Testing Political Economy Models of Reform in the Laboratory

A fast-growing theoretical literature on the political economy of reform has provided a sizable collection of models that have deepened our understanding concerning how distributional conflict manifests itself in the political process and can prevent efficiency-enhancing economic reform from taking place (see e.g., Allan Drazen [2000 Ch. 10, 13] for an insightful review). Unfortunately, systematic empirical work that provides direct tests of the validity and significance of the mechanisms articulated in these models has been limited. As Torsten Persson and Guido Tabellini (2000 p. 481) note in their evaluation of the larger political economy literature, “The gap between theory and evidence is a final weakness of the existing literature. . . . [W]hen there is empirical work, its ties to the underlying theory are often loose . . . [and] are not tied well to the extensive form games or theoretical predictions in theoretical work. Ideally, we would like more empirical work ‘derived from theory’ as opposed to ‘informed by theory.’ ” One reason for the lack of such empirical studies is that most of these (often gametheoretic) models explain policy outcomes as a result of strategic interaction of forward-looking agents. Direct tests of these models using field data are subject to the same difficulties that researchers have faced when testing gametheoretic models in other areas such as industrial organization, since qualitative features of the equilibria often depend sensitively on the specific assumptions of the game structure (see Richard Schmalensee, 1988 pp. 675–76; Gilles Saint-Paul, 2000). In addition, the politicaleconomy literature of reform explains policy outcomes using political variables such as the distribution of voters’ preferences and the nature of political institutions (see e.g., Drazen, 2000; Stephan Haggard, 2000). The time variation of these variables is often limited, leading to a classic identification problem and making direct tests of theoretical models difficult (Saint-Paul, 2000). Laboratory studies allow the researcher to manipulate explanatory variables of a theory as treatment variables, so such studies should be helpful in partially overcoming these difficulties and can complement field empirical work on reform. The study of reform also poses new challenges to experimental economists, and a dialogue between political economists and experimental economists can enable both sides to capture gains from trade. This paper aims to illustrate this using an experimental study of the model in the influential paper by Raquel Fernandez and Dani Rodrik (1991).