq) to map values. the questions describe a characteristic of a fictitious person and the respondent is asked to evaluate how much the described person resembles him or her on a scale from 1 (very much like me) to 6 (not like me at all). each of the ten value-types is expressed by two or three items. for example, one of the items for universalism is: “she/he strongly believes that people should care for nature. looking after the environment is important to her/him.” for each respondent, a mean score of all pvq items was first computed and subtracted from 7 to reverse the scale in order to make its interpretation more intuitive: a high score means a respondent generally felt much like the person portrayed. for each of the value types, power, achievement, benevolence and universalism, each respondent’s mean score across the two or three items of the value type was calculated and the scale again reversed by subtracting it from 7. the respondent’s overall mean score across all the pvq items was subtracted from each of these values and 5 were added to the figures for each respondent to eliminate any negative values. each respondent’s mean of power and achievement represent her self-enhancement score and the mean of universalism and benevolence represent her self-transcendence score. we applied the demographic weights provided by ess to compensate for over and under-representation of certain age groups and household types to calculate national mean self-transcendence and self-enhancement scores. the difference between the two is the compound indicator we used to compare public opinion over time. we refer to this as the public opinion net self-transcendence score. value-priorities expressed through governmental policy the first five rounds of ess gives a time series from 2002-2003 to 2010-2012 of changing value priorities of public opinion on the se/st-dimension. to study feedback effects, we also need a mirror measure of changes to governments’ value priorities over the same time period. one option would have been to study changes to material effects of public policies of most obvious relevance to value priorities on the self-transcendence vs. self-enhancement opposition, such as marginal income tax, immigration or environmental policies. however, we found that official statistics were deficient in many fields before 2004 for newer eu member states (e.g., on immigration or environmental policies) and/or they covered a very small part of what basic values might impact on (such as in the case of marginal income tax). furthermore, there may be significant time lags – the material effects of public policies may appear long after they have been debated and adopted. we did searches of the frequency of keywords associated with the se/st-dimension on websites of heads of government over time (using google advanced search) in order to infer governments' value priorities, but we found that results were extremely sensitive to the choice of single words and that it was not suited to compare governments. we decided instead to construct a compound indicator of what we could infer as being the different governments’ value priorities on the se/st-dimension, based on experts’ observations. european journal of government and economics 3(1) 30 as noted by svallfors (2010), the normative feedback mechanisms of public policies that we are concerned with may be independent of direct experience of public policies: it matters not only what governments do (and don't), but also how they motivate their decisions. in other words, what matters is the sum of what the public perceives of government action and inaction. due to the lack of consistent opinion polls on these matters, we decided to approach academic political scientists, whom we presumed would have followed national politics with interest since the first ess round in 2002 whilst having relatively non-partisan views. we constructed a questionnaire (political scientists survey – pss) with 12 political goals representing typical government priorities that would be relevant across europe over the last decade. this questionnaire was sent to political scientists in the six countries with the most significant variations in the public opinion net selftranscendence score in the period from 2002-2003 to 2010-2012. we used our networks to identify active researchers (with at least a phd) at universities with a good reputation in political science. respondents were asked to rate the extent to which their countries’ governments from 2002 to 2011 (we defined a government as the tenure of a head of government) prioritised each of the 12 goals (six reflecting se-values, six reflecting st-values) using a 5-point scale. the complete list and details of the methodology can be found in the appendix. mean scores for each of the 12 items for each government were calculated and then combined into a government net self-transcendence score for each government, defined as: finally, we combined for each of the selected countries the graphs of net selftranscendence scores from ess and from pss to allow for a discussion of directions of effects between value change in public opinion and in government. data ess analysis our aim was to verify if the public’s value change may be associated with similar change in governments' value emphases, and to see chronologically in which direction these changes have occurred. for this particular aim, we focused our analysis on those eu countries with the most significant changes to the net selftranscendence score, both between the ess1 and ess5 and between two consecutive ess rounds. the countries with the largest changes in these measures can be seen in table 1 and table 2 respectively. hoff-elimari, bardi, matti and östman ● collective action problems 31 table 1: largest changes in net self-transcendence between ess1 and ess5 table 2: largest changes in net self-transcendence between consecutive ess rounds positive negative sweden 0.27 ess5 czech republic -0.45 ess2 greece 0.26 ess5 portugal -0.35 ess2 portugal 0.26 ess3 ireland -0.33 ess5 greece -0.32 ess4 as a result, the czech republic, spain, portugal, sweden, ireland, and greece were selected for further study. figures 2a-f show the evolution of selftranscendence and self-enhancement for these countries over time, mirroring each other. figures 2a-f: public opinion self-transcendence and self-enhancement positive negative spain 0.55 czech republic -0.73 sweden 0.34 ireland -0.26 norway 0.15 ukraine -0.24 european journal of government and economics 3(1) 32 in figure 3, the unpredictable evolution of the public opinion net selftranscendence score in all six countries is illustrated. for instance, sweden has increased its score from a level that was already at the top. spain started from a medium position and moved to the top of the list. conversely, the czech republic started at the top only to end up with the lowest score of all six at the time of ess5. figure 3: public opinion net self-transcendence score for selected countries the political scientist survey (pss) the expert survey was carried out using the web service freeonlinesurveys.com which allowed the respondents to fill it in anonymously at their own leisure. emails were sent to 8-16 political scientists in each country with a link to the survey and a two week period to respond. after nine days they were all approached again with a reminder by email. the average response rate was 41% between the six countries, with an average of 4 respondents each and 22 respondents in total. with the exception of the czech republic and portugal, all respondents followed the instructions and filled in the survey for all their respective governments. the inter-judge reliability, or the degree of agreement between the different respondents for each government, was calculated using cronbach’s alpha. the range of values calculated was 0.61-0.92, except for the lower cases of the persson government in sweden (0.47), the barroso and santana lopes governments in portugal (0.52 and 0.57, respectively) and all governments in hoff-elimari, bardi, matti and östman ● collective action problems 33 greece. it was found that the unreliability for the greek case was caused mainly by one respondent. once this data set was removed, all governments except for karamanlis had acceptable cronbach’s alpha values of more than 0.6. the karamanlis government, which remained at an astonishingly low 0.09, is therefore treated with caution, as discussed under results. results and discussion to investigate feedback loops between the value-priorities expressed through governmental policies and those expressed in public opinion, graphs were plotted showing net self-transcendence both for public opinion and governments. a high net self-transcendence score shows a tendency towards self-transcendence values whereas a low score shows a tendency towards self-enhancement values. the public opinion’s net self-transcendence score is tracked on the primary vertical axis to the left and the governments’ net self-transcendence score on the secondary vertical axis to the right (figures 4, 5, 7, 8, 9 and 10). as our primary interest is to explore whether changes to the value priorities reflected in a government’s policies are associated with later changes to values of the public, we focus on the extent to which the graphs show that a change to the governments’ scores precedes changes to that of the public’s values, and we discuss each of the six countries based on the graphs with ess and pss data. to further our analysis, we also complement our results with election outcomes and opinion polls as well as data from the ess on the political preferences of the respondents. spain figure 4: net self-transcendence for spain spain has experienced the highest increase in the ess net self-transcendence score. it appeared gradually and continuously between ess1 and ess5. the three spanish governments in office 2002-2011 also show the clearest differences in their value priorities: the conservative popular party (pp) governments under josé maría aznar (1996-2004) and mariano rajoy (2011-) both receive a net selftranscendence score about three points lower than the socialist psoe government european journal of government and economics 3(1) 34 led by josé luis rodríguez zapatero (2004-2011). there is large consensus amongst pss respondents in this assessment, with cronbach’s alpha of around 0.9 for all three governments. as the zapatero government entered office between ess1 and ess2 and stayed in office until after ess5, it means the interesting juncture to study is the change of government from aznar to zapatero, which resulted from the march 2004 general elections. the run-up to the elections shows that zapatero became prime minister by accident. the pp consistently led the opinion polls ahead of the 14 march elections (libertad digital, 2004). this changed with the 11 march 2004 madrid train bombings, which left 191 dead and 1,800 injured. the government quickly blamed the basque terrorist organisation eta, despite evidence to the contrary. the government was seen to have tried to manipulate facts and the pp was consequently defeated (gordon, 2004). as mentioned above, the zapatero government is seen to have been very clearly focused on self-transcendent political goals. the ess data suggest that this may have triggered a policy feedback loop confirmed by his re-election in 2008. why, then, did the feedback loop stop at the general elections in 2011, after which the pp returned to government with a majority in parliament? we believe this may be explained by the economic crisis in which spain has been engulfed since 2008. with the recession, unemployment has soared. in none of the worst crisis-ridden euro-zone countries – greece, ireland, italy, portugal and spain – have incumbents been re-elected after 2009. in other words, just like the exogenous event of the madrid bombings may have triggered a policy feedback loop that took the spanish public opinion’s net self-transcendence score on an upward trend, another exogenous event – the economic crisis – may have put a halt to it. thus, the spanish case suggests that, in the absence of large external shocks, governments may influence the value-priorities of the mass public rather than the other way round. ireland figure 5: net self-transcendence for ireland hoff-elimari, bardi, matti and östman ● collective action problems 35 the irish public opinion net self-transcendence score remains remarkably stable over most of the time period with relatively small oscillations up and down during the tenures of bertie ahern and brian cowen (both fianna fáil, centre-right). this is matched by a stable score for the same two governments in office until 2011. this picture changes dramatically with the last ess round (2011-2012) and the change of government after the 2011 elections won by enda kenny’s fine gael party (to the right of fianna fáil). irish public opinion as well as the government turned massively towards self-enhancement. judging from figure 5, both causal directions between public opinion and government value priorities are possible: ess4 was recorded 11 september 2009-12 march 2010, the elections took place on 25 february 2011, and ess5 was recorded 20 september 2011-31 january 2012. the drop in the public opinion net self-transcendence score between ess4 and ess5 could thus have occurred before or after the february 2011 elections. in any case, the fact that public opinion in ess5 mirrors the kenny government value priorities, indicate possible policy feedback. to compare the two potential causal directions between changes to value priorities of government and those of public opinion, we look at opinion polls on voting intentions between ess4 and ess5 (figure 6). figure 6: irish opinion polls from ess4 to 2011 election source: quinn, c. (2008) the polls show that kenny’s fine gael for most of the time period, including at the time ess4 was recorded, had a score that was at a level similar to their election result in february 2011. it also had a consistent political line. if there was any feedback between value priorities of government and those of public opinion, it is more likely that the value change in public opinion occurred after the elections, which would be in line with our hypothesis. the victory of fine gael may be explained by the general pattern since 2009 that incumbents lose elections in crisis-ridden euro-zone countries. european journal of government and economics 3(1) 36 greece figure 7: net self-transcendence for greece in greece, the public opinion net self-transcendence score experienced a dip between ess2 and ess4 (greece did not take part in ess3) followed by an astonishing increase between ess4 and ess5. the government scores are stable until george papandreou’s pasok (socialist) government 2009-2011, when it increases significantly and then drops even more with the care-taking government of lucas papademos. note that the kostas karamanlis score needs to be interpreted with caution: the participants in the pss differ widely in their assessment of his government. we focus our attention on the most abrupt and significant change to the public opinion net self-transcendence score, between ess4 and ess5. ess4 took place 15 july-20 november 2009. this was after pasok had won the european elections in june 2009, confirmed by the general election on 4 october 2009 after which karamanlis was replaced by papandreou. thus the public opinion net selftranscendence score at the time of the 2009 elections was rather contrary to the value priorities of papandreou. probably as a result of the deep economic crisis, the incumbent lost. the subsequent rise of the public opinion net self-transcendence score under papandreou provides some evidence favourable to our hypothesis that the government may influence public opinion more than the other way round. hoff-elimari, bardi, matti and östman ● collective action problems 37 portugal figure 8: net self-transcendence for portugal portugal experienced a dramatic downward shift in public opinion’s net selftranscendence score between ess1 and ess2. it then bounced back up by ess3, although it remained below the ess1 level. the dip corresponds to the josé manuel barroso government 2002-2004 (social democratic party, centre-right), followed by pedro santana lopes 2004-2005 (also social democratic party) after barroso had been appointed president of the european commission. santana lopes was defeated in the general elections of 20 february 2005 and was replaced by josé sócrates of the socialist party. the bounce between ess2 and ess3 corresponds to the first two years of the sócrates government. portugal was the first country in the euro-zone to introduce fiscal austerity measures, under the barroso government, after it had broken the eu stability and growth pact ceilings on public deficits. this policy was not reversed by santana lopes. it is hardly surprising, then, that both governments appear largely selfenhancement oriented in the pss (although there was significant disagreement amongst our respondents for both these governments, with cronbach’s alpha being 0.52 and 0.57 respectively). the sócrates government from 2005 received a far higher net self-transcendence score. as in the case of greece, the coincidence of elections and ess rounds makes it straightforward to test our hypothesis for the santana lopes/sócrates shift. ess2 was carried out from 15 october 2004 until 17 march 2005. in other words, about four of the survey’s five months of interviews took place in the run-up to the elections. the ess2 results show that the portuguese public opinion had turned strongly towards self-enhancement during the barroso and santana lopes tenures. sócrates’ victory seems more the result of a “sanction vote” against santana lopes, who carried the stigma of being a substitute for barroso, had not held any national electoral office and presided over an economic slowdown and increased unemployment. the subsequent jump in the public opinion net self-transcendence score between ess2 and ess3, during sócrates’ first two years in office, is in line with our hypothesis. it leaves unexplained the slight, but gradual, decrease in the public opinion’s net self-transcendence score between ess3 and ess5, while sócrates european journal of government and economics 3(1) 38 was still in office. this decrease was, however, far smaller than the changes between the three first ess rounds. sócrates’ subsequent defeat at anticipated 2011 elections and replacement by pedro passos coelho (whose government has a strong self-enhancement orientation) could give credence to the opposite to our hypothesis, in other words that a shift in public opinion’s value priorities helped trigger the election of passos coelho. but this change of government could equally be put down to the general pattern of losing incumbents we also see in other crisisridden euro-zone countries. of the three changes of political parties in government in the period studied, the two first (antonió guterres/barroso and santana lopes/sócrates) could be interpreted in line with a causal effect of public policy on public opinion and the last one in line with the opposite effect. czech republic figure 9: net self-transcendence for the czech republic the czech republic has experienced a steady decline of the public opinion's net self-transcendence score. this started with the single biggest change between the scores of two subsequent ess rounds: between ess1 (24 november 2002-9 march 2003) and ess2 (1 october 2004-13 december 2004), it declined by almost 0.5 points. between the two ess rounds, no general elections were held but stanislav gross succeeded vladimír špidla as prime minister in august 2004. they were both from the same political party (čssd, social-democrats), but the gross government received a much lower inferred net self-transcendence score than the špidla government. the trigger of the change of government was the european elections in june 2004 (czech statistical office, 2004). the čssd lost votes both to the centre-right ods party and to the communist party (ksčm), and ended up in fifth place. it should be noted that the rate of participation was very low (28.32%). špidla stepped down and was replaced by his deputy prime minister gross, who was seen as a youthful, charismatic figure to reinvigorate the čssd. however, his premiership was quickly tainted by cronyism and corruption claims (the economist, 2005), in contrast to the dull but honest reputation of špidla. gross was forced to resign in april 2005. hoff-elimari, bardi, matti and östman ● collective action problems 39 it is difficult to find indicators that would support our hypothesis, given the large change of the public opinion’s score but short period of time between gross’ entry into office in august 2004 and the ess2 interviews (october-december 2004). it is easier to find indicators to test the opposite hypothesis: that shifts in value priorities of public opinion drove the changes to value priorities of government. an indicator would be if the rejection of the čssd were confirmed by a general move in ess2 to the political right, as the political right is associated with selfenhancement in the czech republic. ess data show that this was not the case between ess1 and ess2. it is thus possible that other factors, such as the controversies around gross and the cynicism about politics that he inspired, contributed to the change in the public opinion value-priorities between ess1 and ess2. it is also clear that prior to gross’ government, there was already a potential for cynicism building up, as the špidla government had proven to be a fractious coalition and the prime minister was unable to carry out many of his pledges. to sum up, there is no clear evidence for either causal relationship between shifts in the value priorities of governments and those of the public opinion for this country. during the rest of the time period, there was a slower but steady decline in the public opinion’s net self-transcendence score, accompanied by governments whose score remained relatively low and stable until 2010, when petr nečas took over as prime minister. its net self-transcendence score is significantly lower than the preceding ones. however, with no clear trend breaks, neither in the ess data nor in the government scores, we avoid comparing hypothetical causalities for the developments after the gross government. sweden figure 10: net self-transcendence for sweden sweden is one of the countries with the highest public opinion net selftranscendence score throughout all ess rounds. the score was stable until a significant increase appeared between ess4 and ess5. the only change of prime minister occurred in 2006, when the social-democrat government led by göran european journal of government and economics 3(1) 40 persson was defeated in the general elections by a centre-right coalition led by fredrik reinfeldt of the conservative party (moderaterna). the pss in sweden only comprised two respondents. cronbach’s alpha is satisfactory for reinfeldt (0.73) but not for persson (0.47), which means its score should be interpreted with caution. however, the large difference between the two governments’ score (more than 2.5 points) instills confidence that the reinfeldt government’s net selftranscendence score is lower than that of its predecessor. if there were any causal links between shifts in value priorities of public opinion and those of the government, a shift in public opinion should have occurred either between ess2 and ess3 (which was conducted from 21 september 2006 to 3 february 2007, immediately after the september 2006 elections) or between ess3 and ess4 (which was conducted after two years of the reinfeldt government). neither of them occurred. other factors have been at play to increase the public opinion net self-transcendence score between ess4 (2008-9) and ess5 (20102011). thus, in the swedish case we do not find any clear evidence for a public policy-public opinion effect. conclusions in three (spain, greece and ireland) of the six eu member states with the highest changes to public opinion net self-transcendence scores, findings are in line with the idea that governments’ value priorities as expressed through public policy may predict – in the same direction – self-transcendence values of public opinion. the impact of such possible influence on re-election is, however, secondary to exogenous shocks, such as economic downturns or trust-breaking revelations of government misdoings. the combination of these factors – exogenous shocks and government’s influence on public opinion – can produce contrasted trends, as exemplified by greece and ireland: an acute economic crisis left incumbents defeated in elections in 2009 and 2011 respectively; the new greek government had more self-transcendent political goals compared to its predecessor, whereas the new irish government had more self-enhancement oriented political goals. in the ess round carried out after these elections, public opinion had moved in the direction indicated by the respective government changes. in two cases (czech republic and portugal) there is support for feedback loops between value priorities expressed in government policies and public opinion, but the data do not enable us to disentangle the direction of effects in the feedback loop (czech republic), or they point to effects in both directions (portugal). the czech case is, however, interesting by the fact that it is the country with the highest increase in the purchasing power standard per inhabitant and the only one with a fall in the unemployment rate throughout the period of all the six countries studied, yet with the biggest decrease in the public opinion net self-transcendence score. it confirms the insight from the contrasting cases of ireland and greece that economic trends do not determine the direction of change in public opinion value priorities. in the last case (sweden), we have not found support for any influence between government and public opinion’s value priorities. this paper is intended merely as a preliminary attempt to investigate the existence and possible directions of effects between value priorities of the government and those of public opinion, the confirmation of which would require, inter alia: inclusion of the other ess countries (in particular to compare with countries with small variations to public opinion net self-transcendence scores – specifically, slovenia, netherlands, great britain, denmark, switzerland and belgium)  inclusion of feedback loops between governments and public opinion on the value dimension openness to change vs. conservation hoff-elimari, bardi, matti and östman ● collective action problems 41  better validation of the pss design and a higher number of respondents in each country  more objective measures of government's value priorities  quantitative analysis with control factors such as economic growth or unemployment  inclusion of ess6 data (2012-2013)  systematic consideration of socio-economic variables with these caveats, we draw the cautious conclusion that there are indeed possible feedback loops between the value priorities of governments and of public opinion, and that the values expressed by governments may influence value priorities of the public more than the other way round. this can have far-reaching implications for political strategies to solve bigger-than-self problems such as child poverty or climate change. appeals to economic growth as an end in itself may undermine voters’ willingness to finance welfare services to fight, for instance, child poverty. arguing for investments in renewable energy primarily as a competitive necessity to prevent trading partners from “catching” future jobs could reduce voters’ support for strong climate change policies in general. if our conclusions are confirmed by others, it will also give more confidence to politicians who want to focus on bigger-than-self problems. the politicians’ influence is not limited to the direct effect of policies adopted under their tenure; their rhetoric and their policies can make citizens more supportive of action to tackle such problems – even beyond the next election. references altemeyer, bob (1998) 'the other "authoritarian personality"' in mark p. zanna (ed.) advances in experimental social psychology. san diego, ca: academic, pp. 47-92. amara, roy c. (1972) 'toward a framework for national goals and policy research', policy sciences 3(1): 59-69. bardi, anat and lilach sagiv (2003) 'the eu and israel: comparison of cultures and implications' in klaus boehnke (ed.) israel and europe: a complex relationship. wiesbaden: deutscher universitäts-verlag, pp. 13-26. bardi, anat and robin goodwin, (2011) 'the dual route to value change: individual processes and cultural moderators', journal of cross-cultural psychology 42(2): 271-287. bardi, anat, kathryn e. buchanan, robin goodwin, letitia slabu and mark robinson (2014) 'value stability and change during self-chosen life transitions: self-selection versus socialization effects', journal of personality and social psychology 106(1): 131-147. barnea, marina f. and schwartz, shalom h. (1998) 'values and voting', political psychology 19(1): 17-39. brewer, paul r. and kimberly gross (2005) 'values, framing, and citizens’ thoughts about policy issues: effects on content and quantity', political psychology 26(6): 929-948. burstein, paul (2003) 'the impact of public opinion on public policy: a review and an agenda', political studies quarterly 56(1): 29-40. caprara, gian vittorio, shalom schwartz, cristina capanna, michele vecchione and claudio barbaranelli (2006) 'personality and politics: values, traits and political choice', political psychology 27(1): 1-28. european journal of government and economics 3(1) 42 cochran, charles and eloise f. malone (1995) public policy. new york: mcgrawhill. converse, philip (1964). 'the nature of belief systems in mass publics', in david apter (ed.) ideology and discontent. new york: free press, pp. 206-261. crompton, tom (2010). common cause: the case for working with our cultural values. wwf-uk. url (consulted april 2014): http://assets.wwf.org.uk/downloads/common_cause_report.pdf czech statistical office (2004). url (consulted april 2014): http://www.volby.cz/pls/ep2004/ep11?xjazyk=en dahl, robert a. (1989). democracy and its critics. new haven, ct: yale university press. davidov, eldad, peter schmidt and shalom h. schwartz (2008) 'bringing values back in. the adequacy of the european social survey to measure values in 20 countries', public opinion quarterly 72(3): 420-445. de groot, judith i. m. and linda steg (2008) 'value orientations to explain beliefs related to environmental significant behavior: how to measure egoistic, altruistic, and biospheric value orientations', environment and behavior 40(3): 330-354. dror, yehezkel (1973) public policy reexamined. london: leonard hill books. duit, andreas (2011) 'patterns of environmental collective action: some crossnational findings', political studies 59 (4): 900-920. easton, david (1953) the political system. new york: knopf. the economist (2005, 3-9 march) gross misdemeanours. url (consulted april 2014): http://www.economist.com/node/3723535 european social survey round 5 data (2010) data file edition 2.0. norwegian social science data services, norway data archive and distributor of ess data. european social survey cumulative file, ess 1-4 (2011) data file edition 1.0. norwegian social science data services, norway data archive and distributor of ess data. feldman, stanley (1988) 'structure and consistency in public opinion: the role of core beliefs and values', american journal of political science 32(2): 416-440. fiorina, morris p. (1981). retrospective voting in american national elections. new haven, ct: yale university press. gilbert, daniel t., susan t. fiske and gardner lindzey (1998) the handbook of social psychology. oxford: oxford university press. glynn, carroll j., susan herbst, garrett j. o’keefe and robert y. shapiro (1999) public opinion. boulder, co: westview press. gordon, philip h. (2004) madrid bombings and u.s. policy. testimony to the senate committee on foreign relations. url (consulted april 2014): http://www.brookings.edu/research/testimony/2004/03/31europe-gordon hayek, friedrich a. (1960) the constitution of liberty. chicago, il: university of chicago press. hjern, benny (1987) 'policy analysis: an implementation approach', paper presented at the annual meeting of the american political science association, 3-6 september 1987, chicago. hodge, ian and sandra mcnally (2000) 'wetland restoration, collective action and the role of water management institutions', ecological economics 35(1): 107-118. hoff-elimari, bardi, matti and östman ● collective action problems 43 holmes, tim, elena blackmore, richard hawkins and tom wakeford (2011) the common cause handbook. public interest research centre. url (consulted april 2014): http://valuesandframes.org hofstede, geert (1980) culture’s consequences: international differences in workrelated values. beverly hills, ca: sage. hurwitz, jon and mark peffley (1987) 'how are foreign policy attitudes structured? a hierarchical model', american political science review 81(4): 1099-1120. jacobs, lawrence r. and robert y. shapiro (2000) politicians don't pander: political manipulation and the loss of democratic responsiveness. chicago, il: university of chicago press. jacoby, william (2006) 'value choice and american public opinion', american journal of political science 50(3): 706-723. jenkins-smith, hank and paul sabatier (1993) 'methodological appendix: measuring longitudinal change in elite beliefs using content analysis of public documents', in paul sabatier and hank jenkins-smith (eds) policy change and learning: an advocacy coalition approach. boulder, co: westview press, pp. 237-276. kingdon, john w. (1995) agendas, alternatives and public policies (2nd edition). new york: harpercollins. libertad digital (2004) encuestas y sondeos. url (consulted april 2014): http://www.libertaddigital.com/suplementos/elecciones2004/encuestas.html mackuen, michael b., robert s. erikson and james a. stimson (1992). 'peasants or bankers? the american electorate and the us economy', american political science review 86(3): 597-611. ostrom, elinor (2000) 'crowding out citizenship', scandinavian political studies 23(1): 3-16. page, benjamin i. and robert y. shapiro (1983) 'effects of public opinion on policy', american political science review 77(1): 175-190. pierson, paul (1993) 'when effect becomes cause: policy feedback and political change', world politics 45(4): 595-628. premfors, rune (1989) policyanalys: kunskap, praktik och etik i offentlig verksamhet. lund: studentlitteratur. quinn, ciaran (2008) na pobalbhreitheanna is deireanaí. url (consulted july 2013): http://www.guthanphobail.net/pobalbhreitheanna.htm rasinski, kenneth r. (1987) 'what’s fair is fair—or is it? public values and conflicting views about justice', journal of personality and social psychology 53(1): 201–211. rein, martin and donald schön (1993) 'reframing policy discourse', in frank fischer and john forester (eds) the argumentative turn in policy analysis and planning. durham, nc: duke university press, pp. 145-166. rohan, meg j. and mark p. zanna (1996) 'value transmissions in families', in clive seligman, james m. olson and mark p. zanna (eds) the psychology of values: the ontario symposium, vol. 8. new jersey: lawrence erlbaum associates publishers, pp. 253-76. rohan, meg j. and mark p. zanna (1998) 'the "products of socialization": a discussion of self-regulatory strategies and value systems', in joel cooper and john m. darley (eds) attribution and social interaction: the legacy of edward e. jones. washington dc: american psychological association, pp. 279-292. european journal of government and economics 3(1) 44 rokeach, milton (1973) the nature of human values. new york, ny: the free press. sabatier, paul a. and hank c. jenkins-smith (1999) 'the advocacy coalition framework: an assessment', in paul a. sabatier (ed), theories of the policy process. boulder, co: westview press, pp. 117-166. sagiv, lilach and shalom h. schwartz (1995) 'value priorities and readiness for out-group social contact', journal of personality and social psychology 69(3): 437448. schattschneider, elmer e. (1935) politics, pressures and the tariff: a study of free private enterprise in pressure politics, as shown in the 1929-1930 revision of the tariff. new york: prentice-hall. schultz p. wesley, valdiney v. gouveia, linda d. cameron, geetika tankha, peter schmuck and marek franěk (2005) 'values and their relationship to environmental concern and conservation behavior', journal of cross-cultural psychology 36(4): 457-475. schwartz, shalom h. (1992) 'universals in the content and structure of values: theory and empirical tests in 20 countries', in mark p. zanna (ed) advances in experimental social psychology (vol. 25). new york: academic press, pp. 1–65. schwartz, shalom h. (1994) 'beyond individualism-collectivism: new cultural dimensions of values', in uichol kim, harry c. triandis, cigdem kagitcibasi, sangchin choi and gene yoon (eds) individualism and collectivism: theory, method, and applications. london: sage, pp. 85-119. schwartz, shalom h. (2006) basic human values: an overview. jerusalem: the hebrew university of jerusalem. schwartz, shalom h. (2007) 'a theory of cultural value orientations: explication and applications', in yilmaz r. esmer and thorleif petterson (eds) measuring and mapping cultures: 25 years of comparative value surveys. leiden: brill, pp. 3378. schwartz, shalom h. (2011) 'values: individual and cultural', in fons j. r. van de vijver, athanasios chasiotis and seger m. breugelmans (eds) fundamental questions in cross-cultural psychology. cambridge, ma: cambridge university press, pp. 463-493. schwartz, shalom h. and anat bardi (1997) 'influences of adaptation to communist rule on value priorities in eastern europe', political psychology 18(2): 385-410. skocpol, theda (1992) protecting soldiers and mothers: the political origins of social policy in the united states. cambridge, ma: harvard university press. soroka, stuart and christopher wlezien (2004) 'opinion representation and policy feedback: canada in comparative perspective', canadian journal of political science 37(3): 531-559. soroka, stuart and christopher wlezien (2010) degrees of democracy. cambridge: cambridge university press. soss, joe (1999) 'lessons of welfare: policy design, political learning, and political action', american political science review 93(2): 363-380. soss, joe and sanford f. schram (2007) 'a public transformed? welfare reform as policy feedback', american political science review 101(1): 111-127. stern, paul c. and thomas dietz (1994) 'the value basis of environmental concern', journal of social issues 50(3): 65–84. stern, paul c., thomas dietz, linda kalof and gregory a. guagnano (1995) 'values, beliefs, and proenvironmental action: attitude formation toward hoff-elimari, bardi, matti and östman ● collective action problems 45 emergent attitude objects', journal of applied social psychology 25(18): 16111636. stewart, jenny (2009) public policy values. basingstoke: palgrave macmillan. stimson, james a., michael b. mackuen and robert s. eriksson (1995) 'dynamic representation', american political science review 89(3): 543-565. svallfors, stefan (2010) 'policy feedback, generational replacement, and attitudes to state intervention: eastern and western germany, 1990–2006', european political science review 2(1): 119-135. tetlock, philip e., randall s. peterson and jennifer s. lerner (1996) 'revising the value pluralism model: incorporating social content and context postulates', in clive seligman, james m. olson and mark p. zanna (eds) the ontario symposium of values, vol. 8. new jersey: lawrence erlbaum associates inc., pp. 25-47. thacher, david and martin rein (2004) 'managing value conflict in public policy', governance: an international journal of policy, administration, and institutions 17(4): 457-486. wallner, jennifer (2008) 'legitimacy and public policy: seeing beyond effectiveness, efficiency, and performance', the policy studies journal 36(3): 421443. wlezien, christopher (1995) 'the public as thermostat: dynamics of preferences for spending', american journal of political science 39(4) 981-1000. wlezien, christopher (1996) 'dynamics of representation: the case of us spending on defence', british journal of political science 26(1): 81-103. wlezien, christopher (2004) 'patterns of representation: dynamics of public preferences and policy', journal of politics 66(1): 1-24. zaller, john r. (1992) the nature and origins of mass opinion. new york: cambridge university press. european journal of government and economics 3(1) 46 appendix items of the political scientists’ survey (pss) and correspondence with schwartz value types government priority corresponding pvq items in ess inferred corresponding schwartz value type 1 economic growth it is important to her/him to be rich. she/he wants to have a lot of money and expensive things. achievement 2 publicly funded services (e.g. health, pensions, education and transport funded through taxes and compulsory social security contributions) she/he thinks it is important that every person in the world should be treated equally. she/he believes everyone should have equal opportunities in life. universalism 3 making domestic companies more competitive against foreign ones being very successful is important to her/him. she/he hopes people will recognise her/his achievements. achievement 4 respect for authority it is important to her/him to get respect from others. she/he wants people to do what she/he says. power 5 fight corruption it is important to her/him to be loyal to her/his friends. she/he wants to devote herself/himself to people close to her/him. benevolence 6 liberalisation of regulated sectors being very successful is important to her/him. she/he hopes people will recognise her/his achievements. achievement 7 redistribution (from richer to poorer households) it's very important to her/him to help the people around her/him. she/he wants to care for their well-being. benevolence 8 tolerance (for different lifestyles, appearances and beliefs) it is important to her/him to listen to people who are different from her/him. even when she/he disagrees with them, she/he still wants to understand them. universalism 9 reducing the top marginal income tax rate it's important to her/him to show her/his abilities. she/he wants people to admire what she/he does. achievement 10 helping other countries in need and showing solidarity with them she/he thinks it is important that every person in the world should be treated equally. she/he believes everyone should have equal opportunities in life. universalism 11 prestige of the country it is important to her/him to get respect from others. she/he wants people to do what she/he says. power 12 protection of the environment she/he strongly believes that people should care for nature. looking after the environment is important to her/him. universalism processing of responses responses were coded numerically as follows: option value contrary to goals: -2 indifferent: 0 goal unless public opposition: 1 one of priority goals: 2 the most important goal: 3 more options with positive than negative values were given as we expected more answers with positive values and hence it was reasonable to allow for more nuances to express these. this was confirmed by the distribution of answers. this is also why the only option with a negative value was set at -2 to reflect the fact that the options with positive values ranged from 1 to 3. can exit prizes induce lame ducks to shirk less? experimental evidence european journal of government and economics volume 1, number 2 (december 2012) issn: 2254-7088 106 can exit prizes induce lame ducks to shirk less? experimental evidence leif helland, bi norwegian business school, norway* jon hovi, university of oslo and cicero, norway lars monkerud, bi norwegian business school, norway abstract elected representatives serving their final period face only weak incentives to provide costly effort. however, overlapping generations (olg) models suggest that exit prizes sustained by trigger strategies can induce representatives in their final period to provide such effort. we evaluate this hypothesis using a simple olg public good experiment, the central treatment being whether exit prizes are permitted. we find that a significantly higher number of subjects in their final period contribute when exit prizes are permitted. however, this result does not originate from use of trigger strategies. more likely explanations include gift-exchange and focal-point effects. jel classification c7; c9; h4 keywords overlapping generations; last period effects; legislatures * address for correspondence: leif.helland@bi.no. european journal of government and economics 1(2) 107 introduction legislative parties consist of overlapping generations of elected representatives. having finite biological and political lives, such representatives eventually reach their final legislative period. when a representative realises that she has reached her final period, she becomes a lame duck. we use the term lame duck liberally, meaning representatives that know they are in their final period. in a strict sense the term lame duck characterizes a representative in the time between electoral defeat and exit from the legislature. in the us congress lame duck periods are fairly short; they last from the announcement of electoral loss until replacement by a winner a few weeks later. in parliamentary systems lame duck periods may last considerably longer: from when a representative is denied re-nomination prior to election until replacement takes place several months later. of course, a representative might be in her last period without recognizing it; for example, due to sudden and unexpected death or electoral defeat. in such cases she is not a lame duck, and does not face special incentives problems. since in this study we use an experimental setup in which reelection is exogenously given, a subject’s lame duck period unambiguously corresponds to the final period in which it makes a decision. re-election concerns can then no longer discipline her actions. this creates a tension; while a party's remaining (and future) representatives derive benefits from continued effort by lame ducks, a lame duck motivated by self interest will decline to provide costly effort unless she is incentivized to do so. whereas only few studies have focused on final-period behaviour in assemblies outside the united states,1 a voluminous body of research has considered finalperiod behavior in the us congress.2 these us studies have provided mixed results that to some extent contradict predictions derived from agency models. in particular, most studies have found some degree of final-period attendance shirking, but only scant evidence of deviant voting (ideological shirking). scholars often ascribe the latter finding to selection bias; only candidates with preferences akin to those of their constituencies will likely be elected. it is less clear why constituencies apparently do not select representatives that also continue to attend in their final period (rothenberg and sanders 2000).3 the choice of operational definitions impact on findings and may help explain the mixed results; for example, scholars differ over questions such as how ideological deviations should be measured and when the final period begins. this article serves a three-fold purpose. first, few previous studies have considered the important question of how political parties might use attractive retreat positions and other post-office perks to influence final-period behavior. we contribute towards filling this gap. second, we do so by using a novel experimental approach. we believe that the study of final-period behavior can profit from experimental control, because such control allows for explicit regulation of rewards, containment of reputational concerns to the legislative game, unambiguous separation of the final period from preceding periods, and elimination of selection bias. although many previous public goods experiments have used automatons, our approach is novel in that the automatons mimic an indefinite time horizon in the 1 notable exceptions include besley's and larcinese's (2011) study of attendance shirking in the british parliament, as well as lien's (2008) study of attendance shirking in the norwegian parliament. 2 bender and lott (1996) provide a critical review of the field. lott (1990) deals explicitly with postelective office employment. more recent contributions include rothenberg and sanders (2000), parker and powers (2002) and parker (2004). 3 our research is related to the literature on end-game effects. see brañas-garza and espinosa (2011) for many references to this literature. european journal of government and economics 1(2) 108 laboratory. finally, underlying many previous studies of final-period behavior is alchian's and demetz's (1972) framework (cf. crain, leavens and tollison 1986), which treats incentive schemes as exogenously given. taking the common view that control of procedures and institutions constitutes a defining characteristic of majority assemblies, this is clearly unsatisfactory (krehbiel 1990, shepsle 1986). our experimental design allows incentive schemes to be determined endogenously through majority choice. in the public goods olg model, sufficiently large exit prizes supported by trigger strategies can sustain a fully cooperative equilibrium in which even lame ducks contribute.4 the absence of exit prizes, in contrast, means no equilibrium exists in which lame ducks contribute. however, partially cooperative equilibria, in which all other representatives contribute, may still exist (shepsle and nalebuff 1990, cremer 1992, hammond 1975). with or without exit prizes, other equilibria also exist. in particular, playing the stage-game equilibrium (in which no player contributes) in every period is always an equilibrium.5 to fix ideas, one may think of exit prizes as attractive retreat positions. examples include a position as director or board member of a public company, an ambassador post, a leading position in a national or sub-national administration. related options include campaign support (financing and endorsement) for a top international position. political parties commonly award such positions to retired top politicians.6 we examine the impact of exit prizes in a simple olg experiment. our treatment is whether exit prizes are permitted. we treat electoral support as exogenously given, and representatives are re-elected a fixed number of times.7 in each period subjects choose simultaneously whether to contribute to the provision of a public good.8 we may think of such contributions as costly effort needed for the production of constituency services.9 as a simplifying assumption we let the quantity of the public good increase linearly in the number of contributions. monetary payoffs reflect the assumption that representatives value the public good, but dislike effort. by design, the exit prize 4 salant (1991:255) suggests, but does not analyze, the effect of exit prizes in the generic two-player public goods olg game. exit prizes in a purely distributive olg game are analyzed in alesina & spear (1988). in their model electoral competition is endogenous. there is a growing literature on the distribution of agenda setter rights and other valuable positions in legislative assemblies with overlapping generations of legislators (muthoo and shepsle 2007, 2004; shepsle, dickson and houweling 2002; diermeir 1995). the incentive schemes considered in this literature deviate slightly from ours, in that members gradually obtain more valuable positions in equilibrium (a "seniority system"). in these models (as in ours) electoral competition is exogenous. the impact of exit prizes is not considered. 5 kandori 1992 characterizes folk theorems for olg games with varying information about the history of the game. 6 political scientists debate whether attractive retreat positions serve primarily as rewards for services rendered, or as instruments for cementing partisan power in the longer run, referred to as "patronage" (see for instance pappas 2009; and kopecký and scherlis 2008, with references). we do not see a fundamental conflict here. as long as attractive retreat positions remain scarce, party leaders can use them both to discipline current legislators and to entrench power in the longer run. and even if such positions were to be used mainly for long-run entrenchment, party leaders selecting among otherwise comparable candidates should avoid candidates with a history of shirking. 7 this is clearly a simplifying assumption. it may well be that behavior would change in the experiment if re-election was endogenous (and linked to individual contributions or aggregate production). exogenous re-election allow us to focus more clearly on our main question; can exit prizes incentivize lame ducks. 8 this binary choice is invoked as a simplifying assumption; alternatively, we could have let subjects contribute part or all of a given endowment. 9 shepsle and nalebuff (1990) provide an alternative interpretation, in which aggregate efforts produce "power". european journal of government and economics 1(2) 109 offsets the lame duck’s cost of contributing. moreover, awarding the prize is cost free for remaining subjects.10 few previous experiments addressing the ability of trigger strategies to support high contribution levels in an olg public-goods game have been carried out. notable exceptions include van der heijden et al. (1998) and offerman, potters and verbon (2001). both of these experiments consider a game with two players per period, in which only the newborn player takes an action. in contrast, we consider a strategically richer olg game with three players per period, all of whom take actions. in keeping with the two mentioned studies, the subjects in our experiment face a binary choice (contribute vs. not contribute). van der heijden et al. (1998) study the impact of the game's information structure on contribution levels and on the variability of contributions. they find that knowledge of the game's history explains neither the level of contributions nor their variability. offerman, potters and verbon (2001) consider the impact of recommending the use of a trigger strategy. they find that such a recommendation increases the contribution level and causes many subjects to use trigger-like strategies. however, because of a remaining group of unconditional defectors, the fully cooperative outcome fails to materialize. scholars continue to discuss how one might best mimic an indefinite horizon in olg experiments. van der heijden et al. (1998) use a fixed and publicly known last period. because of this the cooperative outcome cannot be sustained as an equilibrium, which implies serious problems for studying the impact of trigger strategies. offerman, potters and verbon (2001) let subjects play a single olg game ("no reincarnation") with a constant and publicly known periodic stopprobability. as they note, with this procedure the number of subjects in the lab imposes a publicly known upper bound on the number of periods in the game. therefore, the game is not indefinitely repeated in a proper sense. olg experiments conducted in the context of monetary economics rely on a third approach (lim et al. 1994, marimon and sunder 1993), where subjects enter repeatedly in a longer game ("reincarnation"). the reincarnation approach entails that the experimental game becomes much more complicated than the olg models that motivated it (olg models do not admit "reincarnation"). we use a novel design in which automatons replace one subject in the penultimate period and two subjects in the ultimate period of a five-period game (see table 1).11 the automatons are programmed to follow a trigger strategy. this design solves several problems encountered in previous olg experiments. it also reduces the set of equilibria an attractive feature for our purposes. the reader might object that the automatons provide a powerful focal point (schelling 1960) that will likely impact on behavior. our response is two-fold. first, previous research shows that providing a focal point in the form of a strategy recommendation fails to bring out clear trigger-like behavior in olg public-goods experiments, and our own results suggest that the (even stronger) focal point provided by our automatons also fails to generate trigger-like behavior. second, while no-one has thus far come up with a procedure capable of perfectly mimicking an indefinite horizon in finite olg 10 we have resisted the temptation to motivate our experiment more broadly, say, by referring to a richer array of organizations with end-period challenges. in most organizations awarding a bonus for good behavior entails costs for the remaining players. legislatures are special in this regard. remaining legislators are not competing for the positions (= bonuses) concerned, so they do not incur a direct cost by awarding such a position to an outgoing representative. in addition, awarding a position to an outgoing representative (rather than to an outside competitor) entails only modest audience costs. retired legislators will likely be as competent as outside competitors for such positions. furthermore, the positions in question are usually long term, so current legislators will unlikely compete for them in the near future. interesting discussions of end-game effects in bureaucracies are provided by horn (1995). 11 increasing the number of periods further (say, to ten) would either reduce the number of independent observations or require a considerably larger number of subjects. european journal of government and economics 1(2) 110 experiments, our automatons provide a nice and novel way of circumventing this serious problem. we describe our automatons in detail in the section on experimental design. our research question is: do exit prizes induce lame ducks to contribute to the public good? we find that a significantly higher number of outgoing subjects contribute in the treatment with exit prizes than in the baseline treatment without exit prizes. however, our results suggest that this result does not derive from the use of trigger strategies. the next section depicts the olg public-good model underlying our experiment. the third section outlines our experimental design. the fourth section contains descriptive statistics. the fifth section presents the main results. finally, the sixth section concludes. model consider a t-person overlapping generations game under the standard assumptions of rational and self-regarding players. each period corresponds to a stage game with prisoners dilemma (pd) payoffs, in which n = 3 players move simultaneously. information is complete and (almost) perfect.12 it is common knowledge that the game ends in period t. in period t the stage game is played by two automatons and a human; in period t-1 the stage game is played by two humans and an automaton. in periods t = 1, 2,..., t-2 the stage game is played by three humans. a player is either in position a, b or c. the player in position a plays her first stage game, the player in position b plays her second (and next last) stage game, while the player in position c plays her last stage game. the automaton in t-1 plays in position a, while the two automatons in period t play in positions a and b, respectively. no prize the material payoff of player i in stage game t is:    n j jtitit zddzv 1 )1(  (1) in equation 1, z > 0 denotes player i's (exogenously given) endowment (players are assumed to have identical endowments). dit is a dummy that takes the value 1 if i contributes to the public good in stage t, and 0 otherwise. we assume that the material payoffs satisfy (1/n) < β < 1. this means that the payoffs conform to a prisoners dilemma game. since β < 1, setting dit = 0 is a dominant strategy in the stage game. the unique stage game equilibrium is thus dit = 0 ∀ i є t. since β > (1/n), dit = 1 ∀ i є t pareto-dominates the stage game equilibrium. let the state rt be: dit’ = 1 for i = (a, b) in all periods t′< t. a "grim trigger" strategy for the game can now be defined as follows: set dit = 1 if in position a or b and state is rt and set dit = 0 otherwise. the automatons used in the no-prize treatment were programmed to follow this grim trigger. on the equilibrium path of the grim trigger, a player in position a nets (6β + 1)z; a player in position b nets (4β + 1)z; and a player in position c nets (2β + 1)z. by a single deviation the player in a nets (β + 3)z; the player in b nets (β + 2)z; while the player in c nets 3βz. it follows that the player in position a cannot profit by a single 12 almost perfect information means that the history up to period t, but not including period t, is common knowledge. european journal of government and economics 1(2) 111 deviation from the equilibrium path of the grim trigger (by not contributing) if β ≥ (2/5). similarly, the player in position b cannot profit by such a deviation if β ≥ (1/3). finally, the player in position c cannot profit by deviating from the equilibrium path (by contributing) if β < 1. once the punishment path has been triggered, no player can profit by a single deviation from this path, since such a deviation would only reduce her payoff by (1 β)z. it follows that grim trigger is subgame perfect if β ≥ (1/3). given the way the automatons are programmed, only one other equilibrium exists. in this equilibrium all players set dit = 0. prize consider now the game with exit prizes. this game differs from the previous game in only one respect. after the players have made their contribution decisions and these decisions have been announced, players in positions a and b vote on whether to award a prize θz, with θ > 0, to the player in position c. the prize is awarded only if both of the players in positions a and b vote "yes". the material payoff to players in positions a and b is identical to the one described in equation (1). the material payoff to the player in position c is: zevw titit  (2) in equation (2) et is a dummy that indexes the outcome of the vote in stage game t. et takes the value 1 if both of the players in a and b vote "yes", and 0 otherwise. let state st be: dit’ = 1 for i = (a,b,c) and et’ = 1, in all periods t′< t. a grim trigger for the game with prize is defined as follows: if (a) in state st set dit = 1; (b) in state st, in position a or b, and dit+1 = 1 for i = (a,b,c), vote "yes". otherwise set dit =0 and do not vote "yes". as noted, the automatons in our prize treatment were programmed to follow this grim trigger. on the grim-trigger equilibrium path the player in position a nets (9β+θ)z; the player in b nets (6β+θ)z; while the player in c nets (3β+θ)z. consider first a single deviation dit = 0 from the equilibrium path of the grim trigger. such a deviation nets (2β+1)z for the player in position c; it nets (2β+2)z for the player in position b; and it nets (2β+3)z for the player in position a. so, the player in position c has no incentive to deviate if β ≥ (1-θ), while the player in position b has no incentive to deviate if β ≥ ((2-θ)/4) and the player in position a has no incentive to deviate if β ≥ ((3-θ)/7). if θ ≤ (2/3), then (1-θ) ≥ ((2-θ)/4) ≥ ((3-θ)/7). this means that if θ ≤ (2/3) and the player in position c has no incentive to deviate by playing not contribute, then nor will players in positions b or a have an incentive to deviate. next, consider the possibility of a single deviation from the equilibrium path of the grim trigger consisting of players a or b voting "no" to awarding the prize. by voting "no" a player in position b nets z, which is clearly less than what he nets if he deviates by setting dit = 0. by voting "no", a player in a nets 2z, which is clearly less than what he nets if he deviates by setting dit’ = 1. thus, players in positions a and b (who have a choice as to what kind of deviation to perform), will never deviate by voting "no" while continuing to contribute. finally, consider a single deviation from the punishment path of grim trigger, consisting of dit = 1. a player in position c nets βz by deviating, while he nets z if he abstains. a player in position b nets (β+1)z by deviating, while he nets 2z if he abstains. finally, a player in position a nets (β+2)z by deviating, while he nets 3z if he abstains. clearly, no player has an incentive to deviate from the punishment path of grim trigger by setting dit’ =1. the remaining question is whether players in positions a or b can profit by deviating from the punishment path of the grim trigger by voting "yes". the answer is clearly no. a single "yes" is insufficient to change the outcome from no-prize to european journal of government and economics 1(2) 112 prize, so the deviation cannot be profitable. because voting is cost free, players in a and b do not have a strict incentive to coordinate on a "no" vote. on the other hand, neither do they have a strict incentive to coordinate on a "yes" vote. summing up, in the prize treatment the grim trigger is subgame perfect if θ≤(2/3) and β≥(1-θ). given the way the automatons are programmed, there is only one other subgame-perfect equilibrium. in this equilibrium players in positions a, b and c always set dit =0 and never vote "yes". in the grim-trigger equilibrium, even a single defection will effectively end cooperation and will thus likely have a definitive effect on the full behavioral path of the group. moreover, players in positions a and b will have a strong incentive to vote “yes” as long as the players stay on the equilibrium path. design in our experimental design t=5, n=3, z=100 and β=0.6. this applied both to the treatment with prize and to the baseline treatment without prize. in the treatment with prize, θ=0.5. we specified payoffs in an "experimental currency" called schillings. every contribution (whether made by a subject or by an automaton) increased the sum of payoffs by 180 schillings, which were distributed equally among the three subjects who were active players in that period (60 schillings per subject), irrespective of the subjects' own decisions. in the prize treatment, lame ducks that were awarded a prize received an additional 50 schillings. we communicated the resulting payoff structure to the subjects via the instructions (available upon request). we conducted both the prize treatment and the baseline no-prize treatment with three subjects in periods 1, 2 and 3, two subjects and one automaton in period 4, and one subject and two automatons in period 5 (the final period). a game required 5 subjects altogether (cf. table 1). we played four games of the no-prize treatment, and four games of the prize treatment. no subject played more than one game, so this required 40 subjects; 20 subjects in the baseline no-prize treatment, and 20 subjects in the prize treatment. to expand the number of observations, we repeated this basic design with 40 additional subjects. the required 80 subjects were recruited (by e-mail) from undergraduate classes at the bi norwegian business school.13 since the lab had a capacity of 20 subjects we conducted four sessions, two with the no-prize treatment, and two with the prize treatment. the experiment was conducted on two separate days. each day we ran one session without prize and one with prize (in that order). table 1: structure of interaction position a position b position c period 1 subject iii subject ii subject i period 2 subject iv subject iii subject ii period 3 subject v subject iv subject iii period 4 automaton subject v subject iv period 5 automaton automaton subject v for each session we invited 24 subjects in total. whenever more than 20 subjects showed up, we withdrew excess subjects through random draws. a withdrawn subject received a show-up fee of 150 nok (approximately 23 usd). in contrast, 13 informed consent to particiption was obtained by positive responses to written e-mail invtations with a detailed description of the experimental situation. all procedures – including the execution of the experiment, the recording and management of data and presentation of results – were performed in compliance with applicable laws and regulations on subjects’ privacy rights. the experiment was endorsed by the school’s committee for coordinating surveys among students. european journal of government and economics 1(2) 113 participating subjects received no show-up fee. we randomly distributed the 20 subjects participating in a given session to the four groups. also, we randomly assigned numbers from i to v to the five subjects in each group. these numbers determined subjects’ starting positions. we communicated the programming of automatons to the subjects through the instructions. we informed subjects that they would receive their payoffs in cash once their session was over and that schillings would be converted to nok using the exchange rate 1 schilling =0.55 nok. in order to restrict social pressures, subjects entered a separate room one at a time to collect their earnings. because it was impossible to earn more than nok 1000 in this experiment, the payoffs were tax free by norwegian tax laws. as there was no show-up fee for participating subjects, their minimum theoretical earning was 99 nok (approximately 15 usd; in the unlikely event that a subject would be the sole contributor in all three periods). during the experiment all interaction took place via a computer network.14 before starting the experiment, the administrator distributed the instructions and read them aloud (to make them public knowledge). the administrator then asked the subjects several control questions to check that they understood the instructions and the payoff structure. we also conducted a test round (without monetary payoffs) to allow subjects to become familiar with the software. after the test round we randomly rematched groups and starting positions, in order to avoid reputation building based on test-round behavior. to compensate for the fact that participants acting as subject i could make a decision in only one period, we offered those participants additional earnings corresponding to twice the average per period payoff in the group. similarly, because participants acting as subject ii could make a decision in only two periods, we offered these participants additional earnings corresponding to the average per period payoff in the group. the compensation scheme was made public knowledge. the sessions with prize replicated the sessions without prize, except in the following respect: once the subjects had taken their contribution decisions, and these decisions were made known to other subjects in their group, the subjects/automatons in positions a and b voted on whether to award the subject in position c a prize of 50 schillings. awarding the prize required two votes in favor. descriptive statistics and analytical choices in this section we present descriptive statistics for the two types of decisions subjects made during the experiment (contribute vs. not contribute and award prize vs. not award prize). 14 the experiment was programmed in z-tree (fischbacher 1999). european journal of government and economics 1(2) 114 table 2: average percentage of contributions, contingent on position (a/b or c) and treatment (prize or no prize) decisions subjects groups position prize no prize prize no prize prize no prize a or b 69.6 46.4 70.3 48.4 69.6 46.4 (56) (56) (32) (32) (8) (8) c 75 15 75 15 75 15 (40) (40) (40) (40) (8) (8) percentage of decisions, averages over within-subject decision percentages, averages over withingroup decisions percentages (n). table 2 shows the average percentage of contributions, depending on position (a/b vs. c), and treatment (prize vs. no prize). table 3: average percentage of votes cast by subjects in position a or b to award the prize to the outgoing subject (position c) in the prize game (n) decisions subjects groups 80.4 82.8 80.4 (56) (32) (8) table 3 shows the average percentage of subjects in positions a or b voting in favor of awarding a prize to the outgoing subject (position c) in the prize treatment. tables 2 and 3 show little difference between, on one hand, averages based on within-subject means, and, on the other hand, total averages or averages based on group means (the latter two must necessarily yield identical results). as shown in table 2, our data leave us with a maximum of 56 decision-level observations, 40 subject-level observations or 8 group-level observations for contribution decisions within a treatment-position combination. similarly, table 3 shows that further analysis of subjects' propensity to award a prize can be based on a total of 56 decision-level observations, 32 subject-level observations or 8 group-level observations. we report results for group-level observations, which we believe bring us closest to the requirement of independent observations. first, we expect dependencies to exist across different decisions made by the same subject; in fact, it would be strange if no learning or adjustment took place. second, we expect dependencies to exist across subjects in the same group, because of strategic interaction and because subjects in a given group acquire information about the behavior of other players in that group. third, kruskal-wallis tests reveal significant across-group differences in contribution levels and voting patterns between subjects operating under the same experimental condition (i.e. the same combination of treatment and position). this indicates that within-group dependencies actually exist (tests are available upon request). we use only non-parametric hypothesis tests: mann-whitney u-tests (mwu) and kruskal-wallis (kw) tests for comparisons among group measures that vary only between groups (e.g. treatment effects and unobserved differences between individual groups); wilcoxon signed-rank tests (wsr) and friedman tests for comparisons of group measures that may vary within groups (e.g. differences in contributions between different portions or periods of the game); one-sample location tests (osl) for comparing certain outcomes with model equilibria. finally, we use the two-tailed p<0.10 as the criterion for a significant effect. european journal of government and economics 1(2) 115 results we organize the discussion in two parts. first, we demonstrate that lame ducks contribute more often in the prize treatment than in the no-prize treatment. second, we explore possible explanations for this finding. do prizes induce lame ducks to contribute? both treatments in our experiment include an equilibrium in which no player contributes. however, only the prize treatment also includes an equilibrium in which players in position c contribute. thus, our main hypothesis is that the fraction of position c players that contribute is on average at least as high in the prize treatment as in the no-prize treatment. table 2 shows that, in the no-prize treatment, only 15 per cent of the subjects in position c contribute on average. by contrast, in the prize treatment 75 per cent of the subjects in position c contribute. this 60 percent difference between the two treatments is highly significant in a mwu test (z=-3.41, p<0.000), and thus supports our main hypothesis.15 also, the average percentage of votes to award the prize to the outgoing subject in the prize treatment seems quite high in substantive terms (p=80.4; see table 3).16 to check the robustness of our finding that the prize treatment boosts contributions from the outgoing subject, we check whether a similar difference over treatments exists for positions a and b as well, and whether the difference for position c is stable across periods. a first and overall test can be conducted by comparing overall contribution levels for positions a and b in the prize treatment and the noprize treatment, respectively (i.e. the difference between p=69.6 and p=46.4 in table 2). it turns out that no significant difference exists here (mwu test, z=1:45,p=0.15). figure 1 provides additional evidence. 15 however, all four percentages in the rightmost column of table 2 are significantly off the mark in relation to any possible equilibrium outcome: osl tests for h0:p = 0 and h0: p = 100 for the prize-ab, prize-c and no-prize-ab conditions and h0: p = 0 test for the no-prize-c condition all generate p-values less than 0.10. 16 invoking the harsher criterion that data should conform not only to a model's directional predictions but also to its point predictions, we note that this percentage is significantly off the mark in relation to both of the model's equilibrium outcomes (specifically, osl tests of h0: p = 0 and h0: p = 100 both produce p = 0.01). european journal of government and economics 1(2) 116 figure 1: average number of contributions, contingent on position, treatment and period. n=8 for each data point figure 1 shows that in periods 1 through 3, across-treatment differences for subjects in position c are two to three times larger than the corresponding differences for subjects in positions a or b. in period 4 the across-treatment difference for subjects in position c is a sizeable 5 times larger than the corresponding difference for subjects in positions a or b. in the final period no subject in position c contributes in the no-prize treatment, whereas almost 40 per cent of the subjects in position c contribute in the prize treatment. the pattern of gradually diminishing contributions over time that revealed in figure 1 resembles the pattern usually observed in non-olg public goods games (without punishments). it is generally thought that such patterns are due to heterogeneity in social preferences.17 table 4: mann-whitney u tests for differences over treatments implied by figure 1 position treatment χ² p-value a or b prize* 9.15 0.03 no prize* 9.00 0.03 c prize** 9.23 0.06 no prize** 2.33 0.67 total n=16 for each test table 4 displays mwu tests of the across-treatment differences in contribution levels, conditioned on positions and periods. whereas a significant difference across treatments exists for the a/b condition in period 3, the other period-by 17 ledyard (1995) provides a rich survey of public goods experiments. see for instance fehr & fiscbacher (2002) for more recent work on social preferences in public goods experiments. european journal of government and economics 1(2) 117 period across-treatment differences are not significant for this condition. in contrast, all period-by-period across-treatment differences are significant for the c condition. these results make it evident that position c subjects behave differently in the prize and no-prize treatments. figure 1 also shows a marked tendency for the average number of contributors to decrease over the five periods. table 5 presents friedman tests for differences over the five periods. the results suggest that this tendency is significant for all experimental conditions except the c position in the no-prize game, in which contribution levels consistently remain low throughout. table 5: friedman tests for differences over periods implied by figure 1 period position 1 2 3 4 5 a or b z-value -1.47 -1.17 -1.83 -0.45 p-value 0.14 0.24 0.07 0.65 c z-value -2.38 -2.38 -2.84 -2.38 -1.78 p-value 0.02 0.02 0 0.02 0.07 *total n=32, **total n=40. that contribution levels decrease over the five periods is not necessarily incompatible with subjects using trigger strategies to sustain cooperation. we now check if subjects stick to the trigger's punishment phase whenever a deviation from the cooperative equilibrium path has occurred. to do this we condition contribution levels on whether the trigger's punishment phase has been activated. when this phase has been activated, the trigger instructs subjects to cease contributing and, if relevant, cease voting in favor of awarding a prize, for the remainder of the game. figure 2 conveys a first impression of the results. european journal of government and economics 1(2) 118 figure 2: total group contributions (hollow circles, left y-axis) and whether trigger is broken or not (right y-axis black discs) over periods, contingent on contract availability (1=prize; 0=no prize), group (1-4), and day (0=first day; 1=second day) total group contributions (hollow circles, left y-axis) and whether trigger is broken or not (right y-axis black discs) over periods, contingent on contract availability (1=prize; 0=no prize), group (1-4), and day (0=first day; 1=second day) the figure displays the evolution of contributions over the five periods, for the 16 groups in the experiment. the first two rows in the figure show play in the eight groups with no prize, whereas the last two rows show play in the eight groups with prize. hollow circles indicate the sum of contributions for the group (including contributions from the automatons). these are plotted on the left y-axis. black discs, plotted on the right y-axis, indicate whether the punishment path of the trigger is activated. the main picture is that contributions tend to fall once the punishment phase is activated, though not instantly (as it should according to theory). while only one group in the no-prize treatment manages to stay on the trigger's equilibrium path for all five periods, two groups manage to do so in the prize treatment (and one additional group stays on the equilibrium path until the final period). six groups in the no-prize treatment activate the punishment path by period two, compared to three groups in the prize treatment. in all, prizes clearly delay activation of the punishment path. table 6 displays average contribution levels in the two experimental treatments for the part of the game following a deviation from the cooperation path of the trigger strategy, conditioned on position. european journal of government and economics 1(2) 119 table 6: mean contribution levels over treatments in non-cooperative parts of the game, contingent on position (n) position prize no prize a or b 41.3 34.3 (5) (7) c 56.9 7.1 (6) (7) does the behavioral pattern correspond to what we would expect if subjects were to use trigger strategies? first, osl tests for all but one of the entries (p) in table 7 (the exception is position c contributions in the no-prize treatment) reveal that actual outcomes differ significantly from what one should expect if the trigger had not been activated. specifically, for these entries tests of h0: p=100 (i.e. the cooperative equilibrium outcome of an unbroken trigger) all show p-values less than 0.10, which suggests that activation of the trigger at the very least entails a reduction of contribution levels. these results are consistent with the conjectures provided by game theory. still, osl tests of h0: p=0 (i.e. the equilibrium outcome once the trigger has been broken) are also consistently significant (p<0.10) for all table entries, save for contributions from the c position in the no-prize treatment (p=7.1, p=0.50). in particular, contribution levels in the prize-treatment’s c position (p=56.9) are way off the equilibrium mark in substantive terms.18 gift exchange, efficiency, or focal point effect? why do we observe such a clear breach of equilibrium behavior in our data? in addressing this question we are constrained by our experimental design, and our answers can therefore be suggestive only. we focus on three possible explanations. first, outgoing subjects might be aiming for creating a gift-exchange relationship. by contributing, a position c subject makes a costly sacrifice for the benefit of the group. the remaining subjects can return this favor at no cost by awarding a prize to the outgoing subject. moreover, this holds regardless of whether the cooperative equilibrium path of the trigger has already been abandoned. previous research from other settings show that gift exchange may provide a stronger motivation for effort than hard incentives do.19 note that the presence of a gift-exchange relationship would undermine the credibility of the trigger's punishment phase. second, the high observed rates of "yes" votes and of awarded prizes might reflect efficiency concerns. specifically, awarding a prize increases the subjects' aggregate monetary payoffs, at no cost to those subjects that award the prize. there is an ongoing debate in the experimental economics literature regarding the extent to which efficiency concerns impact on behavior.20 18 although the p-value is a "mere" 0.06, this result is most likely influenced by a shortage of observations as some groups (2 out of 8) manage to stay on the cooperative path, as well as by the fact that group-level measures become more unstable as aggregates are based on fewer periods/decisions (only those following a switch to the punishment path of the trigger strategy, which, as noted above, tends to come relatively late in the prize treatment). 19 gift-exchange relationships have been studied experimentally by fehr, gächter and kirchsteiger (1997), and by fehr, kirchsteiger and reidl (1993, 1998). in fehr, klein and schmidt (2001) the contract design is endogenous (i.e. subjects choose a contract from a menu of available contracts). fehr and fischbacher (2005) provide a brief overview of gift-exchange experiments. 20 for a seminal paper dealing with this question in a social preferences framework, see charness and rabin (2000). engelman and strobel (2002) provide a review and some new experiments, which fehr, naef and schmidt (2005) criticize. güth, kliemt and ockenfels (2000) provide an application dealing european journal of government and economics 1(2) 120 finally, across-treatment differences in contribution and "yes-vote" levels may reflect a focal-point effect (schelling 1960): in addition to introducing an altered strategic environment, the prize treatment arguably creates a strong focus on cooperative behavior as such. we utilize the comparative-statics features of our experimental design, first with respect to contributions from the outgoing player and then with respect to "yesvotes". specifically, our comparisons exploit the fact that subjects' actions (contributions, voting decisions) cannot in any way be decisive for outcomes (awarding the prize) when (1) the trigger's cooperative equilibrium path has been abandoned and (2) automatons have entered the group as players (periods iv and v). table 7 lists mean contribution levels for different experimental conditions in which one or two but not all of the three mentioned explanations can be operative. if the trigger drives the subjects' behavior, one should observe low contribution levels and little across-treatment differences in cases where the trigger's cooperative equilibrium path has been abandoned. however, the two mwu-tests reported in table 7 show that contribution levels in such cases are in fact significantly higher in the prize treatment (42 to 70) than in the no-prize treatment (0 to 17). moreover, while the results for the upper row in table 8 (i.e. for the early periods of the game) are clearly at odds with trigger behavior, as well as with behavior driven by efficiency concerns, it is consistent with both the gift-exchange hypothesis and the focal-point hypothesis (i.e. the prize treatment creates a "cooperative focus"). in other words, this particular test cannot distinguish between the two latter hypotheses. table 7: mean contribution levels for outgoing subjects (position c) in periods where non-cooperative behavior has occurred, by treatment and period periods prize no prize z-value p-value 2 and 3 70 16.7 1.86 0.06 (5) (6) 4 and 5 41.7 0 2.38 0.02 (6) (7) z-statistics and p-values for the mann-whitney u test (n). therefore, it makes sense to compare the entries in the bottom row of table 7. whereas our two treatments differ in more than one respect in early post-defection periods (ii and iii), a nice feature of our design is that the treatments do not differ in more than one respect in later periods (iv and v). in our experiment it is public knowledge that automatons will necessarily vote against awarding a prize in periods iv and v, assuming that the cooperative equilibrium path has already been abandoned. hence, it would be pointless to aim at a gift exchange in these periods. however, the two experimental treatments differ in the focus they create on cooperation. the substantial and significant difference in contribution levels at this point (42 vs. 0) provides a strong indication of a focal-point effect. finally, if the gift-exchange hypothesis is correct, one should expect sharply declining contributions from outgoing subjects as opportunities for gift-exchange behavior wither: the pattern for the player in position c of the prize treatment shown in figure 1 is suggestive, with contribution levels decreasing from 87.5 in the first three periods to 50.0 in period iv and 37.5 in period v. however, it is not clear directly with public goods provision. hsu, anen and quartz (2008) explore the neurological correlates of equity and efficiency concerns. european journal of government and economics 1(2) 121 to what extent consistently cooperative groups manage to keep the aggregate at relatively high levels. the relevant pattern and test for group aggregates of contributions in situations where the cooperative equilibrium path has been abandoned concern the levels presented in the far left column of table 7. it turns out that a substantial 40 percentage point difference exists in contribution levels between (1) periods where outgoing subjects can be decisive (70) and (2) periods where they cannot be decisive (30, rather than the listed figure of 41.7, which includes a group that cooperates through periods 2 and 3). however, although sizable, this effect is not significant in a wsr test at conventional levels (s=3.0, p=0.25, n=5).21 we now turn to voting patterns in the prize treatment. table 8 lists the group mean of votes cast in favor of awarding a prize to the outgoing player, conditioned upon whether the latter chooses to contribute. table 8 includes only cases where voting occurs after the trigger's cooperative equilibrium path has been abandoned in periods 1, 2 or 3.22 table 8: mean share of votes in favor of awarding the prize to the outgoing subject (position c) in periods where non-cooperative behavior has occured before period 4, by contribution from the outgoing player (n) contribution from c no contribution from c total 0.8 0.63 0.75 (5) (2) (7) the overall share of votes cast in favor of awarding a prize after abandoning the cooperative equilibrium path is high (0.75,n=7) and significantly different from zero in a simple osl test (p=0.02). while at odds with the hypothesis that subjects play trigger strategies, this finding is consistent with the focal-point hypothesis. however, it is also consistent with the gift-exchange hypothesis and the efficiencyconcerns hypothesis. while having the right "reciprocal sign" according to the giftexchange hypothesis, the difference between the contribute condition and the not contribute condition is insignificant. table 9 shows that only two group-level units have observations in both conditions. the average percentage of "yes-votes" is 0.63 in the not contribute condition, and increases only moderately to 0.80 in the contribute condition for the same two groups. needless to say, applying the appropriate wsr test with only two group-level units proves futile (s=0.5, p=1.00).23 in essence, our experiment fails to provide statistically strong support for the giftexchange hypothesis. however, as we explained in our analysis of contribution patterns, it seems that outgoing subjects do not expect a prize to be awarded 21 five groups in the prize treatment have observations both in early periods (ii and iii) and in late periods (iv and v). in other words, three out of the eight groups are naturally excluded from the analysis: the two groups that manage to stay on the cooperative equilibrium path, and the one group that abandons this path in period iv, so that it plays under the broken trigger only in period v. 22 we include decisions in period 1, since the trigger strategy may shift to the punishment path not only as a consequence of non-cooperative play in any previous period, but also as a consequence of any departure from a pattern of across-the-board contributions in the current period of play. also, when looking at voting behavior in post-defection parts of the game we completely disregard patterns in period 4 since any level here is consistent with both the gift-exchange and the efficiency-concerns hypotheses: a voting decision in this situation is not only costless, it is also haphazard since subjects are completely disenfranchised (the outcome of no prize assured by the automatons inevitable exercise of its veto powers). 23 departing from our analytic choice of utilizing the group level as our unit of analysis and/or from the sounder practice of applying within-unit tests (wsr) where this is feasible, we also note that the listed difference of 0.80-0.63=0.17 in vote share averages between the two situations is not significant in the more lenient mwu test between groups (z=-0.63, =0.53, n=7) nor in an mwu test with individual decisions as units of analysis (diff.=0.80-0.67=0.13, z=-0.63, p=0.53, n=26). european journal of government and economics 1(2) 122 regardless of whether they contribute. in the prize treatment, outgoing subjects usually choose to contribute rather than to keep their endowment hoping that remaining subjects will nevertheless award them a prize (see table 6). in conclusion, outgoing subjects contribute far more often in the prize treatment than in the baseline no-prize treatment. however, our data indicate that this result does not originate from use of trigger strategies. several statistical tests reveal that behavior differs significantly from what one would expect if trigger strategies were to drive behavior. in the prize treatment, the focal-point effect likely explains the observed behavior; in fact, this is the only alternative explanation for which we find statistically significant evidence. although there is also some evidence that subjects engage in gift-exchange behavior, the small number of observations in our design makes statistically significant evidence for this proposition infeasible. conclusion many scholars consider that lame ducks will continue to service their party only if being incentivized. according to the model motivating our experiment, remaining party representatives can discipline lame ducks by credibly promising them exit prizes (such as attractive retreat positions or other post-office perks) if they do not shirk. we have examined this proposition experimentally. novel use of automatons allowed us to sidestep the fundamental problem of mimicking parties with indefinite lives in the lab. in one treatment remaining subjects could award cost-free exit prizes to the lame duck. the other treatment did not permit such prizes. in line with the model’s prediction, we found that a significantly higher proportion of outgoing subjects contribute in the prize treatment than in the baseline no-prize treatment. closer inspection, however, revealed that many outgoing subjects who chose to contribute received a prize irrespective of whether the trigger's punishment path had been activated. while inconsistent with the incentive scheme provided by trigger strategies, this behavioral pattern may be explained in several ways. we have indicated three explanations. first, the strategic situation generates a gift-exchange relationship. sheer decency suggests that an outgoing player who contributes should be awarded a prize regardless of play in previous periods. the fact that awarding a prize entails zero cost for remaining players makes this moral imperative particularly compelling. second, because failure to award a prize would leave money on the table, efficiency concerns imply that a prize should be awarded regardless of previous play. finally, the prize treatment makes cooperative behavior a powerful focal point, which might explain the observed behavior. our data cast considerable doubt on efficiency concerns as a likely explanation, while not allowing us to discriminate between gift-exchange and focal-point effects. the presence of either of these two motives, however, might undermine the credibility of the trigger strategy that supposedly sustains the proposed incentive scheme. the environment we study is very simple: the structure of the game is public knowledge; legislative (mis)behavior cannot impact on re-election prospects or on future job prospects (through reputational concerns); end-game behavior is automated; there is no ambiguity with respect to lame-duck periods; all interaction is anonymous; and rewards and punishments are fully controlled by the majority of the party. clearly, it bears little resemblance to the environment of real-world legislative politics. this, however, is hardly an objection. our environment was designed to control the impact of such other factors, so as to obtain a rigorous test of one particular hypothesis about legislative behavior: are lame ducks disciplined by endogenously determined exit prizes? our experiment indicates that they are, although in ways inconsistent with the standard theory of rational, self-regarding european journal of government and economics 1(2) 123 players. this, in turn, suggests that standard theory may be too restrictive to provide a proper understanding of legislative behavior, and that further experiments could be useful to guide future modelling. if subjects in a simple setup like ours deviate systematically from standard theory, one may also expect legislators operating in vastly more complex environments to deviate. references alchian, armen and harold demsetz (1972) ‘production, information costs, and economic organization’, american economic review 62(5): 777-795. alesina, alberto and sstephen e. spear (1988) ‘an overlapping generations model of electoral competition’, journal of public economics 37(3): 359-79. brañas-garza, pablo and maria paz espinosa (2011) ‘unraveling public good games’ games 2(4): 434-451. bender, bruce and john r. lott (1996) ‘legislator voting and shirking: a critical review of the literature’, public choice 87(1-2): 67-100. besley, timothy and valentino larcinese (2011) ‘working or shirking? expenses and attendance in the uk parliament’, public choice 146(3-4): 291-317. cadsby, charles bram and murray frank (1991) ‘experimental tests of ricardian equivalence’, economic inquiry 29(4): 645-664. charness, gajiy and mathew rabin (2000) ‘social preferences: simple tests and a new model’, economics working paper 441. department of economics and business. universitat pompeu fabra. crain, w. mark, donald r. leavens and robert d. tollison (1986) ‘final voting in legislatures’, american economic review 76(4): 833-41. cremer, jaques (1986) ‘cooperation in ongoing organizations’, quarterly journal of economics 101(1): 33-50. diermeir, daniel (1995) ‘commitment, deference, and legislative institutions’, american political science review 89(2): 344-55. engelman, dirk and martin strobel (2002) ‘inequality aversion, efficiency, and maximin preferences in simple distribution experiments’, american economic review 94(4): 857-69. fehr, ernst and urs fischbacher (2005) ‘the economics of strong reciprocity’, in herbert gintis, samuel bowles, robert boyd and ernst fehr (eds) moral sentiments and material interests: the foundations of cooperation in economic life, pp. 151-192. cambridge mass.: the mit-press. fehr, ernst, simon gächter and georg kirchsteiger (1997) ‘reciprocity as a contract enforcement devise’, econometrica 65(4): 833-60. fehr, ernst, michael naef and klaus m. schmidt (2005) ‘the role of equality and efficiency in social preferences‘, cepr discussion paper no. 5368. fehr, ernst, georg kirchsteiger and arno reidl (1993) ‘does fairness prevent market clearing?’, quarterly journal of economics 108(2): 437-59. fehr, ernst, georg kirchsteiger and arno reidl (1998) ‘gift exchange and reciprocity in competitive experimental markets’, european economic review 42(1): 1-34. fehr, ernst, alexander klein and klaus m. schmidt (2001) ‘fairness, incentives and contractual incompleteness’, working paper no. 72, insitute for empirical research in economics, university of zurich. european journal of government and economics 1(2) 124 fehr, ernst and urs fischbacher (2002) ‘why social preferences matter the impact of non-selfish motives on competition, cooperation and incentives’, the economic journal 112 (478): c1-c33. fischbacher, urs (1999) z-tree: zurich toolbox for readymade economic experiments. university of zurich. güth, werner, hartmut kliemt and axel ockenfels (2000) fairness vs efficiency. an experimental study of (mutual) gift giving. berlin: humbolt university (unpublished). hammond, peter (1975) ‘charity: altruism or cooperative egoism’, in edmund s. phelps (ed) altruism, morality, and economic theory. new york: sage. horn, murray j. (1995) the political economy of public administration. new york: cambridge university press. hsu, ming, cedric anen and steven r. quartz (2008) ‘the right and the good: distributive justice and neural encoding of equity and efficiency’, science 320(5879): 1092-1095. kandori, michi (1992) ‘social norms and community enforcement’, the review of economic studies 59(1): 63-80. kopecký, petr and gerardo scherlis (2008) ‘party patronage in contemporary europe’, european review 16(3):355-71. krehbiel, keith (1990): information and legislative organization. ann arbor: university of michigan press. lien, jon (2008) a politician who's quitting has already quit. m.sc. thesis (political economy). norwegian school of management bi. lim suk s., edward c. prescott and shyam sunder (1994) ‘stationary solution to the overlapping generations model of fiat money: experimental evidence’, empirical economics 19(2): 255-77. ledyard, john o. (1995) ‘public goods: a survey of experimental research’, in john h. kagel and alvin e. roth (eds) handbook of experimental economics, pp. 11194. princeton: princeton university press. lott, john r. (1990) ‘attendance rates, political shirking, and the effect of postelective office employment’, economic inquiry 28(1): 133-50. marimon, ramon and shyam sunder (1993) ‘indeterminacy of equilibria in a hyperinflationary world: experimental evidence’, econometrica 61(5): 1073-1107. mutho, abhinay and kenneth a. shepsle (2007) information, institutions and constitutional arrangements. university of harvard (unpublished). mutho, abhinay and kenneth a. shepsle (2004) agenda-setting power in organizations with overlapping generation of players. university of harvard (unpublished). offerman, theo, jan potters and harrie a. a. verbon (2001) ‘cooperation in an overlapping generations experiment’, games and economic behavior 36(2): 264275. pappas, takis s. (2009) ‘patrons against partisans: the politics of patronage in mass ideological parties’, party politics 15(3): 315-334. parker, glenn r. and stephen c. powers (2002) ‘searching for symptoms of political shirking: congressional foreign travel’, public choice 110(1-2): 173-191. parker, glenn r. (2004) self policing in politics. princeton, princeton university press. european journal of government and economics 1(2) 125 rothenberg, lawrence s. and mitchell s. sanders (2000) ‘serving the electoral connection: shirking in the contemporary congress’, american journal of political science 44(2): 316-325. salant, david j. (1991) ‘a repeated game with finitely lived overlapping generations of players’, games and economic behavior 3(2): 244-259. shepsle, kenneth a. (1986) ‘institutional equilibrium and equilibrium institutions’, in herbert f. weisberg (ed) political science: the science of politics, pp. 51-81. new york: agathon. shepsle, kenneth a., eric s. dickson and robert p. houweling (2002) bargaining in legislatures with overlapping generations of politicians. harvard university (unpublished). shepsle, kenneth a. and barry nalebuff (1990) ‘the commitment to seniority in self-governing groups’, journal of law, economics and organization 6(special issue): 45-72. schelling, thomas (1960): the strategy of conflict. cambridge mass.: harvard university press. van der heijden, eline c. m., jan nelissen, jan potters and harrie a. a. verbon (1998) ‘transfers and the effect of monitoring in an overlapping-generations experiment’, european economic review 42(7): 1363-1391. microsoft word ejge_02_02_043.doc european journal of government and economics volume 2, number 2 (december 2013) issn: 2254-7088 119 the common agricultural policy and the eu budget: stasis or change? alan greer, university of the west of england abstract this article evaluates the reform of the eu’s common agricultural policy, set within the context of negotiations about the multi-annual framework for 2014-20. it traces the reform process from the proposals presented by the commission in 2010 – encapsulated as ‘convergence, capping and greening’ – to the outcomes eventually agreed in 2013 after inter-institutional bargaining. the conclusion is that the reform outcomes highlight that the cap remains resistant to substantial change, both in terms of its budget and in its main policy instruments. this incremental change is explained in institutional terms. first, the balance of institutional forces within the eu, especially the member states and the continuing power of the agricultural interest, still works to insulate the cap against pressures for radical reform. there is a continuing cleavage between advocates of substantial change and a much larger bloc of member states who favour the retention of the ‘traditional’ cap. second, the new institutional setting of co-decision, which increased the role and influence of the ep, reinforced the dominant ‘state-assisted’ conception of agricultural policy. jel classification q18; h230 keywords agricultural policy, cap reform, multi-annual financial framework, co-decision european journal of government and economics 2(2) 120 introduction agriculture has always provided a fertile field for students of politics and public policy, especially those of us fascinated by how the political power of farmers in europe has persisted despite the long gradual decline in their number and the relative economic importance of the sector. this is reflected in the fact that the common agricultural policy (cap) not only has received the lion’s share of eu level spending over the years, but that it continues to do so. the durability of the cap and farm spending in the face of pressures for its substantial reduction, and the fact that it continues to be important for many member states, gives a highly political edge to debates about its reform. it is partly for these reasons – the size of the farm budget and the relative resistance to change of the cap that the agriculture sector is of interest for scholars of the eu as well as those seeking to explain the durability of public policies generally. much of the academic literature on the cap and comparative agricultural policy generally has tended to emphasise its ‘exceptional’ nature and its relative resistance to change, underpinned by an institutional balance of forces that favours the agricultural interest, both in respect of national governments and societal groups representing producers (see for example coleman et al 1997, grant 1997, rieger 2000, roederer-rynning 2010, skogstad 1998). of course this does not mean that change is impossible, and over the long term, incremental change can have substantial cumulative effects. rather what is at issue is the speed, extent and direction of change. burrell (2009) charts a pattern of continuous reform of the cap, from a highly centralized protectionist policy focused on farm incomes to one that is more market sensitive and environmentally sustainable, and in which governments have greater scope to adapt the overall framework to their particular national conditions (see also greer 2005). however it would be a mistake to see policy change as a historically driven one-way process. daugbjerg (2009), for example, uses the notion of ‘sequencing’ to show how changes to the cap over time are often reactive but not necessarily in the same direction and that each reform event opens possibilities for further reform. cap reform episodes since the late 1980s – such as the macsharry reforms in 1992, the agenda 2000 reforms in 1999 and the fischler package in 2003 have provided insightful case studies of the speed and scale of change, the endogenous institutional forces at play, and importance of exogenous factors such as enlargement and world trade liberalisation (see ackrill 2000a, cunha 2011, keeler 1996, swinbank 1999, and swinnen 2009). typically cap reform outcomes are viewed as incremental change, the outcome of bargaining between actors in which the key factors are the preferences and institutional structures of member states, with the commission also playing a crucial role in setting the reform agenda. reflecting the wider contemporary interest in the role of ideas in the policy process, some authors emphasise the link between the changing ideational context and the shape of reform outcomes (lynggaard and nedergaard (2009). also drawing on the importance of policy ideas, daugbjerg and swinbank (2009) point to the importance of trade agreements, notably the uruguay round agreement on agriculture (uraa), in the development of the cap, especially in establishing the market liberal paradigm as the ideational underpinning of agricultural trade. yet they still caution that this sits awkwardly with the continued dominance of the stateassisted paradigm as the foundation of the cap. erjavec et al (2008) also have noted how the policy discourse of agriculture commissioners (fischler and fischer-boel) exhibited a rhetorical shift from a largely mercantilist to a neo-liberal perspective. subsequently, however, some have argued that the tenure of commissioner cioloş has witnessed something of a reversal back to the stateassisted position that defended farm subsidies as a way to ensure a fair and efficient european agriculture (rutz et al, forthcoming). greer ● the common agricultural policy and the eu budget 121 budgetary considerations have played a key role in agricultural policy change, sometimes bringing the issue onto the policy agenda and opening a policy window for cap reform, for example the crisis of over-production in the 1980s. ackrill (2000b) has argued that eu budgetary rules and expenditure limits can work to constrain cap reform. in addition, he uses ideas about historical institutionalism and path-dependence to explore the linkages between institutional reform of the budget and change in the cap, especially in the period 1988-92. while these concepts are ideally suited to explain the resilience of agricultural policy, they need to be joined with the notion of ‘institutional layering’ to explain the how largely pathdependent processes can experience reform (ackrill and kay 2006a). this relationship can be seen clearly in the negotiations on the multi-annual financial framework (mff) for 2014-20, and a parallel round of cap reform, both of which concluded in 2013. in the mff case, debates about the overall level of the eu budget, and of the place of agriculture within it, were centre-stage, framed by the context of economic austerity. on cap reform the core questions concerned how best to reshape the policy to meet contemporary concerns, for example about fair treatment for all member states and the deepening of environmental sustainability, related crucially to the overall budgetary envelope. a crucial factor that influenced both process and outcomes was the changed institutional setting. as well as the contemporaneous discussions on the budget, the cap reform debates took place within the new institutional arrangements introduced in the lisbon treaty, which extended the co-decision procedure to the cap and arguably has enhanced the influence of the european parliament (ep). indeed the 2013 cap reform dossiers were the first major test of these new institutional arrangements. after first summarising the budgetary context and the historical trends on the funding of the cap, this article sets out the outcomes of the mff for 2014-20, highlighting changes in the proposed allocations during the negotiations. it then traces the cap reform process between 2010 and 2013 in light of the initial proposals presented by the commission. it concludes that the outcomes of the reform process were less radical than originally envisaged. this relative pathdependence and incremental change is explained in institutional terms. first, the balance of institutional forces within the eu, most especially the policy preferences of the main policy actors – especially the member states and the continuing power of the agricultural interest still works to insulate the cap against pressures for radical reform. there is a continuing cleavage between member states, which maps onto a broader budgetary gainers/losers division, between advocates of radical reform and those who favour the retention of the ‘traditional’ cap. second, the new institutional setting of co-decision, which increased the role and influence of the ep, reinforced the ‘traditional’ conception of the purpose and shape of agricultural policy. the central conclusion is that the outcomes of the reform processes highlight that the cap still remains resistant to substantial change, both in terms of the level and distribution of its budget, and in its main policy mechanisms and instruments, despite demands from some quarters for a radical reconfiguration of policy to take a more focused ‘public goods’ approach. cap spending in historical perspective agriculture has always consumed a big slice of the eu budget, reflecting that the cap historically has been the most important ‘common’ policy. in the late 1970s around 75 per cent of total spending went to agriculture but since then the trajectory has been downwards. by the first year of the 1988-92 financial period the cap still took up 60 per cent of spending, despite reforms to the budget that made it ‘redistributive and less cap-oriented’ (laffan and lindner 2010, p. 217). by the late 1990s farm expenditure fell to around half, reflecting successive reforms to the cap and the expansion of the eu into areas such as cohesion, regional and social policy. by the late 2000s the cap budget (now including rural development) still european journal of government and economics 2(2) 122 represented around 40 per cent of the total but is projected to continue on a gradual downwards trajectory (for a fuller discussion see greer 2012). annual budgets for agriculture and rural development are set within the overall framework of the eu’s multi annual financial frameworks. in the mff for 2007-13, around 43 per cent of a total €976bn went to the ‘preservation and management of natural resources’, mainly the cap. although total spending did not fall by much over the mff, the agriculture budget continued its relative decline because of the expansion of competences and increased expenditure in other areas. by the final year of the mff in 2013 the proportion of the eu budget devoted to the cap had fallen to around 40 per cent (€60bn) (see figure 1). figure 1: eu budget 2013 source: http://ec.europa.eu/budget/figures/2013/2013_en.cfm the distribution of these substantial resources for agriculture and rural development has always been a matter of contention, especially around spending on environmental sustainability. in the 2007-13 mff one third of the total budget (around 80 per cent of cap spending) went to ‘traditional’ direct payments and market intervention in agriculture (pillar 1) while the remainder was for measures on the environment and rural development (pillar 2). to use the commission’s somewhat misleading language, by 2013 ‘agricultural’ spending had declined to around 30 per cent of the total budget, although this is something of an ‘accountancy trick’ because almost all of pillar 2 expenditure goes to farmers and landowners under the auspices of the cap. so despite a falling share, spending on the cap remains substantial. as the commission acknowledged, ‘agriculture is, in budgetary terms, the second most important union policy, and the only fully integrated policy at union level’ (eu commission 2011b). the multi-annual financial framework 2014-2020 discussions about cap reform took place in tandem with negotiations about the mff for 2014-20, both framed by financial crisis and the ‘austerity agenda’. the draft mff unveiled by the commission in june 2011 envisaged spending of €1025 billion, an increase of nearly five per cent. following difficult negotiations, in february 2013 the european council agreed an mff that was widely referred to as the first ever budget ‘cut’ in the history of the eu (although previous mff saw ‘cuts’ in terms of percentage gross national income (gni)(see benedetto and milio 2012, p. 180). inter-institutional negotiations between the ep, council and commission produced a compromise political agreement in june 2013. table 2 illustrates the proposals and outcomes of the negotiations at various stages prior to the final inter-institutional agreement. an overall ceiling of €960bn (commitment greer ● the common agricultural policy and the eu budget 123 appropriations) was agreed, a reduction of around three per cent in 2011 prices over previous period and of eight per cent on the commission’s proposals. explanations of the outcomes of budget negotiations usually emphasise the relative influence of core actors and institutions at both the supranational and national levels. for laffan and lindner (2010) the european council ‘is the dominant player’, with the commission trying to play the role of ‘honest broker’ (2010, pp. 213-4). as swidlicki et al. also note the eu budget has proved difficult to reform ‘because it is not primarily designed to maximise economic returns across europe, but rather to balance a range of political interests. member states are keen to protect areas of the budget from which they do well...’ (2012, p. 6). a usual approach is to classify member states in terms of whether they are ‘net contributors’ (countries who pay out more than they get back such as the uk, sweden, finland and germany) or ‘net beneficiaries’ (such as greece and portugal) in terms of the eu and cap budget (with sometimes a third category of countries who pay in more or less as much as they receive (including belgium, denmark, france and italy)(see de wilde 2012, p. 1081; swidlicki et al 2012, pp. 79). on the 2014-2020 mff, the net contributors resisted a budget increase, highlighted in a letter to commission president barroso in december 2010 in which david cameron, angela merkel and other leaders argued that eu spending ‘cannot be exempt from the considerable efforts made by the member states to bring their public spending under control.’ specifically the next mff ‘should not exceed the 2013 level with a growth rate below the rate of inflation’ (cameron et al. 2010). table 2. mff 2014-2020: comparisons (€m) commitment appropriations in million euros (2011 prices) mff 2007 2013 mff 20142020 commission proposal june 2012 mff 20142020 european council conclusions 08.02.2013 european council conclusions vs mff 2007-2013 european council conclusions vs commission proposals million euros (%) million euros (%) total commitment appropriations 994.176 1.045.282 959.988 -34.188 (-3%) -85.294 (-8%) as a percentage of gni 1,12% 1,09% 1,00% -0,12% -0,09% 1. sustainable growth 446.310 503.310 450.763 +4.453 (+1%) -52.547 (-10%) 1a. competitiveness for growth and jobs 91.495 164.316 125.614 +34.119 (+37%) -38.702 (-24%) of which: connecting europe facility 12.783 40.249 19.299 +6.516 (+51%) -20.950 (-52%) of which: galileo, iter and gmes 8.047 15.548 12.793 +4.746 (+59%) -2.755 (-18%) 1b. cohesion for growth and employment 354.815 338.994 325.149 -29.666 (-8%) -13.845 (-4%) of which: investment for growth and jobs 345.935 327.116 313.197 -32.738 (-9%) -13.919 (-4%) of which: european territorial cooperation 8.880 11.878 8.948 68 (+1%) -2.930 (-25%) 2. preservation and management of natural resources 420.682 389.972 373.179 -47.503 (-11%) -16.793 (-4%) of which: market related expenditure and direct payments 318.820 286.551 277.851 -40.969 (-13%) -8.700 (-3%) of which: rural development 95.741 91.966 84.936 -10.805 (-11%) -7.030 (-8%) 3. citizenship, freedom, security and justice 12.366 18.809 15.686 +3.320 (+27%) -3.123 (-17%) 4. eu as a global player 56.815 70.000 58.704 +1.889 (+3%) -11.296 (-16%) 5. administration 57.082 63.165 61.629 +4.547 (+8%) -1.536 (-2%) 6. compensations 920 27 27 0 (0%) 0 (0%) source: http://ec.europa.eu/budget/mff/index_en.cfm european journal of government and economics 2(2) 124 negotiations between the member states on the mff reflected core national interests and revolved around established issues such as the uk ‘rebate’ and the level of funding for the cap. here the relationship between the uk and france is again instructive. with the government under pressure from a sizeable number of euro-sceptic conservative mps, the uk wanted at least a freeze, if not a substantial cut, in the total mff but also to defend its ‘rebate’ (see house of commons library 2013, p. 7). although outgoing president sarkozy (but not president françois hollande) at times supported a freeze in spending, he disagreed with the uk on the extent of ‘cuts’ and in the areas they should fall. while there were suggestions that cameron and sarkozy had agreed informally that the uk would not push too hard for cap reform if france did not demand cuts in the rebate (the guardian, 28 may 2012), hollande questioned the justification for the british rebate and brought italy and spain into a troika of ‘refuseniks’ in an effort to fend off a substantial reduction in the mff and to protect agricultural spending. overall the consensus of opinion favoured budgetary constraint, although there was disagreement about the scale of ‘cuts’. the pivotal role was played by german chancellor angela merkel who came down in favour of a squeeze on spending. for one commentator, the negotiations created ‘an impression of earnest endeavour that paved the way for a victory for the austerity agenda of david cameron and angela merkel’ (wyles 2013). certainly the british government presented the mff outcome as a major diplomatic triumph, both in terms of protecting the rebate and securing a cut in the budget – what cameron referred to as ‘europe's seven-year credit card limit’ (although it was also acknowledged that the uk’s net contributions will still rise because the rebate does not cover increased spending in new member states). cap reform and the mff 2014-2020 reaching agreement on the mff is only the beginning of the story. perhaps more important are the debates about how a smaller cake is to be divided up, whether between countries or sectors, the cap after 2013: the mff context debates about cap reform after 2013 took place within the context of the negotiations on the draft mff. this was something of a departure on previous experience because reforms of the cap have tended to take place ‘outside the framework of the big budget bargains’ (laffan and lindner 2010, p. 224). agriculture spending for 2007-13, for example, was fixed by the chirac-shroeder deal in 2002 and independently of the main mff negotiations on the mff (see greer 2012, p. 106). during the debate on the mff, some reformist voices advocated a radical shift of the eu’s budgetary priorities to fund increased spending on sustainable growth in areas such as employment, research/development and energy, rooted in a conviction that most cap spending does not promote the attainment of public goods (greer 2012, pp. 111-2). one proposal advocated a switch in funding from the cap to better targeted spending on issues such as energy and climate change (núñez ferrer, 2009). a complete and radical overhaul of the eu also was recommended in a report by the relatively euro-sceptic open europe, whose ‘alternative budget’ proposed a reduction of spending by almost a third while focusing the smaller budget that remained ‘far more effectively on boosting jobs and growth’ (swidlicki et al, 2012, p. 3). yet arguably the agreement on the mff changed little despite the rhetoric and reality of cuts. for one commentator the negotiations produced a budget agreement ‘that helps farmers but will do little to create growth and jobs’ (wyles 2013). certainly the distribution of ‘cuts’ in relation to the commission’s original proposals fell heavily on areas such as ‘citizenship’ (17 per cent), the ‘eu as a greer ● the common agricultural policy and the eu budget 125 global player’ (16 per cent) and crucially proposed expenditure on ‘sustainable growth’ was reduced by 10 per cent (€50m) on the proposals, with the ‘competitiveness for growth and jobs’ heading reduced by 24 per cent (€38m), and funds for the ‘connecting europe’ facility within this slashed by over half, although on this still represented increases on the previous mff. that a radical reconfiguration of the budget away from the cap was unlikely had been evident from the commission’s draft mff which explicitly acknowledged that ‘a significant part of the eu budget should continue to be dedicated to agriculture, which is a common policy of strategic importance’, and that the cap share of funding be maintained at the 2013 level (2011c, p. 7). nevertheless the actual resources available for the cap will be reduced. in the initial proposals €379bn was earmarked for the cap (37 per cent of the total), compared with €415bn in the previous mff. after the council agreement, this figure was adjusted marginally downwards to €363bn, representing a reduction of around 12 per cent on the previous mff, and an extra cut of 4-5 per cent on the commission proposals (see table 2). there will be real reductions in agricultural spending, which will go down in real terms and also as a percentage of the total budget (predicted to fall to around 37 per cent by 2020). while consistent with the pattern of continued gradual decline, however, this does not represent the fundamental restructuring eu spending and its core priorities that the radical reformers have argued for. within this overall context, a the mff agreement broadly maintains the 75:25 spending ratio between pillar 1 direct payments/market measures and pillar 2 rural development/environmental sustainability. the commission proposal earmarked 76 per cent to direct payments and 24 per cent to rural development; in the council conclusions these figures were roughly maintained although the reduction for rural development was eight per cent compared with four per cent in direct payments. expressed in current prices, proposed annual expenditure from 2014 is stable, although commitment appropriations on market support and direct payments will still make up 30 per cent of the eu budget in 2014 and 27 per cent in 2020 (see table 3). table 3. mff 2014-2020: commitment appropriations (€m) source: house of commons library 2013, p. 9. cap reform after 2013: the proposals between april 2010 (when it initiated preliminary discussions) and october 2011 (the publication of detailed legislative proposals), the eu commission’s directorate general for agriculture and rural development (dg agri) formulated proposals for european journal of government and economics 2(2) 126 a reformed cap after 2013. the aim was to take the opportunity provided by the new mff to ‘refocus the cap on its core and new activities’ (european commission, 2011a, p. 15). resources would be better targeted with a ‘greener and more equitably distributed first pillar’ with a second pillar ‘more focussed on competitiveness and innovation, climate change and the environment’ (european commission, 2011a, p. 16). the goal is to promote a ‘new partnership between europe and its farmers’ through creating a cap that will ‘strengthen the competitiveness, sustainability and permanence of agriculture throughout the eu in order to secure for european citizens a healthy and high-quality source of food, preserve the environment and develop rural areas’ (europa, 2011). based on the belief that there remained widespread support for a strong cap structured around its two pillars, dg agri set out three broad policy scenarios that struck different balances between them. an ‘adjustment scenario’ envisaged ‘further gradual changes’, while a ‘refocusing scenario’ would usher in far reaching reform, with a substantially reduced budget centred on environmental and climate change objectives. for the commission however, the first option would not adequately address the challenges of the future, whereas the second would ‘come at a significant social and environmental cost’ (european commission, 2011c, pp. 5-6; 2011d, p. 38; 2010a, p. 12). consequently the preferred approach was a midpoint ‘integration scenario’ that would ‘make major overhauls of the policy in order to ensure that it becomes more sustainable, and that the balance between different policy objectives, farmers and member states is better met’ (european commission, 2010a, p. 12 original emphasis). as fleshed out in policy specifics in the commission’s legislative proposals, this approach has three main elements that are intended to alter the distribution of spending within the cap: convergence, capping, and greening (see swinbank 2012). ‘convergence’ aimed to promote fairness by progressively narrowing variations in direct payments between farmers and across countries, particularly between old and ‘new’ europe, to ensure both ‘a more equal distribution of direct support’ and ‘fairer treatment of farmers performing the same activities’ (european commission, 2011a, p. 16). a unified ‘basic payment scheme’ would be phased in and replace the existing plethora of systems by 2019. national envelopes for direct payments will be adjusted so that countries receiving less than 90 per cent of the eu average payment will see one third of the gap closed. ‘capping’ proposed the progressive reduction of payments received by large beneficiaries and holdings, with resources transferred to rural development (sometimes referred to as degressivity). reductions would start at 20 per cent for entitlements between €150,000 and €200,000, gradually increasing in three stages to a 100 per cent reduction for payments over €300,000. ‘greening’ was to be substantially enhanced by making 30 per cent of direct support (pillar 1) conditional on verifiable and legally defined ‘environmentally supportive practices’ with farmers ‘receiving payments to deliver public goods to their fellow citizens’ (european commission, 2011a, p. 16). these practices were to include practices such as crop diversification, maintenance of permanent pasture, and the preservation of ecological reserves and landscapes. countries would be able to transfer up to five per cent of direct payments between pillars to reinforce rural development, although for those whose level of direct payments is below 90 per cent of the eu average, ‘reverse’ transfer to pillar 1 will be allowed. the cap after 2013: explaining the outcomes for laffan and lindner, the three financial perspectives since early 1990s did little more than facilitate incremental changes in the levels of spending on the cap (2010, p. 218). while farm spending will go down, analysis of the mff for 20142020 supports this picture, with agriculture still accounting for over one third of the total eu budget. two main ideas usually are offered to explain this: the relative greer ● the common agricultural policy and the eu budget 127 balance of influence between member states as reflected in the outcomes of bargaining, and the nature of inter-institutional governance in the eu, both of which are overlaid by an enduring structural power enjoyed by agricultural interests. because the cap still takes up over a third of the budget, there is an overlap between ‘net recipient’ countries and a bloc of ‘cap defenders’, which swidlicki et al estimate at 24 countries. although probably an over-exaggeration, around 20 countries defended the cap at an agriculture council meeting in march 2011, greeted by french agriculture minister, bruno le maire, as not just a ‘strong political signal of support by governments for the cap’ but for ‘strengthening it in the years to come’ (euractiv.com, 2 june 2010, 18 march 2011). most member states generally favour maintaining cap funding at around its current level, although they do differ about what the money should be spent on. for swidlicki et al., this is ‘a powerful bloc which continues to block reform under the influence of the farm lobby, the commission, and many meps’ (2012, p. 9). this draws attention to the importance of eu institutions such as the ep, which has a formal role on cap under the lisbon treaty and which has tended to favour the maintenance of agricultural spending at around its current level (see greer & hind 2012). the agriculture council – historically the key actor on the cap typically has been regarded as defending the interests of farmers. as swidlicki et al. pithily summarise, ‘through the commission’s agenda-setting powers and the parliament’s veto powers, the eu institutions are also an obstacle to reforming the budget’ (2012, p. 9). this, however, understates the extent to which the commission actually has at times been an influential actor in promoting cap reform. national interests and preferences negotiating outcomes on the cap and mff reflect compromise and bargaining between different national interests but fundamental disagreements between member states remain extremely important. as agra europe noted in a report on an informal meeting of agriculture ministers in spain in june 2010, ‘calls for an end to pillar one largesse were echoed by more liberal-leaning member states…while traditional defenders of the cap budget made clear their continued support for a strong cap despite the new budgetary austerity sweeping across europe’ (no. 2415, 4 june 2010). traditional cap defenders such as france, ireland and greece support maintenance of the farm budget, favour direct payments tied to past levels of production, and remain sceptical about ‘greening’. in early 2011, for example, president sarkozy made it clear that france aimed to ‘maintain the cap's budget to the last euro’ and stated that ‘we do not have to excuse ourselves for defending community preference and the cap budget’ (euractiv.com, 19 january 2011; le monde.fr, 12 may 2011). a crucial element in the political process on cap reform, as it was in 2002, was the franco-german axis. in a joint paper in september 2010 they set out agreed core principles for ‘a strong cap beyond 2013’, rejected any ‘renationalization’, supported retention of the two pillar structure and of direct payments, and opposed substantial redistributive measures towards convergence’ (bundesministerium et al, 2010, p. 2). this was reinforced by a joint communique issued after a meeting in berlin in october 2012 by agriculture ministers, ilse aigner and stéphane le foll, which rejected calls from britain, poland and others for substantial cuts in pillar 1 expenditure. both ministers also stressed the need to maintain ‘close and trustful relations during the final stages of negotiations over cap reform and the mff’ (euractiv.com, 11 october 2012). france also joined with spain in defence of farm spending. in february 2012 their agriculture ministers issued a statement that stressed the importance of maintaining a strong agricultural sector and made clear they would ‘not accept’ any budget that ‘does not guarantee the stabilisation of the cap’ or maintain the existing level of spending (euractiv.com, 15 february 2012). european journal of government and economics 2(2) 128 reflecting their general stance on the mff, pro-reform countries such as the uk, sweden, denmark and the netherlands outlined radical reform ideas that were predicated to a degree on budgetary restraint. recognising that substantial cuts in the short term were unlikely, they pressed for a substantial reorientation of support from pillar i (direct payments) to funding for the provision of public goods under pillar 2 in relation to rural development, the environment and climate change. in september 2011 for example, the agriculture ministers of the uk and poland called for ‘deep and genuine’ reform of the cap, centred on a more competitive agriculture sector and better incentives to improve the environment, with reduced emphasis on pillar 1, convergence of direct payment rates, and a ‘step change’ in measures to increase competitiveness, including support under pillar 2. this was described in one report as london and warsaw putting themselves ‘firmly on a collision course with france’ over cap reform (euractiv.com, 22 october 2011). preferences & outcomes the extent of the influence of the ‘reformers’ can be assessed by mapping the extent to which they were successful in translating policy preferences into outcomes, using the uk as an exemplar. the uk historically has been in the vanguard of those favouring radical reform of the cap. while governments of all party complexions have not advocated the total abolition of the cap, which they see as vital to free trade within an undistorted single market, they do want a much less expensive, more consumer friendly, and more market oriented agricultural policy that is better focused on core objectives such as competitiveness and the environment. this means that reform must be radical and extensive, phasing out direct income support payments and shifting emphasis to pillar 2 funded public goods in the overall context of a smaller agricultural budget that has greater cofinancing. whether this would resemble anything like the cap as we have come to know it is open to doubt. as the department for the environment, food and rural affairs (defra) noted in its response to the commission’s reform communication in january 2011, ‘successive reforms of the cap have set a direction of travel towards greater market orientation and agricultural competitiveness and a greater focus on the delivery of public benefits in return for cap expenditure. the uk wants to see the acceleration of this process...’ (defra 2011b: 1). for the uk the commission’s proposals did not go far enough in two respects. first they insufficiently recognised the changed economic circumstances in the wake of the financial crisis. with intense pressure on public finances, the cap ‘cannot be immune to the hard choices being made elsewhere in the eu’ and consequently there must be ‘a very substantial cut to the cap budget’ for the next mff, concentrating on pillar 1 and leaving pillar 2 with ‘a greater share of a smaller cap budget’ (house of commons, 2011a, p. 5). second, by not taking the radical re-focusing’ route the commission proposals were ‘insufficiently ambitious for engendering the change in eu agriculture sector that will be needed if it is to survive in an increasingly competitive international agricultural market’ (house of commons, 2011a, p. 4). specifically the uk was concerned that proposals such as capping payments and greening pillar 1 ‘would be counterproductive to eu aims to develop a competitive agriculture sector, and risk entrenching continued reliance on subsidies instead of independence.’ rather there is ‘scope for pillar 2 to better reward farmers for the important public goods they provide’ and that we ‘need to stimulate a change in behaviour rather than entrench continued reliance on subsidy which it is increasingly difficult for the european taxpayer to afford’ (defra, 2011b: para. 7). the uk therefore argued strongly for phasing out of the remaining coupled subsidies, an end to export subsidies and market support measures such as intervention, and a radical reorientation of spending from pillar 1 to pillar 2, involving the gradual abolition of direct payments to reduce spending substantially. greer ● the common agricultural policy and the eu budget 129 so how does the outcome on cap reform map onto such policy preferences? as one report put it, the cap deal was finally reached on 26 june 2013 ‘after months of haggling over how ambitious the policy would be on overhauling direct payments, ending quotas, and making farmers more environmentally accountable’ (euractiv.com, 11 july 2013). key issues were the reform of direct payments and the pillar 2 budget, the abolition of market support measures, capping, convergence and the plans for ‘greening’ pillar 1. first, it is clear that advocates of radical reform did not succeed in obtaining the substantial reduction in the budget that they desired. agriculture council ministers broadly backed the commission’s reform ideas, noting for example in march 2011 that the cap had to remain a strong common policy with financial resources commensurate with its objectives (euractiv.com, 18 march 2011). the share of agriculture spending in the new mff will still be around a third and will decrease only slowly. so a common reaction has been that ‘agriculture was spared from major cuts made elsewhere in the eu’s spending framework’ (euractiv.com, june 2013). second, the 75:25 spending ratio between the pillars remains and will not change much, if all, by 2020. if anything, the council conclusions on the mff have resulted in a relatively greater reduction of planned spending on pillar 2 than in pillar 1. this indicates that when the budgetary circumstances are tight, governments and stakeholders resort to protecting their core interests (‘there are no votes in pillar 2’). arguably ‘net contributors’ such as the uk prefer overall budgetary constraint to a reconfigured cap, which might actually cost more in the short term. so while cameron played up his ‘success’ on the mff, this came at the expense of failure to move the cap substantially in the british government’s favoured direction. indeed on some calculations the mff outcome has reduced the uk’s resources under pillar 2 by more than originally planned. third, there was a mismatch on direct payments between the uk’s long-term vision for the cap and its specific negotiating priorities. while the government argued that income support subsidies are neither desirable nor necessary, it ‘made it clear that phasing out such payments by 2020 is unrealistic, in both practical and negotiating terms’ (house of commons, 2011a, p. 6). instead the aim was for ‘a very substantial, transitional reduction followed by ultimate abolition at a later date’ (defra, 2011b, para. 12). this chimed with the environment, food and rural affairs committee’s recommendation for ‘a more pragmatic approach’ because ending direct payments ‘is unachievable in the short-term’ and sticking rigidly to this policy ‘reduces the uk’s ability to engage constructively with other member states and could diminish the uk’s influence in this round of reform’ (2011b, p. 41). essentially this recognises that while the uk does not like direct payments, most other countries do. in fact there are important voices in the uk who challenge the policy approach, which in many respects reflects a treasury driven-agenda that is ideologically opposed to ‘subsidies’. the devolved adminstrations in wales and northern ireland defend them, and stakeholders such as the national farmers’ union (nfu) are sceptical that they can be substantially reduced without having a substantial detrimental impact on the viability of many british farms. fourth, the uk criticised the plans for ‘greening’ a substantial share of pillar 1 funding as too modest but also fundamentally flawed, and ‘unlikely to deliver significantly greater or more ambitious environmental benefits than those that are currently delivered’ (defra, 2011b, para. 27). the ‘greening’ proposals were the subject of much haggling during the negotiations on cap reform, what one source has called the subject of ‘a high-pressure lobbying campaign’ from both farmers and environmentalists (euractiv.com, july 2013). other national governments expressed concerns that the policies would be burdensome. while the french and german agriculture ministers said that they supported ‘greening’, they nonetheless wanted a ‘flexible’ system so that ‘agriculturally sustainable use of areas of ecological interest may be possible’ (euractiv.com, 11 october 2012). the european journal of government and economics 2(2) 130 statement issued by france and spain was even blunter, criticising the draft rules for ‘greening’ as ‘not adapted to the challenges facing european agriculture’ (euractiv.com, 15 february 2012). in the negotiations, both the council and meps supported plans to introduce ‘greater flexibility’ into the farm subsidies system. this reflected some core concerns of farming stakeholder groups about ‘being locked into standardised environmental rules despite the diverse landscape of european agriculture’ (euractiv.com july 2013). for others, including environmental groups, this meant watering down the proposed requirements for ‘greening’. one commentator noted in the wake of the council conclusions on the mff that commission ‘is fighting a rearguard action to force farmers to work in a way that benefits the environment’, and that the scheme ‘was weakened as part of last week's grand bargain between eu leaders at their budget summit in brussels’ (harrabin 2013). a spokesperson for birdlife europe complained that ‘europe is offered a budget that scales back investment in the environment and caters for the usual fat cats that have been milking the system until now’; for the royal society for the protection of birds (rspb) ‘wildlife across europe will pay a heavy price for this terribly regressive deal’ (as quoted in harrabin 2013). under the cap deal, 30 per cent of direct payments will still be contingent on meeting certain environmental criteria, however there will be no eu-wide performance standards and member states will have greater flexibility in implementation, for example about when to apply sanctions. in addition the political agreement introduced a range of exceptions relating to water pollution, crop diversification and environmental sustainability. farms under 15 hectares do not have to comply with new requirements to create “ecological focus areas,” which in the first instance will apply to five per cent of farmland in 2015, rather than the proposed seven per cent (this may still increase pending a review in 2017). for critics, more than one-third of all farmland and 89 per cent of farmers will be exempted from the rules. farms of less than 10 hectares (one third of the total in the eu) are exempted from crop diversification rules aimed at improving soil quality, and farmers also remain outside some eu environmental and water pollution legislation. according to a spokesperson for birdlife europe this represented ‘a major blow to those who championed a more sustainable, forwardthinking policy – one which would deliver for people and the environment as well as protecting the long-term interests of farming’ (euractiv.com, july 2013). fifth, capping direct payments, inspired by a desire to better support small farmers, also was an area of dispute. similar proposals were fiercely resisted in previous reform episodes by countries such as the uk and france who have efficient and large scale enterprises. for defra capping discourages greater competitiveness by restricting ‘natural structural processes’ such as amalgamation and consolidation (2011b, para. 23), and proposals for supporting small farms should concentrate on improving their underlying competitiveness. in the event the reform deal did stipulate that payments to those receiving more than €150,000 per year would be progressively reduced, but left unresolved the level of a limit on how much any farmer could receive. the new rules stipulate that each farmer receive at least 60 per cent of the average national or regional direct payment by 2019, a reshuffling that advocates say will help smaller landholders. measures also were introduced to help ‘new entrant’ farmers. sixth, some caveats were introduced around convergence and the forward march of ‘liberalisation’ was stalled in some respects, illustrating again the influence of the protectors of a traditional cap. german, french and spanish ministers had strong reservations about convergence, not least because any redistribution in favour of ‘new’ member states would entail reduction in the benefits received by their own farmers (a commission estimate put this as high as a 7 per cent reduction in funding for french farmers). france and spain wanted a more careful phasing in of convergence and complained that the ‘magnitude’ and ‘pace’ proposed by the greer ● the common agricultural policy and the eu budget 131 commission was ‘not acceptable’. nevertheless the cap deal does provide for the gradual harmonisation of payments between old and new countries, requiring that no single state receives less than 75 per cent of the eu average by 2019. on the other hand the force of renewed arguments about food security in a world made increasingly volatile by climate change underpinned decisions to retain some production quotas. although the last remaining export subsidies were reduced to zero, facilitated by high world food prices, sugar quotas were extended until 2017 (two years later than their planned abolition) and a new vine planting scheme after 2016 was introduced, rather than withdrawal of protection for grape growers. as julie girling, agriculture spokeswoman for the british conservative party, complained, ‘old-fashioned market intervention is back in a big way, potentially taking us back to the bad old days of butter mountains and wine lakes’ (euractiv.com, 11 july 2013). constructing a balanced scorecard on all of these elements it seems clear that the result of the negotiations on cap reform was to markedly water down the original proposals of the commission in order to secure agreement between member states, each of whom had their own ‘red lines’ and negotiating objectives. in most respects this ‘watering down’ was at the expense of ideas such as ‘greening’ that are central to the proposals of the radical reformers, and consistent with objections raised by defenders of a ‘traditional’ cap. one way this has been done is to continue the trend to give greater flexibility for member states and hence more scope for national variation (see greer 2005). one analysis remarked that while the final agreement ‘retained some’ of the original goals, the inter-institutional negotiations produced an outcome that ‘gave the 28 member states more leeway, including over new environmental performance rules’ (euractiv.com, 11 july 2013). this actually is consistent with the uk’s argument that member states should continue to be given the flexibility to allocate cap funding in a way that best suits the requirements of their own regions and farming structures, providing it is consistent with the wider objectives of the cap. a one-size fits all solution will restrict rather than facilitate, as well as adding significant complexity and costs (defra, 2011b, para. 24). the cap after 2013: the influence of co-decision the outcome of the cap reform process can be explained in essentially traditional ways, mainly by focusing on the defence of important national interests by member states (acting on their own, bilaterally or in coalitions) usually under the continued influence of a domestic farm lobby. in addition the cap deal (as with the mff) embodies side payments and trade-offs between the main policy institutions and actors (for example increased budget rebates for the netherlands and austria, and extra rural development funding for several countries including ireland). one new influence compared to previous cap reform episodes was the part played by the ep, exercising the formal role given to it by the lisbon treaty. although some relatively minor issues had already been processed using the new rules, the 2013 cap reform was the first real test of these new inter-institutional arrangements (see greer & hind, 2012). the first point to make is that co-decision in agriculture, at least on the big policy issues, is likely to prolong the policy process. the inter-institutional deal reached in june 2013 came nearly two years (21 months) after the commission published its legislative proposals. as one report put it, there was a ‘slow decision-making process, highlighted by intense lobbying’, which means that much of the agreement will not be implemented until 2015, requiring the commission to introduce transitional arrangements to cover 2014 (euractiv.com, 11 july 2013). second, as suggested in some early analyses of co-decision in agriculture, while the ep now has a greater formal role in the decision-making process, this – so far at least – has buttressed the status quo on the cap rather than facilitate radical european journal of government and economics 2(2) 132 change (greer & hind 2012). the ep’s agricultural committee, comagri, dominated by farming, landowning and rural interests, defended the cap in the negotiations and played a key part in altering the original proposals in some respects. the debates over ‘greening’ showed up the structural divisions within the ep, ‘leading to battles in parliament between the more green-focused environmental committee and its agricultural counterpart’ (euractiv.com, 11 july 2013). irish agriculture minister, simon coveney, who oversaw the final stages of negotiations during ireland’s eu presidency, accepted that there had been ‘inter-institutional frictions’ but considered that ‘we have found a balance that everyone can agree with’. others welcomed the broadening out of the decision process to a wider range of actors rather than a handful of national leaders. at the very least meps exercised their formal authority, ‘re-writing parts of the european commission’s original farming proposal and working through 40 rounds of negotiations with national ministers and the commission’. one french environmental campaigner even praised the inclusion of the ep as ‘good for food democracy…it’s not perfect, but it is better than in the past’ (euractiv.com, july 2013). on the other hand, a more obvious interpretation is that offered by a spokesperson for wwf who complained that the ep has proven that it is not ready to handle its new full co-decision powers on the common agricultural policy. at every turn the agriculture committee has tried to water down this reform. it even managed to throw out the few improvements the parliament plenary had requested of them. (euractiv.com, july 2013). conclusions the parallel negotiations on a new mff for 2014-20 and proposals for the reform of the cap after 2013 introduced greater complexity into the picture. it is arguable for example that the priorities of the uk focused more on big picture reductions (or a ‘freeze’) in overall budget expenditure rather than the specifics of cap reform. in budgetary politics, radical reform is much harder under conditions of constraint, and in this case the tight agreement on the mff made it even more difficult to secure radical changes in the cap. so the window that might have opened for the mff to usher in radical cap reform stayed well shut. from the outset it was clear that the mff process would not lead to a radical reconfiguration of the eus budget priorities. although real cuts were made in the resources allocated to agriculture, the cap continues to be a substantial beneficiary from the eu budget. within this framework, the balance between the two pillars will stay broadly the same, with no real transfer of funds from direct payments to measures for rural development and environmental sustainability. if anything, the outcome of the negotiations actually was to water down the original proposals for enhanced environmental measures, achieved in some part by reinforcing the capacity for national variation, and to row back from the liberalisation agenda by reintroducing market intervention measures and allowing the retention of some coupled subsidies. the 2013 cap reform episode again highlights many of the core themes that are present in the extensive literature on agricultural policy in the eu. although in many respects path-dependent, reform is not impossible but takes place in a largely incremental fashion that can nonetheless produce considerable change over time. there remains a tension between a state-assisted and neo-liberal paradigm that can fluctuate between reform episodes, and policy actors working within institutional frameworks negotiate on the basis of preferences, which in the case of many member states continue to be favourable to agriculture. essentially the decision rules and institutional structures around the cap, plus the balance of forces between member states, still works as a barrier against radical policy change. although some governments such as the uk continue to advocate fundamental change, these remain largely voices in the wilderness. most member states support the retention of the familiar cap and its main policy instruments and greer ● the common agricultural policy and the eu budget 133 mechanisms. this preference has been buttressed, at least in the medium term, by the inclusion of the ep in the formal procedures of cap reform. exploiting its enhanced role in the decision-making process, the ep – so far at least – has worked to support the status quo on the cap rather than facilitate radical change. references ackrill, robert (2000a) 'cap reform 1999: a crisis in the making?', journal of common market studies 38(2): 343-53. ackrill, robert (2000b) ‘the european union budget, the balanced budget rule and the development of common european policies’, journal of public policy 20(1): 1-19. ackrill, robert and adrian kay (2006a) ‘historical-institutionalist perspectives on the development of the eu budget system’, journal of european public policy 13(1): 113-33. ackrill, robert and adrian kay (2006b) ‘the eu budget and the cap: an agenda for the review?’, eurochoices 5(3): 20-25. benedetto, giacomo (2013) ‘the eu budget after lisbon: rigidity and reduced spending?’, journal of public policy 33(3): 345-69. benedetto, giacomo (2012) ‘introduction: a history of the european budget and the possibilities for reform’, in giacomo benedetto and simona milio (eds.), european union budget reform: institutions, policy and economic crisis. basingstoke: palgrave macmillan, pp. 1-20. benedetto, giacomo and simona milio (2012) ‘conclusion: budget policy, past experience and the future’ in giacomo benedetto and simona milio (eds.), european union budget reform: institutions, policy and economic crisis. basingstoke: palgrave macmillan, pp. 171-192. bundesministerium für ernährung, landwirtschaft und verbraucherschutz, ministere de l’alimentation de l’agriculture et de al peche (2010) franco german position for a strong common agricultural policy beyond 2013. burrell, alison. (2009) ‘the cap: looking back, looking ahead’, journal of european integration 31(3): 271-89 cameron, david et al. (2010) ‘a letter from prime minister david cameron and other european leaders to the president of the european commission on 18 december 2010’. http://www.number10.gov.uk/news/letter-to-president-ofeuropean-commission/ coleman, william, grace skogstad, michael (1997), ‘paradigm shifts and policy networks: cumulative change in agriculture’, journal of public policy 16(3): 273301. cunha, arlindo with alan swinbank (2011) an inside view of the cap reform process: explaining the macsharry, agenda 2000, and fischler reforms. oxford: oxford university press. daugbjerg, carsten (2009), ‘sequencing in public policy: the evolution of the cap over a decade’, journal of european public policy 16(3): 395-411. daugbjerg, carsten and alan swinbank , ‘ideational change in the wto and its impacts on eu agricultural policy institutions and the cap’, journal of european integration 31(3): 311-27. defra (2011a) cap reform post 2013: defra discussion paper on the impact in england of the eu commission regulatory proposals for the common agricultural policy reform, post 2013. december 2011. european journal of government and economics 2(2) 134 defra (2011b) uk response to the commission communication and consultation: “the cap towards 2020: meeting the food, natural resources and territorial challenges of the future.” january 2011. erjavec, karmen, emil erjavec and luka juvancic (2008) ‘new wine in old bottles: critical discourse analysis of the current common eu agricultural policy reform agenda’, sociologia ruralis 49 (1): 41-55. euractiv.com (11 july 2013) ‘cap 2014-2020: a long road to reform’. http://www.euractiv.com/cap/cap-reform-2014-2020-linksdossier-508393 euractiv.com (11 october 2012) ‘franco-german statement on cap (9 oct. 2012)’. http://www.euractiv.com/cap/france-germany-agree-keep-eu-far-news-515325 euractiv.com (15 february 2012) ‘spain joins france in bid to ring fence cap budget’, http://www.euractiv.com/cap/spain-joins-france-bid-ring-fenc-news-510824 euractiv.com (22 september 2011), ‘britain, poland join calls for 'radical' cap reform’. http://www.euractiv.com/cap/britain-poland-join-calls-radica-news-507829 euractiv.com (12 september 2011) ‘nine eu countries call for slim eu budget’. http://www.euractiv.com/euro-finance/eu-countries-call-slim-eu-budget-news507532 euractiv.com (18 march 2011) ‘reformers left isolated in eu farm policy debate’. http://www.euractiv.com/cap/reformers-left-isolated-eu-farm-policy-debate-news503245 euractiv.com (19 january 2011) ‘sarkozy: france needs no excuse to defend eu farm policy’. http://www.euractiv.com/cap/sarkozy-france-needs-excuse-defend-eufarm-policy-news-501411 europa (2011) ‘press release: the european commission proposes a new partnership between europe and its farmers’, ip/11/118, 12 october 2011. european commission dg agriculture & rural development (2010), communication, the cap towards 2020: meeting the food, natural resources and territorial challenges of the future (brussels, 18.11.2010, com (2010) 672 final). european commission (2011a) communication from the commission to the european parliament, the council, the european economic and social committee and the committee of the regions, a budget for europe 2020, com (2011) 500 final, part i (brussels, 29 june). european commission (2011b), eu budget 2012: for 500 million europeans. for growth and employment. http://ec.europa.eu/budget/library/biblio/publications/2012/budget_folder/budget_20 12_en.pdf european commission (2011c) proposal for a regulation of the european parliament and of the council on the financing, management and monitoring of the common agricultural policy, com (2011) 628/3, 2011/0288 (cod), sec (2011) 1153/4 (brussels). european commission (2011d) impact assessment: common agricultural policy towards 2020, commission staff working paper, xxx sec (2011) 1153 (brussels). european commission (2010) communication, the cap towards 2020: meeting the food, natural resources and territorial challenges of the future, com (2010) 672 final (brussels, 18 november). european parliament (2013) resolution on the european council conclusions of 7/8 february concerning the multiannual financial framework’, b7-0129/2013. greer ● the common agricultural policy and the eu budget 135 greer, alan (2012) ‘reform of the eu budget: implications for the common agricultural policy’, in giacomo benedetto and simona milio (eds.), european union budget reform: institutions, policy and economic crisis. basingstoke: palgrave macmillan, pp. 103-121. greer, alan and tom hind (2012) ‘the lisbon treaty, agricultural decision-making and the reform of the cap: an analysis of the nature and impact of ‘co-decision’, politics and society 31 (4): 331-41. greer, alan (2005) agricultural policy in europe. manchester: manchester university press. grant, wyn (1997) the common agricultural policy. basingstoke, palgrave. harrabin, roger (2013) ‘eu budget deal for farmers raises wildlife concerns’, bbc news 12 february 2013. http://www.bbc.co.uk/news/science-environment21424957. house of commons, environment, food and rural affairs committee (2011a) the common agricultural policy after 2013: government response to the committee’s fifth report of session 2010–11, fifth special report of session 2010–12, hc 1356. june 2011. house of commons, environment, food and rural affairs committee (2011b) the common agricultural policy after 2013, fifth report of session 2010–11, hc 671, vols. i & ii. april 2011. house of commons library (2013), eu multiannual financial framework (mff) 2014-2020, standard note snep 6455, march 2013. keeler, john (1996) 'agricultural power in the european community: explaining the fate of cap and gatt negotiations', comparative politics 28(2): 127-49. laffan, bridget and johannes lindner (2010) ‘the budget: who gets what, when and how’, in helen wallace, mark a pollack and alistair young (eds), policy making in the european union (6th edition). oxford, oxford university press, pp. 207-28. le monde.fr (12 may 2011) ‘sarkozy : "la france veut le maintien du budget de la pac à l'euro près"’. http://www.lemonde.fr/europe/article/2011/05/12/sarkozy-lafrance-veut-le-maintien-du-budget-de-la-pac-a-l-euro-pres_1521067_3214.html. lynggaard kennet and peter nedergaard (2009) ‘the logic of policy development: lessons learned from reform and routine within the cap 1980– 2003’, journal of european integration 31(3): 291-309. núñez ferrer, jorge (2009) ‘for a future sustainable, competitive and greener eu budget: integrating the climate change objectives’. final report of a ceps task force. brussels: centre for european policy studies. paice, jim (2011) http://www.defra.gov.uk/news/2011/08/26/cap-reform-meetings/. rieger, elmar (2000) ‘the common agricultural policy: politics against markets', in helen wallace and william wallace (eds), policy-making in the european union. oxford, oxford university press, pp. 180-210. roederer-rynning, christilla (2010) ‘the common agricultural policy: the fortress challenged’, in helen wallace, mark pollack and alastair young (eds.), policymaking in the european union (6th ed.). oxford: oxford university press, pp. 181206. roederer-rynning, christilla (2003) ‘from "talking shop" to "working parliament"? the european parliament and agricultural change’, journal of common market studies 41(1): 113-35. european journal of government and economics 2(2) 136 roederer-rynning, christilla and frank schimmelfennig (2012) ‘bringing codecision to agriculture: a hard case of parliamentarization’, journal of european public policy 19(7): 1-18. rutz, cordula, janet dwyer and jorg schramek, (forthcoming) ‘more new wine in old bottles? the evolving nature of the cap debate in europe’, sociologica ruralis. skogstad, grace (1998), ‘ideas, paradigms and institutions: agricultural exceptionalism in the european union and the united states’, governance 11(4): 463-90. swidlicki, pawel, anna kullmann and mats persson (2012) seizing the moment: aligning the eu budget with europe’s economic needs. london: open europe. http://www.openeurope.org.uk/content/documents/pdfs/2012eubudget.pdf. swinbank, alan (2012) ‘another reform? proposals for the post-2013 common agricultural policy’, world agriculture: problems and potential, 3(1): 32-37. swinbank, alan (1999) 'eu agriculture: agenda 2000 and the wto commitments', world economy 22(1): 41-54. swinnen, j. (2009)(ed.) the perfect storm: the political economy of the fischler reforms of the common agricultural policy. brussels: centre for european policy studies. swinnen, jo and louise knops (2012) ‘cap reform: will the european parliament take the bull by the horns?’ ceps commentaries. centre for european policy studies: brussels. available from www.ceps.eu de wilde, peter (2012) ‘politicisation of the eu budget: conflict and the constraining dissensus’, west european politics 35(5): 1075-94. wyles, john (2013) ‘an eu budget deal that sends the wrong signals’, european voice, 14 february 2013. http://www.europeanvoice.com/article/imported/an-eubudget-deal-that-sends-the-wrong-signals/76431.aspx. microsoft word ejge_04_2015-010.docx european journal of government and economics volume 4, number 2 (december 2015) issn: 2254-7088 134 the scope of public organisations with productive functions: insights from the inefficiency of italian local public transport ugo arrigo, university of milano-bicocca giacomo di foggia, university of milano-bicocca abstract it is a well-known fact that reforms necessary to enhance competition and make the economy more attractive play a major role in the government activity in europe. considering the italian state of affairs, this paper focuses on the inefficiency of public producers in the light of certain market and legal impediments. this paper describes key barriers that undermine the healthy functioning of an important industrial and service sector of the italian economy: specifically local public transport. this paper also sheds some light on this problem analysing the impact that a controversial regulation framework may have on an industry and suggests that the degree of liberalisation affects the return on investments. jel classification h11; h40; d78. keywords state-owned enterprises; efficiency; italy; local public transport; competition. european journal of government and economics 4(2) 135 1. introduction the economic literature on public economics has often analysed relationships between the government, society and the market, recurrently to evaluate the role of public organisations and the impact of public policies on the functioning of modern markets. indeed, over the past decades, there has been heightened interest in the organisation and efficiency of public organisations with vast consensus of essential key roles of modern governments that comprehend the protection of individuals’ freedom, the redistribution of resources and the mitigation of market failures (pollitt, 2004), accordingly, many scholars agree on the good reason for the existence of government organisations with productive functions. a relatively young area of research is the analysis of european integration on local governments alongside their sublevels. in this regard, it is generally acknowledged that public budgets in many european countries are under significant constraints. schmidt (2006) argues that the institutional structure has contributed to alter the balance of power among national institutions and weakened national decision autonomy. the efficiency of the state-owned enterprises of eu countries varies widely, however available information on their performance is fragile. nevertheless, significant even if minute steps forward are being made in italy, in fact, the publication of the database on soes (especially key accounts variables) has constituted a considerable advance over the previous situation, allowing the knowledge of the main characteristics of such firms, and facilitating the evaluation of performance according to the different industries. with this in mind, it is underlined that the performance can be strongly affected by a multitude of exogenous factors that can’t be observed from our analyses. at any rate, putnam et al. (1994) provide measures to evaluate institutional performance given that the quality of the institution is strongly correlated with growth (arnold et al. 2011). prior research provides useful inputs using different approaches and shows that new challenges arise for public organisations as they have to deal with rapid and accelerating economic change, increasing complexity of regulatory issues, new technologies and services, calls for openness, transparency and citizen participation (pitlik et al. 2012). reforms must be implemented and sustained during times when fiscal constraints and budget consolidation pressures become increasingly tighter since good legislative frameworks can promote the healthy functioning of the market (arnold et al. 2011). however, regulatory frameworks (i) may be flawed by various factors that undermine their public interest aims, (ii) may involve costs that exceed their expected benefits; (iii) may suddenly become obsolete because of technical developments or the evolution of demand. many economists tend to be inclined to foster policies aimed at increasing competition in order to increase efficiency (amaral et al., 2009; jonsson, 1984; niskanen, 1973). such competition can also be generated with the aid of continuous productivity and efficiency comparisons between public bodies which provide similar output. likewise, other authors have been stressing the importance of collaboration (entwistle and martin, 2005; hartley et al. 2013; osborne and strokosch, 2013; warner, 2011). in this paper the ownership of enterprises is also discussed, there is in fact renewed interest in the role that soes can play in promoting economic development, the relationship between soes and the government as a shareholder, and the criteria used in assessing options for investing in or disposing of state-owned enterprises. given the importance of a well-functioning sector and the presence of certain indications that competition in the italian local public transport struggles (boitani et al. 2009; ibl, 2013), we try to look at the reasons for these inefficiencies. arrigo and di foggia ● the scope of public organisations with productive functions 136 in an effort to provide these concepts with more details, we focus on the performance of the selected enterprises operating in it. as the industry is strongly regulated and the behaviour of companies needs to be assessed in the context of the existing regulatory framework, we also look in broad terms at aspects of the regulatory framework. we then champion some conditions to be achieved or defended, such requirements lies in the restriction of the spoil system, choice of management made from specific lists of candidates with a certified level of expertise and based on free-access comparative selection procedures and implementation of training schools and human resources development. appropriate policies could provide citizens with efficient services while at the same time may contribute to the creation of an open business environment that supports the competitiveness of the industry. that said, policies will ensure that services entrusted by open, transparent and non-discriminatory tenders, make available the public service obligations and the procedures for determining compensation, and define precisely the subject of the tender and the amount of investments. the results of our analysis suggest a positive relation between open business environment and productivity. nevertheless this relation is only tested using the return on equity (roe) as dependent variable consistently with the italian ministry of economics. we find that soes operating in a highly liberalised market (energy) outperform those operating in local public transportation. the remainder of this paper is structured as follows: in the first section, we provide a review of related literature used to introduce and support our statements. after that, the background of the italian situation is presented; this is followed by the introduction of the italian local public transport market. next, the empirical analysis is performed. the discussion of the results and conclusion follow. 2. review of relevant literature the evolution of the role of government in modern states has been well documented and arguably represents one of the current most thought-provoking topics (heady, 2001). a keystone in the classification of roles is the work of musgrave (1959); providing for adjustments in the distribution of income and the function of contributing to stabilisation, see habermas (1994), dahl (1947) and kettl (2002). similarly, bator (1958), newman (1974), brown, potoski and van slyke (2006), haque, (2001) describe the triple role of government: security of the individuals’ freedom, the redistribution of resources, and the intervention in market failures. while the first two roles – redistribution of resources and the intervention in market failures – derive from the functioning of the market, as explained in normative economic theory (buchanan, 1968; martimort and pouyet, 2008), the security of the individuals’ freedom is a condition sine qua non of modern states (brennan, 1977; nozick, 1974). it might be objected thought that despite many different approaches have been proposed in an effort to shed some light on this issue the identification of scope and functions is tough (hood, 2000). this is corroborated by raadschelders and lee (2011) that present a historical review of research and infer that more recent research has tended to focus on different methods, mainly regarding organisation, metrics and performance (frederickson et al 2003; grandy, 2009; ostrom and ostrom, 1971). a critical aspect however of many studies aimed at assessing the performance of public entities in complying with their mandate is the comparability of methodology and results characterised by remarkable heterogeneity. in this sense, afonso et al. (2005) compute public sector performance (psp) and public sector efficiency (pse) indicators and find differences that lead the authors to suggest paths to public savings. to the same token dabla-norris et al. (2012) provide a public investment efficiency index that captures the institutional environment underpinning public investment management across four different stages: project appraisal, selection, implementation, and evaluation. these studies suggest that european journal of government and economics 4(2) 137 governments besides the public sector play an important role in the economic life of the state through the revenue and expenditure measures. in the same fashion of the general roles outlines above the essential economic purposes orbit around are taxation and expenditure measures, stabilisation policies (required by the government to affect the levels of aggregate demand) and allocation, i.e. the provision of public goods that cannot be provided through market mechanism. in certain cases, e.g. if there is market failure, government may be able to provide the good at a more optimal level and price if compared with the market equilibrium. as a matter of fact the economic mandate justifies a productive function, eventually, in the form of public producers, both providing market and non-market goods and services. nonetheless, other models of provision of market and non-market goods and services exist, e.g. public-private partnerships are growing in popularity as a governing model (forrer et al., 2010). as a producer of goods and services, public administration plays a significant role for the well-being of citizens and the competitiveness of countries. hence, the questions of which factors improve performance and raise capacities of a public administration to provide goods and services efficiently are at the heart of all discussions about public sector reforms (pitlik et al., 2012). to this regard a great deal has been written about the politics-related factors that impact on performance of firms (al-obaidan and scully, 1992; bottasso and sembenelli, 2004; sapienza, 2004; shleifer and vishny, 1994; zheng et al. 2003). amaral (2008) analyses the determinants of the performance differential between the private and public management of urban public transport in europe. according to the author, private management is associated with lower operating costs; however, the differential can depend on the interaction of the local authorities' capacity for expertise and the private operators' autonomy margin. in terms of total costs, no systematic advantages should be expected from private management. despite significant regional variation both between and within different regions, there is widespread consensus on the scope of soes, for example, to correct market failures, provide public goods, and foster economic development (kowalski, büge, sztajerowska and egeland 2013). the previously mentioned productive functions justify certain public producers (arrigo and di foggia, 2013; dewenter and malatesta, 2001; toninelli, 2000). although the government as a regulator and owner of assets opens a possibility of favourable treatment granted to soes (kowalski, büge, sztajerowska and egeland, 2013), it may be argued that there is, however, still little reliable information on their efficiency and on the advantages they may be enjoying because of their ownership since soes increasingly compete with private firms. firms frequently interact with public administration in many different ways and in a variety of different circumstances. in addition, firms indirectly rely on public administration outputs. thus, an efficient public administration that efficiently provides public goods and services and that absorbs relatively few public resources affects productivity and competitiveness of firms (afonso et al. 2005; allum, 1974; calandra, 1978; fratianni and spinelli,1982; ongaro, 2004; torres, 2004). other authors provide pieces of evidence on the causes of inefficiency (capano, 2003; cassese, 1993; del monte and papagni, 2001; tanzi, 1998). bandiera et al. (2008) estimate the cost of active (its presence entails direct or indirect benefit for the public decision-maker) and passive (its presence does not advantage the public decision-maker) waste from observed costs of public services. the authors assess the impact on how efficiently a certain public service is provided. their model focused on generic goods purchase which account for 40 per cent of public spending for goods and services. their findings suggest that the difference in prices across public bodies is principally due to variation in passive arrigo and di foggia ● the scope of public organisations with productive functions 138 (83 per cent of total) rather than active waste. based on average total cost (frank, bernanke and johnston, 2007) show that productive inefficiency implies an excess of production costs. other noteworthy and widely investigate elements that concur to determine the average low performance of italy are both clientelism (caciagli, 2006; della porta and vannucci, 1997; garcía, 2013; guzzini, 1995) and corruption. also results of a recent study (fiorino et al. 2012) confirm evidence of a negative correlation between corruption and growth. at the time of writing a controversial topic is the underperformance of local public transport or lpt sector. it is generally acknowledged that public budgets, including those dedicated to cover public transport, are under significant constraints. recent austerity measures have affected this sector too. between 2010 and 2012, the industry witnessed an overall decline in resources (600 million) or -12 per cent of public contributions. the reduction of public transfers has triggered a general tendency to raise the price of tickets. according to a recent fact-finding investigation of the italian competition authority (agcom, 2014), the ongoing situation of general inefficiency and lack of financial resources is largely attributable to the ownership, the management objectives and the regulatory framework that is layered and not always consistent. as highlighted by asquer (2011), local public transport has traditionally been operated by local state-owned enterprises – soes. boitani et al. (2009) investigate how the ownership and the procedure for the selection of firms operating in the local public transport sector affect their productivity. in order to compare different institutional regimes, they carry out a comparative analysis of companies operating in large european cities. the authors find that when firms are totally or partially in public hands their productivity is lower. moreover, firms selected through competitive tendering display higher total factor productivity. however there are cases of soes success worldwide and some soes are closing the gap with their private-sector competitors. as far as we know, there are, however, few studies that specifically analyse soes based on profitability measures. bovaird and löffler (2009) provide some highlights on key concepts of management and performance measurement that include profitability ratios. in fact the profit made by organizations can be effectively evaluated when compared to the amount of resources and activity required to generate it. return on investment (roi) is a widely used measure of overall performance and there are two key approaches to roi (walsh, 2003). the first approach is based on the return on total assets (rota) or return on capital employed (roce) which focuses on operating efficiency of the total enterprise. the second approach, employed in this paper, is based on the return on equity (roe), which concentrates on performance efficiency as translated into return to shareholders. it is anticipated that this approach opens to several interpretations. 3. background 3.1. unsuitability of regulation prevents the healthy functioning of local markets a breakthrough in regulatory policy during the last decades has been the awareness that government objectives for the utility industries can also take benefit from facilitating competition (arrigo and di foggia, 2013). the european commission enforces competition rules towards a single market by ensuring that all companies compete equally and fairly (european commission, 2014a). this benefits consumers, businesses and the economy as a whole. the competitive market is primarily a selection mechanism of economic behaviour, evaluated in terms of efficiency, able to protect consumers and ultimately the general public from the effects of poor decisions made by producers. european journal of government and economics 4(2) 139 still, if competition does not seem possible with regards to public organisations that produce administrative acts, it may be introduced for soes that compete with private companies under specific rules and in viable sectors. this can introduce adequate competition for services that will be offered by many organizations using the same infrastructure, as it is not economically convenient to duplicate it (oecd, 2004). to this extent, arnold et al. (2011) underscore that regulation generally addresses public-interest concerns about market failures, including monopoly conditions, externalities and asymmetric information. in this context, a good regulation can promote competition in certain industries by ensuring that market power in natural-monopoly segments is not used abusively and by providing the correct incentives to business participants. however, regulatory frameworks may be flawed by various factors, thus (i) some regulations may drift away from their original public interest aims, (ii) regulations sometimes involve costs that exceed their expected benefits and (iii) technical development, the evolution of demand and progress in regulatory techniques can make the design of regulations obsolete. even if it does not create effective competition, the separation of production and distribution would make the introduction of forms of comparative competition between suppliers operating in different geographical areas possible. the same method may also be introduced in order to evaluate the performance of similar offices in the typically public area of the production of administrative acts. 3.2. degree of liberalisation the world economic forum defines competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country. at the roots of competitiveness are the institutional and microeconomic policy arrangements that create the right conditions for a wealthy business environment under which businesses can grow (european commission, 2014b). by analysing eight sectors, asquer (2011) suggests that the difficulty to implement liberalisation and regulatory reforms in italy may be explained by various concurrent forces, which have to do with: the rent-seeking behaviour, the rise of barriers to entry against competitors, and the risk of collusive practices between regulators and regulated. it becomes therefore important to shed some light on factors that impact the efficiency of italian public administration.table 1 gives an idea about the rank of liberalisation in different sectors in italy. for each sector a number of criteria are employed in order to assess the existence of barriers to entry in, organization within, and exit from the market. the existence of such barriers is inferred from a number of quantitative as well as qualitative indicators. among the former, concentration indices, price dynamics, the public vs. private ownership of the incumbents, and other structural indicators are considered. among the latter, the index of liberalisation looks at such indicators as the degree of unbundling for essential facilities in network industries, the existence of fiscal or legal discriminations against the newcomers, the regulatory quality, etc. arrigo and di foggia ● the scope of public organisations with productive functions 140 table 1: index of liberalisation (italy) sectors 2007 2008 2009 2010 2011 2012 2012/07* natural gas 48 54 52 55 62 64 +16 post 37 38 38 41 47 52 +15 electricity 63 65 69 71 72 77 +14 labour market 50 35 55 60 60 60 +10 motorway 32 32 29 29 28 40 +8 financial services 59 62 63 64 69 66 +7 professional orders 46 46 47 47 47 52 +6 italy (total) 47 47 49 48 49 52 +5 telecommunicatio n 40 35 39 41 42 45 +5 art 55 55 56 56 56 58 +3 inland revenue 44 43 52 48 48 47 +3 public administration 40 37 35 38 39 42 +2 local public transport 45 46 43 43 44 45 0 airways 66 70 68 60 62 65 -1 water 27 27 32 17 19 19 -8 tv 70 68 67 65 62 61 -9 railways 49 49 49 41 36 36 -13 *change over the period 2007 – 2012. source: ibl (2012), liberalisation index, page 41. table 1 also shows the overall rankings of the ibl liberalisation index, comparing this year’s rankings with those from the previous edition of the index, showing all sectors ranked together. as graph 1 shows the ibl index of liberalisation appears to be correlated with the world economic forum’s competitiveness index while it is negatively correlated with the oecd state control indicator (the indicator covers formal regulations in the area of state control of business enterprises). these relationships support the idea that the selected index captures factors that are important for developing the lpt industry. on the same basis we see the ibl liberalisation index is taken as a reference for measuring the liberalisation degree of two italian sectors, namely lpt and energy to be used in our analysis. european journal of government and economics 4(2) 141 graph 1: correlation between ibl's index of liberalisations, wef's competitiveness index and oecd state control indicator source: own elaboration based on ibl liberalisation index (ibl_lib), oecs state control indicator (oecd_stc), wef competitiveness index (wef; gci). reference year: 2013. 3.3. the ownership of organisations there are well-known differences between governance of public and private companies (rainey et al. 1976) and the concept of governance is a growing body of european literature (peters and pierre, 1998). although state-owned enterprises as government assets open a possibility of favourable treatment these organisations may cope with multiple, unclear, or conflicting financial and social objectives. political interference can prompt decisions that threaten a company’s financial goals; therefore, managers can find it thorny to match the private sector’s performance standards. the defining characteristics of such organisations are that they have a distinct legal form and they are established to operate in markets even in they may also have public policy objectives. to better comprehend the struggle of public management and decision-taking process one must remember that administrative action within the sphere of the state that produces administrative acts, is governed by rigid written procedures that are consistent with the justice/equality objectives that administrative action pursues. garrone et al. (2013), underline that management discretion is a significant source of inefficiency in municipal enterprises. public sector organisations are similar to private companies since they have hierarchical structures that impose mandatory allocations of productive factors. however, while in private companies personal authority as defined by arrow (1974) is dominant, in public organisations impersonal authority prevails, consisting of written rules and laws and regulations that are relatively rigid and stable over time (arrow, 1974). in this way, public sector organisations do not benefit from the advantage that private companies have, represented by non-rigidity and the open and only partially predetermined content of work contracts. in private companies, the rules and procedures are subject to the leadership, on the contrary, in public organisations, leadership is subject to rules. therefore, in the case of poor legal arrigo and di foggia ● the scope of public organisations with productive functions 142 systems, when producing services for citizens, managers slog to achieve dynamically efficient solutions. dwyer and edwards (2009) digest this concept: dealing with change in the external environment creates considerable challenges for managers. given the complexity of strategy formulation it is difficult for managers to analyse all aspects of their environment or establish precise objectives, consequently business strategies tend to be characterised by small strategic adjustments or “incrementalism”. however, these marginal adjustments of strategy within an organisation’s existing culture may lead to strategic drift reflecting strategies that are inconsistent with changes taking place in the external environment. besides, andrews et al. (2006) show that the organisational failure is to some extent attributable to difficult circumstances and management features such as weak leadership and poor performance management. ongaro and valotti (2008) identify some factors affecting implementation of public management reform: characteristics of the administrative tradition and features of the politico-administrative context; the design of the reform package and the coalition of interests sustaining the reform; behavioural triggers; and the building over the time of management capacity at the level of individual public sector organisations. according to the financial police, in 2013, fraud and waste amounted to €5 billion and (over 19,000 managers identified by the military). specifically, the complaints to the judicial authorities, concerning crimes against the public administration, were more than 4,300 among others: bribery, extortion, embezzlement, misappropriation of funds, and abuse of office. the offences were put in place by directors, officers and civil servants alike. additionally, it is worth noting that, results of 25,000 inspections performed in 2013 show that among 1,704 public employees (total public employees amounted to 3.3 million) were sued for incompatibility with other assignments or jobs (gdf, 2013). state-owned enterprises may be overmanned to please employees that are voters too (boycko et al. 1996). non-commercial purposes can also make a firm vulnerable in the wage-bargaining process (haskel and szymanski, 1992). willner (2001) presents conditions under which political interference yields higher welfare than under commercial purposes, and vice versa. this supports a further efficiency gap of public organisations linked to the control of the organisation by politicians, resulting in resources for institutional duties instead being used by the political class, above all to bestow private benefits to constituencies (boubakri et al. 2008). the data presented in table 2 relate to 6,151 companies out of a total of 7,065 participated. in particular, for about 700 companies no data were available and so they were excluded. nevertheless, according to spicer (2010), scholars have too often been condescending towards the linkages between politics and governance, viewing political activities and interests as opportunities for corruption, mismanagement, and skewed priorities. table 2: participated companies (by local administrations) performance number of companies percentage operative result (billion €) average share (participation) profit 2879 47% 1.413 29% neutral* 1249 20% 60% loss 2023 33% -2.214 15% total 6151 100% -0.801 * companies with a loss or a gain up to 0.5% of net income are neutral: -0.5% < net income/asset < 0.5%. source: mef (2013) 3.4. the lpt industry at the time of writing a controversial issue is the apparent underperformance of local public transport sector. according to a recent fact-finding investigation of the european journal of government and economics 4(2) 143 italian competition authority (agcom, 2014), the ongoing situation of general inefficiency and lack of financial resources is largely attributable to the ownership and the management objectives. the report highlights several critical issues, among others: the organisation and procedures to select service operators (in many cases, the transport services are entrusted to state-owned inefficient companies or are managed on the basis of repeated extensions); the lack of transparency, efficiency and regulation of contracts, the overlap of activities of entrusted operators: monopoly and competition and problems that arise with respect to the determination of compensation, often awarded on the basis of criteria not aimed at efficient costs. the inefficiency of soes can generate losses other than the operating ones (€1.2 billion in 2012 according to the italian competition authority). even if almost all industries in which soes operate underperform, remarkable losses refer to the lpt (€300 million in 2012), other nonoperating losses are funded indeed by service contracts and government transfers (to current or capital account), or by citizens through tariffs based on the service total cost, e.g. the waste management sector. as highlighted by asquer (2011), local public transport has traditionally been operated by local soes. in addition, the regulatory framework is layered and not always consistent. as per the market structure one may note that the lpt sector is highly regulated, and differently from other european countries, on the supply side, there are plenty of smes. a european comparison shows that in italy the market share of the top three operators is equal to 26 per cent compared to 56 per cent in the uk, 77 per cent in france and 40 per cent in sweden, and that 88 per cent of enterprises have fewer than 100 employees. other data are shown in table 3. amaral (2008) analyses the determinants of the performance differential between the private and public managements of urban public transport in europe. according to the author, private management is associated with lower operating costs; however, the differential can depend on the interaction of the local authorities’ capacity for expertise and the private operators’ autonomy margin. in terms of total costs, no systematic advantages should be expected from private management. boitani et al. (2009) investigate how the ownership and the procedure for the selection of firms operating in the local public transport sector affect their productivity. in order to compare different institutional regimes, they carry out a comparative analysis of companies operating in large european cities. the authors find that when firms are totally or partially in public hands their productivity is lower. moreover, firms selected through competitive tendering display higher total factor productivity. however, there are cases of soe success worldwide and some soes are closing the gap with their private-sector competitors. table 3: key data of the lpt industry tpl industry values (≈) unit of measure companies 1150 number employees 116500 number turnover 10 billion € kilometres year (billion) 5.4 billion km fleet (n°) 50000 number buses 92 share (%) other means 8 share (%) source: own elaboration it is worth noting that 82 per cent of the production value comes from soes, which run 95 per cent of the urban transport services and 75 per cent of suburban public transport services. in 2013, most of the companies generated losses, with worse outcomes compared to those of other european countries (uk, germany, france, sweden, the netherlands and belgium). in the segment of road transport, the average ebit (-1.1 per cent) is poorer than the european average (3.5 per cent). the comparison with other countries is also negative considering the revenue per km of traffic (€1.08 against a european average of €1.34) and the public contributions €2.2/km against a €1.4/km european average of (agcom, 2014). arrigo and di foggia ● the scope of public organisations with productive functions 144 table 1 shows that while the italian situation increased from 2007 to 2012, local public transport did not. it is important to emphasise the referendum held in 2011 that has affected the existing rules of local public services and in particular on local public transport (dpr, 2011). the mentioned referendum has limited the floor for fair competition in the field of local public transport. furthermore, the structure of the italian lpt industry is characterised by fragmentation as several firms operate in relatively small user basin areas. asquer (2011) advises that, considering the italian environment, lpt has been traditionally run by local state-owned enterprises. graph 2: ibl liberalisation index – focus on energy and lpt source: own elaboration on ibl (2012). energy = electricity + gas 4. empirical analysis our primary source of data is the database of companies wholly or partially owned by the government (at different levels) published in 2014 by the ministry of economy and finance (mef). this choice was aimed at getting a general picture of the performance of the firms listed in the database. for our analysis, we managed to retrieve additional financial information and contextual variables from reliable sources: istat as per contextual variables and amadeus, a database of comparable financial information for public and private companies. we decided to omit variables related to industrial output and to take into consideration industrial activities and location to group the information. the statistical technique employed was ols regression. one of the principal challenges inherent in this approach – besides the assumption that the data are independent – was the lack of a definitive and universally accepted variable to be used as an object for the evaluation or dependent variable; thus we decided to employ the same index of the mef report; the return on equity roe. serious precautions were taken accurately and thoroughly to screen, clean and model the data in an effort to enhance results: 1,554 firms out of 3,500 used. the main limitation of the variables omission is the amount of variance accounted for in the response variable by the predictors. rsquared in fact indicates that the model accounts for a very low variance. however, provided the purpose of this paper, major benefits of models predominate. our work clearly has some limitations: sample, methodology, and absence of a time element to foster causal relations. 4.1. variables the key variable for the performance appraisal of the firms is roe, which is the most valuable indicator. it includes both dividends paid to shareholders and the retained profit which technically belongs to shareholders and which generates future capital growth (pizam, 2010). since the roe is useful for comparing the -5 0 5 10 15 20 2007 2008 2009 2010 2011 2012 a b so lu te c h an g e italy (total) local public transport energy european journal of government and economics 4(2) 145 profitability of a company to that of other firms in the same industry, we add some dummy variables to define both industrial activities and geographical distributions. as follows, the used variables accompanied the meaning.  roe: return on equity (retrieved for 2011, 2012 and 2013)  ep: (operating revenue/cost of employees)*100  empl: log of employees 2012  prco12: log of total production cost  prva12: log of total production value  derd: debt equity ratio 2012 – debt equity ratio 2011  av12: added value per capita  cl12: cost per employee  gdp12: gross domestic product at nuts3 level (italian provinces)  pop: population of the municipality  alt: log of altitude (metres)  net: dummy variable, it takes a value of 1 for companies that operate in a typical network public service (energy, gas, water, lpt, waste) 0 otherwise.  energy: dummy variable, it takes a value of 1 for companies that operate in the energy sector “energy” , 0 otherwise  tpl: dummy variable, it takes a value of 1 for companies that operate in the lpt sector, 0 otherwise.  ncs: 1= north, 2=centre, 3=south and islands (sicily and sardinia). 4.2. evidence table 4 presents correlations (2012 and 2013) for return of equity and financial output per employee, pe. weak even if interesting features emerge from a reading of this table. profitability of the analysed companies slightly decreases in southern regions, sicily and sardinia. table 4: correlation of some variable with geography variables roe13 roe12 ep13 ep12 ncs roe13 1 roe12 0.44 1 ep13 0.13 0.10 1 ep12 0.12 0.14 0.88 1 ncs -0.02 -0.06 -0.08 -0.06 1 source: own elaboration. similarly, correlations for independent variables used in the models are shown in table 5. unsurprisingly prco12 and prva12 are highly correlated, however this feature does not undermine the effectiveness. all other variables are pretty much uncorrelated. arrigo and di foggia ● the scope of public organisations with productive functions 146 table 5: correlation of dependent variables empl prco1 2 prva12 derd av12 cl12 gdp12 pop alt empl 1 prco12 0.86 1 prva12 0.85 1.00 1 derd -0.07 -0.02 -0.02 1 av12 0.03 0.37 0.40 -0.02 1 cl12 0.25 0.43 0.43 -0.01 0.54 1 gdp12 -0.04 0.03 0.04 0.05 0.13 0.03 1 pop 0.26 0.27 0.27 -0.01 0.08 0.18 0.00 1 alt -0.15 -0.15 -0.16 -0.01 -0.05 -0.10 0.12 -0.46 1 source: own elaboration our first estimation results are shown in table 6, which presents several alternative specifications of our reference model in column (1) that represents the starting point. in model (2) the variable net identifies the network public services, within model (3) the energy & gas sector is defined by the variable energy, while the model (4) is aimed at characterise the lpt sector. the model in column (1) provides broad preliminary support for our further assumptions regarding the determinants of roe. first, with respect to production cost prco12 and value prco12, we find that coefficients are as expected negative in the case of prco12 and positive considering prova12, both at the 1 per cent significance level. in line with what anticipated we find a negative coefficient associated with the number of employees empl, also (p<0.001). moreover, the gross domestic product per capita has a positive impact on the return of equity (p<0.001). a morphological characteristic, the altitude alt, though (p<0.1) negatively influences the performance too. it must be stressed that factors that do not show up as significant are by no means unimportant. european journal of government and economics 4(2) 147 table 6: model outputs (1) (2) (3) (4) variables roe roe roe roe empl -2.876*** -2.933*** -2.537*** -2.558*** (0.788) (0.789) (0.800) (0.795) prco12 -54.01*** -54.11*** -54.29*** -53.23*** (4.460) (4.462) (4.457) (4.461) prva12 57.06*** 57.06*** 56.92*** 56.11*** (4.746) (4.747) (4.741) (4.750) derd -0.00244*** -0.00245*** -0.00250*** -0.00241*** (0.000709) (0.000709) (0.000708) (0.000708) av -1.940 (1.308) cl12 0.136 (1.304) gdp12 6.351*** 6.578*** 6.425*** 6.103*** (2.202) (2.212) (2.202) (2.202) pop -0.113 (0.338) alt -0.659* -0.687** -0.718** -0.613* (0.340) (0.340) (0.340) (0.339) net 1.421 (1.223) energy 4.794** (2.056) tpl -6.390*** (2.328) constant -68.84*** -70.55*** -67.41*** -66.18*** (22.51) (22.57) (22.51) (22.51) observations 1,554 1,553 1,553 1,553 r-squared 0.152 0.153 0.155 0.156 standard errors in parentheses. non-significant variables other than dummies are only kept in column (1) *** p<0.01, ** p<0.05, * p<0.1 the results in model alternatives in table 6 are generally consistent with those in the model (1) and in particular reinforce our arguments. all of the variables that were significant in column (1) remain significant. overall, the results of the three regression analyses, columns (1), (2) and (3) with roe as dependent variable reveal a number of insights into what how the industrial activity (net stands for network public service, lpt because of its low liberalisation rank and energy since one of the most liberalised sectors) contribute to the measure of performance. considering the model in column (2) one may note the coefficient is positive though not significant. indeed, coefficients associated with the dummy variables energy, positive (p<0.05), and lpt, negative (p<0.01) are both significant. 5. discussion and conclusion examining our results, we speculate that while not all of the results were significant, the overall direction of results showed trends that could be helpful to learning about profitability of local public transport. indices that measure the efficiency of the participated companies can be an important stimulus to their performance improvement. the database published by the ministry of economics and finance reports a well-known index of efficiency, namely the return on equity roe. return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. noticeably profitability measures alone fail to capture in full the performance of soes because of the scope that these organisations pursue. in addition, although state-owned enterprises as government assets open a possibility of favourable treatment, managers of these organisations may cope with multiple, unclear, or conflicting financial and social objectives, therefore, they can find it thorny to match the private sector’s performance standards. as anticipated in the literature section arrigo and di foggia ● the scope of public organisations with productive functions 148 there are contrasting studies focused on the eventual political interference and on its effective ability to prompt decisions that threaten a company’s financial goals. our findings share a number of similarities with those reported in some of the papers above mentioned and in terms of the models presented in table 6, results support the theoretical assumption that different levels of liberalisation associated with different industrial activities affect the roe. apparently, a competitive environment with a sound regulatory framework may enable improvements in the profitability of firms, specifically the performance efficiency as translated into return to shareholders. in addition coefficients associated with the dummy variables energy, positive (p<0.05), and lpt, negative (p<0.01) are both significant, therefore as put forward, our results show different profitability of firms across different markets, regulatory frameworks and competition levels. given that our findings are based on a limited number of firms, the results from such analyses should consequently be treated with the utmost caution. important limitations might have influenced the results obtained, allowing alternative explanations. in particular, as previously indicated, it is possible that inefficiency may be driven more by omitted forces than by the variables highlighted in our theoretical and empirical arguments. as per the regulation of local public services, the current situation is at a standstill. although the goal is to move from a system of attribution of exclusive rights by issuing administrative orders to the liberalisation of the service, which entails the consequent free delivery, some critical aspects must be considered, among others the public service obligations to be observed by the operating entity, the definition of economic compensation and the issue of minimum standards (efficiency and quality) of services to be provided. we underline the need for high quality services granted in efficient and affordable procedures and providing all stakeholders with the required legal certainty. in this sense appropriate policies would provide people with efficient services while at the same time contribute to the creation of an open business environment that supports the competitiveness of the industry. as a premise, the simplification of the market access procedure, in terms of time required for authorisation is needed. at the same time the widely recognised lack of transparency in the current system impedes the efficient development of this market. we claim that the completion of the liberalisation and simultaneously the privatisation of a number of enterprises would pilot a better allocation of resources and consequently to an increase of the demand (apparently under the level of the mentioned european countries). as a matter of fact, according to oecd (2006), soes face explicit difficulties regarding their governance since are often effectively protected from two major threats i.e. threat of takeover and bankruptcy. data in table 7 seem to confirm that problems arise when control of public entities exceed the 50 per cent. we also agree with findings of the competition authority agcom (2014) who advises that the most important aspects for the market development are the proper definition of the areas of public service, both in terms of territory as regards the nature of the services offered and the definition of minimum services and the related question of the correct quantification of the compensation of the public service obligations. table 7: net income per employee and ebitda margin (italy eu 15) country public ownership ebitda net income per employee it >50.01% 8.05 -2.69 ≤ 50% 10.11 43.80 eu-15 >50.01% 11.18 18.39 ≤ 50% 13.24 74.39 source: own elaboration our results contribute to the literature on the governance of italian public transport by focusing on how different market structures influence the profitability of firms. results support leaders of public sector organisations as well as policy makers. european journal of government and economics 4(2) 149 our research suggests that, as per the profitability of firms within the lpt sector, soes could boost their productivity. however, companies and other organisations and policy makers need to address considerable challenges if they are to capture the full potential of such markets. 5.1. conclusion in this paper, we have highlighted that public organisations with productive responsibilities – public producers – may face multiple problems linked to the ownership, the management, the regulatory framework and the degree of competition of the markets in which they operate. this is done in conformity with the findings of the european commission (2014b) report on competition as it shows that competition enforcement helps promoting growth and competitiveness of states, prevents dominant companies from expelling competitors from the market, keeps markets open and efficient, and creates the conditions for lower input prices for the industry. as per the government expenditure related to soes (also in the form of state aid), policies aimed at enforcing competition help to steer public resources towards growth-enhancing objectives. indeed, on the one hand we have stressed that like unlawful government subsidies, unproductive government expenditure in soes can distort the level playing field, erect superfluous barriers and undermine the growth potential. on the other hand, we have also pointed out that government support and intervention can also have a positive impact when it is well-targeted. we advocate that efficiency and profitability problems arise in markets characterised by biases in some of the above mentioned aspects which threaten competition. this is particularly true in those markets where governments tend to intervene to protect incumbents. focusing on local public transport, we have highlighted critical aspects that have a negative impact on market development. specifically, the evidence of this study and the related literature points towards the idea that both exogenous factors like the regulatory framework and the level of competition coexist with endogenous factors (ownership and size) and mutually concur to the inefficiency of lpt. given these points, we have underlined that the results of our estimates reinforce our arguments. our results endow preliminary support for our assumptions. overall, the results of the three regression analyses reveal a number of signals on how the market structure impacts on the employed measure of performance, the roe. indeed, coefficients associated with the variables aimed at identifying the energy and lpt markets, confirm the better performance of firms operating in the energy market. the findings are not representative of the entire soes universe firstly because of the lack of consistent and robust information and secondly because in line with the opening decision this paper does not address in detail the potential additional affecting forces. the results however will be trusted considering the uniformity with most of the dedicated literature, though the findings cannot be generalised to other markets, countries or even measures of performance. our research suggests that policies aimed at containing government expenditure and in the meantime increasing the efficiency of the services provided will (i) ensure that service operators are entrusted by open, transparent and nondiscriminatory tenders and procedures, (ii) put at the disposal of all potential operators clear and sound rules to comply with the public service obligations and simplify procedures for determining compensation, and (iii) define precisely the subject of the tenders in order not to hamper considerably the participation of new entrants. the findings of this research have managerial implications too. governments should be able to select top-level management on soes who shall then have autonomy. after that, the selection of personnel (both at top and middle levels) should only be made from specific lists detailing candidates with certified expertise based on free-access comparative selection procedures. to do this, advanced and arrigo and di foggia ● the scope of public organisations with productive functions 150 professional schools for public management should be enforced, creating incentive schemes to encourage young people who are motivated and prepared for a public career. future work will concentrate on an international comparison of controlled companies and soes’ governance, regulation and performance in specific sectors by share of ownership. references afonso, antonio, ludger schuknecht and vito tanzi (2005) ‘public sector efficiency: an international comparison’, public choice 123(3-4):321-347. agcom (2014) audizione presso la ix commissione della camera dei deputati del presidente dell’autorità garante della concorrenza e del mercato professor giovanni pitruzzella. indagine conoscitiva sul settore del trasporto pubblico locale. allum, percy a. (1974) ?italy—republic without government?the world today’ 30(11): 448-459. al-obaidan, abdullah m. and gerald w. scully (1992) ‘efficiency differences between private and state-owned enterprises in the international petroleum industry’, applied economics 24(2): 237-246. amaral, miguel (2008) ‘public vs private management of public utilities–the case of urban public transport in europe’, research in transportation economics 22(1): 8590. amaral, miguel, stéphane saussier and anne yvrande-billon (2009) ‘auction procedures and competition in public services: the case of urban public transport in france and london’, utilities policy 17(2):166-175. andrews, rhys, george a. boyne and gareth enticott (2006) ‘performance failure in the public sector: misfortune or mismanagement?’, public management review 8(2): 273-296. arnold, jens m., giuseppe nicoletti and stefano scarpetta (2011) ‘regulation, resource reallocation and productivity growth’, european investment bank papers 16(1): 90-115. arrigo, ugo and giacomo di foggia (2013) ‘schemes and levels of state aid to rail indutry in europe: evidences from a cross-country comparison’, european journal of business and economics 8(3):14-20. arrow, kenneth j. (1974) the limits of organization. fels lectures on public policy analysis. london: ww norton & co. asquer, alberto (2011) ‘liberalization and regulatory reform of network industries: a comparative analysis of italian public utilities’, utilities policy 19(3):172-184. bandiera, oriana, andrea prat and tomasso m. valletti (2008) active and passive waste in government spending: evidence from a policy experiment. ceis working paper (115). retrieved from: http://ssrn.com/abstract=1115339. bator, francis m. (1958) ‘the anatomy of market failure. the quarterly journal of economics’ 72(3): 351-379. boitani, andrea, marcelo nicolini and carlo scarpa (2009) do competition and ownership matter? evidence from local public transport in europe. working papers siet 2009 issn 1973-3208. bottasso, anna and alessandro sembenelli (2004) ‘does ownership affect firms’ efficiency? panel data evidence on italy’, empirical economics 29(4):769-786. boubakri, narjess, jean claude cosset and walid saffar (2008) ‘political connections of newly privatized firms’ journal of corporate finance 14(5): 654-673. european journal of government and economics 4(2) 151 bovaird, tony and elke löffler (2009) public management and governance. taylor & francis: abingdon. boycko, maxim, andrei schleifer and robert w. vishny (1996) ‘a theory of privatisation’, economic journal 106(435): 309–319. brennan, willian j. jr.(1977) ‘state constitutions and the protection of individual rights’, harvard law review 90(3):489-504. brown, trevor l., mattew potoski and david m. van slyke (2006) ‘managing public service contracts: aligning values, institutions, and markets’, public administration review, 66(3):323-331. buchanan, james m. (1968) the demand and supply of public products (vol. 6). chicago: rand mcnally. caciagli, mario (2006) ‘the long life of clientelism in southern italy’, in kawata, j. (ed.) comparing political corruption and clientelism, 157-170, burlington: ashgate. calandra, piero (1978) storia dell'amministrazione pubblica in italia [history of italian public administration] (vol. 180), bologna: il mulino. capano, giliberto (2003) ‘administrative traditions and policy change: when policy paradigms matter. the case of italian administrative reform during the 1990s’, public administration, 81(4):781-801. cassese, sabino (1993) ‘hypotheses on the italian administrative system’, west european politics, 16(3): 316-328. dabla-norris, era, jim brumby, annette kyobe, zac mills and chris papageorgiou (2012) ‘investing in public investment: an index of public investment efficiency’, journal of economic growth, 17(3): 235-266. dahl, robert a. (1947) ‘the science of public administration: three problems’, public administration review, 7(1): 1-11. del monte, alfredo and erasmo papagni (2001) ‘public expenditure, corruption, and economic growth: the case of italy’, european journal of political economy, 17(1): 1-16. della porta, donatella and alberto vannucci (1997) ‘the ‘perverse effects’ of political corruption’, political studies 45(3): 516-538. dewenter, kathryn l.and paul h. malatesta (2001) ‘state-owned and privately owned firms: an empirical analysis of profitability, leverage, and labor intensity’, the american economic review, 91(1): 320-334. dwyer, larry and deborah edwards (2009) ‘tourism product and service innovation to avoid “strategic drift” 1, international journal of tourism research, 11(4): 321–335. entwistle, tom and steve martin (2005) ‘from competition to collaboration in public service delivery: a new agenda for research’, public administration 83(1): 233-242. esping-andersen, gosta (1990) the three worlds of welfare capitalism (vol. 6). cambridge: polity press. european commission (2014a) directorate-general for competition, competition policy in the european union. retrieved from http://ec.europa.eu/dgs/competition/index_en.htm. european commission (2014b. report on competition policy 2013 {swd(2014) 148 final}. fiorino, nadia, emma galli and ilaria petrarca (2012) ‘corruption and growth: evidence from the italian regions’, european journal of government and economics 1(2): 126-144. arrigo and di foggia ● the scope of public organisations with productive functions 152 forrer, john, james e. kee, kathryn e. newcomer and eric boyer (2010) ‘public– private partnerships and the public accountability question’, public administration review, 70(3): 475-484. frank, robert h., ben bernanke and louis d. johnston (2007) principles of economics. new york: mcgraw-hill/irwin. fratianni, michele and franco spinelli (1982) ‘the growth of government in italy: evidence from 1861 to 1979’, public choice 39(2): 221-243. frederickson, h. george, kevin b. smith and christopher w. larimer (2003) the public administration theory primer. boulder, co: westview press. garcía, césar (2013) ‘clientelism, economic structure, and public relations in southern europe: an example of diversity in the western world’,. public relations journal 7(2): 214-241. garrone, paola, luca grilli and xavier rousseau (2013) ‘management discretion and political interference in municipal enterprises. evidence from italian utilities’, local government studies 39(4): 514540. guardia di finanza (2014) rapporto annuale 2013 [annual report 2013]. grandy, christopher (2009) ‘the “efficient” public administrator: pareto and a well‐rounded approach to public administration’, public administration review, 69(6):1115-1123. guzzini, stefano (1995) ‘the ‘long night of the first republic’: years of clientelistic implosion in italy’, review of international political economy 2(1): 27-61. habermas, jürgen (1994) ‘three normative models of democracy’, constellations 1(1): 1-10. haque, m. shamsul (2001) ‘the diminishing publicness of public service under the current mode of governance’, public administration review, 61(1): 65-82. hartley, jean, eva sørensen and jacob torfing (2013) ‘collaborative innovation: a viable alternative to market competition and organizational entrepreneurship’, public administration review 73(6): 821-830. haskel, jonathan and stefan szymanski (1992) ‘a bargaining theory of privatization’, annals of public and cooperative economics, 63(2): 207–228. heady, ferrel (2001) public administration, a comparative perspective. new york: crc press. hood, christopher (2000) ‘paradoxes of public-sector managerialism, old public management and public service bargains’, international public management journal 3(1): 1-22. istituto bruno leoni (2012) indice delle liberalizzazioni 2012 [index of liberalisation 2012]. torino: ibl libri. jonsson, ernst (1984) ‘recurrent cost and performance comparisons within public administration: a method of generating efficiency-promoting competition’ public choice 42(2): 185-192. kettl, donald f. (2002). the transformation of governance: public administration for twenty-first century america. baltimore: johns hopkins university press. kowalski, przemyslaw, max büge, monica sztajerowska and matias egeland (2013) state-owned enterprises: trade effects and policy implications, oecd trade policy paper, no. 147, oecd publishing. european journal of government and economics 4(2) 153 martimort, david and jerome pouyet (2008) ‘to build or not to build: normative and positive theories of public–private partnerships’, international journal of industrial organization 26(2):393-411. ministero dell'economia e delle finanze (2013) rapporto sulle partecipazioni detenute dalle amministrazioni pubbliche al 31 dicembre 2011 [report of participation of public administrations by december 31 2011] musgrave, richard a. (1959) the theory of multi-level public finance. in proceedings of the annual conference on taxation under the auspices of the national tax association (pp. 266-278). national tax association. newman, meredith a. (1994) ‘gender and lowi's thesis: implications for career advancement’, public administration review, 54 (3): 277-284. niskanen, willian a. (1973) bureaucracy: servant or master? london: the institute of economic affairs. nozick, robert (1974). anarchy, state and utopia. new york: basic books. organisation for economic co-operation and development (2004) access pricing in telecommunication. paris: oecd publishing. organisation for economic co-operation and development (2006) comparative report on corporate governance of state-owven enterprise. paris: oecd publishing ongaro, edoardo (2008) ‘introduction: the reform of public management in france, greece, italy, portugal and spain’, international journal of public sector management 21(2): 101-117. ongaro, edoardo and giovanni valotti (2008) ‘public management reform in italy: explaining the implementation gap’, international journal of public sector management 21(2): 174-204. osborne, stephen p. and kirsty strokosch (2013) ‘it takes two to tango? understanding the co‐production of public services by integrating the services management and public administration perspectives’, british journal of management, 24(s1): s31-s47. ostrom, vincent and elinor ostrom (1971) public choice: a different approach to the study of public administration. public administration review 31(2): 203-216. peters, b. guy and john pierre (1998) ‘governance without government? rethinking public administration’, journal of public administration research and theory 8(2): 223-243. piattoni, simona (ed.) (2001) clientelism, interests, and democratic representation: the european experience in historical and comparative perspective. new york: cambridge university press. pitlik, hans, werner hölzl, christof brandtner, friedrich heinemann, florian misch, mustafa yeter, geert steurs, simon gagnage and kristof mertens (2012) excellence in public administration for competitiveness in eu member states. report for the european commission, dg enterprise and industry. pizam, abraham (ed.) (2010) international encyclopedia of hospitality management (second ed.). oxford: elsevier. pollitt, christopher. a. (2004) public management reform: a comparative analysis. new york: oxford university press. putnam, robert d., robert leonardi and raffaella y. nanetti (1994) making democracy work: civic traditions in modern italy. princenton: princeton university press. arrigo and di foggia ● the scope of public organisations with productive functions 154 raadschelders, jos c.n. and kwang-hoonlee (2011) ‘trends in the study of public administration: empirical and qualitative observations from public administration review, 2000–2009’, public administration review 71(1):19-33. rainey, hal g., robert w. backoff, and charles h. levine (1976) ‘comparing public and private organizations’, public administration review, 36(2):233-244. sapienza, paola (2004) ‘the effects of government ownership on bank lending’, journal of financial economics 72(2): 357-384. schmidt, v. a. (2006) ‘procedural democracy in the eu: the europeanization of national and sectoral policy-making processes’, journal of european public policy 13(5): 670-691. shleifer, andrei and robert w. vishny (1994) ‘politicians and firms’, the quarterly journal of economics, 109(4): 995-1025. spicer, michael w. (2010) in defense of politics in public administration: a value pluralist perspective.tuscaloosa: university of alabama press. tanzi, vito (1998) corruption around the world: causes, consequences, scope, and cures. international monetary fund working paper wp/98/63. toninelli, pier a. (ed.) (2000) the rise and fall of state-owned enterprise in the western world (vol. 1). new york: cambridge university press. torres, lourdes (2004) ‘trajectories in public administration reforms in european continental countries’, australian journal of public administration, 63(3): 99-112. walsh, ciaran (2003) key management ratios. master the management metrics that drive and control your business (3rd ed.). harlow: financial times prentice hall publishing. warner, mildred e. (2011) ‘competition or cooperation in urban service delivery?’, annals of public and cooperative economics 82(4): 421-435. willner, johan (2001) ‘ownership, efficiency, and political interference’, european journal of political economy,17(4): 723-748. zheng, jinghai, xiaoxuan liu and arnbe bigsten (2003) ‘efficiency, technical progress, and best practice in chinese state enterprises (1980–1994)’, journal of comparative economics 31(1):134-152. european journal of government and economics volume 2, number 1 (june 2013) issn: 2254-7088 5 how long can austerity persist? the factors that sustain fiscal consolidations david lodge, european central bank marta rodríguez-vives, european central bank abstract to put public debt on a sustainable path, many governments face the task of enacting large fiscal consolidation followed by years of sustained primary surpluses. by estimating hazard functions for the duration of consolidations, we analyse the features of past consolidation efforts across a panel of advanced economies. our contribution is to identify the factors that help to start and sustain consolidations, separately discussing governments’ “commitment” to the cause as well as their “capacity” for action. our analysis suggests that longer consolidations are initiated when public debt is high, fiscal deficits are large, the interest burden heavy and long-term sovereign bond yields elevated. however, we also find that a countries’ “capacity” to change course is important. higher initial private sector savings, a stronger external balance, a competitive position and stable financial conditions appear to provide more scope for governments to sustain longer-lasting consolidations. once we have controlled for the initial macroeconomic conditions, there is a lesser role for governments’ commitment as reflected in factors such as the composition and the pace of the fiscal adjustment or the political cycle in explaining the duration of consolidation. however, commitment to permanent, rather than temporary, fiscal adjustment is key. jel classification c23; e20; e62; h62 keywords government debt; government deficit; fiscal consolidation; panel data; survival function acknowledgements the opinions expressed herein are those of the authors, and do not necessarily reflect the views of the ecb or the eurosystem. we thank phillip rother, ad van riet, the editor and two anonymous referees for their useful comments and suggestions. european journal of government and economics 2(1) 6 introduction one legacy of the recent financial and economic crisis has been a substantial fiscal burden for most developed countries. heavy financial sector support, deep economic contraction, and counter-cyclical fiscal policies have all sharply raised government debt-to-gdp ratios since 2008. the legacy effects are potentially severe: increased government borrowing is likely to raise governments’ financing costs, impact on private financing conditions, crowd-out private investment and lower potential economic growth (hartwig lojsch, rodríguez-vives and slavik, 2011). restoring fiscal sustainability is thus a top policy priority across much of the developed world. to ensure that government debt is on a sustainable path many governments inside and outside the euro area must enact large fiscal consolidation and then sustain substantial primary budget surpluses for many years. that is especially true for the euro area countries currently under eu/imf programmes, where countries commit to rein in deficits and reform their economies. the challenge is big but not unknown. several analyses, from the ecb and other international institutions, have highlighted the past experience of countries that managed to sustain fiscal consolidations and/or large primary budget surpluses over some years (ecb, 2011). however, to understand properly the relevance of fiscal adjustment processes of the past, we need to analyse how different factors supporting the length of periods of government action to improve their fiscal balances. in this vein, there is a rich stream of empirical papers that have tried to understand the possible factors supporting “successful” fiscal consolidations. the academic literature systematically refers to the expression “success” and provides a number of definitions to it. however, the term “successful” is controversial. the aims and effects of a period of consolidation would be perceived differently by different actors which may have conflicting preferences about choices for achieving fiscal sustainability.1 while one stream of the literature defines “success” as the ability to significantly reduce government debt over the consolidation period (e.g. heylen and everaert, 2000), our work, in line with another stream of existing studies, measures the persistence (length or longevity) of the fiscal consolidation effort over time. in this article, we draw from the literature that analyses the factors affecting the length of consolidations, using duration analysis to estimating hazard functions (e.g. von hagen, hughes, and strauch (2002); gupta, clements, baldacci and mulas-granados (2004); maroto illera and mulas-granados (2008); agnello, castro and sousa (2012)). the bulk of previous empirical research on the determinants affecting consolidation makes use of case studies, descriptive statistics and econometric techniques – mainly regressions with “successful” fiscal consolidations as dummy variable (e.g. alesina and ardagna (1998); guichard, kennedy, wurzel and andre (2007)).2 the results of existing research differ, not only because of methodological differences, but also due to the different definitions of “success”. the benefit of duration analysis for our purpose is that, as gupta et al. (2004) argue, it enables us to treat the duration of fiscal consolidation as endogenous. in contrast to empirical studies which use a descriptive approach to assess the determinants of past adjustment episodes, duration analysis makes use 1 moreover, another interesting angle to explore would be whether policy makers with their choices in the fiscal consolidation mix are successful in limiting the pressure exerted by organized interest groups towards increasing quasi-private expenditure, such as the recipients of current and capital grants (e.g. buchanan and tullock (1962)), or in reducing the perception of fiscal illusion (buchanan and wagner (1977)). 2 other approaches to overcome shortcomings of regression analysis, include the use of model averaging techniques by hernández de cos and moral-benito (2011) which implies considering and estimating all the possible regressions and subsequently construct a weighted average as the estimate of the variables (determinant of consolidations). lodge and rodríguez-vives ● how long can austerity persist? 7 of all the information available in the data.3 the distinction is important: to understand what helps sustain a long-lasting consolidation effort, we also need to analyse the failures, those that stopped after only a short period of time. in doing so, we aim at addressing one of the major challenges facing several euro area countries: how likely is it that a government will be able to enact large fiscal consolidations over a number of years? and what factors are likely to support their efforts? no doubt it has been a key question posed by capital markets as sovereign bond spreads have widened since the onset of financial crisis in 2007. but this is just one approach to analysing past experiences with fiscal consolidation and it has quite a narrow focus: it asks how long governments have managed to sustain uninterrupted periods of consolidation in the past and what factors affected their ability to do so? it does not directly comment either on debt sustainability, the success of fiscal consolidation in achieving a lasting reduction in government debt ratios nor does it deal with the consequences of consolidation – either for growth or welfare. candidate factors sustaining the length of fiscal consolidations our contribution is to provide a systematic and comprehensive analysis of candidate determinants of duration of fiscal consolidation applied to 20 advanced economies between 1970 and 2010. we group the potential main factors – mostly justified by the literature as likely to sustaining consolidations – into three types of variables (see overview table 1). first, we refer to the “push factors”, which act as circumstances where adjustment is likely to start. lengthy consolidations are frequently ‘forced’ upon governments when fiscal deficits and government debt are large, but also when the interest burden is heavy and long-term sovereign bond yields are elevated. second, once consolidation has started we identify the “pull” factors that sustain the adjustment over time. we separate these variables into two sets: governments’ “capacity” for action, or in other words, a wide range of macroeconomic conditions that might enable and facilitate lengthy fiscal consolidation; and governments’ “commitment”, or the fiscal policy and political factors that might support governments’ willingness to pursue painful consolidations. other papers have already analysed, mostly using regressions but also duration analyses,4 simultaneously several factors sustaining consolidation in a comprehensive way. however, as explained in the remainder of this section, the emphasis has been largely on the fiscal policy and political factors that affect consolidations. papers that also consider the macroeconomic conditions are typically limited to analysing the evolution of the growth rate of gdp or output gap. some studies have extended the analysis of economic conditions to other variables – competitiveness, the international economic environment, or monetary conditions – but there has been a clear gap in empirical research on the role of financial or private sector balance sheets in sustaining fiscal consolidations. 3 the survival analysis comes originally from medical research, but it started to be applied in socioeconomic research in the 1970s and 1980s to plausibly model the behaviour of complex issues– also denominated duration analysis. for instance, in labour economics, empirical questions about employment can be specified in the language of hazard functions such as the longer a job is held, the less likely it is to be lost (kiefer, 1988) or, in housing markets to analyse the duration of house price upturns and downturns (bracke, 2011). 4 although duration analysis techniques have already been applied to study the persistence of fiscal consolidations, some related studies apply different sample period and countries (e.g. eu-15 countries during 1960-2004 by maroto illera and mulas-granados (2008); or 25 emerging countries during 19802001 by gupta et. al (2004)). european journal of government and economics 2(1) 8 table 1: candidate determinants explaining the length of fiscal consolidation episodes variables indicators budget balance position initial primary budget balance government indebtedness initial stock government debt-to-gdp ratio p u s h f a c t o r s p re -c o n d iti o n s cost of financing government interest payments short-term interest rate long-term bond yields growth gdp monetary conditions inflation rate interest rate external positions current account balance international economic conditions world gdp competitiveness real exchange rate unit labour cost private sector balance sheets stock of private debt private sector saving private sector net lending c a p a ci ty financial conditions and financial imbalances asset price developments credit growth financial crisis dummy variable composition of consolidation consolidation on the revenue side versus consolidation on the expenditure side pace of adjustment size of the adjustment effort degree of frontloading fiscal rules expenditure rules budget balance rules strength of the fiscal rules durability of the adjustment structural consolidation versus temporary and one-offs p u l l f a c t o r s c o m m itm e n t political factors elections, as dummy variable source: authors’ classification based on european commission (2007), and the references quoted therein. although there is no consensus or theoretical model of reference5 on the determinants driving “successful” consolidations a central focus of the literature has been the fiscal factors. most papers note the role of initial fiscal conditions, in particular the influence of high initial debt or large fiscal deficits (e.g. european commission (2007); devries, guajardo, leigh and pescatori (2011)). also guichard et al. (2007) conclude that fiscal consolidations tend to occur when large budget deficits threaten sustainability. this is reflected in the “pre-conditions” in table 1. under “commitment” we include the composition of the fiscal consolidation as its role has been strongly highlighted by the literature on past consolidations. in particular, there is a general preference for the expenditure-based adjustment over tax hikes. von hagen and strauch (2001), for example, conclude that the ‘good quality’ of fiscal adjustments – i.e. the emphasis on expenditure reduction rather than tax increases – has an important effect on the persistence of consolidations. the literature appears to emphasise the effectiveness of reducing politically sensitive items such as government consumption (mainly government wages and employment), subsidies and social transfers (e.g. alesina and perotti (1995, 1997)). heylen and everaert (2000) confirmed these results with multivariate analysis, suggesting that, surprisingly, raising taxes on business proves also to be effective6. another pull factor of fiscal consolidation typically covered by the 5 as pointed by hernández de cos and moral-benito (2011), the empirical research in this field is mostly based on selecting a single regression and dependant on the decision of which factors are relevant (based on its associated t-ratio). 6 however, molnár (2012) after examining 20 different revenue and expenditure items finds that the composition of the consolidation does not seem to explain its length. lodge and rodríguez-vives ● how long can austerity persist? 9 existing literature is the size and the speed of the fiscal adjustment. the general idea is that large and persistent fiscal adjustments contribute to success7 (e.g. briotti (2004); giavazzi and pagano (1996)), which is linked to the credibility of governments in their consolidation strategies and expectations of future tax reductions. in relation to the speed, there is a preference for gradual consolidations, but more intense efforts (e.g. “cold showers”) seem to be more effective than longer consolidations at high and rising debt levels and in low growth scenarios (european commission (2007), barrios et al., 2010). moreover, we also consider under the “commitment”, the possible role of fiscal governance factors as a framework for sustaining consolidation, as suggested by the literature8 (e.g. briotti (2004), and guichard, kennedy, wurzel and andre (2007)). although not explicitly contemplated by the relevant literature, we also test the durability of the adjustment undertaken by governments: whether it is based on structural consolidation over temporary and one-off measures.9 finally, we also include under “commitment” the potential explanatory effect of political factors, via elections, in line with the growing literature – although the evidence is not conclusive (e.g. alesina and perotti (1995), alesina et al. (1998), larch and turrini (2008)). another stream of the literature relates to the importance of the prevailing macroeconomic factors. where papers assess the role of initial macroeconomic conditions the broad conclusions are that governments are ‘pushed’ into fiscal consolidations, in particular referring to weak public finances, but also when the initial macroeconomic indicators suggest a crisis situation (ahrend, catte and price, 2006). moreover, von hagen et al. (2001, 2002) 10, and guichard et al. (2007) found that weak domestic economic pre-conditions also play a role in explaining the likelihood of starting “successful” fiscal consolidations. once consolidation has started, there is also a need to analyse the wider macroeconomic factors that ‘allow’, or make room for adjustment. the leading indicator that seems to justify the role of the macroeconomic environment is output growth, and to a lesser extent monetary conditions, competitiveness and the international economic environment. in general, existing empirical findings tend to suggest that favourable economic growth (in terms of gdp or output gap) contributes to the success of consolidation strategies (e.g. alesina and perotti (1995), ardagna (2004), hernández de cos and moral-benito (2011), agnello et al. (2012)). the findings on monetary conditions are mixed: while the monetary stance could positively contribute by accommodating consolidation (e.g. ardagna (2004)), other authors found no evidence (e.g. von hagen and strauch (2001)). the role of competitiveness through exchange rate policy is not conclusive either, but evidence tends to suggest a positive effect of exchange rate depreciation on the success of consolidations (e.g. molnár, 2012). alesina and perotti (1997) found that floating exchange rates better support successful consolidations than fixed 7 however, the results are not consistent across existing studies, also due to the different definitions of success. for instance, heylen and evaraert (2000) find only a weak evidence to support the view of the importance of the size of fiscal adjustment. 8 however, some studies do not find a significant impact of the expenditure rules (european commission, 2007) or on the budget deficit rules (barrios et al. 2010) on their sustaining role in successful fiscal consolidations. 9 one-offs are temporary or non-recurrent fiscal operations that may substantially impact the government cyclically adjusted primary balance positively or negatively, e.g. capital revenues as result of pension transfers from the private sector to the social security system; sales of mobile phone licences; debt assumptions and debt cancellations; or tax amnesties (joumard et al. 2008). 10 von hagen and co-authors observe that initial conditions (in terms of output gap) were less favourable for “successful” consolidations than for “unsuccessful” ones. however, they also find that a) positive large output gaps increases the likelihood of starting fiscal consolidations, although they reduce the chances of success, and b) that fiscal consolidation is likely to start when the domestic economy is doing well compared to other economies. european journal of government and economics 2(1) 10 exchange rates as currency devaluations increase the likelihood of success. heylen and everaert (2000) suggest that currency devaluations prior to consolidation episodes may be beneficial to their success, but only under the right composition of fiscal adjustment – otherwise it is counterproductive. also a favourable international economic environment (high economic growth) has generally been assessed as sustaining fiscal consolidations (alesina and perotti (1995) and heylen and everaert (2000)). there is a lack of empirical evidence, to the best of our knowledge, on the impact of private sector balance sheets and wider financial conditions in sustaining consolidations. for some euro area members, with on-going private sector balance-sheet adjustment and financial sector restructuring, weak growth prospects and large current account deficits, the ability to change course – and not simply the government’s willingness to make the adjustment – will matter. the literature suggests that consolidations are more difficult after financial crises and depend crucially on the resolution of problems in the banking sector (baldacci, gupta and mulas-granados (2010); and barrios et al. (2010)). in identifying financial factors, we follow the imf (2008 and 2009), which identified fifteen recessions that were associated with (i.e. followed) financial crises. in doing so they relied on the narrative analysis of reinhart and rogoff in a series of recent papers (2008, 2009) describing banking crises over the past four decades. that analysis built on work identifying banking crisis episodes from the world bank – see caprio, klingebiel, laeven and noguera (2003). the article proceeds as follows. section 3 outlines a definition of consolidation episodes and presents some stylised facts. section 4 describes the analysis method, and section 5 presents estimates of survival functions for consolidation episodes. section 6 elaborates on the robustness of the results. section 7 illustrates an example of the role of push and pull factors in selected euro area countries. finally, section 8 concludes. a definition of consolidation episodes and some initial stylized facts to start the analysis we need to define a sample of consolidation episodes and their duration. the literature takes two approaches. one angle is to measure fiscal consolidations based on reductions of the general government debt-to-gdp ratios accomplished during the consolidation period. in those studies, the duration of a consolidation episode is set by the period of time required to reduce debt by a given amount. the second approach, which we take here, is to assess consolidation periods according to changes in the government deficit, with most papers choosing to look at developments in the cyclically-adjusted primary budget balance (capb) which excludes the influence of interest rate developments and the cyclical fluctuations in economic activity on the government deficit. the duration of a consolidation period depends broadly on the length of period in which the government deficit (measured by capb) improves. while the use of the capb indicator is fairly common in the literature, it is subject to some criticism regarding its limitations to capture the macroeconomic effects of fiscal consolidations (devries et al., 2011). while a number of studies use the capb approach to defining consolidations, each study tends to set different thresholds for what constitutes the start of a consolidation and what represents an ongoing improvement. perhaps the simplest definition, used by maroto illera and mulas-granados (2008) and von hagen et al. (2002), is for the duration of the consolidation episode to represent the number of years in which the capb improves. one criticism of that approach, however, is that it captures a lot of short, small changes in the government fiscal stance, which lodge and rodríguez-vives ● how long can austerity persist? 11 might not be seen as periods of active consolidation.11 thus others (e.g. guichard et al. (2007)) use a stricter definition of the beginning of a consolidation period, requiring a substantial initial consolidation effort (e.g. around 1% or 1.5% over two years). other authors define larger changes in capb to qualify for fiscal consolidation episode (e.g. two percentage points of gdp in one year by alesina and ardagna (1998)) or more refined definitions of changes in the capb (e.g. afonso (2010) uses changes in capb at least 1.5 times the panel’s standard deviation in one year, or when the change in the capb is at least one standard deviation on average in the last two years). we broadly follow the oecd approach (guichard et al., 2007) by defining a consolidation period as: starting if the capb improves by at least one percentage point of gdp in one year or at least one half percentage point in two consecutive years; and continuing as long as the capb improves (although an interruption is allowed without terminating the episode as long as the deterioration of the capb is small – less than 0.3% of gdp – and is more than offset the following year). however, we add two features to this definition. first, we rule out any consolidation episodes that lasted only one year – we aim to assess the factors affecting periods of sustained improvements in the capb and are not interested in short-lived consolidation efforts. second, we judge that a small decline in an already better fiscal position should not represent an interruption, as a sizeable primary surplus is likely to help a country reduce its government debt. thus for instances during a consolidation period in which countries have reached a sizeable positive capb – defined here as 3% of gdp – we ignore any deteriorations in the capb that did not move the deficit below that threshold. inevitably, the initial decision on what constitutes a consolidation episode sets the basis for the subsequent analysis. section 5, therefore, analyses the implications of changing our definition of consolidation episodes. before proceeding, however, it is worth noting that changes in the capb are just one way of viewing a consolidation effort. in particular, the fiscal literature tends to distinguish between consolidations that are based on structural, permanent measures and those that arise from reliance on temporary or special factors. the importance of those effects is discussed by joumard, minegishi, andré, nicq and price (2008) with a comprehensive overview on the nature and amount of one-off operations and their role in undermining the accuracy of capbs. 11 based on that definition, von hagen et al. (2002), for example, find 122 consolidation episodes from a sample of oecd countries between 1960 and 1998. illera and mulas-granados (2007) find 277 episodes of consolidation for eu countries between 1960 and 2004. european journal of government and economics 2(1) 12 figure 1: the duration of fiscal consolidations (number of consolidations lasting for x years) 0 5 10 15 20 25 30 35 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 source: oecd and author calculations. our study is based on an annual dataset covering 20 advanced economies over the period from 1970 to 2010, namely 14 eu countries (austria, belgium, denmark, finland, france, germany, greece, ireland, italy, the netherlands, portugal, spain, sweden, the u.k.), and 6 non-eu countries (australia, canada, japan, new zealand, switzerland, and the u.s.). based on our criteria and using this panel we find 65 complete episodes of consolidation as shown in table 2. past experience suggests consolidations have been short: nearly half of the episodes in the sample last only two years and most are over after four years. only a few well-known cases lasted much longer: denmark (1983-1991), belgium (1993-2005), ireland (1986-2001) and japan (1979-1990).12 overall, the average duration of fiscal adjustment in our study is just under four years, which contrasts with the findings of other approaches (for instance, two years by giavazzi and pagano (1996)). 12 the dates for these countries are the result of using the definition described above. alternative definitions, of course, would yield somewhat different dates for the consolidation episodes. lodge and rodríguez-vives ● how long can austerity persist? 13 table 2: dates of consolidation episodes country start end country start end australia 1979 1981 ireland 1986 2001 australia 1986 1989 ireland 2003 2007 australia 1995 1999 italy 1976 1978 australia 2002 2004 italy 1982 1984 austria 1996 1998 italy 1990 1994 belgium 1974 1976 italy 1995 2001 belgium 1984 1988 japan 1979 1990 belgium 1993 2005 netherlands 1972 1974 belgium 2006 2008 netherlands 1976 1978 canada 1986 1990 netherlands 1982 1986 canada 1994 2002 netherlands 2004 2006 denmark 1983 1991 new zealand 1991 1996 denmark 1999 2001 new zealand 2002 2004 denmark 2004 2008 portugal 1982 1985 finland 1981 1983 portugal 2002 2004 finland 1984 1987 portugal 2006 2008 finland 1988 1990 spain 1986 1988 finland 1996 2004 spain 1994 1998 france 1979 1981 spain 2005 2007 france 1983 1985 sweden 1975 1977 france 1994 2000 sweden 1983 1985 germany 1976 1978 sweden 1986 1989 germany 1981 1986 sweden 1994 1999 germany 1992 1995 sweden 2004 2006 germany 1996 2000 switzerland 1994 1997 germany 2005 2008 switzerland 2005 2009 greece 1979 1981 united kingdom 1979 1983 greece 1982 1984 united kingdom 1994 2001 greece 1986 1988 united states 1976 1980 greece 1990 1995 united states 1987 1990 greece 1998 2001 united states 1993 1999 greece 2005 2007 united states 2005 2007 ireland 1982 1985 note: oecd economic outlook database, variable code nlgxqa. note that there are a further 10 episodes that begin in 2010 which have not been concluded and are excluded from our analysis. duration analyses in the subsequent analysis, we study the factors that appear to have affected the length of expansions in our sample of advanced economies, using estimates of hazard functions (e.g. maroto illera and mulas-granados, 2008). duration analysis provides estimates of the probabilities of a consolidation coming to an end after a certain length of time. we estimate hazard functions for the duration of consolidations in the sample of advanced economies, where the duration represents the number of years of uninterrupted fiscal consolidation (according to the definition above). the hazard function measures the conditional rate at which a consolidation will come to an end. relative to other models such as those that focus on the probability of an event taking place (e.g. a probit or logit model), the focus of duration analysis is somewhat different. the central concept in duration analysis is not the unconditional probability of an event but its conditional probability (e.g. the probability of a consolidation ending in a given year given that the expansion has lasted up to that point). we define the length of a consolidation (t), measuring the number of years from the start to the end, as a random variable with a cumulative distribution function f(t) and probability density function f(t). the survivor function is s(t) = 1 – f(t), which gives the probability that the duration of a consolidation is greater than or equal to t. the hazard function h(t) = f(t) / s(t) measures the rate at which consolidation spells will be completed at duration t – i.e. the probability of a budget surplus or deficit deteriorating at time t, conditional on the consolidation having lasted until that moment. broadly speaking, there are two main approaches in the literature to estimating the hazard function. one is to use a non-parametric or semi-parametric approach, most commonly associated with the cox proportional hazards model. although the nonparametric approach is more flexible, it can lead to less precise estimates of the hazard function than a correctly specified parametric form. the other approach, and the one taken here, is to specify and estimate a functional form for the hazard european journal of government and economics 2(1) 14 function. various forms are possible, but a common approach – and the one used here – is the weibull model: h(t,x) 1 t exp )'( x where exp(.) is the exponential function and x is a vector of covariates which influence the hazard rate. the hazard rate (the conditional rate at which consolidations end) either rises with time ( >1) – which is termed “positive duration dependence”, falls with time ( <1) or is constant. this suggests that the conditional probability of a consolidation ending increases as time passes, either as ‘consolidation fatigue’ sets in, or perhaps because as a consolidation continues, policymakers conclude that the ‘job is done’ – governments have pushed through sufficient consolidation to put finances on a sustainable path. in the following sections we present parametric estimates, with hazard functions using the weibull model. to check the robustness of the results, we also considered other functional forms and the non-parametric approach of the cox proportional hazards model. in order to discriminate between models, the literature suggests a graphical analysis of the so-called cox-snell residuals (e.g. arjas, 1988). that analysis suggested that, indeed, the weibull model presents a relatively good fit for our estimated model. another key issue is how to handle the possible presence of country level heterogeneity. various approaches exist. one is to assume that countries have differing propensities for sustaining consolidations. these propensities – or frailties – are analogous to random effects in panel data models. an alternative is to include fixed effects or country dummies in the set of covariates. as an initial step in our estimations, we tested for the significance of fixed and random effects. however, in both instances we found the effects to be insignificant. parametric analyses: factors sustaining the length of fiscal consolidations tables 4 to 7 present estimations of hazard models for the duration of consolidation periods for our panel of advanced economies, using the weibull model. the variables included in the models are described in table 3. the coefficients are reported as hazard ratios – a coefficient greater than zero indicates that an increase in the explanatory variable increases the hazard rate (the conditional probability of a consolidation coming to an end). we also report a measure of explained variation, an adjusted r-squared employed for survival models (royston (2006)). lodge and rodríguez-vives ● how long can austerity persist? 15 table 3: definitions of variables used in duration analyses variable definition capb government cyclically adjusted primary balance (oecd definition) government debt gross government debt as percent gdp government debt >90% dummy variable indicating government debt-to-gdp ratio grater than 90% govt. interest payments (% gdp) gross government interest payments as percent gdp (expressed as negative number) real long-term interest rates yields on 10 year government bonds deflated by current cpi yearon-year growth real short-term interest rates yields on short-term government bonds deflated by current cpi year-on-year growth real gdp growth rate annual gdp growth in three years prior to consolidation real potential output growth rate potential output growth (oecd estimate) output gap output as percent of potential (oecd estimate) world gdp growth annual growth in world gdp (imf) current account balance current account balance as percent of gdp private sector net lending private sector surplus / deficit as percent of gdp private sector credit-to-gdp private sector credit to gdp ratio (source: bis) private sector credit growth change in private sector credit-to-gdp ratio in three years prior to consolidation real equity price growth annual growth in equity prices (deflated by cpi) in three years prior to consolidation financial crisis dummy for occurrence of financial crisis in three years prior to consolidation (source reinhart and rogoff (2008)). real effective exchange rate real effective exchange rate deflated by cpi inflation annual cpi inflation in three years prior to consolidation share of consolidation expenditure expenditure adjustment: share of deficit change during consolidation episode share of consolidation revenue revenue adjustment: share of deficit change during consolidation episode share of consolidation temporary measures share of deficit change during consolidation episode accounted for by one-off measures (oecd definition) intensity of consolidation average change in government deficit during consolidation episode (above minimum set by consolidation definition) frontloading (consolidation in first two years) deficit change in first two years of consolidation change in government debt over consolidation percentage point change in debt-to-gdp ratio during consolidation track record of consolidation number of years of consolidation in five years prior to consolidation episode fiscal rules fiscal rules strength index (source: european commission) source: oecd databases (unless otherwise stated). table 4 investigates the role of initial fiscal and financial conditions. we start by estimating the model without any covariates (column 1) and the results suggest positive duration dependence: the estimates of alpha are greater than one. indeed, throughout the various specifications that remains the case. that means that in general, in our sample, consolidations are more likely to end as they become older. the next set of variables analyse the initial conditions before fiscal consolidations got underway. as far as possible, we would like to isolate factors driving the duration of consolidations. we therefore focus the analysis on variables in the year before the consolidation began, rather than the first year of consolidation when the impact of changes to the fiscal deficit will already be apparent. this should help ensure that the variables are exogenous – drivers of the consolidation length rather than reflections of ongoing consolidation – although we cannot control for possible expectation effects that might have arisen from the anticipation of planned consolidation efforts. we find a strong role for the government’s starting position: a larger deficit tends to presage a longer consolidation (column 2). high government debt also matters but european journal of government and economics 2(1) 16 is no longer statistically significant when instead we also include the government interest burden (column 3). interestingly, we found no role for non-linearities: for example, we found no statistical evidence that government debt above a 90% (a threshold identified reinhart and rogoff (2012)) affected the length of consolidations. nonetheless, market pressures would appear to play a role: higher long-term real bond yields also push governments to sustain consolidations for longer (columns 6 and 7). table 4: determinants of duration of consolidations – the role of initial conditions (estimates of hazard function using weibull model, coefficients shown as hazard ratios) (1) (2) (3) (4) (5) (6) (7) duration of the episode 0.517*** 0.676*** 0.703*** 0.706*** 0.706*** 0.765*** 0.759*** cyclically adjusted primary balance 0.104* 0.116* 0.094 0.094 0.108** 0.110* government debt -0.021*** -0.003 -0.002 -0.002 government interest burden 0.197*** 0.200** 0.201*** 0.126*** 0.122*** high government debt (>90%) 0.151 0.150 government debt (60% to 90%) -0.004 real long-term interest rates -0.181*** -0.163*** real short-term interest rates -0.020 constant -2.441*** -1.380*** -1.646*** -1.758*** -1.757*** -1.729*** -1.726*** number observations 253 248 248 248 248 242 240 number of countries 20 20 20 20 20 20 20 number of consolidations 65 63 63 63 63 61 60 adjusted-r-squared 0.149 0.177 0.172 0.163 0.265 0.247 notes: ***, ** and * indicate significance at the 1%. 5% and 10% level respectively. each variable is measured in the year before the consolidation begins. the “duration of the episode” reports the value of the weibull parameter that governs the shape of the hazard function. the coefficients are reported as hazard ratios – a coefficient greater than zero indicates that an increase in the explanatory variable increases the hazard rate (the conditional probability of a consolidation coming to an end). we also report a measure of explained variation, an adjusted r-squared employed for survival models (royston (2006)). in table 5 we turn to investigating the role of initial macroeconomic conditions. we retain the significant ‘push’ factors from table 1 – the capb, government interest burden and long-term bond yields – and add other macro variables. we find that a larger initial current account surplus or higher private sector surplus tends to help sustain consolidations (columns 2 and 3), even once we have accounted for the role of the government deficit. higher private sector saving (as a percent of gdp) also appears to reduce the probability of consolidations ending (column 4). there is more mixed evidence on the role of financial conditions. a high stock of private sector debt is not a significant explanatory factor but strong credit growth in the period before the consolidation does appear to affect the likelihood of a sustained consolidation (columns 5 and 6). perhaps because strong credit growth may subsequently require retrenchment from the private non-financial and financial sectors, we find that higher private sector credit growth in the years prior to the consolidation tends to reduce the duration of the consolidation. a similar role for boom-bust dynamics may explain why strong growth in equity prices in the years before a consolidation episode also tends to reduce the duration (column 7). that finding might reflect the suggestion from mian, sufi and trebbi (2012) that in a post-boom phase countries become highly politically polarized following financial crises, and as a result, sustained consolidation efforts are more difficult. we do not find the dummy for financial crises to be significant (column 8), which might be explained by two factors. first, the impact of the financial crisis on the duration of subsequent consolidation efforts may simply be seen most through the deleterious effect on the fiscal position which then push governments towards consolidation. lodge and rodríguez-vives ● how long can austerity persist? 17 second, it may be that following a financial crisis, the state of private sector balance sheets (captured in other variables in our model) is a more important determinant of how effectively governments can tackle the subsequent need for retrenchment. table 5: determinants of duration of consolidations – the role of macroeconomic conditions (estimates of hazard function using weibull model, coefficients shown as hazard ratios) (1) (2) (3) (4) (5) (6) (7) (8) duration of the episode 0.765*** 0.832*** 0.831*** 0.856*** 0.770*** 0.780*** 0.768*** 0.759*** capb 0.108** 0.164*** 0.080* 0.080** 0.117** 0.073 0.096* 0.107** government interest burden 0.126*** 0.175*** 0.092 0.126** 0.156*** 0.127** 0.113** 0.126*** real long-term interest rates -0.181*** -0.178*** -0.177*** -0.222*** -0.173*** -0.168*** -0.230*** -0.187*** current account balance -0.081*** private sector net lending -0.081*** private saving ratio -0.080* credit to gdp ratio -0.005 change in credit to gdp ratio 0.063* real equity price growth 0.020* financial crisis 0.324 constant -1.729*** -1.742*** -1.827*** -0.239 -1.254*** -1.956*** -1.789*** -1.717*** number observations 242 228 228 232 234 232 237 232 number of countries 20 19 19 20 19 19 20 20 number of consolidations 61 57 57 57 58 57 59 61 adjusted-r-squared 0.265 0.296 0.302 0.321 0.275 0.275 0.272 0.252 (9) (10) (11) (12) (13) (14) (15) (16) duration of the episode 0.794*** 0.774*** 0.761*** 0.807*** 0.886*** 0.765*** 0.802*** 0.759*** capb 0.100** 0.091* 0.101* 0.065 0.076* 0.113** 0.155*** 0.110* government interest burden 0.146*** 0.128*** 0.125** 0.104* 0.220*** 0.125*** 0.178*** 0.122*** real long-term interest rates -0.187*** -0.162*** -0.170*** -0.191*** -0.155*** -0.181*** -0.108** -0.163*** gdp growth -0.101 world gdp growth 0.363 output gap 0.061 real exchange rate 0.026** relative ulc growth 0.201*** openness -0.001 inflation 0.084*** monetary policy interest rate -0.020 constant -1.488*** -3.155*** -1.713*** -4.500*** -1.770*** -1.683*** -2.253*** -1.726*** number observations 240 232 242 232 228 242 240 240 number of countries 20 20 20 20 19 20 20 20 number of consolidations 60 61 61 58 56 61 60 60 adjusted-r-squared 0.261 0.267 0.264 0.296 0.342 0.257 0.286 0.247 notes: ***, ** and * indicate significance at the 1%. 5% and 10% level respectively. each variable is measured in the year before the consolidation begins. the “duration of the episode” reports the value of the weibull parameter that governs the shape of the hazard function. the coefficients are reported as hazard ratios – a coefficient greater than zero indicates that an increase in the explanatory variable increases the hazard rate (the conditional probability of a consolidation coming to an end). the measure of explained variation is an adjusted r-squared employed for survival models (royston (2006)). we tested a number of other variables. the role of growth dynamics is unclear: a higher real gdp growth rate tends to increase the probability of a consolidation continuing but a larger output gap lowers the probability of a sustained consolidation. moreover, none of the coefficients are statistically significant (columns 9 and 10). in combination with other variables we find that stronger real gdp growth at the onset of a consolidation period is typically associated with a longer-lasting consolidation effort. the international environment – proxied by world real gdp growth – played no significant role. the important role for competitiveness is confirmed: a more competitive real exchange rate and smaller european journal of government and economics 2(1) 18 increases in unit labour costs (relative to other advanced economies) in the lead-up to a consolidation tend to increase the likelihood that the consolidation will last (columns 12 and 13). we find no additional explanatory power from the openness of an economy, measured as the ratio of exports to gdp (column 14). moreover, stronger inflation in the years preceding the start of consolidation tends to reduce the length of subsequent consolidations (column 15). but, the coefficient on the monetary policy interest rate is insignificant (column 16). this is line with the literature, which does not find a uniformly significant role for monetary policy in affecting the length of consolidation periods. table 6: determinants of duration of consolidations – fiscal policy and the fiscal framework (estimates of hazard function using weibull model, coefficients shown as hazard ratios) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) duration of the episode 0.765*** 0.832*** 0.831*** 0.856*** 0.770*** 0.780*** 0.768*** 0.794*** 0.772*** 0.761*** capb 0.074 0.074 0.111 0.011 0.070 0.367*** 0.126 0.074 0.068 -0.008 government interest burden 0.242*** 0.267*** 0.288*** 0.297*** 0.246*** 0.304*** 0.277*** 0.236*** 0.234*** 0.116 real long-term interest rates -0.115* -0.109 -0.122* -0.149* -0.118* -0.149** -0.119* -0.128* -0.117* -0.683*** current account balance -0.080** -0.084** -0.088** -0.008 -0.079** -0.066* -0.088** -0.081** -0.081** -0.069 change in credit to gdp ratio 0.087** 0.102*** 0.095** 0.102** 0.086** 0.093*** 0.059 0.091** 0.087** 0.087 real exchange rate 0.037* 0.043** 0.046** 0.020 0.036* 0.028 0.031 0.035* 0.036* 0.122*** gdp growth -0.221* -0.228** -0.209* -0.058 -0.224* -0.212* -0.211* -0.263** -0.221* 0.002 inflation 0.104** 0.116** 0.125** 0.146*** 0.105** 0.111** 0.100** 0.087 0.100* 0.209 consolidation composition: expenditure share 0.001 revenue share -0.003 temporary measures share 0.012** track record in consolidation 0.032 intensity of consolidation 2.461*** frontloading 0.150 change in debt 0.024 election 0.172 fiscal rules 0.411* constant -6.055*** -6.585*** -6.694*** -5.234** -6.049*** -5.689*** -5.462** -5.634** -6.052*** -16.100*** number observations 210 200 200 173 210 200 210 195 210 96 number of countries 19 19 19 18 19 19 19 19 19 13 number of consolidations 51 51 51 44 51 51 51 49 51 22 adjusted-r-squared 0.394 0.393 0.404 0.472 0.385 0.476 0.395 0.384 0.387 0.627 notes: ***, ** and * indicate significance at the 1%. 5% and 10% level, respectively. each variable is measured in the year before the consolidation begins. the “duration of the episode” reports the value of the weibull parameter that governs the shape of the hazard function. the coefficients are reported as hazard ratios – a coefficient greater than zero indicates that an increase in the explanatory variable increases the hazard rate (the conditional probability of a consolidation coming to an end). we also report a measure of explained variation, an adjusted r-squared employed for survival models (royston (2006)). having analysed the macroeconomic backdrop to consolidation episodes, we turn to the role of fiscal policy choices. table 6 presents the estimations for duration of consolidation, again using the weibull model. we retain the set of initial conditions that proved to be significant and add different indicators of fiscal policy, including indicators of the composition of adjustment, the temporality of the adjustment, the size and pace of consolidation and the strength of the governance framework. a key finding in the literature is that the composition of consolidation – the split between expenditure and revenue measures – is important (e.g. maroto illera and mulas-granados (2008), von hagen et al. (2002)). in columns two and three we add variables that indicate the proportion of deficit reduction during the consolidation phase accounted for by changes in current expenditure, and current revenue. in contrast to several studies in the literature, we find the coefficients on the composition variables to be insignificant. once we have accounted for the role lodge and rodríguez-vives ● how long can austerity persist? 19 of initial macroeconomic conditions, the composition of the fiscal adjustment – the split between revenue and expenditure measures – does not appear to be a significant determinant of the duration of consolidation.13 but the dimension that does appear to play a role is the durability of the adjustment. our evidence suggests that consolidations lasted longer when one-off measures played a smaller role (column 4). one explanation is that the key to successful consolidation efforts is linked to the commitment of the government in approaching the task, seeking for a permanent rather than a temporary change to the fiscal position.14 the results for other features of fiscal policy choices are generally in line with the literature. we find that the intensity of deficit reduction – the average pace of improvement in the capb over the consolidation episode – is significant. longerlasting consolidation episodes were based on rather gradual improvements in government deficit positions. however, we find no evidence that the amount of frontloading of the consolidation effort is a signal of greater willingness or ability to sustain consolidation efforts for longer. neither do we find a significant role for a country’s track record of consolidation. elections do not appear to signal the end of a consolidation episode. examining the robustness of the results to assess the robustness of the results we checked variations to the definition of consolidation: first, we included in the sample consolidation periods lasting only one year; second we specified a higher starting hurdle – i.e. a greater initial change in the fiscal position (of at least 1.5% in the first two years); third we allowed for more gradual deficit reductions to qualify, with a lower initial threshold (only 0.5% over the first two years). these alternative definitions yielded respectively 101, 76 and 52 consolidation episodes. in general, in neither case did we see large changes to our findings. most variables that were significant using our main definition were also significant under these alternative specifications. in particular, we still find a strong role for the starting fiscal position: the initial deficit, interest burden and long-term real bond yields. most macro conditions also remained significant. in particular, the external position and competitiveness remained important indicators of sustainable consolidation. two exceptions, however, were in the roles of growth and inflation in the run up to consolidation, which were less consistently significant predictors of the duration of consolidations using these alternative definitions. finally, we also investigate whether adjustments to our sample affected the results. one concern might be that the outliers – in particular the three long consolidations in belgium, ireland and japan – have affected the results. however, rerunning the estimations excluding these observations, we found the results to be very similar. 13 to check this finding, we also used a more detailed breakdown of government revenue and spending, separating the proportion of deficit reduction in each consolidation episode by types of expenditure and revenue. following von hagen et al. (2002) we added to each equation a variable showing the contribution of a particular budget item to the total deficit reduction achieved during the consolidation episode. all but one coefficient (that on capital expenditure) is statistically insignificant suggesting that there is overall not strong support for the view that the composition of deficit reductions is an important determinant of the length of consolidation periods. we also investigated different definitions for the fiscal composition – e.g. using a dummy variable to define whether the adjustment was predominantly expenditureor revenue-based etc. in none of the cases were the variables statistically significant. 14 however, the role of the fiscal rules could not be demonstrated, as the analysis (column 10) shows a curious result that stronger fiscal rules appear to increase the likelihood of a consolidation episode ending. moreover, with the series for the fiscal rules strength index available only for eu countries from 1990 onwards, the sample of consolidation episodes is considerably smaller, and therefore the results are limited. european journal of government and economics 2(1) 20 the role of push factors and pull factors in euro area countries to illustrate the insights from our work, we use our results to illustrate some of the challenges that lie ahead for some euro area countries that have embarked on a consolidation path during 2010-11. while, for several member states the push factors are obvious, with high public debt levels, large deficits, high sovereign bond yields and rising interest burdens forcing governments to take strong action towards fiscal austerity, there are clear challenges too. this is particularly true for those countries suffering from twin deficits of large fiscal and current account imbalances and cumulated competitiveness problems. in this sense, figure 2 shows survivor curves for the duration of the current fiscal consolidation efforts in countries under eu/imf economic and financial programmes (ireland, greece and portugal) as well as spain and italy. figure 3 shows a decomposition of the factors affecting the estimated probability of a duration lasting at least five years. the probability estimates are based on the equation which includes the initial fiscal conditions – deficit, bond yields and interest payments – and macroeconomic capacity – current account, real effective exchange rate, recent credit developments and growth and inflation dynamics. to provide a common overview, the estimated starting point is 2010. the estimated probabilities that these countries will be able to maintain a sustained consolidation effort are generally quite low. that should not be a surprise: the estimates are derived from analysis of past experiences and previous examples of long-lasting consolidation are relatively rare, as figure 1 highlighted. for example, from our sample, the unconditional probability of consolidation lasting longer than five years is under a half. figure 2: estimated survivor curves for current fiscal consolidation efforts in selected euro area countries (probability of consolidation lasting to particular year) 0.0 0.2 0.4 0.6 0.8 1.0 0 5 10 average experience ireland portugal greece spain italy notes: survivor functions estimated using weibull distribution assumption for baseline hazard (see table 6, column 1). the “average experience” shows the average estimated probability assuming all explanatory variables are at their mean. other curves show estimates of the probabilities for ireland, greece and portugal based on current developments. figure 3: factors affecting current probabilities of achieving long-lasting consolidation in selected euro area countries (contribution to estimated probability of consolidations starting in 2010 lasting five years or more) -0.5 0.0 0.5 1.0 ireland portugal greece spain italy capb govt. interest payments long-term real int. current account balance real exchange rate gdp growth inflation prob> five years notes: survivor functions estimated using weibull distribution assumption for baseline hazard (see table 6, column 1). the “average experience” shows the average estimated probability assuming all explanatory variables are at their mean. the other contributions show the effect of each variable relative to the mean experience. however, there are interesting differences in the estimated probabilities for each country which highlight the potential varied pressures in each situation. for instance, according to the estimates, ireland appears considerably more likely to maintain fiscal consolidation than the other countries from the sample. some of the drivers for ireland are the ‘push’ factors that make consolidation a necessity, such lodge and rodríguez-vives ● how long can austerity persist? 21 as the high primary deficit, relatively heavy interest burden and high long-term real bond yields. yet the recent improvement in ireland’s competitive position, with relatively low inflation and unit labour cost growth, as well as the return towards current account balance, could also be expected to help ireland’s consolidation effort. these rebalancing efforts in the irish economy are further supported by the return to the capital markets during 2012. by contrast, greece suffers from continued poor competitiveness (a high real exchange rate and continued high unit labour cost growth) which, combined with a large current account surplus, underscores the apparent difficulty for the government to achieve lasting fiscal consolidation. the relatively low likelihood shown for greece in figure 2 was confirmed by the need to restructure its government debt in spring 2012. portugal’s problems are also related to lack of competitiveness and continued high current account deficit. another finding is that countries with less dominant ‘push’ factors (lower interest payments like spain or stronger capb position like italy) show also a relatively lower probability of sustaining long consolidations. as discussed above, one needs to recall that this analysis uses as the starting point the situation in 2010.15 developments during 2011 would perhaps have heightened concerns that these countries also needed to implement consolidation in the coming years. moreover, the estimates omit some important elements to the current efforts, such as the role of the institutional framework of the eu/imf programmes in sustaining consolidations.16 conclusions this article has presented analysis of the factors affecting the duration of past consolidations in advanced economies. our analysis suggests that the starting point matters – the fiscal and macroeconomic conditions appear to influence the success of governments in sustaining lengthy consolidations. in line with the literature, we find that governments often appear to have been ‘pushed’ towards sustained fiscal consolidations – the duration of consolidation is driven by the need to adjust course: longer consolidations occur when public debt is high, fiscal deficits are large, the interest burden heavy and long-term bond yields elevated. our contribution to the literature is to put considerably more emphasis on the macroeconomic backdrop to consolidation episodes. we find that other factors, what we call pull factors, affect the duration of consolidations: a countries’ capacity to change course or its room for manoeuvre is important. higher initial private sector savings and a stronger external balance appear to help governments sustain longer-lasting consolidations. the important role for competitiveness is underlined: a more competitive real exchange rate in the lead-up to a consolidation tends to increase the likelihood of a sustained fiscal adjustment. finally, in contrast to some studies in the literature, we also find that there is less prominence for factors that might indicate a government’s willingness or resolve in its approach to consolidation. in particular, once we have accounted for the role macroeconomic conditions, the composition of the fiscal adjustment – the split between expenditure and revenue measures – does not appear to be a significant determinant of the duration of consolidation. however, commitment to permanent, rather than temporary, fiscal adjustment is key. 15 the regression estimates use the situation in the year before consolidation began. in this framework, for an assessment of the consolidation prospects from 2011 onwards, it is therefore the situation in 2010 that affects the length of consolidation. 16 see, for example, gupta et al. (2004) who analyse a wide dataset for countries with imf-supported programmes in the 1990s. european journal of government and economics 2(1) 22 references afonso, antónio (2010) ‘expansionary fiscal consolidations in europe: new evidence’, applied economics letters 17(2): 105-109. agnello, luca, vitor castro and ricardo sousa (2012) ‘what determines the duration of a fiscal consolidation program?’, nipe working paper no 17. ahrend, rudiger, pietro catte and robert price (2006) ‘interactions between monetary and fiscal policy: how monetary conditions affect fiscal consolidation’, oecd working paper, no 521. alesina, alberto and silvia ardagna (1998) ‘tales of fiscal adjustment’, economic policy 13(27): 487-545. alesina, alberto and roberto perotti (1995) ‘fiscal expansions and fiscal adjustments in oecd countries’, economic policy 21(2): 205-248. alesina, alberto and roberto perotti (1997) ‘fiscal adjustments in oecd countries: composition and macroeconomic effects’, imf staff papers 44(2):210248. alesina, alberto, roberto perotti and josé tavares (1998) ‘the political economy of fiscal adjustments’, brookings papers on economic activity 29(1): 197-266. ardagna, silvia (2004) ‘fiscal stabilisations: when do they work and why’, european economic review 48(5): 1047-1074. arjas, e. (1988) ‘a graphical method for assessing goodness of fit in cox’s proportional hazards model’, journal of the american statistical association 83(401): 204–212. baldacci, emanuele, sanjeev gupta and carlos mulas-granados (2010) ‘restoring debt sustainability after crises: implications for the fiscal mix’, imf working paper no 232. barrios salvador, sven langedijk and lucio pench (2010) ‘eu fiscal consolidation after the financial crisis: lessons from past experiences’, european commission economic papers no 418. bracke, philippe (2011) ‘how long do housing cycles last? a duration analysis for 19 oecd countries’, imf working paper no 231. briotti, maria gabriella (2004) ‘fiscal adjustment between 1991 and 2002: stylised facts and policy implications’, ecb occasional paper series, no 9. buchanan, james m. and gordon tullock (1962) the calculus of consent: logical foundations of constitutional democracy, ann arbor, mi: university of michigan press. buchanan, james m. and richard e. wagner (1977) democracy in deficit: the political legacy of lord keynes. new york: academic press. caprio, gerard, daniela klingebiel, luc laeven and guillermo noguera (2003) ‘banking crisis database: an update of the caprio-klingebiel database (1996, 1999), october 2003’, url (consulted june 2013): www1.worldbank.org/finance/html/database_sfd.html. devries, pete, jaime guajardo, daniel leigh and andrea pescatori (2011) ‘a new action-based dataset of fiscal consolidation’, imf working paper no. 128. european central bank (2011) ‘past experience with sustaining large primary budget surpluses’, monthly bulletin, april, 94-95. european commission (2007) ‘public finances in emu 2007’, european economy 3/2007, directorate-general for economic and financial affairs. lodge and rodríguez-vives ● how long can austerity persist? 23 european commission (2011) ‘public finances in emu 2011’, european economy 3/2011, directorate-general for economic and financial affairs. giavazzi, francesco and marco pagano (1996) ‘non-keynesian effects of fiscal policies changes: international evidence and the swedish evidence’, swedish economic policy review 3(1): 67-112. guichard, stéphanie, mike kennedy, eckhard wurzel and christophe andré (2007) ‘what promotes fiscal consolidation: oecd country experience’, oecd working papers no 553. gupta, sanjeev, benedict clements, emanuele baldacci and carlos mulasgranados (2004) ‘the persistence of fiscal adjustments in developing countries’, applied economic letters 11(4): 209-212. hartwig lojsch, dagmar, marta rodríguez-vives and michal slavik (2011) ‘the size and composition of government debt in the euro area’, ecb occasional paper series no. 132. heylen, freddy and gerdie everaert (2000) ‘success and failure of fiscal consolidation in the oecd: a multivariate analysis’, public choice 105(1-2): 103124. hernández de cos, pablo and enrique moral-benito (2011) ‘endogenous fiscal consolidations’, documentos de trabajo del banco de espana no. 1102. international monetary fund (2008) ‘what happens during recessions, crunches and busts?’, imf working paper no 274. international monetary fund (2009) world economic outlook april 2009: crisis and recovery. washington, dc: international monetary fund. joumard, isabelle, makoto minegishi, christophe andré, chantal nicqand and robert price (2008) ‘accounting for one-off operations when assessing underlying fiscal positions’, oecd working paper no 50. kiefer, nicholas m. (1988) ‘economic duration data and hazard functions’, journal of economic literature 26(2): 646-679. larch, martin and alessandro turrini (2008) ‘received wisdom and beyond: lessons from fiscal consolidation in the eu’, european commission, economic papers no 320. maroto illera, r. and c. mulas-granados (2008) ‘what makes fiscal consolidations last? a survival analysis of budget cuts in europe (1960-2004)’, public choice 134(3): 147-161. mian, atif r., amir sufi and francesco trebbi (2012) ‘resolving debt overhang: political constraints in the aftermath of financial crises’, nber working paper no 17831. molnár, margit (2012) ‘fiscal consolidation: what factors determine the success of consolidation efforts?’, oecd economics department working papers no 936. reinhart, carmen and kennet rogoff (2008a) ‘is the 2007 us sub-prime crisis so different?’, nber working paper no 13761. reinhart, carmen and kennet rogoff (2008b) ‘banking crises: an equal opportunity menace’, nber working paper no 14587. reinhart, carmen and kennet rogoff (2009) ‘the aftermath of financial crises’, american economic review 99(2): 466-472. reinhart, carmen and kennet rogoff (2012) ‘debt overhangs: past and present’, nber working paper no 18015. european journal of government and economics 2(1) 24 royston, patrick (2006) ‘explained variation for survival models’, the stata journal 6(1): 83-96. von hagen, jürgen, andrew hughes hallett and rolf strauch (2002) ‘budgetary consolidation in europe: quality, economic conditions, and persistence’, journal of the japanese and international economies 16(4):512-535. von hagen, jürgen and rolf strauch (2001) ‘fiscal consolidation: quality, economic conditions and success’, public choice 109(3-4): 327-346. european journal of government and economics volume 4, number 1 (june 2015) issn: 2254-7088 the role of political competition in the link between electoral systems and corruption: an extension maria rosaria alfano, seconda università degli studi di napoli anna laura baraldi, seconda università degli studi di napoli abstract this work provides an extension to an international context of the analysis made by alfano, baraldi and cantabene (2013) on the role of political competition as a channel through which electoral systems affect corruption. our result conflicts with that found by empirical literature on that topic that makes plurality rules the most virtuous in terms of corruption. political scientists must be cautious in designing the degree of proportionality of electoral rules without take into account the variation in political competition that follows. keywords political competition; electoral systems; corruption. jel classification d72; c23; k42. 5 alfano and baraldi ● political competition, electoral systems and corruption introduction the choice of an electoral system is one of the most important institutional decisions for any democracy. a country’s electoral system is the method used to calculate the number of elected positions in government that individuals and parties are awarded after elections. in other words, it is the way that votes are translated into seats in parliament or in other areas of government. there are many different types of electoral systems in use around the world, and even within individual countries, different electoral systems may be found in different regions and at different levels of government (e.g., for elections to school boards, city councils, state legislatures, governorships, etc.). the choice of a particular electoral system has a profound effect on the future political life of the country;the electoral system guarantees the representation of voters’ desires and, once chosen, often remains fairly constant. voting systems are generally divided into majoritarian/plurality rule and proportional representation (pr) with a number of variations and methods. in a democratic system, the mechanism of representation of political parties is also characterized by the degree of political competition among political parties and by the conflict between voters and candidates (the political corruption). this work deals the effect of electoral systems on the level of corruption of a country. the wide literature studying the causes of corruption (tanzi, 1998; rose-ackerman, 1999), considers the electoral system a most important political determinant of corruption. indeed, in the public sector, corruption arises and persist when bureaucrats and politicians possess discretionary power which allows to extract economic rents. this happens when institutions (political, bureaucratic, juridical and economic) are weak (aidt, 2011). electoral rules characterize those institutions, as to the degree of political competitiveness among political parties. the theoretical literature investigating the relationship between the electoral system and corruption seems to conclude that the way in which electoral rules affect corruption depends on contrasting forces while the empirical literature suggests that countries with proportional systems have much more widespread corruption than countries with majoritarian systems (see subsection 2.1). that literature, theoretical and empirical, seems to completely neglect the role played by political competition in the link between the electoral system and corruption. political competition (defined as the competition among political parties to collect votes at elections, that is, as the competition for political power (bardhan and yang, 2004)) may be an important channel through which the electoral system affects corruption. both the electoral system and political competition use the same mechanism to affect corruption: the accountability of incumbent politicians but, as for electoral rules, political competition may drive corruption in opposite directions. moreover, we may believe that the electoral system has some effect on the degree of political competitiveness among political parties. here we are interested in underlining that the literature, in particular the empirical literature, did not consider that political competition might affect corruption in combination with electoral systems. alfano, baraldi and cantabene (2013) (hereafter abc) were the first to attempt this unexplored issue. the deep analysis of the complex web wrapping electoral systems, political competition and corruption motivated the hypothesis formulated by abc that the electoral system may affect corruption directly and indirectly, via political competitions.the two effects may drive corruption in the same direction or in the opposite one; the total effect of the degree of proportionality of the electoral formula on corruption is the sum of the two effects. abc use the suitable italian scenario and the gallagher disproportionality index as a measure of the degree of proportionality of an electoral system to test their hypothesis. they find that the way in which corruption is affected by the proportionality degree of an electoral system (that is, the total effect) depends on how the degree of political competition reacts to changes in the degree of proportionality of the electoral rule. the last issue is still unexplored. this powerful result underlines that it can be 6 european journal of government and economics 4(1) misleading to analyze the impact of electoral rules on corruption regardless of the role of political competition, and further investigations are encouraged. we pick up the invitation of the authors. we extend the testing hypothesis of abc to an international context, on a cross-country panel data and we use different measures of corruption, available at the cross-country level, in order to check the robustness of results. our finding confirmed that of abc. firstly, the direct effect of the degree of proportionality on corruption is positive: an increase in proportionality of the electoral rule is beneficial for corruption. this result conflicts with that of previous empirical literature on a cross-country basis. the interpretation of this contrasting result is linked to the measure of the proportionality degree of the electoral system we used which allowed us properly to consider all electoral systems variants in an empirical setting. secondly, as in abc, we find that the indirect effects matter: political competitiveness is a channel through which the electoral system affects corruption and the direction of its effect depends on the degree of proportionality of the electoral system. the paper is organized as follows. section 2 summarizes the abc framework and shows the extension we made to their model. section 3 describes the empirical model and variables we used. section 4 explores the empirical strategy and shows the results. section 5 presents the concluding remarks. the framework and the extension before describing our work, we briefly summarize the general framework of the existing literature on the link between electoral systems and corruption which the abc analysis refers to. the abc framework the theoretical literature has explored the impact of electoral rules on corruption according to two dimensions: the district size (i.e. the number of seats in a district) and the electoral formula (i.e. how votes are translated into seats). regarding the district size, pr promotes competition among politicians reducing the possibility of rent for incumbents (myerson, 1993; ferejohn, 1986); instead, looking at the electoral formula, the greater accountability of politicians induced by majoritarian representations provides a lower incentive for corruption than in pr (persson and tabellini, 1999a,b; 2000). therefore, from the theoretical point of view, the effect of the electoral system on corruption goes in opposite directions. the empirical literature suggests that countries with proportional systems have much more widespread corruption than countries with majoritarian systems (persson et al., 2003; gagliarducci et al., 2011; kunicova and rose-ackerman, 2005). the study of effects of political competition on the economic variables is limited. political competition may affect economic performance via the quality of politicians (besley et al., 2010; padovano and ricciuti, 2009; alfano and baraldi, 2012). in the political economy literature, the concept of political competition seems close to that of accountability for incumbents (persson et al., 1997): if political competition is intense, the incumbent politician is more accountable for his actions in office and has an incentive for good performances because, otherwise, he can be easily removed and replaced by the public, with challengers. therefore, according to this concept, an intense political competition leads to less corruption (mulligan and tsui, 2006).otherwise, when political competition is intense, the electoral base of each party tends to be smaller, the probability of re-election reduces and politicians have an incentive to adopt myopic behavior maximizing rents during their remaining time in office, and corruption increase (stigler, 1972). also for political competition, its effect on corruption is difficult to define. 7 alfano and baraldi ● political competition, electoral systems and corruption while it is widely documented that the party system is largely determined by the choice of the electoral system (duverger, 1954; cox, 1997; lijphart, 1994; 1999; sartori, 1976; taagepera and shugart, 1989), there is no evidence about the relationship between the latter and political competitiveness among parties. the number of political parties competing at the elections does not measure the degree of political competitiveness among them. as sartori (1976) pointed out, for political competition, it is important, indeed, to consider the relative size of political parties (this will justify the choice of the herfindahl index). the electoral system and political competition use the same mechanism in order to affect corruption and it is not hard to assume that the electoral system has some effect on the degree of political competition. this last consideration, within the framework of political determinants of corruption, motivated the abc analysis. abc advance in the empirical literature on the link between electoral systems and corruption in two ways. firstly, they were the first that consider the role of political competition in the relationship between the electoral system and corruption. they argued that electoral systems, political competition and corruption are wrapped in a complex web and formulate the hypothesis that there is a direct and an indirect effect of electoral rules on corruption, the latter via political competition. secondly, they distinguished electoral systems by using a continuous measure of their degree of proportionality (the gallagher disproportionality index), differently from previous works which did that by using dummy variables (persson et al., 2003). indeed, the electoral rules a country decides to adopt defines the way in which votes obtained by political parties are translated into seats in parliament; it defines the degree of proportionality of the electoral system. therefore, in order to properly consider electoral systems in an empirical setting, a measure of its degree of proportionality is the correct way. a further advantage of such a measure of proportionality is the possibility to consider mixed electoral rule, beside the pr and majoritarian. indeed, mixed electoral systems, combining pr and majoritarian elements, are more likely to be characterized by intermediate degrees of proportionality. abc exploited the gallagher disproportionality index (gallagher, 1991) in order to treat italian mixed systems, that is, to differentiate mixed rules that alternate according to their degree of proportionality during the time span they consider for the analysis. they computed the gallagher index using the electoral outcomes of the senate elections from 1979 to 2006 for the 20 italian regions. abc tested their hypothesis on a sample of the 20 italian regions since 1979 to 2005 arguing that it is a suitable scenario because of the particular characteristics of corruption and the electoral system. the hypothesis of the abc analysis is that direct and indirect effects of electoral rules on corruption may drive corruption in the same direction or in the opposite direction depending on how the degree of political competition reacts to variations in the degree of proportionality of the electoral rule; therefore, the total effect of the electoral system on corruption is the sum of the two described effects. abc measure the degree of political competitiveness among political partiesthrough the normalized herfindahl index over the votes of each political party at elections from 1979 to 2006. the indirect effect of the electoral system on corruption has been caught by an interaction variable constructed by multiplying the two political indices just above described. as a dependent variable, abc used the number of crimes against public administration and estimated a distributed lag model, where corruption is regressed on the past values of regressors. the reason of the choice of a distributed lag model relies on the kind of dependent variable they used. indeed, corruption crimes perpetuated in a given year may be actually detected contemporaneously or with lags; crimes committed at different times can be detected contemporaneously; there is a lag between the beginning of the investigation and the conclusion of the penal action. thus, the empirical model should allow for lags between the year the crime 8 european journal of government and economics 4(1) is committed and that of the sentence, that justifies the estimation of a distributed lag model, where corruption is regressed on the past values of regressors, with lags from 2 to 4 years. abc found the following results: • the direct effect of the degree of disproportionality of an electoral rule on corruption is positive: the more the degree of proportionality of the electoral system the less the level of corruption. • the indirect effect shows that the way in which political competition affects corruption depends on the degree of proportionality of the electoral rule: there is a threshold of the degree of proportionality that allows us to separate an increase from a decrease of corruption due to an increase in the concentration of votes in the hands of political parties. • the total effect depends on how political competition reacts to changes in the degree of proportionality. if the gallagher index is below the threshold and if it is assumed that political competition moves in the same direction as the degree of proportionality of the electoral rule, the beneficial (negative) effect on corruption of an increase (decrease) in the degree of proportionality of the electoral system is reinforced by an increase (decrease) in political competition; otherwise,if the two indexed move in opposite direction, the two effects go in opposite direction and the total effect on corruption is indeterminate. when, instead, the value of the gallagher index goes up to that threshold and an increase (decrease) in political competition follows an increase (decrease) in proportionality, the direct and indirect effects drive corruption in opposite directions; if the variations of the two political variables are reversed, the overall effect on corruption is the same. table 1 below offers a graphical illustration of the abc results. table 1. effects of the degree of proportionality of the electoral system on corruption effect on the level of corruption below the threshold above the threshold direct (δgdi) + (-) + (-) + (-) + (-) indirect (δnhi) + (-) (+) + (-) -(+) total + (-) +/+/+ (-) authors’ elaboration the authors conclude, firstly, that this “within country” result contrasts with the previous cross-country one that, instead, stated that countries with pr have much more widespread corruption thancountries with majoritarian representations (persson et al., 2003); secondly, that, assuming a variation in the degree of proportionality of the electoral system only, is not sufficient to establish what is the consequent trend of corruption; how political competition reacts to some changes in the degree of proportionality should allow us to draw conclusions. the relationship between the electoral system and political competition still remains unexplored. the extension the hypothesis that abc test and the results they found are very interesting within the political determinants of corruption framework. but, as they suggest, further investigations in that topic are needed. the present work tries to fill some weaknesses of the abc analysis; in detail, we are referring to: 1) the “within-country” analysis. italy certainly provides a suitable scenario, but results (as the authors stressed) could be unresponsive to other realities; 2) the gallagher index, although it is on the italian regional basis, was computed under the same electoral rule over time. that is, changes in the italian electoral 9 alfano and baraldi ● political competition, electoral systems and corruption system during the period under exam concerned all the regions at the same time. this is the reason why the gallagher index showed little variability across regions (indeed, it ranges from 0.02 to 0.52); 3) the cross-sectional dimension of the italian panel data is short (n = 20 italian regions); this may create some problem in estimations using the system gmm technique which, instead, is designed for panel with short t and long n. thus, we test the same hypothesis as abc to a cross-country scenario. we conduct the empirical analysis on a panel of 85 countries over 28 years (from 1984 to 2010). this extension to abc’s work allows us to compare our results with those previously found by the literature. it seems very interesting to the light of the more suitable measure we used to distinguish electoral systems and their degrees of proportionality that were never done before. moreover, the panel dimensions are perfect to exploit the system gmm estimation technique. the empirical model and variables the estimated equation of country i at time t is 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖,𝑡𝑡 = ∑𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑖𝑖,𝑡𝑡−𝑗𝑗 + 𝛽𝛽1𝐺𝐺𝐺𝐺𝐺𝐺 + 𝛽𝛽2𝐻𝐻𝐺𝐺 + 𝛽𝛽3(𝐺𝐺𝐺𝐺𝐺𝐺 ∗ 𝐻𝐻𝐺𝐺) + ∑𝛿𝛿 𝐶𝐶𝑟𝑟𝑟𝑟𝐶𝐶𝑟𝑟𝑟𝑟𝑟𝑟𝐶𝐶𝐶𝐶𝑟𝑟𝑖𝑖,𝑡𝑡 + +𝛼𝛼𝑖𝑖 + 𝜇𝜇𝑡𝑡 + 𝜀𝜀𝑖𝑖,𝑡𝑡 (1) where αi is a country specific effect, µt is a time-specific effect. the dependent variable is the corruption index (thereafter corr) provided by the international country risk guide icrg. (even though the icrg database includes a collection of records for about 150 countries, our analysis is cut off from some countries which showed few observations. therefore we reduced the dataset to 85 countries. table a1, appendix, provides a full description of the variable.) it is a measure of “perceived” corruption and is one of the three most popular indices based on corruption perception. the other two are the corruption perception index (by transparency international) and the control of corruption index (by the world bank). it summarizes the valuation of corruption within the political system; in particular, it deals with the warning for foreign investments. the corruption index ranges in an interval [0 to 6] where 0 represents the highest risk of corruption and 6 is the lowest risk; it provides the longer time series of corruption data, from 1984 to 2010. tables a2 and a3, appendix, show respectively the descriptive statistics of corr and partial correlation. figure 1 below shows an overview of the corruption index distribution for different countries. for each country in the figure we calculated the mean over years (19842010). to the left with a high index value (meaning low corruption risk) we find the scandinavian countries and the three countries of oceania (australia, new zealand and papua new guinea). european countries in the dataset show low/medium levels of corruption while countries in asia, africa and south america have the highest value. figure 1. mean of corruption index over the years 10 european journal of government and economics 4(1) the dynamic panel data model (as equation (1)) can be identified only for stationary time series cross-sectional data; therefore, a panel test for unit roots on the dependent variable corr is needed. we perform the fisher-type test developed by maddala and wu (1999). a fisher-type test combines the p-values from n independent unit root tests. it is based on the p-values of individual unit root test; the null hypothesis is that all series are non-stationary against the alternative that at least one series in the panel is stationary. we chose this test because it does not require a balanced panel. at 1 percent we reject the null hypothesis of non-stationary series, thus our dependent variable does not show unit root. we perform the fisher-type test including drift and 1, 2 and 3 lags in the individual adf regressions. we always reject the null. the test is not shown. two lags of the dependent variable are introduced in the estimated equation because of the dynamic of corruption (aidt, 2003). estimations of equation (1) without lags of corr showed autocorrelation of residuals. in order to solve this problem, we introduced two lags of the dependent variable in the right-side of equation (1). the two regressors of our interest are political indices. the first one, as mentioned above, is the gallagher disproportionality index. as in abc, we use it as a measure of the degree of proportionality of the electoral system. as for the within-country analysis, this is a novelty also in the cross-country empirical literature on the effects of electoral systems on corruption. the gallagher index (or least squares index) is a representation index of political parties within a parliament; it may be considered as a very good proxy for the degree of proportionality of an electoral system because the electoral system that guarantees a greater representation of political parties is a more proportional one while the less representative one is less proportional. moreover, empirical studies have shown that a majoritarian system produces a higher level of disproportionality than a proportional representation system (lijphart, 1994; anckar, 2001), whereas a mixedelectoral system produces an intermediate level (powell and vanberg, 2000; anckar, 2001). the gallagher index (thereafter gdi) is constructed as 𝐺𝐺𝐺𝐺𝐺𝐺 = � 1 2 � (𝑣𝑣𝑖𝑖 − 𝑟𝑟𝑖𝑖)2 𝑖𝑖 where vi and si are respectively the share of votes and of seats of a single political party (i=1,....,n political parties) at elections in each country in the time span under consideration. the index may range from 0 to 100 with 100 indicating perfect proportionality between seats and votes and 0 meaning that the only seat at stake goes to the winner (in which case the index equals the percentage of votes obtained by the defeated candidate). clearly the bounds of the gdi (0 and 100) are only theoretical values. among the investigated countries, the gdi ranges from 0.26 to about 33 (see table a2, appendix, for the descriptive statistics of the gdi). the dataset comprises countries that experienced majoritarian, proportional and mixed systems. the upper bound of the gdi (33.25) is very far from the theoretical value of 100 of perfect disproportionality. this means that also countries under plurality rules have a relatively strong proportionality. therefore, all the three systems have a certain degree of proportionality; moving from pr to majoritarian systems, such degree of proportionality decreases. the other political index measures the political competitiveness among political parties at elections. it is the herfindahl index (hi) calculated as: 𝐻𝐻𝐺𝐺 = �𝑣𝑣𝑖𝑖 2 𝑛𝑛 𝑖𝑖=1 11 alfano and baraldi ● political competition, electoral systems and corruption where vi is the vote share of a single political party at elections in each country from 1984 to 2010 and n is the number of political parties at each election. it ranges from 0 (theoretically perfect competition with n equally sized parties) to 1 (monopoly) and it is open on the lower bound. the herfindahl index is usually used to measure the size of firms in relation to an industry; therefore, it is an indicator of the amount of competition among them. following stigler (1972), which interprets competition in the market for votes as competition in the goods’ market (the more competitive the parties, the more responsive the political system will be to the desires of the majority), an index of goods’ market power seems the correct way to measure the market for votes’ power. abc employed the normalized herfindahl index because of its desirable properties for that kind of analysis. we are forced to use the standard herfindahl index because we are unable to collect the number of political parties at elections in each country, required to construct the normalized herfindahl index. table a2, appendix, summarizes the descriptive statistics of this index. the direct effect of the degree of proportionality on corruption is caught by the coefficient β1 in eqaution (1). the indirect effect is caught by the coefficient β3 of the interaction term gdi*hi. de haan and seldadyo (2005) in their survey on the causes of corruption, detect tens of such determinants. among them, we chose, as control variables, those we believed the more suitable for the analysis we will perform. therefore, control variables are: • per capita gdp, in natural log (lngdp); it controls for structural differences in economic development (de haan and seldadyo, 2005). we expect its positive correlation with perceived corruption (ades and di tella, 1999; la porta et al., 1999; treisman 2000). hall and jones (1999) and kaufmann et al. (1999) question the causal relationship between corruption and income: the per capita gdp is high because of low corruption. for this reason we treat lngdp as endogenous. • population (pop); it controls for country size. empirical literature found contrasting evidence (knack and azfar, 2003; tavares, 2003). • government stability (gov_stab); it controls for quality of government. the higher the quality of government, the lower the probability of corruption (de haan and seldadyo, 2005). • democratic accountability (dem); it controls for the level of democracy of a country. there is a general consensus that democracy reduces corruption (de haan and seldadyo, 2005). • freedom of press (press); it controls for democratic governance. informed voters are better able to hold elected officials accountable for their policy decisions; the greatest part of people get their information via the media (snyder and stromberg, 2008). this variable is found to be negatively correlated with corruption (brunetti and weder, 2003). • law and order (law_order); it controls for the rule of law as a measure of the confidence that agents have in the rules of society, the effectiveness of judiciary and the enforceability of contracts (de haan and seldadyo, 2005). a stronger rule of law reduces the likelihood of corruption to take place. also in this regard, an issue of causality may emerge: agents may have trust in the rule of law because corruption is low. in order to take this problem into account, in some estimations we treat law_order as endogenous. • woman (wom); it is the proportion of seats held by women in national parliaments (percentage); it controls for the gender dimension of corruption meaning that conventional wisdom states that women in public life can be an 12 european journal of government and economics 4(1) effective anticorruption strategy because women are less corruptible than men (dollar et al., 1999; goetz, 2004; sung, 2003). • general government consumption expenditure (g); it controls for government size. there is no consensus among authors on the theoretical relationship between government size and corruption (abdiweli and hodan, 2003; bonaglia et al., 2001; fisman and gatti, 2002). we normalize general government consumption expenditure in percentage of gdp and per capita. • net enrollment primary rate, in natural log (lnschool); it controls for the human capital development. empirical literature found contrasting evidence (ali and isse, 2003; frechette, 2001). tables a.1, a.2 and a.3, appendix, show respectively the detailed description of all the variables, the statisticsand the correlation matrix. • we follow standard practice of counting a country as democratic according to its rate of polity iv political freedom score; we define as a democracy a country which scores a polity iv index greater than +3 in the year of the election (gleditsch and hegre, 1997). see table a.1 for a detailed description of this index and table a.2 for its descriptive statistics. in order to generalize the estimation results, we will provide robustness checks by using other measures of corruption available at cross-country level. empirics empirical strategy equation (1) is a dynamic panel data model which has been estimated using arellano-bover (1995)/blundell-bond (1998) system gmm estimators;1 estimation results are shown in table 2.the empirical analysis has been conducted on a panel of 85 countries over 28 years (from 1984 to 2010). in order to control for heteroskedasticity, every estimated equation has cluster-robust standard errors. the second-last raw of table 2 (see sub-section 4.1) shows the chi-squared (and the pvalue in parentheses) of the hansen test whose null hypothesis is that the overidentification restrictions are valid; we do not reject the null and the model is correctly specified. (we also compute, but we do not show, the difference-in-hansen test in order to test the joint validity of the full instrument set; we do not reject the null.) the last raw of table 2 displays the p-value of the arellano-bond test for second-order autocorrelation in the first differenced residuals; the null hypothesis is the absence of autocorrelation of residuals that we always accept.in order to control for common shocks in a given year, calendar year dummies are included. (in table 2 of estimation results we do not display such dummies.) every specification in table 2 is estimated by the two-step options with the windmeijer (2005) correction. windmeijer (2005) finds that the two-step efficient gmm performs somewhat better than one-step in estimating coefficients, with lower bias and standard errors, and that the two-step estimation with corrected errors is superior to robust one-step. we start estimating equation (1) including the two typical controls in cross-country analysis, the (log of) per capita gdp and the population size; in order to test the robustness of results, in the following specifications we add, step by step, all the control variables described above. all the regressors in equation (1) are introduced contemporaneously: given that our dependent variable is an index of perceived corruption, we have no reason to believe that this perception by citizens is affected 1 we used the stata command xtabond2 provided by david roodman (2009) 13 alfano and baraldi ● political competition, electoral systems and corruption by past values of the variables. this is the reason why we do not introduce lag structure in the estimated model. an important issue here is to deal with the possibility of endogeneity of the gallagher index. first of all, the theoretical literature analyzing the link between electoral rules and corruption considers the first as a determinant of corruption and not the reverse. second, it seems unlike to think that the perception of corruption (as a menace for foreign investments) may affect the way in which electoral system is designed by politicians; third, it seems also unlike to believe that a more or less corrupt system may affect the way in which votes are translated in seats, as the electoral system does. however, an endogeneity problem may arise when dealing with political institutions, that is, there may be some omitted factors that influence electoral systems and simultaneously influence corruption.in order to verify the exogeneity of gdi we perform the c test on the gdi variable. under the null, the hansen statistic tests the validity of a subset of orthogonality conditions. to perform the c test we have to estimate two models, one where gi is exogenous and another where the gi is endogenous. the estimation of the first model gives us a hansen statistic (called h1) and the estimation of the second model gives us another hansen statistic (called h2). we need to use the same set of exogenous instruments for both estimations that is we have to assume that all the other orthogonality conditions hold, i.e. all the other included and excluded instruments remain exogenous. h1 and h2 are both distributed as a chi-squared with the dof of h2 smaller than the dof of h1. the c test on gi is simply a test of h1h2. the test statistic h1-h2 is distributed as chi-squared with dof equal to the number of regressors being tested for endogeneity (in our case 1, gdi). if it is endogenous, then h1-h2 will be high because h1 is high while h2 is not. in order to deal with the general endogeneity issue, system gmm treats the model as a system of equations—one for each time period—where the predetermined and endogenous variables in first differences are instrumented with suitable lags of their own levels (see table a4, appendix). columns (a) and (a’) display the estimates of equation (1) where gdi is treated respectively as exogenous and endogenous (only with lngdp and pop as control variables). this allows us to calculate the statistic (h1-h2). it is distributed as a chi-squared with dof=1 and it is equal to 0.03. looking at the critical value of the chi-squared distribution with 1dof, the test says that at 1 percent we do not reject the null: gdi is exogenous. moreover, the coefficients of gdi, hi and gdi*hi are significant when gdi is endogenous. as mentioned above, the per capita gdp is treated as endogenous and it is instrumented with its own lags. we treat the low and order variable as exogenous and endogenous; where endogenous, it is instrumented with its own lags. 14 european journal of government and economics 4(1) results table 2. estimation results. dependent variable: corruption index (a) (b) (c) (c’) (d) (d’) (e) (f) (f’) (g) corr (-1) 1.08*** (20.8) 1.03*** (16) 1.01*** (14.4) 1.08*** (12.5) 1.04*** (15.7) 1.04*** (14.6) 0.99*** (12) 1.05*** (15) 1.04*** (15) 0.98*** (8.03) corr (-2) 0.23*** (-5.7) 0.21*** (-5.3) 0.21*** (-4) 0.23*** (-3.3) 0.21*** (-4.4) 0.22*** (-5) 0.21*** (-4.2) 0.21*** (-4.3) 0.21*** (-4.5) -0.17** (-2.2) gdi -0.01** (-2.23) -0.01** (-2.28) -0.01* (-3) -0.01* (-1.77) 0.01*** (-3.18) 0.01*** (-2.7) -0.01** (-2.5) 0.01*** (-2.88) 0.01*** (-3.04) -0.01** (-2.1) hi -0.48** (-1.92) -0.6** (-2.03) -0.8* (-2.6) -0.36* (-1.72) -0.6** (-2.10) -0.67* (-1.86) -0.41* (-1.62) -0.54* (-1.8) -0.59** (-2.01) -0.43* (-1.8) gdi *hi 0.02*** (2.6) 0.02** (2.49) 0.03* (3.2) 0.02** (2.23) 0.03*** (2.8) 0.03*** (3.02) 0.02** (1.92) 0.03** (2.5) 0.03*** (2.63) 0.02* (1.8) lngdp 0.02 (0.7) 0.02 (0.5) -0.05 (-0.7) 0.03 (1) -0.09 (-1.1) -0.06 (0.9) -0.02 (-0.26) -0.08 (-1.09) -0.09 (-1.1) 0.03 (0.4) pop -5.77e11 (-0.5) -8.90e11 (-0.7) -2.05e10 (-1) 5.63e11 (0.8) -1.08e10 (-0.7) -1.45e10 (-0.8) 3.30e11 (0.27) -1.14e10 (-0.7) -7.88e11 (-0.4) 1.84e11 (0.1) gov_stab 0.05*** (3.1) 0.05* (2.95) 0.03** (1.96) 0.03** (2.4) 0.04 (1.54) 0.03*** (2.7) 0.03** (2.17) 0.03** (2.2) 0.03 (1.48) dem 0.05** (1.96) 0.003 (0.2) 0.003 (2.39) 0.02 (0.5) 0.004 (0.35) 0.006 (0.5) -0.01* (-0.7) press -0.004 (-1.1) law_order 0.15*** (2.73) 0.06 (0.5) 0.12*** (2.11) 0.13*** (2.6) 0.14*** (2.7) 0.10 (1.3) women 0.006** (2.14) g/gdp 0.003 (0.8) g/pop 0.08* (0.8) lnschool 0.6 (0.8) n. obs. (n. groups) 1303 (70) 1298 (70) 1191 (69) 1151 (70) 1191 (69) 1191 (69) 1155 (69) 1182 (69) 1182 (69) 697 (65) n. instrum. 36 37 47 41 47 48 47 48 48 49 chi2 (pvalue) hansen test 1.1 (0.89) 1.9 (0.7) 12.4 (0.5) 6.6 (0.35) 10.4 (0.58) 11.9 (0.53) 9.36 (0.7) 11.6 (0.47) 10.2 (0.6) 17.3 (0.18) p-value 2nd order autocor 0.17 0.13 0.12 0.12 0.18 0.14 0.25 0.17 0.2 0.9 notes. all specifications contain calendar year dummies (results not reported); the time span is 19842010. the dependent variable is corr. standardized normal z-test values are in parentheses; clusterrobust standard errors. lngdp is endogenous everywhere and it is instrumented with its own lags; law_order is endogenous in (d’) and it is instrumented with its own lags. significant coefficients are indicated by * (10% level), ** (5% level) and *** (1% level).two-step estimations with windmeijer (2005) correction. specification (a) contains only the per capita gdp (in natural log) and population; the specifications which follow contain all the control variables we described above. the signs and significance of the political indices of interest do not change in every specification. at the cross-country level, our findings exactly confirm those in abc. the coefficient of the gdi is negative everywhere; recalling that it is a disproportionality index, the more the degree of proportionality of the electoral system, the less the level of corruption (remember also that the higher the value of the corruption index, the lower the level of corruption). this result states that the direct effect of the proportionality of the electoral system on corruption is positive also at the cross-country level and contradicts the previous empirical findings of persson et al. (2003). this may be due to the fact that we distinguish electoral 15 alfano and baraldi ● political competition, electoral systems and corruption systems according to their degree of proportionality instead of dummy variables; in our opinion, as stated above, the measure of proportionality is the correct way to identify electoral rules in an empirical setting. the magnitude of β1 is 0.01 meaning that if the proportionality increases, for example, by 0.1, the level of corruption decreases by 0.001. the hi shows a negative and significant coefficient equal, on average, to 0.55: a decrease in this index means an increase in political competition which is beneficial for corruption. finally, the novelty of the present work (as that of abc) is the interpretation of the interaction term gdi*hi, capturing the indirect effect of the degree of proportionality of the electoral system on corruption. looking at the specification (a), we can write (2) that is, the effect of political concentration on corruption depends positively on the degree of disproportionality of the electoral system. in equation (2), there is a threshold value of the gdi (gdi=24) such that if gdi> 24, hi corr ∂ ∂ > 0, if gdi<24, hi corr ∂ ∂ < 0. (the threshold value of gdi is the value such that hi corr ∂ ∂ = 0 in equation (2). this is equal to 24.) therefore, an increase in political competition may have a positive or negative impact on corruption depending on whether the variable gdi is above or below that threshold value. the threshold values slightly change according to the estimated coefficients of specifications in table 2. we can now deal with the total effect of the degree of proportionality of the electoral system on corruption. it depends on how political competition reacts to changes in the degree of proportionality of the electoral system. where electoral systems are characterized by high degrees of proportionality, an increase (decrease) in their degrees of proportionality followed by an increase (decrease) in political competition, is beneficial (is not beneficial) for corruption because the direct and the indirect effects go in the same direction. otherwise, under less proportional electoral systems (gdi above 24), an increase (decrease) in political competition which follows an increase (decrease) in proportionality, leads to the direct and the indirect effects in opposite directions. in this situation, in order to reduce corruption, an increase in the degree of proportionality should be followed by a reduction in political competitiveness. therefore, if the change in political competition has the same sign as the change in the degree of proportionality of the electoral formula, the indirect effect strengthens the direct effect under more proportional rules and it mitigates the direct effect on corruption under less proportional regimes. in terms of the data, only few countries in few years of elections experienced a degree of proportionality greater than 24. (those countries are albania, bahamas, france, jamaica, mongolia, papua new guinea, philippines, sri lanka, trinidad & tobago and turkey.) this means that, according to our estimation, the relevant case to be considered is hi corr ∂ ∂ < 0. now look at the other variables. past values of corr are always highly significant and the long-run effect is positive, as expected. the introduction of all the control variables does not change the results.the lngdp and pop are never significant. the government stability (gov_stab) is positive and significant, as expected, almost everywhere with magnitude, on average, of 0.03: an increase of 0.1 in government stability index leads to an increase in the corruption index (that is, a decrease in corruption) of 0.003. in columns (c) and (c’) we introduce demand press: they are gdi= hi corr ∗+− ∂ ∂ 0.0248.0 16 european journal of government and economics 4(1) both variables related to the democratization of countries. [d]emis positive, as expected, and significant in (c); when we introduce press in (c’), dem loses significance and press is not significant. we drop this latter from the following estimations. [l]ow_order is positive everywhere and significant only where it is exogenous (in (d’) it is treated as endogenous): a stronger rule of law is confirmed to deter corrupt behaviour. a positive sign is confirmed also for the presence of women in the country’s parliament. as a proxy for the government size, we control for both public consumption spending/gdp and public consumption spending/population. only the second one is significant with positive sign. finally, the rate of schooling seems to have no relevance in the explanation of corruption. robustness analysis we perform a further robustness check of the analysis, concerning the dependent variable. we test the same model with the two other most widely used indicators of corruption worldwide: the corruption perceived index (hereafter cpi) and the control of corruption index (hereafter c_c). the cpi measures the perceived levels of public sector corruption (cpi, 2012). based on expert opinion, countries are scored from 0 (highly corrupt) to 10 (very clean). c_c index reflects perceptions of the extent to which public power is exercized for private gain capturing all the forms of corruption by which elites and private interests take advantage from public sector. it ranges from approximately -2.5 (high corruption) to 2.5 (low corruption). (see tables a1 and a2 for the description and statistics of those variables.) the estimation results are in table 3 where we introduce, as controls, only lngdp and pop.2 table 3. estimations. dependent variables: cpi and c_c (h) dep. var.: cpi (i) dep. var.: c_c cpi (-1) 0.05 (0.9) cpi (-2) 0.46** (2.1) c_c (-1) -0.08 (0.5) gdi -0.08* (-1.9) -0.05** (-2) hi -1.81* (-1.9) -1.78* (-1.82) gdi *hi 0.25** (2) 0.11* (1.65) lngdp 0.4 (1.2) 0.33* (1.66) pop -2.15e-10 (-0.5) -6.63e-10* (-1.21) n. obs. (n. groups) 734 (67) 540 (69) n. instrum. 39 35 chi2 (p-value) hansen test 21.4 (0.2) 25.3 (0.2) p-value 2nd order autocorrelation 0.2 0.7 notes. cpi is the corruption perception index; c_c is the control of corruption index. all specifications contain calendar year dummies (results not reported); in (h) the time span is 1995-2011; in (i) the time span is 2002-2011. standardized normal z-test values are in parentheses; cluster-robust standard errors. lngdp is endogenous everywhere. significant coefficients are indicated by * (10% level), ** (5% level) and *** (1% level).two-step estimations with windmeijer (2005) correction. as we can notice, both direct and indirect effects of the degree of proportionality of the electoral system on corruption remain robust to different measures of corruption. the number of observations drastically decreases because the time span is 19952 in the estimation with c_c as dependent variable, in column (i) table 3, we introduce only one lag of the dependent variable because it is enough to remove the autocorrelation of residuals. 17 alfano and baraldi ● political competition, electoral systems and corruption 2011 for the cpi and 2002-2011 for the c_c. the estimated coefficients for gdi, hi and the interaction gdi*hi show that the threshold values of the gdi fall into the allowable range: it is equal to 7.24 when the dependent variable is the cpi, and it is equal to 16.2 when the dependent variable is the c_c. this robustness check seems very important; it indicates that the threshold value of the disproportionality index is not easily determined. the threshold value would allow to identify the direction of the indirect effect of the degree of proportionality on corruption, and therefore, to deal with the total effect. in our estimations, it depends on the corruption index we use, but, probably, it may widely vary among countries depending on their specific characteristics. concluding remarks this work extends the abc paper to an international context. the very interesting results they found, within the italian scenario, on the role played by political competition in the link between the electoral system and corruption required further investigations in order to be generalized. therefore, we test the same hypothesis as in abc on a cross-country panel data, from 1984 to 2010. our findings, firstly, contradicts previous empirical literature on cross-country data that makes plurality systems those most virtuous in terms of corruption. the interpretation of this reversed result can be due to the use of a more suitable measure of electoral rules, as a degree of proportionality index, instead of a dummy variable, that allowed us to properly consider all electoral systems in an empirical setting. secondly, they confirm that one cannot draw conclusions about the way the electoral system could be designed as a tool in fighting corruption without considering political competition. again we stress the fact that how political competition reacts to changes in the degree of proportionality of the electoral system, both theoretically and empirically, remains, until now, still unexplored. references abdiweli, ali m. and isse s. hodan (2003) ‘determinants of economic corruption: a cross-country comparison’, cato journal 22(3): 449-466. ades, alberto and rafael di tella (1999) ‘rents, competition, and corruption’, american economic review 89(4): 982-92. aidt, toke s. (2003) ‘economic analysis of corruption: a survey’, the economic journal, 113: 632-652. aidt, toke s. (2011) ‘the causes of corruption’, cesifo dice report, ifo institute for economic research at the university of munich 9(2): 15-19. alfano maria r. and anna l. baraldi (2012) ‘is there an optimal level of political competition in terms of economic growth? evidence from italy’, european journal of law and economics 39(2): 263-285. alfano, maria r., anna l baraldi and claudia cantabene (2013) ‘the role of political in the link between electoral systems and corruption: the italian case’, the journal of socio-economics 47(1): 1-10. anckar, carsten (2001) ‘effects of electoral systems. a study of 80 countries’, working paper presented at the sns seminar in stockholm. arellano, manuel and stephen bond (1991) ‘some tests of specification for panel data: monte carlo evidence and an application to employment equation’, the review of economic studies 58(2): 277-297. bardhan, pranab and tsung-tao yang (2004) ‘political competition in economic perspective’, bureau for research and economic analysis of development, working paper 78. 18 european journal of government and economics 4(1) besley, timothy, torsten persson and daniel m. sturm (2010) ‘political competition and economic performance: theory and evidence from the united states’, review of economic studies 77: 1329–1352. blundell, richard and stephen bond (1998) ‘gmm estimation with persistent panel data: an application to production functions’, institute for fiscal studies, working paper series, n. 99/4. bonaglia, federico, jorge braga de macedo and maurizio bussolo (2001) ‘how globalization improves governance’, discussion paper n. 2992, centre for economic policy research, organisation for economic co-operation and development, paris, france. brunetti, aymo and beatrice weder (2003) ‘a free press is bad news for corruption’, journal of public economics 87(7-8): 1801-1824. cox, gary w. (1997) making votes count: strategic coordination in the world’s electoral systems. cambridge: cambridge university press. cpi. (2012) url (consulted june 2015): http://www.transparency.org/cpi2012/in_detail de haan, jakob and harry seldadyo (2005) ‘the determinants of corruption: a reinvestigation’, unpublished paper prepared for the epcs-2005 conference durham, england, 31 march–3 april 2005. dollar david, raymon fisman and roberta gatti (1999) ‘are women really the fairer sex? corruption and women in government’, world bank working paper series 4. duverger, maurice (1954) political parties: their organization and activity in the modern state. london, wiley. new york: methuen. fisman, raymon and roberta gatti (2002) ‘decentralization and corruption: evidence across countries’, journal of public economics 83(3): 325-345. forejohn, john (1986) ‘incumbent performance and electoral control’, public choice 50: 5-25. frechette, guillaume r. (2001) ‘a panel data analysis of the time-varying determinants of corruption’, paper presented at the epcs. gagliarducci, stefano, tommaso nannicini and paolo naticchioni (2011) ‘electoral rules and politicians’ behavior: a micro test’, american economic journal: economic policy 3(3): 144-174. gallagher, michael (1991) ‘proportionality, disproportionality and electoral systems’, electoral studies 10(1): 33-51. gleditsch, nils p. and havard hegre (1997) ‘peace and democracy: three levels of analysis’, journal of conflict resolution 41(2): 283-310. goetz, anna m. (2004) political cleaners: how women are the new anti-corruption force. does the evidence wash? url (consulted may 2015): http://www.u4.no/document/showdoc. cfm?id=124. hall, robert e. and charles i. jones (1999) ‘why do some countries produce so much more output per worker than others’, quarterly journal of economics 114: 83-116. kaufmann, daniel, aart kraay and massimo mastruzzi (1999) ‘governance matters’, world bank policy research working paper 2196. knack, stephen and omar azfar (2003) ‘trade intensity, country size and corruption’, economics of governance 4: 1-18. 19 alfano and baraldi ● political competition, electoral systems and corruption kunicova, jana and susan rose-ackerman (2005). ‘electoral rules and constitutional structures as constraints on corruption’, british journal of political science 35(4): 573–606. la porta, rafael, florencio lopez-de-silanes, andrei shleifer and robert w. vishny(1999) ‘the quality of government’, journal of law, economics, and organization’ 15(1): 222-79. lijphart, arend (1994) electoral system and party systems: a study of ttwentyseven democracies, 1945-1990. new york: oxford university press. maddala, gangadharrao s. and shaowen wu (1999) ‘a comparative study of unit root tests with panel data and new simple test’, oxford bullertin of economics and statistics, pp. 631-652. mulligan, casey b., tsui, kevin t. (2006). ‘political competitiveness’, nber working paper 12653. myerson, roger b. (1993) ‘effectiveness of electoral systems for reducing government corruption: a game-theoretic approach’, games and economic behavior 5(1): 118–32. padovano, fabio and roberto ricciuti (2009) ‘political competition and economic performance: evidence from the italian regions’, public choice 138(3-4): 263–277. persson, torsten and guido e. tabellini (1999a) ‘the size and scope of government: comparative politics with rational politicians’, european economic review 43(4-6): 699–735. persson, torsten and guido e. tabellini (1999b) ‘political economics and public finance’, in auerbach, alan j., feldstein, martin. (eds.) handbook of public economics. vol. 3. amsterdam: northholland. persson torsten and guido e. tabellini (2000) political economics: explaining economic policy. cambridge: the mit press. persson, torsten, guido e. tabellini and francesco trebbi (2003) ‘electoral rules and corruption’, journal of the european economic association 1(4):958-989. persson, torsten, gerard roland and guido e. tabellini (1997) ‘separation of powers and political accountability’, quarterly journal of economics 112(4): 1163– 1202. powell, g. bingham and georg s. vanberg (2000) ‘election laws, dis-proportionality and median correspondence: implications for two visions of democracy’, british journal of political science 30(3): 383–411. roodman, david. (2009) ‘how to do xtabond2: an introduction to difference and system gmm in stata’, stata journal 9: 86-136. rose-ackerman, susan (1999) corruption and government, causes, consequences and reform. cambridge: cambridge university press. sartori, giovanni (1976) parties and party systems: a framework for analysis. cambridge: cambridge university press. snyder, james m., stromberg, david (2008) ‘press coverage and political accountability’, journal of political economy 118(2): 355–408. stigler, george j. (1972) ‘economic competition and political competition’, public choice 13(1): 91–106. sung, hyung jin (2003) ‘fairer sex or fairer system? gender and corruption revisited’, social forces 82(2): 703-723. taagepera, rein and matthew shugart (1989) seats and votes: the effects and determinants of electoral systems. new haven: yale university press. 20 european journal of government and economics 4(1) tanzi, vito (1998) ‘corruption around the world: causes, consequences, scope and cures’, imf staff papers 45(4): 559–94. tavares, jóse (2003) ‘does foreign aid corrupt?’, economic letters 79: 99-106. treisman, daniel (2000) ‘the causes of corruption: a cross-national study’, journal of public economics 76(3): 399–57. windmeijer, frank (2005) ‘a finite sample correction for the variance of linear efficient two-step gmm estimators’, journal of econometrics 126(1): 25–51. 21 alfano and baraldi ● political competition, electoral systems and corruption appendix table a1: variables description corr corruption index. it summarizes the valuation of corruption within the political system; in particular, the presence of corruption is a threat to foreign investment because it ‘distorts the economic and financial environment; reduces the efficiency of government and business by enabling people to assume positions of power through patronage rather than ability, and introduces an inherent instability into the political process’ (http://www.prsgroup.com/icrg_methodology.aspx). the result is that corruption makes it difficult to conduct business and, in some cases, it may force the withdrawal of investments. source: icrg, 1984-2010. cpi corruption perceptions index. the corruption perceptions index (cpi) ranks countries and territories based on how corrupt their public sector is perceived to be. it is a composite index – a combination of polls – drawing on corruptionrelated data collected by a variety of reputable institutions. the cpi reflects the views of observers from around the world, including experts living and working in the countries and territories evaluated see more at: http://cpi.transparency.org/cpi2012/in_detail/#sthash.bqb3zgzv.dpuf source: transparency international, 1995 – 2012. c_c control of corruption index. it reflects perceptions of the extent to which public power is exercized for private gain capturing all the forms of corruption by which elites and private interests take advantage from public sector. it is based on 30 underlying data sources reporting the perceptions of governance of a large number of survey respondents and expert assessments worldwide. the used data are selected from the worldwide governance indicators (wgi) research dataset which estimate the quality of governance. the estimated data of governance ranges from approximately -2.5 (weak) to 2.5 (strong) governance performance. source: worldwide governance indicators by world bank, 1996 -2011 (with missing in 1997, 1999, 2001). gdi gallagher disproportionality index. source: gallagher electoral disproportionality data,1945-2011 http://www.tcd.ie/political_science/staff/michael_gallagher/elsystems/docts/electionindices.pdf. hi herfindahl index. source: gallagher electoral disproportionality data,1945-2011 http://www.tcd.ie/political_science/staff/michael_gallagher/elsystems/docts/electionindices.pdf. lngdp natural logarithm of gross domestic product at constant price 2000 us. source: world bank, 1980-2011. pop urban population refers to people living in urban areas as defined by national statistical offices. source: world bank population estimates and urban ratios from the united nations world urbanization prospects, 1980-2011. gov_stab government stability. it is an assessment both of the government’s ability to carry out its declared program(s), and its ability to stay in office. the risk rating assigned is the sum of three subcomponents (government unity, legislative strength, popular support), each with a maximum score of four points and a minimum score of 0 points. a score of 4 points equates to very low risk and a score of 0 points to very high risk. this index ranges into the interval (0, 12). source: icrg, 1984-2010. dem democratic accountability. measure of how responsive government is to its people, on the basis that the less responsive it is, the more likely it is that the government will fall, peacefully in a democratic society, but possibly violently in a nondemocratic one. the points in this component are awarded on the basis of the type of governance enjoyed by the country in question. this index ranges into the interval (0, 6). source: icrg, 1984-2010. press freedom of press. freedom house has been at the forefront in monitoring threats to media independence which plays a key role in sustaining and monitoring a healthy democracy, as well as in contributing to greater accountability, good government, and economic development. the annual index contains the most comprehensive data set available on global media freedom; it provides numerical rankings and rates each country's media as "free," "partly free," or "not free". index score ranges from 0 to 100 cover the period 1993-2011; 0 states that press freedom is maximum and 100 means press is absolutely not free. during the period 1980-1992 the statistics published by freedom house are expressed using the status free, partly free, not free. the freedom house specifies that these status could be scored in different intervals, in particular the status free press range in the interval [0-30]; the status partly free press range in the interval [31-60] and the status not free press range in the interval [61-100]. taking these instructions, we assign the mean score of each interval of status only in the case the mean value of interval was very close to index score. source: freedom house’s annual press freedom, 1980-2014. https://www.freedomhouse.org/report-types/freedom-press#.vk_reu0u_iu law_order law and order is composed by sub-component comprising zero to three points. the law sub-component is an assessment of the strength and impartiality of the legal system, while the order sub-component is an assessment of popular observance of the law. thus, a country can enjoy a high rating – 3 – in terms of its judicial system, but a low rating – 1 – if it suffers from a very high crime rate of if the law is routinely ignored without effective sanction (for example, widespread illegal strikes). this index ranges into the interval (0, 6). source: icrg, 1984-2010. wom proportion of seats held by women in national parliaments (%). the data referred to unicameral assembly or lower chamber of bicameral assembly. these data are comparable with united nations women's indicators and statistics database – wistat published by world bank. source: parlia database, 1980-2011. http://www.ipu.org/wmn-e/classif-arc.htm, http://www.ipu.org/parline-e/parlinesearch.asp, http://databank.worldbank.org/data/views/reports/tableview.aspx g general government final consumption expenditure (% of gdp). it includes all government current expenditures for purchases of goods and services, most expenditures on national defense and security, but excludes government military expenditures that are part of government capital formation. source: world development indicators, 19802011 http://data.worldbank.org/indicator/ne.con.govt.zs. lnschool natural log of the net enrolment primary rate. it is the ratio between who are enrolled in primary school and the total population of the official primary school age. source: world development indicators http://data.worldbank.org/indicator/se.prm.nenr, 1980-2011. polity iv the polity iv index is a combined polity score ranging from -10 (strongly autocratic) to +10 (strongly democratic), reached by subtracting the autocracy score from the democracy score. the democracy and autocracy indices were originally constructed additively based on the following indicators: competitiveness of executive recruitment, openness of executive recruitment, constraints on chief executive, regulation of participation, and competitiveness of participation. scholars have reduced the index to a dichotomous measure of democracy and autocracy. a perfect +10 democracy, like australia, greece, and sweden, has institutionalized procedures for open and competitive political participation; chooses and replaces chief executives in open, competitive elections; and imposes substantial checks and balances on the powers of the chief executive. in a perfect -10 autocracy, by contrast, citizens’ participation is sharply restricted or suppressed; chief executives are selected according to clearly defined (usually hereditary) rules of succession from within the established political elite; and, once in office, chief executives exercise power with few or no checks from legislative, judicial, or civil society institutions. a polity score of -88 indicates economies in transition. source: polity iv individual country regime trends, 1946-2013: http://www.systemicpeace.org/polity/polity4.htm 22 european journal of government and economics 4(1) table a2: descriptive statistics of variables variable mean std. dev. min max observations corr 3.39 overall 1.41 0 6 n = 2160 between 1.18 n=85 within 0.76 t=25 cpi 5.02 overall 2.4 0.4 10 n = 1223 between 2.32 n=85 within 0.5 t=14 c_c 0.34 overall 1.08 -1.7 2.56 n = 1105 between 1.07 n=85 within 0.18 t=13 gdi 7.64 overall 6.54 0.26 33.25 n = 1975 between 5.46 n=85 within 3.67 t=23 hi 0.3 overall 0.13 0.06 0.89 n = 1772 between 0.12 n=79 within 0.06 t=22 lngdp 8.25 overall 1.46 4.9 10.9 n = 2566 between 1.44 n=83 within 0.22 t=31 pop 3.97e+07 overall 1.14e+08 210600 1.24e+09 n = 2688 between 1.13e+08 n=84 within 1.89e+07 t=32 gov_stab 7.63 overall 2.01 1 11.5 n = 2153 between 0.88 n=85 within 1.82 t=25 dem 4.92 overall 1.79 0 11.5 n = 2153 between 1.43 n=85 within 1.05 t=25 press 33.4 overall 19.2 5 100 n = 1762 between 18.2 n=85 within 6.2 t=21 law_order 3.93 overall 1.53 0 6 n = 2153 between 1.32 n=85 within 0.75 t=25 wom 14.4 overall 10.1 0 47.3 n = 2347 between 7.5 n=84 within 6.8 t=28 g/gdp 16.5 overall 5.98 2.9 43.4 n = 2526 between 5.16 n=83 within 3.04 t=30 g/pop 0.08 overall 0.32 3.33e-06 2.99 n = 2510 between 0.31 n=83 within 0.06 t=30 lnschool 4.48 overall 0.2 2.9 4.6 n = 1494 between 0.17 n=81 within 0.08 t=18 polity iv 8.4 overall 1.79 4 10 n=1995 between 1.73 n=79 within 0.73 t=25 23 alfano and baraldi ● political competition, electoral systems and corruption table a3. correlations corr gd i hi lngd p po p gov_st ab de m pres s law_ord er wo m g/gd p g/po p lnscho ol corr 1 gdi -0.2 1 hi 0.2 4 0.1 7 1 lngdp 0.63 0.2 3 0.3 4 1 pop 0.0 9 0.0 2 0.0 8 0.05 1 gov_sta b 0.0 8 0.0 8 0.1 1 0.11 0.0 4 1 dem 0.35 0.2 8 0.2 6 0.38 0.02 0.08 1 press 0.6 0.19 0.1 5 -0.8 0.0 9 -0.12 0.3 1 law_ord er 0.7 0.1 8 0.2 8 0.66 0.0 6 0.12 0.39 -0.6 1 wom 0.39 0.3 8 0.1 6 0.33 0.1 3 0.06 0.21 -0.5 0.28 1 g/gdp 0.43 0.1 8 0.1 8 0.45 0.1 6 -0.01 0.14 0.44 0.51 0.3 7 1 g/pop 0.27 0.1 4 0.0 1 0.28 -0.1 0.17 0.0 4 0.26 0.25 0.1 4 0.14 1 lnschool 0.22 0.1 8 0.3 0.6 0.0 4 -0.01 0.3 7 0.38 0.33 0.1 5 0.32 0.1 1 table a4: c test. dependent variable: corruption index (a) (a’) corr (-1) 1.83*** (20.8) 1.08*** (20.8) corr (-2) -0.23*** (-5.7) -0.23*** (-5.7) gdi -0.01** (-2.23) -0.007 (-0.17) hi -0.48** (-1.92) -0.42 (-0.7) gdi *hi 0.02*** (2.6) 0.13 (0.17) lngdp 0.02 (0.7) 0.02 (0.4) pop -5.77e-11 (-0.5) -6.23e-11 (-0.5) n. obs. (n. groups) 1303 (70) 1303 (70) n. instrum. 36 35 chi2hansen test (dof) 1.1 (4) 1.07 (3) p-value 2nd order autocorrelation 0.17 0.7 notes. all specifications contain calendar year dummies (results not reported); the time span is 19842010. the dependent variable is corr. standardized normal z-test values are in parentheses; clusterrobust standard errors. lngdp is treated as endogenous everywhere. in (a) gdi is treated as exogenous while in (a’) it is treated as endogenous and it is instrumented with its own lags. significant coefficients are indicated by * (10% level), ** (5% level) and *** (1% level). two-step estimations with windmeijer (2005) correction. 24 regional demands for policy participation in the eu multilevel system european journal of government and economics volume 1, number 1 (june 2012) issn: 2254-7088 9 regional demands for policy participation in the eu multilevel system philipp studinger, humboldt-universität zu berlin michael w. bauer, humboldt-universität zu berlin** abstract over the past 50 years, an increasing amount of political authority has been delegated to the regional government level in europe. this paper analyses regional demands for involvement in policy-making by focusing on the preferences of toplevel regional civil servants (“regio-crats”). a survey (n=347) of regio-crats in 60 regions of 5 european union member states serves as the empirical basis for the analysis of regional demands for policy involvement in the multilevel system. the data reveal differential patterns of demands. by and large, regio-crats emerge as being conservative, incremental and modest in their wishes for greater policy involvement, except where the regional contexts are characterised by substantial emancipatory political ambitions or cultural distinctiveness. regional demands for policy participation in the multilevel system are pragmatic, patch-worked and incremental, and more conservative than transformative. jel classification d73; h77; r50 keywords subnational bureaucrats; european union; policy allocation; multilevel system  this paper emerged from the project “governance preferences in the european multilevel system” funded by the german research foundation (grant ba3658/2-1), whose support is gratefully acknowledged. we are indebted to diana pitschel for her collaboration in the project and for her input to earlier versions of this paper. we also thank arjan schakel and charlie jeffery for valuable comments. ** address for correspondence: prof. dr. michael w. bauer, chair of politics and public administration, humboldt-universität zu berlin, institute of social sciences, unter den linden 6, d-10099 berlin, e-mail: mw.bauer@sowi.hu-berlin.de. doi: https://doi.org/10.17979/ejge.2012.1.1.4274 european journal of government and economics 1(1) 10 introduction over the past 50 years, regions – and especially those in today’s european union – have been entrusted with ever greater political authority (hooghe et al. 2010). however, notwithstanding the growing political importance of regions, we know very little about the elites who run these subnational political structures, who shape regional political decisions and implement political programmes. the aim of this paper is twofold. first, we want to help fill this research gap by focussing on the preferences of top-level regional civil servants (“regio-crats”). second, we put centre stage the question of the role of regions in the european multilevel governance context. in particular, two questions are raised: what explains regiocrats’ preferences regarding involvement in policy-making (by their respective regions) in the multilevel system and, do we need regional-level variables in order to conduct a satisfying analysis of subnational preferences regarding vertical competence allocation? the questions we raise are of interest to those who study regions as agents of ongoing transformation of states and the rise of multilevel political orders, in general, and also to those investigating the regions of the european union, in particular. we look for patterns in the regio-crats’ preference variations and suggest explanations for them. in order to answer our research questions, we conducted a survey among top-level subnational officials in five european countries and asked them about their preferences with respect to competence for their regions in twelve policy areas. our quest for explanations is based on a view on socio-economic, political and cultural aspects of regional authorities. we believe that there is a link between the beliefs and attitudes of regio-crats (especially those at the top of their organisations) and the political structures for which they work. the individual – within certain range – can choose his actions and does so strategically with view of his self-interests. but he is also shaped by and thus embodies the way his organisation interprets outside reality.1 moreover, by working in an institution an individual himself becomes the bearer of the norms, scripts and standard assessments of the collectivity he represents (egeberg 2004).2 under this assumption, we argue that the preferences of regio-crats represent a general estimate of subnational political ambitions to participate in the european multilevel governance system. the paper is structured as follows. in section 2, we present competing approaches (individual, functional, national and regional) for how best to explain regio-crats’ preferences regarding policy competence allocation in multilevel constellations. section 3 describes the survey we conducted and outlines the operationalisation of the explanatory approaches. the statistical analysis follows in section 4, while section 5 presents the conclusions drawn on the basis of our findings. as the analysis will show, we find a number of regional variables that are persistently significant across several different models. in particular, the variables concerning the cultural distinctiveness, institutional endowment and socioeconomic performance of regions stand out. in addition, the analysis shows that the personal opportunities of regio-crats influence their preferences regarding greater policy competence at the regional level. 1 the use of male pronouns throughout the text is for ease of reading only and should be taken to refer to either gender. 2 institutionalists argue that “members of an institution observe and are the guardians of its constitutive principles and standards” and that their behaviour is based on a “logic of appropriateness and a sense of obligations and rights derived from an identity, role, or membership in a political community and the ethos and practices of its institutions” (olsen 2009: 9). european journal of government and economics 1(1) 11 underlying assumptions before we elaborate on our theoretical models and begin the descriptive and analytical analyses, a word about the subnational data on which they are based seems in order. it is extremely difficult to acquire this kind of data, especially if it is to be suitable for cross-national comparisons. usually, the researchers who are interested in subnational issues will have to obtain it themselves, which, in fact, was also the case for this study (details below). more concretely, our dependent variables are based on data illustrating the attitudes of regio-crats. attitudinal data relating to elites in general have both strengths and weaknesses, and so do our subnational elite data. that is, individuals who work in the upper echelons of subnational authorities and have direct links to the political sphere probably form their preferences under different conditions than does the broader, generally less well-informed and less well-trained national public. one can thus assume that regio-crats, with their particular expertise and their routine familiarity with the regional political universe, hold views which (especially with respect to core topics related to their respective political entities) are different, more reliable and more coherent than those of the general public in their regions. our research question is the following: what explains regio-crats’ attitudes concerning competence allocation in the multilevel system? in other words, what are the factors, with respect to a range of predefined policy areas, that lead regiocrats to desire codetermination rights? the standard explanatory factors found in the literature are based on the concepts of individual utility, contextual variables and functionality (hooghe 2001; loveless and rohrschneider 2008). we test these standard programmes, focusing, in particular, on the regional context. factors that reflect the regional context are summarised under an explanatory programme based on regional social identity. we want to see whether and under which conditions such regional factors have an added value in their own right in explaining differences in preferences regarding regional participation in the european multilevel governance system (pitschel 2012). we now turn to these explanatory programmes. the individual opportunity approach the first explanatory programme is strongly related to the utility calculus. it argues that individuals calculate the respective impacts of different options on their personal opportunity structures. as a consequence, when faced with a choice, individuals will favour the option they believe will lead to a higher personal pay-off (thielemann 2004: 367). other studies have shown that individual opportunity structures – especially in the case of bureaucrats – are driving forces behind preference formation (niskanen 1971; dunleavy 1985; searing 1991, 1994).regarding the question of regional authorities’ policy competences, we argue that top-level subnational bureaucrats will desire the allocation of competences to the regional level if they expect some gain for themselves. it is difficult to define the actual utility that might be involved. on the one hand, rational-choice research refers exclusively to tangible goods that are directly available to the individual (kato 1996). accordingly, financial incentives should be the driving force behind preference formations (hooghe 2001). on the other hand, public-administration research often uses a broader conceptualisation of an individual’s utility. in this context, the commodity to be maximised does not refer exclusively to the individual but also to his social context (levi 1997). in other words, tangible as well as non-financial goods – such as the prestige or power of a region – might play a role in the formation of subnational administrators’ preferences. european journal of government and economics 1(1) 12 applying such a broad concept of utility would obviously be problematic, because all manner of motives and factors that somehow relate to a utility consideration could be included.3 we thus follow the narrow conceptualisation of utility and consider only those aspects that are directly related to the amendment of the subnational administrators’ positions. research on the motivations of publicadministration personnel has demonstrated that administrative elites are basically motivated in their career prospects and their opportunities for advancement (searing 1994: 19; hooghe 2001: 21). regio-crats compete for leverage in designing policies. the more competences the regional level of authority has, the higher this leverage. in sum, the opportunity approach argues that regio-crats will desire more regional policy competences whenever they perceive that this would enhance their individual situations. the functionality approach the second explanatory programme concerns the nature of policies themselves. recent studies find that functionality is an influential factor when the allocation of competences is examined (schakel 2009). similarly, hooghe’s study (2003) on top-level officials in the european commission and in national administrations demonstrates that political elites are guided by functional considerations when they are asked which policies should be regulated at the supranational and which at the national level. the issue of functionally efficient policy allocation is debated in the literature on fiscal federalism.4 oates’ theorem states that, in the absence of problems of redistribution and negative external effects, policies should be allocated at the lowest possible hierarchy level (oates 1999: 1122). in addition, although economies of scale might push the provision of most public goods and services towards the national (or even higher) political levels, possible heterogeneity of local preferences, which would pull allocation of competences to subnational levels, also has to be considered. especially because detailed information about local diversity (which would be needed to design efficient policy solutions) is difficult to obtain and to process centrally, efficient (i.e., functional) allocation of competences is usually not quite as central as the functionality paradigm might seem to predict at first sight (hooghe and marks 2005). concerning regio-crats, we can assume that they come with special knowledge about these characteristics of the different policies. in consequence, it is plausible to argue that they are able to roughly rate the efficiency of different options regarding policy competence allocation. in sum, if top-level subnational bureaucrats base their preferences regarding policy competences for regions on a rationale of functionality, then they should favour policy competences for subnational entities only if regulation at this level of authority is functionally efficient. the subnational social identity approach the explanatory programme we call the subnational social identity approach sees the affiliation of individuals to socially defined groups as an important factor in the formation of preferences (mclaren 2002; diez medrano 2003; scully and farrell 2003; thielemann 2004; hooghe and marks 2005; van esch 2006; de vries and van kersbergen 2007). individuals form and orient their preferences in line with the norms and values of their own social groups. it is clear that subnational administrators are part of the socially defined group of the region to which they belong and for which they work. since they hold top-level positions within their 3 for a detailed discussion of this question, and for theoretical arguments, see pitschel (2012). 4 “the main analytical task for fiscal federalism has been to define the appropriate assignment of allocative responsibilities to decentralised government levels and matching revenue sources” (bird et al. 2002: 416). european journal of government and economics 1(1) 13 regional administrations, they prepare, design and implement policies and political decisions and consequently are familiar with the political interests of their region. in consequence it is plausible to assume that the interests and preferences of regions’ institutions are a primary focus of the regional administrators.5 according to the social identity approach, top-level bureaucrats should pursue the interests of their own regions and internalise regional preferences concerning political issues. before we can analyse the desire for subnational policy competences, we first need information about regional ambitions regarding these competences. we can draw on the literature on subnational mobilisation that discusses policy-making processes (hooghe 1995; jeffery 1996, 2000; tatham 2008) to find explanatory factors for the emancipatory efforts of regions. because the endowment of regions with policy competences reflects one aspect of emancipatory aspirations, we can use these same factors in order to determine subnational preferences. generally, we argue that regions seeking to enhance their political profile will want to expand their political competences. one important factor discussed in the subnational mobilisation literature is the socioeconomic situation of regions (bookman 1992; harvie 1994; marks et al. 1996). however, there is disagreement about the actual direction of this relationship. on the one hand, socioeconomically strong regions want to gain some independence from central government and assume competence for certain policies (gourevitch 1979). on the other hand, socioeconomically weak regions are also believed to have an incentive to take matters into their own hands with a view to advancing their economic development independently of the nation state (hechter 1975; fearon and van houten 2002). another factor that influences the emancipatory potential of a region is its cultural distinctiveness. subnational authorities that deviate from the national population with respect to ethnic or religious characteristics are culturally distinct from the nation state. this regional identity induces the desire to safeguard selfdetermination (esman 1977; connor 1994; keating 1998; alesina and spolaore 2003; björklund 2006; brancati 2006). therefore, subnational entities that are culturally distinct from the nation state should be interested in holding competence with respect to many policies. third, party-political competition is believed to influence subnational demands for autonomy (van houten 2003, 2009). in particular, an incongruence in the composition of the governmental coalition between the regional and national levels might produce disagreement in policymaking and consequently stimulate the desire for policy competences among regional elites. finally, the institutional setting of subnational authorities – also discussed in the mobilisation literature – also has to be taken into account. on the one hand, regions that are already institutionally well endowed are argued to be more active promoters of policies. the less restricted subnational authorities are with respect to their policy engagement, the greater their (potential) scope for development. on the other hand, the status quo of regional competences should be a good predictor of desire for competence allocation because the current setting to some extent determines the possibility of increased allocation. in other words, the degree of constitutionally defined regional autonomy should be correlated with the amount of policy competence desired by regio-crats. 5 we take some comfort from the findings of the cans project (citizenships after the nation state). the team around charlie jeffery, ailsa henderson and roland sturm find in their regional population suvey broad support for regional authority. see http://www.institute-ofgovernance.org/major_projects/citizen_after_the_nation_state citizens’ and oberhofer et al. 2011. european journal of government and economics 1(1) 14 to sum up, the social identity approach assumes that regio-crats’ preferences are influenced by specific characteristics of the regions they work for. in short, the greater the emancipatory potential of a region, the more competences for their region the elites should favour. table 1 summarises our three candidate explanatory programs. table 1: explanatory approaches and respective hypotheses explanatory approach hypothesis dependent variable individual opportunity regio-crats should desire more regional policy competences if they expect a positive impact on their individual situation. functional criteria regio-crats should favour policy competences for the regions if regulation at this level of authority is functionally efficient. subnational social identity regio-crats should desire more regional policy competences if they belong to a region with a high emancipatory potential. regio-crats’ preferences regarding regional policy competences source: authors’ compilation. research design in order to test for the territorial effect on regio-crats’ preferences regarding policy allocation, we make use of a survey addressed to subnational administrative elites concerning their attitudes about different aspects of european integration and governance. we defined the subnational units we are interested in as political authorities which are located directly below the national level and have an elected assembly.6 the selection of interviewees – high-ranking officials in subnational administrations – was carried out in several stages. first, we had to decide which european member states should be included in the survey. our aim was to ensure that the sample would feature interviewees from states with different institutional settings (decentralised and federal states). we also wanted to include entities with differences in their experience with the european integration process. we assumed that the older member states would have already consolidated their governance structures in the context of european integration. thus, we decided to interview regio-crats in germany, spain, france, poland, and hungary comprehending old and new member states as well as decentralised and federal states. second, the selection of the subnational units was guided by the consideration of including interviewees with distinct regional backgrounds. in order to increase the variety at the regional level and to ensure that we have variance on the explanatory variables, three factors were of major importance: the socioeconomic status of the interviewees’ respective regions, and their cultural and party-political incongruence with respect to the centre (the nation state). such aspects had been theoretically conceived as potential explanatory factors. hence, we ensured that both socioeconomically poor and rich regions, regions with and without cultural specificities, and regions with the same and with different governing parties compared to the party-political constellation at the centre were all represented (marks et al. 1996; keating 2008).7 third, the final criterion for the selection of the individuals was their position within the subnational administration. we focussed exclusively on heads of unit with policy responsibilities (cf. bauer 2008) because these are assumed to be the 6 this definition is similar to that of marks et al. (1996). 7 for a full list of the subnational authorities included in the survey, see table 7 in the appendix. the numbers of enclosed regions differ by country as a consequence of the size of the regional administrative body. european journal of government and economics 1(1) 15 “backbone” of the subnational administrations. high-ranking civil servants generally started their careers within their respective subnational administrations. they hold their positions for a long time and usually demonstrate a high degree of identification with the political unit for which they work. they are equally knowledgeable with respect to the technical requirements of a dossier and with the political constellation surrounding it (bauer 2008). out of the initial sample, we randomly selected the interviewees for each region in each member state. however, due to the varying size and the diverging responsibilities of the regions represented, the numbers of interviewees per region ranged from 1 to 13. altogether, the sample consisted of 347 individuals in 60 regions (see table 2). we developed a standardised questionnaire of about 100 (mostly closed) questions. telephone interviews were conducted by specially trained native speakers in 2007 and 2008.8 table 2: sample structure country regions included in sample interviews per region interviews per country response rate germany 13 länder (of 16) 4-9 78 47% poland 12 voiwodships (of 16) 2-9 70 45% hungary 19 megyek (of 19) 2-7 84 41% france 10 régions (of 26) 1-13 66 45% spain 6 autonomous communities (of 17) 5-11 49 53% total 347 source: authors’ compilation. our dependent variable is the regio-crats’ preferences regarding the participation of the subnational level in twelve policy areas in the european multilevel system.9 we thus asked top-level subnational bureaucrats to decide whether or not regional authorities should be involved in policy-making across a range of twelve specific policy areas.10 we constructed an additive index ranging from 0 (no regional competence) to 12 (competence regarding all policies under study). an even more detailed analysis is possible if we distinguish between policies which are regulated in a functionally efficient manner at the regional level and those which are not. however, we need an objective benchmark in order to evaluate whether or not a particular policy is regulated efficiently at the subnational level. such a benchmark does not exist, however, or where researchers have developed something of this nature, it is unsuitable for application to the policy categories we chose for our study.11 we adopt a second-best solution for our problem by following fiscal federalism arguments and then deducing implications for the subnational level. in essence, we assess whether the scope and externalities of policies are decisive parameters for ascertaining whether a certain policy can be regulated efficiently at the regional level or not. we derive a yardstick which is explained in more detail in 8 for a sociological overview of this data set of administrative elites and for further information, see bauer et al. (2010). 9 multilevel governance is a complex concept comprising aspects that concern policy competences and also varying modes of coordination and interaction (benz 2007; benz and zimmer 2008; tömmel 2008). in our project, we limited our analysis exclusively to aspects concerning policy competence allocation. 10 the twelve policy areas are social affairs, asylum and immigration, foreign affairs and defence, health care and consumer protection, border police and frontier defence, culture and education, agriculture, tourism, environmental protection, monetary policy, economic development and structural policy, and research and technology. note that we do not differentiate between administrative and legislative competences. 11 schakel (2009) conducted an expert survey in order to obtain information which authoritative level efficiently regulates in regard to certain policies. however, the categorisation carried out in his study is not applicable in our context as we have different and broader policies under study. european journal of government and economics 1(1) 16 the appendix.12 based on this distinction, we can derive two other variations of the dependent variable. one concerns the preference for competence allocation at the regional level in regard to policies which are efficiently regulated by subnational authorities, while the other concerns those which are not. the operationalisation of the opportunity approach is based on individual-level variables which were also collected by means of the survey.13 on the one hand, the dummy variable “career ambitions” indicates whether top-level bureaucrats want to advance their career within the regional administration where they work.14 the dummy variable “security of employment” (as a motivation for entering the subnational administration) taps into another common aspect of individual utility. the subnational social identity programme is based on factors that are common in subnational mobilisation research. the variable “regional gdp” (gross domestic product) describes the socioeconomic situation of the regions. the dummy variable “stateless nation” indicates cultural differences between the nation state and the subnational entities. the party-political situation is captured by the opposition variables: if the subnational governmental coalition is partly in opposition at the national level, the variable “partly in opposition” is coded 1 (otherwise 0). if no regional government party is represented in the national government, the variable “completely in opposition” takes the value 1.15 finally, the institutional embeddedness of the subnational authorities is operationalised by an indicator taken from the regional authority index developed by hooghe et al. (2010). the variable “institutional depth” measures the extent to which a regional government is autonomous as opposed to deconcentrated.16 finally, we include a control variable allocated at the subnational measurement level. the variable “regional population (log)” captures how populous a subnational entity is. in the literature, it is assumed that efficient provision of public goods is determined not only by the characteristics of the policies themselves, but also by the size of the affected group. we argue that, all else being equal, the larger the regional population, the more efficient (or less inefficient) is the regulation of the policy at the subnational level. because regions differ in regard to their number of inhabitants, we control for this fact. our list of policies for which subnational administrators can articulate their preferences for codetermination is both rather broad and quite general – for instance, “culture and education” instead of more fine-grained policies, such as “primary schools”. this enables us to assume that the handling of our policy categories at the regional level will be more efficient (i.e., more functional) the greater the size of the subnational population. although this factor picks up on the functionality argument, for methodological reasons we cannot integrate a variable representing the actual functional reasoning of our 12 table 9 in the appendix provides an overview of the classification of the policies. we argue that policies that are generally characterised by high externalities should be regulated at a higher level. in other words, we believe that in such cases the participation of regional authorities is less functional. this approach might be criticised as a normative and subjective decision. however, in consideration of the fact that we need an objective benchmark which is applicable to our framework, this, in our view, is the most objective and transparent approach possible. due to problems of endogeneity, we could not justify validating the classification exclusively on the basis of the preferences of the interviewees. 13 for an overview of the independent variables, the operationalisation, the coding and sources, and the expected sign of the coefficient, see table 8 in the appendix. 14 table 2 provides an overview of the operationalisation of the variables. 15 the situation where a regional government coalition is completely represented in the central government is the reference group in the quantitative analysis. the aspect of incongruence respectively congruence between the governing coalition at regional and national levels is a categorical variable. therefore we decided to split the potential situations in three dummy variables. 16 the variable has a theoretical value range of 0 to 4. in our data set, “institutional depth” takes on the values of 3 and 4. european journal of government and economics 1(1) 17 interviewees in the statistical analyses below.17 however, we do address the functionality approach by means of a descriptive analysis in the next section. to test whether the factors characterising the different approaches explain the regiocrats’ preferences for policy allocation at the regional level, we use a multilevel analysis with random-effects. the individuals constitute the first and the regions the second level of the model.18 table 3: operationalisation of the explanatory variables explanatory approach variable operationalisation expected sign career ambitions interviewee wants to advance his career within the subnational administration. 19 + individual opportunity security of employment interviewee is motivated by the security of employment within the subnational administration. 20 + functionality number of individual competence preferences that match with allocation as functionally efficient for the twelve policies under study. + regional gdp gross domestic product -/ + stateless nation the region is a stateless nation. + partly in opposition regional governmental coalition is partly congruent with the national governmental coalition + completely in opposition regional governmental coalition is in opposition at national level. + subnational social identity institutional depth extent to which a subnational government is autonomous rather than deconcentrated. + control regional population (log) the logarithm of the regional population. + source: authors’ compilation. note: for an explanation as to why we do not operationalise the functionality approach, please see footnote 12. empirical analyses asked whether the subnational level should hold competence regarding twelve policy areas, the average response of regio-crats was in the mid-range, although there was a high standard deviation (see table 4). in general, the regio-crats we surveyed turned out to be surprisingly reluctant to see regions participating in the multilevel governance system. a comparison of the national mean values for competence allocation at the regional level reveals variation in the preferences for subnational participation within our sample. first, we observe differences across countries. hungarian top-level subnational bureaucrats do not see a need for 17 in our descriptive analysis, we assess with respect to how many policies the individuals’ preferences are in line with functionally efficient policy allocation. however, if we included such an independent variable in the regression analysis, we would explain the dependent variable by means of a part of a modified dependent variable. 18 a potential objection to this research strategy might be the choice of the statistical model. we do not use dummy variables for the countries in order to control for country-specific factors, rather we emphasise the individual and the regional levels. given that we integrate several (potential) explanatory factors measured at the subnational level, we risk falling into the trap of multicollinearity. we also use an indicator capturing the institutional setting in the nation states. 19 the variable is based on a survey question: ”which professional position would you like to have reached in 5-10 years? that is, other or same position in the regional administration in a national ministry, in the eu administration?” whenever the interviewee indicated that he sought to reach a higher position in the administration, the variable “career ambitions” is coded “1” otherwise “0”. 20 the information is based on a survey question: “why do you have chosen to work in the administration of a region? please tell me the most important reason.” the answer options had been secure job, proximity to residence, good salary, good career prospects, interesting working area, would like to contribute to the development of the region, i was offered this job, or decentralization or fusion. for interviewees indicated the option “secure job” the variable “security of employment” is codes “1” otherwise “0”. european journal of government and economics 1(1) 18 extensive policy participation. on average, they desire competence regarding only 1.6 of the twelve policy areas. although the desire for policy competence is stronger in the other countries, german respondents are still surprisingly modest in their preferences, desiring subnational competence for only 3.4 policies. this picture is noteworthy because the preferences actually lag behind the status quo for german länder competences. the national mean values for the polish (4.8) and french (4.3) respondents point to a mid-degree claim for codetermination rights compared to the other country scores. in contrast, spanish top-level subnational bureaucrats favour regional participation in about eight policy areas, which reflects a desire for strong policy participation within the european multilevel system.21 second, the standard deviations for the countries listed in table 4 indicate considerable within-country variation as well. in other words, we do find interesting variation within the five countries. what explains such differences among regio-crats’ preferences for policy codetermination rights? table 4: national mean values for desired policy competence22 country mean sd n germany 3.4 2.3 76 poland 4.8 2.5 65 hungary 1.6 1.8 83 france 4.3 2.0 65 spain 8.0 1.3 49 total 4.1 2.8 338 source: authors’ compilation. can the differential desires for policy codetermination be explained by functionality? looking at the preference patterns of the top-level subnational bureaucrats in regard to the twelve policy areas, we are able to assess whether the administrators form their preferences on the basis of a functionality rationale or not. by comparing the preference patterns for regional policy competences to what we deem would be the objective functional policy allocation, we are able to assess whether or not there is a correlation. if the interviewees favoured regional policy participation regardless of whether or not such codetermination is functional (according to our assessment), we have at least an indication that some other than a functional-efficiency explanation must be at work. having carried out the categorisation, we can count for how many policies the answers of our regio-crats are in line with the presumably most efficient allocation. our result is that the answers of our respondents are substantially in line with functional criteria of competence allocation. table 5 gives an overview of the share of policies for which the regio-crats’ preferences for regional participation (or nonparticipation) are in accordance with the allocation on the basis of functional efficiency. for example, the preferences of about 59 percent of the german interviewees are in line with the functionality rationale for six to eight policies. in france, about 57 percent of our respondents show preferences that correspond with the efficient participation or non-participation of regional authorities for more than eight policies. all in all, in every country we studied, the preferences regarding (non-)participation of subnational authorities of the majority of interviewees correspond with the functional-efficiency expectation. only a few respondents demonstrate codetermination preferences that clearly conflict with functionality. 21 for a detailed discussion of the preferences regarding policy competences, see pitschel (2012). 22 the table shows the mean value of the desired number of policies for regional policy competences. shown are the mean values (mean) of the preferences, the standard deviation (sd), and the number of respondents (n) for the sample and per country. european journal of government and economics 1(1) 19 table 5: correspondence of regio-crats’ preferences with functional needs23 for how many of the twelve policies do subnational administrators’ responses correspond with efficient competence allocation? germany poland hungary france spain total for less than 6 policies 7.9 9.2 41.0 4.6 12.2 16.3 for 6 to 8 policies 59.2 41.5 50.6 38.5 83.7 53.3 for more than 8 policies 32.9 49.2 8.4 56.9 4.1 30.4 source: authors’ compilation. summing up, we observe that the national mean preferences for regional participation in the twelve policies differ across the five countries, with the spanish having the highest and the hungarian the lowest scores. at the same time, however, we observe variation within the countries under study. the individuals’ preferences concerning the desired extent of regional policy competence vary considerably within the countries. individual attitudes deviate most around the respective national average in poland and germany. to find a reason for this result, we turn to the statistical analysis. quantitative analysis our quantitative analysis assesses how the factors underlying the explanatory approaches are related to the dependent variable, namely the desire for regional codetermination in different policy areas. we basically run three regressions, which differ in the conceptualisation of the dependent variable. the dependent variable of the first model refers to all twelve policies under study. in the second and third models, the dependent variables relate to policies for which (according to our yardstick) regions constitute the functionally appropriate – or non-appropriate – governmental level of execution for the policies in our sample. this procedure enables us to detect stable relationships between the independent variables and the subnational administrators’ preferences regarding regional policy codetermination. moreover, we gain knowledge about the influence of policyinherent logics on the process of preference formation. the results of the models are presented in table 6. first, the subnational administrators’ preferences regarding regional competence are analysed with respect to all twelve policies (model 1 in table 6). concerning the individual-utility variables, only the indicator for safety thinking (“security of employment”) is significant. the positive sign is in line with the theoretically expected relationship: administrators who entered subnational administrations motivated by security of employment are in favour of more subnational competences. as regards the social identity approach, the socioeconomic variable reflecting the regions’ economic performance (measured in gdp) shows a negative sign – implying that the desire for subnational competence decreases with regional wealth. in other words, our data show that regio-crats from socioeconomically weaker regions are more in favour of regional policy participation than their colleagues from socioeconomically stronger entities. cultural distinctiveness is also influential as a predictor of regional desire for emancipation from the nation state. the positive and significant coefficient of the 23 percentage of respondents per country for which the preferences for regional policy competences are in line with the functionality principle. whether participation or non-participation of subnational authorities in policies is functionally efficient was evaluated on the basis of objective criteria (see table 9 in the appendix). european journal of government and economics 1(1) 20 variable “stateless nation” indicates that subnational administrators of such regions in our sample (alsace and brittany in france, catalonia and país vasco in spain) want to have more subnational policy competences. we also find significant coefficients concerning the indicators of the party-political constellation. on the one hand, the subnational context in which the regional government is “partly in opposition” to the national government or government coalition seems to be negatively related to the desire of the top-level bureaucrats for regional policy competences. in contrast, the individuals from subnational authorities where the regional government is “completely in opposition” to the national government (or governmental coalition) are obviously more in favour of policy participation by their authority. we supposed that the institutional setting would influence the preferences as well. the significant and positive coefficient of the variable “institutional depth” is in line with the theoretical expectation that top-level bureaucrats from institutionally strong regions would desire more codetermination rights over a greater range of policy areas. what also shows a significant and positive coefficient, however, is the variable measuring regional population. this means that the larger the regional population, the more competences are desired by regio-crats. the model including all twelve policies shows a considerably higher degree of variance between the groups (regions) than within the regions. overall, model 1 explains about 24 percent of the variance. table 6: regression results for all 12 policies explanatory approach variables model 1 all 12 policies model 2 7 functional policies model 3 5 non-functional policies career ambitions 0.043 0.041 0.002 (0.279) (0.223) (0.090) security of employment 0.969* 0.381 0.386** opportunity approach (0.518) (0.413) (0.168) regional gdp -0.125** -0.069* -0.058** (0.053) (0.037) (0.024) stateless nation 2.728*** 1.548*** 1.229*** (0.833) (0.587) (0.373) partly in opposition -1.427*** -1.275*** -0.112 (0.449) (0.313) (0.204) completely in opposition 1.410* 0.807 0.646* (0.773) (0.537) (0.352) institutional depth 1.521** 0.298 1.244*** subnational social identity (0.678) (0.473) (0.308) regional population (log) 0.000** 0.000*** 0.000 control (0.000) (0.000) (0.000) constant 2.086* 3.568*** -1.521*** (1.255) (0.877) (0.567) observations 297 297 296 number of regions 57 57 57 r-squared within 0.000 0.000 0.003 betwe en 0.446 0.446 0.362 overall 0.243 0.182 0.315 source: authors’ compilation. note: standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1. second, we analysed only those policies that can be deemed efficiently regulated at the subnational level (model 2 in table 6).24 whereas the individual variables of the opportunity model seem not to be influential at all, the social identity variables show similar patterns to the first model. the “regional gdp” variable is once again negative and significant. similarly, the “stateless nation” variable is significant and 24 these policies are social affairs, health care and consumer protection, culture and education, tourism, environmental protection, research and technology, and economic development and structural policy. the reasons for this classification are explained in table 9 in the appendix. european journal of government and economics 1(1) 21 has a positive sign, as in the preceding model. with respect to the party-political situation, only the variable “partly in opposition” maintains its negative and significant coefficient in this model. in contrast, the variable “completely in opposition” is insignificant in model 2. the same is true for the regional authority variable “institutional depth”. neither “fiscal autonomy” nor “regional representation” show a significant coefficient. finally, the regional population size repeatedly demonstrates a positive and significant coefficient. comparing the variance explained by this model to the first model, we do not find any enhancement, neither in the explanation of the individual-level variance nor in the explanation of the between variance. however, the overall explained variance of the model on those policies that are efficiently regulated at the regional level is lower than in the model including all twelve policies (model 1). finally, we assess the explanatory programmes with respect to those policies in our sample that are supposedly not efficiently regulated at the regional level (see model 3 in table 6).25 this variant of the dependent variable might be an interesting case for both the opportunity and the subnational identity approaches. do such variables influence the preference for regional policy competence although such participation is not efficient? in this third model, the individual variable of the opportunity explanatory program “career ambition” again shows no significant and positive coefficient. in contrast, the variable “security of employment” regains its theoretically expected positive sign. the subnational identity approach variables perform comparably to the second model. the “regional gdp” variable shows a negative and significant coefficient. the better the socioeconomic situation concerning gdp, the less policy competences are desired by regio-crats. the variable indicating that a region represents a stateless nation is positive and significant, as expected. the same holds for the political variable “completely in opposition”, which reflects the situation where the regional governmental coalition is incongruent with the party-political constellation in national government. again, we see our expectation of a positive relationship between this variable and the desire for more regional competences confirmed. the variable “partly in opposition”, however, is not significant. concerning the aspect of regional autonomy, we find that subnational administrators from regions which are institutionally well endowed favour more policy competences. the variance between the units explained by the regression model is lower than in the other two models. model 3 explains about 36 percent of the variance between the regions. compared to model 1 and 2 this proportion is lower. in contrast, with regard to the overall variance, we find a high proportion is explained by model 3 (about 32 percent). discussing the regression results in the context of non-functional policies, we believe this is evidence that subnational administrators’ preference formation is based on an opportunity rationale. personal interest in secure employment in the regional administration is influential not only in the first model, comprising all twelve policies, but also in third model, which concentrates on those policies that are not efficiently regulated at the regional level. as regards the emancipatory ambitions of regional authorities, which are supposed to be the driving force in the social identity approach, we find some evidence to confirm the theoretical reasoning. whereas the picture is clear for those administrators from culturally distinct regions who favour more policy competences, the influence of the political situation is less evident. in contrast, we find unambiguous results for the influence of the 25 these policies are asylum and immigration, foreign affairs and defence, border police and frontier defence, agriculture, and monetary policy. the reasons for this classification are explained in table 9 in the appendix. european journal of government and economics 1(1) 22 institutional setting (“institutional depth”) on the extent of regional policy participation. summing up, the results of our quantitative analysis are consistent. the significant variables do not change their signs in the different models and we find the theoretical expectations generally confirmed. however, some points have to be reinvestigated in more detail. this applies, in particular, to the influence of the party-political constellation of the regions compared to the situation at the central state level. on the one hand, we find the expected relationship for the case when the regional government is not congruent with the party-political constellation of the central government. on the other hand, the opposite is true for the case where the regional government is partly in opposition at the national level. this contradicts the theoretical expectation and requires further investigation. conclusion two sets of conclusions can be drawn from this study. the first concerns the insights our analysis is able to generate in view of the question as to how to explain regio-crats’ preferences regarding policy participation in the multilevel system. notwithstanding bold statements in the relevant literature, the desire for subnational policy codetermination is astonishingly low throughout our sample. regio-crats cannot be seen as “competence conquerors” that fuel state transformation by demanding ever greater policy involvement. quite the contrary, regio-crats appear in this respect to be rather conservative. there is little reason to fear (or hope, depending on the perspective) that regions will shake up the existing competence distribution; the suspicion that regions will actively ask for ever greater policy involvement cannot be substantiated by our data. instead, the preferences seem to a large extent based on a rationale of functionality. the big picture is that regio-crats’ policy participation demands are in harmony with what can be conceived as objectively efficient vertical competence allocation. on a smaller scale, however, the statistical analyses show that besides individual utility aspects, variables that are related to regional emancipatory ambitions also have a positive influence on the desire for more policy competence. cultural and political distinctiveness (in comparison to the situation at the central state level) increase the demand for regional policy involvement. in other words, a large-scale and uniform transformation in the direction of a europe of the regions is unlikely. pressure for greater regional policy involvement is differential and its direction and magnitude depend on particular regional situations. on the basis of our analysis, we do not expect demands for regional policy involvement to be systemic and systematic, but disorderly, disparate and diverse. regional policy participation demands in the multilevel system are pragmatic, patch-worked and incremental – and more conservative than transformative. references alesina, alberto and enrico spolaore (2003) the size of nations, cambridge, ma: mit press. alesina, alberto, ignazio angeloni and ludger schuknecht (2001) 'what does the european union do?' national bureau of economic research working paper no. 8647, washington dc. bauer, michael w. (2008) 'diffuse anxieties, deprived entrepreneurs. commission reform and middle management', journal of european public policy, 15(5): 691707. bauer, michael w, diana pitschel and philipp studinger (2010) 'governance preferences of subnational administrative elites in the european union. an european journal of government and economics 1(1) 23 empirical analysis', lehrstuhl für politik und verwaltung working paper no. 4, 2010, hu berlin. benz, arthur. (2007) 'politischer wettbewerb', in a. benz, s. lütz, u. schimank and g. simonis (eds), handbuch governance. theoretische grundlagen und empirische anwendungsfelder. wiesbaden: vs verlag, 5467. benz, arthur. and christina zimmer (2008) 'the eu’s competences: the “vertical” perspective on the multilevel system', living reviews in european governance 3(3). url (consulted 30 nov. 2008) : http://www.livingreviews.org/lreg-2008-3. bird, richard, bernard dafflon, claude jeanrenaud and gebhard kirchgässner (2002) 'assignment of responsibilities and fiscal federalism', in raoul blindenbacher and arnold koller (eds) conference reader of the international conference on federalism 2002: federalism in a changing world learning from each other, quebec: mcgill-queen’s university press. björklund, fredrika. (2006) 'the east european ethnic nation – myth or reality?` european journal of political research, 45(1): 93-121. bookman, milika z. (1992) the economics of secession. new york: st. martin’s press. brancati, dawn. (2006) 'decentralization: fueling the fire or dampening the flames of ethnic conflict and secessionism?' international organization, 60(3): 651-85. connor, walker (1994) ethnonationalism. princeton, nj: princeton university press. de vries, catherine e. and kees van kersbergen (2007), 'interests, identity and political allegiance in the european union', acta politica, 42(2-3), 307-28. diez medrano, juan (2003) framing europe: attitudes to european integration in germany, spain and the united kingdom. princeton: princeton university press. dunleavy, patrick (1985) 'bureaucrats, budgets and the growth of state: reconstructing an instrumental model', british journal of political science, 15(3): 299-328. egeberg, morten (2004) 'an organisational approach to european integration: outline of a complementary perspective', european journal of political research, 43(2): 199-219. esman, milton j. (1977) 'perspectives on ethnic conflict in industrialized societies', in milton j. esman (ed.) ethnic conflict in the western world, pp. 371-90. ithaca: cornell university press:. fearon, james d. and pieter van houten (2002). 'the politicization of cultural and economic difference. a return to the theory of regional autonomy movements'. paper presented at the fifth meeting of the laboratory in comparative ethnic processes (licep), stanford university, 10-11 may. gourevitch, peter a. (1979) 'the re-emergence of "peripheral nationalisms": some comparative speculations on the spatial distribution of political leadership and economic growth', comparative studies in society and history, 21(3): 303-22. harvie, christopher (1994) the rise of regional europe. london: routledge. hechter, michael. (1975) internal colonialism: the celtic fringe in british national development, 1536-1966. berkeley, ca: university of california press. hoeller, peter, marie-odile louppe and patrice vergriete (1996) 'fiscal relations within the european union', oecd economic department working paper no. 163, paris: oecd publishing. european journal of government and economics 1(1) 24 hooghe, liesbet. (1995) 'subnational mobilisation in the european union', west european politics, 18(3): 175-98. hooghe, liesbet. (2001) the european commission and the integration of europe. images of governance, cambridge: cambridge university press. hooghe, liesbet (2003) 'europe divided? elites vs. public opinion on european integration', european union politics, 4(3): 281-304. hooghe, liesbet and gary marks (2005) 'calculation, community and cues: public opinion on european integration', european union politics, 12(1): 419-43. hooghe, liesbet. and gary marks (2009) 'does efficiency shape the territorial structure of government?' annual review of political science, 12(1): 225-41. hooghe, liesbet, gary marks and arjan h. schakel (2010) the rise of regional authority. a comparative study of 42 democracies, abingdon: routledge. jeffery, charlie (1996) 'conclusions: sub-national authorities and ‘european domestic policy', regional and federal studies, 6(2): 204-19. jeffery, charlie (2000) 'sub-national mobilization and european integration: does it make any difference?', journal of common market studies, 38(1): 1-23. jeffery, charlie and daniel wincott (2010) 'the challenge of territorial politics: beyond methodological nationalism', in colin hay (ed.) new directions in political science: responding to the challenges of an interdependent world, basingstoke: palgrave macmillan, 167-88. kato, junko (1996) 'the challenge of territorial politics: beyond methodological nationalism’, british journal of political science, 26(4): 553-82. keating, michael (1998) the new regionalism in western europe. territorial restructuring and political change. cheltenham: edward elgar. keating, michael (2008) 'a quarter century of the europe of the regions', regional and federal studies, 18(5): 629-35. levi, margaret (1997) 'a model, a method and a map: rational choice in comparative and historical analysis`, in mark i. lichbach and allan s. zuckerman (eds), comparative politics: rationality, culture and structure, cambridge: cambridge university press, 19-41. loveless, matthew and robert rohrschneider, r. (2008) 'public perceptions of the eu as a system of governance', living reviews in european governance, 3 (1). online. available from: http://www.livingreviews.org/lreg-2008-1, (accessed 19 december 2008). marks, gary, françois nielsen, leonard ray and jane e. salk (1996) 'competences cracks and conflicts: regional mobilization in the european union', comparative political studies, 19(2): 164-92. mclaren, lauren m. (2002) 'public support for the european union: cost/benefit analysis or perceived cultural threat?', journal of politics, 64(2): 551-66. niskanen, william .a. (1971) bureaucracy and representative government. new york: aldine-atherton. oates, wallace e. (1999) 'an essay on fiscal federalism', journal of economic literature, 37(3): 1120-49. oberhofer, julia, julia stehlin and roland sturm (2011) 'citizenship im unitarischen bundesstaat', politische vierteljahresschrift, 52(2): 163-194 olsen, johan p. (2009) 'change and continuity: an institutional approach to institutions of democratic government', european political science review, 1(1): 332. european journal of government and economics 1(1) 25 pitschel, diana (2012) europa mit den regionen? eine empirische analyse der kompetenzbeteiligung von regionen im europäischen mehrebenensystem. badenbaden: nomos. schakel, arjan h. (2009) 'explaining policy allocation across government tiers by identity and functionality', acta politica, 44(4): 385-409. schakel, arjan h. (2010) 'explaining regional and local government: an empirical test of the decentralization theorem', governance: an international journal of policy, administration and institutions, 23(2): 331–55. scully, roger and david farrell (2003) 'meps as representatives: individual and institutional roles', journal of common market studies, 41(2): 269-288. searing, donald d. (1991) 'roles, rules and rationality in the new institutionalism', american political science review, 85(4): 1239-60. searing, donald d. (1994) westminster’s world. understanding political roles. cambridge, ma: harvard university press. seeman, melvin (1993) 'a historical perspective on attitude research', in dagmar krebs and peter schmidt (eds), new directions in attitude measurement, berlin: walter de gruyter, 3-20. shah, anwar (2002) 'fiscal decentralization in transition economies and developing countries – progress, problems and the promise', paper presented at the international conference “federalism in a changing world – learning from each other”, st. gallen, 27 30 august. shah, anwar (2007) 'introduction: principles of fiscal federalism', in idem. (ed.) the practice of fiscal federalism: comparative perspectives. montreal: mcgillqueen’s university press, 3-43. sinn, hans-werner. (2003) the new systems competition. oxford: basil blackwell. smekal, christian (2001) 'zentralisation und dezentralisation öffentlicher aufgabenerfüllung aus finanzwissenschaftlicher sicht', in peter pernthaler and peter bußjäger (eds) ökonomische aspekte des föderalismus, schriftenreihe des instituts für föderalismus, pp. 69-76. vienna: braumüller. tatham, michael (2008) 'going solo: direct regional representation in the european union', regional and federal studies, 18(5): 493-515. ter-minassian, teresa (1997) 'intergovernmental fiscal relations in a macroeconomic perspective: an overview', in teresa ter-minassian (ed.) fiscal federalism in theory and practice, pp. 3-24. washington: imf. thielemann, e.r. (2004) 'dividing competences: germany’s vision(s) for europe’s federal future', comparative european politics, 2(3): 358-74. tömmel, ingeborg (2008) 'governance und policy-making im mehrebenensystem der eu', in ingeborg tömmel (ed.) die europäische union governance und policy-making, pvs-sonderheft, pp. 13-35. wiesbaden: vs verlag für sozialwissenschaften. van esch, femke (2006) 'the europeanization of central decision makers’ preferences concerning europe. a perpetual motion?', in ronald holzhacker and markus haverland (eds) european research reloaded: cooperation and integration among europeanized states, pp. 119-49. berlin: springer. van houten, pieter. (2003) 'globalization and demands for regional autonomy in europe', in miles kahler and david a. lake (eds) governance in a global economy. political authority in transition, pp. 110-35. princeton, nj: princeton university press. european journal of government and economics 1(1) 26 van houten, pieter (2009) 'multi-level relations in political parties. a delegation approach', party politics, 15(2): 137-56. european journal of government and economics 1(1) 27 appendix table 7: overview of regions represented in the sample country region number of interviewees country region number of interviewees dolnośląskie 7 alpes côte 7 kujawsko-pomorskie 9 alsace 4 lubelskie 7 aquitaine 1 lubuskie 6 bretagne 6 małopolskie 5 centre 13 mazowieckie 4 franche-comté 4 opolskie 8 île-de-france 8 podkarpackie 4 midi-pyrénées 10 pomorskie 6 poitou-charentes 6 śląskie 2 france rhône-alpes 7 świętokrzyskie 5 poland wielkopolskie 7 bács-kiskun 5 badenwürttemberg 8 baranya 3 bayern 8 békés 3 berlin 4 borsod-abaújzemplén 7 brandenburg 5 csongrád 4 hessen 5 fejér 4 niedersachsen 5 győr-moson-sopron 6 nordrheinwestfalen 9 hajdú-bihar 4 rheinland-pfalz 7 heves 7 saarland 5 jász-nagyunszolnok 3 sachsen 6 komáromesztergom 6 sachsen-anhalt 7 nógrád 3 schleswig-holstein 4 pest 7 germany thüringen 5 somogy 6 szabolcs-szatmárbereg 3 andalucía 11 tolna 3 baleares 9 vas 5 cataluña 6 veszprém 3 galicia 8 hungary zala 2 madrid 10 spain país vasco 5 table 8: independent variables variable level of measurem ent operationalisation coding expected sign career ambitions interviewee wants to advance his career within the subnational administration. 1 = yes, 0 = no + security of employment individual interviewee is motivated by the security of employment within the subnational administration. 1 = yes, 0 = no + regional gdp subnation al gross domestic product gross domestic product (purchasingpower parity) per -/ + european journal of government and economics 1(1) 28 capita in 1000 euro stateless nation the region is a stateless nation. 1 = yes, 0 = no + partly in opposition regional governmental coalition is partly congruent with the national governmental coalition. 1 = yes, 0 = no + completely in opposition regional governmental coalition is in opposition at the national level. 1 = yes, 0 = no + institutional depth extent to which a subnational government is autonomous rather than deconcentrated. 0 = no functioning general-purpose administration at the regional level; 1= deconcentrated, general-purpose administration; 2 = nondeconcentrated, general–purpose administration subject to central government veto; 3 = nondeconcentrated, general–purpose administration not subject to central government veto. + regional population (log) regional population as percentage of the national population. log (percentage) + table 9: classification of policies policy is a regional participation in this policy functional? rationale social affairs yes the standard of regulation of social affairs is already high within the eu member states, so that there is no call for central regulation (alesina et al., 2001). furthermore, some studies argue that differing levels of regulation might lead to a competitive advantage for a region in some sociopolitical areas (and that heterogeneous preferences regarding regional regulation can be traced back to this) (cf. hoeller et al. 1996; smekal 2001). at any rate, the involvement of the regions is consistent with the functional principles of competence allocation. asylum and immigration no the area of asylum and immigration is characterised by high external effects. to internalise these and to avoid free-rider effects, regulation ought to be conducted as centrally as possible (i.e., at national or supranational level) (alesina, et al., 2001; shah, 2007). foreign affairs and defence no this policy area is characterised by high external effects. moreover, regulation preferences are relatively homogeneous (at least within the eu member states). by centralising (regulation at eu level), external effects can be more fairly distributed in the community, free-rider effects can be avoided and national obstacles overcome (ter-minassian 1997). other authors claim that foreign and defence policies should be regulated at the national level because resulting costs and benefits also manifest at the national level (shah 2002). according to this view, regional participation in foreign affairs and defence is not functional. health and consumer protection yes health care and consumer protection need to be adjusted to the citizens’ requirements on site, while, at the same time, standards should be uniform and binding eu wide. the most efficient approach is for health care and consumer protection to be regulated under involvement of all levels of the hierarchy (eu, nation state and subnational entities) (alesina et al. 2001; smekal 2001; hooghe and marks 2009). thus, the regions should be involved in shaping this policy. border police no this policy also entails high externalities, which – from a functional european journal of government and economics 1(1) 29 and frontier defence perspective – need to be re-allocated to the community (hoeller et al. 1996). from a european point of view, the observance of uniform standards and the export provisions of the schengen agreement must be kept in mind. culture and education yes the policy area of culture and education has a strong identitydefining component. thus, heterogeneous regulation preferences potentially outweigh external effects. resulting benefits of centralisation are estimated as limited. hence, and in line with functional considerations, a decentralised provision of services is to be preferred here (smekal 2001; schakel 2010). agriculture no in the eu context and under efficiency considerations, regulation at the community level is not justifiable. however, excessive decentralisation would counteract the single market (alesina, et al. 2001; hoeller et al. 1996). hence, from a functional perspective, this policy can be best organised at the national level. tourism yes regional preferences and requirements vary within this policy. in addition, for many regions, tourism holds an identity-defining component. accordingly, the regions should be involved in shaping this policy (hooghe and marks 2009). environment yes due to the strong external effects of environmental problems and their transnational scope, a stipulation of regulation standards on the supranational level would fit best. however, specific environmental problems are regionally concentrated, so that an involvement of national and subnational entities in environmental politics is assumed to be functionally adequate (alesina et al. 2001; sinn 2003). monetary policy no monetary policy (at least in the eu) is among those policies that, for reasons of economic efficiency, should be regulated centrally. even if states are not members of the european monetary union (euro), a central regulation seems to be appropriate to guarantee uniform standards of quality (alesina et al. 2001; smekal 2001). economic development and structural policy yes in the area of economic development and structural policy, it is assumed to be economically wise to regulate basic aspects and conditions at the central level (eu) to avoid distortions of competition. however, subnational actors should be involved during policy implementation so as to ensure an efficient realisation on site which corresponds to regional requirements (alesina et al. 2001; hoeller et al. 1996). research and technology yes differing regional standards of regulation in the area of research and technology boost regional competition and are seen as regional economic factors. accordingly, a decentralised regulation is to be preferred from a functional perspective. however, it is also argued that some research areas, e.g., nuclear energy, require a central political organisation (alesina et al. 2001). clarifying the concept of social capital through its three perspectives: individualistic, communitarian and macro-social european journal of government and economics 6(2), december 2017, 146-170. european journal of government and economics journal homepage: www.ejge.org issn: 2254-7088 clarifying the concept of social capital through its three perspectives: individualistic, communitarian and macro-social matias membiela-pollán a, *, josé-atilano pena-lópez a a universidade da coruña, faculty of economics and business, campus de elviña, 15071 a coruña, spain * corresponding author at: department of business, univeridade da coruña, campus elviña, 15071 a coruña, spain. matias.membiela@udc.es article history. received 9 may 2017; first revision required 2 november 2017; accepted 20 november 2017. abstract. the concept of social capital has received increasing attention in recent years. the complexity and multidimensionality that accompany the variable of social capital have caused confusion and ambiguity. this article presents a synthesis of social capital in three perspectives. from the individualistic or micro-social perspective, social capital is an "individual resource" that consists of the networks of relations of the focal subject that bring it a set of instrumental and expressive resources. for the communitarian or meso-social perspective, social capital is a "community resource" or set of attributes and properties present in the social structure (shared norms and values, private trust, closure ...) that facilitate its functioning and collective action. finally, for the macrosocial perspective, social capital is a "macro-social and macro-institutional resource" resting on aspects such as civic-mindedness, general trust and social cohesion, which favors the functioning of the economy and society in general. keywords. social capital; individual social capital; communitarian perspective of social capital; general trust jel classification. a14; z13 1. introduction since the 1990s there has been an exponential growth in the research of social capital. the concept has come to inform a large number of subjects and theories, such as economics, sociology, politics, education, family, health, crime, organizational theory and even technological innovation (tsai and ghoshal, 1998, p. 446; adler and kwon, 2002, p. 17; castiglione et al., 2008a, p. 1; woolcock and radin, 2008; guiso, sapienza and zingales, 2011, p. 418). however, as ahn and ostrom (2008, p. 92) express, criticism is part of the take-off of all theory and paradigm, especially when it is played in the field of new and abstract concepts (castiglione, 2008). in this sense, the main reproach that falls on social capital alludes to its ambiguity as a variable. it is argued that social capital is an umbrella concept because it brings together aspects as diverse as norms and values, rules, social networks and trust (sobel, 2002, p. 145; sánchez-santos and pena-lópez, 2005, p. 142). http://www.ejge.org/ mailto:matias.membiela@udc.es 147 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 despite the seductive appearance of the idea, this evidence results in the construct being ambiguous and difficult to outline (dasgupta, 2005), which is one of the reasons why it is strongly criticized by those who do not recognize its own personality. it is called "a wonderfully elastic term" (adler and kwon, 2002, p. 18), "a notion that means many things to many people", a term without demarcation (dasgupta and serageldin, 2000, pp. xi), a "vague and imprecise concept" (roche, 2004, p. 107) and an "ambiguous if not incoherent concept and valid for everything" (fine, 1999). the term "umbrella concept" is justified; however, it has a lot to do with the "multidimensional" nature of this construct. it is evident that "social" is a broad and complex entity. however, this peculiarity does not negate the relevance it has in economic fact and productivity in general. this theory should go deeper into the analysis of how cultural aspects (norms, values, trust) are linked to structural aspects (social networks); and how the micro and macro dimensions of the concept are linked (portes, 2000). it must also rely on the validity of the indicators used for its empirical measurement, even though the nature of the construct makes it difficult to have a single quantification system or a system of consolidated indicators. this article aims to concretize the perspectives that coexist within the theory of social capital. this point is central because it helps to specify what it is and what the use of this variableparadigm is. in what follows the concept of social capital will be introduced and we shall show some attempts of conceptual classification carried out by some investigators. next, we shall present three great perspectives that coexist within the theory and that encompass in their totality what social capital is and what it is used for. each of these three approaches places social capital within a social level (micro-, meso-, or macro-), which in turn is a resource for such a network. a) from the individualistic or micro-social perspective, social capital is an "individual resource" that consists of the networks of relations of the focal subject that bring him a set of instrumental and expressive resources (bordieu, 1986; lin, 1999a, 2001). b) for the communitarian or meso-social perspective, social capital is a "community resource"; a set of attributes and properties present in the social structure (shared norms and values, particular trust, closure) that facilitate its functioning and collective action (coleman, 1988; bowles and gintis, 2002). c) finally, for the macrosocial perspective, social capital is a "macrosocial and macroinstitutional resource" resting on aspects such as civic-mindedness, general trust and social cohesion that favors the performance of the economy and society in general (putnam, 1993; knack and keefer, 1997). as we have pointed out, the lack of consensus and the ambiguity about the precise meaning of social capital naturally affects the agreement about its measurement system (bjørnskov and svendsen, 2003; pérez garcía et al., 2005; castiglione et al., 2008, p. 6; van deth, 2008, pp. 151-153). in this research we review the empirical methodology that accompanies each of the three perspectives. 148 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 2. the concept of social capital the concept of capital in the economy refers to the installed productive capacity involved in the execution of productive processes, which is strictly speaking called "physical capital" (penalópez and sánchez-santos, 2011, p. 125). another conventional form of capital, commonly cited, is "natural capital", which refers to the natural resources of the environment. however, none of the above reflects the uniqueness of the human being, his capacities and relationships. for this reason, the concepts of "human capital", referring to capacities and knowledge, and "social capital", referring to relational structures and other social attributes, have come to complete the analysis of endowments that presents the economic fact (sánchez-santos and pena-lópez, 2005, pp. 138-139). social capital is an ambitious concept that serves to agglutinate the problem of embeddedness, that is to say, the question of the overlap between social and economic (penalópez and sánchez-santos, 2013). more concisely, it is very useful when studying the contribution of the "social dimension" to the economic fact (membiela, 2013, 2016); with a special focus on "the active value of social networks" (conill, 2004). the reasons for its success lie in its capacity for synthesis and in that it allows, from the supporters who defend social institutions to those of third parties, participatory ways to politically unite, including those who are against regulatory interventions and who favor free social organization as those who are uncomfortable with the free play of market forces (sobel, 2002). it is a new and disputed concept, with a potential that has not yet been fully covered (paldam, 2000). depending on the individual or social approach that is adopted, we focus on seemingly unconnected facts (portes, 2000). as a whole, social capital research offers a complex and controversial conceptual framework that allows the integration of different lines of research from sociology, political science and economics (adler and kwon, 2002). history of the concept the systematic study of "social capital" is recent but several authors point out that the concept has a diversity of roots traceable to the eighteenth and nineteenth centuries (adam and roncevic, 2003). we could say that social capital is a general concept that links with the work of thinkers such as tocqueville (associative activity), john stuart mill (civic engagement), tönnies (community value), durkheim (forms of solidarity), weber (hierarchy and power), locke (civil society), rousseau (network of relations), simmel (group identity) and marx (social class) (bankston and zhou, 2002; brewer, 2003; lazega and pattison 2001; portes and sensenbrenner 1993; putnam, 1995; knack, 2002), and finds antecedents in the work of other authors like aristotle and machiavelli, who studied "civic virtue", and adam smith that approached the grounds of relationality, moral feelings and trust (brewer, 2003); see figure 1. 149 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 figure 1. historical evolution of the concept of social capital. castiglione, van deth and wolleb (2008, p. 2) indicate that in the economic literature of the nineteenth century it is possible to find this term, although without consistency in its use and with a different meaning. robert putnam writes that the first person to refer to social capital as we now understand it, was lyda j. hanifan (1920). this rural educator of the early twentieth century understood that "the community as a whole will benefit from the cooperation of all its parts, while the individual will find in his associations the advantages of the help, sympathy, and social capital background aristotle, machiavelli tocqueville, tönnies, a. smith treatment of similar concepts: civic virtue, civic participation, ring of trust... first real approximation lyda j. hanifan reference to social capital as we know it today: community and cooperation. the concept is focused jane jacobs, glen loury they explain its personality and peculiarities: social network resources founders of the theory of social capital pierre bordieu, james coleman, robert putnam in-depth study of the mechanisms that operate in social capital. "micro" (networks) and "macro" (cultural attributes) approaches. two major orientations: "individualist" and "culturalist" burt, portes, fukuyama, dasgupta, lin, knack, ostrom, glaeser, woolcock ... 150 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 fellowship of his neighbors" (putnam, 2000, p. 19). recently, jane jacobs (1961) and the economist glen loury (1977) have appeared as the first to explicit social capital with a personality and peculiarities accepted by the common researchers, even though the concept seems to require a more systematic elaboration/development. these authors expressed the importance of community ties because they contain the social resources that are useful for the development of individuals and that contribute to give vitality to cities and society (woolcock 1998; tsai and ghoshal, 1998; glaeser et al., 2002, p. 440; durlauf, 2008, p. 602). however, it was the two sociologists, pierre bordieu (1986) and james coleman (1988, 1990), who made the two most relevant contributions with their methodical and detailed study of social capital in the 1980s. we shall return to the work developed by these authors when we deal in depth with the three perspectives of social capital. bordieu, in his classic article "the forms of capital" (1986), understands social capital as the resources available to a subject that are a function of belonging to a group. from a marxist perspective he tries to outline a general theory of social reproduction and develops an instrumental vision in which the network of relationships is the product of "investment strategies, individual or collective, consciously or unconsciously aimed at establishing or reproducing social relationships that are directly usable in the short or long term" (bordieu, 1986, p. 52). for james coleman, social capital corresponds to a variety of aspects of social structures, information channels, obligations and expectations, sets of rules and systems of sanction that facilitate or inhibit the actions of actors (coleman, 1988, p. 98). from the methodological individualism, this american sociologist used the field of education to study the implications of social capital and in his popular article "social capital in the creation of human capital" (1988) he analyzed the relation and the degree of influence with the human capital. in spite of the fact that the roots of the concept go back to the authors mentioned above, it is the writings of robert putnam, making democracy work (1993) and bowling alone (2000), which introduce social capital with clarity in public debate (castiglione et al., 2008, p. 3). these works spurred the interest of scholars and a number of publications on the subject.1 contrary to previous individualistic or class reproduction perspectives, this author develops a more culturalist view of social capital. in the first of the cited works putnam establishes the importance of social capital for the development of democratic institutions. in particular, putnam (1993) understands this concept as "features of social organization, such as trust, norms, and networks that can improve the efficiency of society by facilitating coordinated actions" and points out that the different degree of civic engagement between regions of northern and southern italy had played a relevant role in the greater economic success and superior institutional performance of the north facing south. this author claims a rich associative activity, since, he points out, associations "instill in 1 in these years diverse authors begin to publish articles and essays following the wake of bordieu, coleman and putnam, becoming independent or no longer acknowledging them and acquiring wide relevance; we can use the example of francis fukuyama with his well-known work trust: the social virtues and the creation of prosperity (1995). 151 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 their members habits of cooperation, solidarity and public spirit" (putnam, 1993). putnam's other major work, bowling alone (2000), talks about the causes that have led to the loss of social capital, and focuses on the case of the united states. the author pays attention to the generation of prosocial behaviors and the characteristics of social organizations that facilitate cooperation for mutual benefit (sánchez-santos and pena-lópez, 2005, p. 139). among other names that illustrate articles, books and studies considered "key" in the broad theory of social capital, we must mention the works of mark granovetter, ronald burt, alexander portes, francis fukuyama, patha dasgupta, nan lin, s. keefer, norman uphoff, elinor ostrom, glaeser and michael woolcock. these researchers fall into the two main orientations of social capital mentioned above: the individualist and the culturalist, and, in a more systematic way and following the classification that we propose below, they fall into one of these three approaches: individualistic, communitarian and macrosocial. 3. the three perspectives of social capital as we pointed out earlier, social capital is an ambiguous and disputed concept. the term "umbrella concept" is justified by the coexistence of multiple definitions and measurement systems (dasgupta and serageldin, 2000). robinson et al. (2002) indicate that definitions of social capital are grouped and depend on whether they focus on substance, sources (causes) or effects (consequences). adler and kwon (2002, pp. 19-20) classify the families of definitions based on the relationship that an actor maintains with other agents (bridging views) or based on the structure recreated by actors within the community (bonding views). herreros and de francisco (2001) differentiate "structural definitions" —where social capital is conceived as a set of available resources derived from the participation of the individual in social networks)— and "cultural definitions" —in which social capital carries more than relations because it is a subjective phenomenon that is composed of attitudes and values—. paldam (2000) talks about three families of concepts within the theory of social capital; the one that has "trust"as its axis, which is based on the "ease of cooperation" and the one that identifies it with the "social network". finally, millán and gordon (2004) link the different streams of social capital with the thought of the following authors: james coleman, robert putnam and nan lin. we propose that classifications can be systematized as follows: the first understands social capital as an "individual resource" that consists of the networks of relations of the focal subject that bring him a set of instrumental and expressive resources. the second sees social capital as a "community resource", i.e. as a set of attributes and properties present in a social structure that facilitate its operation and collective action. and the third, conceives social capital as a "macrosocial and macroinstitutional resource" that rests on aspects such as civic-mindedness, social cohesion and general trust that favors the functioning of the economy and society in general (see figure 2). 152 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 individualist or micro-social perspective social capital is an "individual resource" that consists in the networks of relations of the focal subject that bring him a set of instrumental and expressive resources. authors: bordieu (1986), portes (1998), lin (2001). communitarian or meso-social perspective social capital is a "community resource", i.e. a set of attributes and properties present in the social structure that facilitate the cooperation and collective action. authors: coleman (1988), uphoff (1999), bowles and gintis (2002). macro-social and macro-institutional perspective social capital is a "macrosocial and macroinstitutional resource" resting on aspects such as civic-mindedness and social trust that favors the functioning of the economy and society in general authors: putnam (1993), knack and keefer (1997), inglehart (1997). figure 2. the three perspectives of social capital. this division into three approaches corresponds to the triple cataloging of social capital as "individual good", as "collective good" and as "public good" (putnam, 1993, 2000; adler and kwon, 2002, p. 22; dasgupta, 2005; sánchez-santos and pena-lópez, 2005). that is, social capital generates returns for the individual, for the group and for the whole of society. figure 3. micro, meso and macro measurements of social capital. social trust civic-mindedness civic engagement individual social network macro measurements of social capital micro measurements of social capital meso measurements of social capital community attributes three perspectives of social capital 153 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 in what follows we shall analyze each one of the perspectives presented and we shall present the empirical methodology that accompanies them (figure 3). the latter diverges on the basis of four attributes: (1) the level of analysis of social capital: micro, meso or macro. (2) the main study variable: structural (focusing on social networks) or cultural (focusing on norms, values, trust). (3) the method of measurement used: surveys, polls and statistical indicators, community studies and observations, projects and experiments. (4) the type of study: quantitative, qualitative or comparative (membiela, 2016). 3.1 individualistic or micro-social perspective. the "micro" perspective, also known as "networks approach", is very widespread and focuses on the analysis of social capital as an individual resource, where the actor uses his network of relationships2 in the achievement of personal goals, both instrumental (income, status, power...) and expressive (welfare, health, recognition, mutual aid...). the most outstanding reference within this expository line is nan lin. however, one of the initiators of the theory of social capital, pierre bordieu, in his pioneering article the forms of capital (1986) already defined social capital as the "the aggregate of the actual or potential resources which are linked to possession of a durable network of more or less institutionalized relationships of mutual acquaintance and recognition". from lin's point of view, it could be interpreted as an instrumental action from the perspective of class position defense, in which "the network of relationships is the product of investment strategies, individual or collective, consciously or unconsciously aimed at establishing or reproducing social relationships that are directly usable in the short or long term" (bordieu, 1986, p. 52). in bordieu, useful relationships serve to obtain material and symbolic resources; and thus, the social capital possessed by the agent depends on the network of connections he can mobilize and on the volume of capital (economic, cultural or symbolic) that networks have. "social capital as an individual resource" is reflected in numerous definitions, as shown in table 1. these definitions are grouped within the same approach because they rest on two identifiable elements: the individual as the focal subject of the benefit and the social network as the entity from which the benefit is extracted. however, in their reading matter it can be observed that the authors differ when specifying what social capital is, since some identify it with the amount of networks of relations previously constructed by the person that facilitates the access to a pool of resources (burt, 1992; boxman, de graaf and flap 1991; belliveau, o'reilly and wade 1996; pena-lópez and sánchez-santos, 2013), while for others social capital consists of "resources" that the individual obtains from such networks (bordieu, 1986; lin, 2008; baker, 1990; nahapiet and goshal, 1998). therefore, we can talk about the prominence of networks or resources. 2 these networks are made up of very different bonds (family, community, work, associations...; what is called bonding social capital or bridging social capital depending on the strength of the ties) and have a different origin because they could have been inherited or created by the main actor. 154 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 table 1. definitions of social capital in the individualistic perspective. authors individualistic perspective pierre bordieu (1986) "the aggregate of the actual or potential resources which are linked to possession of a durable network of more or less institutionalized relationships of mutual acquaintance or recognition." nan lin (2001, cap. 2; 2008, p. 51) "resources embedded in one's social networks, resources that can be accessed or mobilized through ties in the networks." baker (1990, p. 619) "a resource that actors derive from specific social structures and then use to pursue their interests; it is created by changes in the relationship among actors." burt (1992, p. 9) "friends, colleagues, and more general contacts through whom you receive opportunities to use your financial and human capital." nahapiet and goshal (1998, p. 243) "the sum of the actual and potential resources embedded within, available through, and ghoshal derived from the network of relationships possessed by an individual or social unit. social capital thus comprises both the network and the assets that may be mobilized through that network." portes (1998, p. 6) "the ability of actors to secure benefits by virtue of membership in social networks or other social structures." knoke (1999, p. 18) "the process by which social actors create and mobilize their network connections within and between organizations to gain access to other social actors' resources." boxman, de graaf and flap (1991, p. 52) "the number of people who can be expected to provide support and the resources those people have at their disposal." belliveau, o´reilly and wade (1996, p. 1572) "an individual's personal network and elite institutional affiliations." from our perspective, the first option is more appropriate because the networks, with their attributes, constitute the "social fact" from which the resources available to the principal actor emerge a posteriori. in this sense, it can be said that networks are instrumental and polymorphic and allow a multitude of resources to be obtained. lin's perspective (1999b, 2008) integrates both proposals. for him, social capital is the set of "resources embedded in one’s social networks, resources that can be accessed or mobilized through ties in the networks." that is, it integrates both material and immaterial resources and networks. now, for this author "social capital" and "social networks" are not equivalent or interchangeable terms; the networks provide the necessary condition to access and use the resources rooted in them but to equate both notions is incorrect (lin, 2008, pp. 58-59). lin (1999b) understands that actors find in their network (of strong and weak ties) a place of exchange where interests (or preferences) are able to coordinate naturally and generate equilibria, just as the market can regulate prices (millán and gordon, 2004). individuals invest in social relationships with the expectation of obtaining benefits and therefore interact with other subjects, assuming that the responses are the consequence of the expectation of a reward or return. this investment in relationships facilitates the flow of information and opportunities and access to differentiated resources, both instrumental and expressive. in lin's model, "network" is understood as the structure that organizes material and immaterial resources and the strategic positions of individuals. for lin, "social interaction" is a means of access to these resources and of approach between positions; and "action" is conceived as the orientation of the behavior destined to obtain returns (millán and gordon, 155 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 2004, p. 741). as millán and gordon (2004, p. 743) point out, in this perspective "the network is the element that organizes resources, and the action aimed at capitalizing them is what makes us talk about social capital." measurement in the individualistic or micro-social perspective. as we have just seen, in the individualistic perspective social capital is perceived as a set of resources which an individual has access to (actively or potentially) as a result of his membership of a social network. to measure social capital in this micro and structural approach, we analyze the extension of the individual network and the resources that it implies. to do this, a survey is usually used to provide information about his access to nodes and the capacity to mobilize them when some resurce is needed. as an example: someone who knows an official in the local administration has access to a number of resources (information, procedures ...); whoever belongs to an extended family has access to greater family support; and whoever knows one or several subjects in the banking sector has better financial advice. nan lin (2008, pp. 54-56) points to two methods: the "name generator" and the "position generator".3 in the name generator, a list of contacts proposed by the focal subject is created for each of the proposed resources (pena-lópez and sánchez-santos, 2013). in the "position generator" a list of socially useful positions for the purposes of the focal subject is presented to a respondent and then asked about the first individual who could give access to that resource, additionally considering the level of relationship between them (family, friend, acquaintance) (erickson, 1996; pena-lópez and sánchez-santos, 2017). both methods have advantages and disadvantages. lin points out that the "name-generator" method is appropriate for testing the depth of close nodes; but is limited in the universe of contacts that the individual (usually three to five)4 proposes (and/or remembers). the "position generator" facilitates the study of the individual's access to the different levels of the social hierarchy (e.g. different occupations and strata in society)5 and shows high degrees of validity and reliability. however, this relational structure-based methodology is less developed and provide less precise information about strong links (lin, 2008, pp. 56-57; see also van der gagg and snijders, 2004, 2005). among the studies that have followed each methodology, campbell et al. (1986) examined the association of individual network resources and socioeconomic status, based on information from the detroit area for the years 1965-1966. following the "name-generator" method, they found that the composition of network resources had a significant association with the status 3 also, van der gaag and snijders (2005) propose a third methodology called resource generator. 4 in this sense, the resources tend to be homogeneous and the relations related to the subject, "homophilic". 5 it is therefore a more favorable methodology when evaluating "heterophilic" relationships and weak ties of the focal subject. 156 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 reached, as measured by occupational prestige and family income (lin, 1999, p. 477). volker and flap (1996), in their study of east germany, used the "position generator" methodology to ask the respondents to identify, among 33 occupations, if they knew someone in each of them, and, if so, to specify what kind of relationship they maintained (family, friends, acquaintances). for the occupational scenario of 1989, the effect of the highest status reached was positive and significant (volker and flap, 1996, p. 478). 3.2 communitarian or mesosocial perspective “gal oya was said by engineers and officials to be the most deteriorated and disorganized irrigation system in the country. yet it became one of the most efficient and cooperatively managed systems, even fairly quickly, once approached with an effective plan for engaging farmers in joint system management. the efficiency of water use was doubled within two years, even before the planned physical rehabilitation was completed, through the introduction of ‘social infrastructure’." (uphoff, 2000, p. 232).6 the social capital approach as a "community resource" highlights the benefit that it generates in the community, compared to the previous one that conceives it as a mere individual good. its axis of study is the "social organization", which contains a set of resources that in addition to serving the individual subject favors cooperation and global functioning. in this approach, however, the term "resource" is not equivalent to its use in the individualistic perspective of social capital. a rule or a sanction constitutes in this approach a resource for the subject and for the collective; while in the previous approach the word resources refers to material goods, influence, or promotion, for example. the definition of social capital provided by james coleman (1988, p. 98; 1990, p. 302) fits this way of understanding social capital, although the author's epistemological approach is based on the idea of individual who behaves with criteria of rationality. coleman (1988) points out that "social capital is defined by its function. it is not a single entity, but a variety of different entities, having two characteristics in common: they all consist of some aspect of a social structure, and they facilitate certain actions of individuals who are within the structure". the resource-entities referred to by this author, which mediate interactions between individuals and favor individual and community productivity, are: obligations and expectations, potential information, norms and effective sanctions, relations of authority, closure and appropriate social organization (coleman, 1998, p. 98),7 all integrable into the concepts of networks and community. 6 the author refers to his experience in a development project in sri lanka that began in 1980. 7 closure means the existence of sufficient ties between a certain number of people to guarantee the observance of norms (portes, 1998). coleman (1988) points out that the emergence of norms and their fulfillment depends not only on the negative external effects of "punishable" actions, but on how closed or open the structure is. while the appropriability of the organization (appropriability) expresses that social ties of one kind (e.g., friendship) often can be used for different purposes (e.g., moral and material support, work and non-work advice) (adler and kwon, 2002, p. 18). 157 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 table 2. definitions of social capital in the communitarian perspective. authors communitarian perspective m. schiff (1992) "the set of elements of the social structure that affects relations among people and are inputs or arguments of the production and/or utility function." fukuyama (1995) "the ability of people to work together for common purposes in groups and organizations." brehm and rahn (1997) "the web of cooperative relationships between citizens that facilitate resolution of collective action problems." fukuyama (1997) "social capital can be defined simply as the existence of a certain set of informal values or norms shared among members of a group that permits cooperation among them." woolcock (1998) "the information, trust, and norms of reciprocity inherent in one's social networks." nahapiet and goshal (1998) "the sum of the current and potential resources embedded within, available through, and derived from the network of relationships possessed by an individual or social unit. social capital thus comprises both the network and the assets that may be mobilized through that network." bowles and gintis (2002) "social capital generally refers to trust, concern for one´s associates, a willingness to live by the norms of one´s community and to punish those who do not." these entities are valued as resources by the actors, employed to achieve certain interests or meet certain needs (millán and gordon, 2004). the norms of reciprocity or closure are appropriable by the subjects and constitute a resource for them but in turn they are an input to the overall functioning of the structure. other authors have proposed some definitions that also bring us closer to the idea of social capital as a "community resource", collecting certain cognitive and structural assets (uphoff, 2000) that favor collective action (see table 2). francis fukuyama (1997) identifies social capital as shared norms and values (within the organization) that favor cooperation; woolcock (1998) and bowles and gintis (2002) point out that it consists of information, trust and norms of reciprocity inherent to the social network (which also favor cooperation); and brehm and rahn (1997) talk about the "network of cooperative relations" (see table 2). let us look at three examples or models that provide insight into the way in which social capital is conceived as a "community resource". i) the presence of a high intra-group social capital in a company that manifests itself in shared goals and values, an adequate work environment and high trust and interpersonal interaction, favors "group human capital" (gui, 2001, p. 158), the global productivity, and therefore the final result that the business seeks. ii) the relations of trust and reciprocity established between the neighbors of a residential estate help them to act more effectively in the face of problems that require collective action, such as prowling thieves or a fire; benefiting even those members who barely interact with other residents (putnam, 2000). iii) the new york diamond market, notes coleman (1988, pp. 98-99), is mainly played by the hyper-laced jewish ethnicity. ties (their closure) provide informal insurance in facilitating transactions in the market, making the merchants belonging to this group feel "compelled" and indebted to the norm avoiding any disaffection influencing the collective good. for example, if one of the individuals of this ethnicity affronts another leading to a significant deception (opportunistic behavior), he must expect a sanction that ranges from warning to expulsion. 158 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 however, it should be emphasized that these forms of social capital do not have to be positive. the same elements (obligations and expectations, norms and effective sanctions, potential information, relations of authority, closure, appropriability and trust) that are rooted in the organization and which are constitutive of social capital, understood as a community resource, can be used for negative results. in these cases, they may favor intra-group objectives, but they are adverse in their contribution to the aggregate social capital due to the (negative) sign of their externality (portes, 1998; paldam, 2000, p. 635; adler and kwon 2002; durlauf, 2008). this is the case of "bad social capital" often exemplified by organizations such as the mafia and the ku klux klan. measurement in the communitarian or meso-social perspective. in this perspective, social capital is considered as a collective property that emerges from the same community, benefiting the totality as an aggregate and each one of its members. as we have seen, coleman (1990, p. 302) points out that "social capital is defined by its function. it is not a single entity, but a variety of different entities having two characteristics in common: they all consist of some aspect of social structure, and they facilitate certain actions of individuals who are within the structure". consequently, coleman (1988) uses as indicators of social capital: (a) "aspects of the social structure" that (b) "facilitate actions of individuals within that structure". regarding the family and the community he focuses on the strength and frequency of interaction and more concretely on whether it is made up of a father and a mother or it is singleparent; on parents’ expectations regarding what the future holds for their children; on residential mobility; on whether or not the mother works; in the relationship between parents and children; on the type of school attended by the student: state school, private or private confessional — that is a question that involves differences in collegial community ties—; and on the existence of links between the students’ parents. in order to explain their impact on academic achievement and school drop-outs, coleman uses the structural/cultural indicators cited because he considers them determinants in the construction of the entire system of obligations and expectations, reliability, channels of information, norms and effective sanctions, closure and "appropriability" of social organization. these are elements that together make up social capital and give it a greater guarantee when they seek the stated objectives; in this case, to favor the creation of human capital. as this researcher points out, a greater number of links between the students’ parents (more community) impels closure in the social network and therefore the capacity of mutual monitoring on the children (and their studies), by facilitating the flow of information and the imposition of sanctions; and by promoting expectations of mutual behavior. other researchers develop case studies examining attributes such as norms and values, cohesion, roles and rules, trust and interpersonal interaction; all of those cognitive, structural, 159 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 and relational assets of social capital that favor collective action and the achievement of the group's objectives. as an example, tsai and ghoshal (1998) used data collected from a multiplicity of respondents belonging to the clusterscomplex business units of a multinational electronics company. the purpose of their work was to examine the relationships that are established between the structural, relational and cognitive dimension of social capital and between these dimensions and the different patterns of resource exchange and product innovations in the company. they observed in this process the positive and significant effect of social interaction (structural dimension), trust (relational dimension) and shared vision (cognitive dimension); concluding that investment in informal social capital and formal social arrangements drive the exchange and combination of productive resources, and promote innovation. on the other hand, portes (1995) and light and karageorgis (1994) analyzed the economic welfare of different communities of immigrants in the united states. they demonstrated that certain groups (koreans in los angeles and chinese in san francisco) thrive better than others (mexicans in san diego and dominicans in new york) because of the social structure in which new immigrants are integrated. successful communities are able to offer assistance to newcomers through informal sources of credit, insurance, migrant family support, language training, and job referrals. less successful communities sometimes show only a short-term commitment to the host country and are almost unable to stabilize their newly arrived members. 3.3 macro-social perspective previous visions of social capital do not enter into the analysis of its effects beyond the individual and/or the group. the third "classical" social capital approach, culturally oriented, sees it as a resource that benefits the broad socio-economic aggregate. without abandoning the benefits that it generates at the individual and group levels (microand meso-), it also conceives it as a "macrosocial" and "macroinstitutional" asset (fukuyama, 1999; sobel, 2002; woolcock, 2001, p. 70; castiglione et al., 2008, p. 7; warren, 2008, p. 123; van deth, 2008, pp. 200-202). in this sense, this proposal argues that social capital is important for the functioning of democracy, for institutional performance in general, for market articulation and economic development, and for social cohesion and the progress of civil society. the work of robert putnam making democracy work: civic traditions in modern italy (1993) is an exponent of this approach. in it, the author offers one of the most generalized definitions of social capital, identifying it with those "features of social organization, such as trust, norms and networks that can improve the efficiency of society by facilitating coordinated actions" (putnam, 1993, p. 167). putnam expresses himself in "macro" terms when referring to "improve the efficiency of society"; a posture which other authors have manifested with posterity. as table 3 shows, knack and keefer (1997) and knack (2002) equate social capital with the degree of civicmindedness of a society. sánchez-santos and pena-lópez (2005, p. 137) point to the importance of trust and cooperative and prosocial behavior for the proper functioning of the 160 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 economy and society, and serageldin (1996) and the world bank8 note the analogy of social capital with "social cohesion". in general and in this line, social capital is identified with different cultural and attitudinal aspects such as civic commitment, social trust, generalized reciprocity, cooperative norms and civic-mindedness, which facilitate social, economic and institutional functioning. within this approach, the researchers differ in the relevance attributed to the aspects that weave the social capital and in the process that links them. the most common divergence is between putnam's position, which understands networks of association as a prior step to the extension of civic-mindedness and social trust, and that of a number of critics who find no significant correlation between trust and associationism. for putnam, social capital is an asset that increases the efficiency of society and favors institutional and economic performance. specifically, and in his definition, it consists of the following three features of social organization: trust, norms and networks. these three elements, which appear in other definitions, tend to establish circular and mutually reinforcing relationships (putnam, 1993, p 177). putnam, like other scholars (e.g. fukuyama, 1995; la porta et al., 2000; dasgupta, 2005; paldam, 2000, pp. 629-630), attaches great importance to "trust" as a "core component of the social capital" that acts as lubricant in the functioning of society and also mediates in any relationship or exchange, with its economic reflection on the reduction of transaction costs (wolleb, 2008, p. 378). table 3. definitions of social capital in the macrosocial perspective. authors macrosocial perspective putnam (1993, p. 167) "features of social organisation, such as trust, norms and networks, which can improve the efficiency of society by facilitating coordinated actions." serageldin (1996) "the glue that holds societies together." ingleheart (1997, p. 188) "a culture of trust and tolerance, in which extensive networks of voluntary associations emerge." thomas (1996, p. 11) "those voluntary means and processes developed within civil society which promote development for the collective whole." turner (1999, p. 53) "those forces that increase the potential economic development of a society by creating and maintaining relationships and patterns of social organization." grootaert and thierry van bastelaer (2002) "the social capital of a society includes the institutions, the relationships, the attitudes and values that govern interactions among people and contribute to economic and social development." pena and santos (2005, p. 137) "social capital represents the idea that trust and the internalization of rules conducive to cooperative and prosocial behavior are the basis for the better functioning of the economy and of society in general." the world bank "social capital refers to the institutions, relationships and norms that make up the quality and quantity of the social interactions of a society. numerous studies show that social cohesion is a critical factor for societies to thrive economically and for development to be sustainable. social capital is not only the sum of the institutions that make up a society, but also the stuff that holds them together." 8 http://web.worldbank.org, under the title "what social capital is". 161 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 at the same time, trust is closely linked to "generalized reciprocity" (putnam, 1993, p 172; putnam, 2000; szreter, 2002; millan and gordon, 2004, p. 726; uslaner, 2008, p. 116). the frequency in interaction, typical of dense social networks, favors the birth and diffusion of norms of reciprocity, fosters trust and contributes to cooperation. putnam refers to civic engagement networks (neighborhood societies, purchasing associations, cooperatives, football clubs) characterized by a horizontal type of interaction9 in which there is a certain public and not merely a private interest that tends to favor generalized reciprocity and to extend the cooperative arrangement beyond the group. for this researcher, associations have a "didactic" effect on the culture of the population (millán and gordon, 2004, p. 734) and are a source of social commitment by fostering internal habits such as cooperation, solidarity, public spirit (putnam, 1993, pp. 89-90), which are then projected to other associations and generalized trust. putnam's perspective is in the line with alexis de tocqueville10 and assumes that institutional and democratic performance is linked to the characteristics of civic life in their common purposes. in his 1993 work, he compares northern and southern italy, finding that the greater civic commitment and participation of civil society and the highest level of trust in the northern regions correlates with increased government quality and institutional performance, and with more satisfactory economic development. this author goes so far as to say that good governance in italy is a byproduct of choral societies and football clubs (putnam, 1993, p. 176). despite being the most widespread approach, it has been very much challenged. it has been argued that it does not take into account aspects such as the size of the network, the sociability within it, the intensity of the contact between its components or the weight of its benignity (since there are violent, racist, criminal organizations, rent seekers...) (paldam 2000; glaeser et al., 2002, p. 444). in addition, researchers debate the role of associations in building trust, generalized reciprocity and cooperation. paxton (2007) expresses that civic participation generates social trust when the associations are interconnected and do not remain isolated. stolle and lewis (2001) point out that there is no empirical evidence to show that associations work as schools of democracy, and levi (1996) doubts that belonging to one type of association leads to overcoming problems of free riding in another; this same researcher warns us furthermore, that putnam does not take into account the structure and philosophy of the italian political system when it comes to establishing the differences between the north and the south. in this way, a new approach emerges within the perspective that considers social capital as a "macrosocial" and "macroinstitutional" resource. social capital is equated with trust and civic 9 a vertical network, however dense and important it may be for its participants, cannot maintain trust and cooperation, since "vertical flows of information are often less reliable than horizontal" (putnam, 1993, p. 174). 10 in tocqueville (1987 [1835-1840]) there is a virtuous link between civic associations, common good, and democracy. in this sense, the author writes: "if men are not linked in a solid and permanent way, it is difficult they act in common" (1987, p. 477). "political parties can be considered as great free schools, where all citizens come to learn the general theory of associations" (1987, p. 481 [1835, 1840]). "in all the countries where political associations are prohibited, civil associations are rare [...]" (tocqueville, 1987; taken from millán and gordon, 2004, pp. 731-732). 162 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 cooperation, but such aspects do not correlate with associationism-civic engagement in the way putnam puts it. this is the line followed by knack and keefer (1997) and knack (2002) when they criticize the american sociologist on the basis of olson's (1982) idea that the nature of associations is an element that must be taken into account since because of this the effect of associationism on trust and economic growth can be neutral. knack (2002, p. 778) sets the example of those interest groups whose objectives undermine efficiency and the general interest. this criticism goes back to the "olson-putnam controversy." because not all types of associations generate trust, the positive effect per se of greater social connectivity cannot be affirmed (sánchez-santos and pena-lópez, 2005, pp. 138, 146). olson (1982) noted that horizontal associations could damage growth by acting as lobbies pursuing their own interests in a preferential policy that imposes a cost on society (knack and keefer, 1997, p. 1271). for these authors, trust and civic cooperation (social capital) are actually the two faces of the same mirror (knack and keefer, 1997, p. 1258) because of the logical and intense relationship between them. an atmosphere of high trust acts by reducing the costs associated with economic activity (in general all transaction costs), it encourages innovation and investment, and creates less dependence of society towards formal institutions. while civic cooperation impacts on the economic outcome by restricting through its (civic) norms the behavior based on the self-interest of the subjects, thus reducing opportunism and leading individuals to favor the public and private good.11 likewise, it promotes the improvement of the political channel, as well as the reduction of bureaucracy and corruption (knack and keefer, 1997, pp. 1252-1254). sánchez-santos and pena-lópez (2005) express themselves in a similar line since they understand the social capital as "moral capital"; while guiso, sapienza and zingales (2011) conceive it as "civic capital". the concept of "moral capital" focuses on the behaviors that underlie the formal and informal relationships that are established within civil society and the ethical attitudes that predispose to general reciprocity and cooperation. while the notion of "civic capital" focuses on the values and beliefs that internalize the common good, fostering cooperative behavior and economic development. social capital ("moral capital" and "civic capital" in their case) benefits the "macro" functioning of the economy and society. however, unlike putnam, they also point out that "although the tautological relationship between trust and social capital is evident, it is not the relationship raised by the sociological perspective, that is, the relation between associationism and social trust" (sánchez-santos and pena-lópez, 2005, pp. 148-149). measurement in the macrosocial perspective. in presenting the third perspective of social capital, we have already indicated that there are two approaches. the most significant exponent of the first one is robert putnam who understands 11 by promoting such rules, it facilitates cooperative solutions to numerous problems of collective action. in this sense, civic norms solve the "prisoner's dilemmas" without imposing external costs while increasing allocative efficiency. 163 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 that associative activity and civic engagement favor institutional performance and economic development by promoting civic-mindedness and social trust. the second approach, which includes authors such as knack and keefer (1997), sánchez-santos and pena-lópez (2005), uslaner (2008) or guiso, sapienza and zingales (2011), equates social capital with civicmindedness and social trust and agrees on the high relevance of these attributes for economic performance; rejecting, however, its necessary correlation with the degree of associative activity. from this perspective —macro and cultural— two measurement options fit. putnam employs the density of voluntary organizations as a tool (paldam, 2000) by measuring civic commitment to the per capita number of groups and associations (church groups, labor unions, sports groups, academic or professional societies, political, and fraternal organizations) which the residents of each region or state belong to (kawachi et al., 1997, p. 1493). nevertheless, several authors criticize the vision of putnam and with this, the instrument used to evaluate the social capital. for martin paldam (2000) there are three main problems: the definition of voluntary organization, the intensity of contacts and the problem of the weight of benignity (for example, criminal and racist associations); while glaeser et al. (2002, p. 445) criticize the fact that the size of the network within the organization and the sociability of the organization are not taken into account. in the second approach, the measurement of social capital is carried out using trust as the base indicator. in this type of research and in these trials the questions of the world values survey (wvs) are posed: "do you think most people would try to take advantage of you if they got a chance, or would they try to be fair?" (item for the study of the perception of probability of opportunism) and " generally speaking, would you say that most people can be trusted or that you can't be too careful in dealing with people?" (item for the study of social trust-distrust). the indicator (trust) is the percentage of respondents who states that "most people can be trusted" (paldam, 2000; kawachi et al., 1997, p. 1492; knack and keefer, 1997, p. 1256). to measure trust in a general sense, the so-called "wallet test" has also been used (paldam, 2000). an experiment is performed in which n wallets are lost in public spaces, and the test analyzes how many of them are returned. knack and keefer (1997, p. 1257) point out that, in their study, the measure of lost wallets is correlated by 0.67 with the level of social trust. we have indicated that social trust and civic-mindedness bear a strong correlation. however, there are systems that are primarily aimed at measuring civic capital. this is the case of guiso, sapienza and zingales (2011, p. 430) who propose to focus on those values and beliefs that foster cooperative behavior. respondents are asked about their opinion on issues such as paying taxes, abuse of public goods, and always negative actions of: unfairly changing their position in a queue, littering the streets, and other similar behaviors; scores range from 1 = never justifiable to 10 = always justifiable. it is suggested that these items with their peers can be good indicators of the prevalence of moral actions and the desire of people to internalize the common good. in a similar sense, knack and keefer (1997, p. 1256), who equate social capital with "civic164 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 mindedness", point out that the strength of norms and civic cooperation is assessed on the basis of justification (justified, never justified or something justified) attributed to the following reasons: a) claiming government benefits to which one is not entitled, b) avoid paying the ticket on public transport, c) lying when paying taxes, d) saving money which has been found at random, and e) covering up the damage done to a parked vehicle. however, these authors point out that those measures are not exempt from contradictions and it is more than likely that respondents will be reluctant to admit their judgments. in this case, it is often used parallel questions (trap questions) that indicate the truthfulness with which the individual responds to the survey. 4. conclusions we started this article with an introduction to the concept and history of social capital, an issue that is subject to increasing attention in the fields of economics, society and politics. as we indicated, the term of "umbrella concept" (social capital is many things for many people) makes it difficult to recognize its utility as a variable that favors socioeconomic and institutional functioning. in this sense, our article has sought to clarify, based on the status questions of the theory, the three great perspectives of the concept, also reviewing the empirical methodology used in each of them. social capital consists of the set of social networks that gives the individual material and immaterial resources (individualistic or micro-social perspective). social capital also lies in the attributes and properties of the social structure that facilitate its operation and collective action (community or meso-social perspective). equally, social capital resides in general cultural aspects such as civic-mindedness and social trust that favor the global functioning of the economy and society (macro-social perspective). social capital is therefore a multidimensional concept with great potential in its application. for this purpose, it is necessary to clarify what it is and what it is for, an issue aided by this presentation of the three great approaches within the theory. after presenting this conceptual clarification, future lines of research will focus on different functions developed by social capital in each of the proposed approaches, as well as the concrete measures that policymakers can take to enhance this factor of development. references adam, f., & roncevic, b. (2003). social capital: recent debates and research trends. social science information 42(2), 155-183. https://doi.org/10.1177/0539018403042002001 adler, p. a., & kwon, s. w., (2002). social capital: prospects for a new concept. the academy of management review 27(1), 17-40. https://doi.org/10.5465/amr.2002.5922314 ahn, t. k., & ostrom, e. (2008). the meaning of social capital and collective action. in d. https://doi.org/10.1177/0539018403042002001 https://doi.org/10.5465/amr.2002.5922314 165 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 castiglione, j. w. van deth, and g. wolleb (eds.), the handbook of social capital (pp. 1735). new york: oxford university press. baker, w. e. (1990). market networks and corporate behavior. american journal of sociology 96(3), 589-625. https://doi.org/10.1086/229573 bankston, carl l., & zhou, m. (2002). social capital as process: the meanings and problems of a theoretical metaphor? sociological inquiry 72(2), 285-317. https://doi.org/10.1111/1475682x.00017 belliveau, m. a., o'reilly, c.-a., & wade, j.-b. (1996). social capital at the top: effects of social similarity and status on ceo compensation. academy of management journal 39(6), 1568-1593. https://doi.org/10.2307/257069 bjørnskov, ch., & svendsen, g. t. (2003). measuring social capital – is there a single underlying explanation? working paper, n.º 5, department of economics. university of aarhus, aarhus school of business. bordieu, p. (1986). the forms of capital. in j. richardson (ed.), handbook of theory and research for the sociology of education (pp. 241-258). new york: greenwood. bowles, s., & gintis, h. (2002). social capital and community governance. the economic journal 112 (483), 419-436. https://doi.org/10.4337/9781781002841.00006 boxman, e. a. w., de graaf, p. m., & flap, h. d. (1991). the impact of social and human capital on the income attainment of dutch managers. social networks 13(1), 51-73. https://doi.org/10.1016/0378-8733(91)90013-j brehm, j., & rahn, w. (1997). individual-level evidence for the causes and consequences of social capital. american journal of political science 41(3), 999-1023. https://doi.org/10.2307/2111684 brewer, g. a. (2003). building social capital: civic attitudes and behavior of public servants. journal of public administration research and theory 13(1), 5-26. https://doi.org/10.1093/jopart/mug011 burt, r. (1992). structural holds: the social structure if competition. cambridge, ma: harvard university press. campbell, k. e., marsden, p. v., & hurlbert, j.-s. (1986). social resources and socioeconomic status. social networks, 8(1), 97-117. https://doi.org/10.1016/s0378-8733(86)80017-x castiglione, d., van deth, j. w., & wolleb, g (eds.) (2008a). the handbook of social capital. new york: oxford university press. castiglione, d., van deth, j. w. , & wolleb, g (eds.), (2008b). social capital's fortune: an introduction. in in d. castiglione, j. w. van deth, and g. wolleb (eds.), the handbook of social capital (pp. 1-12). new york: oxford university press. coleman, j. s. (1988). social capital in the creation of human capital. the american journal of sociology 94, 95-120. https://doi.org/10.1086/228943 coleman, j. s. (1990). foundations of social theory. cambridge: harvard university press. conill sancho, j. (2004). horizontes de economía ética. madrid: editorial tecnos. dasgupta, p. (2005). the economics of social capital. the economic record 81(s1), s58-s70. https://doi.org/10.1086/229573 https://doi.org/10.1111/1475-682x.00017 https://doi.org/10.1111/1475-682x.00017 https://doi.org/10.2307/257069 https://ideas.repec.org/p/hhs/aareco/2003_005.html https://ideas.repec.org/p/hhs/aareco/2003_005.html https://ideas.repec.org/s/hhs/aareco.html https://doi.org/10.4337/9781781002841.00006 https://doi.org/10.1016/0378-8733(91)90013-j https://doi.org/10.2307/2111684 https://doi.org/10.1093/jopart/mug011 https://doi.org/10.1016/s0378-8733(86)80017-x https://doi.org/10.1086/228943 166 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 https://doi.org/10.1111/j.1475-4932.2005.00245.x dasgupta, p., & serageldin. i (eds.) (2000). social capital: a multifaceted perspective. washington, d. c.: world bank. durlauf, s. n. (2008). membership and inequality. in in d. castiglione, j. w. van deth, and g. wolleb (eds.), the handbook of social capital (pp. 594-623). new york: oxford university press. erickson, b. (1996). culture, class and connections. american journal of sociology 102(1), 217-51. https://doi.org/10.1086/230912 fine, b. (1999). the developmental state is dead long life social capital? development and change 30(1), 1-19. https://doi.org/10.1111/1467-7660.00105 fukuyama, f. (1995). trust: the social virtues and the creation of prosperity. new york: free press. fukuyama, f. (1997). social capital and the modern capitalist economy: creating a high trust workplace. stern business magazine 4(1), 4-17. fukuyama, f. (1999). social capital and civil society. virginia: the institute of public policy, george mason university. glaeser, e., laibson, d., & sacerdote, b. (2002). an economic approach to social capital. the economic journal 112(483), 437-458. https://doi.org/10.1111/1468-0297.00078 granovetter, m. s. (1973). the strength of weak ties. american journal of sociology 78(6), 1360-1380. https://doi.org/10.1086/225469 grootaert, ch., narayan, d., nyhan, v., & woolcock, m. (2004). measuring social capital: an integrated questionnaire. world bank working paper 18. https://doi.org/10.1596/0-82135661-5 grootaert, ch., & van banstelaer, t. (2002). understanding and measuring social capital. analysis 1(320). https://doi.org/10.1596/0-8213-5068-4 gui, b. (2001). organizaciones productivas con fines ideales y realización de la persona: relaciones interpersonales y horizontes de sentido. in l. bruni, economía de comunión (pp. 149-168). madrid: editorial ciudad nueva. guiso, l., sapienza, p., & l. zingales (2011). civic capital as the missing link. in j. benhabib, m. o. jackson and a. bisin, handbook of social economics (vol. 1a., pp. 417-480). san diego: elsevier. https://doi.org/10.1016/b978-0-444-53187-2.00010-3 hanifan, lyda j. (1920). the community center. boston: silver, burdett and company. herreros, f., & de francisco, a (2001). introducción al capital social como programa de investigación. zona abierta 94/95, 1-46. hirsch, p. m. and levin, d. z. (1999). umbrella advocates versus validity police: a life-cycle model. organization science 10(2), 199-212. https://doi.org/10.1287/orsc.10.2.199 homans, g. c. (1961). social behavior: its elementary forms. new york: harcourt, brace and world. inglehart, r. (1997). modernization and post-modernization: cultural, economic, and political change in 43 societies. princeton, nj: princeton university press. https://doi.org/10.1111/j.1475-4932.2005.00245.x https://doi.org/10.1086/230912 https://doi.org/10.1111/1467-7660.00105 https://doi.org/10.1111/1468-0297.00078 https://doi.org/10.1086/225469 https://doi.org/10.1596/0-8213-5661-5 https://doi.org/10.1596/0-8213-5661-5 https://doi.org/10.1596/0-8213-5068-4 http://www.google.es/search?hl=es&tbo=p&tbm=bks&q=inauthor:%22jess+benhabib%22 http://www.google.es/search?hl=es&tbo=p&tbm=bks&q=inauthor:%22matthew+o.+jackson%22 http://www.google.es/search?hl=es&tbo=p&tbm=bks&q=inauthor:%22alberto+bisin%22 https://doi.org/10.1016/b978-0-444-53187-2.00010-3 https://doi.org/10.1287/orsc.10.2.199 167 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 jacobs, j. (1961). the life and death of great american cities. new york: random house. kawachi, i., kennedy, b. p., lochner, k., & prothrow-stith, d. (1997). social capital, income inequality, and mortality. american journal of public health 87(9), 1491-1497. https://doi.org/10.2105/ajph.87.9.1491 knack, s. (2002). social capital and the quality of government: evidence from the states. american journal of political science 46(4), 772-785. https://doi.org/10.2307/3088433 knack, s., & keefer, p. (1997). does social capital have an economic payoff? the quaterly journal of economics 112(4), 1252-1288. https://doi.org/10.1162/003355300555475 knoke, d. (1999). organizational networks and corporate social capital. in r. leenders and s. m. gabbay (eds.),, corporate social capital and liability (pp. 17-42). boston: kluwer. https://doi.org/10.1007/978-1-4615-5027-3_2 la porta, r., lópez-de-silanes, f., schleifer, a., & vishny, r. w. (2000). trust in large organizations. in p. dasgupta, p., and i. serageldin (eds.), social capital: a multifaceted perspective (pp. 310-324). washington, d. c.: world bank. lazega, e., & pattison, p. e. (2001). social capital as social mechanisms and collective assets: the example of status auctions among colleagues. in n. lin, k. c. cook and r. s. burt (eds.),. social capital: theory and research (pp. 185-208). new york: aldine de gruyter. levi, m. (1996). social and unsocial capital: a review essay of robert putnam’s making democracy work. politics and society 24(1), 45-55. https://doi.org/10.1177/0032329296024001005 light, i., & karageorgis, s. (1994). the ethnic economy. in n. j. smelser and r. swedberg (eds.),, the handbook of economic sociology (pp. 650–677). princeton and nueva york: princeton university press. https://doi.org/10.1515/9781400835584.650 lin, n. (1999a). building a network theory of social capital. connections 22(1), 28-51. lin, n. (1999b). social networks and status attainment. american review of sociology 25(1), 467-487. https://doi.org/10.1146/annurev.soc.25.1.467 lin, n., k. s cook and r. s. burt (2001). social capital: theory and research. new jersey: transaction publishers. lin, n. (2008). a network theory of social capital. in in d. castiglione, j. w. van deth, and g. wolleb (eds.), the handbook of social capital (pp. 50-69). new york: oxford university press. loury, g, (1977). women, minorities, and employment discrimination. in p. a. wallace and a. le mund (eds.),. a dynamic theory of racial income differences, lexington.: lexington books. membiela pollán, m. (2013). capital social: glosario. el valor económico de la dimensión social. a coruña: editorial camiño do faro. membiela pollán, m. (2016). la teoría del capital social. a coruña: editorial camiño do faro. millán, r., & gordon, s. (2004). capital social: una lectura de tres perspectivas clásicas. revista mexicana de sociología 66(4), 711-747. https://doi.org/10.2307/3541414 https://doi.org/10.2105/ajph.87.9.1491 https://doi.org/10.2307/3088433 https://doi.org/10.1162/003355300555475 https://doi.org/10.1007/978-1-4615-5027-3_2 https://doi.org/10.1177/0032329296024001005 https://doi.org/10.1515/9781400835584.650 https://doi.org/10.1146/annurev.soc.25.1.467 https://doi.org/10.2307/3541414 168 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 nahapiet, j., & ghoshal, s. (1998). social capital, intellectual capital and the organizational advantage. academy of management review 23(2), 242-266. https://doi.org/10.5465/amr.1998.533225 olson, m. (1982). the rise and decline of nations. new haven: yale university press. paldam, m. (2000). social capital, one or many? definition and measurement. journal of economic surveys 14(5), 629-653. https://doi.org/10.1111/1467-6419.00127 paxton, pamela (2007). association memberships and generalized trust: a multilevel model across 31 countries. social forces 86(1), 47-76. https://doi.org/10.1353/sof.2007.0107 pena lópez, j. a., & sánchez santos, j. m. (2011). el capital social como recurso de la empresa familiar: la familiness. a coruña: netbiblo. pena lópez, j. a., & sánchez santos, j. m. (2013). el capital social individual: lo micro y lo macro en las relaciones sociales. in j. l. veira veira, desigualdad y capital social en españa (pp. 11-31). oleiros: netbiblo. pena lópez, j. a., & sánchez santos, j. m. (2017). individual social capital: accessibility and mobilization of resources embedded in social networks. social networks 49, 1-11. https://doi.org/10.1016/j.socnet.2016.11.003 pérez garcía, f. (dir.), v. montesinos, l. serrano, & fernández de guevara, j. (2005). la medición del capital social: una aproximación económica. madrid: bbva. portes, a. (1995). the economic sociology and sociology of inmigration: a conceptual review. in a. portes (ed.), essays on networks, ethnicity and entrepreneurship. nueva york: rusell sage. portes, a. (1998). social capital: its origins and applications in modern sociology. annual review of sociology 24(1), 1-24. https://doi.org/10.1146/annurev.soc.24.1.1 portes, a. (2000): the two meanings of social capital. sociological forum 15(1), 1-12. portes, a., & sensenbrenner, j. (1993). embeddedness and immigration: notes on the social determinants of economic action. american journal of sociology 98(6), 1320-1350. https://doi.org/10.1086/230191 putnam, r. (1995). bowling alone: america's declining social capital. journal of democracy 6(1), 65-78. https://doi.org/10.1353/jod.1995.0002 putnam, r. (2000). bowling alone. the collapse and revival of american community. new york: simon and schuster. putnam, r., leonardi, r., & nanetti, r. (1993). making democracy work: civic traditions in modern italy. new jersey: princeton university press. robison, l., schmid, l. j., & siles, m. e. (2002). is social capital really capital? review of social economy 60(1), 1-21. https://doi.org/10.2139/ssrn.280892 roche, m. (2004). social policy and social capital: a clear case of putting merit before method? social policy and society 3(2), 97-111. sánchez santos, j. m., & pena lópez, j. a. (2005). actividad asociativa, confianza y generación de capital social: evidencia empírica. ekonomiaz: revista vasca de economía 59, 136-159. https://doi.org/10.5465/amr.1998.533225 https://doi.org/10.1111/1467-6419.00127 https://doi.org/10.1353/sof.2007.0107 http://dialnet.unirioja.es/servlet/libro?codigo=529270 http://dialnet.unirioja.es/servlet/libro?codigo=529270 https://doi.org/10.1016/j.socnet.2016.11.003 https://doi.org/10.1146/annurev.soc.24.1.1 https://doi.org/10.1086/230191 https://doi.org/10.1353/jod.1995.0002 https://doi.org/10.2139/ssrn.280892 169 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 schiff, m. (1992). social capital, labor mobility, and welfare: the impact of uniting states. rationality and society 4(2), 157-175. https://doi.org/10.1177/1043463192004002003 serageldin, i. (1996). sustainability as opportunity and the problem of social capital. brown journal of world affairs 3(2), 187-203. sison, a. (2003). the moral capital of leaders: why virtue matters. cheltenham/northampton: edward elgar publishing. sobel, joel (2002). can we trust in social capital? journal of economic literature 40(1), 139154. https://doi.org/10.1257/0022051027001 stolle, d., & lewis, j. (2001). social capital – an emerging concept. in b. hobson, j. lewis and b. siim (eds.),, key concepts in gender and european social politics, cheltenham: edward elgar press. https://doi.org/10.4337/9781781950340.00012 szreter, s. (2002). the state of social capital: bringing back in power, politics and history. theory and society 31(5), 573-621. https://doi.org/10.1023/a:1021300217590 thomas, c. y. (1996). capital markets, financial markets and social capital. social and economic studies 45(23), 1-23. tsai, w., & ghoshal, s. (1998). social capital and value creation: the role of intrafirm networks. the academy of management journal 41(4), 464-476. https://doi.org/10.2307/257085 tocqueville, a. (1987). la democracia en américa. méxico: fondo de cultura económica. turner, j. h. (2000). the formation of social capital. in p. dasgupta and i. serageldin (eds.),. social capital: a multifaceted perspective (pp. 94–146). washington, dc: the world bank uphoff, n. (2000). understanding social capital: learning from the analysis and experience on participation. in p. dasgupta, and i. serageldin (eds.), social capital: a multifaceted perspective (pp. 215-252). washington, d. c.: world bank. uslaner, e. m. (2008). trust as a moral value. in in d. castiglione, j. w. van deth, and g. wolleb (eds.), the handbook of social capital (pp. 101-121). new york: oxford university press. van der gaag, m., & snijders, t. (2004). proposals for the measurement of individual social capital. in h. d. flap and b. völker (eds.),. creation and returns of social capital, (pp. 199218). london: routledge. van der gaag, m., & snijders, t. (2005). the resource generator: measurement of individual social capital with concrete items. social networks 27(1), 1-29. https://doi.org/10.1016/j.socnet.2004.10.001 van deth, j. w. (2008). measuring social capital. in in d. castiglione, j. w. van deth, and g. wolleb (eds.), the handbook of social capital (pp. 150-176). new york: oxford university press. volker b., & flap, h. (1996). getting ahead in the gdr: human capital and social capital in the status attainment process under communism. acta sociologica 42(1), 17-34. https://doi.org/10.1080/00016999950079925 warren, m. e. (2008). the nature and logic of bad social capital. in in d. castiglione, j. w. https://doi.org/10.1177/1043463192004002003 https://doi.org/10.1257/0022051027001 https://doi.org/10.4337/9781781950340.00012 https://doi.org/10.1023/a:1021300217590 https://doi.org/10.2307/257085 https://doi.org/10.1016/j.socnet.2004.10.001 https://doi.org/10.1080/00016999950079925 170 m. membiela-pollán and a. pena-lópez / european journal of government and economics 6(2), 146-170 van deth, and g. wolleb (eds.), the handbook of social capital (pp. 122-149). new york: oxford university press. winter, i. (2001). toward a theorized understanding of family life and social capital. working paper 21. melbourne university. wolleb, g. (2008). introduction: social capital and economic development. in in d. castiglione, j. w. van deth, and g. wolleb (eds.), the handbook of social capital (pp. 373-385). new york: oxford university press. woolcock, m. (1998). social capital and economic development: toward a theoretical synthesis and policy framework. theory and society 27(2), 151-208. https://doi.org/10.1023/a:1006884930135 woolcock, m. (2001). the place of social capital in understanding social and economic outcomes. canadian journal of policy research 2(1), 1492-1525. woolcock, m., & e. radin (2008). a relational approach to the theory and practices of economic development. in in d. castiglione, j. w. van deth, and g. wolleb (eds.), the handbook of social capital (pp. 411-437). new york: oxford university press. world bank. (21/03/2017). overview: social capital. retrieved from http://www.worldbank.org/en/webarchives/archive/ https://doi.org/10.1023/a:1006884930135 http://www.worldbank.org/en/webarchives/archive/ abstract. the concept of social capital has received increasing attention in recent years. the complexity and multidimensionality that accompany the variable of social capital have caused confusion and ambiguity. this article presents a synthesis of s... keywords. social capital; individual social capital; communitarian perspective of social capital; general trust jel classification. a14; z13 2. the concept of social capital references european journal of government and economics 12(1), june 2023, 5-38 this work is licensed under a creative commons attribution-noncommercial 4.0 international license. european journal of government and economics issn: 2254-7088 wagner’s hypothesis in europe: a causality analysis with disaggregated data ivan d trofimova * a kolej yayasan saad (kys) business school, malaysia * corresponding author at: ivan.trofimov@kysbs.edu.my abstract. this paper examines wagner hypothesis of the growth of public expenditure alongside the growth of economic activity for a panel of 28 european economies during the 1995-2018 period. the hypothesis is verified using pesaran (2007) panel unit root and westerlund (2007) cointegration tests that account for cross-sectional dependence in the series, and three panel causality tests (toda-yamamoto, dumitrescu-hurlin and juodis-karavias-sarafidis) that are suitable for mixed order of series’ integration, heterogeneous balanced panels and cases of limited evidence of cointegration. the empirical results suggested that expenditure and output variables were non-stationary in levels and stationary in the first differences; the cointegration among the variables was present; the causality was principally uni-directional (from output to public expenditure), in line with wagner’s hypothesis, or bi-directional; the causality from public expenditure to output along keynesian lines was limited. keywords. wagner’s hypothesis; panel cointegration; panel causality, europe jel codes. c23; e60; h50; n44 doi. https://doi.org/10.17979/ejge.2023.12.1.9146 1. introduction this paper empirically tests wagner’s hypothesis,1 which assumes a faster rate of growth of government expenditure (in absolute and in relative senses) than economic growth, as well as expansion of the government spending (and, more generally, activity) at the expense of private sector (wagner, 1912). the consideration of wagner’s hypothesis was diverse in terms of the definition and measurement of the public expenditure variable, the selection of independent variables in addition to gdp, the country coverage, econometric methods and tests, as well as the findings (the following section provides a cursory review of the empirical studies). in contrast to many previous studies, the focus of this paper is on the relationship between output and expenditure at both aggregate and disaggregated levels. the consideration of the aggregate level of analysis is justified by the fiscal sustainability, budget deficit and public debt problems that plague 1 in the absence of universally acceptable terms in the empirical studies, we use ‘public’ and ‘government’ expenditure terms interchangeably, and, given the conflicting findings of the empirical research, refer to wagner’s ‘hypothesis’, as opposed to wagner’s ‘law’. https://creativecommons.org/licenses/by-nc/4.0/ mailto:ivan.trofimov@kysbs.edu.my https://doi.org/10.17979/ejge.2023.12.1.9146 ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 6 the developed economies particularly strongly (koester & priesmeier, 2013): the validity of wagner’s hypothesis may provide a solid theoretical explanation of these problems (in addition to other explanatory factors). on the other hand, while wagner’s hypothesis may hold at the aggregate expenditure level, this may not necessarily be the case for the individual expenditure categories, e.g. the growth of health expenditure may exceed output growth, but the growth of expenditure on agriculture may lag behind it (as put by peacock & scott, 2000, the references to the differing pace and speed of expansion of the government may be found in wagner’s original works). additionally, the focus on the aggregate level may be unsound from an econometric perspective: rajaguru (2002) and kucukkale et al. (2012: 1-2) note the distortionary and bias-inducing effects of expenditure aggregation on cointegration and causality relationships, while granger (1988) mentions the incongruity of the unit root properties of the aggregate and component (disaggregated) series. given the specific aim of the paper (to make certain generalisations as to the validity of wagner’s hypothesis in a sufficiently large group of economies) and the lack of public expenditure data with a sufficient time series dimension (that is typically available only for a limited number of economies), we use a panel data set that covers 28 european economies over the 1995-2018 period. due to the economic and political integration that has been underway in europe since the 1950-60s, it is reasonable to assume that the panel data would be characterized by the cross-sectional dependence (stemming principally from intra-regional trade and investment flows, implementation of common economic policies, and the public expenditure decisions made at supra-national level) and thus use appropriate panel data econometric techniques. the rest of the paper is organized as follows. section 2 contains a review of the theoretical basis of wagner’s hypothesis and of the relevant empirical studies. section 3 provides the modeling framework, the data and econometric methodology, and the description of the panel data. section 4 presents the empirical results. section 5 concludes the paper, discusses the policy implications and outlines the avenues for future research. 2. theoretical framework and empirical literature certain ambiguity exists regarding the exact definition of wagner’s hypothesis, its applicability in a specific socio-economic setting and the formulation for the modelling purposes. peacock and scott (2000, pp. 2-3), based on a thorough examination of wagner’s original works, note that wagner preferred to call the concept an ‘empirical observed uniformity’ rather than law; tended to apply the concept both to the traditional services of the government (e.g. defence, law and order) and to the newer functions (welfare provision); included the expenditure by the central and local government as well as the activity of public enterprises; noted the problem of public sector expansion at the expense of the private sector growth; and conceptualised public sector growth not purely as a quantitative but also as a qualitative phenomenon (manifested in sophistication and greater extent of government regulation). ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 7 timm (1961) argued that wagner formulated the hypothesis for the analysis of the 19th-century governments but did not restrict the applicability of the concept, stating that government size would grow and involvement would extend as long as “cultural and economic progress” continues. thus, the hypothesis may be equally applicable to the economies at the early stage of capitalist development (as were european economies in the 19th century), and to other economies at various development stages.2 the public expenditure growth at a faster rate than economic growth has been attributed to a number of objective factors. firstly, the industrialisation, production on a large scale, and application of science and technology necessitate the accompanying growth of the organising force, embodied in government and manifested in greater spending (north & wallis, 1982, pp. 336; oxley, 1994, pp. 287). secondly, in contrast to the earlier epochs (e.g. 18th and 19th centuries, when the role of the government was restricted to the provision of public order, law and basic services), the 20th century witnessed much broader roles of the government. the popularity of socialist ideas and the accompanying class struggle, the rise of central or indicative planning (along with socialist economic doctrine), the two world wars and the cold war, the failures of the capitalist economies at certain junctures (e.g. great depression), led to greater public expenditure in such areas as welfare, education, health, and defense. thirdly, the sophistication of economic activity and transactions, and scientific and technological progress required greater regulation and oversight by the government in such functional areas as the design and implementation of legislation, improvement of economic and political institutions, consumer protection from monopolies, prevention of unfair competition, and also justified greater spending to support scientific and technological capability. the economic theory provides a number of explanations behind wagner’s hypothesis. the demand for education, health, social protection has high-income elasticity, hence the expenditure in these categories is more likely to conform to wagner’s predictions. public spending is an outcome of a public decision making process that is subject to influence by vested interests and special interest groups through their lobbying effort, bringing the expansion of the government size and greater public spending in a number of categories (mueller, 1987). the relative cost of government services may rise over time, resulting in spending growth in nominal terms (baumol, 1967). lastly, as stated by the bureaucracy theory of the government, the proliferation of the policies and the growth of spending (frequently at the expense of economic efficiency) result from the immanent features of bureaucracy and bureaucratic concerns that may be summarized as striving for power and prestige, policy and position preservation, and expansion of the bureaucratic apparatus (niskanen, 1971; oxley, 1994, pp. 286). an alternative hypothesis of reverse causality that runs from government expenditure to output is rooted in keynesian economics and is also supported by other lines of economic theory. in the shortrun, during the cyclical downswing, the increase in government expenditure may stimulate output, provided that there exists idle capacity and the economy is below the potential output (ray & pal, 2022). this view was challenged in a number of studies: while the causality originating from government expenditure may be present, the effects on output may be negative. barro (1991) notes the inefficiencies that are caused by the public sector expansion and that potentially slowdown economic 2 an alternative argument is the exclusive applicability of wagner’s hypothesis to the society that undergo rapid industrialisation, and not to the preor post-industrial social settings (jaen garcia, 2004, p. 13). ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 8 growth. tobin (2005) argues that the strength and sign of the expenditure-output effect hinges on the specific role of the state as a modernisation agent (as opposed to a product of vested interests and political pressures, or a source of bureaucratic failure and slack). the positive effects of expenditure on output are, therefore, not guaranteed. the empirical testing of wagner’s hypothesis was diverse in many respects. with regard to the definition of government expenditure, the empirical studies chose between the nominal and real expenditure values (for instance, gandhi, 1971, and lin, 1995, are examples of the study that used expenditure in current prices, while bohl, 1996, is the study that defined expenditure in constant prices). in a number of studies, the defence expenditure was excluded to isolate the expenditure-output relationships in a civil economy (abizadeh, gray, 1985). the empirical research focused on both the expenditure by the central government (mann, 1980) and the spending at sub-national level (e.g. narayan et al, 2012 in the study of wagner’s hypothesis for a group of indian states), but tended, in the absence of disaggregated expenditure data, to examine the aggregate expenditure (few studies, such as the analysis of the hypothesis in canada by biswal et al, 1999, stand as exception). regarding the selection of regressors, the following variables were used in addition to gdp (per capita): the sectoral shares of output to account for structural influences on ‘expenditure-output’ nexus (mann, 1980), the values of exports and imports to account for external economy influences of government spending decisions (abizadeh, gray, 1985); permanent income and deviation of current demand from the trend (courakis et al, 1993); country size and population density (alesina, wacziarg, 1998; dao, 1995). in terms of geographic coverage, a large number of studies focused on a single economy: wagner’s hypothesis in usa (islam, 2001), spain (jaen garcia, 2004), italy (magazzino, 2012), canada (ahsan et al, 1996), egypt (ghazy et al, 2021), among others. selected studies looked at regional or level of development groups (developing economies by diamond, 1977; 14 european economies by afonso, alves, 2017), economies with specific characteristics (e.g. the study of the hypothesis for petroleum exporters, where oil export revenues constitute a major source of government revenue and thus influence fiscal policy significantly, burney, 2002), or random sets of economies (e.g. the comparative study of spain and armenia by sedrakyan and varela-candamio, 2019; or of the three african economies, ansari et al, 1997). in terms of econometric methods and tests, the earlier studies tended to rely on descriptive statistics analysis (bairam, 1992), the use of linear regression (lin, 1995), or specification of the simultaneous equation models for the demand and supply of public expenditure (dollery, singh, 2000). such methods suffered from the ‘spurious regression’ and identification problems and ignored the non-stationarity of the time series. to address these problems, a more recent empirical analysis started to utilise cointegration and causality tests (oxley, 1994; legrenzi, 2000), vector autoregression models (benavides et al, 2013), panel data techniques (afonso, jalles, 2014), or non-linear models (karagianni, pempetzoglou, 2009). the empirical research delivered conflicting results. a number of studies indicated the absence of causality between expenditure and gdp in either direction (huang, 2006; sinha, 2007). the unidirectional causality that supports wagner’s hypothesis was identified in the studies by courakis et ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 9 al (1993), tang (2001), chang et al (2004), jaen garcia (2004), sideris (2007), lamartina and zaghini (2011) and, in selected specifications, benavides et al (2013). the causality along keynesian lines was demonstrated by iyare and lorde (2004) and babatunde (2011). the bi-directional causality was indicated by narayan et al (2008), ziramba (2009), and yay and tastan (2009). given a variety of empirical outcomes in the studies that focused at aggregate expenditure and individual economies (or narrow groups of economies), it is advantageous to consider the specific expenditure categories and a broader panel that encompassed the maximum possible number of countries. 3. methodology model following loizides and vamvoukas (2005), a bivariate representation of wagner’s hypothesis is used, with no inclusion of additional variables. the five specifications of the hypothesis suggested by peacock and wiseman (1979), mann (1980), musgrave (1969), gupta (1967), and goffman (1968) were considered: specification 1 ln ln tg yα β ε= + + (1) specification 2 ln( ) ln tg y yα χ ε= + + (2) specification 3 ln( ) ln( ) tg y y pα δ ε= + + (3) specification 4 ln( ) ln( ) tg p y pα φ ε= + + (4) specification 5 ln ln( ) tg y pα ϕ ε= + + , (5) where g , y and p respectively represent government, expenditure, real gdp and population. it is assumed that causality runs from the right to the left-hand side of the above equations under wagner’s hypothesis, and in the opposite direction under keynesian hypothesis. data the paper uses the gdp and public expenditure data released by eurostat. both gdp and expenditure were represented in millions of euro in chain-linked volume measures of gdp (with the base of the chain-linked volume index set at 2010). the constructed panel dataset used in the empirical analysis covered 1995-2018 period and included 28 european economies: austria, belgium, bulgaria, cyprus, czech republic, denmark, estonia, finland, france, germany, greece, hungary, ireland, italy, latvia, lithuania, luxembourg, netherlands, norway, poland, portugal, romania, slovakia, slovenia, spain, ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 10 sweden, switzerland, and the uk. the public expenditure categories followed classification of the function of the government (cofog), version 1999 (oecd, 2011, pp. 194-5). in addition to total expenditure, the following expenditure categories are delineated: defence; economic affairs; education; environmental protection; general public services; health; housing and community amenities; public order and safety; recreation, culture and religion; social protection. econometric methods initially, we examine the integration order and the unit root properties of the expenditure and output. there is a possibility of cross-sectional dependence in the series (the correlation of the panel members in the cross-section due to various unobserved common factors, such as policy and political integration or policy learning). as a result, we conduct pesaran (2004, 2015) cross-sectional dependence test that is flexible with regard to panel data structure (specifically when time series dimension is smaller than cross-sectional dimension, t n< ), and pesaran (2007) cross-sectionally augmented ips test (cips) that is robust to the cross-sectional correlation (in lieu of the first-generation panel unit root tests that ignore the phenomenon). for the variables that have (1)i integration order and contain unit roots, we consider the possibility of cointegration and conduct westerlund panel cointegration tests (westerlund, 2007). westerlund test tackles cross-sectional dependence, removes common factor restriction, and specifies the errorcorrection model as follows (persyn& westerlund, 2008, pp. 233): ( )1 1 1 1 i i i p p it i t i it it ij it ij it j it j j q y d y z y zδ α β α γ ε− − − − = =− ′ ′∆ = + − + ∆ + ∆ +∑ ∑ , (6) where td is a deterministic component, and iα is a coefficient that measures the speed at which the system returns to the equilibrium ( 1 1it ity zβ− −′− ). the null hypothesis is of the absence of error-correction and cointegration ( 0iα = for all i ); an alternative hypothesis is of the presence of error correction and cointegration for some of i , or all i ’s ( 0iα < in the test’s group-mean statistics or 0iα α= < in the panel statistics). as a next step, in order to ascertain causality between public expenditure and output, we employed toda-yamamoto (ty) causality test (toda & yamamoto, 1995). the test is applicable for the situations when the variables have different order of integration, for instance, the combination of (0)i and (1)i order (the data characteristic that renders the conventional granger causality test unreliable), or when the cointegration tests give conflicting indications. the ty test is invariant to the integration orders (allows any combination of the orders) and is valid irrespective of the presence or absence of cointegration. implementation-wise, the ty test establishes the maximum integration order of the series, maxd , uses it in the estimation of the augmented var model in levels (where the optimal lag ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 11 order is determined using the conventional lag selection criteria, and the selected lag for each variable is increased by maxd ) and constructs modified wald ( mwald ) statistics to confirm causality (similarly to the conventional granger causality test). the inclusion of lags is necessary, due to the delayed (not instantaneous) effects of gdp on government expenditure. for the case of public expenditure-output relationship, the augmented var model is represented as: max max 0 1 1 1 1 1 1 1 1 1 d dk k t i t i i t j i t j i t j t i j k j j k y y y x xα φ ϕ γ λ ε− − − − = = + = = + = + + + + +∑ ∑ ∑ ∑ (7) max max 1 2 2 2 2 2 1 1 1 1 d dk k t i t i i t j i t j i t j t i j k j j k x x x y yα φ ϕ γ λ ε− − − − = = + = = + = + + + + +∑ ∑ ∑ ∑ (8) the causality in the sense of granger from x to y in equation (7) exists when 1 0iγ ≠ , i∀ , and the like causality from y to x in equation (8) is present when 2 0iγ ≠ , i∀ . for the purpose of robustness check, we conducted dumitrescu-hurlin (2012) test of causality in a panel of stationary data (i.e. to implement the test the (1)i variable were converted to the first difference form). the estimated coefficients are time-invariant but are allowed to differ across the panel members (the test is thus suitable for heterogeneous balanced panels, lopez & weber, 2017, pp. 3-4). the lag order ( k ) that is uniform across panel members is determined using the usual information criteria, with the first maxk eliminated during the lag selection process. for the case of two stationary variables, the dumitrescu-hurlin model is set as (lopez& weber, 2017, pp. 3-4): 1 1 k k it i ik it k ik it k it k k x x yα δ γ ε− − = = = + + +∑ ∑ , (9) for 1, ,i n=  and 1, ,t t=  . the null hypothesis is of no causality for any cross-sections in the panel: 0 1: 0i ikh γ γ= = = for 1, ,i n∀ =  (10) under an alternative hypothesis the causality in some of the cross-sections is allowed: 1: 0a i ikh γ γ= = = for 11, ,i n∀ =  and (11) 1 0iγ ≠ or  0ikγ ≠ for 1 1, ,i n n∀ = +  (12) for each i , the wald test is conducted for the hypothesis 0ikγ = and the wald test statistics for each panel member and the aggregate panel are obtained as: ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 12 itw and 1 1 n it i w n w = = ∑ (13) as a last step the standardized z and z statistics are calculated: ( ) , (0,1)2 d t n n z w k k →∞ = − →ν and (14) 3 5 3 3 (0,1) 2 2 3 3 1 d n n t k t k z w k n k t k t k →∞ − − − −  = ⋅ ⋅ ⋅ − → − − − −   (15) as a last step we perform the causality test proposed by juodis et al. (2021). in contrast to dumitrescu-hurlin test that has the highest power with large t dimension and 2/n t approaching zero, it is suitable for the panels with a moderate time series dimension. the test performs well in both homogeneous and heterogeneous panels, assumes that granger causality parameters are equal to zero under the null, and thus allows using pooled estimator for granger causality parameters (xiao et al., 2021, p. 4). the pooled estimators have faster rate of convergence while at the same time suffering from the ‘nickel bias’, the problem corrected in the test using the half-panel jackknife method (xiao et al., 2021, p. 3). the test equation is given as (xiao et al., 2021, p. 3): 0 1 1 p p it i pi it p pi it p it p p x x yφ φ γ ε− − = = = + + +∑ ∑ , (16) where 1, ,i n=  , 1, ,t t=  , 1, ,p p=  , 0iφ are individual specific effects, piφ are heterogeneous autoregressive coefficients, and piγ are heterogeneous feedback coefficients. ity is assumed to be a scalar. the null hypothesis assumes the absence of granger causality 0 : 0pih γ = for all i and p , while the alternative hypothesis assumes that 0piγ ≠ for some i and p . 4. empirical results figure 1 (appendix) shows the dynamics of cross-sectional means of gdp and expenditure series. both gdp and gdp per capita exhibited an upward trend throughout the period (with the exception of the global financial crisis / gfc years of 2008-09). with regard to absolute values of expenditures, the upward trend during the whole period (1995-2018) was observed for the total, education, health, public order and safety, social protection and recreation, culture and religion categories, while other categories were characterised by stabilisation of expenditure (economic affairs, general public services, and environmental protection), decline (defence and housing and community amenities) in the post-gfc years. the expenditure shares of gdp did not follow any specific trend (possibly with the exception of defence, and general public services). for the expenditure per capita, the deterministic patterns were observed only for education, health, public order and safety, social protection and recreation, culture and religion categories. the visual inspection is supplemented for formal unit root tests; the former method is deemed misleading (cuddington et al, 2002: 21). ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 13 as demonstrated in table 1, according to the pesaran 2004 and 2015 tests, the null hypotheses of cross-sectional independence and weak dependence were respectively rejected: each of the variables in question was found to be characterised by strong cross-sectional correlation. the pattern is not unusual, given the high degree of economic and political integration in europe: the previous research indicated convergence in public expenditure across european economies (apergis et al., 2013) and also highlighted gdp and business cycle comovement in the region (azcona, 2022). the incorporation of the cross-sectional dependence into unit root and cointegration tests is therefore warranted. the results of the pesaran cadf unit root test are presented in table 1. the test was implemented with a trend component in order to account for the growth of public expenditure and gdp in the longrun. the test was also run on the levels and the first differences of the variables in order to determine the integration order of the variables, which is instrumental for toda-yamamoto causality test (that requires the knowledge of the maximum order of integration). the test indicates that gdp and gdp per capita variables were trend stationary in both levels and the first differences (in the latter case at 5% and 10% significance levels), and are thus (0)i order variables. all other variables in the level form contained unit root and the test’ null hypothesis was not rejected (the exceptions were the absolute level of total, education, health, public order and safety, environmental protection and housing and community amenities expenditure; the per capita expenditure on education, public order and safety; and the public expenditure as a proportion of gdp in general public services and environmental protection). in the first difference form, all expenditure variables were trend stationary at 5% level (social protection expenditure as a proportion of gdp at 10% level). overall, we conclude that the variables are the mix of (0)i and (1)i order of integration, and the maximum order is (1)i . the westerlund cointegration test was implemented with a maximum of two lags, one lead and a short kernel window of two (in line with recommendations for panels with small time-series dimension, persyn & westerlund, 2008) for each of the five specifications of wagner’s hypothesis. alternative laglead and kernel width combinations were also tried, yielding rather similar results (results available ob request). a total of 220 test statistics were obtained: four statistics, ( tg , ag , tp and ap ) for five specifications (peacock-wiseman, mann, musgrave, gupta and goffman), and 11 expenditure categories. the test failed to reject the null hypothesis of no cointegration in 41 instances (i.e. by 41 statistics), thus suggesting that overall the public expenditure and gdp were cointegrated. the greatest number of non-rejections was indicated in the social protection expenditure category, suggesting that a long-term equilibrium relationship between public expenditure and gdp was less likely in this category. out of four westerlund test statistics, the greatest number of non-rejections of the null was indicated for the ag statistics. out of five specifications, mann and musgrave models (specifications 2 and 3) gave somewhat weaker support for cointegration. while the evidence of cointegration relationships is generally strong, we relied on toda-yamamoto causality test that is invariant to the presence of the long-run equilibrium relationship and the (non-) stationarity of the variables. the pesaran cadf unit root test unequivocally indicated the highest order of integration of one. the optimal lag length for the test was selected based on a combination of information criteria (akaike, schwarz-bayesian and hannan-quinn). given that the too-short lag length ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 14 causes bias, while longer than optimal lag length results in test’ inefficiency (caporale & pittis, 1999; ayad & belmokaddem, 2017) we considered alternative lag structures and, where applicable, reported the results with the highest and the second highest lag length. the toda-yamamoto test was run for 100 cases (given five possible specifications of wagner’s hypothesis and alternative lag structures for the test). the causality running unidirectionally from public expenditure to gdp was not indicated in a single case, while bi-directional causality was noted in 37 cases (table 3). no causality in either direction was demonstrated in 14 cases, while causality from gdp to public expenditure in line with wagner’s hypothesis was shown in 49 cases. overall, toda-yamamoto test does not support the keynesian hypothesis of the uni-directional influence of public expenditure on gdp. as part of the robustness check, we conducted dumitrescu-hurlin causality test on each specification, with variables expressed as first-differences. the optimal lag length was determined by bayesian-schwarz criterion from a maximum of eight lags, and in all cases was found to be one. table 4 contains an asymptotically well-behaved average wald statistics ( w ), the standardised z and approximated standardised z statistics that follow normal distribution (the latter used for the panels with fixed time-series dimension), together with the respective p-values. we note that in a number of instances z and z statistics gave conflicting results; however, based on z , the test rejected the null hypothesis that public expenditure does not granger-cause gdp only in five cases (three specifications for the general public services category, and two specifications for the defence category). in contrast, the null hypothesis that gdp does not granger-cause public expenditure was rejected in a total of 26 cases, while bi-directional causality was indicated in 7 cases. lastly, given the relatively short n and t dimensions of the panel, we implemented the biascorrected granger causality test proposed by xiao et al. (2021). the test was run on the first differences of the series with optimal lag selected based on bayesian-schwarz criterion (similarly to the previous test, in all cases, the optimal lag length stood at one). the results are presented in table 5: the halfpanel jackknife (hpj) wald test statistics and the estimator, both with the respective p-values. the test rejected the null of no unidirectional causality from gdp to public expenditure in a total of 29 out of 55 cases, but rejected the null of no unidirectional causality from public expenditure to gdp in only 2 cases (mann and musgrave specifications for the public order and safety category). the bi-directional causality was indicated in 11 cases. robustness checks in addition to causality testing, the study has experimented with cross-sectional analysis of the data. for each year of the period (1995-2018), the cross-sectional average was calculated for each output and expenditure variable. the wagner’s hypothesis was then verified through the significance of the coefficient in the regression that includes expenditure as independent variable and gdp (output) as regressor. table 6 in the appendix demonstrates the coefficient significance in most expenditure categories in specifications 1 and 4, in the majority of categories in specification 5, and in many categories in other specifications. ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 15 the toda-yamamoto causality results were consistent over time. two checks that capture the effect of the business cycle on the causality and that distinguish causality in the expansion and downturn were implemented. the first check introduced the cyclical dummy variable in the toda-yamamoto relationship (the dummy takes the value one when gdp has negative growth and zero value when the growth rate is positive). as indicated in table 7 in the appendix, the inclusion of the dummy variable did not alter the results substantially, with bi-directional causality replacing wagner hypothesis causality in few categories (specifications) and vice versa. importantly, the keynesian-type causality from expenditure to output was not identified in any of the cases, similar to the baseline model. the second check included the specification of output in expansionary and recessionary stages (the calculation of the growth rate of gdp, the separation of instances of positive and negative growth, and calculation of the cumulative sums of positive and negative growth). the check was performed for specification 1, for the whole period and the two sub-periods prior to and after gfc (the maximum lags were tried only for the whole period, given a limited number of observations in the sub-periods). for the whole period, bidirectional causality was identified in 10 out of 40 cases, while wagner type causality was observed in 25 cases (table 8 in the appendix). for the post-gfc period, the number of wagner type causality cases stood at 11 out of 22, and for the pre-gfc period at 9 out of 22. bi-directional or no causality were observed in other instances. keynesian causality was identified only in two instances in pre-gfc period, however at higher lags this causality does not hold. overall, the robustness checks give results that are very similar to the baseline model. ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 16 table 1. pesaran cd test and cadf test results. expenditure area variable pesaran (2004) cd test pesaran (2015) cd test cadf (trend, levels) cadf (trend, first differences) stat p-value stat p-value stat p-value stat p-value gdp y 95.240 0.000 85.585 0.000 -3.124 0.000 -2.629 0.035 gdp per capita y/p 95.232 0.000 81.140 0.000 -3.080 0.000 -2.583 0.060 total g/y 95.214 0.000 24.075 0.000 -2.693 0.015 -3.424 0.000 total g/p 95.229 0.000 52.590 0.000 -2.789 0.003 -3.642 0.000 total g 95.236 0.000 83.761 0.000 -2.847 0.001 -3.880 0.000 economic affairs g/y 93.318 0.000 8.802 0.000 -2.523 0.113 -4.011 0.000 economic affairs g/p 95.131 0.000 14.079 0.000 -2.512 0.126 -3.906 0.000 economic affairs g 95.175 0.000 34.250 0.000 -2.698 0.014 -4.003 0.000 defense g/y 33.609 0.000 27.440 0.000 -2.286 0.555 -3.846 0.000 defense g/p 95.057 0.000 8.194 0.000 -2.379 0.348 -4.086 0.000 defense g 95.124 0.000 5.827 0.000 -2.598 0.051 -4.141 0.000 education g/y 95.045 0.000 16.610 0.000 -2.262 0.608 -3.588 0.000 education g/p 95.208 0.000 48.748 0.000 -2.844 0.001 -3.461 0.000 education g 95.228 0.000 71.561 0.000 -2.997 0.000 -3.652 0.000 health g/y 94.694 0.000 46.563 0.000 -2.572 0.068 -3.110 0.000 health g/p 95.188 0.000 76.444 0.000 -2.634 0.033 -3.166 0.000 health g 95.214 0.000 82.476 0.000 -2.940 0.000 -3.431 0.000 public order and safety g/y 64.675 0.000 4.521 0.000 -2.331 0.452 -3.263 0.000 public order and safety g/p 95.177 0.000 51.373 0.000 -2.825 0.002 -3.436 0.000 public order and safety g 95.203 0.000 70.858 0.000 -3.029 0.000 -3.762 0.000 social protection g/y 95.121 0.000 27.647 0.000 -2.064 0.919 -2.584 0.060 social protection g/p 95.220 0.000 70.212 0.000 -2.183 0.765 -2.911 0.000 social protection g 95.230 0.000 88.382 0.000 -1.948 0.980 -2.752 0.006 general public services g/y 94.471 0.000 29.048 0.000 -2.989 0.000 -3.819 0.000 general public services g/p 95.166 0.000 1.752 0.080 -2.545 0.090 -3.478 0.000 general public services g 95.201 0.000 17.338 0.000 -2.606 0.046 -3.539 0.000 environmental protection g/y 42.025 0.000 5.969 0.000 -2.815 0.002 -3.851 0.000 environmental protection g/p 94.405 0.000 21.722 0.000 -2.762 0.005 -3.563 0.000 environmental protection g 94.859 0.000 40.309 0.000 -2.840 0.001 -3.910 0.000 recreation, culture, religion g/y 9.367 0.000 8.040 0.000 -2.278 0.572 -3.388 0.000 recreation, culture, religion g/p 95.066 0.000 36.176 0.000 -2.556 0.080 -3.372 0.000 recreation, culture, religion g 95.164 0.000 57.551 0.000 -2.707 0.012 -3.421 0.000 housing and community amenities g/y 29.495 0.000 18.457 0.000 -2.757 0.005 -3.740 0.000 housing and community amenities g/p 94.292 0.000 5.234 0.000 -2.735 0.008 -3.860 0.000 housing and community amenities g 94.905 0.000 6.287 0.000 -2.868 0.001 -3.736 0.000 note. all variables are in the logarithm form. the pesaran cadf test critical values at 10%, 5% and 1% levels are -2.580, -2.660, and -2.810 respectively. ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 17 table 2. westerlund cointegration test results. expenditure area variable specification 1 specification 2 specification 3 specification 4 specification 5 peacock-wiseman mann musgrave gupta goffman d(g) d(y) d(g/y) d(y) d(g/y) d(y/p) d(g/p) d(y/p) d(g) d(y/p) total gt -3.147 0.000 -3.147 0.000 -3.108 0.000 -2.593 0.000 -2.874 0.000 ga -12.747 0.000 -6.083 0.848 -6.272 0.801 -8.719 0.063 -11.625 0.000 pt -15.051 0.000 -14.431 0.000 -14.502 0.000 -14.359 0.000 -13.517 0.000 pa -10.429 0.000 -5.479 0.068 -5.531 0.061 -9.286 0.000 -8.156 0.000 education gt -2.385 0.000 -2.385 0.000 -2.532 0.000 -2.251 0.003 -2.235 0.004 ga -10.305 0.001 -5.272 0.966 -5.993 0.868 -10.102 0.002 -8.833 0.050 pt -10.370 0.003 -10.191 0.006 -11.235 0.000 -10.849 0.001 -11.435 0.000 pa -8.331 0.000 -5.207 0.122 -5.845 0.027 -8.976 0.000 -7.918 0.000 economic affairs gt -2.636 0.000 -2.636 0.000 -2.640 0.000 -2.676 0.000 -2.646 0.000 ga -11.200 0.000 -9.484 0.011 -10.038 0.002 -11.439 0.000 -10.633 0.000 pt -15.750 0.000 -15.670 0.000 -15.946 0.000 -15.404 0.000 -15.369 0.000 pa -11.689 0.000 -11.182 0.000 -11.605 0.000 -12.243 0.000 -10.838 0.000 defense gt -2.324 0.000 -2.324 0.001 -2.228 0.004 -2.153 0.014 -2.185 0.008 ga -6.541 0.721 -7.666 0.305 -7.063 0.531 -6.815 0.625 -6.973 0.566 pt -11.095 0.000 -11.142 0.000 -11.014 0.000 -10.213 0.005 -10.457 0.003 pa -7.071 0.000 -6.982 0.001 -6.848 0.001 -6.220 0.009 -6.608 0.002 health gt -3.021 0.000 -3.021 0.000 -3.041 0.000 -2.597 0.000 -2.744 0.000 ga -15.795 0.000 -7.471 0.375 -6.924 0.584 -11.931 0.000 -12.402 0.000 pt -14.370 0.000 -12.472 0.000 -12.773 0.000 -13.233 0.000 -13.933 0.000 pa -13.334 0.000 -9.349 0.000 -8.813 0.000 -10.820 0.000 -11.121 0.000 social protection gt -2.630 0.000 -2.630 0.000 -2.522 0.000 -2.408 0.000 -2.489 0.000 ga -6.039 0.858 -2.905 1.000 -2.841 1.000 -6.099 0.845 -5.663 0.925 pt -10.889 0.001 -9.029 0.084 -8.594 0.174 -11.481 0.000 -10.817 0.001 pa -6.109 0.013 -3.283 0.871 -2.876 0.947 -5.033 0.169 -4.681 0.296 ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 18 table 2. (cont). public order and safety gt -2.593 0.000 -2.593 0.000 -2.566 0.000 -2.089 0.034 -2.618 0.000 ga -9.733 0.006 -7.253 0.457 -7.390 0.405 -7.565 0.341 -9.064 0.031 pt -12.577 0.000 -13.962 0.000 -13.940 0.000 -11.949 0.000 -12.971 0.000 pa -7.873 0.000 -7.909 0.000 -7.641 0.000 -6.629 0.002 -7.326 0.000 general public services gt -2.369 0.000 -2.369 0.000 -2.192 0.007 -2.113 0.024 -2.178 0.009 ga -7.489 0.368 -6.942 0.577 -5.688 0.921 -7.175 0.487 -6.468 0.744 pt -12.926 0.000 -12.820 0.000 -12.971 0.000 -12.342 0.000 -12.845 0.000 pa -8.278 0.000 -7.714 0.000 -7.800 0.000 -8.006 0.000 -8.067 0.000 environmental protection gt -2.339 0.001 -2.339 0.001 -2.464 0.000 -2.357 0.000 -2.608 0.000 ga -8.991 0.036 -8.058 0.187 -8.336 0.123 -8.523 0.090 -9.969 0.003 pt -11.330 0.000 -11.317 0.000 -10.769 0.001 -12.300 0.000 -11.051 0.000 pa -7.516 0.000 -6.883 0.001 -6.393 0.005 -8.480 0.000 -7.053 0.000 recreation, culture, religion gt -2.001 0.094 -2.001 0.094 -2.103 0.028 -1.862 0.310 -2.278 0.002 ga -8.151 0.164 -5.426 0.952 -5.975 0.872 -7.149 0.497 -8.488 0.096 pt -10.135 0.006 -10.099 0.007 -10.134 0.006 -9.094 0.075 -10.454 0.003 pa -7.613 0.000 -6.229 0.009 -6.541 0.003 -5.995 0.018 -7.857 0.000 housing and community amenities gt -2.862 0.000 -2.862 0.000 -2.615 0.000 -2.588 0.000 -2.848 0.000 ga -8.446 0.103 -8.193 0.154 -8.154 0.163 -7.591 0.331 -8.551 0.085 pt -12.283 0.000 -12.329 0.000 -11.711 0.000 -13.035 0.000 -12.140 0.000 pa -8.131 0.000 -7.855 0.000 -7.664 0.000 -9.089 0.000 -8.204 0.000 note. the statistics in bold indicates non-rejection of the null hypothesis. ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 19 table 3. toda-yamamoto panel causality test results expenditure area specification 1 specification 2 specification 3 specification 4 specification 5 peacock-wiseman mann musgrave gupta goffman d(g) d(y) d(y) d(g/y) d(y) d(y) d(g/y) d(g/y) d(y/p) d(y/p) d(g/y) d(g/p) d(y/p) d(y/p) d(g/p) d(g) d(y/p) d(y/p) d(g) 1 chi square 123.284 27.356 45.688 27.356 40.079 24.389 33.964 0.281 86.866 28.584 prob 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.869 0.000 0.000 lag 4 4 4 4 4 4 2 2 4 4 bi-directional bi-directional bi-directional bi-directional bi-directional chi square 133.328 23.566 54.452 23.566 48.766 23.720 68.708 13.088 98.053 24.664 prob 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.011 0.000 0.000 lag 5 5 5 5 5 5 4 4 5 5 bi-directional bi-directional bi-directional bi-directional bi-directional 2 chi square 40.058 10.212 31.179 10.212 31.835 10.133 31.660 7.525 29.158 16.343 prob 0.000 0.037 0.000 0.037 0.000 0.038 0.000 0.111 0.000 0.003 lag 4 4 4 4 4 4 4 4 4 4 bi-directional bi-directional bi-directional y→g bi-directional 3 chi square 15.608 1.191 5.734 1.191 5.491 1.451 12.011 3.187 13.582 1.351 prob 0.001 0.755 0.125 0.755 0.139 0.694 0.003 0.203 0.004 0.717 lag 3 3 3 3 3 3 2 2 3 3 y→g no causality no causality y→g y→g chi square 39.619 9.280 35.848 9.280 34.014 11.722 10.529 2.748 38.216 10.650 prob 0.000 0.233 0.000 0.233 0.000 0.110 0.015 0.432 0.000 0.222 lag 7 7 7 7 7 7 3 3 8 8 y→g y→g y→g y→g y→g 4 chi square 106.126 0.847 18.663 0.847 18.242 1.757 83.357 5.503 76.628 1.211 prob 0.000 0.932 0.001 0.932 0.001 0.780 0.000 0.139 0.000 0.876 lag 4 4 4 4 4 4 3 3 4 4 y→g y→g y→g y→g y→g chi square 65.742 1.974 prob 0.000 0.741 lag 4 4 y→g ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 20 table 3. (cont). 5 chi square 116.408 11.018 38.008 11.018 32.330 10.884 61.118 10.971 97.801 11.314 prob 0.000 0.026 0.000 0.026 0.000 0.028 0.000 0.027 0.000 0.023 lag 4 4 4 4 4 4 4 4 4 4 bi-directional bi-directional bi-directional bi-directional bi-directional chi square 99.358 21.883 50.920 21.883 38.204 12.770 63.230 15.889 71.674 12.500 prob 0.000 0.005 0.000 0.005 0.000 0.047 0.000 0.044 0.000 0.052 lag 8 8 8 8 6 6 8 8 6 6 bi-directional bi-directional bi-directional bi-directional bi-directional 6 chi square 24.435 0.384 0.575 0.384 7.317 0.735 18.662 0.013 9.018 0.258 prob 0.000 0.825 0.750 0.825 0.026 0.692 0.000 0.994 0.011 0.879 lag 2 2 2 2 2 2 2 2 2 2 y→g no causality y→g y→g y→g chi square 50.145 4.343 10.492 4.343 5.750 7.161 34.687 4.209 33.511 4.038 prob 0.000 0.362 0.033 0.362 0.219 0.128 0.000 0.520 0.000 0.401 lag 4 4 4 4 4 4 5 5 4 4 y→g y→g no causality y→g y→g 7 chi square 107.205 10.899 13.445 10.899 26.908 10.355 75.663 5.104 123.616 16.208 prob 0.000 0.012 0.004 0.012 0.000 0.066 0.000 0.403 0.000 0.006 lag 3 3 3 3 5 5 5 5 5 5 bi-directional bi-directional bi-directional y→g bi-directional chi square 155.005 12.198 32.839 12.198 9.300 10.229 50.810 1.501 88.522 14.007 prob 0.000 0.032 0.000 0.032 0.026 0.017 0.000 0.682 0.000 0.003 lag 5 5 5 5 3 3 3 3 3 3 bi-directional bi-directional bi-directional y→g bi-directional 8 chi square 1.720 1.124 23.417 1.124 25.006 0.831 2.024 0.612 1.484 0.838 prob 0.423 0.570 0.000 0.570 0.000 0.660 0.363 0.737 0.476 0.658 lag 2 2 2 2 2 2 2 2 2 2 no causality y→g y→g no causality no causality chi square 2.611 5.814 13.948 5.814 15.238 4.550 1.289 2.225 2.615 4.468 prob 0.456 0.121 0.003 0.121 0.002 0.208 0.732 0.527 0.455 0.215 lag 3 3 3 3 3 3 3 3 3 3 no causality y→g y→g no causality no causality ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 21 table 3. (cont). 9 chi square 17.189 0.301 2.176 0.301 1.408 0.370 18.387 0.912 13.608 0.074 prob 0.000 0.861 0.337 0.861 0.495 0.831 0.000 0.634 0.001 0.964 lag 2 2 2 2 2 2 2 2 2 2 y→g no causality no causality y→g y→g chi square 18.435 1.259 3.333 1.259 2.346 2.023 8.614 3.022 15.974 24.433 prob 0.000 0.739 0.343 0.739 0.504 0.568 0.035 0.388 0.007 0.000 lag 3 3 3 3 3 3 3 3 5 5 y→g no causality no causality y→g bi-directional 10 chi square 39.510 1.100 15.197 1.100 15.293 1.029 36.183 0.832 33.692 1.501 prob 0.000 0.577 0.001 0.577 0.001 0.598 0.000 0.660 0.000 0.472 lag 2 2 2 2 2 2 2 2 2 2 y→g y→g y→g y→g y→g chi square 39.449 6.960 11.257 6.960 11.097 7.227 45.733 1.348 32.579 9.442 prob 0.000 0.138 0.024 0.138 0.026 0.124 0.000 0.718 0.000 0.051 lag 4 4 4 4 4 4 3 3 4 4 y→g y→g y→g y→g bi-directional 11 chi square 29.725 3.015 15.849 3.015 14.745 6.003 8.567 17.115 22.147 8.894 prob 0.000 0.389 0.001 0.389 0.002 0.111 0.036 0.001 0.000 0.031 lag 3 3 3 3 3 3 3 3 3 3 y→g y→g y→g bi-directional bi-directional chi square 25.658 2.969 11.814 2.969 10.254 7.086 17.014 8.491 prob 0.000 0.563 0.019 0.563 0.036 0.131 0.002 0.075 lag 4 4 4 4 4 4 4 4 y→g y→g y→g bi-directional note. the expenditure area numbers represent respectively: total expenditure (1), economic affairs (2), defense (3), education (4), health (5), public order and safety (6), social protection (7), general public services (8), environmental protection (9), recreation, culture, religion (10), and housing and community amenities (11). ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 22 table 4. dumitrescu-hurlin panel causality test results. expenditure area specification 1 specification 2 specification 3 specification 4 specification 5 peacock-wiseman mann musgrave gupta goffman d(g) d(y) d(g/y) d(y) d(y) d(g/y) d(g/y) d(y/p) d(y/p) d(g/y) d(g/p) d(y/p) d(y/p) d(g/p) d(g) d(y/p) d(y/p) d(g) 1 w-bar 3.241 0.968 0.895 0.968 0.990 0.866 3.248 0.744 3.319 0.945 z-bar 8.386 -0.120 -0.392 -0.120 -0.036 -0.501 8.412 -0.957 8.677 -0.207 p-value 0.000 0.905 0.695 0.905 0.972 0.617 0.000 0.339 0.000 0.836 z-bar tilde 6.490 -0.457 -0.680 -0.457 -0.389 -0.768 6.511 -1.141 6.727 -0.528 p-value 0.000 0.648 0.497 0.648 0.698 0.442 0.000 0.254 0.000 0.597 y→g no causality no causality y→g y→g 2 w-bar 2.233 1.586 1.575 1.586 1.601 1.476 2.327 1.312 2.232 1.531 z-bar 4.614 2.191 2.153 2.191 2.247 1.779 4.963 1.167 4.608 1.986 p-value 0.000 0.029 0.031 0.029 0.025 0.075 0.000 0.243 0.000 0.047 z-bar tilde 3.409 1.430 1.399 1.430 1.476 1.094 3.694 0.593 3.404 1.262 p-value 0.001 0.153 0.162 0.153 0.140 0.274 0.000 0.553 0.001 0.207 y→g no causality no causality y→g y→g 3 w-bar 1.696 1.916 1.393 1.916 1.430 1.881 2.379 1.744 1.657 1.883 z-bar 2.605 3.426 1.472 3.426 1.609 3.295 5.161 2.783 2.456 3.303 p-value 0.009 0.001 0.141 0.001 0.108 0.001 0.000 0.005 0.014 0.001 z-bar tilde 1.768 2.439 0.842 2.439 0.955 2.332 3.856 1.914 1.647 2.338 p-value 0.077 0.015 0.400 0.015 0.340 0.020 0.000 0.056 0.100 0.019 bi-directional g→y g→y bi-directional bi-directional 4 w-bar 5.129 1.511 1.458 1.511 1.296 1.303 3.363 1.307 4.773 1.363 z-bar 15.450 1.911 1.714 1.911 1.107 1.132 8.842 1.150 14.119 1.358 p-value 0.000 0.056 0.087 0.056 0.268 0.258 0.000 0.250 0.000 0.174 z-bar tilde 12.260 1.201 1.040 1.202 0.545 0.565 6.863 0.580 11.172 0.749 p-value 0.000 0.230 0.298 0.230 0.586 0.572 0.000 0.562 0.000 0.454 y→g no causality no causality y→g y→g 5 w-bar 3.285 0.790 1.332 0.790 1.191 0.772 3.293 0.925 3.192 0.737 z-bar 8.551 -0.785 1.242 -0.785 0.715 -0.853 8.580 -0.279 8.203 -0.983 p-value 0.000 0.432 0.214 0.432 0.474 0.394 0.000 0.780 0.000 0.326 z-bar tilde 6.625 -1.001 0.655 -1.001 0.225 -1.056 6.648 -0.588 6.341 -1.162 p-value 0.000 0.317 0.513 0.317 0.822 0.291 0.000 0.557 0.000 0.245 y→g no causality no causality y→g y→g ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 23 table 4. (cont). 6 w-bar 2.680 1.362 1.119 1.362 1.105 1.556 2.414 1.373 2.523 1.577 z-bar 6.286 1.354 0.445 1.354 0.393 2.082 5.290 1.395 5.700 2.158 p-value 0.000 0.176 0.656 0.176 0.695 0.037 0.000 0.163 0.000 0.031 z-bar tilde 4.775 0.746 0.004 0.746 -0.039 1.341 3.961 0.780 4.296 1.403 p-value 0.000 0.455 0.997 0.456 0.969 0.180 0.000 0.436 0.000 0.161 y→g no causality no causality y→g y→g 7 w-bar 3.252 1.590 2.376 1.590 2.607 1.761 1.954 1.969 3.111 1.621 z-bar 8.428 2.206 5.150 2.206 6.013 2.848 3.570 3.627 7.900 2.324 p-value 0.000 0.027 0.000 0.027 0.000 0.004 0.000 0.000 0.000 0.020 z-bar tilde 6.524 1.443 3.847 1.443 4.552 1.966 2.556 2.603 6.093 1.538 p-value 0.000 0.149 0.000 0.149 0.000 0.049 0.011 0.009 0.000 0.124 y→g y→g bi-directional bi-directional y→g 8 w-bar 1.950 2.596 0.913 2.596 0.991 2.371 1.404 2.147 2.027 2.555 z-bar 3.555 5.970 -0.326 5.970 -0.036 5.129 1.510 4.290 3.844 5.817 p-value 0.000 0.000 0.744 0.000 0.972 0.000 0.131 0.000 0.000 0.000 z-bar tilde 2.544 4.517 -0.626 4.517 -0.389 3.830 0.874 3.145 2.780 4.391 p-value 0.011 0.000 0.531 0.000 0.698 0.000 0.382 0.002 0.005 0.000 bi-directional g→y g→y g→y bi-directional 9 w-bar 2.119 0.750 1.352 0.750 1.212 0.769 2.614 1.402 1.909 0.789 z-bar 4.187 -0.936 1.316 -0.936 0.791 -0.863 6.040 1.505 3.403 -0.789 p-value 0.000 0.349 0.188 0.349 0.429 0.388 0.000 0.132 0.001 0.430 z-bar tilde 3.060 -1.124 0.715 -1.124 0.287 -1.064 4.574 0.870 2.420 -1.004 p-value 0.002 0.261 0.475 0.261 0.774 0.287 0.000 0.385 0.016 0.316 y→g no causality no causality y→g y→g 10 w-bar 3.285 1.021 1.740 1.021 1.667 1.032 3.060 0.661 3.279 1.072 z-bar 8.549 0.077 2.768 0.077 2.495 0.121 7.709 -1.270 8.529 0.269 p-value 0.000 0.939 0.006 0.939 0.013 0.904 0.000 0.204 0.000 0.788 z-bar tilde 6.624 -0.297 1.901 -0.297 1.679 -0.261 5.937 -1.397 6.607 -0.140 p-value 0.000 0.767 0.057 0.767 0.093 0.794 0.000 0.163 0.000 0.889 y→g y→g y→g y→g y→g 11 w-bar 1.408 1.073 1.013 1.073 0.948 1.088 1.413 1.207 1.347 1.060 z-bar 1.526 0.272 0.050 0.272 -0.196 0.329 1.546 0.776 1.299 0.224 p-value 0.127 0.786 0.961 0.786 0.845 0.742 0.122 0.438 0.194 0.823 z-bar tilde 0.887 -0.138 -0.319 -0.138 -0.520 -0.091 0.903 0.274 0.702 -0.177 p-value 0.375 0.891 0.750 0.891 0.603 0.927 0.366 0.784 0.483 0.860 no causality no causality no causality no causality no causality note. as per table 3. ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 24 table 5. bias-corrected granger causality test results. expenditure specification 1 specification 2 specification 3 specification 4 specification 5 area peacock-wiseman mann musgrave gupta goffman d(g) d(y) d(g/y) d(y) d(y) d(g/y) d(g/y) d(y/p) d(y/p) d(g/y) d(g/p) d(y/p) d(y/p) d(g/p) d(g) d(y/p) d(y/p) d(g) 1 hpj 33.811 1.270 0.682 1.270 2.935 0.647 19.080 0.821 24.607 1.504 p-value 0.000 0.260 0.409 0.260 0.087 0.421 0.000 0.365 0.000 0.220 estimator 0.385 -0.027 -0.066 -0.027 -0.136 -0.020 0.305 0.020 0.326 -0.030 p-value 0.000 0.260 0.409 0.260 0.087 0.421 0.000 0.365 0.000 0.220 y→g no causality y→g y→g y→g 2 hpj 0.137 0.482 6.632 0.482 8.524 0.220 0.523 0.063 0.000 0.335 p-value 0.711 0.487 0.010 0.487 0.004 0.639 0.470 0.801 0.986 0.563 estimator 0.093 -0.004 -0.672 -0.004 -0.755 -0.003 -0.179 -0.001 0.005 -0.003 p-value 0.711 0.487 0.010 0.487 0.004 0.639 0.470 0.801 0.985 0.563 no causality y→g y→g no causality no causality 3 hpj 8.584 0.032 0.064 0.032 0.057 0.108 7.205 0.879 6.324 0.041 p-value 0.003 0.857 0.800 0.857 0.812 0.742 0.007 0.348 0.012 0.840 estimator 0.559 0.002 0.049 0.002 -0.046 0.003 0.452 0.009 0.475 0.002 p-value 0.003 0.180 0.800 0.857 0.812 0.742 0.007 0.348 0.012 0.839 y→g no causality no causality y→g y→g 4 hpj 76.201 0.429 2.222 0.429 0.912 1.000 40.331 7.728 70.472 0.334 p-value 0.000 0.513 0.136 0.513 0.340 0.317 0.000 0.005 0.000 0.563 estimator 0.642 0.015 0.121 0.015 0.077 0.023 0.484 0.054 0.611 0.013 p-value 0.000 0.513 0.136 0.513 0.339 0.317 0.000 0.005 0.000 0.563 y→g no causality no causality bi-directional y→g 5 hpj 52.275 20.878 5.965 20.878 3.099 19.524 35.574 18.975 47.383 17.096 p-value 0.000 0.000 0.015 0.000 0.078 0.000 0.000 0.000 0.000 0.000 estimator 0.620 0.084 0.234 0.084 0.168 0.082 0.506 0.076 0.582 0.077 p-value 0.000 0.000 0.015 0.000 0.078 0.000 0.000 0.000 0.000 0.000 bi-directional bi-directional bi-directional bi-directional bi-directional ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 25 table 5. (cont). 6 hpj 30.772 3.555 0.065 3.556 0.174 2.841 20.409 5.291 26.481 2.579 p-value 0.000 0.059 0.799 0.059 0.676 0.092 0.000 0.021 0.000 0.108 estimator 0.731 0.025 0.033 0.025 -0.053 0.022 0.496 0.034 0.668 0.021 p-value 0.000 0.059 0.799 0.059 0.676 0.092 0.000 0.021 0.000 0.108 bi-directional g→y g→y bi-directional y→g 7 hpj 39.533 0.229 0.490 0.229 0.112 0.161 9.266 4.865 30.563 0.038 p-value 0.000 0.633 0.484 0.633 0.737 0.688 0.002 0.027 0.000 0.845 estimator 0.336 -0.015 0.063 -0.015 -0.031 0.013 0.198 0.057 0.293 -0.006 p-value 0.000 0.632 0.484 0.632 0.737 0.688 0.002 0.027 0.000 0.845 y→g no causality no causality bi-directional y→g 8 hpj 15.101 0.801 0.008 0.801 0.110 0.811 10.690 0.288 13.703 0.934 p-value 0.000 0.371 0.931 0.371 0.740 0.368 0.001 0.592 0.000 0.334 estimator 0.610 -0.009 -0.014 -0.009 -0.053 -0.009 0.523 -0.005 0.575 -0.010 p-value 0.000 0.371 0.931 0.371 0.740 0.368 0.001 0.592 0.000 0.334 y→g no causality no causality y→g y→g 9 hpj 13.539 1.559 14.192 1.559 11.572 1.800 9.443 7.081 13.781 1.584 p-value 0.000 0.212 0.000 0.212 0.001 0.180 0.002 0.008 0.000 0.208 estimator 0.996 0.008 0.976 0.008 0.877 0.008 0.875 0.016 0.995 0.008 p-value 0.000 0.212 0.000 0.212 0.001 0.180 0.002 0.008 0.000 0.208 y→g y→g y→g bi-directional y→g 10 hpj 26.708 1.568 4.004 1.568 2.209 1.375 15.501 0.994 23.595 1.863 p-value 0.000 0.211 0.045 0.211 0.137 0.241 0.000 0.319 0.000 0.172 estimator 0.743 -0.015 0.274 -0.015 0.202 -0.014 0.528 0.012 0.688 -0.016 p-value 0.000 0.211 0.045 0.210 0.137 0.241 0.000 0.319 0.000 0.172 y→g y→g no causality y→g y→g 11 hpj 20.952 0.145 6.709 0.145 4.520 0.109 7.875 5.655 17.461 0.164 p-value 0.000 0.703 0.010 0.703 0.034 0.742 0.005 0.017 0.000 0.686 estimator 1.222 -0.002 0.677 -0.002 0.551 -0.002 1.007 -0.010 1.103 -0.002 p-value 0.000 0.703 0.010 0.703 0.033 0.742 0.005 0.017 0.000 0.686 y→g y→g y→g bi-directional y→g note. as per table 3. ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 26 5. discussion and conclusion the paper examined alternative hypotheses that describe the relationship between public expenditure and output in a panel of 28 european economies over the 1995-2018 period using the panel data methods. the respective variables were found to be cross-sectionally dependent (expected result, given the tight and extensive political and economic integration between european economies), and thus, the appropriate unit root and cointegration tests (pesaran cadf and westerlund) were used. the variables were characterised by a mix of (1)i and (0)i integration order, and the long-run equilibrium relationship between public expenditure and output was established in every specification and expenditure category. the strong evidence of cointegration is an indication of robust results, as wagner’s hypothesis presumes a strong equilibrium relationship between public expenditure and gdp at earlier stages of development, and a weaker relationship at later stages. this result is in line with other studies of wagner’s hypothesis for the advanced and industrialised economies in the post-wwii period (the study of g7 economies by kolluri et al., 2000; of six european countries by thornton, 1999; and of italy by magazzino, 2012). the evidence of cointegration was somewhat weaker in the social protection expenditure category. while, as put by shelton (2007), the population ageing in european countries has necessitated greater social security and protection expenditure and thus stronger relationship with gdp (per capita), the previously strong relationship between social expenditure and gdp in the well-established welfare states of europe has weakened in recent decades, due to the structural change of the economy and the reforms of the social security and welfare systems that these economies have been undergoing in the recent decades (carter, 2003; kuckuck, 2014, p. 150). this likely affected the social protection category the most. the causality running from output to public expenditure along wagner’s lines was identified in the majority of cases. the result was consistent across the spending categories. given the robustness checks performed, it was also consistent across the periods as well as in the presence of cyclical dummies. the result supports the findings of previous research in european context, e.g. magazzino (2011) and lamartina and zaghini (2011). there were a number of instances, when there was no causality in either direction between gdp and public expenditure (14.0% of all cases in toda-yamamoto test, and 30.9% and 23.6% in dumitrescu-hurlin and juodis-karavias-sarafidis tests). the absence of causality, however, was not a characteristic of a particular expenditure category, and thus can be attributed to the properties of the causality test or the specification of wagner’s hypothesis. the keynesian hypothesis of sole influence of public expenditure on output and the absence of reverse causality did not find support (zero cases in toda-yamamoto test, and three and two cases in dumitrescu-hurlin and juodis-karavias-sarafidis tests, respectively, in general public services and public order and safety expenditure categories). the missing causality in these two categories may be explained by the structure of the panel: the expansion of the public order and general administration activities alongside output growth is typical for developing economies with a nascent state apparatus, which is clearly not the case of european countries that ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 27 experienced such expansion in the 19th century. the bilateral causality was encountered in 37.0%, 10.9% and 20.0% of cases under the three tests. overall, while bi-directional relationship between public expenditure and output was present, which to certain extend contradicts wagner’s hypothesis, the keynesian hypothesis of sole unidirectional influence of public expenditure on output can be rejected (in this present study). there are multiple policy implications of the results. firstly, the strong evidence of cointegration between output and expenditure and the absence of government expenditure to output causality along keynesian lines may imply limited effectiveness of the short-term spending cuts and rises in government expenditure, given that expenditure will tend to return to a long-run equilibrium level. in this context, as noted by magazzino (2011) and akitoby et al (2006), structural reforms would be needed to help achieve the social and economic objectives that fiscal policy is supposed to accomplish. secondly, the strong output-to-expenditure causality along wagner’s lines and sustained public expenditure was observed despite the slowdown of european economic growth in recent decades. the factors that helped to maintain strong long-term relationships and causality along wagner’s lines included increased revenue collection of the governments, a decrease in the size of the shadow economy, and the growing demand for public expenditure in certain functional areas, e.g. increase in health spending due to new health threats, or the projected expansion of the defence expenditures due to uncertain geopolitical situation in europe. thirdly, as argued by afonso et al (2005), the wagner’s relationship is necessarily weakened over time, due to the improvement of the quality of goods and services provided by the public sector, to the higher efficiency of the sector and slower increase (and perhaps) decrease in spending in the industrial economies. the analysis conducted in this paper for the sub-periods did not demonstrate any weakening of the ‘output-spending’ cointegration in later periods. fourthly, as noted by benavides et al (2013, pp. 71-72), the causality along wagner’s as opposed to keynes’ lines points to the limited role of political factors and political decision-making in the determination of economic outcomes. this empirical result would be contrary to the actual experience of the developed economies in the postwwii period (expansion of public policies, growth of bureaucracy and the predominance of redistribution as opposed to efficiency objectives and logic in the public policies), and the premises of the public choice and new political economy theories (buchanan, tullock, 1977). lastly, the identified weakness of keynesian hypothesis may be attributed to the crowding out of private investment by public spending, a phenomenon that has been well documented in the literature (ashauer, 1989, erden, holcombe, 2005). the relevant policy implication is the absence of any automatic positive effect of greater public spending on growth and productivity. in a related vein, the weakness of keynesian causality may be explained by the weakening of the positive effects of public spending on total factor productivity that has been observed starting from the 1980s. with regard to both phenomena, lachler and aschauer (1998) stressed the importance of savings-financed increase in public spending and capital (as opposed to an increase in public consumption that merely brings greater public debt and higher current and future taxes) for the full manifestation of positive gains of fiscal effort. future research may modify the present model and setting by considering the cyclical components of government expenditure and output and alternative channels through which the expenditure is directed in the economy, by incorporating the effects of discretionary fiscal policy, and by investigating ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 28 wagner’s hypothesis at the level of sub-national finances (kucukkale, yamak, 2012; inshauspe et al, 2020). future empirical studies may consider the role of public enterprises (in addition to the level of spending), the role of government regulation and legislative activity as a proxy or measure of the government size, the breaks and non-linearities in the relationship (in line with armey-rahn hypothesis of optimal size of government). they may also continue to experiment with alternative functional forms of the relationship and alternative definitions of dependent and independent variables (peacock, scott, 2000). the bulk of the research on wagner’s hypothesis has been on variables (e.g. public spending or the scope of legislative activity of the government) that are amenable to quantitative analysis. a more important issue is the nature of the government itself. as noted by lamartina and zaghini (2011), the pursuit of selfor vested-interests (alongside corruption and moral hazard behaviour) by the bureaucracy would render expansion of the government involvement in social and economic affairs undesirable, notwithstanding the growth of the economy and objective need for ‘bigger’ government. in a related vein, the growth of the spending on public services and administration that is motivated by the self-interest in the expansion of bureaucratic prominence and functions or proliferation of government programs due to lobbying efforts are examples of the growth of public spending that takes place irrespective of output or economic growth (niskanen, 1971). wagner’s hypothesis is thus a partial explanation of the public sector growth. references abizadeh, s., gray, j. (1985). wagner's law: a pooled time series, cross-section analysis. national tax journal 38, 209-218. https://doi.org/10.1086/ntj41792010 afonso, a., alves, j. (2017). reconsidering wagner's law: evidence from the functions of the government. applied economics letters 24(5), 346-350. https://doi.org/10.1080/13504851 .2016.1192267 afonso, a., jalles, j. (2014). causality for the government budget and economic growth. lisboa school of economics and management working paper no. wp07/2014/de/uece, pp. 1-5. https://doi.org/10.2139/ssrn.2429909 afonso, a., schuknecht, l., tanzi, v. (2005). public sector efficiency: an international comparison. public choice 123, 321-347. https://doi.org/10.1007/s11127-005-7165-2 ahsan, m., kwan, a., sahni, b. (1996). cointegration and wagner's hypothesis: time series evidence for canada. applied economics 28(8), 1055-1058. https://doi.org/10.1080/000368496328182 akitoby, b., clement, b., gupta, s., inchauste, g. (2006). public spending, voracity, and wagner's law in developing countries. european journal of political economy 22(4), 908-924. https://doi.org/10.1016/j.ejpoleco.2005.12.001 alezina, a., wacziarg, r. (1998). openness, country size and government. journal of public economics 69(3), 305-321. https://doi.org/10.1016/s0047-2727(98)00010-3 ansari, m., gordon, d., akuamoah, c. (1997). keynes versus wagner: public expenditure and national income for three african countries. applied economics 29(4), 543-550. https://doi.org/ 10.1080/000368497327038 apergis, n., christou, c., hassapis, c. (2013). convergence in public expenditures across eu countries: evidence from club convergence. economic and finance research: an open access journal 1(1), 45-59. https://doi.org/10.1080/21649480.2013.862735 aschauer, d. (1989). public investment and productivity growth in the group of seven. economic perspectives, federal reserve bank of chicago 13, 17-25. https://doi.org/10.1086/ntj41792010 https://doi.org/10.1080/13504851.2016.1192267 https://doi.org/10.1080/13504851.2016.1192267 https://doi.org/10.2139/ssrn.2429909 https://doi.org/10.1007/s11127-005-7165-2 https://doi.org/10.1080/000368496328182 https://doi.org/10.1016/j.ejpoleco.2005.12.001 https://doi.org/10.1016/s0047-2727(98)00010-3 https://doi.org/10.1080/000368497327038 https://doi.org/10.1080/000368497327038 https://doi.org/10.1080/21649480.2013.862735 ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 29 ayad, h., belmokaddem, m. (2017). financial development, trade openness and economic growth in mena countries: tydl panel causality approach. theoretical and applied economics 24(1), 233246. azcona, n. (2022). business cycle co-movement in europe: trade, industry composition and the single currency. open economies review 33(1), 121-139. https://doi.org/10.1007/s11079-021-09625-7 babatunde, m. (2011). a bound testing analysis of wagner's law in nigeria 1970-2006. applied economics 43(21), 2843-2850. https://doi.org/10.1080/00036840903425012 bairam, e. (1992). variable elasticity and wagner's law. public finance 3, 491-495. barro, r. (1991). economic growth in a cross section of countries. quarterly journal of economics 106(2), 407-443. https://doi.org/10.2307/2937943 baumol, w. (1967). macroeconomics of unbalanced growth: the anatomy of urban crisis. american economic review 57 (3), 415-426. benavides, d., venegas-martinez, f., santiago, v. (2013). la ley de wagner versus la hipotesis keynesiana: el case de mexico, 1950-2009. investigacion economica lxxii(283), 69-98. https://doi.org/10.1016/s0185-1667(13)72587-6 biswal, b., dhawan, u., lee, h.-y. (1999). testing wagner versus keynes using disaggregated public expenditure data for canada. applied economics 31(10), 1283-1291. https://doi.org/ 10.1080/000368499323490 bohl, m. (1996). some international evidence on wagner's law. public finance 51(2), 185-200. buchanan, j., tullock, g. (1977). the expanding public sector: wagner squared. public choice 31, 147-150. https://doi.org/10.1007/bf01718982 burney, n. (2002). wagner's hypothesis: evidence from kuwait using cointegration tests. applied economics 34(1), 49-57. https://doi.org/10.1080/00036840010027540 caporale, g., pittis, n. (1999). unit root testing using covariates: some theory and evidence. oxford bulletin of economics and statistics 61(4), 583-595. https://doi.org/10.1111/1468-0084.00145 carter, m. (2003). three essays on empirical patterns in functional distribution for a cross section of countries: evidence from the extended penn world tables, 1963-1996. new school university, ph.d. dissertation. chang, t., liu, w., caudill, s. (2004). a re-examination of wagner's law for ten countries based on cointegration and error-correction modelling techniques. applied financial economics 14(8), 577589. https://doi.org/10.1080/0960310042000233872 courakis, a., moura-roque, f., tridimas, g. (1993). public expenditure growth in greece and portugal: wagner's law and beyond. applied economics 25(1), 125-134. https://doi.org/10.1080/ 00036849300000121 cuddington, j., ludema, r., jayasuriya, s. (2002). prebisch-singer redux. washington: us international trade commission. dao, m. (1995). determinants of government expenditures: new evidence from disaggregative data. oxford bulletin of economics and statistics 57(1), 67-76. https://doi.org/10.1111/j.14680084.1995.tb00027.x diamond, j. (1977). wagner's "law" and the developing countries. the developing economies 15(1), 37-59. https://doi.org/10.1111/j.1746-1049.1977.tb00369.x dollery, b., singh, s. (2000). explaining the real size of government in australia: an application of the ferris and west model. economic analysis and policy 30(2), 157-173. https://doi.org/10.1016/ s0313-5926(00)50018-6 dumitrescu, e.-i., hurlin, c. (2012). testing for granger non-causality in heterogeneous panels. economic modelling 29(4), 1450-1460. https://doi.org/10.1016/j.econmod.2012.02.014 erden, l., holcombe, r. (2005). the effects of public investment on private investment in developing economies. public finance review 33(5), 575-602. https://doi.org/10.1177/1091142105277627 gandhi, v. p. (1971). wagner's law of public expenditure: do recent cross-section studies confirm it? public finance 26, 44-56. ghazy, n., ghoneim, h., paparas, d. (2021). the validity of wagner's law in egypt from 1960-2018. review of economics and political science, 6(2), 98-116. https://doi.org/10.1108/reps-0120200004 goffman, j. (1968). on the empirical testing of wagner's law: a technical note. public finance 3(3), 359-364. granger, c.w.j. (1988). aggregation of time series variables a survey. federal reserve bank of minneapolis, discussion paper no. 1, pp. 1-26. https://doi.org/10.21034/dp.1 gupta, s. (1967). public expenditure and economic growth: a time series analysis. public finance 22(4), 423-461. https://doi.org/10.1007/s11079-021-09625-7 https://doi.org/10.1080/00036840903425012 https://doi.org/10.2307/2937943 https://doi.org/10.1016/s0185-1667(13)72587-6 https://doi.org/10.1080/000368499323490 https://doi.org/10.1080/000368499323490 https://doi.org/10.1007/bf01718982 https://doi.org/10.1080/00036840010027540 https://doi.org/10.1111/1468-0084.00145 https://doi.org/10.1080/0960310042000233872 https://doi.org/10.1080/00036849300000121 https://doi.org/10.1080/00036849300000121 https://doi.org/10.1111/j.1468-0084.1995.tb00027.x https://doi.org/10.1111/j.1468-0084.1995.tb00027.x https://doi.org/10.1111/j.1746-1049.1977.tb00369.x https://doi.org/10.1016/s0313-5926(00)50018-6 https://doi.org/10.1016/s0313-5926(00)50018-6 https://doi.org/10.1016/j.econmod.2012.02.014 https://doi.org/10.1177/1091142105277627 https://doi.org/10.1108/reps-01-20200004 https://doi.org/10.1108/reps-01-20200004 https://doi.org/10.21034/dp.1 ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 30 huang, c.-j. (2006). government expenditures in china and taiwan: do they follow wagner's law? journal of economic development 31(2), 139-148. inchauspe, j., kobir, m., macdonald, g. (2020). wagner's law and the dynamics of government spending in indonesia. bulletin of indonesian economic studies 58(1), 1-22. https://doi.org/10.1080/00074918.2020.1811837 islam, a. (2001). wagner's law revisited: cointegration and exogeneity tests for usa. applied economics 8, 509-515. https://doi.org/10.1080/13504850010018743 iyare, s., lorde, t. (2004). co-integration, causality and wagner's law: tests for selected caribbean economies. applied economics letters 11(13), 815-825. https://doi.org/10.1080/ 1350485042000254881 jaen garcia, m. (2004). la ley de wagner: un analisis sintetico. instituto de estudios fiscales, working paper no. 6/04, pp. 1-59. juodis, a., karavias, y., sarafidis, v. (2021). a homogeneous approach to testing for granger noncausality in heterogeneous panels. empirical economics 60, 93-112. https://doi.org/10.1007/ s00181-020-01970-9 karagianni, s., pempetzoglou, m. (2009). evidence for non-linear causality between public spending and income in the european union countries. journal of applied business research 25, 69-82. https://doi.org/10.19030/jabr.v25i1.1049 koester, g., priesmeier, c. (2013). does wagner's law ruin the sustainability of german public finances? finanzarchiv / public finance 69(3), 256-288. https://doi.org/10.1628/ 001522113x671128 kolluri, b., panik, m., wahab, m. (2000). government expenditure and economic growth: evidence from g7 countries. applied economics 32(8), 1059-1068. https://doi.org/10.1080/000368400322110 kuckuck, j. (2014). testing wagner's law at different stages of economic development. finanzarchiv / public finance analysis 70(1), 128-168. https://doi.org/10.1628/001522114x679183 kucukkale, y., yamak, r. (2012). cointegration, causality and wagner's law with disaggregated data: evidence from turkey, 1968-2004. mpra paper no. 36894. lachler, u., aschauer, d. (1998). public investment and economic growth in mexico. world bank, policy research working paper no. 1964. lamartina, s., zaghini, a. (2011). increasing public expenditure: wagner's law in oecd countries. german economic review 12(2), 149-164. https://doi.org/10.1111/j.1468-0475.2010.00517.x legrenzi, g. (2000). the long-run relationship between public sector size and economic growth: income-elasticity and causality of the italian general government expenditure (1861-1998). rivista internazionale di scienze economiche e commerciali 47(3), 415-437. lin, c.-a. (1995). more evidence on wagner's law for mexico. public finance 50(2), 267-277. loizides, j., vamvoukas, g. (2005). government expenditure and economic growth: evidence from trivariate causality testing. journal of applied economics 8(1), 125-152. https://doi.org/10.1080/15140326.2005.12040621 lopez, l., weber, s. (2017). testing for granger causality in panel data. university of neuchatel, institute for economic research working paper no. 17-03, pp. 1-13. https://doi.org/10.1177/1536867x1701700412 magazzino, c. (2011). disaggregated public spending, gdp and money supply: evidence for italy. european journal of economics, finance and administrative sciences 41, 118-131. magazzino, c. (2012). wagner versus keynes: public spending and national income in italy. journal of policy modeling 34(6), 890-905. https://doi.org/10.1016/j.jpolmod.2012.05.012 mann, a. (1980). wagner's law: an econometric test for mexico, 1925-1970. national tax journal 33, 189-201. https://doi.org/10.1086/ntj41862301 mueller, d. (1987). the growth of government: a public choice perspective. imf staff papers 34(1), 115-149. https://doi.org/10.2307/3867026 musgrave, r. (1969). fiscal systems. new haven: yale university press. narayan, p., nielsen, i., smyth, r. (2008). panel data, cointegration, causality and wagner's law: empirical evidence from chinese provinces. china economic review 19(2), 297-307. https://doi.org/10.1016/j.chieco.2006.11.004 narayan, s., rath, b., narayan, p. (2012). evidence of wagner's law from indian state. economic modelling 29(5), 1548-1557. https://doi.org/10.1016/j.econmod.2012.05.004 niskanen, w. (1971). bureaucracy and representative government. chicago: aldine-atherton. north, d., wallis, j. (1982). longer-run determinants of the economic role of the us government. american economic review (papers and proceedings) 72(2), 336-340. organisation for economic cooperation and development / oecd (2011). government at a glance, 2011. paris: oecd publishing. https://doi.org/10.1080/00074918.2020.1811837 https://doi.org/10.1080/13504850010018743 https://doi.org/10.1080/1350485042000254881 https://doi.org/10.1080/1350485042000254881 https://doi.org/10.1007/s00181-020-01970-9 https://doi.org/10.1007/s00181-020-01970-9 https://doi.org/10.19030/jabr.v25i1.1049 https://doi.org/10.1628/001522113x671128 https://doi.org/10.1628/001522113x671128 https://doi.org/10.1080/000368400322110 https://doi.org/10.1628/001522114x679183 https://doi.org/10.1111/j.1468-0475.2010.00517.x https://doi.org/10.1080/15140326.2005.12040621 https://doi.org/10.1177/1536867x1701700412 https://doi.org/10.1086/ntj41862301 https://doi.org/10.2307/3867026 https://doi.org/10.1016/j.chieco.2006.11.004 https://doi.org/10.1016/j.econmod.2012.05.004 ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 31 oxley, l. (1994). cointegration, causality and wagner's law: a test for britain 1870-1913. scottish journal of political economy 41(3), 286-298. https://doi.org/10.1111/j.1467-9485.1994.tb01127.x peacock, a., wiseman, j. (1979). approaches to the analysis of government expenditure growth. public finance quarterly 7(1), 3-23. https://doi.org/10.1177/109114217900700101 peacock, a., scott, a. (2000). the curious attraction of wagner's law. public choice 102, 1-17. https://doi.org/10.1023/a:1005032817804 persyn, d., westerlund, j. (2008). error-correction-based cointegration tests for panel data. the stata journal 8(2), 232-241. https://doi.org/10.1177/1536867x0800800205 rajaguru, g. (2002). the distortionary effects of temporal aggregation on granger causality. bond university business school publications, pp. 1-37. ray, p., pal, p. (2022). fiscal stimulus and the ghost of keynes: an evolutionary chronicle. in n. yoshino, r. paramanik, & a. kumar (eds.), studies in international economics and finance. singapore: springer. https://doi.org/10.1007/978-981-16-7062-6_4 sedrakyan, g., varela-candamio, l. (2019). wagner's law vs. keynes' hypothesis in very different countries (armenia and spain). journal of policy modeling 41(4), 747-762. https://doi.org/10.1016/j.jpolmod.2019.02.011 shelton, c. (2007). the size and composition of government expenditure. journal of public economics 91(11-12), 2230-2260. https://doi.org/10.1016/j.jpubeco.2007.01.003 sideris, d. (2007). wagner's law in 19th century greece: a cointegration and causality analysis. bank of greece working paper no. 64, pp. 1-18. https://doi.org/10.2139/ssrn.4164000 sinha, d. (2007). does the wagner's law hold for thailand? a time series study. mpra paper no. 2560. tang, t.c. (2001). testing the relationship between government expenditure and national income in malaysia, analisis 8(1/2), 37-51. thornton, j. (1999). cointegration, causality and wagner law in 19th century europe. applied economics letters 6(7), 413-416. https://doi.org/10.1080/135048599352916 timm, h. (1961). das gesetz der wachsenden staatsausgaben. finanzarchiv nf 21, 201-247. tobin, d. (2005). economic liberalization, the changing role of the state and "wagner's law": china's development experience since 1978. world development 33(5), 729-743. https://doi.org/10.1016/j.worlddev.2004.12.001 toda, h., yamamoto, t. (1995). statistical inference in vector autoregressions with possibly integrated processes. journal of econometrics 66(1-2), 225-250. https://doi.org/10.1016/03044076(94)016168 wagner, a. (1912). les fondements de l'economie politique. paris: girard & briere. westerlund, j. (2007). testing for error correction in panel data. oxford bulletin of economics and statistics 69(6), 709-748. https://doi.org/10.1111/j.1468-0084.2007.00477.x xiao, j., juodis, a., karavias, y., sarafidis, v. (2021). improved tests for granger non-causality in panel data. munich: mpra paper no. 107180, pp. 1-11. yay, t., tastan, h. (2009). growth of public expenditures in turkey during the 1950-2004 period: an econometric analysis. romanian journal of economic forecasting 4, 101-118. ziramba, e. (2009). wagner's law: an econometric test for south africa, 1960-2006. south african journal of economics 76(4), 596-606. https://doi.org/10.1111/j.1813-6982.2008.00218.x https://doi.org/10.1111/j.1467-9485.1994.tb01127.x https://doi.org/10.1177/109114217900700101 https://doi.org/10.1023/a:1005032817804 https://doi.org/10.1177/1536867x0800800205 https://doi.org/10.1016/j.jpolmod.2019.02.011 https://doi.org/10.1016/j.jpubeco.2007.01.003 https://doi.org/10.2139/ssrn.4164000 https://doi.org/10.1080/135048599352916 https://doi.org/10.1016/j.worlddev.2004.12.001 https://doi.org/10.1016/0304-4076(94)016168 https://doi.org/10.1016/0304-4076(94)016168 https://doi.org/10.1111/j.1468-0084.2007.00477.x https://doi.org/10.1111/j.1813-6982.2008.00218.x ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 32 appendix figure 1. dynamics of output and expenditure categories 11.7 11.8 11.9 12.0 12.1 12.2 12.3 12.4 1995 2000 2005 2010 2015 y 9.6 9.7 9.8 9.9 10.0 10.1 10.2 1995 2000 2005 2010 2015 y/p 10.9 11.0 11.1 11.2 11.3 11.4 11.5 95 00 05 10 15 total 8.9 9.0 9.1 9.2 9.3 95 00 05 10 15 total/p 3.72 3.76 3.80 3.84 3.88 95 00 05 10 15 total/y 8.7 8.8 8.9 9.0 9.1 9.2 9.3 95 00 05 10 15 econ 1.45 1.50 1.55 1.60 1.65 1.70 95 00 05 10 15 econ/y 6.7 6.8 6.9 7.0 7.1 95 00 05 10 15 econ/p 7.5 7.6 7.7 7.8 7.9 95 00 05 10 15 def .0 .1 .2 .3 .4 .5 95 00 05 10 15 def/y 5.45 5.50 5.55 5.60 5.65 5.70 95 00 05 10 15 def/p 8.7 8.8 8.9 9.0 9.1 9.2 9.3 95 00 05 10 15 edu 1.52 1.56 1.60 1.64 1.68 1.72 95 00 05 10 15 edu/y 6.7 6.8 6.9 7.0 7.1 95 00 05 10 15 edu/p 8.6 8.8 9.0 9.2 9.4 9.6 95 00 05 10 15 heal 1.5 1.6 1.7 1.8 1.9 95 00 05 10 15 heal/y 6.6 6.8 7.0 7.2 7.4 95 00 05 10 15 heal/p ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 33 7.4 7.6 7.8 8.0 8.2 8.4 95 00 05 10 15 pub .44 .48 .52 .56 .60 95 00 05 10 15 pub/y 5.5 5.6 5.7 5.8 5.9 6.0 6.1 95 00 05 10 15 pub/p 9.8 10.0 10.2 10.4 10.6 95 00 05 10 15 soc 2.65 2.70 2.75 2.80 2.85 95 00 05 10 15 soc/y 7.8 7.9 8.0 8.1 8.2 8.3 95 00 05 10 15 soc/p 9.15 9.20 9.25 9.30 9.35 9.40 9.45 95 00 05 10 15 gener 1.6 1.7 1.8 1.9 2.0 2.1 95 00 05 10 15 gener/y 7.08 7.12 7.16 7.20 7.24 7.28 95 00 05 10 15 gener/p 6.6 6.8 7.0 7.2 7.4 95 00 05 10 15 env -.6 -.5 -.4 -.3 95 00 05 10 15 env/y 4.4 4.6 4.8 5.0 5.2 95 00 05 10 15 env/p 7.0 7.2 7.4 7.6 7.8 8.0 95 00 05 10 15 recr .00 .05 .10 .15 .20 .25 95 00 05 10 15 recr/y 5.1 5.2 5.3 5.4 5.5 5.6 5.7 95 00 05 10 15 recr/p 6.8 6.9 7.0 7.1 7.2 7.3 7.4 95 00 05 10 15 hous -.8 -.7 -.6 -.5 -.4 -.3 -.2 95 00 05 10 15 hous/y 4.80 4.85 4.90 4.95 5.00 5.05 5.10 95 00 05 10 15 hous/p note. the series are expressed in natural logarithms. ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 34 table 6. cross-sectional results. expenditure area coefficient specification 1 specification 2 specification 3 specification 4 specification 5 peacock-wiseman mann musgrave gupta goffman coeff. p-value coeff. p-value coeff. p-value coeff. p-value coeff. p-value total c -1.319 0.000 3.286 0.000 3.106 0.000 -1.310 0.001 1.066 0.767 cross-sect. 1.041 0.000 0.041 0.020 0.068 0.058 1.053 0.000 1.027 0.008 economic affairs c -2.446 0.000 2.159 0.000 2.525 0.000 -1.855 0.001 0.485 0.886 cross-sect. 0.953 0.000 -0.047 0.074 -0.094 0.073 0.887 0.000 0.865 0.016 defense c -4.801 0.000 -0.196 0.773 2.109 0.054 -2.338 0.043 0.069 0.986 cross-sect. 1.036 0.000 0.036 0.515 -0.188 0.084 0.799 0.000 0.771 0.061 education c -2.778 0.000 1.827 0.000 0.952 0.046 -3.474 0.000 -1.088 0.745 cross-sect. 0.984 0.000 -0.016 0.491 0.068 0.148 1.054 0.000 1.026 0.005 health c -3.937 0.000 0.669 0.187 0.678 0.432 -3.673 0.000 -1.362 0.722 cross-sect. 1.086 0.000 0.086 0.044 0.103 0.237 1.082 0.000 1.062 0.010 public order and safety c -3.611 0.000 0.994 0.024 3.261 0.000 -1.230 0.011 1.221 0.735 cross-sect. 0.961 0.961 -0.039 0.262 -0.275 0.000 0.717 0.000 0.683 0.068 social protection c -2.969 0.000 1.636 0.000 0.927 0.080 -3.473 0.000 -1.113 0.764 cross-sect. 1.092 0.000 0.092 0.001 0.183 0.001 1.167 0.000 1.142 0.005 general public services c -3.447 0.000 1.158 0.015 1.231 0.115 -3.285 0.000 -0.809 0.828 cross-sect. 1.058 0.000 0.058 0.128 0.063 0.414 1.057 0.000 1.021 0.011 environmental protection c -5.816 0.000 -1.211 0.054 -0.996 0.333 -5.287 0.000 -3.035 0.431 cross-sect. 1.067 0.000 0.067 0.183 0.060 0.556 1.033 0.000 1.019 0.013 recreation, culture, religion c -3.998 0.000 0.607 0.220 0.013 0.987 -4.303 0.000 -2.027 0.548 cross-sect. 0.960 0.000 -0.040 0.327 0.012 0.886 0.987 0.000 0.970 0.008 housing and community amenities c -4.587 0.000 0.018 0.982 1.765 0.172 -2.586 0.059 -0.274 0.942 cross-sect. 0.968 0.000 -0.032 0.633 -0.215 0.100 0.762 0.000 0.744 0.058 ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 35 table 7. toda-yamamoto panel causality test with cyclical dummy results. expenditure specification 1 specification 2 specification 3 specification 4 specification 5 area peacock-wiseman mann musgrave gupta goffman d(g) d(y) d(y) d(g/y) d(y) d(y) d(g/y) d(g/y) d(y/p) d(y/p) d(g/y) d(g/p) d(y/p) d(y/p) d(g/p) d(g) d(y/p) d(y/p) d(g) 1 lag 4 4 4 4 4 4 2 2 4 4 bi-directional bi-directional bi-directional y→g bi-directional lag 5 5 5 5 5 5 4 4 5 5 bi-directional bi-directional bi-directional bi-directional bi-directional 2 lag 4 4 4 4 4 4 4 4 4 4 bi-directional bi-directional bi-directional bi-directional bi-directional 3 lag 3 3 3 3 3 3 2 2 3 3 y→g no causality no causality y→g y→g lag 7 7 7 7 7 7 3 3 8 8 y→g y→g y→g y→g y→g 4 lag 4 4 4 4 4 4 3 3 4 4 y→g y→g y→g y→g y→g lag 4 4 y→g 5 lag 4 4 4 4 4 4 4 4 4 4 y→g y→g bi-directional bi-directional bi-directional lag 8 8 8 8 6 6 8 8 6 6 bi-directional bi-directional bi-directional bi-directional y→g 6 lag 2 2 2 2 2 2 2 2 2 2 y→g no causality bi-directional y→g bi-directional lag 4 4 4 4 4 4 5 5 4 4 y→g y→g no causality y→g y→g 7 lag 3 3 3 3 5 5 5 5 5 5 bi-directional bi-directional bi-directional y→g bi-directional lag 5 5 5 5 3 3 3 3 3 3 bi-directional bi-directional bi-directional y→g bi-directional 8 lag 2 2 2 2 2 2 2 2 2 2 no causality y→g y→g no causality no causality lag 3 3 3 3 3 3 3 3 3 3 no causality y→g y→g no causality no causality ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 36 table 7. (cont). 9 lag 2 2 2 2 2 2 2 2 2 2 y→g no causality no causality y→g y→g lag 3 3 3 3 3 3 3 3 5 5 y→g no causality no causality y→g bi-directional 10 lag 2 2 2 2 2 2 2 2 2 2 y→g y→g no causality y→g y→g lag 4 4 4 4 4 4 3 3 4 4 y→g y→g bi-directional y→g bi-directional 11 lag 3 3 3 3 3 3 3 3 3 3 y→g y→g bi-directional bi-directional bi-directional lag 4 4 4 4 4 4 4 4 y→g y→g bi-directional bi-directional note. as per table 3. the causality patterns that are different from the toda-yamamoto procedure with no cyclical dummy (table 3) are highlighted in bold. ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 table 8. toda-yamamoto panel causality test with positive and negative output components (whole period and subperiods) whole period 2009-2018 1995-2008 expenditure specification 1 specification 1 specification 1 area peacock-wiseman peacock-wiseman peacock-wiseman d(g) d(y) d(y) d(g) d(y) d(y) d(g) d(y) d(y) 1 lag 4 4 4 4 4 4 y+ bi-directional bi-directional y→g ybi-directional bi-directional g→y lag 5 5 y+ bi-directional ybi-directional 2 lag 4 4 4 4 4 4 y+ bi-directional bi-directional y→g yy→g y→g no causality 3 lag 3 3 3 3 3 3 y+ y→g y→g no causality yy→g y→g no causality lag 7 7 y+ bi-directional yy→g 4 lag 4 4 4 4 4 4 y+ y→g y→g bi-directional yy→g bi-directional y→g 5 lag 4 4 4 4 4 4 y+ y→g y→g y→g ybi-directional bi-directional y→g lag 8 8 y+ y→g ybi-directional 6 lag 2 2 2 2 2 2 y+ y→g y→g no causality yy→g y→g bi-directional lag 4 4 y+ y→g yy→g 7 lag 3 3 3 3 3 3 y+ y→g bi-directional y→g ybi-directional bi-directional no causality lag 5 5 y+ bi-directional yy→g 8 lag 2 2 2 2 2 2 y+ no causality no causality no causality yno causality y→g g→y lag 3 3 y+ y→g yno causality ivan d trofimov / european journal of government and economics 12(1), june 2023, 5-38 38 table 8. (cont). 9 lag 2 2 2 2 2 2 y+ y→g no causality y→g yno causality no causality no causality lag 3 3 y+ y→g yno causality 10 lag 2 2 2 2 2 2 y+ y→g no causality y→g yy→g y→g bi-directional lag 4 4 y+ y→g yy→g 11 lag 3 3 3 3 3 3 y+ y→g y→g y→g yy→g y→g bi-directional lag 4 4 y+ y→g yy→g an inclusive taxonomy of behavioral biases european journal of government and economics 6(1), june 2017, 24-58. european journal of government and economics journal homepage: www.ejge.org issn: 2254-7088 an inclusive taxonomy of behavioral biases david peóna, *, manel antelob, anxo calvo-silvosaa a department of business studies, universidade da coruña, spain. b department of economics, university of santiago de compostela, spain. * corresponding author at: departamento de empresa. universidade da coruña, campus de elviña s/n, 15071 a coruña, spain. email: david.peon@udc.es article history. received 25 may 2016; first revision required 9 december 2016; accepted 27 february 2017. abstract. this paper overviews the theoretical and empirical research on behavioral biases and their influence in the literature. to provide a systematic exposition, we present a unified framework that takes the reader through an original taxonomy, based on the reviews of relevant authors in the field. in particular, we establish three broad categories that may be distinguished: heuristics and biases; choices, values and frames; and social factors. we then describe the main biases within each category, and revise the main theoretical and empirical developments, linking each bias with other biases and anomalies that are related to them, according to the literature. keywords. behavioral biases; decision-making; heuristics; framing; prospect theory; social contagion. jel classification. d03; g02; g11; g14; g30 1. introduction the standard model of rational choice argues that people choose to follow the option that maximizes expected utility. however, this ignores the presence of behavioral biases, i.e. the tendency to reason in certain ways that can lead to systematic deviations from a standard of rationality (shefrin, 2006). both psychology and behavioral economics have shown that people are vulnerable to biases and use shortcuts in thinking, exhibit biases in decision-making and frame their decisions, exhibit preference reversals and struggle to commit with their decisions in the past, and they are influenced by others’ behavior. this leads to anomalies and decision effects, that is, empirical results that are difficult to rationalize within the paradigm (khaneman, knetsch and thaler, 1991). this paper surveys the main biases in the behavioral economics and finance, leaving aside their behavioral consequences – anomalies, when they refer to market outcomes or competition among firms, and decision effects, when they refer to people’s actions which, given the number of them and extensive literature, deserve a separate review. the literature of behavioral http://www.ejge.org/ peón et al. / european journal of government and economics 6(1), 24-58 25 biases is so vast and boundless that trying to cover them all in detail would be unfeasible. thus, and in order to make it particularly helpful for non-initiated readers, we contribute in three instances. first, we provide an original taxonomy that is based on the reviews of relevant authors in the field. we then describe the most significant of those biases, and review the main contributions in regards to the theoretical, empirical and experimental developments. the impact of the contributions was filtered by their number of citations in the scopus database. finally, we provide a critical discussion in terms of the biases and anomalies that are linked to them, the lines of open debate and research, as well as the policy implications, according to the literature. the remainder of the article is laid out as follows: section 2 provides a taxonomy of biases classified in three groups; section 3 reviews the main heuristics and judgmental biases; section 4 is dedicated to choices, values and frames; section 5 surveys the main social factors; finally, section 6 analyzes some policy implications of the biases described. 2. searching for an inclusive taxonomy of behavioral most taxonomies of behavioral biases available use diverse classification rules and different names for similar concepts, what makes it difficult to provide an inclusive list satisfying all criteria. to circumvent these limitations, we start from some of the reviews provided by the founders of the field, including some nobel prize winners, to end up blending their views in a more inclusive taxonomy. they follow in order. kahneman, slovic and tversky (1982) list heuristics and biases in seven categories: representativeness, causality and attribution, covariation and control, overconfidence, conservatism, availability, and judgmental biases in risk perception. tversky and kahneman (1992) see five major phenomena: framing effects, nonlinear preferences, source dependence, risk seeking and loss aversion. plous (1993) separates perception, memory, and context; heuristics and biases; framing; models of decision-making; and social effects. kahneman and riepe (1998) classify heuristics, errors of preference –loss aversion and prospect theory (pt) and framing. rabin (1998) distinguishes mild biases (e.g. loss aversion), severe biases in judgment under uncertainty (e.g. confirmatory bias) and those implying a radical critique of the maximizing utility model (framing effects, preference reversals, and self-control). shiller (2000a) includes pt, regret and cognitive dissonance, mental accounting, representativeness, and overconfidence. mullainathan and thaler (2000) note three deviations from the standard model (bounded rationality, bounded willpower and bounded self-interest). barberis and thaler (2003) label beliefs (e.g. representativeness) and preferences (pt and ambiguity aversion). camerer and loewenstein (2004) list probability judgments (e.g. heuristics) and preferences (framing, anchoring, loss aversion, reference dependence, preference reversals, and hyperbolic discounting). akerlof and shiller (2009) note five aspects of animal spirits, including feedback mechanisms, attitudes about fairness, and social contagion. dellavigna (2009) separates non-standard preferences, non-standard beliefs, and non-standard peón et al. / european journal of government and economics 6(1), 24-58 26 decision-making. finally, recent surveys separate investor beliefs and preferences (sahi, arora and dhameja, 2013), sources of judgment and decision biases (hirshleifer, 2015). following the above, our taxonomy separates three categories: heuristics and judgmental biases; choices, values and frames; and social factors. this choice requires some clarification in regards to the terminology used. first, we use the generic term behavioral biases –or, simply, biasesto refer to any of them, while judgmental biases are a specific type of systematic errors that are induced by heuristics. second, the categories are devised following some authors in particular. we initially followed the spirit of kahneman and tversky’s work, which distinguishes (i) the heuristics that people use and the biases to which they are prone when judging in an uncertain context, (ii) the prospect theory, as a model of choice under risk, and loss aversion in riskless choice, and (iii) the framing effects (kahneman, 2003a,b). then, we merged pt (preferences, broadly speaking) and framing in a single category. we do this following tversky and kahneman (1981), who consider two phases in the choice process –an initial of framing and a subsequent of evaluation-, and barberis and huang (2009), who suggest framing and prospect theory form a natural pair. to name this category, we use the term ‘choices, values and frames’ following the classical article of kahneman and tversky (1984). finally, we include a third category of social factors, which refer to cultural and social influences on individuals’ behavior. plous (1993), shefrin (2000), and hens and bachmann (2008), among many others, advocate for this category. 3. heuristics and judgmental biases heuristics refer to economic shortcuts for information processing, or simple rules that ignore information (marewski, gaissmaier and gigerenzer, 2010). since information is vast, disperse, changes continuously and its gathering is costly, people develop rules of thumb to make decisions, what often leads them to make some errors (shefrin, 2000). griffin et al. (2012) provide a historical overview. in its initial conception, heuristics were restricted to the domain of judgment under uncertainty, a scope later broadened (kahneman and frederick, 2002) to a variety of fields that share a common process of attribute substitution. in other words, “difficult judgments are made by substituting conceptually or semantically related assessments that are simpler and more readily accessible” (kahneman and frederick, 2005: 287). open debate researchers focus on whether and when people rely on heuristics (e.g. cokely and kelley, 2009) or how accurate they are for predicting uncertain events (e.g. ortmann et al., 2008). however, two contrary views prevail. authors like gigerenzer and gaissmaier (2011) argue that heuristics are efficient shortcuts for inference, adaptive strategies that evolved in tandem with fundamental psychological mechanisms (goldstein and gigerenzer, 2002). no rule is assumed to be rational per se; what matters is to understand when a given heuristic performs better –a peón et al. / european journal of government and economics 6(1), 24-58 27 concept named ecological rationality. contrariwise, other authors identify two cognitive systems, reason and intuition, being the latter norm. in these dual-process theories (kahneman and frederick, 2005), heuristics would be the fast, intuitive, affect-driven and effortless cognitive system. through the process of attribution substitution, a target attribute of the judged object is substituted by a heuristic attribute, and since the target and heuristic attributes are different, it induces systematic errors in judgment and decision, known as judgmental biases. currently, the debate stands between those who observe a natural tendency to make errors – e.g. lacetera, pope and sydnor (2014) show heuristics matter even in markets with easily observed information and those who favor the ecological rationality – e.g. norman et al. (2014) see that encouraging increasing attention to analytical thinking does not improve diagnostic accuracy. in table 1 we collect some relevant heuristics and the judgmental biases associated to them. since both concepts specify how agents form expectations, there are authors who merge them in the same category. nonetheless, most researchers ― e.g. the original approach by tversky and kahneman (1974) ― consider first the heuristics people use, and then the biases they lead to. 3.1 availability heuristic availability is an information selection bias where the probability of an event is estimated by the ease with which occurrences can be brought to mind (tversky and kahneman, 1973). due to our limited attention, memory and processing capacities, we make decisions based on subsets of information that are easily available. the heuristic contributes to judgmental biases such as attention anomalies and an overreaction to new information (hens and bachmann, 2008), and the hindsight bias (camerer and loewenstein, 2004). related judgmental biases attention is a scarce resource and our ability to process information limited. an attention bias follows if the attributes that catch our attention are not critical, leading to suboptimal choices. memory has a limited capacity, too, so it works by reconstruction. a hindsight bias may result as a side-effect: in hindsight we exaggerate what we might have anticipated in foresight (fischhoff, 1982). the availability heuristic contributes to the bias, because events that occurred are easier to imagine than counterfactual ones (camerer and loewenstein, 2004). classic articles include odean (1999) on the attention bias and the excessive trading in financial markets, barber and odean (2008) on three indicators of attention for stock investors, and pan and statman (2010), who suggest that the hindsight bias amplifies regret. european journal of government and economics 6(1), june 2017, 24-58. table 1. heuristics and judgmental biases. heuristic judgmental biases related concepts literature availability attention bias overreaction availability and overreaction to new info (hens and bachmann, 2008) earnings announcement drift hirshleifer and teoh (2003): attention and earnings drift hindsight bias camerer and loewenstein (2004): availability contributes to hindsight bias representativeness law of small numbers gambler's fallacy tversky & kahneman (1974): gambler's fallacy and law of small numbers hot hand fallacy momentum and reversals rabin and vayanos (2010) extrapolation bias hens and bachmann (2008): extrapolation bias and representativeness base rate neglect cognitive dissonance tversky and kahneman (1982a) illusion of validity tversky and kahneman (1974) causality and attribution kahneman et al. (1982) conjunction & conjunction fallacy firstly considered a consequence of anchoring, but of representativeness after tversky and kahneman (1983). anchoring-andadjustment disjunction fallacies reference points anchoring falls from the heuristics list (kahneman and frederick, 2002) affect risk-as-feelings finucane et al. (2000) familiarity aversion to ambiguity status quo bias familiarity, aversion to ambiguity and status quo bias (ackert et al., 2005) recognition heuristic endowment effect recognition (gigerenzer et al., 1991), fluency (marewski et al., 2010) fluency heuristic home bias, underdiversif. seiler et al. (2013): familiarity and home bias (excessive) optimism wishful thinking barberis and thaler (2003) overconfidence self attribution bias cognitive dissonance moore and healy (2008) daniel et al. (1998): self-attribution and cognitive dissonance underand overreaction odean (1998): overconfidence and under/overreaction confirmation bias illusion of validity griffin and tversky (1992): illusion of validity and confirmation bias illusion of control shefrin (2000): illusion of control and overconfidence european journal of government and economics 6(1), june 2017, 24-58. open debate the clash between the efficient and the inefficient shortcut views stands on whether the availability heuristic is useful to assess probability because instances of large classes are better recalled, or it leads to decision biases since it is affected by factors other than frequency –e.g. imagination, familiarity and salience. thus, heath, larrick and klayman (1998) argue its effects are ubiquitous because of a lack of experience with unusual events. instead, the efficient approach suggests that results like the hindsight bias, rather than a reconstruction of the prior judgment, is a by-product of the adaptive process of updating of knowledge after feedback (hoffrage, hertwing and gigerenzer, 2000). recent research on the availability heuristic shows its effect on social media (chou and edge, 2012). the attention bias might explain the post-earnings announcement drift (hirshleifer and teoh, 2003) and the accruals anomaly (battalio et al., 2012), though cready et al. (2014) criticize the spurious effects attributable to misclassification of transactions. recent research on the hindsight bias includes theoretical (roese and vohs, 2012) and experimental research – chelley-steeley, kluger and steeley (2015) obtain positive results, calvillo (2014) highlights individual differences. 3.2 representativeness heuristic tversky and kahneman (1983) define representativeness as the degree of correspondence between an outcome and a model. it implies a tendency to rely on stereotypes, particularly when it comes to estimating probabilities (shleifer, 2000). hence, the representativeness heuristic explains several biases of judgment under uncertainty. we see them next. related judgmental biases one intuition people have about random sampling is the law of small numbers, a tendency to exaggerate how closely a small sample will resemble the parent population (tversky and kahneman, 1971). linked to representativeness after tversky and kahneman (1974), it leads to a gambler’s fallacy (rabin, 1998), a belief in the hot hand fallacy (rabin, 2002), and the extrapolation bias (shefrin, 2000). the gambler’s fallacy is a classic misconception of what regression to the mean implies: a belief that random sequences should exhibit systematic reversals (rabin and vayanos, 2010). similarly, a hot hand fallacy implies a failure to appreciate statistical independence, but involves instead the belief in an excessive persistence rather than reversals. related to that, the extrapolation bias suggests that people bet on trends (shefrin, 2000). the lack of expertise in probability assessment is related to two other biases. prior probabilities (base-rate frequencies) play a key role in probability assessment but none on peón et al. / european journal of government and economics 6(1), 24-58 25 representativeness, implying a base rate neglect (tversky and kahneman, 1974). prendergast and stole (1996) relate it to a cognitive dissonance reduction, where individuals overweight their own information. moreover, a conjunction fallacy appears when people believe the probability of a conjunction of two events is greater than that of one of its constituents. bar-hillel (1973) set an antecedent, though the fallacy is original of tversky and kahneman (1982b) and their classic linda experiment. finally, two additional judgmental biases related to the representativeness heuristic are an illusion of validity, when the confidence people have in their predictions depends on the degree of representativeness (einhorn and hogarth 1978), and causality and attribution, when people attempt to infer the causes of the effects observed and incur in errors related to salience, availability and representativeness –after attribution theory by weiner (1985). open debate recent advances in the study of representativeness include a memory-based model of probabilistic inference by gennaioli and shleifer (2010), and empirical evidence of a bayesian updating failure (alós-ferrer and hügelschäfer, 2012). there is also consistent evidence of most judgmental biases in different instances. thus, huber, kirchler and stöckl (2010) obtain experimental evidence of a gambler’s fallacy effect in investment decisions, while rieger (2012) and erceg and galic (2014) perform experimental tests of the effects of conjunction and disjunction fallacies on markets. liberali et al. (2012) explore the mechanisms underlying how individual differences in numeracy lead to these biases. notwithstanding, a controversial judgmental bias today is the base rate neglect (gigerenzer, 1991). first, it seems in contradiction to the widespread belief that judgments are affected by stereotypes (landman and manis, 1983). besides, in regards to the efficient shortcuts debate, cosmides and tooby (1990) rephrased in a frequentist way the questions in the experimental research of tversky and kahneman (1982a), and found the base-rate fallacy disappeared. a recent contribution by pennycook et al. (2014) offers a mixed interpretation: though base rates are indeed neglected, they may be accessible through intuitive reasoning. other minor sources of disagreement include whether men (suetens and tyran, 2012) or women (stöckl et al., 2015) are more prone to display a hot hand fallacy. 3.3 affect heuristic the list of heuristics changed after the concept of attribution substitution was introduced by kahneman and frederick (2002). on one hand, anchoring did not fit as a heuristic anymore, as it does not work through the substitution of one attribute for another. ever since, most authors (e.g. camerer and loewenstein, 2004) label it as an error of preference that derives from the existence of reference points (see section 4). on the other hand, it put the affect heuristic (finucane et al., 2000) on the list. the heuristic is driven by affect, a natural assessment, peón et al. / european journal of government and economics 6(1), 24-58 26 automatically computed and always accessible, so the basic evaluative attribute (e.g. good/bad, like/dislike) is a candidate for substitution in any task that calls for a favorable or unfavorable response. open debate failing to identify the affect heuristic “reflects the narrowly cognitive focus that characterized psychology for some decades. there is now compelling evidence that every stimulus evokes an affective evaluation” (kahneman and frederick, 2002: 55). affect provides a faster intuition than retrieving from memory. recent contributions include theoretical (haack, pfarrer and scherer, 2014) and experimental (pachur and galesic, 2013; jaspersen and aseervatham, 2015). a sideline theory is the model of risk-as-feelings (loewenstein et al., 2001, slovic et al., 2002), an alternative to cognitive theories of choice under risk that emphasizes the role affect plays: beliefs about risk would be expressions of emotion that often diverge from cognitive assessments. lupton (2013) further elaborates the theory, arguing that both emotion and risk judgments are collectively configured via social and cultural processes. 3.4 familiarity familiarity is the most common name in the literature to refer to a set of emotionally and cognitively driven heuristics. on one hand, there is evidence we make decisions based on the degree of closeness we feel about different alternatives. thus, familiarity is related to fear of change and the unknown (cao et al., 2011) and to ambiguity aversion. on the other, the recognition (gigerenzer, hoffrage and kleinbölting, 1991), and fluency heuristics (marewski et al., 2010) show that the reasons for familiarity may be cognitive as well. heuristics and related judgmental biases two processes govern the recognition heuristic, recognition and evaluation. recognition is the capacity to make inferences in cases of limited knowledge (goldstein and gigerenzer, 2002: 75): “if one of two objects is recognized and the other is not, recognition heuristic infers that the recognized object has the higher value with respect to the criterion”. evaluation judges the heuristic as ecologically rational whenever the recognition validity for a given criterion is much higher than chance. it allows people to benefit from ignorance by making inferences from memory and patterns of missing knowledge. in case two alternatives are recognized, the fluency heuristic fills the gap: if one alternative is recognized faster than another, the heuristic infers the one with the higher value (schooler and hertwig, 2005). schwikert and curran (2014) analyze the memory processes that contribute to the recognition and fluency heuristics. related to familiarity is an aversion to ambiguity (ackert et al., 2005). if ambiguity is the uncertainty about uncertainties (einhorn and hogarth, 1986), ambiguity aversion describes a peón et al. / european journal of government and economics 6(1), 24-58 27 preference for known over unknown risks, as shown in the ellsberg paradox (thaler, 1983). early papers include fellner (1961), who introduced decision weights. open debate recent advances to understand how familiarity and ambiguity aversion operate include neurogenetic studies (chew, ebstein and zhong, 2012). they would help explain anomalies such as the status quo bias (ackert et al., 2005), underdiversification (boyle et al., 2012), and their implications on insurance (alary, gollier and treich, 2013) and asset pricing (füllbrunn, rau and weitzel, 2014). however, this is an open field of research, as contradictory results were obtained. roca, hogarth and maule (2006) show that the status quo bias could lead to ambiguity seeking, and einhorn and hogarth (1986) specify some conditions for ambiguity seeking and avoidance. etner, jeleva and tallon (2012) provide a review on advances in the field. regarding recognition, being the most frugal heuristics (goldstein and gigerenzer, 1999), the debate centers around its efficiency: if ignorance is systematically distributed, recognition and criterion are correlated and the heuristic leads to efficient results. schooler and hertwig (2005) suggest a beneficial forgetting, where loss of information aids inference heuristics that exploit mnemonic information, while ortmann et al. (2008) get mixed results when analyzing how the heuristic performs in portfolio management. gigerenzer and goldstein (2011) survey the literature. 3.5 excessive optimism and overconfidence excessive optimism and overconfidence are two of the most relevant heuristic-driven biases. however, they are often confounded in the literature. indeed, overconfidence may refer to different concepts, what added more noise to the debate. optimists overestimate favorable outcomes and underestimate unfavorable ones (shefrin, 2006). overconfidence, instead, may refer to three different concepts (moore and healy, 2008): overestimation in estimating our own performance; overplacement (better-than-average effect) in estimating our own performance relative to others; and overprecision, an excessive precision to estimate future uncertainty, what entails a miscalibration of subjective probabilities. open debate behaviorists suggest it is heuristics and cognitive biases that cause the overconfidence phenomenon. however, two alternative views are the brunswikian or ecological models (gigerenzer et al., 1991), according to which people are good judges of the reliability of their knowledge as long as such knowledge is representatively sampled, and thurstonian or error models (erev, wallsten and budescu, 1994), which interpret overconfidence as merely an peón et al. / european journal of government and economics 6(1), 24-58 28 illusion, created by unrecognized regression. despite its popularity, the behaviorist interpretation does not provide a clear answer on which heuristics or biases drive excessive optimism and overconfidence. some authors suggest they may have evolved under natural selection, while others allege drivers such as the illusion of validity (rabin and schrag, 1999), the hindsight bias (fischhoff, 1982), and a confirmation bias (koriat, lichtenstein and fischhoff, 1980) for overconfidence, and affect (bracha and brown, 2012), self-attribution bias (lovallo and kahneman, 2003), as well as wishful thinking and overconfidence itself (barberis and thaler, 2003), for overoptimism. many models in finance use overconfidence to explain over and underreaction (daniel, hirshleifer and subrahmanyam, 1998), asset bubbles (scheinkman and xiong, 2003) and excessive trading volume (odean, 1998). it also helps explain the forward premium puzzle (burnside et al., 2011) and sensation seeking (grinblatt and keloharju, 2009). research on managerial overconfidence is a classic as well, causing excessive business entry (camerer and lovallo, 1999) and high rates of mandas (malmendier and tate, 2005). related judgmental biases people exhibit a self-attribution bias when they attribute to their ability events that validate their actions, while attribute contrary evidence to external noise or sabotage (bem, 1965). daniel et al. (1998) relates it to cognitive dissonance. a confirmation bias is observed when, once formed a strong hypothesis, people pay attention to news that support their views and ignore those that contradict them. griffin and tversky (1992) link it to the illusion of validity to induce overconfidence. finally, people exhibit an illusion of control when they behave as though chance events were subject to their control (langer, 1975). some anomalies attributed to be consequence of a biased self-attribution are feedback effects that may cause over and underreaction (daniel et al., 1998), and the spread of stories that is essential in the formation of speculative bubbles (shiller, 2003). recent literature includes libby and rennekamp (2012) and troye and supphellen (2012). empirical tests on the confirmation bias include duong, pescetto and santamaria (2014) on investors’ use of financial information. finally, recent research on the illusion of validity includes cowley, briley and farrell (2015). 4. choices, values and frames the second group of behavioral biases follows tversky and kahneman (1981, 1992), who consider two phases in the choice process: an initial of framing and a subsequent of evaluation. regarding framing, behaviorists have shown that people do not choose in a comprehensively inclusive context as the rational-agent model predicts. in particular, invariance –i.e., the fact that preferences are not affected by inconsequential variations in the description of outcomes (kahneman, 2003a)is violated, since alternative descriptions lead to different choices by only peón et al. / european journal of government and economics 6(1), 24-58 29 altering the salience of different features. framing effects include a variety of biases related to two classics in the literature: frame dependence and mental accounting (thaler, 1985). in regards to evaluation, we have prospect theory (pt) on one hand (kahneman and tversky, 1979), a descriptive theory of choice that explains how individuals evaluate the outcomes of risky prospects and choose in consequence. on the other, the empirical evidence that people make inconsistent choices in decisions over time led to the literature on intertemporal preferences, which started with problems of self-control (thaler and shefrin, 1981). framing, pt, intertemporal preferences, and the biases related to them are listed in table 2, and reviewed below. table 2. choices: framing and preferences. framing & preferences related concepts literature fr am in g frame dependence narrow framing equity premium puzzle barberis and huang (2007): narrow framing, equity premium puzzle loss aversion tversky and kahneman (1986) money illusion kahneman et al. (1986a) context dependence tversky and simonson (1993) repeated gambles kahneman and riepe (1998) hedonic editing mental accounting house money effect thaler (1999) self-control thaler and shefrin (1981) choice bracketing choice bracketing (read et al. 1999) p ro sp ec t t he or y reference dependence anchoring-and anchoring not heuristic, related to reference points (rabin, 1998) adjustment conservatism conservatism: chan et al. (1996) loss aversion myopic loss aversion benartzi and thaler (1995) diminishing sensitivity risk seeking aversion to a sure loss shefrin (2006) favorite longshot bias tversky and kahneman (1992) in te rt em po ra l pr ef er en ce s preference reversals projection bias projection bias: loewenstein et al. (2003) self control precommitment self-control: loewenstein (1996) hyperbolic discounting present bias frederick et al. (2002) 4.1 frame dependence framing, defined as a decision-maker’s conception of the acts, outcomes and contingencies associated with a particular choice (tversky and kahneman, 1981), may produce predictable shifts of preference when the problem is framed differently ― a result known as frame dependence. a basic principle is the passive acceptance of the formulation given (rabin, 1998). framing influences loss aversion and diminishing sensitivity – see pt below. thus, a frame that highlights losses makes a choice less attractive, while if it makes them small relative to the scales involved it exploits diminishing sensitivity, making the choice attractive (tversky and peón et al. / european journal of government and economics 6(1), 24-58 30 kahneman, 1986). besides, related to frame dependence are the concepts of narrow framing, context effects, repeated gambles and hedonic editing. we see them next. related concepts narrow framing (kahneman and lovallo, 1993) is the tendency to analyze problems in a specific context without reflection of broader considerations (hirshleifer and teoh, 2003), such as evaluating risks in isolation, apart from others they already face (barberis and huang, 2009). context dependence (tversky and simonson, 1993) appears when an individual’s preferences among options depend on which other options are in the set (camerer and loewenstein, 2004), in a way that adding or subtracting options in a menu may affect the choice. the literature review of rooderkerk, van heerde and bijmolt (2011) observes a robust evidence of three types of context effects. kahneman and riepe (1998) show that most people do not distinguish between one-time choices and repeated gambles, setting the same cash-equivalent in both cases despite the fact that statistical aggregation reduce the relative risk of a series of gambles. benartzi and thaler (1999) relate the bias to myopic loss aversion. open debate recent articles include lab experiments (schlüter and vollan, 2015) as well as field research (hossain and list, 2012), both with positive results. however, cason and plott (2014) identify four aspects that contribute to the tension between standard preference theory and the theory of framing. some asset pricing models incorporate narrow framing, such as barberis and huang (2009) and de giorgi and legg (2012). in addition, it help explain market anomalies such as the equity premium puzzle (barberis and huang, 2007). finally, cornelissen and werner (2014) reviews framing in the management literature. evidence of choice effects includes empirical (hu and li, 2011) and experimental research (carlsson and martinsson, 2008). in addition, bordalo, gennaioli and shleifer (2012, 2013) analyze the effects of salience in context-dependent consumer choice and choice under risk. finally, regarding repeated gambles, liu and colman (2009) compare them with ambiguity aversion, and lejarraga and gonzalez (2011) observe that decision makers neglect descriptive information when they can learn from experience. 4.2 mental accounting closely related to framing, mental accounting refers to the implicit methods that individuals use to code and evaluate transactions, keeping track of and evaluating them like financial accounting in firms (thaler, 2008). statman (1999: 19) puts it briefly that people think “some money is retirement money, some is fun money, some is college education money, and some is vacation money”. thaler (1985, 1999) explains people engage in mental accounting activities in peón et al. / european journal of government and economics 6(1), 24-58 31 three instances: how outcomes are perceived and decisions are made, how activities are assigned to specific accounts, and the frequency with which accounts are evaluated. related concepts related to both frame dependence and mental accounting, hedonic editing refers to the evidence that people code combinations of events in a way it makes them happier (thaler, 1999). thaler and johnson (1990) provided a theory. choice bracketing refers to the grouping of individual choices into sets (read, loewenstein and rabin, 1999). narrow bracketing leads to myopic risk seeking (haisley, mostafa and loewenstein, 2008) and myopic loss aversion (hardin and looney, 2012). open debate positive empirical results of mental accounting include consumption, when it is temporally separated from purchase (shafir and thaler, 2006), and experimental evidence about inventory decisions (chen, kök and tong, 2013). models based on the mental accounting principle include the behavioral portfolio theory (shefrin and statman, 2000; das et al., 2010). pan and statman (2010) obtain empirical evidence of risk attitude changing across mental accounts of growth and value investments. finally, recent research includes sul, kim and choi (2013), who compare hedonic editing to subjective well-being, and koch and nafzinger (2016), who develop a model of endogenous bracketing where people set either narrow or broad bracketing to tackle self-control problems. 4.3 prospect theory prospect theory is the best known descriptive theory of decision-making under risk. for a closest insight in such an extensive literature we recommend barberis (2013). in short, according to pt, individuals evaluate the outcomes of risky prospects through a value function, where the carriers of value are changes in wealth compared to a reference point rather than final assets, and a probability weighting function, where probabilities are replaced by decision weights –in accordance with the empirical fact that people tend to put much weight on rare events. tversky and kahneman (1992) developed an extended version, cumulative prospect theory. it accounts for a fourfold pattern of risk attitudes confirmed by experimental evidence: people tend to exhibit risk aversion for gains but risk seeking for losses of high probability, and risk seeking for gains but risk aversion for losses of low probability. in addition, a value function that is steeper for losses than for gains implies loss aversion. thus, three features are essential: reference dependence (the carriers of value are gains and losses defined relative to a reference point), loss aversion (the value function is steeper in the negative than in the positive domain) peón et al. / european journal of government and economics 6(1), 24-58 32 and diminishing sensitivity (the marginal value of both gains and losses decreases with their size). this results in a value function that is kinked at the reference point, concave above and convex below, and represents investor’s loss aversion. moreover, diminishing sensitivity applies to the weighting function as well. these three features are analyzed separately in what follows. 4.3.1 reference dependence in pt, it is not final states what carries utility and matters for choice, but changes relative to a reference point. reference dependence is closely related to diminishing sensitivity and loss aversion, and induces two classic behavioral biases, namely, anchoring and conservatism. related concepts anchoring-and-adjustment is a key judgmental bias in risk perception. tversky and kahneman (1974: 1128) first described it as “people make estimates by starting from an initial value that is adjusted to yield the final answer”, an adjustment that is often insufficient. anchoring and reference dependence help to explain decision effects such as the classic status quo bias (tversky and kahneman, 1991). besides, conservatism, defined as the slow updating of models in face of new evidence (shleifer, 2000), explains why markets often respond gradually to new information, what might explain the profitability of momentum strategies (chan, jegadeesh and lakonishok, 1996). open debate though there is extensive evidence that perception is reference dependent, the debate continues in different instances. first, in terms of how reference points are set. common candidates include the buying price in stock markets (shefrin and statman, 1985) and the subject’s rational expectations given the economic environment (kõszegi and rabin, 2006). however, koop and johnson (2012) provide experimental evidence of multiple reference points in risky decision-making, and schmidt and zank (2012) provide a model of endogenous reference points. second, reference points may change over time, following gains and losses. arkes et al. (2008) observe an asymmetric adaptation that suggests hedonic editing: the magnitude of the adaptation is significantly greater following a gain than after a loss of equivalent size. baucells, weber and welfens (2011) find reference points are not recursive, in the sense that the new one is not a combination of the previous one and the new information. arkes et al. (2010) analyze how cultural differences influence reference point adaptation. the debate on anchoring is even better. a first wave of research, which assumed that the reference point was given in the formulation of the problem, is over (epley and gilovich (2010). epley and gilovich (2001, 2006) found anchoring effects for self-generated anchors, hence a second wave of research searched the psychological mechanisms that produce them. peón et al. / european journal of government and economics 6(1), 24-58 33 frederick, kahneman and mochon (2010) provide a theory. finally, a third wave makes predictions on the consequences of anchoring. furnham and boo (2011) provide a review. regarding conservatism, recent research relates return predictability in stock markets to gaap conservatism principle (ball, kothari and nikolaev, 2013). 4.3.2 loss aversion subjects assign more significance to losses than to gains with respect to the reference point. this asymmetry in the value function implies loss aversion: people suffer a loss more acutely than they enjoy a gain of the same magnitude. however, this represents a contradiction to rational choice, because the basic property of expected utility theory that two indifference curves never intersect no longer holds (knetsch, 1989). the influence of loss aversion in choices is observed in different contexts (see novemsky and kahneman, 2005), and it may explain empirical findings like the disposition effect (shefrin and statman, 1985) and why consumers and managers may take fewer risks (rabin, 2000). related concepts the combination of loss aversion and the investors’ common habit of evaluating their portfolios frequently is known as myopic loss aversion (benartzi and thaler, 1995). thaler et al. (1997) provided empirical evidence. langer and weber (2005) extend the concept to myopic prospect theory: when myopic loss aversion combines with diminishing sensitivity and probability weighting, the effect of myopia might increase the willingness to invest. open debate there is plenty of literature, including kahneman and tversky’s research, exposing the impact of loss aversion. moreover, cesarini et al.(2012) show loss aversion is moderately heritable. however, some limits were identified. three examples follow. first, exchange goods given up as intended, like money paid in purchases, do not exhibit loss aversion (novemsky and kahneman, 2005). second, there is mixed evidence of loss aversion on feelings, because judging feelings does not necessarily require comparison (mcgraw et al., 2010). third, polman (2012) shows loss aversion is lessened when we choose for others. finally, regarding myopic loss aversion, gneezy, kapteyn and potters (2003) provide experimental evidence, and fellner and sutter (2009) discuss debiasing techniques. 4.3.3 diminishing sensitivity marginal effects in perceived well-being are greater for changes close to the reference level than for changes further away (rabin 1998). this third essential feature of prospect theory peón et al. / european journal of government and economics 6(1), 24-58 34 applies to both the value and weighting functions. noting diminishing sensitivity is a pervasive pattern of human perception, kahneman and tversky (1979) conjectured the value function would be concave for gains and convex for losses –the latter implying risk seeking to avoid losses. regarding the weighting function, diminishing sensitivity entails that the impact of a given change in probability diminishes with its distance from two natural boundaries, certainty and impossibility, the endpoints of the scale (tversky and kahneman, 1992). consequently, risk-seeking choices are observed in two instances: the aversion to a sure loss, which stems from the shape of the value function, and the favorite-longshot bias –a miscalibration of probabilities often related to the weighting function. related concepts the aversion to a sure loss is a risk-seeking choice in the negative domain. most people are risk averse, but only when confronted with the expectation of a financial gain. instead, when facing the possibility of losing money, they behave as risk lovers, choosing to accept an actuarially unfair risk in an attempt to avoid a sure loss (shefrin, 2006). the favorite-longshot bias is commonly observed in betting markets. bettors put too much weight on rare events (longshot bets) and underestimate the probability of favorites, making the expected return on longshot bets systematically lower than on favorite bets (ottaviani and sorensen, 2007). open debate the favorite-longshot bias is one of the most studied biases. firstly documented in horse-race betting (griffith, 1949), recent studies include derivatives markets (hodges, tompkins and ziemba, 2008), prediction markets (page and clemen, 2013), and sports (lahvicka, 2014). the debate centers around its rationale, including misestimation of probabilities, informational asymmetries (shin, 1992), and limited arbitrage (ottaviani and sorensen, 2007). regarding the aversion to a sure loss, researchers are more focused on its interpretation. adam and kroll (2012) suggest decision makers perceive lotteries as dynamic processes where emotions may lead to attraction to chance, while schwager and rothermund (2013) provide evidence on the effects of framing and attention bias. 4.4 preference reversals intertemporal preferences are rational if they are time consistent. however, empirical evidence shows people do exhibit reversals, have problems to commit with decisions they took in the past, and exhibit present-biased preferences. we see these concepts together under the epigraph of preference reversals, which include problems of self-control, and a present bias in intertemporal decision-making. peón et al. / european journal of government and economics 6(1), 24-58 35 related concepts standard models compare preferences over time with exponential discounting, implying time consistency and 100% short-term patience. however, there is evidence that people exhibit a present bias or hyperbolic discounting, as preferences typically reverse with changes in delay (kirby and herrnstein, 1995). related to such reversals is a projection bias: people exaggerate the degree to which their future tastes will be similar to their current ones, what makes them save less than originally planned as time passes (loewenstein, o’donoghue and rabin, 2003). self-control (and precommitment) relates to that, as being aware in advance that our preferences may change, we sometimes make certain decisions to restrict our own future flexibility (loewenstein, 1996). open debate a classic review by frederick, loewenstein and o’donoghe (2002) observes cross-study differences in discount rates, against the assumption of a single rate under exponential discounting. however, the debate continues today. andersen et al. (2008) showed that a joint estimation of risk and time preferences is required, so the discounting anomalies previously observed had to be re-tested. andersen et al. (2014) find no evidence favorable to hyperbolic discounting. recent advances include a model of preference reversals (tsetsos, chater and usher 2012), and the work of stevens (2016), who suggests people do not discount, rather they compare within attributes (amounts and delays). recent research includes zeisberger, vrecko and langer (2015) about the projection bias, and on self-control an experimental research by burger, charness and lynham (2011) and an interpretation of the cash-credit co-holding puzzle (gatherwood and weber, 2014). 5. social factors the last category compiles the items that refer to the impact of cultural and social factors on individual’s behavior. this is the least developed and structured body of literature in the behavioral economics and finance, but according to hirshleifer (2015: 133): “the time has come to move beyond behavioral finance to social finance, which studies the structure of social interactions, how financial ideas spread and evolve, and how social processes affect financial outcomes.”. the social factors are shown in table 3 and reviewed below. peón et al. / european journal of government and economics 6(1), 24-58 36 table 3. social factors. social factors related concepts literature global culture cultural differences guiso et al. (2006); statman and weng (2010) social contagion obediency to authority herd behavior social contagion: asch (1952). herding: shiller (2000b) communal reinforcement & groupthink (collective) confirmation bias shiller (1984); janis (1972) shefrin and cervellati (2011) status, social comparison self esteem, pride, prejudice rabin (1998) cooperation, altruism fairness and justice kahneman et al. (1986a,b) greed and fear familiarity fear of the unknown and familiarity bias (cao et al., 2011) status quo bias fear of change and status quo bias (samuelson & zeckhauser, 1988) informational cascades availability cascades asset bubbles shiller (2002b): cascades and bubbles herding bikhchandani et al (1998): cascades and herding 5.1 global culture culture is the values that ethnic, religious, and social groups transmit across generations (statman and weng, 2010). shiller (2000a) notices the emergence of a global culture in a convergence of fashions across countries separated by physical and language barriers, and suggests these cultural factors help explain the dot-com bubble. stulz and williamson (2003) claim culture may affect finance through the country values, institutions, and how resources are allocated. related social factors though a global culture might be emerging, cultural differences are also ubiquitous. the best studied case is perhaps the differences between east asians and americans. thus, east asians exhibit a broader perceptual and conceptual view of the world and live in more complex social networks (nisbett and masuda, 2003), and they exhibit different patterns in terms of overconfidence and the disposition effect (chen et al., 2007). open debate culture has had a significant influence on social psychology (e.g. miller, 1984), but economists were reluctant to use it as an explanatory factor because of the vague and ubiquitous ways it can enter the economic discourse, making it difficult to design testable hypotheses (guiso, sapienza and zingales, 2006). recent techniques and data made it possible to identify peón et al. / european journal of government and economics 6(1), 24-58 37 systematic differences in people’s beliefs, and relate them to their cultural legacy (e.g. levinson and peng, 2007). some authors have analyzed how it affects expectations and preferences. these include henrich et al. (2001) on variations across tribes in the ultimatum and dictator games, and hoff and priyanka (2004) who show the effects of social inequality linger: beliefs that are the legacy of extreme inequality for generations determine individual’s expectations that reproduce the inequality. studies on cultural differences in economic and financial variables include statman and weng (2010), who find different borrowing and investing patterns of immigrants long after they settled in their new countries, and beugelsdijk and frijns (2010), who show that the degree of cultural distance between two countries affects foreign asset allocations. recent literature analyzes the effects on corporate structure (bloom, sadun and van reenen, 2015), innovation rates (taylor and wilson, 2012), and corporate mandas (ahern, daminelli and fracassi, 2015). 5.2 social contagion research on cultural differences focuses on inherited, slow-moving components of societies, while social interaction focuses on peer group effects that can be viewed as the fast-moving component of culture (guiso et al., 2006). the antecedents in the study of social contagion are the experiment of sherif (1937) on the autokinetic effect, and the classic experiments of asch (1952). related social factors a classic in the literature is obedience to authority. the experiments of milgram (1963) showed few people have the initiative to resist authority, to the point of performing acts that violate their deepest moral beliefs. years before, festinger (1957) analyzed the effects of forced compliance, showing that a person forced to do something contrary to her opinion may change her view in order to avoid cognitive dissonance. communal reinforcement is a type of social dynamics related to social learning and the psychology of individual suggestibility (katona, 1901). shiller (1984) gives the example of investors who follow gurus, read magazines, discuss investments with other investors... and through this process, market psychology influences markets. groupthink is the tendency of cohesive groups to reach consensus without offering, seeking or considering alternative hypotheses (lunenburg, 2010). janis (1972) identifies some symptoms, like an excessive risk-taking, and members imposing themselves a self-censorship to avoid appearing as a dissenter. shefrin and cervellati (2011) interpret it as a form of collective confirmation bias. peón et al. / european journal of government and economics 6(1), 24-58 38 open debate likewise other social factors, there is an increasing interest in the recent decades for the study of social contagion. nonetheless, the literature review by manski (2000) suggests that the neoclassical view, where non-market interactions are not of interest, ended by the 1970s with the adoption of non-cooperative dynamic game theory. recent contributions include empirical research by rapp et al. (2013), and experimental studies on viral marketing (aral and walker, 2014). in regards to obedience to authority and social contagion, there are two opposite views. the classic one highlights the negative impact they have in financial markets, like herding and asset bubbles (e.g. shiller, 2000b). contrariwise, ent and baumeister (2014) observe that obedience to legitimate authority may be positive, encouraging individuals to set aside their selfish desires for the good of the group. recent research includes mayo-wilson, zollman and danks (2012) on individual and group rationality, and the model by nofsinger (2012) on asset bubbles fueled by groupthink. 5.3 status, envy and social comparison a field of social psychology relevant to economics is the self-perception compared to others, and the feelings of jealousy, self-esteem, pride and prejudice such comparison provokes. we denote this category status, envy and social comparisons following rabin (1998). not all feelings stemming from social comparisons are negative, as cooperation (argyle, 1991) and reciprocal altruism (trivers, 1971) may be included here. open debate early literature already suggested that social comparison occurs in many forms of human interaction, including social status (ball and eckel, 1998), reciprocity and altruism (gilbert, price and allan, 1995), and consumer dissatisfaction, when they compare themselves with the idealized advertising images (richins, 1991). more recently, researchers have focused on testing, whether in the lab or in the field, motivations and effects of social comparison and cooperative behavior. these include experimental tests of the effects of social status (ball et al., 2001), and the motivations for pro-social behavior (carpenter and myers, 2010). 5.4 fairness and justice fairness and justice were recurrently absent from standard economic theory, a striking contrast when compared to other social sciences (kahneman, knetsch and thaler, 1986b). we first find fairness in the literature of efficiency wages, as well as in the literature of customer markets (okun, 1981). three reasons related to fairness why people are willing to spend money are in order to punish others who have harmed them, to reward those who have helped, or to make peón et al. / european journal of government and economics 6(1), 24-58 39 outcomes fairer (camerer and loewenstein, 2004). fairness and justice are related to behavioral effects like money illusion (kahneman, knetsch and thaler, 1986a) and helps to determine people’s reference prices (thaler, 1985). open debate the classic approach to trace evidence of decisions based on fairness and justice analysis is using dictator and ultimatum games (güth, schmittberger and schwarze, 1982). camerer and thaler (1995) provide a review on ultimatum games and list (2007) on dictator games. researchers focus on topics like moral values (sen, 1995), equity and competition (bolton and ockenfels, 2000), perceptions of fairness (nguyen and klaus, 2013), and inequality and preferences for redistribution (durante, putterman and van der weele, 2014). 5.5 greed and fear being emotional factors, greed and fear might indeed be related to the affect heuristic in section 3. however, we opt to classify them as social factors because these biases tend to appear when individuals interact with each other. two related biases are fear of the unknown, an explanation for the familiarity heuristic (cao et al., 2011), and fear of change, a possible explanation for the status quo bias (samuelson and zeckhauser, 1988). open debate the effects of greed and fear are particularly pervasive in financial markets, where they are alleged to play a key role in concepts like market sentiment, bubbles and crashes, and others. indeed, shefrin (2000) identifies human emotions as determinants of risk tolerance and portfolio choice. pan and statman (2010) show risk tolerance varies with test conditions and the emotions associated to them. lo, repin and steenbarger (2005) offer experimental evidence of a negative correlation between successful trading and emotional reactivity. despite these results, the effects of emotions over market efficiency are far from being widely accepted. for instance, shleifer (2004) asserts that the unethical behavior blamed to stem from greed is often a consequence of market competition. recent research on greed and fear includes lee and andrade (2011), who show social projection explains why fear leads to early sell-off in a stock market simulation, and cohn et al.(2015), who provide experimental evidence that fear may play an important role in countercyclical risk aversion. peón et al. / european journal of government and economics 6(1), 24-58 40 5.6 informational cascades we learn by observing what others do, and then we imitate them. imitation would be an evolutionary adaptation for survival, allowing individuals to take advantage of the hard-won information of others. significant market events only occur if large groups of people think the same, and news media might act as precipitators of attention cascades and the spread of ideas. some phenomena such as herding, fads, asset bubbles and crashes might be consequence of informational cascades (bikhchandani, hirshleifer and welch, 1998). related social factors availability cascades are self-reinforcing processes of collective belief formation that have a combination of informational and reputational motives as driving factors (kuran and sunstein, 1999). by the availability heuristic, people judge the importance of a theme according to their ability to remember examples of it. then, as a chain reaction result, the more people talk about an issue the more relevant it seems due to its rising availability in public discourse, leading to a self-reinforcing cycle (hirshleifer, 2008). open debate a line of research today in process focuses on theoretical modeling of the disruptive or corrective nature of informational cascades. for instance, wu (2015) suggests that the probability of wrong cascades decreases if laymen are among a group of experts, while the model of rubin (2014) suggests that cascades inducing larger shocks are more likely to happen in regimes with centralized coercive power. 6. conclusions and policy implications the impact of behavioral biases in financial and consumer markets has many implications for the way in which these markets work. however, there is no consensus on how to address this issue from a public policy intervention perspective. there are three basic approaches –namely, debiasing techniques, liberal paternalism, and active policy-makingand all of them have supporters and detractors. the logic behind debiasing is, if people make biased decisions (positive economics) from what is standard rationality (normative economics), perhaps we may help them to choose better. croskerry, singhal and mamede (2013) provide a recent discussion on several approaches towards debiasing. the idea itself makes no sense for some authors, either under the interpretation of the ecological rationality of the heuristics (gigerenzer and gaissmaier, 2011), or the contrary: when the limitations of the normative model have become so obvious, it is nonsense to insist upon changing humanity to conform to it (frankfurter, mcgoun and allen, peón et al. / european journal of government and economics 6(1), 24-58 41 2004). others advocate for improving financial literacy (e.g. altman, 2012), while for other authors there is evidence that learning and expertise may do little to eliminate biases (rabin, 1998) or even might exacerbate errors (griffin and tversky, 1992). in any case, debiasing would require intervention, since there are many reasons to doubt individuals can debias themselves (kahneman, 2003b). two approaches are trying to increase motivation to perform well, and setting strategies that are closer to normative standards –known as prescriptive decision making. liberal paternalism (thaler and sunstein, 2003) is a smoother approach for prescriptive debiasing. it criticizes the assumption that people always make choices that are in their best interest, and explores different methods to help consumers and investors improving their decision making and enhance their well-being (see ratner et al., 2008). while being paternalistic in the sense that it seeks to help people make better choices, it is liberal in the sense that it also respects freedom of choice. for such purpose, it exploits the passive acceptance of the formulation given (e.g. the status quo bias) or it uses some behavioral traits by the decision maker to reduce other biases –for instance, mental accounting and framing to mitigate self-control problems (thaler and shefrin, 1981). although behavioral biases may affect consumer decisions or lead to anticompetitive behavior by firms, some authors discredit paternalism and oppose public intervention. cooper and kovacic (2012) provide a model that depicts how greater state intervention, especially if oriented to correct firm biases, is likely to lead regulators to adopt policies closer to the preferences of political overseers, either intentionally, or accidentally (due to bounded rationality). the same interpretation would follow in financial markets. behaviorists such as daniel, hirshleifer and teoh (2002) observe that the same psychological biases that affect investors would affect regulators. rather than correcting market pricing errors, for which they do not have a competitive advantage, they advocate for regulators establishing ex ante rules to improve efficiency, such as default-option-setting regulations. to conclude, some examples of recent literature of behavioral biases and policy implications follow in order. briley, shrum and wyer (2013) analyze representativeness and its effect on public policy. some theoretical models interpret excessive optimism as a key factor behind credit booms (e.g. peón, antelo and calvo, 2015), and observe a similar bias in governments’ official forecasts (frankel and schreger, 2013). givoni et al. (2013) offer a heuristic framework to improve the effectiveness of policy interventions. the empirical analysis of hossain and list (2012) suggests some alternatives to increase productivity in factories through simple framing manipulations, while bao et al. (2015) draw policy lessons from mental accounting: authorities often overestimate the traffic of high tolled roads because travelers with low out-of-pocket travel budget perceive a much higher cost. finally, research on social factors includes the effects of culture on innovation rates (taylor and wilson, 2012) and of social contagion: pacheco (2012) models how public opinion influences policy diffusion. besides, altruism and volunteering may be negatively affected by public policies: ariely, bracha and meier (2009) show that extrinsic incentives can reduce charitable donations and volunteering as they dilute the signaling value of peón et al. / european journal of government and economics 6(1), 24-58 42 pro-social behavior. finally, shleifer (2004) observes ethics and efficiency go together when ethical norms promote cooperative behavior, helping for the successful functioning of social institutions. references ackert, l.f., b.k. church, j. tompkins & p. zhang (2005). what's in a name? an experimental examination of investment behavior. review of finance 9, 281304. https://doi.org/10.1007/s10679-005-7594-2 adam, m.t.p. & e.b. kroll (2012). physiological evidence of attraction to chance. journal of neuroscience, psychology and economics 5(3), 152-165. https://doi.org/10.1037/a0029513 ahern, k.r., d. daminelli & c. fracassi (2015). lost in translation? the effect of cultural values on mergers around the world. journal of financial economics 117, 165189. https://doi.org/10.1016/j.jfineco.2012.08.006 akerlof, g.a. & r.j. shiller (2009). how animal spirits destabilize economies. mckinsey quarterly 3, 127-135. alary, d., c. gollier & n. treich (2013). the effect of ambiguity aversion on insurance and selfprotection. the economic journal 123, 1188-1202. https://doi.org/10.1111/ecoj.12035 alós-ferrer, c. & s. hügelschäfer (2012). faith in intuition and behavioral biases. journal of economic behavior and organization 84, 182192. https://doi.org/10.1016/j.jebo.2012.08.004 altman, m. (2012). implications of behavioural economics for financial literacy and public policy. the journal of socio-economics 41, 677-690. https://doi.org/10.1016/j.socec.2012.06.002 andersen, s., g.w. harrison, m.i. lau & e.i. rutström (2008). eliciting risk and time preferences. econometrica 76(3), 583–618. https://doi.org/10.1111/j.14680262.2008.00848.x andersen, s., g.w. harrison, m.i. lau & e.i. rutström (2014). discounting behavior: a reconsideration. european economic review 71, 1533. https://doi.org/10.1016/j.euroecorev.2014.06.009 aral, s. & d. walker (2014). tie strength, embeddedness, and social influence: a large-scale networked experiment. management science 60(6), 135270. https://doi.org/10.1287/mnsc.2014.1936 argyle, m. (1991). cooperation: the basis of sociability. routledge. ariely, d., a. bracha & s. meier (2009). doing good or doing well? image motivation and monetary incentives in behaving prosocially. the american economic review 99(1), 544555. https://doi.org/10.1257/aer.99.1.544 arkes, h.r., d. hirshleifer, d. jiang & s.s. lim (2008). reference point adaptation: tests in the domain of security trading. organizational behavior and human decision processes 105, 67–81. https://doi.org/10.1016/j.obhdp.2007.04.005 https://doi.org/10.1007/s10679-005-7594-2 https://doi.org/10.1037/a0029513 https://doi.org/10.1016/j.jfineco.2012.08.006 https://doi.org/10.1111/ecoj.12035 https://doi.org/10.1016/j.jebo.2012.08.004 https://doi.org/10.1016/j.socec.2012.06.002 https://doi.org/10.1111/j.1468-0262.2008.00848.x https://doi.org/10.1111/j.1468-0262.2008.00848.x https://doi.org/10.1016/j.euroecorev.2014.06.009 https://doi.org/10.1287/mnsc.2014.1936 https://doi.org/10.1257/aer.99.1.544 https://doi.org/10.1016/j.obhdp.2007.04.005 peón et al. / european journal of government and economics 6(1), 24-58 43 arkes, h.r., d. hirshleifer, d. jiang & s.s. lim (2010). a cross-cultural study of reference point adaptation: evidence from china, korea and the us. organizational behavior and human decision processes 112(2), 99-111. https://doi.org/10.1016/j.obhdp.2010.02.002 asch, s.e. (1952). social psychology. prentice hall. https://doi.org/10.1037/10025-000 ball, r., s.p. kothari & v.v. nikolaev (2013). econometrics of the basu asymmetric timeliness coefficient and accounting conservatism. journal of accounting research 51(5), 107197. https://doi.org/10.1111/1475-679x.12026 ball, s. & c. eckel (1998). the economic value of status. journal of socio-economics 27(4), 495-514. https://doi.org/10.1016/s1053-5357(98)80004-8 ball, s., c. eckel, p.j. grossman & w. zane (2001). status in markets. the quarterly journal of economics 116(1), 161-188. https://doi.org/10.1162/003355301556374 bao, y., z. gao, m. xu, h. sun, & h. yang (2015). travel mental budgeting under road toll: an investigation based on user equilibrium. transportation research part a 73, 117. https://doi.org/10.1016/j.tra.2014.12.010 barber, b.m. & t. odean (2008). all that glitters: the effect of attention and news on the buying behavior of individual and institutional investors. review of financial studies 21(2), 785818. https://doi.org/10.1093/rfs/hhm079 barberis, n.c. (2013). thirty years of prospect theory in economics: a review and assessment. the journal of economic perspectives 27(1), 173-195. https://doi.org/10.1257/jep.27.1.173 barberis, n.c. & m. huang (2007). the loss aversion/narrow framing approach to the equity premium puzzle. in r. mehra (ed.) handbook of investments: equity premium, northholland, amsterdam, pp. 199–229. barberis, n.c. & m. huang (2009). preferences with frames: a new utility specification that allows for the framing of risks. journal of economics dynamics and control 33(8), 155576. https://doi.org/10.1016/j.jedc.2009.01.009 barberis, n.c. & r.h. thaler (2003). a survey of behavioral finance. in g.m. constantinides, m. harris and r.m. stulz (eds.), handbook of the economics of finance 1(1), 1053-1128. bar-hillel, m. (1973). on the subjective probability of compound events. organizational behavior and human performance 9, 396-406. https://doi.org/10.1016/0030-5073(73)90061-5 battalio, r.h., a. lerman, j. livnat & r.r. mendenhall (2012). who, if anyone, reacts to accrual information? journal of accounting and economics 53, 205224. https://doi.org/10.1016/j.jacceco.2011.06.007 baucells, m., m. weber & f. welfens (2011). reference point formation and updating: theory and experiments. journal management science 57(3), 506519. https://doi.org/10.1287/mnsc.1100.1286 bem, d.j. (1965). an experimental analysis of self-persuasion. journal of experimental social psychology 1, 199-218. https://doi.org/10.1016/0022-1031(65)90026-0 benartzi, s. & r.h. thaler (1995). myopic loss aversion and the equity premium puzzle. the quarterly journal of economics 110(1), 73-92. https://doi.org/10.2307/2118511 benartzi, s. & r.h. thaler (1999). risk aversion or myopia? choices in repeated gambles and https://doi.org/10.1016/j.obhdp.2010.02.002 https://doi.org/10.1037/10025-000 https://doi.org/10.1111/1475-679x.12026 https://doi.org/10.1016/s1053-5357(98)80004-8 https://doi.org/10.1162/003355301556374 https://doi.org/10.1016/j.tra.2014.12.010 https://doi.org/10.1093/rfs/hhm079 https://doi.org/10.1257/jep.27.1.173 https://doi.org/10.1016/j.jedc.2009.01.009 https://doi.org/10.1016/0030-5073(73)90061-5 https://doi.org/10.1016/j.jacceco.2011.06.007 https://doi.org/10.1287/mnsc.1100.1286 https://doi.org/10.1016/0022-1031(65)90026-0 https://doi.org/10.2307/2118511 peón et al. / european journal of government and economics 6(1), 24-58 44 retirement investments. management science 45(3), 364381. https://doi.org/10.1287/mnsc.45.3.364 beugelsdijk, s. & b. frijns (2010). a cultural explanation of the foreign bias in international asset allocation. journal of banking and finance 34, 212131. https://doi.org/10.1016/j.jbankfin.2010.01.020 bikhchandani, s., d. hirshleifer & i. welch (1998). learning from the behavior of others: conformity, fads, and informational cascades. the journal of economic perspectives 12(3), 151-170. https://doi.org/10.1257/jep.12.3.151 bloom, n., r. sadun & j. van reenen (2015). the organization of firms across countries. quarterly journal of economics 127(4), 1663-1705. https://doi.org/10.1093/qje/qje029 bolton, g.e. & a. ockenfels (2000). erc: a theory of equity, reciprocity, and competition. american economic review 90(1), 166-193. https://doi.org/10.1257/aer.90.1.166 bordalo, p., n. gennaioli & a. shleifer (2012). salience theory of choice under risk. the quarterly journal of economics 127(3), 1243-85. https://doi.org/10.1093/qje/qjs018 bordalo, p., n. gennaioli & a. shleifer (2013). salience and consumer choice. journal of political economy 121(5), 803-843. https://doi.org/10.1086/673885 boyle, p., l. garlappi, r. uppal & t. wang (2012). keynes meets markowitz: the trade-off between familiarity and diversification. management science 58(2), 253272. https://doi.org/10.1287/mnsc.1110.1349 bracha, a. & d.j. brown (2012). affective decision making: a theory of optimism bias. games and economic behavior 75, 67-80. https://doi.org/10.1016/j.geb.2011.11.004 briley, d.a., l.j. shrum & r.s. wyer (2013). factors affecting judgments of prevalence and representation: implications for public policy and marketing. journal of public policy and marketing 32, 112-118. https://doi.org/10.1509/jppm.12.045 burger, n., g. charness & j. lynham (2011). field and online experiments on self-control. journal of economic behavior and organization 77, 393404. https://doi.org/10.1016/j.jebo.2010.11.010 burnside, c., b. han, d. hirshleifer & t.y. wang (2011). investor overconfidence and the forward premium puzzle. review of economic studies 78, 523558. https://doi.org/10.1093/restud/rdq013 calvillo, d.p. (2014). individual differences in susceptibility to misinformation effects and hindsight bias. journal of general psychology 141(4), 393407. https://doi.org/10.1080/00221309.2014.954917 camerer, c.f. & d. lovallo (1999). overconfidence and excess entry: an experimental approach. the american economic review 89(1), 306318. https://doi.org/10.1257/aer.89.1.306 camerer, c.f. & g. loewenstein (2004). behavioral economics: past, present, future. in c.f. camerer, g. loewenstein and m. rabin (eds.), advances in behavioral economics, princeton university press, 3-51. camerer, c.f. & r.h. thaler (1995). anomalies: ultimatums, dictators and manners. journal of https://doi.org/10.1287/mnsc.45.3.364 https://doi.org/10.1016/j.jbankfin.2010.01.020 https://doi.org/10.1257/jep.12.3.151 https://doi.org/10.1093/qje/qje029 https://doi.org/10.1257/aer.90.1.166 https://doi.org/10.1093/qje/qjs018 https://doi.org/10.1086/673885 https://doi.org/10.1287/mnsc.1110.1349 https://doi.org/10.1016/j.geb.2011.11.004 https://doi.org/10.1509/jppm.12.045 https://doi.org/10.1016/j.jebo.2010.11.010 https://doi.org/10.1093/restud/rdq013 https://doi.org/10.1080/00221309.2014.954917 https://doi.org/10.1257/aer.89.1.306 peón et al. / european journal of government and economics 6(1), 24-58 45 economic perspectives 9(2), 209-219. https://doi.org/10.1257/jep.9.2.209 cao, h.h., b. han, d. hirshleifer & h.h. zhang (2011). fear of the unknown: familiarity and economic decisions. review of finance 15(19), 173-206. https://doi.org/10.1093/rof/rfp023 carlsson, f. & p. martinsson (2008). how much is too much? an investigation of the effect of the number of choice sets, context dependence and the choice of bid vectors in choice experiments. environmental and resource economics 40, 165176. https://doi.org/10.1007/s10640-007-9146-z carpenter, j. & c.k. myers (2010). why volunteer? evidence on the role of altruism, image, and incentives. journal of public economics 94, 911920. https://doi.org/10.1016/j.jpubeco.2010.07.007 cason, t.n. & c.r. plott (2014). misconceptions and game form recognition: challenges to theories of revealed preference and framing. journal of political economy 122(6), 123570. https://doi.org/10.1086/677254 cesarini, d., m. johannesson, p.k.e. magnusson & b. wallace (2012). the behavioral genetics of behavioral anomalies. management science 58(1), 2134. https://doi.org/10.1287/mnsc.1110.1329 chan, l.k.c., n. jegadeesh and j. lakonishok (1996). momentum strategies. the journal of finance 51(5), 1681-1713. https://doi.org/10.1111/j.1540-6261.1996.tb05222.x chelley-steeley, p.l., b.d. kluger & j.m. steeley (2015). earnings and hindsight bias: an experimental study. economic letters 134, 130132. https://doi.org/10.1016/j.econlet.2015.07.005 chen, g., k.a. kim, j.r. nofsinger & o.m. rui (2007). trading performance, disposition effect, overconfidence, representativeness bias, and experience of emerging market investors. journal of behavioral decision making 20(4), 425-451. https://doi.org/10.1002/bdm.561 chen, l., a.g. kök & j.d. tong (2013). the effect of payment schemes on inventory decisions: the role of mental accounting. management science 59(2), 436451. https://doi.org/10.1287/mnsc.1120.1638 chew, s.h., r.p. ebstein & s. zhong (2012). ambiguity aversion and familiarity bias: evidence from behavioral and gene association studies. journal of risk and uncertainty 44, 118. https://doi.org/10.1007/s11166-011-9134-0 chou, h.g. & n. edge (2012). "they are happier and having better lives than i am'': the impact of using facebook on perceptions of others' lives. cyberpsychology, behavior, and social networking 15(2), 117-121. https://doi.org/10.1089/cyber.2011.0324 cohn, a., engelmann, j., fehr, e., & maréchal, m.a. (2015). evidence for countercyclical risk aversion: an experiment with financial professionals. american economic review 105(2), 860-885. https://doi.org/10.1257/aer.20131314 cokely, e.t. & c.m. kelley (2009). cognitive abilities and superior decision making under risk: a protocol analysis and process model evaluation. judgmental decision making 4, 20–33. cooper, j.c. & w.e. kovacic (2012). behavioral economics: implications for regulatory behavior. journal of regulatory economics 41, 41–58. https://doi.org/10.1007/s11149-011https://doi.org/10.1257/jep.9.2.209 https://doi.org/10.1093/rof/rfp023 https://doi.org/10.1007/s10640-007-9146-z https://doi.org/10.1016/j.jpubeco.2010.07.007 https://doi.org/10.1086/677254 https://doi.org/10.1287/mnsc.1110.1329 https://doi.org/10.1111/j.1540-6261.1996.tb05222.x https://doi.org/10.1016/j.econlet.2015.07.005 https://doi.org/10.1002/bdm.561 https://doi.org/10.1287/mnsc.1120.1638 https://doi.org/10.1007/s11166-011-9134-0 https://doi.org/10.1089/cyber.2011.0324 https://doi.org/10.1257/aer.20131314 https://doi.org/10.1007/s11149-011-9180-1 peón et al. / european journal of government and economics 6(1), 24-58 46 9180-1 cornelissen, j.p. & m.d. werner (2014). putting framing in perspective: a review of framing and frame analysis across the management and organizational literature. the academy of management annals 8(1), 181-235. https://doi.org/10.1080/19416520.2014.875669 cosmides, l. & j. tooby (1990). is the mind a frequentist? second annual meeting of the human behavior and evolution society, la, ca. cited in g. gigerenzer (1991), how to make cognitive illusions disappear: beyond 'heuristics and biases', in w. stroebe and m. hewstone (eds.), european review of social psychology, wiley. cowley, e., d.a. briley & c. farrell (2015). how do gamblers maintain an illusion of control? journal of business research 68, 2181-88. https://doi.org/10.1016/j.jbusres.2015.03.018 cready, w., kumas, a., & subasi, m. (2014). are trade size-based inferences about traders reliable? evidence from institutional earnings-related trading. journal of accounting research 52(4), 877-909. https://doi.org/10.1111/1475-679x.12056 croskerry, p., g. singhal & s. mamede (2013). cognitive debiasing 1: origins of bias and theory of debiasing. bmj quality and safety 22(2), 58-64. https://doi.org/10.1136/bmjqs2012-001712 daniel, k., hirshleifer, d., & teoh, s.h. (2002). investor psychology in capital markets: evidence and policy implications. journal of monetary economics 49, 139209. https://doi.org/10.1016/s0304-3932(01)00091-5 daniel, k.d., d. hirshleifer & a. subrahmanyam (1998). investor psychology and security market underand overreactions. the journal of finance 53(6), 183985. https://doi.org/10.1111/0022-1082.00077 das, s., h. markowitz, j. scheid & m. statman (2010). portfolio optimization with mental accounts. journal of financial and quantitative analysis 45(2), 311334. https://doi.org/10.1017/s0022109010000141 de giorgi, e.g. & s. legg (2012). dynamic portfolio choice and asset pricing with narrow framing and probability weighting. journal of economic dynamics and control 36, 951972. https://doi.org/10.1016/j.jedc.2012.01.010 dellavigna, s. (2009). psychology and economics: evidence from the field. journal of economic literature 47(2), 315-372. https://doi.org/10.1257/jel.47.2.315 duong, c., g. pescetto & d. santamaria (2014). how value-glamour investors use financial information: uk evidence of investors' confirmation bias. the european journal of finance 20(6), 524-549. https://doi.org/10.1080/1351847x.2012.722117 durante, r., l. putterman & j. van der weele (2014). preferences for redistribution and perception of fairness: an experimental study. journal of the european economic association 12(4), 1059-1086. https://doi.org/10.1111/jeea.12082 einhorn, h.j. & r.m. hogarth (1978). confidence in judgment: persistence of the illusion of validity. psychological review 85(5), 395-416. https://doi.org/10.1037/0033-295x.85.5.395 einhorn, h.j. & r.m. hogarth (1986). decision making under ambiguity. journal of business 59(4), part 2: the behavioral foundations of economic theory, s225-s250. https://doi.org/10.1007/s11149-011-9180-1 https://doi.org/10.1080/19416520.2014.875669 https://doi.org/10.1016/j.jbusres.2015.03.018 https://doi.org/10.1111/1475-679x.12056 https://doi.org/10.1136/bmjqs-2012-001712 https://doi.org/10.1136/bmjqs-2012-001712 https://doi.org/10.1016/s0304-3932(01)00091-5 https://doi.org/10.1111/0022-1082.00077 https://doi.org/10.1017/s0022109010000141 https://doi.org/10.1016/j.jedc.2012.01.010 https://doi.org/10.1257/jel.47.2.315 https://doi.org/10.1080/1351847x.2012.722117 https://doi.org/10.1111/jeea.12082 https://doi.org/10.1037/0033-295x.85.5.395 peón et al. / european journal of government and economics 6(1), 24-58 47 ent, m.r. & r.f. baumeister (2014). obedience, self-control, and the voice of culture. journal of social issues 70(3), 574-586. https://doi.org/10.1111/josi.12079 epley, n. & t. gilovich (2001). putting adjustment back in the anchoring and adjustment heuristic: differential processing of self-generated and experimenter-provided anchors. psychological science 12, 391-396. https://doi.org/10.1111/1467-9280.00372 epley, n. & t. gilovich (2006). the anchoring-and-adjustment heuristic: why the adjustments are insufficient. psychological science 17(4), 311-318. https://doi.org/10.1111/j.14679280.2006.01704.x epley, n. & t. gilovich (2010). anchoring unbound. journal of consumer psychology 20(1), 2024. https://doi.org/10.1016/j.jcps.2009.12.005 erceg, n. & z. galic (2014). overconfidence bias and conjunction fallacy in predicting outcomes of football matches. journal of economic psychology 42, 5262. https://doi.org/10.1016/j.joep.2013.12.003 erev, i., t.s. wallsten & d.v. budescu (1994). simultaneous overand underconfidence: the role of error in judgment processes. psychological review 10(3), 519527. https://doi.org/10.1037/0033-295x.101.3.519 etner, j., m. jeleva & j.-m. tallon (2012). decision theory under ambiguity. journal of economic surveys 26(2), 234-270. https://doi.org/10.1111/j.1467-6419.2010.00641.x fellner, g. & m. sutter (2009). causes, consequences, and cures of myopic loss aversion: an experimental investigation. the economic journal 119, 900916. https://doi.org/10.1111/j.1468-0297.2009.02251.x fellner, w. (1961). distortion of subjective probabilities as a reaction to uncertainty. quarterly journal of economics 75, 670-690. https://doi.org/10.2307/1884325 festinger, l. (1957). a theory of cognitive dissonance. stanford university press. finucane, m.l., a. alhakami, p. slovic & s.m. johnson (2000). the affect heuristic in judgments of risks and benefits. journal of behavioral decision making 13(1), 117. https://doi.org/10.1002/(sici)1099-0771(200001/03)13:1<1::aid-bdm333>3.0.co;2-s fischhoff, b. (1982). for those condemned to study the past: heuristics and biases in hindsight. in d. kahneman, p. slovic and a. tversky, judgment under uncertainty: heuristics and biases. cambridge university press. https://doi.org/10.1017/cbo9780511809477.024 frankel, j. & j. schreger (2013). over-optimistic official forecasts and fiscal rules in the eurozone. review of world economics 149, 247-272. https://doi.org/10.1007/s10290-0130150-9 frankfurter, g.m., e.g. mcgoun & d.e. allen (2004). the prescriptive turn in behavioral finance. journal of socio-economics 33, 449468. https://doi.org/10.1016/j.socec.2004.04.006 frederick, s., d. kahneman & d. mochon (2010). elaborating a simpler theory of anchoring. journal of consumer psychology 20, 17-19. https://doi.org/10.1016/j.jcps.2009.12.004 frederick, s., g. loewenstein & t. o'donoghe (2002). time discounting and time preference: a critical review. journal of economic literature 40, 351https://doi.org/10.1111/josi.12079 https://doi.org/10.1111/1467-9280.00372 https://doi.org/10.1111/j.1467-9280.2006.01704.x https://doi.org/10.1111/j.1467-9280.2006.01704.x https://doi.org/10.1016/j.jcps.2009.12.005 https://doi.org/10.1016/j.joep.2013.12.003 https://doi.org/10.1037/0033-295x.101.3.519 https://doi.org/10.1111/j.1467-6419.2010.00641.x https://doi.org/10.1111/j.1468-0297.2009.02251.x https://doi.org/10.2307/1884325 https://doi.org/10.1002/(sici)1099-0771(200001/03)13:1%3c1::aid-bdm333%3e3.0.co;2-s https://doi.org/10.1017/cbo9780511809477.024 https://doi.org/10.1007/s10290-013-0150-9 https://doi.org/10.1007/s10290-013-0150-9 https://doi.org/10.1016/j.socec.2004.04.006 https://doi.org/10.1016/j.jcps.2009.12.004 peón et al. / european journal of government and economics 6(1), 24-58 48 401. https://doi.org/10.1257/jel.40.2.351 füllbrunn, s., h.a. rau & u. weitzel (2014). does ambiguity aversion survive in experimental asset markets? journal of economic behavior and organization 107, 810826. https://doi.org/10.1016/j.jebo.2014.03.013 furnham, a. & h.c. boo (2011). a literature review on the anchoring effect. the journal of socio-economics 40, 35-42. https://doi.org/10.1016/j.socec.2010.10.008 gatherwood, j. & j. weber (2014). self-control, financial literacy and the co-holding puzzle. journal of economic behavior and organization 107, 455469. https://doi.org/10.1016/j.jebo.2014.04.018 gennaioli, n. & a. shleifer (2010). what comes to mind. the quarterly journal of economics 125(4), 1399-1433. https://doi.org/10.1162/qjec.2010.125.4.1399 gigerenzer, g. (1991). how to make cognitive illusions disappear: beyond 'heuristics and biases'. in w. stroebe & m. hewstone (eds.), european review of social psychology, wiley. https://doi.org/10.1080/14792779143000033 gigerenzer, g. & d.g. goldstein (2011). the recognition heuristic: a decade of research. judgment and decision making 6(1), 100-121. gigerenzer, g. & w. gaissmaier (2011). heuristic decision making. annual review of psychology 62, 451-482. https://doi.org/10.1146/annurev-psych-120709-145346 gigerenzer, g., u. hoffrage & h. kleinbölting (1991). probabilistic mental models: a brunswikian theory of confidence. psychological review 98, 506– 528. https://doi.org/10.1037/0033-295x.98.4.506 gilbert, p., j. price & s. allan (1995). social comparison, social attractiveness and evolution: how might they be related? new ideas in psychology 13(2), 149165. https://doi.org/10.1016/0732-118x(95)00002-x givoni, m., j. macmillen, d. banister, & e. feitelson (2013), from policy measures to policy packages. transport reviews 33(1), 1-20. https://doi.org/10.1080/01441647.2012.744779 gneezy, u., a. kapteyn & j. potters (2003). evaluation periods and asset prices in a market experiment. journal of finance 58, 821–837. https://doi.org/10.1111/1540-6261.00547 goldstein, d.g. & g. gigerenzer (1999). the recognition heuristic: how ignorance makes us smart. in g. gigerenzer, p.m. todd, and the abc research group, simple heuristics that make us smart, new york: oxford university press, pp. 37–58. goldstein, d.g. & g. gigerenzer (2002). models of ecological rationality: the recognition heuristic. psychological review 109, 75–90. https://doi.org/10.1037/0033-295x.109.1.75 griffin, d. & a. tversky (1992). the weighing of evidence and the determinants of confidence. cognitive psychology 24(3), 411-435. https://doi.org/10.1016/0010-0285(92)90013-r griffin, d.w., r. gonzalez, d.j. koehler & t. gilovich (2012). judgmental heuristics: a historical overview. in k.j. holyoak & r.g. morrison (eds.), the oxford handbook of thinking and reasoning, oxford: oxford university press, pp. 322345. https://doi.org/10.1093/oxfordhb/9780199734689.013.0017 griffith, r.m. (1949). odds adjustments by american horse-race bettors. the american journal https://doi.org/10.1257/jel.40.2.351 https://doi.org/10.1016/j.jebo.2014.03.013 https://doi.org/10.1016/j.socec.2010.10.008 https://doi.org/10.1016/j.jebo.2014.04.018 https://doi.org/10.1162/qjec.2010.125.4.1399 https://doi.org/10.1080/14792779143000033 https://doi.org/10.1146/annurev-psych-120709-145346 https://doi.org/10.1037/0033-295x.98.4.506 https://doi.org/10.1016/0732-118x(95)00002-x https://doi.org/10.1080/01441647.2012.744779 https://doi.org/10.1111/1540-6261.00547 https://doi.org/10.1037/0033-295x.109.1.75 https://doi.org/10.1016/0010-0285(92)90013-r https://doi.org/10.1093/oxfordhb/9780199734689.013.0017 peón et al. / european journal of government and economics 6(1), 24-58 49 of psychology 62(2), 290-294. https://doi.org/10.2307/1418469 grinblatt, m. & m. keloharju (2009). sensation seeking, overconfidence and trading activity. the journal of finance 64(2), 549-578. https://doi.org/10.1111/j.1540-6261.2009.01443.x guiso, l., p. sapienza & l. zingales (2006). does culture affect economic outcomes? journal of economic perspectives 20(2), 23-48. https://doi.org/10.1257/jep.20.2.23 güth, w., r. schmittberger & b. schwarze (1982). an experimental analysis of ultimatum bargaining. journal of economic behavior and organization 3, 367388. https://doi.org/10.1016/0167-2681(82)90011-7 haack, p., m.d. pfarrer & a.g. scherer (2014). legitimacy-as-feeling: how affect leads to vertical legitimacy spillovers in transnational governance. journal of management studies 51(4), 634-666. https://doi.org/10.1111/joms.12071 haisley, e., r. mostafa & g. loewenstein (2008). myopic risk-seeking: the impact of narrow decision bracketing on lottery play. journal of risk and uncertainty 37, 5775. https://doi.org/10.1007/s11166-008-9041-1 hardin, a.m. & c.a. looney (2012). myopic loss aversion: demystifying the key factors influencing decision problem framing. organizational behavior and human decision processes 117, 311-331. https://doi.org/10.1016/j.obhdp.2011.11.005 heath, c., r.p. larrick & j. klayman (1998). cognitive repairs: how organizational practices can compensate for individual shortcomings. research in organizational behavior 20, 1-37. henrich, j., r. boyd, s. bowles, c. camerer, h. gintis, r. mcelreath & e. fehr (2001). in search of homo economicus: behavioral experiments in 15 small-scale societies. american economic review 91(2), 73-79. https://doi.org/10.1257/aer.91.2.73 hens, t. & k. bachmann (2008). behavioral finance for private banking. john wiley and sons. hirshleifer, d. (2008). psychological bias as a driver of financial regulation. european financial management 14(5), 856-874. https://doi.org/10.1111/j.1468-036x.2007.00437.x hirshleifer, d. (2015). behavioral finance. annual review of financial economics 7(7), 133159. https://doi.org/10.1146/annurev-financial-092214-043752 hirshleifer, d. & s.h. teoh (2003). limited attention, information disclosure and financial reporting. journal of accounting and economics 36(1), 337386. https://doi.org/10.1016/j.jacceco.2003.10.002 hodges, s.h., r.g. tompkins & w.t. ziemba (2008). the favorite longshot bias in sandp 500 and ftse 100 index futures options: the return to bets and the cost of insurance. in handbook of sports and lottery markets, elsevier. hoff, k. & p. priyanka (2004). belief systems and durable inequalities: an experimental investigation of indian caste. world bank working paper 3351. https://doi.org/10.1596/18139450-3351 hoffrage, u., r. hertwig & g. gigerenzer (2000). hindsight bias: a by-product of knowledge updating? journal of experimental psychology: learning, memory and cognition 26(3), 566581. https://doi.org/10.1037/0278-7393.26.3.566 hossain, t. & j.a. list (2012). the behavioralist visits the factory: increasing productivity using https://doi.org/10.2307/1418469 https://doi.org/10.1111/j.1540-6261.2009.01443.x https://doi.org/10.1257/jep.20.2.23 https://doi.org/10.1016/0167-2681(82)90011-7 https://doi.org/10.1111/joms.12071 https://doi.org/10.1007/s11166-008-9041-1 https://doi.org/10.1016/j.obhdp.2011.11.005 https://doi.org/10.1257/aer.91.2.73 https://doi.org/10.1111/j.1468-036x.2007.00437.x https://doi.org/10.1146/annurev-financial-092214-043752 https://doi.org/10.1016/j.jacceco.2003.10.002 https://doi.org/10.1596/1813-9450-3351 https://doi.org/10.1596/1813-9450-3351 https://doi.org/10.1037/0278-7393.26.3.566 peón et al. / european journal of government and economics 6(1), 24-58 50 simple framing manipulations. management science 58(12), 21512167. https://doi.org/10.1287/mnsc.1120.1544 hu, y. & x. li (2011). context-dependent product evaluations: an empirical analysis of internet book reviews. journal of interactive marketing 25, 123133. https://doi.org/10.1016/j.intmar.2010.10.001 huber, j., m. kirchler & t. stöckl (2010). the hot hand belief and the gambler's fallacy in investment decisions under risk. theory and decision 68, 445462. https://doi.org/10.1007/s11238-008-9106-2 janis, i.l. (1972). victims of groupthink, houghton mifflin. jaspersen, j.g. & v. aseervatham (2015). the influence of affect on heuristic thinking in insurance demand. the journal of risk and insurance. https://doi.org/10.1111/jori.12088 kahneman, d. (2003a). maps of bounded rationality: psychology for behavioral economics. the american economic review 93(5), 1449-75. https://doi.org/10.1257/000282803322655392 kahneman, d. (2003b). a perspective on judgment and choice: mapping bounded rationality. american psychologist 58(9), 697-720. https://doi.org/10.1037/0003-066x.58.9.697 kahneman, d. & a. tversky (1979). prospect theory: an analysis of decision under risk. econometrica 47(2), 263-292. https://doi.org/10.2307/1914185 kahneman, d. & a. tversky (1984). choices, values and frames. american psychologist 39, 341-350. https://doi.org/10.1037/0003-066x.39.4.341 kahneman, d. & d. lovallo (1993). timid choices and bold forecasts: a cognitive perspective on risk taking. management science 39(1), 17-31. https://doi.org/10.1287/mnsc.39.1.17 kahneman, d. & m. riepe (1998). aspects of investor psychology. journal of portfolio management 24, 52-65. https://doi.org/10.3905/jpm.1998.409643 kahneman, d. & s. frederick (2002). representativeness revisited: attribute substitution in intuitive judgment. in t. gilovich, d. griffin & d. kahneman (eds.), heuristics and biases: the psychology of intuitive thought, cambridge university press, pp. 4981. https://doi.org/10.1017/cbo9780511808098.004 kahneman, d. & s. frederick (2005). a model of heuristic judgment. in k.j. holyoake & r.g. morrison (eds.) the cambridge handbook of thinking and reasoning, cambridge university press. kahneman, d., j.l. knetsch & r.h. thaler (1986a). fairness as a constraint on profit seeking: entitlements in the market. american economic review 76(4), 728-741. kahneman, d., j.l. knetsch & r.h. thaler (1986b). fairness and the assumptions of economics. journal of business 59(4), s285-s300. https://doi.org/10.1086/296367 kahneman, d., j.l. knetsch & r.h. thaler (1991). anomalies: the endowment effect, loss aversion, and status quo bias. the journal of economic perspectives 5(1), 193206. https://doi.org/10.1257/jep.5.1.193 kahneman, d., p. slovic & a. tversky (1982). judgment under uncertainty: heuristics and biases. cambridge university press. https://doi.org/10.1017/cbo9780511809477 katona, g. (1975). psychological economics. elsevier. https://doi.org/10.1287/mnsc.1120.1544 https://doi.org/10.1016/j.intmar.2010.10.001 https://doi.org/10.1007/s11238-008-9106-2 https://doi.org/10.1111/jori.12088 https://doi.org/10.1257/000282803322655392 https://doi.org/10.1037/0003-066x.58.9.697 https://doi.org/10.2307/1914185 https://doi.org/10.1037/0003-066x.39.4.341 https://doi.org/10.1287/mnsc.39.1.17 https://doi.org/10.3905/jpm.1998.409643 https://doi.org/10.1017/cbo9780511808098.004 https://doi.org/10.1086/296367 https://doi.org/10.1257/jep.5.1.193 https://doi.org/10.1017/cbo9780511809477 peón et al. / european journal of government and economics 6(1), 24-58 51 kirby, k.n. & r.j. herrnstein (1995). preference reversals due to myopic discounting of delayed reward. psychology science 6(2), 83-89. https://doi.org/10.1111/j.1467-9280.1995.tb00311.x knetsch, j.l. (1989). the endowment effect and evidence of nonreversible indifference curves. the american economic review 79(5), 1277-84. koch, a.k. & j. nafzinger (2016). goals and bracketing under mental accounting. journal of economic theory 162, 305-361. https://doi.org/10.1016/j.jet.2016.01.001 koop, g.j. & j.g. johnson (2012). the use of multiple reference points in risky decision making. journal of behavioral decision making 25, 49-62. https://doi.org/10.1002/bdm.713 koriat, a., s. lichtenstein & b. fischhoff (1980). reasons for confidence. journal of experimental psychology: human learning and memory 6(2), 107118. https://doi.org/10.1037/0278-7393.6.2.107 kõszegi, b. & m. rabin (2006). a model of reference-dependent preferences. quarterly journal of economics 121(4), 1133-65. https://doi.org/10.1093/qje/121.4.1133 kuran, t. & c. sunstein (1999). availability cascades and risk regulation. stanford law review 51, 683–768. https://doi.org/10.2307/1229439 lacetera, n., d.g. pope & j.r. sydnor (2014). heuristic thinking and limited attention in the car market. american economic review 102(5), 22062236. https://doi.org/10.1257/aer.102.5.2206 lahvicka, j. (2014). what causes the favourite-longshot bias? further evidence from tennis. applied economic letters 21(2), 90-92. https://doi.org/10.1080/13504851.2013.842628 landman, j. & m. manis (1983). social cognition: some historical and theoretical perspectives. advances in experimental social psychology 16, 49-123. https://doi.org/10.1016/s00652601(08)60394-9 langer, e.j. (1975). the illusion of control. the journal of personality and social psychology, 32, 311-328, reprinted short version in d. kahneman, p. slovic & a. tversky (1982), judgment under uncertainty: heuristics and biases, cambridge university press. langer, t. & m. weber (2005). myopic prospect theory vs. myopic loss aversion: how general is the phenomenon? journal of economic behavior and organization 56, 2538. https://doi.org/10.1016/j.jebo.2003.01.005 lee, c.j. & e.b. andrade (2011). fear, social projection, and financial decision making. journal of marketing research 48, s121-s129. https://doi.org/10.1509/jmkr.48.spl.s121 lejarraga, t. & c. gonzalez (2011). effects of feedback and complexity on repeated decisions from description. organizational behavior and human decision processes 116, 286295. https://doi.org/10.1016/j.obhdp.2011.05.001 levinson, j.d. & k. peng (2007). valuing cultural differences in behavioral economics. the icfai journal of behavioral finance 4(1), 32-47. libby, r. & k. rennekamp (2012). self-serving attribution bias, overconfidence, and the issuance of management forecasts. journal of accounting research 50(1), 197231. https://doi.org/10.1111/j.1475-679x.2011.00430.x liberali, j.m., v.f. reyna, s. furlan, l.s. stein & s.t. pardo (2012). individual differences in https://doi.org/10.1111/j.1467-9280.1995.tb00311.x https://doi.org/10.1016/j.jet.2016.01.001 https://doi.org/10.1002/bdm.713 https://doi.org/10.1037/0278-7393.6.2.107 https://doi.org/10.1093/qje/121.4.1133 https://doi.org/10.2307/1229439 https://doi.org/10.1257/aer.102.5.2206 https://doi.org/10.1080/13504851.2013.842628 https://doi.org/10.1016/s0065-2601(08)60394-9 https://doi.org/10.1016/s0065-2601(08)60394-9 https://doi.org/10.1016/j.jebo.2003.01.005 https://doi.org/10.1509/jmkr.48.spl.s121 https://doi.org/10.1016/j.obhdp.2011.05.001 https://doi.org/10.1111/j.1475-679x.2011.00430.x peón et al. / european journal of government and economics 6(1), 24-58 52 numeracy and cognitive reflection, with implications for biases and fallacies in probability judgments. journal of behavioral decision making 25, 361381. https://doi.org/10.1002/bdm.752 list, j.a. (2007). on the interpretation of giving in dictator games. journal of political economy 115(3), 482-493. https://doi.org/10.1086/519249 liu, h. & a. m. colman (2009). ambiguity aversion in the long run: repeated decisions under risk and uncertainty. journal of economic psychology 30, 277284. https://doi.org/10.1016/j.joep.2009.02.001 lo, a.w., d.v. repin & b.n. steenbarger (2005). fear and greed in financial markets: a clinical study of day-traders. the american economic review 95(2), 352359. https://doi.org/10.1257/000282805774670095 loewenstein, g. (1996). out of control: visceral influences on behavior. organizational behavior and human decision processes 65(3), 272292. https://doi.org/10.1006/obhd.1996.0028 loewenstein, g., e.u. weber, c.k. hsee & n. welch (2001). risk as feelings. psychological bulletin 127(2), 267-86. https://doi.org/10.1037/0033-2909.127.2.267 loewenstein, g., t. o'donoghue & m. rabin (2003). projection bias in predicting future utility. quarterly journal of economics 118(4), 120948. https://doi.org/10.1162/003355303322552784 lovallo, d. & d. kahneman (2003). delusions of success: how optimism undermines executives' decisions. harvard business review 81(7), 56-63. lunenburg, f.c. (2010). group decision making: the potential for groupthink. international journal of management, business, and administration 13(1), 1-6. lupton, d. (2013). risk and emotion: towards an alternative theoretical perspective. health, risk and society 15(8), 634-647 https://doi.org/10.1080/13698575.2013.848847 malmendier, u. & g. tate (2005). ceo overconfidence and corporate investment. journal of finance 60(6), 2661-2700. https://doi.org/10.1111/j.1540-6261.2005.00813.x manski, c. (2000). economic analysis of social interactions. journal of economic perspectives 14(3), 115-136. https://doi.org/10.1257/jep.14.3.115 marewski, j.n., w. gaissmaier & g. gigerenzer (2010). good judgments do not require complex cognition. cognitive processing 11(2), 103-121. https://doi.org/10.1007/s10339009-0337-0ç mayo-wilson, c., k. zollman & d. danks (2012). wisdom of crowds versus groupthink: learning in groups and in isolation. international journal of game theory 42, 695723. https://doi.org/10.1007/s00182-012-0329-7 mcgraw, a.p., j.t. larsen, d. kahneman & d. schkade (2010). comparing gains and losses. psychological science 21(10), 1438-45. https://doi.org/10.1177/0956797610381504 milgram, s. (1963). behavioral study of obedience. the journal of abnormal and social psychology 67(4), 371-378. https://doi.org/10.1037/h0040525 miller, j.g. (1984). culture and the development of everyday social explanation. journal of https://doi.org/10.1002/bdm.752 https://doi.org/10.1086/519249 https://doi.org/10.1016/j.joep.2009.02.001 https://doi.org/10.1257/000282805774670095 https://doi.org/10.1006/obhd.1996.0028 https://doi.org/10.1037/0033-2909.127.2.267 https://doi.org/10.1162/003355303322552784 https://doi.org/10.1080/13698575.2013.848847 https://doi.org/10.1111/j.1540-6261.2005.00813.x https://doi.org/10.1257/jep.14.3.115 https://doi.org/10.1007/s10339-009-0337-0%c3%a7 https://doi.org/10.1007/s10339-009-0337-0%c3%a7 https://doi.org/10.1007/s00182-012-0329-7 https://doi.org/10.1177/0956797610381504 https://doi.org/10.1037/h0040525 peón et al. / european journal of government and economics 6(1), 24-58 53 personality and social psychology 46, 961-978. https://doi.org/10.1037/0022-3514.46.5.961 moore, d.a. & p.j. healy (2008). the trouble with overconfidence. psychological review 115(2), 502–517. https://doi.org/10.1037/0033-295x.115.2.502 mullainathan, s. & r.h. thaler (2000). behavioral economics. mit dept. of economics working paper no. 00-27. https://doi.org/10.2139/ssrn.245828 nguyen, b. & p. klaus (2013). retail fairness: exploring consumer perceptions of fairness towards retailers' marketing tactics. journal of retailing and consumer services 20, 311324. https://doi.org/10.1016/j.jretconser.2013.02.001 nisbett, r.e. & t. masuda (2003). culture and point of view. proceedings of the national academy of science 100, 11163-70. https://doi.org/10.1073/pnas.1934527100 nofsinger, j.r. (2012). household behavior and boom/bust cycles. journal of financial stability 8, 161-173. https://doi.org/10.1016/j.jfs.2011.05.004 norman, g., sherbino, j., dore, k., wood, t., young, m., gaissmaier, w., kreuger, s., monteiro, s. (2014). the etiology of diagnostic errors: a controlled trial of system 1 versus system 2 reasoning. academic medicine 89(2), 277284. https://doi.org/10.1097/acm.0000000000000105 novemsky, n. & d. kahneman (2005). the boundaries of loss aversion. journal of marketing research 42(2), 119-128. https://doi.org/10.1509/jmkr.42.2.119.62292 odean, t. (1998). volume, volatility, price and profit when all traders are above average. journal of finance 53(6), 1887-1934. https://doi.org/10.1111/0022-1082.00078 odean, t. (1999). do investors trade too much? the american economic review 89(5), 12791298. https://doi.org/10.1257/aer.89.5.1279 okun, a. (1981). prices and quantities: a macro-economic analysis. the brookings institution. ortmann, a., g. gigerenzer, b. borges & d.g. goldstein (2008). the recognition heuristic: a fast and frugal way to investment choice? in c.r. plott & v.l. smith (eds.) handbook of experimental economics results: vol 1, handbooks in economics 28, 993– 1003. https://doi.org/10.1016/s1574-0722(07)00107-2 ottaviani, m. & p. sorensen (2007). the favorite-longshot bias: an overview of the main explanations. in d. hausch & w. ziemba (eds.) efficiency of sports and betting markets, elsevier: handbook in finance series. pacheco, j. (2012). the social contagion model: exploring the role of public opinion on the diffusion of antismoking legislation across the american states. the journal of politics 74(1), 187-202. https://doi.org/10.1017/s0022381611001241 pachur, t. & m. galesic (2013). strategy selection in risky choice: the impact of numeracy, affect, and cross-cultural differences. journal of behavioral decision making 26, 260271. https://doi.org/10.1002/bdm.1757 page, l. & r.t. clemen (2013). do prediction markets produce well-calibrated probability forecasts? the economic journal 123, 491-513. https://doi.org/10.1111/j.14680297.2012.02561.x pan, c. & m. statman (2010). beyond risk tolerance: regret, overconfidence and other investor https://doi.org/10.1037/0022-3514.46.5.961 https://doi.org/10.1037/0033-295x.115.2.502 https://doi.org/10.2139/ssrn.245828 https://doi.org/10.1016/j.jretconser.2013.02.001 https://doi.org/10.1073/pnas.1934527100 https://doi.org/10.1016/j.jfs.2011.05.004 https://doi.org/10.1097/acm.0000000000000105 https://doi.org/10.1509/jmkr.42.2.119.62292 https://doi.org/10.1111/0022-1082.00078 https://doi.org/10.1257/aer.89.5.1279 https://doi.org/10.1016/s1574-0722(07)00107-2 https://doi.org/10.1017/s0022381611001241 https://doi.org/10.1002/bdm.1757 https://doi.org/10.1111/j.1468-0297.2012.02561.x https://doi.org/10.1111/j.1468-0297.2012.02561.x peón et al. / european journal of government and economics 6(1), 24-58 54 propensities. scu leavey school of business, research paper no. 10-05. pennycook, g., d. trippas, s.j. handley & v.a. thompson (2014). base rates: both neglected and intuitive. journal of experimental psychology: learning, memory and cognition 40(2), 544-554. https://doi.org/10.1037/a0034887 peón, d., m. antelo & a. calvo (2015). a dynamic behavioral model of the credit boom. journal of economic issues 49(4), 1077-99. https://doi.org/10.1080/00213624.2015.1105043 plous, s. (1993). the psychology of judgment and decision making. mcgraw-hill. polman, e. (2012). self-other decision making and loss aversion. organizational behavior and human decision processes 119, 141-150. https://doi.org/10.1016/j.obhdp.2012.06.005 prendergast, c. & l. stole (1996). impetuous youngsters and jaded old-timers: acquiring a reputation for learning. journal of political economy 104, 1105– 34. https://doi.org/10.1086/262055 rabin, m. (1998). psychology and economics. journal of economic literature 36(1), 11-46. rabin, m. (2000). risk aversion and expected-utility theory: a calibration theorem. econometrica 68(5), 1281-92. https://doi.org/10.1111/1468-0262.00158 rabin, m. (2002). inference by believers in the law of small numbers. quarterly journal of economics 117, 775-816. https://doi.org/10.1162/003355302760193896 rabin, m. & d. vayanos (2010). the gambler's and hot-hand fallacies: theory and applications. review of economic studies 77(2), 730-778. https://doi.org/10.1111/j.1467937x.2009.00582.x rabin, m. & j. schrag (1999). first impressions matter: a model of confirmatory bias. quarterly journal of economics 114(1), 37-82. https://doi.org/10.1162/003355399555945 rapp, a., l.s. beitelspacher, d. grewal & d.e. hughes (2013). understanding social media effects across seller, retailer, and consumer interactions. journal of the academy of marketing science 41, 547-566. https://doi.org/10.1007/s11747-013-0326-9 ratner, r.k., soman, d., zauberman, g., ariely, d., et al.(2008). how behavioral decision research can enhance consumer welfare: from freedom of choice to paternalistic intervention. marketing letters 19, 383-397. https://doi.org/10.1007/s11002-008-9044-3 read, d., g. loewenstein and m. rabin (1999). choice bracketing. journal of risk and uncertainty 19, 171-197. https://doi.org/10.1023/a:1007879411489 richins, m.l. (1991). comparison and the idealized images of advertising. journal of consumer research 18(1), 71-83. https://doi.org/10.1086/209242 rieger, m.o. (2012). why do investors buy bad financial products? probability misestimation and preferences in financial investment decision. journal of behavioral finance 13(2), 108118. https://doi.org/10.1080/15427560.2012.680991 roca, m., r.m. hogarth & j. maule (2006). ambiguity seeking as a result of the status quo bias. journal of risk and uncertainty 32(3), 175-194. https://doi.org/10.1007/s11166-006-9518-8 roese, n.j. & k.d. vohs (2012). hindsight bias. perspectives on psychological science 7(5), 411-426. https://doi.org/10.1177/1745691612454303 rooderkerk, r.p., h.j. van heerde & t.h.a. bijmolt (2011). incorporating context effects into a https://doi.org/10.1037/a0034887 https://doi.org/10.1080/00213624.2015.1105043 https://doi.org/10.1016/j.obhdp.2012.06.005 https://doi.org/10.1086/262055 https://doi.org/10.1111/1468-0262.00158 https://doi.org/10.1162/003355302760193896 https://doi.org/10.1111/j.1467-937x.2009.00582.x https://doi.org/10.1111/j.1467-937x.2009.00582.x https://doi.org/10.1162/003355399555945 https://doi.org/10.1007/s11747-013-0326-9 https://doi.org/10.1007/s11002-008-9044-3 https://doi.org/10.1023/a:1007879411489 https://doi.org/10.1086/209242 https://doi.org/10.1080/15427560.2012.680991 https://doi.org/10.1007/s11166-006-9518-8 https://doi.org/10.1177/1745691612454303 peón et al. / european journal of government and economics 6(1), 24-58 55 choice model. journal of marketing research 48, 767780. https://doi.org/10.1509/jmkr.48.4.767 rubin, j. (2014). centralized institutions and cascades. journal of comparative economics 42, 340-357. https://doi.org/10.1016/j.jce.2013.11.002 sahi, s.k., a.p. arora & n. dhameja (2013). an exploratory inquiry into the psychological biases in financial investment behavior. journal of behavioral finance 14(2), 94103. https://doi.org/10.1080/15427560.2013.790387 samuelson, w. & r. zeckhauser (1988). status quo bias in decision making. journal of risk and uncertainty 1(1), 7-59. https://doi.org/10.1007/bf00055564 scheinkman, j.a. & w. xiong (2003). overconfidence and speculative bubbles. journal of political economy 111(6), 1183-1219. https://doi.org/10.1086/378531 schlüter, a. & b. vollan (2015). flowers and an honour box: evidence on framing effects. journal of behavioral and experimental economics 57, 186199. https://doi.org/10.1016/j.socec.2014.10.002 schmidt, u. & h. zank (2012). a genuine foundation for prospect theory. journal of risk and uncertainty 45, 97-113. https://doi.org/10.1007/s11166-012-9150-8 schooler, l.j. & r. hertwig (2005). how forgetting aids heuristic inference. psychological review 112, 610-628. https://doi.org/10.1037/0033-295x.112.3.610 schwager, s. & k. rothermund (2013). motivation and affective processing biases in risky decision making: a counter-regulation account. journal of economic psychology 38, 111126. https://doi.org/10.1016/j.joep.2012.08.005 schwikert, s.r. & t. curran (2014). familiarity and recollection in heuristic decision making. journal of experimental psychology 143(6), 2341-65. https://doi.org/10.1037/xge0000024 sen, a. (1995). moral codes and economic success. in c.s. brittan & a. hamlin (eds.) market capitalism and moral values, brookfield, aldershot. shafir, e. & r.h. thaler (2006). invest now, drink later, spend never: the mental accounting of delayed consumption. journal of economic psychology 27, 694712. https://doi.org/10.1016/j.joep.2006.05.008 shefrin, h. (2000). beyond greed and fear: understanding behavioral finance and the psychology of investing. oxford university press, second edition (2002). shefrin, h. (2006). behavioral corporate finance. mcgraw-hill. shefrin, h. & e.m. cervellati (2011). bp's failure to debias: underscoring the importance of behavioral corporate finance. quarterly journal of finance 1(1), 127168. https://doi.org/10.1142/s2010139211000043 shefrin, h. & m. statman (1985). the disposition to sell winners too early and ride losers too long: theory and evidence. journal of finance 40, 777-790. https://doi.org/10.1111/j.15406261.1985.tb05002.x shefrin, h. & m. statman (2000). behavioral portfolio theory. journal of financial and quantitative analysis 35(2), 127-151. https://doi.org/10.2307/2676187 sherif, m. (1937). an experimental approach to the study of attitudes. sociometry 1, 90https://doi.org/10.1509/jmkr.48.4.767 https://doi.org/10.1016/j.jce.2013.11.002 https://doi.org/10.1080/15427560.2013.790387 https://doi.org/10.1007/bf00055564 https://doi.org/10.1086/378531 https://doi.org/10.1016/j.socec.2014.10.002 https://doi.org/10.1007/s11166-012-9150-8 https://doi.org/10.1037/0033-295x.112.3.610 https://doi.org/10.1016/j.joep.2012.08.005 https://doi.org/10.1037/xge0000024 https://doi.org/10.1016/j.joep.2006.05.008 https://doi.org/10.1142/s2010139211000043 https://doi.org/10.1111/j.1540-6261.1985.tb05002.x https://doi.org/10.1111/j.1540-6261.1985.tb05002.x https://doi.org/10.2307/2676187 peón et al. / european journal of government and economics 6(1), 24-58 56 98. https://doi.org/10.2307/2785261 shiller, r.j. (1984). stock prices and social dynamics. brookings papers on economic activity, 457-498. https://doi.org/10.2307/2534436 shiller, r.j. (2000a). human behavior and the efficiency of the financial system. in b. taylor & m. woodfood (eds.), handbook of macroeconomics, amsterdam: north holland. shiller, r.j. (2000b). irrational exuberance. princeton university press. shiller, r.j. (2003). from efficient market theory to behavioral finance. journal of economic perspectives 17(1), 83-104. https://doi.org/10.1257/089533003321164967 shin, h.s. (1992). prices of state contingent claims with insider traders, and the favoritelongshot bias. the economic journal 102(411), 426-435. https://doi.org/10.2307/2234526 shleifer, a. (2000). inefficient markets: an introduction to behavioral finance. oxford university press. https://doi.org/10.1093/0198292279.001.0001 shleifer, a. (2004). does competition destroy ethical behavior? american economic association papers and proceedings 94(2), 414-418. https://doi.org/10.1257/0002828041301498 slovic, p., m.l. finucane, e. peters & d.g. macgregor (2002). the affect heuristic. in t. gilovich, d. griffin & d. kahneman, eds., heuristics and biases: the psychology of intuitive judgment, cambridge university press, 397420. https://doi.org/10.1017/cbo9780511808098.025 statman, m. (1999). behavioral finance: past battles, future engagements. financial analysts journal 55(6), 18-27. https://doi.org/10.2469/faj.v55.n6.2311 statman, m. & j.a. weng (2010). investment across cultures: financial attitudes of chineseamericans. journal of investment consulting 11(1), 37-44. stevens, j.r. (2016). intertemporal similarity: discounting as a last resort. journal of behavioral decision making 29, 12-24. https://doi.org/10.1002/bdm.1870 stöckl, t., j. huber, m. kirchler & f. lindner (2015). hot hand and gambler's fallacy in teams: evidence from investment experiments. journal of economic behavior and organization 117, 327-339. https://doi.org/10.1016/j.jebo.2015.07.004 stulz, r.m. & r. williamson (2003). culture, openness, and finance. journal of financial economics 70(3), 313-349. https://doi.org/10.1016/s0304-405x(03)00173-9 suetens, s. & j.-r. tyran (2012). the gambler's fallacy and gender. journal of economic behavior and organization 83, 118-124. https://doi.org/10.1016/j.jebo.2011.06.017 sul, s., j. kim & i. choi (2013). subjective well-being and hedonic editing: how happy people maximize joint outcomes of loss and gain. journal of happiness studies 14, 14091430. https://doi.org/10.1007/s10902-012-9379-6 taylor, m.z., & s. wilson (2012). does culture still matter? the effects of individualism on national innovation rates. journal of business venturing 27, 234247. https://doi.org/10.1016/j.jbusvent.2010.10.001 thaler, r.h. (1983). illusions and mirages in public policy. public interest 73, 60-74. reprinted in h. arkes & k. hammond (eds.), judgment and decision making: an interdisciplinary reader, cambridge university press. https://doi.org/10.2307/2785261 https://doi.org/10.2307/2534436 https://doi.org/10.1257/089533003321164967 https://doi.org/10.2307/2234526 https://doi.org/10.1093/0198292279.001.0001 https://doi.org/10.1257/0002828041301498 https://doi.org/10.1017/cbo9780511808098.025 https://doi.org/10.2469/faj.v55.n6.2311 https://doi.org/10.1002/bdm.1870 https://doi.org/10.1016/j.jebo.2015.07.004 https://doi.org/10.1016/s0304-405x(03)00173-9 https://doi.org/10.1016/j.jebo.2011.06.017 https://doi.org/10.1007/s10902-012-9379-6 https://doi.org/10.1016/j.jbusvent.2010.10.001 peón et al. / european journal of government and economics 6(1), 24-58 57 thaler, r.h. (1985). mental accounting and consumer choice. marketing science 4(3), 199-214. https://doi.org/10.1287/mksc.4.3.199 thaler, r.h. (1999). mental accounting matters. journal of behavioral decision making 12(3), 183-206. https://doi.org/10.1002/(sici)1099-0771(199909)12:3<183::aidbdm318>3.0.co;2-f thaler, r.h. (2008). mental accounting and consumer choice: anatomy of a failure. marketing science 27(1), 12-14. https://doi.org/10.1287/mksc.1070.0348 thaler, r.h. & e.j. johnson (1990). gambling with the house money and trying to break even: the effects of prior outcomes on risky choice. management science 36(6), 643660. https://doi.org/10.1287/mnsc.36.6.643 thaler, r.h. & h.m. shefrin (1981). an economic theory of self-control. journal of political economy 89(2), 392-406. https://doi.org/10.1086/260971 thaler, r.h., a. tversky, d. kahneman & a. schwartz (1997). the effect of myopia and loss aversion on risk: taking an experimental test. quarterly journal of economics 112(2), 646661. https://doi.org/10.1162/003355397555226 thaler, r.h., sunstein, c.r. (2003). behavioral economics, public policy, and paternalism: libertarian paternalism. american economic review 93(2), 175– 179. https://doi.org/10.1257/000282803321947001 trivers, r.l. (1971). the evolution of reciprocal altruism. quarterly review of biology 46, 3557. https://doi.org/10.1086/406755 troye, s.v. & m. supphellen (2012). consumer participation in coproduction: "i made it myself" effects on consumers' sensory perceptions and evaluations of outcome and input product. journal of marketing 76, 33-46. https://doi.org/10.1509/jm.10.0205 tsetsos, k., n. chater & m. usher (2012). salience driven value integration explains decision biases and preference reversal. proceedings of the national academy of sciences of the united states of america 109(24), 9659-64. https://doi.org/10.1073/pnas.1119569109 tversky, a. & d. kahneman (1971). the belief in the law of small numbers. psychological bulletin 76(2), 105-110. https://doi.org/10.1037/h0031322 tversky, a. & d. kahneman (1973). availability: a heuristic for judging frequency and probability. cognitive psychology 5(2), 207-232. reprinted in d. kahneman, p. slovic & a. tversky (1982), judgment under uncertainty: heuristics and biases, cambridge university press. tversky, a. & d. kahneman (1974). judgment under uncertainty: heuristics and biases. science 185(4157), 1124-31. https://doi.org/10.1126/science.185.4157.1124 tversky, a. & d. kahneman (1981). the framing of decisions and the psychology of choice. science 211(4481), 453-458. https://doi.org/10.1126/science.7455683 tversky, a. & d. kahneman (1982a). evidential impact of base rates. in d. kahneman, p. slovic and a. tversky, judgment under uncertainty: heuristics and biases, cambridge university press. https://doi.org/10.1017/cbo9780511809477.011 tversky, a. & d. kahneman (1982b). judgments of and by representativeness. in d. https://doi.org/10.1002/(sici)1099-0771(199909)12:3%3c183::aid-bdm318%3e3.0.co;2-f https://doi.org/10.1002/(sici)1099-0771(199909)12:3%3c183::aid-bdm318%3e3.0.co;2-f https://doi.org/10.1287/mksc.1070.0348 https://doi.org/10.1287/mnsc.36.6.643 https://doi.org/10.1086/260971 https://doi.org/10.1162/003355397555226 https://doi.org/10.1257/000282803321947001 https://doi.org/10.1086/406755 https://doi.org/10.1509/jm.10.0205 https://doi.org/10.1073/pnas.1119569109 https://doi.org/10.1037/h0031322 https://doi.org/10.1126/science.185.4157.1124 https://doi.org/10.1126/science.7455683 https://doi.org/10.1017/cbo9780511809477.011 peón et al. / european journal of government and economics 6(1), 24-58 58 kahneman, p. slovic & a. tversky, judgment under uncertainty: heuristics and biases, cambridge university press. https://doi.org/10.1017/cbo9780511809477.007 tversky, a. & d. kahneman (1983). extension versus intuitive reasoning: the conjunction fallacy in probability judgment. psychological review 90(4), 293315. https://doi.org/10.1037/0033-295x.90.4.293 tversky, a. & d. kahneman (1986). rational choice and the framing of decisions. the journal of business 59(s4), s251-s278. https://doi.org/10.1086/296365 tversky, a. & d. kahneman (1991). loss aversion in riskless choice: a reference-dependent model. the quarterly journal of economics 106(4), 103961. https://doi.org/10.2307/2937956 tversky, a. & d. kahneman (1992). advances in prospect theory: cumulative representation of uncertainty. journal of risk and uncertainty 5(4), 297323. https://doi.org/10.1007/bf00122574 tversky, a. & i. simonson (1993). context-dependent preferences. management science 39(10), 1179-89. https://doi.org/10.1287/mnsc.39.10.1179 weiner, b. (1985). an attributional theory of achievement motivation and emotion. psychological review 92, 548–573. https://doi.org/10.1037/0033-295x.92.4.548 wu, j. (2015). helpful laymen in informational cascades. journal of economic behavior and organization 116, 407-415. https://doi.org/10.1016/j.jebo.2015.05.002 zeisberger, s., d. vrecko & t. langer (2015). measuring time stability of prospect theory preferences. theory and decision 72, 359-386. https://doi.org/10.1007/s11238-010-9234-3 https://doi.org/10.1017/cbo9780511809477.007 https://doi.org/10.1037/0033-295x.90.4.293 https://doi.org/10.1086/296365 https://doi.org/10.2307/2937956 https://doi.org/10.1007/bf00122574 https://doi.org/10.1287/mnsc.39.10.1179 https://doi.org/10.1037/0033-295x.92.4.548 https://doi.org/10.1016/j.jebo.2015.05.002 https://doi.org/10.1007/s11238-010-9234-3 abstract. this paper overviews the theoretical and empirical research on behavioral biases and their influence in the literature. to provide a systematic exposition, we present a unified framework that takes the reader through an original taxonomy, ba... keywords. behavioral biases; decision-making; heuristics; framing; prospect theory; social contagion. jel classification. d03; g02; g11; g14; g30 microsoft word ejge_04_2015-010.docx european journal of government and economics volume 4, number 2 (december 2015) issn: 2254-7088 155 a quick indicator of effectiveness of “capacity building” initiatives of ngos and international organizations david lempert abstract the article offers an easy-to-use indicator for scholars and practitioners to measure whether ngos, international organizations, and government policies and projects meet the criteria for design and implementation of “capacity building” projects that have been established by various international organizations and that are recognized by experts in the field. the indicator can be used directly to address failures that are routinely reported in this key and growing development intervention. use of this indicator on more than a dozen standard interventions funded today by international development banks, un organizations, country donors, and non-governmental organizations (ngos) reveals that while many smaller organizations are working to change institutions and society in ways that effectively build long-term capacity, most of the major actors in the field of development have failed to follow their own guidelines. many appear to be using “capacity building” as a cover for lobbying foreign governments to promote international agendas (“purchasing foreign officials”) and/or to increase the power of particular officials at the expense of democracy, with the public lacking simple accountability tools. the indicator points to specific areas for holding development actors accountable in order to promote development goals of sustainability and good governance. the breadth of the field of “capacity building” also allows this indicator to be used, with some modifications, for a large variety of development interventions. this article also offers several examples of where current capacity building projects fail, along with a sample test of the indicator using uncdf as a case study. jel classification d02; p48; l31; o17. keywords capacity building; institution building; governance; civil society; development policy. lempert ● a quick indicator of “capacity building” initiatives 156 1. introduction “capacity building” has become the tool of choice for several major international “development” organizations in recent years, including the united nations system, the world bank and other development banks, major international government bilateral donors as well as non-governmental organizations. as of 2009, some $20 billion per year of international development intervention funding went for capacity development; roughly 20 percent of total funding in this category (otoo, agapitova and behrens, 2009). the world bank itself commits more than $1 billion per year to this service in loans or grants (more than 10 percent of its portfolio of nearly $10 billion) (world bank, 2005) and identifies it in all of its formulaic country studies as a ‘core objective,’ while the u.n. system practically defines itself by capacity development as the “how” for ‘“how” undp works’ to fulfill its mission32. between 1995 and 2004, the world bank committed $9 billion in loans and $900 million in grants to capacity building; roughly $1 billion per year. in 2007, the total bank lending was $9.1 billion (world bank, 2005:9). according to recent statistics from the organization of economic cooperation and development, 12 percent of the $15 billion that went to 38 ‘fragile states’ in 2007, of a total official development assistance of $101.3 billion, went for ‘governance and civil society,’ the key area of ‘capacity building.’ (oecd, 2008:12). using the oecd figure of $101.3 billion, the $20 billion reported by otoo et al (2009) would amount to 20 percent.) according to the undp’s current promotional campaign, ‘capacity is development’ and ‘the urgency of “how”’ (whatever that means) (undp global capacity development facility, 2014)33. despite the enormous reliance on this tool to implement missions of (sustainable) ‘human development’ or the rather different goals of ‘poverty reduction; economic growth; improved services’ (world bank, 2005) or ‘poverty eradication’ (undp, 2002), the very organizations that are most committed to this tool are also the first to admit that they do not follow their own guidelines (if any) and that results are often the opposite of what they claim they are trying to achieve. a world bank review noted that ‘examples abound’ in which these initiatives ‘severely undermine public management in recipient countries and unwittingly block rather than promote progress in public sector reform and institution-building’ (world bank, 2000). despite such harsh criticisms dating back almost two decades, little has changed since a 2005 study that showed that the world bank had almost no interest in applying the lessons and clear standards that already existed in the bank for running such projects; knowingly creating a double standard for its capacity building of foreign governments. ‘the bank does not apply the same rigorous business practices to its capacity building work that it applies in other areas. its tools—notably technical assistance and training—are not effectively used... moreover, most activities lack standard quality assurance processes at the design stage, and they are not routinely tracked, monitored, and evaluated’ (world bank, 2005). a undp study of its capacity building projects in 2002 reported almost exactly the same phenomenon and the undp has also done little or nothing to correct this problem since. among the implementing practitioners, ‘there were no generally agreed standards as to what should be expected of newly created or strengthened 32 undp website (2014) url (consulted 17 june 2015): http://www.undp.org/capacity/. 33 undp (2014) going for scale, going for sustainability, going for quality. url (consulted 17 june 2015): http://www.undp.org/capacity european journal of government and economics 4(2) 157 national capacity or of institution or organisation building (undp, 200234).’ despite the fact that the u.n. system and other reports describe exactly how results based measurements could be done in this field (undp 199835, 200436, 200637), with guidelines easily accessible on the internet, u.n. officials continue to offer the excuse that results ‘cannot be easily measured’ to justify why they do not follow measurement procedures and apply a double standard. as a practitioner in the field for more than 30 years, it is this author’s view that the situation has actually gotten worse rather than better. while others may disagree, there is little that they can point to in terms of oversight or measurements that create accountability in this field. the failures may be by design. according to one early observer looking at the state of the field, ‘capacity building’ is simply being used as a ‘buzz word’ by international agencies for whatever they wish to do, with or without any accountability or logic (enemark, 2003). the current state of the field among the major donors is such that it appears to have already reached a theatre of the absurd. projects (some described below) may be the equivalent of seeking to turn current government clerks into brain surgeons (or the equivalent of teaching elephants to fly rather than buying birds) in a purported attempt to meet the need for specialized professionals without having to add or fire staff or to establish performance standards. other projects take the approach of seeking to convince wolves to turn vegetarian through “consciousness-raising” in “rights” or in “learning” how not to be corrupt, rather than facing the real underlying cause of the problem, such as the needs to build walls around the henhouse or find ways to put more power on the side of the hens. many projects have no measures of intended results and lack fit with a development strategy or logic. educators and consultants who work in the field and are paid handsomely to “build capacity” also have little incentive to hold themselves to systematic standards since it might make their contributions obsolete. by definition, the more services they are hired to provide, the more “capacity” they build and the more they profit, whether or not their contribution is really the most efficient, effective or sustainable, or addresses the institutional root causes of the lack of capacity in the first place. generally, these projects are evaluated with ‘smile sheets’, asking beneficiaries if they are ‘happy’ or ‘better off’ and measuring things like ‘raised awareness’, ‘enhanced skills’, and ‘improved teamwork’ that are ‘locally driven’, rather than on whether the underlying problems are solved, and refraining from asking whether there may be hidden agendas to buy influence, subsidize elites, and continue dependency (otoo et al, 2009). the major donors, themselves, admit that they have little incentive to end the double standard and achieve consistency in this area, despite the fact that they have long ago elaborated clear and basic frameworks and standards for how to appropriately measure key components of capacity building (including strategic planning for efficiency, service delivery, or application of skills). the world bank’s 2005 evaluation noted that practitioners shaped and reshaped definitions and 34 undp (2002) capacity building for poverty eradication: analysis of and lessons from evaluations of un system support to countries’ efforts. url (consulted 17 june 2015): http://www.un.org/esa/coordination/capacity_building_for_poverty_eradication.pdf. 35 undp (1998) capacity assessment and development. in a systems and strategic management context. technical advisory paper no.3, bureau for development policy (bahman kia and richard flaman). url (consulted 17 june 2015): http://portals.wi.wur.nl/files/docs/ppme/capsystech3-98e.pdf 36 undp (2004) national human development reports (nhdr) and the use of governance indicators. url (consulted 17 june 2015): http://www.undp.org/oslocentre/docs06/nhdr.pdf. 37 undp (2006) a review of selected capacity development methodologies, bureau of development policy. url (consulted 17 june 2015): http://74.125.153.132/search?q=cache:ll3zlvoiv0gj:www.lacworkspace.undp.org.co/fileadmin/desarrollo_capacidades/documentos/resource_cataloguereview_of_selected_capacity_assessment_methodologies.doc+undp+(1998):+capacity+assessmen t+and+development.+technical+advisory+paper+no.3&cd=3&hl=en&ct=clnk. lempert ● a quick indicator of “capacity building” initiatives 158 standards to suit themselves with some development agencies using ‘a narrow definition focused on strengthening organizations and skills’, with the world bank, itself offering ‘no operational policy to guide its capacity building works’ (world bank, 2005). a undp study in 2002 similarly reported that there was ‘no systemwide framework’ and that participants’ use of the terms ‘capacity,’ ‘capacity building’ and ‘performance’ showed ‘wide disparities’ (undp, 2002). moreover, almost none of the units within undp sought to collect any baseline data and their documents from the two previous decades where such data might exist, routinely “disappeared” into “storage.” the abuse of the “tool” of “capacity building” or the substitution of this tool and its inputs for any measurable development outputs is not unique to this international development intervention (schachter, 2000). in the absence of clear public pressures and accountability measures, many development actors of good or dubious intent justify interventions on the basis of the importance of the symptoms they are treating rather than on actual measurable impact that they say is too difficult or costly to determine; throwing money to build capacity and “strengthen” whomever receives it, rather than addressing problem causes. they often use their location overseas and their direct relations with foreign officials as ways to further hide their activities from public scrutiny in either the donor or recipient countries. in the area of “capacity building,” where the “poor” and members of the “public” are easy to exclude, the transfers of money and resources are often directly from government officials in one (powerful) country to those in another (weaker) country in what can be labelled building the “capacity” of the weaker bureaucrats through a legitimized form of corruption and abuse that circumvents international law. the (perhaps intended) result is that development projects often serve the interests of those government bureaucrats channelling the funds and those who receive them rather than the public that is supposed to benefit from measurable results (lempert, 2008). although some may view statements like this as rather bold, officials in developed countries are often the first to admit that they use ‘aid’ as a form of ‘soft power’ (as opposed to military power and economic pressure) in order to manipulate the political systems of weaker countries (nye, 2004). moreover, this attempt to influence decisions by government officials in weaker countries through use of financial benefits directed to those officials, in ways that favour the interests of the businesses and peoples of the donor country over other countries and/or over the peoples of the recipient countries, easily meets the definitions of corruption that are recognized under international law and that are the very practices that governments all claim they are trying to eliminate. it would be relatively easy for lawyers to find government officials in both the donor and recipient countries in violation of various provisions of the united nations declaration against corruption38 under articles 15 and 16 (bribery), 18 (trading influence), and 19 (abuse of functions). transparency international, the international ngo that is the recognized expert on corruption and that is largely funded by major donor countries, would also classify these behaviours as corruption under their definition of ‘political corruption’ in which funds are used to influence politicians to ‘steer away from good government’ and to make decisions on the basis of factors other than the ‘public interest’ in ways that ‘divert resources’.39 in answer to these challenges in the development field, recent articles by this author have chosen not merely to expose the problems and call for “change” but 38 u.n. declaration against corruption and bribery in international commercial transactions (1996): a/res/51/191. url (consulted 17 june 2015): http://www.un.org/documents/ga/res/51/a51r191.htm. 39 transparency international (2015). url (consulted 17 june 2015): http://www.transparency.org/whatwedo. european journal of government and economics 4(2) 159 have taken some of the initial steps to establish indicators and benchmarks through which the public and organizations can easily arm themselves to hold international development actors accountable to international law, to their mission statements for their interventions and to professional standards. these indicators are offered as easy-to-use tools (essentially, new public “weapons”) to create accountability and transparency in the use of public funds in development interventions; directly exposing abuses and offering specific directives for improvements. previous indicators began with tests of whether development projects met international treaty standards for promoting the agreed development objectives of ‘sustainable development’ (lempert and nguyen, 2008) as well as other basic governance objectives to promote self reliance and end colonial ‘dependency’ (lempert, 2009), to build “democracy” and protect rights as key international legal goals of good governance (lempert, 2010a; 2011) and to hold development professionals to ethics standards in order to eliminate conflicts of interest (lempert, 1997). this is also part of a larger initiative to build organizations that will monitor and challenge donors (lempert, 2008). the article offers an easy-to-use indicator for scholars and practitioners to measure whether ngos, international organizations, and government policies and projects meet the criteria for design and implementation of “capacity building” in ways that have been established by various international organizations, themselves, and that are recognized by experts in the field. this article also serves as a model for accountability in the use of other developments inputs by offering an approach can be adapted to specific interventions. indeed, “capacity building” itself is an umbrella for many specific tools – education, awareness, providing equipment, strategic planning, consulting advice, etc. – that can be measured using similar approaches. the article begins by defining “capacity building” according to basic internationally agreed principles that can be placed into an indicator, then surveys existing indicators, explains why several international “capacity building” projects now fail in the absence of an indicator or standard to hold them accountable to minimal levels of competence, then offers a new indicator and tests it on several categories of projects, including a detailed examination of how to use the indicator on an organization like the united nations capital development fund40 that claims to be doing capacity building as it central tool. 2. principles of “capacity building” the principles of “capacity building” as a standard development intervention are generally agreed upon not only by major donors but also by the community of nongovernmental organizations and by business consulting firms that do capacity building in the government, private business, and ngo sectors (undp, 199141; 1998; world bank, 2002; 2004; 2005). this makes it relatively simple to test whether organizations are actually doing what they say they have committed to do. though organizations use different wording and order, and much of the wording is confusing given jargon in the field, there are really five key concepts that are the essential basis of capacity building: three of them relating to the ability of a system to operate and perform a public function at three different levels (its legal and political authority or “enabling environment” within a larger social and political context; its managerial ability internally to perform effectively and efficiently that is often referred to as its “institutional development”; and the skills of its staff – its 40 united nations capital development fund (uncdf) (2009) website “about uncdf”. url (consulted 17 june 2015): http://www.uncdf.org/english/about_uncdf/index.php. 41 undp (1991) a strategy for water sector capacity building' in delft, the netherlands. url (consulted 17 june 2015): http://www.gdrc.org/uem/capacity-define.html lempert ● a quick indicator of “capacity building” initiatives 160 “human resources”), one relating to good governance (its public accountability), and one relating to the long term sustainability of the function. given that these are generally recognized, they do not need to be detailed here in full, but it is easy to understand the logic of the five elements. to be effective, an organization must have sufficient freedom from constraints to conduct its activities and must be able to use the resources that it has. it also must have people who are skilled, properly selected, compensated and tasked. for public organizations, there must be public oversight of the legal framework, of the organization itself, and of the skills areas (professional and technical fields and the training) and workers applying them to assure they are in line with public needs. this whole system must be sustainable and integrated, not simply driven by donors deciding to toss in resources or training to a specific institution, but working effectively over the longterm with people seeking training according to public needs, being appropriately selected and trained, then selected on merit systems, appropriately compensated and tasked. assuming a quick fix of channelling funds or training courses to workers in an institution who may be the wrong people being wrongly tasked or overseen in ineffective organizations, or to educational institutions that may be training people who will never be hired or that lack the capacity and management for appropriate training may be irrelevant. the cause of failure may be at any one of these levels or several and that is why any solutions must address the whole system. more detail for readers new to this subfield is presented in the appendix to this article (section i). 2.1. indicators in the field and the lack of an indicator for “capacity development” interventions though there have been attempts to develop governance indicators for governance projects and diagnostics to use in planning capacity development interventions in different kinds of organizations, there are no existing indicators to score “capacity building” interventions on whether or not they are meeting the basic professional requirements of capacity building. nor is there any licensing or grading system to measure basic competence or to establish other competence levels for practitioners who do “capacity building” and who claim to be “capacity building experts.” among the most recent attempts, for example, the world bank institute has developed a manual but it is filled with dozens of questions to use and impossible to apply as a quick diagnostic (otoo et al, 2009). nothing else exists in the field. though there are several international measures of “good governance” and “democracy” these do not cover the area of capacity building. other measures, with community based organizations are closer to strategic management tools than capacity building measures (mickinsey, 2001; christensen et al., 2006; gubbels and koss, 2000; lusthaus et al, 2002). a review of these and others is presented briefly in the appendix in section ii. 2.2. the problem with many “capacity building” projects and the real value of an indicator in the absence of any professional standardization for use of the tool of capacity building or any accountability indicator for this approach, there is, in effect, no public review of the billions of dollars of public funds that are being transferred from developed countries to the governments and non-governmental institutions of the rest of the world in the guise of “capacity building.” abuses in this area are in fact running rampant. at best, “capacity development” projects are just throwing money at symptoms with no logic or analysis. at worst they are disguised bribes to european journal of government and economics 4(2) 161 government officials and attempts to undermine entire government structures by setting up foreign run ministries and foreign influenced political parties or civil society to lobby for foreign interests. these problems should be familiar to everyone in the field. in the appendix, in section iii, some of the abuses are presented directly for readers, in stark terms. although many of the descriptions are frank and direct, coming out of professional observations by the author in some 30 years in this field, the donors themselves admit the problems as well as the underlying goals of promoting their national self interest through aid as “soft power”. they simply use more euphemistic language to soften the implications and potential exposure (nye, 2004; raffer and singer, 1996; mayo, 2009). the author has detailed some of these cases in greater detail in other works as well, including those referenced here. whatever the reasons for the failures, it is possible to use a simple tool to measure and expose the failures. 2.3. the indicator of “capacity building” that can measure adherence to recognized professional standards of the field as a first step towards the licensing of practitioners who claim expertise in “capacity building” and as a way for citizens to hold donors accountable in the spending of their funds or in the acceptance of funds for “capacity building” while exposing approaches with hidden agendas, the indicator below is presented with 20 simple questions as a litmus test of basic competence in the field. by asking these 20 easy “yes or no” questions and then counting up the results (possible 11 points), one can determine the relative competence and integrity of a “capacity building” project or intervention on the following scale: scale: 8 11 points comprehensive approach to “capacity building” in ways that also appear to be promoting sustainable development, self reliance, and democracy in line with the rio declaration and international conventions 4 7 points minimally competent approach to “capacity building” with several failures in procedure or safeguards 0 – 3 points narrow or weak intervention < 0 incompetent project with hidden agenda that has been corrupted either by the donor agency, stakeholders in a developing country bureaucracy, or both, in a possible attempt to purchase or influence foreign policies or to collude to misuse funds note that the indicator is not an absolute scale since it is not offered as a social science research tool (though it can be used as such) but as a project evaluation and selection tool. it is best used to show the relative value of different projects. the indicator does not measure the quality of specific capacity building, since that depends on many factors and comparisons, with benchmarks and cost-benefit analysis. it also does not measure how effectively a capacity building intervention is at promoting sustainable development, self-reliance, or democracy, since these are covered by other indicators, though a project that gets the highest score must at least be paying attention to these issues. the purpose of the indicator is not to measure “gross benefit” or “cost benefit.” it is simply to measure compliance with professional standards for this type of intervention. indeed, a capacity building initiative may be technically competent at building long term capacity but could still send a country down the wrong development path. that is why it is important to use this indicator in combination with others and why this indicator qualifies only as a litmus test for basic competence in use of this tool. (what the indicator does is lempert ● a quick indicator of “capacity building” initiatives 162 determine whether the project is actually doing capacity building according to the technical standards of the tool or is hiding another objective. it also determines whether other agendas and ideologies have taken control of the funds and whether the overall goal is really to promote development and public control or not. it is essentially a litmus test of basic competence in the field and application of appropriate safeguards to protect professionalism and the public interest.) like most indicators, answers to each question would need to be “calibrated” to assure that different observers make the exact same determinations. to do so would require a longer manual for standardized, precise answers across observers. 2.4. measures/sub-factors below, is an explanation of how anyone can apply the test to any project by asking the 20 questions and recording the scores. most of the questions are clear cut “yes” (1 point for applying a standard procedure, 0 loss of points for protecting against conflicts of interest or other corruption of standards) or “no” (0 points for failing to apply a standard procedure, -1 indicating a loss of points for facilitating conflicts of interest and corruption of standards), but in cases where there is a judgment call, you can opt for a “debatable” (0.5 points for benefits and – 0.5 points for harm). the measures of performance can be placed into two categories that look at application of basic professional requirements for project design (positive scoring) and protection of the project in implementation from conflicts of interest or negative development impacts (negative scoring): 1) proper application of the basic principles and standards of capacity building (5 of the 5 recognized principles of capacity building, including diagnostic of the three levels of analysis for capacity) and of development interventions, with the donor organization also serving as a model of accountability with a total of 11 questions broken into three sub-categories.  the first sub-category (4 of the 5 recognized capacity building principles) looks at basic professionalism in diagnostic and design (7 questions for a possible 7 points).  the second sub-category (the fifth of 5 capacity building principles), contingent on meeting the standards of the first category, addresses sustainability (2 questions for two possible points).  the third sub-category addresses whether the donor or project implementing organization itself reflects and models the standards of good governance (2 questions for a possible 2 points or loss of 2 points). (the overall potential scores for this section of 11 questions is 11 points.); 2) professional safeguards are in place against conflicts of interest and against unintended consequences that could distort other public or private systems: with a total of 9 questions broken into two sub-categories.  the first sub-category seeks to protect against conflicts of interest and against organizations searching for problems to fit the tool of “capacity building” or stakeholders to agree to projects (4 questions and a total loss of 4 points).  the second sub-category seeks to protect against negative or adverse impacts on the overall political/government system and on related business and civil society systems (5 questions and a potential loss of 9 points). (the overall potential score for this section of 9 questions is to maintain the points awarded in the first section.) european journal of government and economics 4(2) 163 the first category (and particularly the first sub-category of 7 questions) is itself a screening to test whether a project actually achieves anything in the area of capacity building at all, and whether it meets minimal basic competence in the field. questions marked with an asterisk (*) are those that apply to any development intervention. they represent the basic steps of project design (root cause analysis; benchmarks and cost benefit of interventions that are tied to specific measurable results and indicators; sustainability of the input), of screening to assure appropriate development impact, and tests of the donor organization to assure best practices are followed. note that some of the questions below may seem lengthy, and this “simple” list may not look that easy to use on first glance. the questions are lengthy so that the goal of each question is clear and readers can train themselves to effectively score the question. with some short practice (working through the example in the appendix, in section v, and also considering the scoring for several projects, presented in the appendix, in section iv), readers will be able to see how the indicator works to distinguish interventions and to offer a valid way to score and improve them. 1. proper application of the basic principles and standards of capacity building (5 of the 5 recognized principles of capacity building, including diagnostic of the three levels of analysis of capacity) and of development interventions with the donor organization also serving as a model of accountability: this is the category that can be used for screening whether the project and spending really have any substance and fit the basic professional competence of capacity building and of development interventions. (11 questions and a potential score of 11 points) a project that does not score more than 4 points in this category is already partly suspect as being driven by an outside agenda to favour a specific group rather than to promote real democratization and good governance. at least 5 of these questions (marked with an asterisk) are directly applicable to any development intervention. the other 6 are specifically applicable to “capacity building” though they could also be applicable to other development interventions with slight modification. 1.a) project meets 4 of 5 of the recognized principles of capacity building, including diagnostic of the three levels of analysis of capacity, and principles of professionalism for development interventions: this is the heart of the indicator. a project that does not score at least 4 points here is probably not competent in the field. (7 questions and a potential score of 7 points) question 1*: country and cultural fit of the development intervention for sustainable development: fixing what is broken. the project is not formulaic or sector specific (“to train judges”; “to build a modern x system”) but is fit specifically into the local cultures and their needs for maintaining or returning to sustainability and fixing a system that has broken, with the analysis beginning with an assessment of local needs. the question is whether the capacity building is relevant to restore the sustainability of the local culture(s) and repairs an existing and identifiable underlying problem that has moved the culture away from sustainability and needs to be “fixed” in line with international principles of cultural survival and sustainable development. the overall approach carefully incorporates the requirements of sustainable development established by the rio declaration (balance of population and consumption with productivity and resources) in its approach to governance as the basic principle of the role of governance in sustainable development (united nations conference on environment and development42; united nations 42 u.n. declaration on the rights of indigenous peoples (2008) url (consulted 17 june 2015): http://daccessdds.un.org/doc/undoc/gen/n06/512/07/pdf/n0651207.pdf?openelement. lempert ● a quick indicator of “capacity building” initiatives 164 declaration on the rights of indigenous peoples43). if the approach is one that simply targets a “sector” in a “sector wide approach,” and/or that is an outside determination based on a formula or a comparison with what “developed” countries or cultures have, then the score here is zero because it has not started with the cultural fit as a whole and may simply be developing one system to the detriment of the overall balance for sustainability and appropriate governance. (for expanded applications, see lempert and nguyen, 2008.) scoring: yes 1 debatable 0.5 no 0 question 2*: governance or civil society functions promoted are appropriate parts of the key governmental or non-governmental organizational missions through which there is direct public accountability. the project is clearly designed to promote either a specific government function of protecting and/or promoting (separately and as a competing function in a structured system) an asset or resource of specific ethnic groups and of the country in ways that maintain or increase the per capita assets of the culture and the country, or to promote a non-governmental organization function that is specifically separate from government and which is directly accountable to all of its owner, consumer, neighbour stakeholders. there is a clear and measurable mission of accountable governance with measurable costs and benefits to specific units of public spending or resources for which specific government or non-government officials can be held directly accountable by citizens (removal, punishment, or rewards). interventions that “promote regional integration” or “monitor foreign development funds” or “strengthen civil society” do not earn points. government missions should be to “promote, measure, and maintain” assets. those that “promote justice” or “improve health” or “protect resources” but do not assure that there are measurable benefits to specific cultures and/or per capita long-term improvement that are appropriate to their sustainability and adaptability, or that “develop” a resource without also protecting it, may actually distort effective governance systems and earn no points. scoring: yes 1 debatable 0.5 no 0 question 3: full framework analysis includes three of the multiple dimensions or levels of capacity to determine all of the failures and their relationships to each other. regardless of any initial area that the project might pre-select as an intervention, the project withholds judgment on the nature of solutions or problem and conducts a full diagnosis to get at the root causes of the failures. the project design includes a thorough assessment of the multiple dimensions of “capacity” that includes all of the following as a key to understanding the human dimensions and behaviours that are the source of failures of systems to meet needs for sustainable development – 1) the societal and cultural level, including ideologies, mal-adaptations to environmental changes, distributions of power and organization of political and 43 united nations conference on environment and development (1992) rio declaration on environment and development. url (consulted 17 june 2015): http://www.un.org/documents/ga/conf151/aconf15126-1annex1.htm. european journal of government and economics 4(2) 165 legal institutions (including legacies of colonialism or current outside pressures) that interfere with sustainability; 2) failures at the organizational and institutional level for fulfilling specific missions; and 3) human resources failures. the analysis distinguishes symptoms from causes and also models how the entire system would work if it were returned or moved towards sustainability. there is commentary on the status of each of the four areas indicating whether or not there are failures at each level and determining with evidence whether or not specific areas can be approached independently to reach solutions or whether only comprehensive and linked solutions can achieve solutions to the problem and move towards a sustainable model. scoring: yes – 1 (all four of the levels are fully considered) debatable 0.5 (all four levels are considered but measures may be sloppy.) no 0 question 4*: root cause analysis and problem trees. the project focuses on those areas where there are failures and where specific and comprehensive changes can lead to measurable performance improvements. the project design includes a thorough assessment of the root causes for the failures that can be corrected through “building capacity.” problems are mapped in a problem tree and the root causes of the problem, with identifiable target actors whose behaviours need to be changed, are presented in a systematic and linked way. the potential intervention is tied directly to the problems at every one of the identified steps in the sequence where there are failures, with specific measurable outputs per unit of input at each stage, with particular attention to human behaviours at various levels to be changed that underlie the problem (rather than symptoms of weaknesses) that lead to measurable performance outcomes/results. symptoms (low skills; lack of transparency or incentives, weak management, low resources) are not root causes, only individual and social and organizational behaviours are, and these are fully recognized in a problem statement and root cause analysis. the logframe shows specific measurable behaviour changes in cost savings, cost effectiveness, and other service delivery and social indicators, as direct output evidence of performance improvement outcomes, rather than simply throw inputs at a symptom and assume that there will be “better governance” or “improvement” or “greater capacity” or “more efficiency” because resources have been transferred. scoring: yes 1 debatable 0.5 no – 0 (no problem statement or root cause or problem tree) question 5*: logframe specifically targets the root causes in an appropriate sequence, showing how specific measured inputs lead to specific measured performance changes over a long period of time, with cost effectiveness ratios of inputs to outputs included based on benchmarks of outcomes. the project logframe demonstrates specific measurable behaviour changes as outputs that lead to performance improvements, rather than simply throws inputs at symptoms and assumes that there will be “better governance” or “improvement” or “greater capacity” because resources have been transferred, documents have been drafted (laws, action plans or policies), agreements have been signed, people have been “trained,” or new offices or institutions have been established or tasked. inputs are not turned into outputs because they are delivered or received or because something is to be produced. to earn points there must be clear benchmarks of lempert ● a quick indicator of “capacity building” initiatives 166 changed service delivery that are not simply accounting measures of delivery of inputs or intermediate inputs and there should be benchmarks linking units of spending to specific behavioural changes of specific numbers of a target population, with those specific behaviours leading to performance results that move a culture back to a path of sustainable development (living within its resource base). scoring: yes 1 debatable 0.5 no – 0 (no cost benefit analysis of outputs; no logframe or logframe where inputs and outputs are confused and do not meet professional standards) question 6: public accountability mechanisms are part of the assessment (fourth principle of capacity building, in analysis) and the project begins with concern of placing capacity in public hands, starting with youth as the first and priority alternative of any capacity building intervention. the project design includes a thorough assessment of the accountability of the systems to the public as a key to the social context. there is a focus on the laws, the incentives of officials, the feedback for funding, the monitoring of funds, and the public tasking and monitoring of results of the institutions for which capacity is to be “built.” there is a focus on increasing the capacity of the public, first, since all government and non-governmental functions and cultural decisions and understandings ultimately depend on the skills of the public. building capacity of the public is considered first before any decision is made to work directly with the public’s agents or representatives, in order to ensure that specialists will be fully accountable to and controlled by the public. projects to build civil society or governance start with assessments of the general skills, powers, and capacities in the population for such oversight and works to built them at the level of basic socializing institutions with young people, first, rather than with adults. the project clearly explains any decisions not to put all such skills and capacities into the public starting with youth and in models with youth (model civic actions and democratic governance of youth, model youth courts and public investigations, youth newspapers and ngos, youth businesses, etc.) scoring: yes 1 debatable 0.5 no 0 question 7: agreement is transparent to citizens and they are included in the project oversight and approval (fourth principle of capacity building, in implementation). the project transfer of inputs to government or ngo stakeholders is conducted in ways that include screening and monitoring directly by citizens of the host population, including not only the direct approval of their legislative bodies but openness to media and outreach and inclusion of the public, so as to avoid any agreements that are government to government or bureaucrat to bureaucrat transfers. scoring: yes – 1, if the project shows awareness of this and protects against harm debatable or not relevant 0 no – (-1) (loss of a point) european journal of government and economics 4(2) 167 1.b) sustainability of the impact through systematization and institutionalization: the fifth principle of capacity building and one common to other development interventions: the project doesn’t just seek short-term impact but institutionalizes a process of continued responsiveness and adjustments of capacity, as well as identification of needs and building of new capacity, in the governmental system and/or culture. (2 questions and a potential score of 2 points, to be awarded only if the project has achieved a score of at least 4 points on the first 7 questions. otherwise the measures are rewarding sustainability of a project that may actually undermine appropriate capacity building.) question 8: intervention institutionalizes change at the root of the problem, fixing a broken system, and is not funding an institution or activity for a problem that starts elsewhere in the society or culture (e.g. offering remedial training of adults, professionals or employees). the project repairs a system failure (e.g., basic parental or public education for adult responsibilities; university education; professional education; a personnel selection system; salary structure; information system) and assures that is adaptive to change, for multi-generational continuing impact rather than offering a short term transfer or quick fix to one target stakeholder or recipient group. an education problem in skills, an awareness or consciousness issue, an issue of funding or overall behaviours, is traced back to family socialization and the formal and informal (media) education system with a focus on changing those for the long term rather than simply treating the symptom by working with adults. scoring: yes 1 debatable 0.5 no 0 question 9*: sustainability of the intervention and impact. the intervention builds a continuing system of measurement, monitoring, determining of actual need and value, and appropriate advocacy and receipt of future funding. the intervention has built institutional mechanisms that are self-sustainable within the country’s resources and have continued local financing and management, with freedom from continued foreign or institutional funding that would create dependency on outsiders for achievement of the project goals. the project builds and institutionalizes an incountry monitoring system of capacity and of costs and benefits in the services that are being supported, such that the system adapts to changing conditions and measures (with adequate oversight to assure no conflicts of interest in the data) that there is appropriate advocacy for funds and receipt of support in an effective balance with other competing systems through a fair process. there is a specific determination of “how much” capacity is needed to solve a particular problem and at a measurable cost, with costs and benefits considered to the country and how the country will be able to pay for it out of the stream of future benefits. it is not just considered to be good for its own sake, without justification. scoring: yes 1 debatable 0.5 no 0 1.c) internal procedures of the project, itself, reflect the values of accountability and self-reliance: the project organization is itself a model of good governance, accountability, efficiency, transparency and appropriate capacity (2 questions and a potential score of 2 points but also a potential loss of 2 points if the project itself sends a message that contradicts and undermines what it claims to be achieving) lempert ● a quick indicator of “capacity building” initiatives 168 question 10: accountability of the donors: the project itself (the donor organization) is a model of transparency and direct accountability to beneficiaries and to citizens, and does not hide behind barriers that require citizens or beneficiaries to demand that government representatives or other elites bestow accountability. projects that meet this requirement will have open books, clear professional ethics codes, full published reports on their projects, and full use of measurement tools of benefits in the profession (cost-benefit, baselines, comparative indicators, and industry benchmarks). moreover, the donor organization, itself, has conducted the very same capacity analysis subject to the same questions as in this test, to assure that it has a clear and strategic mission, that its own results are measurable with benchmarks and cost effectiveness data, that its employees meet specific tests of certified competence in their fields, that evaluations are done independently and objectively not with management oversight but with the oversight of funders and beneficiary stakeholders, with results available and with feedback systems that assure accountability and implementation of the results. scoring: yes – 1, if the project shows awareness of this and protects against harm debatable or not relevant 0 no – (-1) (loss of a point) question 11: rewards and incentives: the project rewards behaviours that promote independence and sustainability of recipients and punishes behaviours that promote dependency or donor relationships, with no opportunity for collusion to prolong funding in the absence of meeting stringent conditions for results, established in advance. delayed projects are not rewarded because of good “relationships” have been built and officials or beneficiaries “appreciate” the assistance, but because there are clear standards showing progress towards measurable results and sustainability and that exceed standard benchmarks for projects resolving similar root causes of the problems. grants are given with real conditions that have enforceability and consequences without paternalistic justifications that recipients cannot or should not be held to real standards. success of a project does not lead to replication in additional areas using more outside funds but towards promotion of copying by others with their own resources. failure of a project to be sustainable or to show strong benefits does not invite additional funding because of “continued poverty” or “need” but triggers an immediate change and possible liability. the original setting of conditions on the project meets the most stringent of international treaty standards, benchmarks and objectives and was not simply a politically negotiated transfer of support to facilitate project inception. scoring: yes – 1, if the project shows awareness of this and protects against harm debatable or not relevant 0 no – (-1) (loss of a point) 2. professional safeguards are in place against conflicts of interest and against unintended consequences that could distort other public or private systems: these questions are challenge tests to assure that the design process is actually being used in ways that it is supposed to work. for this reason, scoring here is negative, subtracting points for failures. questions are in two categories: 4 questions on conflicts of interest and 5 questions on negative impacts on public and private systems. (9 questions and a potential loss of 9 points) european journal of government and economics 4(2) 169 2.a) the “capacity building” tool is one tool to fit an objectively measured sustainable development need, rather than a tool searching for a need where it can be used or as a political facilitator of some other transfer: no conflicts of interest: the project is not subject to the influence of any stakeholder groups in its design or implementation other than determinations of independent professionals held directly accountable to ethics standards (4 questions and a potential loss of 4 points) question 12: assessment of the need is protected against subjective biases of the partners/ stakeholder recipients. the project clearly distinguishes the difference between sustainable development “needs” and partner/stakeholder “wants.” needs for capacity building are assessed as relevant to fixing a root cause of a development problem with failures assessed before the project begins and before any funds are committed, using independent, objective measures such as skills testing, production and service analyses, monitoring of performance and outputs, strategic management tools (for potential consulting inputs), etc. the project is not a santa claus, measuring its success with “smile sheets” of how happy partners or stakeholder recipients are to receive support and asking them to measure their “needs” with questionnaires or group meetings (what they would “like to learn” or where they could “use consultants”) in ways that offer funds first and then seek to justify their transfer with the subjective or political determinations. scoring: yes – 0 (no loss of points), if the project shows awareness of this and protects against harm no explicit policy at the organization to protect against this, but no clear sign that abuse has occurred – (-0.5) (loss of half of a point) no, and there are signs that this abuse has occurred or is very likely to occur – (-1) (loss of a point) question 13: delivery of inputs does not personally benefit the stakeholders/partners but benefits everyone in the society/culture equally. the project includes no incentive payments in the form of perquisites to convince or ease participation of officials (per diems or other payments that are above salary; travel and tours; scholarships and education resulting in degrees or certificates that can be used in other jobs; vehicles, computers, or other office equipment). anything delivered is measured in a specific test of benefits to the country versus benefits to the implementing stakeholders. such payments and transfers are also those that members of the public are informed about and approve. scoring: yes – 0 (no loss of points), if the project shows awareness of this and protects against harm no explicit policy at the organization to protect against this, but no clear sign that abuse has occurred – (-0.5) (loss of half of a point) no, and there are signs that this abuse has occurred or is very likely to occur – (-1) (loss of a point) question 14: there are no linked inputs or grant funds for officials to manage that do not directly improve capacity for already existing budgets and target root causes of capacity failures rather than symptoms. the project includes no pump priming grants to government agencies that increases their existing budgets without starting directly on the root causes of administrative system failures. anything delivered is measured in a specific test of solving the problem of current lack of lempert ● a quick indicator of “capacity building” initiatives 170 capacity for managing existing budgets or for making the case for increased taxation rather than as a sweetener that could hide another objective. questions are asked immediately about why the agency currently does not tax effectively for funds if they do lead to public benefit, or why they have not closed loopholes of corruption or established appropriate development priorities, before anything is given to a partner to manage. scoring: yes – 0 (no loss of points), if the project shows awareness of this and protects against harm no explicit policy at the organization to protect against this, but no clear sign that abuse has occurred – (-0.5) (loss of half of a point) no, and there are signs that this abuse has occurred or is very likely to occur – (-1) (loss of a point) question 15: screening and delineation of all conflicts of interest of international “partner” organizations for “twinning” projects, for consultants and international firms, and of all implementing and donor agents/ stakeholders is combined with legal and ethical oversight. the project documents all possible biases and benefits to the participating partners, donor agents, and donor staff to assure that there are no future financial or personal benefit conflicts of interest beyond pure humanitarian goals driving projects or methods for specific benefits to stakeholders that are in any conflict with the funders and/or the public beneficiaries that drive project decisions in any way. strict mechanisms are in place for outside challenges, for review, and for stopping projects or penalizing offenders for any such conflicts. scoring: yes – 0 (no loss of points), if the project shows awareness of this and protects against harm no explicit policy at the organization to protect against this, but no clear sign that abuse has occurred – (-0.5) (loss of half of a point) no, and there are signs that this abuse has occurred or is very likely to occur – (-1) (loss of a point) 2.b) no negative or adverse impacts on the political/government system or on related private systems: the project does not distort the overall governmental system or the roles or balance of governmental or non-governmental (business and community based) institutions but supports their appropriate roles. (5 questions and a potential loss of 5 points) question 16: citizen powers and enforceable protections are strengthened as the initial and linked goal and result of all interventions, with real safeguards against transferring new powers to officials or to large private organizations (business or civil society, including foreign government, business and ngo actors) in the name of citizen protection, or any other changes making decisions more opaque or hierarchical. the project does not increase the power of officials or designated representatives over citizens (e.g., supporting strengthening of an “institution” that empowers its officials such as parliament or an “ombudsman” or “prosecutor” rather than increasing the role of the public using the government function, such as empowering the public with legislative power and skills, increasing public ability to sue and remove government officials and to be the judicial deciders, or allowing for class action suits and other “private prosecutor” mechanisms.) the intervention does not create new public bureaucracies without a real change in citizen power. scoring: yes – 0 (no loss of points), if the project shows awareness of this and protects against harm european journal of government and economics 4(2) 171 no explicit policy at the organization to protect against this, but no clear sign that abuse has occurred – (-0.5) (loss of half of a point) no, and there are signs that this abuse has occurred or is very likely to occur – (-1) (loss of a point) question 17: interventions do not improve efficiency of systems that may be undemocratic, inequitable or unjust but begin with a focus on accountability, participation, and equity. the project recognizes the danger of “efficiency” of systems that are inherently unrepresentative and does not simply promote efficiency given the potential for continued rights abuses by an authoritarian or unaccountable regime. projects working with businesses, community based organizations or any aspects of government where decisions are made (particularly the justice system but also parliament and any ministries with discretionary and/or policy authority) work to link efficiency interventions directly with equity and direct citizen control (removal, sanctions, legal challenges, equal participation as jurors). scoring: yes – 0 (no loss of points), if the project shows awareness of this and protects against harm no explicit policy at the organization to protect against this, but no clear sign that abuse has occurred – (-0.5) (loss of half of a point) no, and there are signs that this abuse has occurred or is very likely to occur – (-1) (loss of a point) question 18: donor-to-stakeholder beneficiary financial transfers (grant, loan, gift) or commitments that are given as part of “capacity building” do not create future obligations in ways that could subsidize a favoured social group, distort taxes, or negatively influence priorities for sustainability. the project meets strict public finance criteria for grant, loan/investment, or subsidy and funds are allocated appropriately, with public oversight to assure that any loans are approved by the public and that the public is able and willing to pay for each item that is linked to “capacity building.” the impact of the assistance does not end up subsidizing some other improper spending (allowing a transfer from one category of spending into something else as a result of the gift), reducing pressure on elites who should tax themselves to fund the project, or end up distorting capital markets in the country by offering a gift or subsidy for a kind of productive investment that should be in the form of a loan or in the form of a loan at competitive market rates. if the project merely seeks to find “poor” people to help by building the “capacity” to help them, but does not analyze the responsibility of the elites in the country to fulfill obligations of social solidarity with people in their own country, the project is part of a collusion in detaching elites globally from their local responsibilities and has a negative impact. if the project does not do an analysis of existing government spending and tax policies, it is likely that the project is offering money for the “poor” at the same time that an excessive amount of the budget is being used for military and police spending to control the poor, and the project is actually subsidizing this pattern. if the project includes a gift rather than a loan and does not include standard financial controls and conditions, it is likely being given with the knowledge that corruption will occur and as a subsidy for corruption and waste, including purchase of luxuries and foreign goods. scoring: yes – 0 (no loss of points), if the project shows awareness of this and protects against harm no explicit policy at the organization to protect against this, but no clear sign that abuse has occurred – (-0.5) (loss of half of a point) lempert ● a quick indicator of “capacity building” initiatives 172 no, and there are signs that this abuse has occurred or is very likely to occur – (-1) (loss of a point) question 19: government functions are respected and the balance with civil society is promoted appropriately and internally, with effective public regulation of the nongovernmental sectors. the intervention does not replace a government function with foreign paternalism building parallel systems that are better than government but that do not improve what is wrong, or transfer a government function to another place like civil society because of current underperformance. nor does the project seek to build a civil society that must rely on funds from donors or from elites, in place of direct support and control by the beneficiaries, themselves. nor does it seek to build a strong private sector without effective public regulation of that sector and restrictions on the powers it could exert through financial pressures. (ngos are not public service providers but provide for private needs and have a role in trying to improve government action; businesses are not “corporate citizens” but are producers to be taxed and regulated to fund public functions, etc. the appropriate role of an ngo is to model a new behaviour to try to convince government to change, and to advocate for the special interests of a group with sustainable funding and accountability to that beneficiary group, but not reliant on foreign or other outside funding. the appropriate role of funding for ngos must also be to ensure that they are sustainable with funding from the beneficiaries and with accountability directly to the beneficiaries, and not dependent on funds from foreigners or from elites who are disconnected to benefits to the beneficiaries and who have different interests.) scoring: yes – 0 (no loss of points), if the project shows awareness of this and protects against harm no explicit policy at the organization to protect against this, but no clear sign that abuse has occurred – (-0.5) (loss of half of a point) no, and there are signs that this abuse has occurred or is very likely to occur – (-1) (loss of a point) question 20: the intervention promotes competition among providers in the area where capacity is built and does not distort market systems. the project seeks to build the infrastructure in society for government consulting, training systems/ educational institutions, information systems and other organizations that public institutions can hire and fund through competitive bids, and does not seek to monopolize a particular training or provide it directly where such services can be provided. donors do not pick “winner” ngos or businesses or agencies to receive support in ways that could disfavour competitors from developing. an assessment is done at the beginning of the project of the means of developing this kind of service market for the capacity needs of governmental and non-governmental organizations (following a business development services (bds) model). scoring: yes – 0 (no loss of points), if the project shows awareness of this and protects against harm no explicit policy at the organization to protect against this, but no clear sign that abuse has occurred – (-0.5) (loss of half of a point) no, and there are signs that this abuse has occurred or is very likely to occur – (-1) (loss of a point) european journal of government and economics 4(2) 173 2.5. how some organizations do after understanding how the indicator works, it is easy to apply to every new case in just a few minutes and with close agreement among anyone using it. in the appendix, in section iv, are several examples including many of the standard approaches that are now widespread in the field, showing how different organizations and projects score, from best to worst. rather than score specific projects in particular countries, some of the projects are generalized in project categories that are common in the field, showing the range of scores that they earn depending on which particular features are included in certain types of projects by specific donors and proponents. 3. post-script: solutions the irony of exposing the flaws in development projects today is that the “experts” who are in the position to make changes have little incentive to change, while those who are best protected by change are the least informed and organized about where or how to begin to push for reforms. an indicator can facilitate change, but like other improved tools, it must be in the hands of those willing and able to use it. organizations that score the worst on the new indicator in this article will likely not even recognize their failures. (they are likely to say that professional compliance standards do not apply or that projects are “too diverse” or that measurement is “too difficult” or “subjective”. they may say that this business-like approach that introduces a variety of professional expertise takes the artistry and “humanistic” or “human” judgment out of their work, though in fact it does the opposite by applying their own standards to their work. they are likely to respond defensively to suggestions for more public oversight of their work and to claim that accountability is a form of “policing,” even though they accept the idea of “accountability” as one of the key principles of effective capacity building. they are likely to say that oversight implies “mistrust” and that their good faith is being questioned, in the premise that they are above the law and the public is (by their design) ignorant and uninformed about what they do. they may say that holding a government official accountable for results is unfair because there are “too many factors”) overall, such responses from many “professionals” in “good governance” will demonstrate exactly why many of the people in place in current systems are part of the problem and not the solution. indeed, the only real solution is mobilization of the public. this author has suggested the formation of donor monitor ngos that act as public advocates (lempert, 2008) and has designed a full set of other governance reforms in media, organizational oversight, private attorneys general and other citizen powers that would promote professionalism and accountability at the level of constitutional changes (lempert, 1997) as well as educational and cultural reforms. but who will fund and promote them? in short, foxes have entered the henhouse in design and implementation of capacity building projects in international development as well as many other governmental systems, and there is a need to devise better oversight systems. the only way that change can really occur is if those public voices who have an interest in the oversight act collectively to protect their interests. in the case of capacity building for “governance” those interests are a stable and democratic world as well as control over billions of dollars in public money that is diverted. this article offers one tool, a weapon of empowerment, to at least facilitate that effort, as part of a codification of laws and standards that could ultimately be enforceable both by those paying for the interventions and those at the receiving end. this indicator takes away excuses that oversight is too difficult for ordinary citizens and that we must simply wait, pray, and rely on experts to change in ways lempert ● a quick indicator of “capacity building” initiatives 174 they have little incentive to change, rather than to take on the burdens of citizenship to protect the public interest in promoting effective, efficient and law abiding development interventions. references acharya, meena and art wright (2000) ‘an evaluation of the impact of the united nations system on capacity building for poverty eradication’, a report for the department of economic and social affairs of the united nations, december 15. boesen, nils and ole therkildsen (2004) between naivety and cynicism: a pragmatic approach to donor support for publicsector capacity development. copenhagen: ministry of foreign affairs. boesen, nils, peter christensen and ole therkildsen, ole. (2002) ‘evaluation of capacity development in a sector programme support context: contributions to an analytical framework’, copenhagen: danish international development agency (danida). url (consulted 17 june 2015): http://www.um.dk/publikationer/danida/english/evaluations/capacitydevelopment2 00501/11636_cdoe_asp/annex1.asp busan partnership for effective development cooperation. (2011) ‘fourth high level forum on aid effectiveness’, url (consulted 17 june2015): http://effectivecooperation.org/resources/ ember, carol r. and melvin r. embert (2006) cultural anthropology. 12th edition. united states: prentice hall. christensen, robert k., helen k. liu, stephanie moulton, becky nesbit and eva witesman (2006) ‘assessing the effectiveness of capacity measures and frameworks in public and nonprofit performance evaluation’, url (consulted 17 june 2015): http://arnova.omnibooksonline.com/2006/data/papers/pn062016.2.pdf consulting, elton (2002) ‘the bronte catchment project: a case study in capacity building’, elton consulting march 2002. url (consulted 17 june 2015): http://www.elton.com.au/pdfs/capacity.pdf dresang, dennis l. (2009) personnel management in government agencies and non-profit organizations. london: longman. enemark, stig (2003) ‘best practice in capacity building: understanding the concept of capacity building and the nature of land administration systems’, fig working week, paris, france. emmanuel, clive, kennet merchant and david otley (1990) accounting for management control. london: chapman & hall. european commission (undated, accessed in 2003) handbook on promoting good governance in ec development and cooperation. european aid cooperation office, publication j54-07/20. european commission (2002) measuring democracy and good governance. conference, munich. url (consulted 17 june 2015): http://www.inwent.org/imperia/md/content/bereich4-intranet/abteilung4-06/d1.pdf forrester, jay (1994) ‘systems dynamics, systems thinking and soft or’, system dynamics review 10(2):245-256. freedom house. (2006) methodology. url (consulted 17 june 2015): http://www.freedomhouse.org/template.cfm?page=352&ana_page=330&year=200 6 garrison, ray h., eric noreen and peter c. brewer (2005) managerial accounting. new york: mcgraw-hill irwin. european journal of government and economics 4(2) 175 gubbels, peter and catheryn koss (2000) from the roots up: strengthening organizational capacity through guided self-assessment. oklahoma: world neighbors. honadle, beth walter (1981) ‘a capacity building framework: a search for concept an purpose’, public administration review 41(5): 575-580. kaufmann, daniel, aart kraay and massimo mastruzzi (2007) ‘governance matters vi: aggregate and individual governance indicators 1996-2006’, the world bank, policy research working paper, no. 4280. kekic, laza. (2007) ‘the economist intelligence unit’s index of democracy’, url (consulted 17 june 2015): http://www.economist.com/media/pdf/democracy_index_2007_v3.pdf lempert, david (1997) ‘holding the powers that be accountable to our ethics code to protect our integrity and the peoples we serve’, human rights 24(2):2224. lempert, david (2008) ‘why we need an international development donor monitor’, policy innovations. url (consulted 17 june 2015): http://www.policyinnovations.org/ideas/policy_library/data/01464 lempert, david (2009a) ‘a dependency in development indicator for ngos and international organizations’, global jurist 9(2). url (consulted 17 june 2015): http://www.degruyter.com/view/j/gj.2009.9.2/gj.2009.9.2.1296/gj.2009.9.2.1296.xml ?format=int lempert, david (2009b) ‘why government and ngo projects fail despite ‘evaluations’: an indicator to measure whether evaluation systems incorporate the rules of good governance’, journal of multi-disciplinary evaluation 6(13):58-108. lempert, david. (2010a) ‘a human rights education project indicator for ngos and international organizations’, interamerican journal of education for democracy 3(1): 45-72. lempert, david (2011) ‘democracy building democratic project indicators for ngos and international organizations’, global jurist 11(2) doi: 10.2202/19342640.1385 lempert, david (2012) ‘a quick indicator of effectiveness of “income generation” and “sustainable business initiatives” in international development’, economology journal 2(2):28-90. lempert, david (2014) ‘universal development goals for this millennium’, consilience: the journal of sustainable development 12(1): 1-24. lempert, david (1996) escape from the ivory tower: student adventures in democratic experiential education. michigan: jossey-bass publishers. lempert, david, nguyen, hue nhu (2008) ‘how to tell if development projects are doing sustainable development: an indicator for ngos and international organizations’, international journal of sustainable societies 1(1):44-54. linnell, deborah (2003) evaluation of capacity building: lessons from the field. washington: alliance for nonprofit management. lusthaus, charles, marie-hélène adrien, gary anderson, fred garden and george p. montalván (eds) (2002) organizational assessment: a framework for improving performance. new york: international development research centre. marshall, monty, keith jaggers and ted r. gurr (2006) polity iv project: political regime characteristics and transitions 1800-2006. url (consulted 17 june 2015): http://www.systemicpeace.org/polity/polity4.htm lempert ● a quick indicator of “capacity building” initiatives 176 mayo, dambisa (2009) dead aid: why aid is not working and how there is a better way for africa. new york: farrar, straus and giroux, mckinsey and company and venture philanthropy partners (2001) effective capacity building in non-profit organisations. url (consulted 17 june 2015): http://74.125.153.132/search?q=cache:px5folpu5yj:venturephilanthropypartners.org/learning/reports/capacity/full_rpt.pdf+effective +capacity+building+in+nonprofit+organisations.+mckinsey+and+company.+2001&cd=1&hl=en&ct=clnk measure evaluation (1999) measuring capacity building in health and population programs,” conference proceedings for u.s. agency for international development. arlington, virginia. url (consulted 17 june 2015): http://pdf.usaid.gov/pdf_docs/pnacj170.pdf muller, duane (2007) usaid’s approach to monitoring capacity building activities: experiences, lessons learned, and best practices. url (consulted 17 june 2015): http://74.125.155.132/search?q=cache:vrmlior3eqwj:www.encora.eu/coastalwiki/i nstitutional_capacity_building+institutional+capacity+building&cd=5&hl=en&ct=cln k. musgrave, richard and peggy b. musgrave (1973) public finance in theory and practice. new york: mcgraw hill. nelson, debra l., james c. quick (2005) understanding organizational behavior. mason: thomson south-western, 2nd edition. noe, raymont a., john r. hollenbeck, barry gerhart and patrick m. wright (2007) human resources management. new york: mcgraw hill. nye, joseph s. (2004) soft power: the means to success in world politics. new york: public affairs. ogiogio, gene (2005) ‘measuring performance of interventions in capacity building: some fundamentals’, africa capacity building foundation, occasional paper no 4. organization for economic cooperation and development. (2008) aid targets slipping out of reach? france: paris. url (consulted 17 june 2015): http://www.oecd.org/dataoecd/47/25/41724314.pdf otoo, samuel, natalia agapitova and joy behrens (2009) the capacity development results framework. a strategic and results-oriented approach to learning for capacity. washington d.c.: the world bank. paris declaration on aid effectiveness. (2005) url (consulted 17 june 2015): http://www.oecd.org/dataoecd/11/41/34428351.pdf raffer, kunibert and hans w. singer (1996) the foreign aid business. london: edward elgar. robbins, stephen p. (2002) organizational behavior. london: prentice hall. samuel, otto, natalia agopitova and joy behrens, joy. (2009). capacity development results framework. washington: world bank institute. schachter, mark (2000) capacity building: a new way of doing business for development assistance organizations. ottawa: ottawa institute on governance. seidman, ann and nalin abeyesekere (2000) legislative drafting for democratic social change: a manual for drafters. london: kluwer law international. stiftung bertelsmann (2006) ’bertelsmann transformation index: political management in international comparison’, url (consulted 17 june 2015): european journal of government and economics 4(2) 177 http://www.bertelsmann-transformationindex.de/fileadmin/pdf/bti_2006_brosch_re_gb.pdf todd, landman. (2006) indicators for human rights based approaches to development in undp programming: a users’ guide. new york and oslo: united nations development programme. url (consulted 17 june 2015): http://www.undp.org/oslocentre/ usaid (1998) handbook of democracy and governance program indicators. washington, d.c.: center for democracy and governance. vanhanen, tatu (2000) ‘a new dataset for measuring democracy’, 1810-1998’, journal of peace research 37(2):251-265. world bank (2000) reforming public institutions and strengthening governance. washington, d.c.: the world bank publishin world bank (2001) committee of donor agencies for small enterprise development, business development services for small enterprises: guiding principles for donor intervention. world bank (2005) capacity building in africa: an independent evaluation group evaluation of world bank support. washington d.c: world bank. lempert ● a quick indicator of “capacity building” initiatives 178 appendix section i: principles of "capacity building" two long-standing definitions offered by two major international donor organizations, undp and the european commission, dating back 10 to 20 years, touch on what are essentially five key elements for capacity building in working with foreign governments and civil society in development. these key elements are highlighted in the text with numbers, with the first three relating to the three critical levels at which capacity building interventions must operate and the fourth referring to a principle of good governance. indeed, they come out of the development literature going back at least thirty years (honadle, 1981). undp (1991) defined 'capacity building' as: 1) the creation of an enabling environment with appropriate policy and legal frameworks, 2) institutional development, including community participation (of women in particular), 3) human resources development and strengthening of managerial systems. 4) undp recognizes that capacity building is a long-term, continuing process, in which all stakeholders participate (ministries, local authorities, nongovernmental organizations and water user groups, professional associations, academics and others). the european commission definition highlights these four areas with a particular emphasis on the aspects of accountability to the public (the fourth category above): ‘to develop and strengthen structures, institutions and procedures that help to ensure: transparent and accountable governance in all public institutions; improve capacity to analyze, plan, formulate and implement policies in economic, social, environmental, research, science and technology fields; and in critical areas such as international negotiation.’ (world bank, 2005:26). several documents of major international donor organizations have elaborated on these four areas, above, in documents that are readily available and repeated in multiple undp, world bank, and other sources, including even wikipedia’s page for ‘capacity development.’ the wording is sometimes a bit different, but the concepts are the same. to help make the jargon for the three different levels of organizational performance intelligible, the terms can be clustered as follows.  the ‘enabling environment’ – the legal and political authority, resources and incentives, for an organization to fulfill its legal, public, established purpose is sometimes referred to as the ‘institutional capacity’ (slightly confusing it with ‘institutional development’) to denote the “rules of the game”; the legal or cultural environment in which organizations are constrained and directed (world bank, 2005). the undp refers to this as the ‘broader system/societal level’ or ‘systems level’ (undp, 1998). added to legal and regulatory framework and policy concerns are issues of resources, management, and accountability. major donors do not often use the word “culture” (sometimes they use the euphemism, “social capital” to assume that all societies are on a single path to development and simply lack certain aspects), but of course the cultural fit of a particular institutional function is a necessary part of an analysis of a sustainable system in the development context and is part of a complete analysis of the operating environment.  “institutional development” for effective and efficient management is sometimes defined as ‘organizational development’ or ‘organizational capacity’ (world bank, 2005) with ‘institution’ referring to the overall political or government system as an institution and parts within it or alongside it (private european journal of government and economics 4(2) 179 businesses or community based organizations) as the ‘organizations’ or ‘entities’ (undp, 1998). the capacity building work here is that applied regularly in the business and community based organization (cbo) sectors to improve efficiency and performance through strategic planning and improvement of mission as well as building institutional resources and applying effective financial and organizational management, staffing, accounting and control, including the quality of feedback and evaluation systems.  “human resources” (skills) is sometimes referred to as ‘human capacity’ (world bank, 2005:27). the undp also refers to this as the ‘group of people level/individual development’ (undp, 1998). sometimes ‘education and training’ is also further elaborated as skills, information and perspectives (three sub-areas) that can all be objectively tested and tied to performance.  in addition to the three levels above and accountability to the public, most definitions implicitly offer a fifth category; that of the long term sustainability of the capacity to perform the necessary function and the ability to attract resources to assure that sustainability. a undp definition made it clear that capacity was part of a: 5) ‘continuing process’ whereby individuals or organizations units perform functions ‘sustainably’ as well as effectively and efficiently (undp, 1998:10). others reiterate this as ‘the attraction, management and absorption of resources’ (honadle, 1981) or as an ‘ongoing and sustainable fashion’ (elton consulting, 2002) or with the flexibility to deal continually with a changing environment. there is also an understanding that these five elements must all be taken together. the undp makes clear that, ‘capacity building should be seen as a comprehensive methodology aiming to provide a sustainable outcome through assessing and addressing a whole range of relevant issues and their interrelationships’ with none of these areas to be viewed alone (undp 1998). these elements and their relationship are presented in the chart below. lempert ● a quick indicator of “capacity building” initiatives 180 figure: the five key principles of capacity building in conducting capacity building with non-profit organizations, consulting firms like mckinsey have introduced other frameworks that highlight concerns using different words but essentially reiterate the three ‘systems levels’ along with other elements like ‘culture,’ ‘strategy,’ ‘aspirations’ (mission and vision) and ‘organizational management’ that are already included components of the framework above (mckinsey, 2001). that, in itself, is the basic standard of the tool. like any tool, it also must be part of an established set of routine procedures for development interventions. there are a variety of studies of capacity building by donors that simply put them within the context of ordinary procedures for results based management, appropriate measures of the problems to be solved, the root causes of the problems, use of logframes to match interventions to steps in the root causes of problems, and use of standard cost-benefit analysis procedures and baselines to assure efficient use of resources to achieve measurable results promoting appropriate development objectives (boesen and therkildsen (danida), 2004; boesen, christensen and therkildsen, 2002). this is also essentially what the world bank evaluations and various undp evaluations refer to when they fault their organizations for not applying the standard procedures of the field to these particular tools (undp, 1998, 2002, 2004; world bank, 2000, 2005; acharya and wright, 2000; linnell, 2003). as evaluators have noted, there is nothing magical about capacity building. it simply requires following standard technical practices that are well established in the fields of public administration, law, general business management (strategic planning, personnel management, accounting for managerial control). these are basic textbook skills.   1. policy and legal framework  3. human capacity  2. institutional development/ management efficiency  organizational function: 3 levels of capacity 5. sustainability 4. public accountability european journal of government and economics 4(2) 181 there is certainly room for difference on achieving higher quality or applying new techniques for better results, as in all specialized and technical fields. but the key criticisms that have been launched in this field are not over the use of innovative new practices. they are simply about whether the most basic standards are being applied. and these can very easily be stated, referenced in standard texts, and put into an indicator to see whether they are being followed. just as in medical practice, a standard diagnosis requires certain tests, adherence to certain standards of cleanliness, patient ethics and care, and drug protocols, the basic test of competence is whether these are all followed. once the basics are adhered to for licensing purposes, then there can be disagreements about new tests and procedures and their value. at this stage with “capacity building,” however, we are still at the basic stages simply of establishing whether practitioners meet the basic “licensing” standards for establishing minimal competence. given that organizations have already defined the goals and purposes of capacity building and given that the procedures for design and evaluation of development interventions is also routine, it is relatively simple to run through a checklist to determine whether all of these elements are actually being followed or not in any specific project intervention and for holding development actors accountable. so why has no one sought to, or been able to do it? section ii: indicators in the field and the lack of an indicator for “capacity development” interventions practitioners have sought to create measurements for what is most difficult and what is fraught with political and disciplinary issues, but they have yet to offer a measurement in the area where there is already political and professional agreement; over whether their own activities comply with legal and professional standards; something that can be determined with a simple checklist. political scientists and development organizations have created a series of indicators to measure whether countries as a whole have the attributes of “good governance” that industrialized donor nations (politically) determine reflect the appropriate standard. these generally seek to measure the quality of governance in their entirety and in the aggregate, but without looking at whether specific projects actually improve governance and meet international standards (defined in united nations treaties) for sustainably protecting cultural or community assets. for example, the world bank’s devised indicator uses a definition of governance that reflects its own goals of effectively managing the loans it gives to government officials to ensure that the bank’s objectives are adhered to. the indicator aggregates subjective views on ‘voice and accountability, political stability, government effectiveness, regulatory quality, rule of law and control of corruption’ (kaufmann, kraay, mastruzzi, 1997). similarly, freedom house, a u.s. government funded organization, measures whether certain processes meet their subjective standards in seven areas: (electoral process; civil society; independent media; national democratic governance; local democratic governance; judicial framework and independence; and corruption) and scores whether a country is ‘democratic’ according to its own cultural preferences, rather than whether governance is effective in meeting local needs or even if it is in keeping with international law. a country could score well on this index but still destroy all of its minorities or sell all of its resources in violation of international treaties (freedom house, 2006).) a number of other indicators that are used in political science data sets do not seem to be used at all by development organizations and do not have direct applicability to measuring the quality of capacity building. these indicators rank countries (polity iv; marshall et al, 2006), pick specific attributes (polyarchy 1.2 that measures ‘competitiveness and political participation’ (vanhanen, 2000); lempert ● a quick indicator of “capacity building” initiatives 182 generates an ‘index of democracy’ based on five categories (used by the economist magazine, kekic, 2007)) or substitutes goals of economic transformation that are in direct contradiction to the fundamental principles of good governance that require protecting assets and promoting sustainability (bertelsmann transformation index in stiftung bertelsmann, 2006). though one might expect practitioners to have clear and simple indicators to support and justify program spending, the reality is that the development bureaucracies seem to be even more confused (or politicized) in setting the goals of governance and capacity building interventions than political scientists and in agreeing on what to measure. among development organizations, the one that has come closest to developing an indicator for ‘capacity building’ is the u.s. agency for international development (usaid). usaid’s failure in this area, however, is that it does not start with a basic indicator for ‘capacity building’ or governance initiatives but tries instead to define every kind of outcome or outcome measure they would like to see for specific interventions. in other words, they substitute individual trees for the goal of protecting a forest. for example, usaid’s measure of effective capacity building in the training of officials is whether or not it leads to ‘elected officials who have been trained’ (a restatement of the input), ‘and who say that they are using their new skills on the job’ with ‘examples of how they are using it’ (usaid, 1988, page 166). indeed, as an effective measure, this one violates the basic principles of governance since it turns an input (training) into the measured output and offers only subjective reports from stakeholders with no objective measures of improved performance to citizen beneficiaries. this is more an example of what is wrong than an attempt to provide measures. though usaid also mentions that it would be useful to measure the ‘skill level’ of ‘salaried staff,’ this also has no relation to performances and outcomes. to put it more bluntly, the increased efficiency of an authoritarian or fascist regime in its executions, due to higher skill level, would receive high marks on a usaid indicator. so would simple bribes to government officials or indoctrination that was disguised as ‘training.’ a more recent document on ‘usaid’s approach to monitoring capacity building activities’ simply offers some formulaic suggestions such as: ‘avoid broad statements,’ ‘be inclusive’ and ‘be selective’ (muller, 2007). a usaid review of recent indicators showed little in the way of other approaches (measure, 1999). rather than offer indicators, most development organizations simply offer checklists of ideas to consider when doing “capacity building.” these can more easily be described as a set of cookbook recipes than as a legal means of applying standards of accountability. organizations offering this “recipe” approach are the world bank and asian development bank (ogiogio, 2005; otoo et al, 2009), the u. n. system (that also offers national surveys of public perceptions rather than any objective professional standards, landman, 2006; undp 2004), and the european union (ec, 2002; 2001; ec undated, pre-2003). in many of these documents the definitions are circular and the goals become ‘partnerships’ and ‘policy’ improvement without any measurable content. among the most recent of these, one published by the world bank institute, there is still confusion between the tool of “capacity building” and any kind of development intervention, as well as between the content delivered and the form of delivery. the ‘capacity development results framework’ is described as doing everything that development does – ‘design, implementation, monitoring, management, and evaluation of development projects’ – in ways that are so broad as to make it useless (otoo et al, 2009). such ‘frameworks’ do not start with analysis of the problem, with problem trees, as a diagnostic for lack of capacity but seek to cover everything, including country-wide programme cycles, ‘national development strategies, 5-year plans, and visions for the future’ (otoo et al, 2009:11). essentially, in place of examination of capacity building, they have european journal of government and economics 4(2) 183 substituted frameworks for how to create logical frameworks for any kind of development intervention through any kind of modality. moreover, most of the “framework” (rather than “measurement”) literature comes from publications of the donors, themselves, with little outside to create accountability. indeed, there still does not appear to be even one international journal devoted to “capacity building” anywhere. the result is that the real problems in the field, of hidden agendas for corruption and dependency, are never examined other than in vague euphemisms to protect those responsible, using bureaucratic jargon like ‘unintended negative consequences’ and lack of ‘clarity of mission’ or lack of ‘supportiveness of stakeholders’ among a long list of ‘capacity factors’ (otoo et al, 2009:12). at best, the focus is only on ‘educational impact analysis’. the problems remain hidden, by design. similarly, a number of diagnostics have been developed in the actual practice of “capacity building,” mostly with community based organizations (mckinsey, 2001; christensen et. al., undated; gubbels and koss, 2000; lusthaus et al, 2002). mostly these parallel and actualize approaches that in the business literature would be called ‘strategic management’ or ‘accounting for management control’ (emmanuel, merchant and otley, 1990). however, they have yet to be applied as accountability tools to the billions of dollars in international interventions. it is ironic that while there are two recent international treaties that guide international interventions and reference the idea of standards – the paris declaration on aid effectiveness (2005) and the accra agenda for action (2008)44, now followed and reinforced by the international aid transparency initiative signed in busan (2011) – they offer few specifics and little enforcement, thus reflecting the exact problems they claim they are trying to solve. with so much effort to develop “indicators,” the fact that none of them seem to do what is so simple seems to suggest how deeply rooted are the cultural and institutional barriers to holding even governments in western “democracies” accountable for billions of dollars of public spending. section iii: the problem with many “capacity building” projects and the real value of an indicator the world bank and other organizations’ evaluations readily admit the problems of current capacity building approaches, though they do so euphemistically. it is easy to take their own words and to expose what is going on in simpler language. what the donors’ own internal critics have exposed is that project fail because donors want them to fail to protect other agendas and because major international organizations are using “capacity building” as a cover to bribe or co-opt officials for foreign agendas. one world bank study admitted both the goals and the mechanisms of how this works, noting that ‘governments generally are inclined to improve services demanded by powerful interests’ and then noting specifically that it is ‘donors’ payments’ that ‘subordinate the coherence of the machinery of government to the narrower goal [and] short term gains … of project implementation’ for the donors (world bank, 2000:41). the mechanisms are also clear. often the corruption that foreign donors claim they are seeking to stop are actually initiated or reinforced by donors themselves, with “capacity building” one of the ways of buying off of government officials directly through what the world bank itself admits are ‘donors’ payments of salary supplements’ (i.e., what could be seen as the equivalent of illegal bribes under the 44 accra agenda for action (2008) url (consulted 17 june 2015): http://siteresources.worldbank.org/accraext/resources/4700790-1217425866038/accra_4_ september_final_16h00.pdf. lempert ● a quick indicator of “capacity building” initiatives 184 u.n. declaration against corruption and bribery45), in addition to ‘grants and concessional loans’ to ‘encourage line ministries … to “market” to donors’ (world bank, 2000:41). the world bank notes that the approach is usually to exclude the public, ‘interacting exclusively with government interlocutors’ while disguising bribes in the form of ‘computers and other inputs’ where it is obvious that no changes in services will occur because of ‘the absence of deep and sustainable demand for institutional reform.’ moreover, they note that, ‘this applies to much of the donor community’ (world bank, 2000:14). indeed, this reinforces what the previous indicators designed by this author to test foreign projects for ‘dependency/colonialism,’ ‘sustainability,’ and ‘democracy’ helped reveal; that many of the large donors are in fact continuing to pursue a colonial agenda with little oversight or accountability and the creation of tools that hide their underlying intent (lempert, 2009a, 2011; lempert and nguyen, 2008). most often the ministries or government organizations to be ‘built’ (what many observers would view as a euphemism for co-opted with foreign gifts, funds and advisors) are the ministry of planning and investment, to serve as a (dependent or ‘colonial’) intermediary of international investment banks (mayo, 2009), the judiciary in order to protect international businesses; the parliament in order to write the laws that open their economies and systems to foreign businesses and other influences and then to promote these changes to the public; the head ministers in order to write the development plans and policies and claim they are domestic aspirations rather than foreign driven; ministry of health to stop contagious diseases from leaving the country, etc. the goal in building capacity in the non-governmental sector is often to generate business joint ventures to the benefit of foreign business, to influence current and emerging leaders of political parties while improving their ability to manipulate their citizenry to support foreign agendas, and to build a foreign funded rather than locally accountable or sustainable civil society to lobby for foreign interests (generally for foreign investment; often for ‘women’s rights’ as a way to destroy traditional practices and free women for work in export processing zones or as administrators for the foreign sector) (lempert, 2009a, 2012). in the author’s experience over 30 years, in almost all of these projects, the public is excluded by design and “accountability” is really accountability to the agenda of the donors, not of any parts of government to citizen oversight, and the amount of secrecy has actually been increasing with consultants forced to sign statements of confidentiality that the author, as a lawyer, believes to be in direct violation of most public transparency laws (lempert, 2009b). as the world bank itself noted, the public ‘voice’ is systematically excluded (world bank, 2000:43). the fact that this happens is an open secret with little or no influence either from the taxpayer/donor public or from the publics in countries where the projects are being run. in fact, most international development organizations have now established secrecy clauses (in violation of public laws in both donor and recipient countries) to hide information about these projects under the pretext that officials in recipient countries would not candidly discuss their capacity “needs” if they believed the public might learn of their incompetence and fallibility. some vignettes taken from some actual projects in which the author is familiar (in the section below) highlight the absurdities and flagrant abuses that now occur. in presenting these cases, the author draws on professional experience and participant observer methodologies used in the field of social anthropology as well as determinations applying methodologies of law and public administration. the mechanisms that cloak these bribes as “capacity building” are relatively transparent and are easy to reveal with a good indicator that exposes lack of 45 u.n. declaration against corruption and bribery in international commercial transactions (1996): a/res/51/191. url (consulted 17 june 2015): http://www.un.org/documents/ga/res/51/a51r191.htm european journal of government and economics 4(2) 185 safeguards against conflicts of interest of donors themselves, and of recipient government “stakeholders” and the lack of transparency has nothing to do with encouraging reform and everything to do with covering up the abuses. the extent of these abuses now appears so widespread that most professionals in development can easily list the forms of what could best be described as “shadow bribes” take without a moment’s hesitation. this author has personally witnessed them delivered, in violation of local and international laws, by almost every donor organization in the form of attendance fees to government officials for simply coming to donor workshops (listed as “per diems” or envelope money) so that donors can then seek and spend more money on the pretext that officials are eager for such training and that they have an impact, “study tours” that are disguised junkets, as well as hotel buffets and entertainment (usually in lavish western settings) in recipient countries. officials are also easily bought in the name of capacity building; with donor organizations working in fact as tour agents and caterers, running parties, giving away branded items with logos (including umbrellas, travel bags, and briefcases). institutions like the un appear to have been turned into lobbying agencies or missionaries, for hire by the larger donors who pay them to use government contacts to promote specific agendas of the international banks or of economic blocs seeking to expand their influence in trade agreements or “harmonization” of laws, convincing national officials to legislate and adopt such policies and to claim that it is their local people who have demanded them. many other projects appear to be simply naïve, throwing money at symptoms of incompetence and inefficiency with no idea how organizations work, what the incentives are of individuals within them, or what they are even supposed to do in a functioning and sustainable system and this is a result both of the hiring of staff with few skills (other than language) and little adherence to codes of professional responsibility, with almost no outside direct public oversight. project approval procedures have largely been corroded in order to facilitate (what can be described as “corrupt”) agendas for purchasing government systems that keep money flowing, many projects are implemented with no standard procedures to follow. as a more recent world bank review of ‘capacity building’ projects admitted, most such projects ‘do not specify the capacity building objectives,’ lack ‘adequate needs assessments’ and do not even consider ‘processes of organizational and behavioural change’ (ogiogio, 2005). thus, large numbers of projects come to be funded where the goal of “training officials” is about as effective and well thought out as schemes teaching elephants to fly. officials who lack the salary, the ideology, the incentives or the capacity will not produce services no matter how much education they have. in other cases, government systems that are riddled with nepotism or politics, receive capacity building funds that essentially seek to turn secretaries into brain surgeons without recognizing that the processes of recruitment that are politicized and corrupted and are the source of the problem. rather than improve organizations, foreign funds allocated for “capacity building” are often propping up former generals and their children in regimes that are largely recognized as corrupt (by transparency international and other organizations measuring accountability) in order to keep them employed and in power; building the “capacity” of dictatorships to maintain their rule. “awareness raising” projects for “accountability” and “combating of corruption” often throw training at the very people who are the perpetrators of the crimes and as effective and well thought out as schemes trying to turn wolves into herbivores. the donor justification is that transferring funds to government officials to help “demonstrate” how to run fair judicial systems or equitable public services, can help convince them to “buy in” to the idea. yet, without any pressures or conditions to pressure them to do that or convince them why it might be in their interest to do so, the approach is akin to believing that giving money to criminals for charity will turn them into humanitarians rather than simply end up in their foreign bank accounts. lempert ● a quick indicator of “capacity building” initiatives 186 other projects offer remedial education to specialists or adults when the real failures have occurred in the basic education system, in professional schools, or in selection procedures. a lack of proper analysis of the sources of the problem again results in treating symptoms rather than the disease. the irony of “capacity building” is that the organizations claiming to be the experts are often the last to have their own internal experts who have read the basic textbooks in the field at the university or masters level. few seem to follow the basics of development project design and “results-based management” (with standard practices like problem trees, root cause analysis, appropriate identification of inputs-outputs-outcomes, and use of baselines, and cost benefit analysis) or who even apply their own international treaty agreements and mission statements in areas of sustainable development and protection of cultural rights and diversity (rather than promotion of industrialization, consumption and economic exploitation) (lempert, 2014). there is nothing here that cannot be improved simply by holding donor organizations to safeguards against conflicts of interest and to textbook principles. a list of some of the standard textbooks that apply to capacity building in this field would include those of overall systems and system change (forrester, 1994), principles of legal drafting for democracy and efficacy (seidman and abeyesekere, 2000), understanding of human cultural differentiation and sustainability (ember, 2006), basic business analysis and organizational strategy for effective management control (garrison, noreen and brewer, 2005), principles of public finance (musgrave, 1973), organizational behaviour (robbins, 2002; nelson and quick, 2005), personnel management (noe, gerhart, wright and hollenback, 2007; dresang, 2009), training and education theories to differentiate skills, perspectives, and information (lempert et. al., 1995), and current models of promoting competitive business development services (world bank, 2001). others might be added in the areas of appropriate roles of ngos (innovation and advocacy) versus government (services), and mechanisms for accountability and avoiding conflicts of interest. the point is simply that the disciplines and approaches are well established but many donors seem not to even know their own profession; perhaps deliberately. vignettes: what really happens in "capacity building" projects some standard project types and how they are rigged or doomed to “fail” from the start are described below. projects to turn wolves into doves international projects work with all three branches of foreign governments in approaches that seemed designed to keep the wrongdoers in power by assuring that only they have the “expertise” to run government (in ways acceptable to the donor). while projects with ministries seek to improve them through proselytizing rights treaties to the very people who are the abusers and who have no incentive to change, the classic examples of capacity building failures are those that work with the legislative and judicial branches of governments in developing countries. the responsibilities of these political institutions are to represent the public will in ways that balance interests of different cultures (to assure their sustainability) and of individual rights and preferences, through legislation (legislatures) and through fair and representative means of resolving disputes (adjudication). the “capacity” they need is the capacity to protect and reflect these interests in the process of legislation/policy and in conflict resolution among different interests. that is not what foreign projects seek to promote. what they do, instead, is the following in three basic types that this author has worked on directly.  undp parliamentary capacity building projects with donor support – “parliamentary capacity building” projects are run almost everywhere, with european journal of government and economics 4(2) 187 funding from almost every major donor. those that the author has seen in several regions show no intent to address the real failings and capacity needs of national or local legislatures. if parliaments are failing, it usually means that democracy itself is missing since this is the real capacity underlying a legislature: the public is badly represented, unable to control its representatives, unable to understand what legislation is and how to offer it, and/or that the legislature itself is a symbolic puppet (a legacy of colonial rule) that has no real power to challenge military, police, or economic (domestic or foreign power). it may mean that the legislature is simply a ritual body with no real direct control of most government spending (that may come from overseas governments rather than from taxes or from elite control over some resource that generates funds). in a functioning parliament, the public sets the agenda for sustainable development, the courts assure that the legislature upholds international treaty goals for sustainable development, and competence of parliament is assured through the power of parliament to increase its funding through taxes and to hire the best people to carry out its tasks. failed officials are voted out of power and their failed staffs go with them. what happens in these projects, however, is that the foreign donors seek to reinforce the idea of permanent, “efficient” and “expert” parliamentary staff alongside career parliamentarians who remain no matter what election results say, with training in foreign languages and in passing of foreign laws favoured by the donors. training includes instruction to elected deputies on how to appear democratic by meeting (often for the first time) with their constituents to show how “democratic” they are. the projects promote connections with foreign parliaments in donor countries as a way to create a brotherhood among these elites and in ways that reinforce dependency for future favours.  world bank ministry of justice projects to promote “rule of law” – while these projects in “efficiency” of “administration of justice” are most often supported by the world bank, they are copied by other major donors. as with parliaments, if judiciaries fail, the capacity problem is almost always in their democratic legitimacy rather than in their inability to efficiently or expertly administer (in)justice. where judiciaries fail, it usually means that the public is not represented as jurors or in democratic oversight and balance of judges, that citizens lack the power to enforce norms on military, police, or domestic and international economic powers, and that the public and judges lack the funding to be educated and involved in complex decisions. working judiciaries use the law to bring in the funding and expertise they need, with public support, to challenge abuses of power and imbalances in representation. what happens in these projects is that rather than focus on “justice” and equity, donors seek to reinforce the idea of permanent, “efficient” and “expert” elite selected judges who are “independent” of the public but still vulnerable to existing economic and military power. support for “capacity” includes study tours, computers and training of judges. projects for legal “access” mostly seek to assure that the legal order is efficiently enforced on individuals in minor matters and that edicts are known to the population rather than subject to change. on one japanese funded project that the author worked on for the world bank in a country described as having no rule of law and where project funding was slowed due to violation of bank regulations against insider dealing of bank funds (detailed in world bank documents), a ministry of justice not only gave an ultimatum that the author steer loan funds to a committee of their friends to allocate funds for study tours and computers, but they also demanded a kickback from my salary to the ministry. the author’s approach was to offer loans to students and to promote lawyers representing citizens, farmers and workers to benefit small business and sustainable development, rather than to just promote business law and extraction of that country’s resources (oil). after more than 15 years, the world bank lempert ● a quick indicator of “capacity building” initiatives 188 continues to support the wrongdoing (and the same ruler and legal system remain, with the country increasing their oil contracts).  major donor projects on “human rights” and “anti-corruption” with ministry officials – in many fields, capacity building has developed as part of an “industry” by certain donors to propagate certain treaties or moral values on the pretext that such proselytizing solves problems. donors rushing to offer support given on the size of the perceived problem (violations of rights or corruption). in most cases, the real problem is that ministry officials have no real power or incentives to confront wrongdoing and the public (and communities) are too weak to protect and enforce their own established rights traditions (in many cases, traditions that were at times more progressive than those of developed countries but that were and continue to be destroyed by colonialism and globalization). what happens on these projects is that rather than describe the power imbalances or the reasons why cultural systems that protected rights were destroyed, the projects focus on these government officials who are either powerless, indifferent, or the source of the problem; identifying them as “duty bearers” rather than as oppressors or spectators. the approach is purely symbolic and fits the definition of a public relations ‘whitewash’ or ‘rights wash’ (lempert, 2011). typical projects are those offering “human rights training” for police and prison guards who themselves may have been victims of violence or who are trained in violence and lack the capacity to use other approaches. similar are courses in “anti-corruption” for military or officials who are simultaneously being purchased by foreign donors or pressured and bought by foreign governments and corporations. most of what is really learned, as the author has observed by analyzing the curriculum and measuring the impacts, is how to mouth slogans and falsify international reporting on compliance. the effect is to undermine real public pressures for change by demonstrating the networks that the abusers have now established with international authorities. meanwhile, those who attend project workshops not only benefit from the disguised bribes of free trips and buffets and per diems, but they also walk away with everything from logo blazoned umbrellas (a undp “anti-discrimination” project that the author evaluated in a formerly eastern bloc country, that actually taught officials how to destroy cultural differences and force everyone to the lowest common denominator as a familiar stalinist example of non-discrimination) to “certificates” of course completion that are used as chits for study scholarships and job opportunities. projects teaching elephants to fly like birds international projects not only work with governments but also with “civil society” including businesses and civil society organizations in claimed attempts to build capacity for “market economies” or for “democratic oversight.” a typical failure in both the government and public sector is that they train their “partners” with the very skills that the organizations lack but in areas where the specific individuals will never have the ability to perform those skills. in developed countries, organizations hire people who have the ability to work as managers or fundraisers or advertisers or creative product designers to expand organizations, recognizing that people have different and specific abilities. but in the development community, where it is determined that organizations cannot fire poor performers or hire competence, the idea is that capacity can be built by turning health ministry secretaries into brain surgeons, state lumber company managers into environmentalists, state coal company officials into computer software entrepreneurs, and military officials at national and local levels into legislative drafters for democratic participatory oversight laws. examples of two common types of failures are the following.  ngo capacity building to promote civil society – almost every donor now seeks to support “civil society” projects. what that usually means, in the european journal of government and economics 4(2) 189 author’s experience evaluating projects in this sector, is throwing money at those organizations that have been created as dependent branches of foreign ngos to oppose or perform the functions of governments in recipient countries, rather than to actually rise up as citizen funded representative organizations that act as monitors of government and business to assure their accountability. since these organizations are established as administrative arms of foreigners that have no understanding of how to respond to citizens in their own country by offering them real benefits and asking for their funds, attempts to build their capacity and make them sustainable fall on deaf ears. often what they really teach is the fundraising skills of how to keep appealing to foreigners for money. with little or no management ability, little or no ability to plan, and no understanding of the actual role of civil society, “capacity building” here in skills like management, strategic planning, or even higher skills of statistics and lobbying, is almost always the equivalent of the blind leading the blind.  european commission network of schools of political studies to teach tolerance and rights – a typical capacity building project supported by various donors is on reaching out to young elites in developing countries in a purported attempt to train them in new concepts such as “democracy” as those countries are brought into the orbit of the donor. the european commission, for example, in a project evaluated by this author, spent millions of euro identifying young political elites (usually ruling party members, on career tracks of political patronage) in former soviet and eastern european countries being brought into europe, on the pretext of teaching them “human rights”, “tolerance” and other european “democratic” values. in fact, what these projects appear to actually teach is how to conduct political discussions behind closed doors with political elites, including those of europe, and how to maintain “networks” with each other through meetings in international hotels, rather than through meetings and accountability to their own publics. the moscow branch of this school brought henry kissinger to russia to explain to these identified future elites how he ran an unaccountable u.s. foreign policy under the nixon administration. section iv: how some organizations do in "capacity building", scored using the proposed indicator below are the results of use of the indicator offered in this article on several different categories of international capacity building interventions that are described in international development literature. some of them are from the author’s first hand experiences in more than 30 years in international and community development work. from the categories, it is clear how the scoring works to separate different types of projects in terms of quality as well as to expose hidden agendas and failures and to note where there is a need for accountability and improvement. note that even though not every question applies to every kind of project, the scoring is still designed to yield a scoring spread that leads to categorization and comparison and that also shows how some projects in a category can do better or worse depending on their attention to specific project features that are highlighted in the scoring system. before reading these results, consider the following. most “self-rating” systems using indicators grossly over-inflate results because of the natural tendency to look uncritically at one’s own projects (why there is a need for clear and objective grading standards) and because there is a tendency to avoid considering several organizations at once when rating those organizations one favours. any rating instrument needs to be “calibrated”; i.e., tested for consistency using the same test question multiple times on multiple organizations in order to reveal differences. each observer doing the test ultimately reaches some internal consistency after a lempert ● a quick indicator of “capacity building” initiatives 190 number of tests, but different observers are likely to come up with different results because they are “harder” or “softer.” the scores below are those consistent with the judgment of the author and they are an example of strict application of the ideas, such that weaknesses are revealed as areas where improvement is needed. if such a tool is ultimately adapted by professionals and subject to multiple tests, there would ultimately be a consensus on the scaling and the rating system. the scoring below is not an “absolute” and there is not enough space in this article to present the full detail and evidence to fully explain the scoring for every organization. a sample of the process with full detail for one organization is provided in appendix section v. here, the reader should view the scores as coming from a larger set of data and the professional judgments of the author in following standard social science disciplinary protocols. models of comprehensive capacity building: 8-11 points. the examples that fall into this category are rare. the marshall plan de-nazification of (west) germany after world war ii – though it is a bit of historical guess-work, probably the allied reconstruction of germany after world war ii would earn 9 to 11 points, at the top of the scale. there was little danger of collusion with the nazi officials since they were sentenced for war crimes, and the approach was to rebuild democracy and rule of law at all levels from the schools to the courts to the constitutional and political system. given the understanding of sustainability in 1945, the approach fulfilled it (and tried to begin to rebuild cultures of minorities like jews and roma/gypsies). of course there was self-interest on the part of the u.s. and u.s. corporate and global interests (possibly losing a point on question 10), though the u.s. also understood the long term future interest of a sustainable germany and built a country that competed with the u.s. economically. there are also questions as to whether the u.s. military and government that were implementing this aid were really subject to clear accountability to the u.s. public (though possibly more so then than today!). this is a model intervention, but it also occurred under rare and specific circumstances. for comparison, you can compare the “de-capacitization” that occurred in east germany under the soviets. “street law” civic education projects, “where there is no doctor” training of basic primary health care, grameen bank community self-financed lending, “manage your own business” training for family and household businesses (gtz and other donors), and small scale participatory user-group projects (such as afap’s local contributory irrigation projects – the common dimension of these projects is that they start with a basic need (legal skills, health skills, business and lending skills) and work directly with community groups to build those skills and to change cultures at grassroots levels. in doing so, they can earn about 8 points. these ngo projects are all examples of competence in capacity building in specific fields, building sector and governance skills and institutionalizing them, where major donors fail. the weaknesses that these organizations share is that they do not consider the overall sustainable development impact of their interventions that could be negative (question 1) and they don’t look at the larger systems that have failed to seek ways to get to the real root causes of the problem (question 3). however, they score well in other areas. there are no conflicts of interest in their work but they potentially distort existing service systems (question 18). minimally competent approach to capacity building: 4-7 points. examples here are of interventions that are technically competent but that may be largely flawed from a development perspective as destructive of local cultures. british establishment of public administration schools in colonial africa in 1950 as part of state-building; french support for public health systems (hospitals, “pasteur” and other institutes) in colonial africa and indochina – the “positive” aspects of the european colonial legacy are the institutions that have carried over european journal of government and economics 4(2) 191 in those countries in the post-colonial period and both of these interventions score about 4-5 points. the areas in which they are deficient are clear: the goal was not to promote sustainable development of the natives but to “civilize” them in ways that destroyed their cultures and “modernized” them to follow european approaches. systems were not “fixed” but destroyed. so there are no points on questions 1 or 8, and colonial regimes are not models of accountability (question 10), but these projects score 7 of the 11 positive points. these colonial interventions obviously created and empowered local elites (questions 13 and 16) and there were conflicts of interest on the parts of the colonial implementers (question 15), for a loss of about 3 points. narrow or weak intervention: 0 – 3 points. projects that are technically competent and that offer public training through market solutions can also score points on competency but fail if they are promoting a particular agenda that is not sustainable development and that could distort overall government functions. agricultural extension projects of major donors and small business promotion projects (of donors like the world bank’s international finance corporation/mekong project development facility in southeast asia) -these projects can earn between 2 to 6 points, depending on how carefully they actually promote a “business development services” approach that builds private sector capacity, rather than seeks to replace it. among specific skills promotion projects that work widely with the public on training and outreach and that offer fee based courses or services, these approaches are technically competent in the very basics of capacity building. the reason they only earn about 4 points of the first 7 is that they do not consider overall development (they start with an ideology of productivity) and do not effectively measure the overall function of learning and applying information (about business or agriculture). the organizations running these projects are not accountable and the approaches they promote are sometimes sustainable and long-term but sometimes only short-term inputs. they may lose points for subsidizing elites or for failing to promote truly comprehensive and market based solutions. administration of justice projects, judicial training projects, human rights training for police and judges, projects of the world bank, european commission (ec), usaid, undp, and other donors – these projects, described in vignettes, sometimes show slight benefits in improving efficiency or in ameliorating symptoms, but they lose points by failing to focus on democracy and equity and by entrenching existing elites and their inequities, and at best score 3 points if they save public funds and address inefficiencies in spending and government action, though more often go slightly negative. incompetent projects with hidden agendas that have been corrupted either by the donor agency, stakeholders in a developing country bureaucracy, or both: < 0 points. international organizations working in areas like “justice” and “antidiscrimination” and building “parliamentary” and “government” “capacity,” claim to be doing much more than they really are and the test exposes them, quickly as promoting hidden agendas that undermine democracy rather than promote it, with scores of 0 to as low as minus 7 points (-7). united nations capital development fund (uncdf) and other “local development” projects supported in almost the same model by a large number of donors (e.g., the seila project in cambodia with dfid, world bank, and undp support, local governance projects of gtz, snv, lux-dev, and belgian development assistance in vietnam) – all of these projects work on a common model of transferring funds to local government officials to promote necessary “decentralization,” with claims that they are simultaneously building local government “capacity” and supporting “participation/democracy” by asking some local citizens what gifts they would prefer from the foreign donors in a list of giveaways. a typical score for these projects is strongly negative (-4.5 points), lempert ● a quick indicator of “capacity building” initiatives 192 suggesting that not only do they lack competence but that they are being used to manipulate local governments and destroy local systems for a colonial objective of the donor. the detailed analysis in the appendix (section v) of uncdf demonstrates the conflicts of interest and the lack of professionalism built into the design of these approaches. these projects fail to examine what systems are broken from the perspective of local cultures and are used to promote agendas of globalization/export and industrialization that are favourable to donors and in violation of international treaty agreements. school of the americas (u.s. military) and other military and police capacity building programs in iraq and elsewhere – as expected these projects to build “professionalism” may have good log frames and partly support the role of defence and security (+1.5 points) but they do not look at root causes of instability and work to militarize conflicts, building systems that weaken citizen control over their militaries and elites, militarize conflicts, and are in the interests of the u.s. more than local citizens (-5 points), leading to a score of minus 3.5 points (-3.5). they actually score slightly higher, ironically, than “local development” projects because they are strengthening a system, despite the negative effects of that system. ‘civil society promotion’ projects of the european union (eu) and usaid in the balkans and elsewhere, ashoka foundation civil society grants – the standard “civil society” promotion project of major donors transfers funds and builds skills of a select number of western-style ngos (rather than already existing community organizations of political, tribal, or religious identity) in ways that undermine their sustainability and seek to transform rather than repair local cultural mechanisms; earning minus 5 points (-5). the roles of ngos are defined as providing services that government should provide or lobbying for foreign concerns rather than aggregating local interests with local control and sustainable funding. the projects score no positive points because they do not examine local needs and do not build overall skills or functions, but pick organizations and partners to receive funds. partners in developing countries who receive funds and counterparts who administer the projects introduce biases (loss of 3 points) and the projects actually weaken citizens relative to these foreign-funded organizations, while also distorting civil society and the appropriate role of government and civil society in services (loss of 2 points). instead, these projects should start at the school level, teaching skills, and work with existing organizations that were weakened by colonial rule. standard undp, eu, and world bank capacity building at the national government level with parliaments, planning and investment ministry, and line ministries – while these expensive projects should reflect the highest competence and the state of the art in procedures, the reality is that they are at the bottom of the scale, failing in almost every way, and scoring minus 7 points (-7). the indicator easily exposes them as indicative of an agenda that is designed to buy off foreign governments and to make them unaccountable to their publics in support of an external agenda, rather than to promote capacity in line with international law and basic principles of development. they score no positive points because they do not seek to balance sustainable systems, address existing problems, find what is broken and needs to be fixed, or promote necessary functions (such as “legislation” or “asset protection”). instead of defining and measuring a problem, projects are targeted at specific government entities and justified on the basis of symptoms (“weak governance,” “corruption”) and the need for “governance” projects to “promote development” or “promote the millennium development goals.” there is no measure of output or outcome other than receipt of transfers of money and services that are then defined as “strengthened.” almost all potential conflicts of interest are present (loss of 4 points) and the ability of officials to influence the projects also promotes weakening of citizen powers and oversight and subsidization of country elites (further loss of 3 points). european journal of government and economics 4(2) 193 section v: an example of applying the indicator: the united nations capital development fund scoring of united nations capital development fund (uncdf) on the 20 component questions of the indicator preliminary information for assessment uncdf’s organizational mission (claim) and role of capacity building according to uncdf website ‘the united nations capital development fund (uncdf) offers a unique combination of investment capital, capacity building and technical advisory services to promote microfinance and local development in the least developed countries (ldcs)’ through its programmes, uncdf strives to contribute to the attainment of the millennium development goals (mdgs) and to the implementation of the brussels programme of action for ldcs in a direct, concrete and measurable way. there is growing consensus that democratic governance creates the conditions for sustainable development and poverty reduction. similarly, it is increasingly accepted that achieving the mdgs and eradicating poverty needs to be done at the local level and thus requires the involvement of local authorities. uncdf's local development programmes support national decentralization strategies in the ldcs and seek to improve social services, governance and pro-poor economic infrastructure at the local level by providing technical assistance and investment capital directly to local authorities. uncdf's investment capital is flexible, high-risk and innovative. it is channeled primarily to poor rural areas in the ldcs where poverty reduction, capacity and governance challenges are typically the greatest. uncdf’s “capacity building” activities in practice, according to uncdf website overview of claimed activities: uncdf's local development programmes (ldps) introduce participatory planning and budgeting systems at the local level. these programmes seek to ensure a voice for women and other disadvantaged groups in local public decision-making. the programmes also work within, and support, the national system of central-local government institutional and fiscal relations. description of actual interventions: emphasis on local level institutional development: improving procedures and practices for local level resource mobilization and public expenditure management (including development planning, investment programming, performance budgeting, procurement, implementation, asset management and internal controls) to enhance the efficiency, effectiveness and accountability of local authorities in poverty reduction activities. performance-linked block-grant funding facility: providing local authorities with general purpose development budget support for sustainable, small-scale, local investments in social and economic infrastructure, such as schools, health clinics, rural roads, water and sanitation and natural resources management. this support is linked to agreed measures of local performance and serves as an incentive for local capacity building. local economic development: this approach emphasizes the importance and leadership of local authorities in encouraging and supporting local entrepreneurship and local enterprise creation. overall analysis of uncdf in using the tool of “capacity building” uncdf has no clear mission statement and starts off its mission by defining its tools rather than its ends. it confuses several potential end goals that it offers as political slogans without definitions – sustainable development, the mdgs (that do not promote sustainable development if improperly applied), eradicating poverty, and local development – with means to those ends such as microfinance, governance, and decentralization. rather than offer measurements of results, it justifies actions on the basis of politics and slogan of a “growing consensus” that has no clear link to beneficiaries or the public that funds the organization. the role of “capacity building” along with other tools like investment capital is equally confused, with the role of these tools in helping to achieve the means to an ends or the ends unclear. there seems to be a formulaic approach to building local government infrastructure for delivering grants to increase productivity, rather than supporting democratic accountability or sustainable development, or protecting communities or cultural groups. it looks like the organization is opportunistic rather than goal driven and this waves red flags for the use of “capacity building” as an appropriate development tool. uncdf offers several slogans about how it is “participatory,” builds local tax systems and other forms of “accountability” but none of this is demonstrated in operating procedures or design given that it simply funnels money and training to local officials without assessing the problems or building citizen skills. an organization that defines itself by shifting of money and resources (here simply “investment capital”) and promoting “growth” without clear development ends is almost certain to score miserably on a development index that tests how it seeks to use a tool properly and professionally for development objectives. lempert ● a quick indicator of “capacity building” initiatives 194 analysis question indicator scoring i. proper application of the basic principles and standards of capacity building and donor interventions scoring in the first category demonstrates that uncdf’s approach to capacity building is an afterthought or opportunistic slogan at best, to promote an agenda that is not one of sustainable development and that does not follow the basic competence and requirements of sustainable development. 1.5 points i. a.) project meets 4 of 5 recognized principles of capacity building and of basic professionalism in the initial review of competence, with a checklist of 7 basic attributes of capacity building, uncdf does not achieve more than 1. this is a “capacity building” organization that lacks the basic competence in its own field. this initial scoring raising red flags that uncdf is either opportunistic, completely mismanaged, or hiding another agenda. 1 point. 1. intervention is fit to country and cultural needs for sustainable development uncdf does no independent analysis of minority cultural sustainability even though it purports to work on “decentralization” as a goal, and it does not conduct overall analysis of sustainability. its focus is only on economic production not on achieving the development balance to protect resources or to balance consumption with production. this is business investment, not development that meets international treaty standards. 0 points. 2. governance or civil society functions are appropriate and key and there is direct public accountability several of the functions that uncdf promotes are relevant government functions: capital budgeting and investment policy to protect and promote assets. it is debatable whether it is really doing so in ways that really protect funds and capital investments in communities or not. it is also debatable whether it is promoting these assets on a per capita or community basis. they appear to be promoting the private sector though it is not clear whether they are protecting the public against its power. assume they know their business and award 1 point, though a more stringent scoring would award 0.5 points. 3. diagnosis includes full framework analysis of all levels affecting capacity there is no evidence that uncdf analyzes the problems in each country or locality before moving to apply a formulaic tool and approach. they are starting with the tools before analyzing all of the dimensions of the problem. 0 points. 4. intervention targets root causes and problems, not symptoms, are defined and mapped the country analyses that they have done to date show no evidence of problem trees or root cause analysis and simply list symptoms of weak government management of various sectors. 0 points. 5. logframe targets root causes with benchmarks and cost effectiveness measures uncdf’s logframes bear the hallmark of lack of competence of most projects in the u.n. system in that the “outputs” are simply restatements of the inputs with no benchmarks or cost-benefits and no true measurable outputs in terms of service performance and capacity. 0 points. 6. public accountability mechanisms are part of the assessment and a first priority uncdf claims that it builds democracy and accountability but the reality is that its activities are with government officials. there is no attempt to start teaching basic concepts of finance, investment, and government oversight to citizens as part of basic civic skills, which would truly meet the goals of improving local government performance and accountability. 0 points. 7. the project agreement is transparent and accountable to citizens uncdf actually worsens the problem it claims to be solving with regard to democratization and accountability to citizens. if the goal is accountability, the project agreements need to start with the public and model public oversight, rather than start with government officials who are the symptoms of the problem (unrepresentative, non-transparent, possibly corrupt). 0 points. i. b.) sustainability of impact (5th principle of capacity building) 0 points are to be awarded here because uncdf does not meet the threshold of at least 4 points in the first seven questions. however, even if it did, it still would not receive points for these two questions. 8. intervention fixes a broken system at the heart of the problem uncdf never identifies the system that is broken and the root causes to be fixed, nor does it institutionalize a new kind of system. it simply trains existing officials who may or may not be in place in the future rather than creating institutions to add needed skills into the society. 0 points. 9. intervention institutionalizes a flexible, funded, sustainable system uncdf’s small credit projects may be sustainable if they are properly managed and safeguarded but there is no evidence to suggest that local government financial systems will maintain themselves after the intervention or that the categories of block grants will be maintained after the intervention ends. 0 points. i. c.) internal project procedures model good governance and capacity the organization itself is not open and accountable but it does have at least a partial commitment to the idea of conditionality. 0.5 points. european journal of government and economics 4(2) 195 10. donor agency is itself a model of accountability and capacity uncdf is not directly accountable to the public that funds it or the beneficiary public where it works and its procedures bear the hallmark of an unaccountable bureaucracy largely shrouded in secrecy, typical of the un system and large donors. 0 points. 11. project conditions aid on clear capacity improvements with measurable beneficiary results uncdf claims that it sets performance conditions though performance seems to be based not on capacity and services but rather on economic productivity gains or transfers that occur as a result of assistance. 0.5 points given that the kind of conditionality uncdf offers has debatable impact. ii. professional safeguards in place against conflicts of interest and unintended consequences though claiming to promote both government and the private sector, uncdf seems to promote the worst features of both with no safeguards. -6 points ii. a.) no conflicts of interest uncdf is highly vulnerable to conflicts of interest given the way that it operates to toss funds into localities and to promote business. -2.5 points 12. needs assessment protects against biases of stakeholder recipients it seems that uncdf already has a formulaic approach and is not much influenced by local priorities. however, its commitment to “participation” and to offering funds along with capacity building is a sign that it is vulnerable to using funds to pander to local interests for political reasons. -0.5 points. 13. inputs do not personally benefit stakeholder/partners there is no indication from project documents that uncdf is offering salary supplements to local officials or that recipients of training are going on to better paying jobs. however, there are no clear policies to screen against it. -0.5 points. 14. grant funds are directly linked to capacity improvements and not budget subsidies uncdf offers grant funds in order to fund economic growth and certain policies, even while claiming that it is part of capacity building. this is an example of failure. -1 point 15. donor implementing agents are screened for conflicts of interest there is no direct evidence that uncdf partners or consultants are profiting directly from export businesses and deals with localities where they are sent, but there is an inference within the organization that the goal is to hire business experts to promote business and trade rather than to assure sustainable local business development, and there are no ethics codes or other forms of screening in this area. -0.5 points ii. b.) no negative or adverse impacts on public or private systems uncdf’s projects appear to exist to promote uncdf’s glory in promoting business and productivity rather than in protecting communities or local systems. uncdf lacks the discipline either of a bank or a government agency and seems to introduce the worst characteristics of both. -3.5 points 16. citizen powers are strengthened relative to officials uncdf’s modality of working directly with government officials suggests that it is rooting authority and connections in particular individuals and at particular places rather than in the society in ways that will disempower citizens. -1 point 17. focus is on equity, participation, accountability and not efficiency the focus of uncdf’s interventions seems to be on governmental efficiency rather than on equity or participation, though the small credit and community approach partly counters this. -0.5 points 18. aid does not distort financial systems or subsidize elites uncdf’s choice to award grants rather than to work as a bank and award loans, and its lack of assessment of community savings and tax policies as a prelude to grants suggests that it is subsidizing elites and distorting the very fiscal policies it claims to be building. -1 point 19. public and private functions are kept in an appropriate balance with proper roles it is questionable whether uncdf’s intervention in small credit is interfering with the private sector. there are also questions as to whether uncdf’s probusiness ideology includes any protections for consumers or communities through regulation. -0.5 points 20. market systems are promoted where possible uncdf’s capacity building through local governments is done through outside consultants even though building financial expertise is best left to business schools and government training centers. this suggests a potential distortion of these private and public services. -0.5 points total: uncdf’s score in capacity building is strongly negative, suggesting that it is using “capacity building” simply as a slogan to promote a corporatist and business agenda that is in fact undermining development and governance objectives rather than promoting them. -4.5 points lempert ● a quick indicator of “capacity building” initiatives 196 analysis of uncdf is based not only on its own statements on its website but also from review of some 8 project documents in as many countries (a 20 percent sample of 40 project countries in 2009) including its logframes, problem statements, results measures, inputs and overall goals and project logic at the request of one of uncdf’s regional offices. a copy of this review of tensions in uncdf’s overall mission and overall deficiencies in standards, is on file with the author. neither this review nor any similar critique has been posted on uncdf’s website and provides evidence of the organization’s inability to follow such claimed procedures of transparency and stakeholder participation in its own activities.