Working Papers from the Institutions, Organizations & Growth Program
Francesco Passarelli and Guido Tabellini. Emotions and Political Unrest. February, 2013.
This paper formulates a general theory of how political unrest influences public policy. Political unrest is motivated by emotions. Individuals engage in protests if they are aggrieved and feel that they have been treated unfairly. This reaction is predictable because individuals have a consistent view of what is fair. This framework yields novel insights about the sources of political influence of different groups in society. Even if the government is benevolent and all groups have access to the same technology for political participation, equilibrium policy can be distorted. Individuals form their view of what is fair taking into account the current state of the world. If fewer aggregate resources are available, individuals accept a lower level of welfare. This resignation effect in turn induces a benevolent government to procrastinate unpleasant policy choices.Download PDF
Philippe Aghiony, Ufuk Akcigitz, Peter Howittx. What Do We Learn From Schumpeterian Growth Theory? February, 2013.
Schumpeterian growth theory has .operationalized. Schumpeter.s notion of creative destruction by developing models based on this concept. These models shed light on several aspects of the growth process which could not be properly addressed by alternative theories. In this survey, we focus on four important aspects, namely: (i) the role of competition and market structure; (ii) .rm dynamics; (iii) the relationship between growth and development with the notion of appropriate growth institutions; (iv) the emergence and impact of long-term technological waves. In each case Schumpeterian growth theory delivers predictions that distinguish it from other growth models and which can be tested using micro data.Download PDF
Daniel Trefler. Canadian Policy Responses to Offshore Outsourcing. November, 2012.
AS A POLICY MAKER, it is hard not to be drawn into the hysteria surrounding the rise of China as the world’s manufacturer and of India as the new capital of outsourced services. While cries for a dramatic government response are everywhere, panic is the wrong mindset. The impacts to date have been smaller than one might think, especially in services. In addition, there is a very limited set of short-run policy fixes that can address the most significant looming issue, namely, the slow but steady rise in the innovative capacities of China and India.Download PDF
Diego Puga and Daniel Trefler. International Trade and Institutional Change: Medieval Venice’s Response to Globalization. July, 2012.
Abstract: International trade can have profound effects on domestic institutions. We examine this proposition in the context of medieval Venice circa 800–1350. We show that (initially exogenous) increases in longdistance trade enriched a large group of merchants and these merchants used their newfound muscle to push for constraints on the executive i.e., for the end of a de facto hereditary Doge in 1032 and for the establishment of a parliament or Great Council in 1172. The merchants also pushed for remarkably modern innovations in contracting institutions (such as the colleganza) that facilitated largescale mobilization of capital for risky longdistance trade. Over time, a group of extraordinarily rich merchants emerged and in the almost four decades following 1297 they used their resources to block political and economic competition.Download PDF
Mauricio Drelichman and Hans-Joachim Voth. Diversification, and the Underwriting of Early Modern Sovereign Loans. June, 2012.
Lending to early modern monarchs could be very profitable, yet highly risky. International financiers unlocked the excess returns in sovereign debt markets by parceling out the risk and transferring it to downstream investors in exchange for financial intermediation fees. We link two sovereign loans to Philip II of Spain to a downstream Genoese partnership. After examining the performance of the loans through the 1596 bankruptcy and its ensuing settlement, we conclude that the risk diversification scheme used by international bankers worked. Shares in sovereign loans were held within highly diversified portfolios, enhancing their returns in normal times and not posing excessive risks when caught in a default.Download PDF
Mauricio Drelichman and Hans-Joachim Voth. Risk Sharing With The Monacrch: Contingent Debt and Excusable Defaults In the Age of Philip II, 1556-1598*. June, 2012.
Contingent sovereign debt can create important welfare gains. Nonetheless, there is almost no issuance today. Using hand-collected archival data, we examine the first known case of large-scale use of state-contingent sovereign debt in history. Philip II of Spain entered into hundreds of contracts whose value and due date depended on verifiable, exogenous events such as the arrival of silver fleets. We show that this allowed for effective risk-sharing between the king and his bankers. The data also strongly suggest that the defaults that occurred were excusable – they were simply contingencies over which Crown and bankers had not contracted previously.Download PDF
Nathan Nuun and Daniel Trefler. Incomplete contracts and the boundaries of the multinational firm. May, 2012.
Using data on U.S. intra-firm and arm’s-length imports for 5705 products imported from 220 countries, we examine the determinants of the share of U.S. imports that are intra-firm. We examine two predictions that arise from Antràs (2003), Antràs and Helpman (2008) and Antràs and Helpman (2004). First, we find that, consistent with the implicit logic of Antràs (2003) and the explicit predictions of Antràs and Helpman (2008), vertical inte-gration is increasing in the importance of non-contractible headquarter inputs relative to non-contractible supplier inputs. In other words, we show that only non-contractible head-quarter inputs affect the firm’s make-or-buy decision. Second, we also provide empirical support for the Antràs and Helpman (2004) prediction that intra-firm trade is largest where non-contractible headquarter inputs are important and productivity is high.Download PDF
Mauricio Drelichman and David González Agudo. What price a roof? Housing and the cost of living in 16th-century Toledo. May, 2012.
Data on housing costs and rental markets for the early modern period are notoriously scarce. We build a database of rent paid on 183 properties belonging to the Cathedral Chapter of Toledo between 1489 and 1600. Using detailed information on location, physical characteristics of the property, and the identity of the renter, we reconstruct housing costs for various social groups and trace the effect of exogenous shocks on the rental market. We then use our data to explore the impact of adding rent to early modern price indices and estimates of living standards. Price indices show a moderate effect. When comparing the living standards of Toledo to two northern European locations, the addition of rent reduces the gap between them by up to 9.5%.Download PDF
Marc J. Melitz and Daniel Trefler. Gains from Trade when Firms Matter. April, 2012.
The gains from long-distance international trade have been understood and exploited since prehistoric times. Our pre-urban ancestors were benefifi tting from long-distance trade in obsidian some 10,000 years ago; Plato’s Academy was built on the profifi ts of Athenian silver exports; and Rome was not built in a day partly because goods moved too slowly in the vast Roman trade network.Download PDF
Elhanan Helpman, Oleg Itskhoki, Marc-Andreas Muendler and Stephen Redding. Trade and Inequality: From Theory to Estimation. April, 2012.
While neoclassical theory emphasizes the impact of trade on wage inequality between occupations and sectors, more recent theories of firm heterogeneity point to the impact of trade on wage dispersion within occupations and sectors. Using linked employer-employee data for Brazil, we show that much of overall wage inequality arises within sector-occupations and for workers with similar observable characteristics; this within component is driven by wage dispersion between firms; and wage dispersion between firms is related to firm employment size and trade participation. We then extend the heterogenous-firm model of trade and inequality from Helpman, Itskhoki, and Redding (2010) and structurally estimate it with Brazilian data. We show that the estimated model fits the data well, both in terms of key moments as well as in terms of the overall distributions of wages and employment, and find that international trade is important for this fit. In the estimated model, reductions in trade costs have a sizeable effect on wage inequality.Download PDF
Mauricio Drelichman and Hans-Joachim Voth. Lending to the Borrower from Hell: Debt and Default in the Age of Philip II. December, 2011.
Philip II of Spain accumulated debts equivalent to 60% of GDP. He also failed to honor them four times. We ask what allowed the sovereign to borrow much while defaulting often. Earlier work emphasized either banker irrationality or the importance of sanctions. Using new archival data, we show that neither interpretation is supported by the evidence. What sustained lending was the ability of bankers to cut off Philip II’s access to smoothing services. Making loans in overlapping coalitions, the Genoese acted in unison in times of crisis. Lending moratoria were enforced through a “cheat the cheater” mechanism (Kletzer and Wright, 2000). Thus, market power and reputational concernswere sufficient to sustain lending under conditions of anarchy.Download PDF
Pablo Fajgelbaum, Gene M. Grossman, and Elhanan Helpman. A Linder Hypothesis for Foreign Direct Investment. October, 2011.
We study patterns of FDI in a multi-country world economy. First, we present evidence for a broad sample of countries that .rms direct FDI disproportionately to markets with income levels similar to their home market. Then we develop a model featuring non-homothetic preferences for quality and monopolistic competition in which specialization is purely demand-driven and the decision to serve foreign countries via exports or FDI depends on a proximity-concentration trade-o¤. We characterize the joint patterns of trade and FDI when countries di¤er in income distribution and size and show that FDI is more likely to occur between countries with similar per capita income levels. The model predicts a Linder Hypothesis for FDI, consistent with the patterns found in the data.Download PDF
Siwan Anderson, Patrick Francois and Ashok Kotwal. One Kind of Democracy. September, 2011.
This paper explorers the performance of rural governance institutions (Gram Panchayats) in Maharashtra, India. The results of a detailed set of household and village surveys we conducted point to a stunningly robust and participatory democratic process. Elections are freely contested, fairly tallied, highly participatory, non-coerced and lead to political representation believed by voters to strongly reflect their will.Download PDF
Mauricio Drelichman and Hans-Joachim Voth. Serial Defaults, Serial Profits: Returns to Sovereign Lending in Habsburg Spain, 1566-1600. January, 2011.
Philip II of Spain accumulated debts equivalent to 60% of GDP. He also defaulted four times on his short-term loans, thus becoming the first serial defaulter in history. Contrary to a common view in the literature, we show that lending to the king was profitable even under worst-case scenario assumptions. Lenders maintained long-term relationships with the crown. Losses sustained during defaults were more than compensated by profits in normal times. Defaults were not catastrophic events. In effect, short-term lending acted as an insurance mechanism, allowing the king to reduce his payments in harsh times in exchange for paying a premium in tranquil periods.Download PDF
Nathan Nunn, and Daniel Trefler. The Structure of Tariffs and Long-Term Growth. October, 2010.
We show that the “skill bias” of a country’s tariff structure is positively correlated with long-term per capita GDP growth. Testing for causal mechanisms, we find evidence consistent with the existence of real benefits from tariffs focused in skill-intensive industries. However, this only accounts for a quarter of the total correlation between skill-biased tariffs and growth. Turning to alternative explanations, we extend the standard Grossman-Helpman “protectionfor- sale” model and show how the skill bias of tariffs can reflect the extent of domestic rent-seeking activities in the economy. We provide evidence that the remaining variation is explained by this endogeneity.Download PDF
Bühler, Benno and Kessler, Anke. Ideologues: Explaining Partisanship and Persistence in Politics (and Elsewhere). March, 2010.
This paper provides an explanation for why political leaders may want to adopt ideological positions and maintain them over time even in the face of conflicting evidence. We study a dynamic framework in which politicians are better informed than the voting public about an underlying state of nature that determines the desirability of a given policy measure. The issue itself is non-partisan (everybody has the same policy preferences) but voters attach ideological labels to both candidates and available policy alternatives. We show that both sides may be caught in an ideology trap: because voters expect the perceived ideology of office holders to determine their political actions, politicians are tempted to act according to their perceived ideology, resulting in political failure.Download PDF
Gustavo J. Bobonis and Peter M. Morrow. Export Commodity Booms, Labor Coercion, and the Historical Containment of Education. February, 2010.
A significant share of labor arrangements during the colonial period in the Americas involved the use of coercion. To what extent did labor coercion affect individuals’ accumulation of human capital? What was the role of primary commodity exports in influencing this relationship? We study these questions in the context of nineteenth century Puerto Rico, where unskilled laborers were forced to work for legally-titled landowners from 1849 until 1874. We develop a model of labor market coercion under an elite-controlled regime, and show that coercion depresses the effective wages of unskilled labor, inducing workers to acquire more schooling than in a case without coercion. Guided by this model, we use unique micro data from individuals and municipalities in Puerto Rico and exploit variation in the suitability of coffee cultivation across municipalities and changes in world coffee prices across time to estimate the response of schooling to coffee price changes. During the coercive period, governments in coffee growing regions allocated more public resources towards coercive labor measures and fewer resources towards primary schooling – with the latter declining 40 percent. Following the abolition of coercive measures in 1874, literacy rates declined 25 percent, consistent with a significant drop in the skilled labor wage differential. These results strongly suggest that labor market liberalization reduced the extraction of rents from unskilled laborers’ wages by local landowners.Download PDF
Helpman, Elhanan; Itskhoki, Oleg and Stephen Redding. Inequality and Unemployment in a Global Economy. February, 2010.
This paper develops a new framework for examining the determinants of wage distributions that emphasizes within-industry reallocation, labor market frictions, and differences in workforce composition across firms. More productive firms pay higher wages and exporting increases the wage paid by a firm with a given productivity. The opening of trade enhances wage inequality and can either raise or reduce unemployment. While wage inequality is higher in a trade equilibrium than in autarky, gradual trade liberalization first increases and later decreases inequality.Download PDF
Tim Besley and Marta Reynal-Querol. Do Democracies Select More Educated Leaders? October, 2009.
This paper tests whether education levels differ between leaders selected in autocracies and democracies. We use a unique data set on over 1300 world leaders between 1848 and 2004 and exploit within country variation from transitions to and from democracy to show that democracies pick more highly educated leaders. The results are robust to a wide range of specifications, controls and ways of measuring education and democracy.Download PDF
Helpman, Elhanan and Oleg Itskhoki. Labor Market Rigidities, Trade and Unemployment. October, 2009.
We study a two-country two-sector model of international trade in which one sector produces homogeneous products and the other produces differentiated products. Both sectors are subjected to search and matching frictions in the labor market and wage bargaining. As a result, some of the workers searching for jobs end up being unemployed. Countries are similar except for frictions in their labor markets, such as effciency of matching and costs of posting vacancies, which can vary across the sectors. The differentiated-product industry has firm heterogeneity and monopolistic competition. We study the interaction of labor market rigidities and trade impediments in shaping welfare, trade flows, productivity, and unemployment. We show that both countries gain from trade. A country with relatively lower frictions in the differentiated-product industry exports differentiated products on net. A country benefits from lowering frictions in its differentiate sector's labor market, but this harms the country's trade partner. Alternatively, a simultaneous proportional lowering of labor market frictions in the differentiated sectors of both countries benefits both of them. The opening to trade raises a country's rate of unemployment if its relative labor market frictions in the differentiated sector are low, and it reduces the rate of unemployment if its relative labor market frictions in the differentiated sector are high. Cross-country differences in rates of unemployment exhibit rich patterns. In particular, lower labor market frictions do not ensure lower unemployment, and unemployment and welfare can both rise in response to falling labor market frictions and falling trade costs.Download PDF
Tim Besley and James A. Robinson. Quis Custodiet Ipsos Custodes? Civilian Control over the Military. October, 2009.
In The Republic, Plato posed an essential problem of the state. Having suggested that a guardian class be nominated to protect the polity, the key question was "who will guard the guards?" (Quis custodiet ipsos custodes?) The question of who guards the guards is intimately connected with broader questions of state capacity and the establishment of a monopoly of violence in society, something which Max Weber viewed as the defining feature of the modern state. But to establish such a monopoly, civilian rulers need not only to build an effective military, but also to control it. In this paper we study how governments may solve this problem when they recognize that their decisions to build a strong army may have ramifications for subsequent coups.Download PDF
Tim Besley and Torsten Persson. State Capacity, Conflict and Development. September, 2009.
The absence of state capacities to raise revenue and to support markets is a key factor in explaining the persistence of weak states. This paper reports on an on-going project to investigate the incentive to invest in such capacities. The paper sets out a simple analytical structure in which state capacities are modeled as forward looking investments by government. The approach highlights some determinants of state building including the risk of external or internal conflict, the degree of political instability, and dependence on natural resources. Throughout, we link these state capacity investments to patterns of development and growth.Download PDF
Helpman, Elhanan; Itskhoki, Oleg and Stephen Redding. Unequal Effects of Trade on Workers with Different Abilities. September, 2009.
In recent research, we have proposed a new framework for examining the determinants of income inequality, which emphasizes firm and worker heterogeneity and selection into export markets. In this paper, we use our framework to examine how wage inequality and unemployment vary across workers with different abilities. Both in the closed and open economy, the unemployment rate is decreasing in worker ability, whereas both the average wage and wage inequality are increasing in worker ability. Upon opening the economy to trade, however, intermediate-ability workers experience reductions in average wages and increases in unemployment rates relative to both lower and higher ability workers.Download PDF
Helpman, Elhanan; Grossman, Gene M. and Fajgelbaum, Pablo. Income Distribution, Product Quality, and International Trade. August, 2009.
We develop a framework for studying trade in horizontally and vertically differentiated products. In our model, consumers have heterogeneous incomes and heterogeneous tastes. They purchase a homogenous good as well as making a discrete choice of quality and brand of a differentiated product. The distribution of preferences in the population generates a nested logit demand structure. These demands are such that the fraction of consumers who buy a higher-quality product rises with income. We use th emodel to study the pattern of trade between countries that differ in size and income distributions but are otherwise identical. Trade - which is driven primarily by demand factors - derives from "home market effects" in the presence of transport costs. When these costs are sufficiently small, goods of a given quality are produced in a single country. The model provides a tractable framework for studying the welfare consequences of trade, transport costs, and trade policy for different income groups in an economy.Download PDF
Matilde Bombardini, Giovanni Gallipoli and Germán Pupato. Skill Dispersion and Trade Flows. June, 2009.
Is skill dispersion a source of comparative advantage? While it is established that a country's aggregate endowment of human capital is an important determinant of comparative advantage, this paper investigates whether the distribution of skills in the labor force can play a role in the determination of trade .ows. We develop a multi-country, multi-sector model of trade in which comparative advantage derives from (i) differences across sectors in the complementarity of workers' skills, (ii) the dispersion of skills in the working population. First, we show how higher dispersion in human capital can trigger specialization in sectors characterized by higher substitutability among workers skills. We then use industry-level bilateral trade data to show that human capital dispersion, as measured by a standard international metric, has a significant effect on trade flows. We find that the effect is of a magnitude comparable to that of aggregate endowments. The result is robust to the introduction of several controls for other proximate causes of comparative advantage.Download PDF
Tim Besley and Hannes Mueller. Estimating the Peace Dividend: The impact of violence on house prices in Northern Ireland. May, 2009.
This paper exploits data on the pattern of violence across regions and over time to estimate the impact of the peace process in Northern Ireland on house prices. We begin with a linear model that estimates the average treatment effect of a conflict-related killing on house prices showing a negative correlation between house prices and killings. We then develop an approach based on an economic model where the parameters of the statistical process are estimated for a Markov switching model where conflict and peace are treated as a latent state. From this, we are able to construct a measure of the discounted number of killings which is updated in the light of actual killings. This model naturally suggests a heterogeneous effect of killings across space and time which we use to generate estimates of the peace dividend. The economic model suggests a somewhat different pattern of estimates to the linear model. We also show that there is some evidence of spillover effects of violence in adjacent regions.Download PDF
Mauricio Drelichman. License to Till: The Privileges of the Spanish Mesta as a Case of Second Best Institutions. April, 2009.
The Mesta was the association of the migratory shepherds of Castile, controlling fine wool production between the thirteenth and the nineteenth centuries. Its royally granted privileges have often been blamed for the stagnant Spanish agricultural productivity during the Early Modern period. I argue that the Mesta’s privileges allowed Medieval Castile to develop its comparative advantage in wool, and that the Crown was able to restrict their scope and application when economic conditions favored arable farming interests. I support my argument with extensive archival data, including a new series of wool prices and a detailed analysis of lawsuits involving the Mesta.Download PDF
Bombardini, Matilde and Francesco Trebbi. Competition and Political Organization: Together or Alone in Lobbying for Trade Policy? February, 2009.
This paper employs a novel data set on lobbying expenditures to measure the degree of within-sector political organization and to explore the determinants of the mode of lobbying and political organization across U.S. industries. The data show that sectors characterized by a higher degree of competition (more substitutable products, and a lower concentration of production) tend to lobby more together (through a sector-wide trade association), while sectors with higher concentration and more differentiated products lobby more individually. The paper proposes a theoretical model to interpret the empirical evidence. In an oligopolistic market, firms can benefit from an increase in their product-specific protection measure, if they can raise prices and profits. They find it less profitable to do so in a competitive market where attempts to raise prices are more likely to reduce profits. In competitive markets firms are therefore more likely to lobby together thereby simultaneously raising tariffs on all products in the sector.Download PDF
Matilde Bombardini and Francesco Trebbi. Votes or Money? Theory and Evidence from the US Congress. November, 2008.
This paper investigates the relationship between the size of interest groups in terms of voter representation and the interest group’s campaign contributions to politicians. We uncover a robust hump-shaped relationship between the voting share of an interest group and its contributions to a legislator. This pattern is rationalized in a simultaneous bilateral bargaining model where the larger size of an interest group affects the amount of surplus to be split with the politician (thereby increasing contributions), but is also correlated with the strength of direct voter support the group can offer instead of monetary funds (thereby decreasing contributions). The model yields simple structural equations that we estimate at the district level employing data on individual and PAC donations and local employment by sector. This procedure yields estimates of electoral uncertainty and politicians effectiveness as perceived by the interest groups. Our approach also implicitly delivers a novel method for estimating the impact of campaign spending on election outcomes: we find that an additional vote costs a politician between 100 and 400 dollars depending on the district.Download PDF
Acemoglu, Daron; Georgy Egorov; Konstantin Sonin. Dynamics and Stability of Constitutions, Coalitions, and Clubs. August, 2008.
A central feature of dynamic collective decision-making is that the rules that govern the procedures for future decision-making and the distribution of political power across players are determined by current decisions. For example, current constitutional change must take into account how the new constitution may pave the way for further changes in laws and regulations. We develop a general framework for the analysis of this class of dynamic problems. Under relatively natural acyclicity assumptions, we provide a complete characterization of dynamically stable states as functions of the initial state and determine conditions for their uniqueness. We show how this framework can be applied in political economy, coalition formation, and the analysis of the dynamics of clubs. The explicit characterization we provide highlights two intuitive features of dynamic collective decision-making: (1) a social arrangement is made stable by the instability of alternative arrangements that are preferred by sufficiently many members of the society; (2) efficiency-enhancing changes are often resisted because of further social changes that they will engender.Download PDF
Acemoglu, Daron; Davide Ticchi; and Andrea Vindig. A Theory of Military Dictatorships. June, 2008.
We investigate how nondemocratic regimes use the military and how this can lead to the emergence of military dictatorships. Nondemocratic regimes need the use of force in order to remain in power, but this creates a political moral hazard problem; a strong military may not simply work as an agent of the elite but may turn against them in order to create a regime more in line with their own objectives. The political moral hazard problem increases the cost of using repression in nondemocratic regimes and in particular, necessitates high wages and policy concessions to the military. When these concessions are not sufficient, the military can take action against a nondemocratic regime in order to create its own dictatorship. A more important consequence of the presence of a strong military is that once transition to democracy takes place, the military poses a coup threat against the nascent democratic regime until it is reformed. The anticipation that the military will be reformed in the future acts as an additional motivation for the military to undertake coups against democratic governments. We show that greater inequality makes the use of the military in nondemocratic regimes more likely and also makes it more difficult for democracies to prevent military coups. In addition, greater inequality also makes it more likely that nondemocratic regimes are unable to solve the political moral hazard problem and thus creates another channel for the emergence of military dictatorships. We also show that greater natural resource rents make military coups against democracies more likely, but have ambiguous effects on the political equilibrium in nondemocracies (because with abundant natural resources, repression becomes more valuable to the elite, but also more expensive to maintain because of the more severe political moral hazard problem that natural resources induce). Finally, we discuss how the national defense role of the military interacts with its involvement in domestic politics.Download PDF
Acemoglu, Daron; Munther A. Dahlehz; Ilan Lobelx; and Asuman Ozdaglar. Bayesian Learning in Social Networks. May, 2008.
We study the (perfect Bayesian) equilibrium of a model of learning over a general social network. Each individual receives a signal about the underlying state of the world, observes the past actions of a stochastically-generated neighborhood of individuals, and chooses one of two possible actions. The stochastic process generating the neighborhoods defines the network topology (social network). The special case where each individual observes all past actions has been widely studied in the literature. We characterize pure-strategy equilibria for arbitrary stochastic and deterministic social networks and characterize the conditions under which there will be asymptotic learning -- that is, the conditions under which, as the social network becomes large, individuals converge (in probability) to taking the right action. We show that when private beliefs are unbounded (meaning that the implied likelihood ratios are unbounded), there will be asymptotic learning as long as there is some minimal amount of "expansion in observations". Our main theorem shows that when the probability that each individual observes some other individual from the recent past converges to one as the social network becomes large, unbounded private beliefs are sufficient to ensure asymptotic learning. This theorem therefore establishes that, with unbounded private beliefs, there will be asymptotic learning in almost all reasonable social networks. We also show that for most network topologies, when private beliefs are bounded, there will not be asymptotic learning. In addition, in contrast to the special case where all past actions are observed, asymptotic learning is possible even with bounded beliefs in certain stochastic network topologies.Download PDF
Mauricio Drelichman and Hans-Joachim Voth. Debt Sustainability in Historical Perspective: The Role of Fiscal Repression. May, 2008.
This article examines the debt history of two contenders for European hegemony: 16th-century Spain and 18th-century Britain. We analyze their fiscal behavior using measures of overborrowing and fiscal policy institutions. Our results suggest that stringency was not key for Britain's success in avoiding default. Instead, fiscal repression allowed the United Kingdom to borrow at below-market rates, thereby outspending its continental rivals.Download PDF
Persson, Torsten and Guido Tabellini. Democratic capital: The nexus of political and economic change. April, 2008.
We study the joint dynamics of economic and political change, with theory and historical data. Democratic capital — measured by a nation’s historical experience with democracy and by the incidence of democracy in its neighborhood — reduces the exit rate from democracy and raises the exit rate from autocracy. A higher stock of democratic capital stimulates growth by increasing the stability of democracies. Heterogeneous effects of democracy induce endogenous sorting of countries into political regimes, which can account for observed systematic differences between democracies and autocracies. Our results suggest a virtuous circle, where the accumulation of physical and democratic capital reinforce each other, promoting economic development jointly with the consolidation of democracy.Download PDF
Tabellini, Guido and Massimo Bordignon. Moderating Political Extremism: Single vs Dual Ballot Elections. April, 2008.
We compare single ballot vs dual ballot elections under plurality rule, assuming sincere voting and allowing for partly endogenous party formation. Under the dual ballot, the number of parties is larger but the influence of extremists voters on equilibrium policy is smaller, because their bargaining power is reduced compared to a single ballot election. The predictions on the number of parties are consistent with data on municipal elections in Italy, where cities with more (less) than 15,000 inhabitants have dual (single) ballots respectively.Download PDF
Drelichman, Mauricio and Hans-Joachim Voth. Lending to the borrower from Hell: DEBT AND DEFAULT IN THE AGE OF PHILIP II, 1556-1598. February, 2008.
Philip II of Spain was the first serial defaulter in history, failing to honor his debts four times. We analyze 457 lending contracts between the king and his bankers, and ask what allowed the sovereign to borrow so much while defaulting so often. Earlier work emphasized banker irrationality or, in line with the Bulow-Rogoff argument, the ability of lenders to punish the king. We show that the evidence speaks against these interpretations. Instead, what sustained lending was the ability of bankers to effectively cut off access to lending to Philip II. With no alternative means of smoothing consumption, while being faced with highly volatile revenues and expenditures, the king returned to servicing his debts. Defaults were quickly resolved via reschedulings. In line with the arguments by Grossman and van Huyck, we find strong indirect evidence that bank loans were contingent on the fiscal health of the Spanish Crown.Download PDF
Daron Acemoglu, Michael Golosov and Aleh Tsyvinski. Dynamic Mirrlees Taxation under Political Economy Constraints. February, 2007.
We study the structure of nonlinear incentive-compatible taxes, in a dynamic economy subject to political economy and commitment problems. In contrast to existing analyses of dynamic and/or nonlinear taxation problems, we relax the assumptions that taxes are set by a benevolent government and that there is commitment to policies. Instead, in our model economy taxes are set by a self- interested politician, without any commitment power. This politician is partly controlled by the citizens via elections. The resulting environment is one of a dynamic mechanism design without commitment. We focus on the best sustainable mechanism, which is the mechanism that maximizes the ex ante utility of the citizens. Towards a full characterization of the allocations implied by the best sustainable mechanism, we first prove that a version of the revelation principle applies in our environment and that attention can be restricted to direct truth-telling mechanisms. Using this result, we prove that the provision of incentives to politicians can be separated from the provision of incentives to, and from redistribution, across individuals. This also enables us to develop a method of characterizing the best sustainable mechanism as a solution to a standard dynamic mechanism design problem subject to additional political economy and commitment constraints formulated only as functions of aggregate variables. Using this formulation, we provide conditions under which distortions created by political economy and commitment problems persist or disappear in the long run. In particular, if politicians are as patient as (or more patient than) the citizens, these distortions disappear asymptotically, and they remain positive otherwise. Finally, we extend our analysis to the case where the government cares both about its own consumption and the future utility of the citizens. This extension generalizes our results to environments where the key constraint is the time-inconsistency of a (partially) benevolent government.Download PDF
Helpman, Elhanan and Daniel Trefler. The New World Division of Labour. October, 2006.
CHINA AND INDIA ARE SETTING HISTORICAL RECORDS with the pace of their integration into the world economy. For those living in Organisation for Economic Co-operation and Development (OECD) countries that must compete with this remarkable growth, adjustments are needed. Many commentators believe that these adjustments will become so severe that the OECD countries will not be able to maintain their current standards of living. It is argued that China and India are poised to move beyond “merely” adopting OECD technologies and strategies (a remarkable ability in and of itself) and are ready to become technological juggernauts themselves. When this happens — and we are told that it will happen soon — China and India will have become an economic steamroller that hurts OECD countries. This scenario is possible, but not likely.Download PDF