An Alternative Approach for Understanding
Political Systems: Veto Players

by: Michael Leyh

Table of contents

1 Abstract  1

2 Individual veto players  2

2.1 Number of veto players, policy stability and policy risk  4
2.2 Distance among veto players and policy stability  6
2.3 Sequence of moves of veto players  9
2.4 Problem of the veto player theory  11

3 Collective veto players  13

3.1 Decision making by qualified and simple majority 14
3.2 Transitivity of preferences  15

4 The influence of veto players on capital flows  18

4.1 Veto player effect on business environment 18
4.2 Veto players and FDI  20
4.3 Veto players and Property Rights  21

5 Conclusion 23
 

1 Abstract

To date, the majority of literature on political systems uses a single criterion to classify the main characteristics of a polity. A very common differentiation is represented by the concepts of democracy and autocracy. The analyses of these concepts reveal a great need for a more differentiated view on political systems. In business management these concepts are of great significance, as they help to asses the business environment, and therefore help to calculate the risk of doing business in foreign countries. In this context, the credibility of government commitments and the importance of policy stability are key factors for long term investments. The centre of attention is very often the detailed description and analysis of interactions between different players (with different political goals) within these complex political structures, mainly to predict their future (re)-actions. The Veto player approach present s a high-quality method of explaining policy outputs and outcomes, and can easily be applied to diverse constitutional and party configurations. The objective of this paper is to give an introduction to George Tsebelis’ Veto Player framework and to show its applications in business management particularly concerning FDI theory. The paper is divided into three main parts. The first part will focus on individual veto players, whe re the correlation of the number and the distances of veto players with policy stability in political system will be examined. It will reflect how various veto actors influence the decision making process and hence how they effect the political outcome. The second part will, with reference to the establish terms and propositions of part one, aid to a closer look on how veto player theory varies in the process and outcome of the collective veto player case. Given that the individual veto player case uses unanimity as its often applied decision rule, this may be noticeably different for collective actors. Decision making by qualified or simple majorities are realistic decision rules that can be found in the political environment. The implications of these rule s and how these concepts are influencing not only outcomes but also the policy stability will be shown in the second part of this part. After having established the fundamental rules and constraints of decision making in this veto player framework, the third part will demonstrate how this theory can be applied to economics and business management in order to produce valuable information to asses the business environment.

2 Individual veto players

In order for change to occur within political systems, a number of individual and collective actors have to mutually agree on proposed changes.¹ These actors are referred to as veto players and are specified in a country by its constitution (the President, the Senate, etc.) or by the political system (party members of a government coalition)². These two different types of veto players are called institutional and partisan veto players. All actors in a political system face the status quo which describes the actual political situation. The actors, in addition to the status quo are graphically illustrated in Tsebelis’ veto player framework using Euclid geometric models. Each veto player has a circular indifference curve, on which all alternatives have the same distance from the ideal center point. Figure 1.1 presents suc h a model in a two dimensional space.

Figure 1: Circular indifference curves of a veto player³ [figur only in downloadfile]

Player 1 prefers the combinations of locations indicated by the indifference curve with the center point 1. The other points P, X, Y, and Z illustrate different locations, which represent different political opinions or preferences. As the figure shows, player 1 is indifferent between the points X and Y, as they lay within the same distance form the center point 1. The player 1 is certainly favoring point P, as it is the closest to his preference. The assumption of a circular shape of the indifference curve may be criticized, as it indicates the same intensity of preferences in each issue, which is not necessarily a given assumption. For reasons of simplicity, the circular shape of the indifference curve is seen as given. Two main concepts that explain the possible outcomes of political decision making in the veto player framework are the winset of the status quo and core.⁴ The winset of the status quo describes the set of points that can overpower the established status quo, thus representing all policies that can replace the exciting one. The core is a set of points that is limited through the ideal preference points of the veto players. The core points cannot be defeated by any other point under a certain decision- making rule. If decisions are taken by unanimity (the decision-making rule) the core is referred to as a “unanimity core”. Tsebelis describes this core as “the set of policies that cannot be defeated by unanimity rule at least one veto player vetoes a policy change in this set, so it is not possible to change any policy in this set by unanimity rule”. Figure 2, shows the concepts with three veto players A, B and C.

Figure 2: Winset and core of a system with three veto players ⁵ [figur only in downloadfile]

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1 The paper will focus on individual actors as it is an easier way of explaining the basics of the theory.

2 Tsebelis, George (2000): p. 13 f.

3 Figure is taken from Tsebelis, George (2000): p. 55

4 Tsebelis, George (1995): p. 294.

5 Figure is taken from Tsebelis, George (2000): p. 56