The determinants of Market Regulation and Social Protection Preferences

This paper argues that when considering the political viability of deregulation policies, it is crucial to take into account the political sustainability of fiscal measures to compensate the losers of reforms or to accommodate any temporary negative effect on aggregate demand. This implies that the political determinants of market regulation (MR) and social expenditure (SE) have to be jointly analysed. Empirically, a first macro-level clue of substitutability between such policies emerges by investigating the relationship between MR and SE acrosscountries. This suggests that countries choose different institutions for social protection, i.e. combinations of MR and SE. As a preliminary step to analyse this choice in a political economy framework, we analyze the determinants of individuals' demand for social protection. To this goal we present a simple model in which it is explicitly recognized that income and the degree of exposure to labour market risks are key determinants of preferences over alternative forms of protection. Using microdata from the International Social Survey Programme (ISSP), we test whether and how the main structural relationships identified in the model empirically emerge when controlling for some of the other important determinants of preferences for protection which have been highlighted in the literature. On the same dataset, we also study the existence and the determinants of the importance individual voters attach to different issues (issue salience). Our results show that the intensity of individual preferences, and thus the salient policy issue, is significantly influenced by the position in the income distribution and by the degree of vulnerability to labour market risks. Nevertheless, these results present crosscountry peculiarities and systematic differences according to the country legal origins.