Working Papers from the Institutions, Organizations & Growth Program
Anderson, Siwan; Francois, Patrick and Kotwal, Ashok. 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
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
Bobonis, Gustavo J. 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
Besley, Tim 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
Besley, Tim; 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
Besley, Tim 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
Bombardini, Matilde; 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
Besley, Tim 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
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
Bombardini, Matilde 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
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
Acemoglu, Daron; 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