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Electoral Design and Voter Welfare from the U.S. Senate: Evidence from a Dynamic Selection Model Gautam Gowrisankaran Matthew F. Mitchell Andrea Moro April 13, 2007 Abstract Since 1914, the U.S. Senate

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Electoral Design and Voter Welfare from the U.S. Senate: Evidence from a Dynamic Selection Model Gautam Gowrisankaran Matthew F. Mitchell Andrea Moro April 13, 2007 Abstract Since 1914, the U.S. Senate has been elected and incumbent senators allowed to run for reelection without limit. This differs from several other elected offices in the U.S., which impose term limits on incumbents. Term limits may harm the electorate if tenure is beneficial or if they force high quality candidates to retire but may also benefit the electorate if they cause higher quality candidates to run. We investigate how changes in electoral design affect voter utility by specifying and structurally estimating a dynamic model of voter decisions. We find that tenure effects for the U.S. Senate are negative or small and that incumbents face weaker challengers than candidates running for open seats. Because of this, term limits can significantly increase voter welfare. We thank Ethan Bueno de Mesquita, Zvi Eckstein, Barton Hamilton, Antonio Merlo, Larry Samuelson, Kenneth Wolpin, seminar participants at numerous institutions and Industrial Organization graduate students at Harvard and Yale for their insightful comments and Anita Todd for editorial assistance. Gowrisankaran acknowledges financial support from the National Science Foundation (Grant SES ). Any opinions, findings, and conclusions or recommendations expressed herein are those of the authors and do not necessarily reflect the views of the National Science Foundation, the Federal Reserve Bank of New York, or the Federal Reserve System. University of Arizona and National Bureau of Economic Research. Department of Economics, University of Iowa. Microeconomic and Regional Studies Function, Federal Reserve Bank of New york. 1 Introduction In a variety of electoral situations, incumbents win substantially more than half of the time. This is sometimes referred to as an incumbency advantage. Authors such as Elhauge (1998) and Palmer and Simon (2006) have argued that this fact could reflect various barriers to entry for new candidates, and therefore might be a signal of electoral inefficiency. Many policies have been considered, at least in part, as a response to the possibility that incumbency confers an unfair advantage. Most prominent among these policies are term limits; others include matching funds for political candidates, mandated air time for television advertisements, and reforms to campaign finance laws, which are intended to make incumbency less advantageous. To ascertain the potential costs and benefits of such programs, a natural counterfactual question is, how would electoral designs that eliminate or limit incumbents affect a voter s well-being? The purpose of this paper is to provide evidence on the welfare impact of different electoral designs, specifically term limits. To do this, we specify and structurally estimate a model of voter behavior for the U.S. Senate and analyze the impact of counterfactual electoral design. In the U.S. Senate, incumbents win almost 80 percent of the time. Unlike several other elected offices in the U.S., such as the U.S. presidency and several state senates, there are no term limits or other restrictions on incumbents running for reelection. 1 We focus on several possible effects of eliminating an incumbent. Since becoming an incumbent requires having won, and winning candidates will tend to be of relatively high quality, eliminating incumbents will reduce quality by reducing the positive selection of good candidates. We call this a selection effect. The presence of a selection effect would imply that the incumbency advantage may not be due to any direct benefit of incumbency, but may rather simply be a consequence of the different distribution of quality for incumbents. Incumbency may also confer a direct electoral advantage. Many explanations have been posited along these lines, including 1 Individual states have attempted to pass term limit restrictions for senators from their state, but such changes were ruled unconstitutional by the Supreme Court (see U.S. Term Limits, Inc. v. Thornton, 514 U.S. 779). 1 pork-barrel spending, congressional relations, media coverage, incumbent visibility, and party attachment. We term these tenure effects, and our model is agnostic as to the sources of these effects. Last, we consider the possibility that eliminating an incumbent might change the distribution of candidates. For instance, Elhauge (1998) stresses that term limits may cause better quality candidates to run, thus improving the challenger quality distribution. In order to be able to answer the counterfactual question, a key goal of this paper is to disentangle empirically the effects of selection, tenure and candidate quality distribution, as we believe that this is critical to understanding the counterfactual experiment. It is straightforward that we need to measure differences in candidate quality in elections with and without incumbents to evaluate whether term limits improve voter welfare by discouraging high quality candidates. However, evaluating the counterfactual also requires understanding whether the incumbency advantage stems from tenure effects or selection. As an example, consider one-term incumbents. To the extent that one-term incumbents win because of a beneficial tenure effect, that tenure effect will still accrue under a term limit; however, to the extent that some one-term incumbents come to office by beating five-term incumbents, and therefore sometimes have very favorable selection, term limits may limit the ability of that selection effect to ever occur. Moreover, data on electoral histories provide a natural way to disentangle our different effects because tenure effects are determined only by the tenure of the current candidate, while selection effects may depend on the electoral history of a seat. Two senators with the same tenure have different expected distributions of quality if they came to office by beating different types of incumbents, for instance ones who themselves had different tenure. The different quality distributions will then result in different reelection probabilities in subsequent elections. Thus, tenure and selection effects will be separately identified by differences in reelection probabilities based on the electoral history of a senate seat. Similarly, differences in candidate quality based on whether an incumbent is present in the election can also be distinguished by subsequent reelection probabilities. 2 We formulate a simple, stylized model of voter decisions for candidates that allows for the three above effects. In our model, the voters in each U.S. state are identical dynamically optimizing agents. They observe the permanent quality of two current candidates and then elect one of them. Permanent candidate quality is drawn from a fixed distribution which varies depending on whether the election is an open seat election or one where an incumbent is running. Once quality is drawn, the only change in the utility flow from a candidate over his career is his tenure effect. We allow the relationship between tenure and tenure effects to be of any shape, although we restrict the shape to be the same across candidates. An incumbent leaves the senate with an exogenous exit probability that depends on tenure. As such, we do not account for the selection bias that may result from senators choosing when to retire based on their electoral prospects. 2 Though simple, the model implies that tenure and the entire history of the seat following an open seat election (e.g., how many terms were served by each candidate who was later defeated by another candidate) will influence the probability of reelection, thus allowing for the above sources of identification. We estimate our model using U.S. Senate data since 1914, the start of the elected senate. Our data contain the history of senatorial seats, recording how candidates came to office, how long they served in office and the reason they left office. Conditional on a given vector of structural parameters, the solution to the voter s dynamic choice problem implies a probability distribution over the possible electoral histories of a senatorial seat. We derive this distribution and use it to estimate the parameters of the model with the method of maximum likelihood. Using the estimated parameters, we then examine the welfare implications of counterfactual electoral design policies, by implementing the policies and solving optimal voter decisions given the 2 Although we are not aware of any evidence on the exogeneity of retirement from the Senate, Kiewiet and Zeng (1993) find that age is the most important determinant of the retirement decision for House representatives, with scandals a distant second. Indicators of quality such as chairmanship of a committee, party leadership, or the victory margin in the previous election are not statistically significant. These findings support our choice of exogenous exit probabilities to the extent that they apply to the behavior of senators. Ansolabehere and Snyder Jr. (2004), using term limits as an instrumental variable, also find no evidence that candidates are strategic in their retirement decisions. 3 policies. Because our model is a very simple representation of the electoral decision, we also discuss the principal ways in which our model abstracts from reality and examine how potential variants of the model might affect our main conclusions. 2 Relationship to the existing literature Starting in the 1970s, a vast literature has tried to quantify incumbency advantages. 3 Early studies regressed the winning probability on an incumbency dummy, generally finding a positive sign. These papers provide no evidence on the sources of the incumbency advantage and hence cannot be used to determine how electoral reforms would affect voter welfare. A more closely related literature has tried to separate tenure and selection effects. The first method to attempt to separate tenure from selection effects defined the tenure effect as the difference between the vote share that a senator earned in his second and first elections. This measure became known as the sophomore surge. 4 Gelman and King (1990) pointed out that the sophomore surge approach also suffers from selection bias because a candidate who is elected would disproportionately have had a good draw in his first election, that may be idiosyncratic to the first election. They developed a reduced-form least squares method that helps mitigate this selection bias. Levitt and Wolfram (1997) apply a Heckman-style correction to the sophomore surge to further mitigate the Gelman and King (1990) selection bias. Our paper builds on these earlier papers, in that our model and estimation explicitly control for the selection biases that these papers analyze. As in Gelman and King (1990), in our model, the winner of an election will likely have had a positive idiosyncratic shock in his first election, in the sense of facing a relatively 3 Most studies use House election data, which contain a larger number of elections. They typically regress winning probabilities on a set of regressors. See the references in the surveys by Cover and Mayhew (1977), Fiorina (1989), and Mayhew (1974). For more recent studies, see also, Ansolabehere and Snyder Jr. (2004), Cox and Katz (1996), and Lee (2001), together with the other references cited in this section. There is also a literature studying the advantage in offices other than the House: recent studies include Ansolabehere and Snyder Jr. (2002), Gronke (2000) and Berry et al. (2000) (see also references therein). 4 See Erikson (1971), Cover (1977), Gelman and King (1990) and references therein. 4 weak competitor. Also, as in Levitt and Wolfram (1997), candidate quality density can differ based on whether the candidate is in an open seat election or not. Another related literature has structurally estimated candidate career decisions to retire or face reelection. This literature attempts to predict reelection probabilities. Diermeier et al. (2005) estimate a model where candidate career decisions are endogenous but reelection probabilities are exogenous. In contrast, we treat retirement decisions as exogenous but endogenize election decisions, necessary to evaluate voter welfare. Our paper differs from the above literatures in that we estimate a full dynamic model of voter behavior. This allows us to provide evidence on the relative magnitude of the selection, tenure and challenger quality effects, and more importantly, to analyze how these effects and electoral design ultimately affect voter welfare. In addition, our model is identified by the entire history of electoral outcomes since the open seat election in a manner that is consistent with the underlying model. 5 This allows us to identify our parameters of interest in an intuitive manner. 3 The Model We propose a relatively simple model of voter behavior. Although parsimonious, to our knowledge, our model is the first to endogenize and estimate voter decisions in a rational dynamic model. In Section 6, we discuss the potential implications of more robust specifications. We model voters in each senatorial seat as identical dynamically optimizing agents who value services from an elected official, in our case a senator. The valuation has two components: a senator-specific, permanent quality q and a tenure effect τ m common to all senators of tenure m. 6 The quality q is an element of a 5 In this way, our model relates to Samuelson (1987), who first recognized the importance of the entire history of a seat in evaluating incumbency advantage. 6 Our notation includes τ 0, which is to be interpreted as the tenure effect of candidates with zero tenure. We argue below that this parameter is not empirically separately identified from the mean of the candidate s quality distribution. We include it here to simplify the formal description of the dynamic program. 5 compact set Q. Tenure is defined by the number of completed terms in office. Both q and m are observed by the voters. The utility flow for the voter in a given period is additive in these two components, i.e., u(q, m) = q + τ m. (1) The voter values the expected sum of current and future utility flows, discounted by β 1. In each period, voters choose between two candidates in an election. There are two kinds of elections between which it is useful to distinguish. One is an incumbentchallenger election. This is an election where an incumbent runs against a challenger. The other type is called an open seat election, which takes place in situations where neither candidate is an incumbent. This happens when incumbents leave office for reasons other than losing an election. We assume that these reasons are exogenous and depend only on tenure. The timing is as follows. At the beginning of the period, the incumbent either exits or runs for reelection. Denote the probability of exit at tenure m by δ m. If he exits, two new candidates run for the seat. If he runs for reelection, a single challenger runs against the incumbent. Each candidate in an open seat election then draws his permanent quality q from an atomless distribution F o (q) with corresponding density f o (q). Correspondingly, each challenger in an incumbentchallenger election draw his permanent quality from an atomless distribution F c (q) with corresponding density f c (q). 7 The tenure effects τ m are tenure-specific constants known to the voter. The voter observes the qualities of the current candidates and then elects the candidate that maximizes expected discounted utility. The voter also knows the distributions F o and F c from which future candidates will draw their permanent qualities. For an open seat election, the optimal choice of the voter is simple: choose the candidate with the higher q. The utility flows generated by the candidates are otherwise identical. 7 We assume that F o and F c are atomless to ensure that the voter has strict preferences over candidates with probability one. 6 In an incumbent-challenger election the decision is more complicated. We express the problem recursively using a Bellman equation. Denote by q the quality of the incumbent and by q c the quality of the challenger. The voter s decision can be expressed as a function of the incumbent senator s quality q and tenure m. V (q, m) for m 1 denote the expected discounted utility for the voter at the beginning of the period, before either exit occurs or new candidates appear. Let W denote the expected discounted utility from an open seat. Then, q + τ m + βv (q, m + 1), V (q, m) = (1 δ m ) max Q q c + τ 0 + βv (q c, 1) f c(q c )dq c + δ m W. (2) If the incumbent chooses to run again (which occurs with probability 1 δ m ), the voter chooses between the incumbent and a challenger. Let The integral in the first term in (2) reflects the expected utility in this case, which involves integrating over q c. If the incumbent exits, creating an open seat election, the voter obtains W. Letting the two new candidates qualities be defined by q and q c, q + τ 0 + βv (q, 1), W = max Q Q q c + τ 0 + βv (q c, 1) f o(q c )f o (q)dq c dq. (3) The value of the open seat reflects the fact that two candidates are drawn and the higher q is retained. Denote by r(q, q c, m) the optimal reelection rule of a voter when the incumbent has quality q and tenure m and the challenger has quality q c ; r(q, q c, m) = 1 denotes reelecting the incumbent and r(q, q c, m) = 0 denotes choosing the challenger. We now show that the solution to the decision problem can be characterized as a cutoff rule. As a result, the Bellman equation takes a simple form that is useful in computing the solution. We start by characterizing the decision rule. Lemma 1 r(q, q c, m) is weakly decreasing in q c. The proof is in Appendix A.1. The lemma implies that the voter follows a cutoff rule: challengers are elected only if their quality exceeds a cutoff q(q, m). Note that 7 voters do not simply choose the candidate with the higher q, or even the higher q + τ m, since the voter is forward-looking and considers future tenure effects and exit probabilities. The cutoff rule allows us to express the Bellman equation more concisely, as V (q, m) = (1 δ m ) max F c( q) (q + τ m + βv (q, m + 1)) q + (4a) q (x + τ 0 + βv (x, 1)) df c (x)dx + δ m W. (4b) If the incumbent does not exit (the case given in (4a)), the expected return has two components: first, the payoff when the incumbent is retained, times the probability of retention F c ( q); and second, the expected value of the challenger, conditional on his quality being above q. 4 Estimation 4.1 Overview Our goal is to provide inference on the fundamental parameters of our model: the candidate permanent quality densities f o and f c, the tenure effects τ m, the exit probabilities δ m, and the discount factor β. Our data contain information on when and how each U.S. senator came to office and when and how he left office. These data allow us to understand, for instance, whether a senator came to office by winning an open election or by defeating an incumbent. 8 We do not directly observe any component of quality. However, given a vector of fundamental parameters, the model generates a probability distribution over sequences of electoral outcomes. We use the method of maximum likelihood to find the parameter values that maximize the probability of seeing the observed electoral outcomes. 8 Note that we use only data on election wins and not on vote shares. We made this decision in order to estimate parameters that are consistent with a well-specified model and because of the potential noisiness of vote shares. 8 To understand how the model provides evidence on reelection probabilities that we observe in the data, it is useful to consider a special case. Suppose that tenure effects and exit proba

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