The Moderating Role of Electoral Pressure on Congressional Ideological Polarization: A Cross-Sectional Time-Series Analysis

Reelection and self-interest are recurring themes in the study of our congressional leaders. To date, many studies have already been done on the trends between elections, party affiliation, and voting behavior in Congress. However, because a plethora of data has been collected on both elections and congressional voting, the ability to draw a connection between the two provides a very reasonable prospect. This project analyzes whether voting shifts in congressional elections have an effect on congressional voting. Will a congressman become ideologically more polarized when his electoral margins increase? Essentially, this paper assumes that all congressmen are ideologically polarized, and it is elections which serve to reel congressmen back toward the ideological middle. The election and ideological data for this study, which spans from the 56th to the 107th Congress, finds statistically significant relationships between these two variables. In fact, congressman pay attention to election returns when voting in Congress. When broken down by party, Democrats are more exhibitive of this phenomenon, which suggest that Democrats may be more likely to intrinsically follow the popular model of representation. Meanwhile, it can be hypothesized that insignificant results for Republicans indicate that Republicans may follow a trustee model of representation.

Asset Pricing with Heterogeneous Agents, Incomplete Markets and Trading Constraints

The consumption capital asset pricing model is the standard economic model used to capture stock market behavior. However, empirical tests have pointed out to its inability to account quantitatively for the high average rate of return and volatility of stocks over time for plausible parameter values. Recent research has suggested that the consumption of stockholders is more strongly correlated with the performance of the stock market than the consumption of non-stockholders. We model two types of agents, non-stockholders with standard preferences and stock holders with preferences that incorporate elements of the prospect theory developed by Kahneman and Tversky (1979). In addition to consumption, stockholders consider fluctuations in their financial wealth explicitly when making decisions. Data from the Panel Study of Income Dynamics are used to calibrate the labor income processes of the two types of agents. Each agent faces idiosyncratic shocks to his labor income as well as aggregate shocks to the per-share dividend but markets are incomplete and agents cannot hedge consumption risks completely. In addition, consumers face both borrowing and short-sale constraints. Our results show that in equilibrium, agents hold different portfolios. Our model is able to generate a time-varying risk premium of about 5.5% while maintaining a low risk free rate, thus suggesting a plausible explanation for the equity premium puzzle reported by Mehra and Prescott (1985).