Dangers of Using Political Preference Functions in Political Economy Analysis: Examples from U.S. Ethanol Policy

Rausser and Freebairn (1974) proposed a method for empirically measuring the political power of interest groups competing in real-world political economies. In the first half of the 1990s, staunch criticism of PPF methodology appeared. Von Cramon-Taubadel (1992) obtained counter-intuitive results in PPF simulations using a simple model of EU wheat and barley policy instrument use. Bullock (1994) emphasized that PPF methodology requires that observed policy be Pareto efficient policy, which requires researchers to manipulate the dimensions of their models so that the number of interest groups is exactly one more than the number of policy instruments. He concluded “[PPF methods] need not reveal anything meaningful about interest group political power, and may incorrectly measure the direction of transfers” (Bullock 1994, p. 347). The criticisms of the PPF approach were cogent, published in leading agricultural economics journals, and deserved carefully argued response from anyone wishing to continue publishing PPF research. None came forth, even though many PPF studies appeared since. In the present article we provide a step-by-step demonstration of the potential pitfalls of the PPF approach. For our purpose in this article is to once again critique PPF methodology, but this time in a more methodical and less abstract fashion, in hopes of catching and keeping the attention of the upcoming generation’s agricultural political economists. For concreteness, we have chosen a model of U.S. ethanol policy for our simulations. We build the model so that its economic agents can be aggregated or divided into various groups of different sizes, and its several policy instruments can be included or excluded from the model. In these ways, our model is flexible enough for us to use it to illustrate the various issues of model dimension that confront the potential PPF modeler.