We have proposed that a democracy's electoral rules are linked to the regulatory output of that country's elected legislators, and that this effect manifests itself in a country's real-price levels. In particular, we contend that the greater seat-vote elasticities of majoritarian electoral systems will tilt policy in favor of consumers, while proportional systems should strengthen producers; and that the pro-consumer bias of majoritarian systems should lead to systematically lower prices.

Empirical testing of our hypothesis in Chapter 3 supported the expected relationship between majoritarian electoral institutions and lower real prices among the wealthy, developed democracies of the Organization for Economic Cooperation and Development (OECD). Among the twenty-three OECD democracies, a country that shifted from a proportional to a majoritarian electoral system was estimated typically to enjoy a short-run yearly reduction in real prices of about 1.2 index points (where U.S. prices = 100), corresponding to a long-run reduction in real prices of at least 10 percent. This is about half of a standard deviation of average prices across OECD countries – over time, a significant effect.

Introduction

The analyses presented in the previous chapters highlight our basic argument – SMD systems consistently yield lower real prices. This strong empirical regularity holds up not only in the advanced OECD countries, as shown in Chapter 3, but also in developing democracies, as shown in Chapter 4. In addition to empirical evidence amassed from the cross-national comparisons, the electoral system-to-prices link is further corroborated in our detailed study of the Italian case, where the shift toward a majoritarian system was followed by regulatory liberalization and a reduction of real prices.

As we elaborated in Chapter 2, PR systems’ association with higher real prices by no means contradicts the emerging consensus in the political economy literature that PR systems also enhance socioeconomic equality. However, here we explore the seeming paradox more fully.

In the previous chapters, we have focused on building a theory of how electoral incentives tilt regulatory policy – and hence, price levels – toward producers or consumers. We have also endeavored to construct a persuasive empirical case that real price levels are indeed lower in majoritarian systems. Our results, although strongly robust over samples and methods, do exhibit one obvious limitation: they only capture the two endpoints of a long process between incentives and outcomes. How specifically do legislators bring about higher prices when votes are valued less and the obverse when they are valued more?

Our theory posits that regulatory policy is the key. Where legislators privilege producers, they insulate them from competition through regulations such as licensing schemes or barriers to entry for new competitors. Where consumers are ascendant, liberalization rules the day. Our theory is consistent with our results – producer-coddling regulation should raise real prices – but it is possibly not the only theory to connect electoral arrangements to price levels. Might other regularities between proportional and majoritarian countries explain price differences? Without a closer empirical examination of the mechanism, the actual policy-forming behavior of legislators under different electoral regimes, we cannot rule out rival explanations. We address these concerns here.

Even casual tourists – perhaps especially casual tourists – immediately notice one major difference among the countries they visit: prices vary. The restaurant meal that would cost $50 in Los Angeles can be had for $15 in Ensenada but will lighten one's wallet by $200 in Tokyo. More astonishingly, what appear to be identical and fully tradable goods – a writing tablet, a package of brand-name diapers – retails for far more in Norway than in Spain, or – as some pioneering economic field studies have shown (Engel and Rogers 2001) – for far more on one side of the street (which happens to lie in Switzerland and accepts only Swiss francs) than on the other (which is in France and accepts only Euros).

The person who actually moves to another country, and lives and works there for some time, notices another striking difference: levels of regulation vary. Whoever attempts to build a house, open a business, buy an automobile, or even change her address will find the process easy (or perhaps scarcely regulated at all) in some countries, but subject to repeated licensure and inspections in others.

In the article that originally motivated this book, Rogowski and Kayser (2002) performed only a plausibility check of the hypothesized link between electoral systems and real prices, based on cross-sectional analysis of OECD countries in 1990. The cross-sectional evidence was strongly supportive, suggesting that real prices were, controlling for all other influences commonly adduced and employing a broad array of robustness checks, about 10 percent lower in the average OECD country with single-member district (SMD) electoral systems than in those that used some form of proportional representation.

As with all new empirical claims – no one had previously even suggested a relationship between electoral arrangements and real prices – healthy skepticism was warranted. Indeed, recent research on related areas of public policy has contrasted with – but not contradicted – these price results, associating proportional electoral arrangements with such outcomes as (a) lower income inequality (Austin-Smith 2000; Birchfield and Crepaz 1998), (b) higher public spending (Persson and Tabellini 2003; Milesi-Feretti et al. 2002) or, in combination with central banking institutions, (c) greater price stability (Keefer and Stasavage 2003). As we noted in the previous chapter, and will treat more extensively later (Chapter 7), these outcomes – some of them desirable on non-utilitarian (e.g., Rawlsian) normative grounds – are almost always purchased at the cost of an overall reduction in social welfare; but it remains a question of (social) taste whether more equal slices are preferred to a larger pie, or whether greater growth is worth greater volatility. In this chapter, we restrict ourselves to a closer study of the price relationship among OECD countries.

We begin with some fundamental and still highly influential work on regulation and its effects by two leading economists of the mid-twentieth century, George Stigler and Sam Peltzman. We then move to develop a specific Stigler-Peltzman political support function and analyze the role of electoral responsiveness in it. We next consider possible welfare and distributional effects of regulated, high-price economic systems. We then consider how the analysis might differ in a small, open, export-dependent economy. Then, having analyzed the effect of various kinds of democratic constitutions, we consider some of the implications for nondemocracies, weakly institutionalized democracies, and less developed economies. Finally, we consider whether electoral systems can be regarded as exogenous and whether this affects our overall analysis.

The Stigler-Peltzman Framework

The essential insight of the Stigler-Peltzman (S-P) analysis of regulation can be conveyed by a single and widely familiar diagram shown in Figure 2.1 (cf. Peltzman 1976, p. 224). Suppose that the price of a given industry's product is represented on the horizontal axis and its profits on the vertical one. At the perfectly competitive price (pc), profits will be zero. To the extent that regulation in any of its familiar forms – licensure schemes that artificially restrict supply, regulatory boards that set minimum prices, impediments to efficient retailing, tariffs, quotas, and so on – raises the product's price above this competitive level, total industry profits begin to rise until price reaches the level that a monopoly would impose; this is denoted as pm. If regulation becomes so restrictive of supply as to push price even beyond this monopolistic level, industry profits again decline, returning to zero (or even becoming negative) as the price becomes prohibitive.

The fundamental claim of this book has been just this: that more responsive political systems – ones that shift the most power in response to the smallest changes in voter sentiment – empower consumers. The less the distribution of power responds to voter sentiment, the more powerful producers will be. And because producers readily conspire to inhibit competition, that power expresses itself in anticompetitive policies: barriers to entry, regulated prices, local or niche-market monopolies. Although we have focused on one (we believe) particularly compelling bit of evidence, namely the link between electoral systems and prices, our more basic point has many further implications, some of which we outline here as an agenda for further research.

If our basic point is right, electoral systems must be endogenous (as Acemoglu [2005] has argued, and as we have tried to show in Chapter 6): Neither voters nor politicians (let alone lobbyists) are fools, and they understand (if only intuitively) a great deal of what is at stake. Yet crucial political institutions are “sticky,” indeed often constitutionally anchored, and we will follow convention in positing in the first part of our discussion here that the electoral system is exogenous. So what, beyond higher prices, does a less responsive electoral system (in most cases, PR) entail? At a minimum, we argue, quite different modes of political action and organization, different fiscal systems, and consequently different policies.