When Reciprocity Becomes Back-Scratching: an Economic Inquiry

When reciprocity becomes back-scratching: An economic inquiry Cameron K Murray M.Sci. (Business), B.Sci. (Property Economics) A thesis submitted for the degree of Doctor of Philosophy at The University of Queensland in 2015 School of Economics Abstract This thesis reports four studies of a particular type of cooperation where the formation of coor- dinated groups through favour exchanges benefits the connected few at the expense of the many. This process is labelled back-scratching, and is a common feature of political decision-making where institutional powers allow for a large amount of discretion and the imposition of externalities in situations where property rights are not well-defined. Chapter 1 introduces the concept of back-scratching in as a coordination game with negative externalities, providing a common framework within which to incorporate the studies that follow. The first study in Chapter 2 uses a natural experiment to quantify the gains from back-scratching in political decisions about value-enhancing land zoning. The effectiveness of a variety methods used to support implicit favouritism are examined, including political donations, employing professional lobbyists, and investing in relationships. Using micro-level relationship data from multiple sources, characteristics of landowners of comparable sites inside and outside rezoned areas are compared. `Connected' landowners owned 75% of land inside rezoned areas, and only 12% outside, and captured $410 million in value gains, indicating a trade in favours amongst connected insiders. Marginal gains to all landowners of connections in our sample were $190 million. Engaging a professional lobbyist appears to be a substitute for having one's own connections. The second study in Chapter 3 offers a theoretical explanation for the unusual hedging and partisan patterns of political donations observed in Australia, Canada, UK and Germany based on a model of donations as reputation signals, and where reputation levels determine the political distribution of the economic surplus. Simulating optimal signal investments in a population of agents distributed within a reputation space results in a clustering of signalling strategies consistent with political donations data. The model shows how the entrenchment of interests can occur through exclusive access to a `social ladder' for elites engaged signalling reputations, offering a potential underlying explanation of Mancur Olson's (1982) institutional sclerosis. To explore more closely potential institutional changes to curtail back-scratching a new experiment is introduced in Chapter 4 that allows for back-scratching between player pairs to arise within a group of four players. In each of the 25 rounds of the experiments, a player (the àl- locator') nominates one of three others as a co-worker (the `receiver'), which determines the group production that period to be the productivity of the receiver (which varies by round), but also gives the receiver a bonus and makes them the allocator in the next round. Alliances form if two individuals keep choosing each other even when their productivities are lower than that of others, causing efficiency losses; a situation that occurred in 84% of experiment groups. Males and business students were found to be more likely to form alliances. Random allocator rotation policies and low bonuses fail to significantly improve overall welfare: rotation policies significantly reduce the rate of formation of new alliances but do not lead to the breakdown of existing alliances, while low bonus policies are only found to be effective when alliances are well established. This points to the importance of the strength of existing alliances for the chances of institutional interventions curtailing back-scratching. Institutional changes creating greater transparency are tested in the new experimental setup and reported in Chapter 5. The main treatment reveals photographs of each player in order to deter bilateral alliances and encourage cooperation with the group as a whole in the absence of punishment. Transparency does not affect the probability of alliance formation due to two countervailing forces; more rapid alliance formation due to the use social cues from the photos as a coordination device, and more pro-sociality at the group level that leads to shorter alliances. There are policy lessons about when transparency may curtail corruption, or facilitate it. 1 Declaration by author This thesis is composed of my original work, and contains no material previously published or written by another person except where due reference has been made in the text. I have clearly stated the contribution by others to jointly-authored works that I have included in my thesis. I have clearly stated the contribution of others to my thesis as a whole, including statistical assistance, survey design, data analysis, significant technical procedures, professional editorial advice, and any other original research work used or reported in my thesis. The content of my thesis is the result of work I have carried out since the commencement of my research higher degree candidature and does not include a substantial part of work that has been submitted to qualify for the award of any other degree or diploma in any university or other tertiary institution. I have clearly stated which parts of my thesis, if any, have been submitted to qualify for another award. I acknowledge that an electronic copy of my thesis must be lodged with the University Library and, subject to the policy and procedures of The University of Queensland, the thesis be made available for research and study in accordance with the Copyright Act 1968 unless a period of embargo has been approved by the Dean of the Graduate School. I acknowledge that copyright of all material contained in my thesis resides with the copyright holder(s) of that material. Where appropriate I have obtained copyright permission from the copyright holder to reproduce material in this thesis. 2 Publications during candidature None. Publications included in this thesis None. Contributions by others to the thesis Melissa Vorster contributed to early drafts of the experimental design and in administering the experiments that comprise Chapter 5. Markus Schaffner was pivotal as a coach and research parter in the experiments in both Chapter 5 and 6, contributing coding expertise, iPad experimental kit, and funding to the experiments. Statement of parts of the thesis submitted to qualify for the award of another degree None. 3 Acknowledgements There is no irony in acknowledging that my networks of relationships were an extremely valuable asset while undertaking this thesis. My supervisor Paul Frijters was perhaps the most valuable connection. Having got to know Paul at QUT during previous studies, his refreshingly direct Dutch ways where in stark contrast to the usual social niceties in a world where brutal honesty is underrated. As a mentor and coach he took me under his wing as an apprentice academic, allowing me extensive freedom to choose my research topics and methods, while also supporting and guiding each step. This allowed me to successfully navigate the mysterious unwritten norms and complex sociology of academic economics. I have come to learn that such freedoms for research students are rare, and I very much appreciate the chance Paul has given me to take full ownership of my research in all its successes and failures. Marco Faravelli has also been a key player in my supervisory team, with timely pointed and precise inputs and feedback. Thanks must go to Markus Schaffner, who spent many hours teaching to write code in CORAL, his new experimental software, which ultimately enabled me to devise a new experimental method of taking participant photos using the built-in iPad camera during an economic experiment. Markus also contributed financially to some of the experiments, along with in-kind use of his iPad classroom at QUT. He has hence been pivotal in transforming my experimental ideas into practice. Fellow PhD student Melissa Vorster was instrumental in developing the new design and assisting in the implementation, while Tim Frijters was a studious assistant for the experiments reported in Chapter 5. In terms of piecing it all together Ian McKenzie and Myra Yazbeck have provided advice on the literature, writing and presentation that has been invaluable. Outside of the thesis directly I need to acknowledge three other groups that have supported my development as an economist and public intellectual. First is my blog network. Leith van Onselen, David Llewelyn-Smith and Chris Becker at MacroBusiness have provided me with an outlet for economic ideas that have found a wide audience. I am honoured to be part of this crew of independent writers and analysts who have been a highly influential catalysts for change in the economic and political discourse in Australia. I have also found allies in Karl Fitzgerald and David Collyer at Prosper Australia, and Philip Soos and Lindsay David of LF Economics, who have solidified into an informal force for change, participating in Senate and Parliamentary inquires into housing markets and providing an alternative perspective in the mainstream news which is normally dominated by industry propaganda. Second is my network at the Economics Society of Australia, including Tim Wonhof, Michael Knox, Rimu Nelson, Uwe Dulleck, Gene Tunny and Brad Rogers, who have integrated me into the economics community in Queensland and nationally. A notable thanks also

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