Political Business Strategy by Professor Crombez
Fall 2023
Practical information about the course:
1. Lectures
- 5 weeks, 2x/week, recordings available after class
2. Slides
- Only available after the class
3. Group project (+-5 people)
- 30% Paper and 30% presentation
- Topic: a real-life situation: analyze political environment and write strategy to deal
with it.
- During the weeks of presentations, you only have to go to the session where you
present.
- A real-life situation, analyze political environment and write strategy to deal with it.
- Important thing to do in group presentation: make distinction between political
institutions and interest groups.
o If you talk about government, who is the government? Institution that
represents who?
o Taxpayers are the ones that pay the price for the tax credit. Tax payers are an
interest group and are not well organised.
4. Grading
- 30% presentation
- 30% paper
- 30% multiple choice test during class with guessing correction
- 10% class participation: he will recognize faces. Ask questions to other groups during
the presentations.
- No final exam
5. Textbook
- Baron: read chapters only if unclear
6. Course objectives
- Provide frameworks:
o To think about nonmarket issues and analyze them
o To formulate strategies to detect and deal with such issues; proactive
approach
SAMPLE EXAM QUESTIONS ON THE LAST PAGE!
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,Session 1: Introduction and Voting
Nonmarket/political strategies
Building permits, environmental permits, diploma, labor regulations, fiscal policies, liability.
All these things need to be considered to create your nonmarket/political strategy. Analyse
the non market/political world and outline your strategy to tackle that. As a company you
are part of it. Companies can/should play a role in the political process.
Political Analysis I: voting
Condorcet Paradox: (read online: link)
- = Is a situation in which collective preferences can be cyclic, even if the preferences
of individual voters are not cyclic.
- Under majority rule:
o Each pairwise comparison has a different conclusion. A vs B, B vs C, A vs C.
o A beats B beats C beats A: so we get a voting cycle
- The group does not behave as a rational individual. It does not have well-defined
preferences.
- What outcome is best for the group?
o We cannot tell. We cannot rank the alternatives. If we knew the utilities the
individuals derive from the respective alternatives, we could.
o We don’t know which outcome is in the ‘public interest’.
o Politics is about aggregating preferences and making policy decisions
- Group decision making can lead to chaos. More structure is needed to minimize the
prospect of chaos.
- This matters for businesses since it may not be clear what the optimal choice is for
society
o We may all have incentives to convince politicians that the alternative we
prefer is the best
o There is nothing wrong with informing politicians about your interests, they
are there to represent
▪ Information transmission to politicians is an important part of the
political process
Setting the agenda
- To make a decision, there is a need for more structure, a political structure.
- This is where political institutions come in. They help avoid chaos and create stability
- The outcome depends on the institutions
- Example: assume we have 2 rounds to have decision making. The decision depends
on the starting point, it depends on which comparison you conduct in the first place.
o You may structure it in such a way so that you have the outcome you desire
- What is the best outcome for the group? We don’t know, it is a perfectly symmetrical
problem. Very difficult to evaluate. Even if you know what the best outcome is we
will not necessarily have that outcome.
- The agenda setter is not the only one who can steer the process though: also voters
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,Strategic voting
- Voters may also influence the final outcome
- In a 2-round decision making process: there is an incentive for a group to vote
strategically/sophisticatedly against their own preferences
o Setting the agenda thinking that one group would vote strategically, you may
do backward induction (=reverse engineering: you look at last step first) to
still get your preferred outcome.
- The voters are not powerless. They may
o Vote strategically and
o Vote against their preferences in the first stage to get their desired outcome
in the second stage.
Arrow:
- Arrow generalizes the Condorcet paradox because it is too extreme
- Arrow set 5 requirements for a decision rule and concluded that it was
mathematically impossible to design a decision rule that is immune to strategic
manipulations.
- He showed that no decision rule (that satisfies some basic requirements) is immune
to strategic manipulations
- Online: The Arrow Condorcet Paradox is a thought experiment that highlights the
limitations of simple voting methods. It shows that under certain conditions (=5
requirements) a majority of voters can prefer one candidate over another, yet the
overall outcome of the election can be the opposite. This paradox has important
implications for how we design voting systems, emphasizing the need for more
sophisticated and nuanced methods that can handle complex preferences and
contradictory results.
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, Session 2: Political Analysis: Spatial Theory
Introduction
- Let’s look at policy-making in more general terms
- Voters care about
o Policies: we’ll look at this in more detail in this session
▪ Economic policies: left-right, taxes, growth, inequality
▪ Social policies: progressive-conservative, health care, education
▪ Also: immigration, environmental policies
o Benefits
o Personalities
- We may think of policies and policy making in a systematic way: spatial theory
o Often used in marketing, product characteristics but this can also be done for
policy-making
The Basics of Spatial Theory
- Voters and parties can be represented in a policy space
- One of the fundamental building blocks in the analysis of political phenomena is the
representation of preferences. Without some means of capturing the essence of
goals and trade-offs for individual choices, the mechanics of the public choice
method are stalled. While there are many ways of representing preferences, the
single most commonly used approach is the “spatial” model.
- Euclidean preferences of voters: They have ideal policies and prefer policies that are
closer rather than further away from their ideal policies.
- It is a way to say where to locate something, not necessarily in the real world.
o i.e. where your political party (left vs right-wing) is located on a scale of 0 to 1.
- Example: politicalcompass.org
- If these two dimensions were all that mattered and voters voted for the party closest
to them, they would vote as indicated below:
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