The spatial model of politics initially focused on the analysis of two agents, j and k, competing in a policy space X for electoral votes. The two agents (whether candidates or party leaders) are assumed to pick policy positions zj, zk, both in X, which they present as manifestos to a large electorate. Suppose that each member of the electorate votes for the agent that the voter truly prefers. When X involves two or more dimensions, then under conditions developed by Plott (1967), Kramer (1973), McKelvey (1976, 1979), Schofield (1978, 1983, 1985), and many others, there will generically exist no Condorcet or core point unbeaten under majority rule. That is to say, whatever position, zj, is picked by j there always exists a point zk that will give agent k a majority over agent j.

However, the existence of a Condorcet point has been established in those situations where the policy space is one-dimensional. In this case, the agents can be expected to converge to the position of the median voter (Downs, 1957). When X has two or more dimensions, it is known that a Condorcet point exists when electoral preferences are represented by a spherically symmetric distribution of voter ideal points. Even when the distribution is not spherically symmetric, a Condorcet point can be guaranteed as long as the decision rule requires a sufficiently large majority (Caplin and Nalebuff, 1988). Although a PNE generically fails to exist in competition between two agents under majority rule, there will exist mixed strategy equilibria whose support lies within a central electoral domain called the uncovered set.

INTRODUCTION

Understanding Italian politics in terms of coalition theory has proved very difficult. From the office-seeking perspective, the common occurrence of both minority and surplus coalitions during the 1970s and the 1980s seemed puzzling (Axelrod, 1980; Laver and Schofield, 1990; Strom, 1990). Other writers have been intrigued by the apparent instability of Italian coalition governments during this same period (Sartori, 1976; Pridham, 1987). The theoretical challenge has become even harder after the institutional upheaval of the early 1990s. So much has changed in terms of electoral rule, party alignment, and party composition that it has been hard to follow, let alone explain.

Recently, Mershon (1996a,b, 2002) has made a significant contribution to the study of Italian politics by combining a theoretical approach with careful data analysis. Our own theoretical model of multiparty politics is offered as an extension of Mershon's earlier work.

Different sources of data are used in this chapter. For party policy positions before 1996 we rely on the most updated version of the Comparative Manifesto Project (CMP) (Budge et al., 2001). The methodological status of the CMP data set, obtained via content analysis of party platforms, has been challenged on various grounds. First, the CMP research strategy is meant to ascertain salience of issues rather than party positions on those issues (Laver, 2001). Second, party positions derived from the content analysis of party platforms do not necessarily coincide with voter perceptions of these positions. We use the CMP analyses only to give an approximate indication of party positions prior to 1996. For the 1996 election, we use original data obtained by Giannetti and Sened (2004).

CRITICAL ELECTIONS IN 1860 AND 1964

This chapter will develop the idea of activist influence in elections presented in the previous chapter, but will apply the model to the transformation of electoral politics that has seemed to occur in recent elections in the United States. Indeed we shall use the model to suggest that a slow transformation has occurred in the locations of Republican and Democrat presidential candidates, and as a consequence, pattern of majorities for the two parties in the States of the Union have shifted. In our account, this is because the most important policy axes have slowly rotated. We ascribe this to the shifting balance of power between different activist groups in the polity.

Just to illustrate the idea, Table 8.1 shows the shift in state majorities for the two-party candidates between 1896 and 2000, whereas Table 8.2 shows the similarity between the two elections. It is clear that there is a strong tendency for states that voted Republican in 1896 to vote Democrat in 2000, and vice versa. Aside from the fact that a number of states had been formed out of the territories in the period from 1860 to 1896, there is little substantive difference between the pattern of Democrat and Republican states in 1860 and 1896. However, as Table 8.1 suggests, the states that voted Republican for Lincoln in 1860, or for McKinley in 1896, tended to vote Democrat in 2000.

Prior to 1856 of course, there was good reason to believe that the Democrat Party had almost become the permanent majority, by controlling almost all southern and western states.

ASSESSMENT OF THE MODEL

We briefly conclude with an assessment of the model presented in this book, together with some remarks on how the work can be extended.

The essence of democracy is that voters respond to the past acts and promises of party leaders. It has been traditional to use manifestos as measures of promises, and to gauge the distance between the preferred policy of the voter and the promise of the party leader as the “disutility” of the voter. In addition, of course, the voter may not trust the party leader. Valence is one very simple way to model the judgment of the voter about the degree to which the party leader can be trusted. This addition to the standard spatial model of voting changes one of the principal results of the model, namely the mean voter theorem. As the main theorem of Chapter 3 shows, it is no longer necessarily the case that all parties will converge to an electoral center. Instead, each election will be characterized by a convergence coefficient. Empirical analysis associated with the election can be used to give a list of valence coefficients for each of the party leaders. If the valences are similar, then the convergence coefficient will be low, and symmetry will induce all parties to converge to the center.

The formal model shows that this convergence coefficient is an increasing function of the valence differences, the electoral variance, and the spatial parameter. Moreover, with many parties with differing valences, the coefficient will tend to be high.

As discussed in Chapter 3, formal models of voting usually make the assumption that political agents, whether parties or candidates, attempt to maximize expected vote shares. Stochastic models typically derive the mean voter theorem—that each agent will adopt a convergent policy strategy at the mean of the electoral distribution. This conclusion, however, is contradicted by some of the empirical evidence.

In this chapter we emphasize the competitive dynamics of the electoral process in order to examine the inconsistency between theory and evidence. In particular, we argue that to fully elucidate vote motivations of the parties, it is necessary to incorporate valence terms in the statistical model and, therefore, in the theoretical model as well.

The valence of each party derives from the average weight given, by members of the electorate, to the overall competence of the particular party leader. In empirical models, a party's valence is independent of current policy declarations, and can be shown to be statistically significant in the estimation. As Theorem 3.1 has shown, when valence terms are incorporated in the formal model, then the convergent vote-maximizing equilibrium can fail to exist. We contend that the empirical evidence is consistent with a formal stochastic model of voting in which valence terms are included. Low-valence parties, in equilibrium, will tend to adopt positions at the electoral periphery. High-valence parties will contest the electoral center, but will not, in fact, occupy the electoral mean. We use evidence from the Israeli case to support and illustrate our theoretical argument.

The previous chapters on the proportional electoral systems of Israel, Italy, and the Netherlands have considered the hypothesis that the policy positions of parties were chosen not simply to maximize vote-shares, but incorporated strategic concerns over the effect of position on the probability of joining a government coalition. However, this coalition consideration is generally not present in the plurality electoral system of Britain. (For convenience we use the term Britain for the United Kingdom). We can therefore use our electoral model for this polity to determine the degree to which simple vote-maximization characterizes policy choices. We first discuss the MNP model used by Quinn, Martin, and Whitford (1999) to study the election of 1979 in Britain, and then extend the analysis to MNL models of the 1992 and 1997 elections. In all three cases the estimated parameters give low convergence coefficients. Theorem 3.1 then implies that convergence to the electoral center should have occurred under vote-share maximization.

Since there is no evidence of convergence by the major parties in Britain (Alvarez, Nagler, and Bowler, 2000) we develop the activist valence model mentioned in the previous chapter. We now allow the contributions of activists to indirectly enhance the valence of the party leader. The principal result we offer shows that there is a tradeoff to be made between the leader's “exogenous” valence and this “indirect” valence induced by the activists for the party.

We suggest that the valence of the Labour Party, under Tony Blair, increased in the period up to 1997.

ELECTORAL COMPETITION

It was James Madison's hope that the voters in the Republic would base their choices on judgments about the fitness of the Chief Magistrate. Madison's argument to this effect in Federalist 10 may very well have been influenced by a book published by Condorcet in Paris in 1785, extracts of which were sent by Jefferson from France with other materials to help Madison in his deliberation about the proper form of government. While Madison and Hamilton agreed about the necessity of leadership in the Republic, there was also reason to fear the exercise of tyranny by the Chief Magistrate as well as the turbulence or mutability of decision making both in a direct democracy and in the legislature.

INTRODUCTION

When Parliament first appeared as an innovative political institution, it was to solve a simple bargaining problem: Rich constituents would bargain with the King to determine how much they wished to pay for services granted them by the King, such as fighting wars and providing some assurances for the safety of their travel and property rights.

In the modern polity, governments have greatly expanded their size and the range and sphere of their services, while constituents have come to pay more taxes to cover the ever-growing price tag of these services. Consequently, parliamentary systems and parliamentary political processes have become more complex, involving more constituents and making policy recommendations and decisions that reach far beyond decisions of war and peace and basic property rights. But the center of the entire bargaining process in democratic parliamentary systems is still Parliament.

Globalization trends in politics and economics do not bypass, but pass through local governments. They do not diminish but increase pressure and demands put on national governments. These governments that used to be sovereign in their territories and decision spheres are now constantly feeling globalization pressures in every aspect of their decision-making processes. Some of these governments can deal with the extra pressures while others are struggling. A majority of these governments are coalition governments in parliamentary systems. Unlike the U.S. presidential system, parliamentary systems are not based on checks and balances but on a more literal interpretation of representation.

THE SPATIAL MODEL WITH ACTIVISTS

As our discussion of Israel in Chapter 4 illustrated, government in multiparty polities, based on proportional electoral methods, requires the cooperation of several parties. The model of coalition bargaining indicates that a large, centrally located party, at a core position, will be dominant. Such a core party can, if it chooses, form a minority government by itself and control policy outcomes. If party leaders are aware of the fact that they can control policy from the core, then this centripetal tendency should lead parties to position themselves at the center.

Yet, contrary to this intuition there is ample empirical evidence that party leaders or political contenders do not necessarily adopt centrist positions. For example, Budge et al. (1987) and Laver and Budge (1992), in their study of European party manifestos, found no evidence of a strong centripetal tendency. The electoral models for Israel and Italy presented in the previous two chapters estimated party positions in various ways, and concluded that there is no indication of policy convergence by parties. Theorem 3.1 indicates why convergence does not occur in these two polities. In this chapter, we re-examine the earlier empirical analyses for the Netherlands (Schofield et al., 1998; Quinn, Martin, and Whitford, 1999; Quinn and Martin, 2002) to determine if the nonconvergence noted previously can be accounted for by the electoral theorem.

This book closes a phase of a research program that has kept us busy for more than ten years. It sets out a theory of multiparty electoral politics and evaluates this theory with data from Israel, Italy, the Netherlands, Britain, and the United States.

Four decades ago, our teacher and mentor, William H. Riker, started this effort with The Theory of Political Coalitions (1962). What is perhaps not remembered now is that Riker's motivation in writing this book came from a question that he had raised in his much earlier book, Democracy in the United States (1953): Why did political competition in the United States seem to result in roughly equally sized political coalitions of disparate interests? His answer was that minimal-winning coalitions were efficient means of dividing the political spoil. This answer was, of course, not complete, because it left out elections—the method by which parties gain political power in a democracy. His later book, Positive Political Theory (1973), with Peter Ordeshook, summed up the theory available at that time, on two-party elections. The main conclusion was that parties would tend to converge to an electoral center—either the median or mean of the electoral distribution. Within a few years, this convenient theoretical conclusion was shown to be dependent on assumptions about the low dimension of the policy space. The chaos results that came in the 1970s were, however, only applicable to two-party elections where there was no voter uncertainty. With voter uncertainty, it was still presumed that the mean voter theorem would be valid.

The previous chapters show that parliamentary political events affect market behavior. Where the outcome of those events is less predictable, market returns tend to be lower than in situations where the political result is anticipated. But the previous tests do not tap into the process of political events. Parties posture for influence; legislators make proposals and counter-proposals. The media covers politics closely, reporting on how parties are performing, what policies are on the table, and what the likely outcome will be. The information contained in these news reports conditions the expectations of market actors. We argue that the market impact of political news during these processes will vary according to the prior expectations of market actors about the likely outcome. If news items confirm the beliefs of economic actors, this information will have little effect on market behavior. In situations where the eventual outcome is less predictable, however, we anticipate that these news items will affect market performance as economic actors update their expectations based on the new information. In this chapter and the next two, we examine case studies of political events to investigate this argument, generating data that not only captures the exact timing of the arrival of information but also accounts for the prior beliefs of market actors.

We first analyze two specific coalition formations: Austria after the October 1999 elections and New Zealand after the October 1996 elections. Both negotiations proved contentious and lengthy.

To this point, we have investigated how political events shape asset market behavior. We have shown that less predictable events often lead to shifts in asset market behavior or increases in market volatility. But what are the political consequences of this asset market volatility? In this chapter, we examine how asset market volatility can affect government popularity.

One issue in measuring the impact of asset market behavior on political outcomes is that neither “markets” or “politics” is exogenous. If we take asset markets as exogenous to political factors, we discount the possibility that politics affects market behavior. On the other hand, if we assume that political events are exogenous, we ignore the possibility that market activity can precipitate a cabinet dissolution or affect an electoral outcome. An accurate assessment of how markets and domestic politics affect each other, therefore, requires an analysis of how both evolve together.

We examine the relationship between government popularity and exchange rate movements in Britain between 1987 and 2001. We argue that unexpected drops in the government's public support will lead to currency depreciations and increased exchange rate volatility. In turn, unanticipated depreciations hurt the government's public support.

We estimate separate models of exchange rate volatility and government voting intention iteratively and recursively. At each iteration, we use estimates from each model to generate measures of exchange rate and public opinion shocks.

Modern presidential elections tend to be predictable: the winner is known long before election day. With the combination of lop-sided vote totals and sophisticated voter surveys, television news reports can confidently predict a winner even before polls close on the west coast. The 2000 contest between the Democratic candidate, Vice President Al Gore, and Republican George Bush, Governor of Texas, however, did not conform to this pattern. Throughout the campaign, polls had the candidates running close. The unpredictability of the race made markets jittery. One portfolio manager commented, “The election is so important and the outcome is so unknown and the effect of it is so unknown that things are on knife edges out there.” Despite the closeness of the race, most Americans assumed that they would quickly learn the identity of the next president on the evening of November 7th, thanks to the wonders of exit polling. But the actual vote totals were so close that television analysts could not conclude who would win the majority of electoral college votes. Indeed, the news anchors were embarrassed when, after calling Florida as a Gore state early in the evening, they had to switch their call, classifying it as a toss-up an hour later. The media then called Florida for Bush later in the night, prompting Gore to call Bush to concede. But a few hours later, it was still not certain how Florida would vote, and news organizations took Florida out of the Bush column. Gore called Bush back.