The Lisbon Meeting on Institutions and Political Economy hosts 20 reputed authors who will present their work. The papers can be downloaded here.
Session 1: Political Economy of Development
I analyze the impact on identity manipulation of the creation of an “agricultural caste” category by the Punjab Alienation of Land Act (1901), the membership of which granted access to various advantages on the land market. Using original data built from the census of Punjab from 1881 to 1921, I show, using double and triple differences strategies, that caste groups manipulated their caste identity in order to claim an affiliation to the castes registered as agricultural. This points to the ability of caste groups to manipulate their identity in response to economic incentives. More broadly, it questions the impact of any ethnic based policy on the definition of ethnic groups themselves, and gives a measure of the extent of mistargeting that those type of policies can lead to.
Are family ties a complement to or a substitute for social capital? We establish a positive relationship between family ties and civic virtues, as captured by disapproval of tax and benefit cheating, corruption, and a range of other dimensions of exploiting others for personal gain. We find that family ties are a complement to social capital, using within and across country evidence from 83 nations spanning a quarter of a century, as well as data on second generation immigrants. Our results contrast with earlier findings that family ties are negatively related to political participation, and hence a substitute for social capital. Furthermore, we find that those who are engaged in political activities, like demonstrators, are not necessarily those with the highest civic virtues. Our results indicate that political participation may, on the margin, be motivated by personal gain.
JEL codes: A13, H26, D73, P16, Z13
Intermediaries facilitate exchanges between buyers and sellers. Intermediation activities are an important part of the formal economy. Anecdotal evidence suggests that intermediaries are ubiquitous in corrupt activities; however, empirical evidence on their role as facilitators of corrupt transactions is scarce. This paper asks whether, besides eliminating uncertainty, intermediaries facilitate corruption by reducing the moral or psychological costs of possible bribers and bribees. Indeed, intermediaries might create psychological distance between the briber and the corrupt transaction, and might institutionalize corruption. We address our research question using a specifically designed bribery lab experiment that simulates petty corruption trans- actions between private citizens and public officials. The experimental data confirm that intermediaries lower the moral costs of citizens and officials and, thus, increase corruption.
Session 2: Accountability
We propose a political-economics model of decentralization and collusion to explain high death rates in the coalmine industry in China, where the local government allows the firms to choose dangerous but high-payoff production technology when collusion is feasible. In terms of death rates, our model predicts a positive effect of decentralization, a negative effect of media exposure and a positive effect of collusion. We collect a provincial level panel dataset from 1995 to 2005 and compare the decentralization period (1998 to 2000) with the adjacent centralization periods. We find that decentralization increases death rates and that media exposure (proxied by newspapers published per 1000 individuals) decreases death rates. Moreover, given decentralization, death rates are about 100% higher in provinces where the governor in charge of coalmine safety is a native or has been in office longer than average.
Keywords: decentralization, collusion, public bads
This paper studies party discipline in congress within a political agency framework with retrospective voting. Party discipline serves as an incentive device to induce office-motivated congress members to perform in line with the party leadership’s objective of controlling both the executive and the legislative branches of government. I show first that the same party is more likely to control both branches of government (i.e., unified government) the stronger the party discipline in the congress is. Second, the leader of the governing party imposes more party discipline under unified government than does the opposition leader under divided government. Moreover, the incumbents’ aggregate performance increases with party discipline, so a representative voter becomes better off.
JEL classification: D72.
Keywords: Party discipline; Political agency; Retrospective voting; Office-motivated politicians.
Session 3: Micro-Level Analysis of Conflict
We construct a dynamic theory of civil conflict hinging on inter-ethnic trust and trade. The model economy is inhabited by two ethnic groups. Inter-ethnic trade requires imperfectly observed bilateral investments and one group has to form beliefs on the average propensity to trade of the other group. Since conflict disrupts trade, the onset of a conflict signals that the aggressor has a low propensity to trade. Agents observe the history of conflicts and update their beliefs over time, transmitting them to the next generation. The theory bears a set of testable predictions. First, war is a stochastic process whose frequency depends on the state of endogenous beliefs. Second, the probability of future conflicts increases after each conflict episode. Third, “accidental” conflicts that do not reflect economic fundamentals can lead to a permanent breakdown of trust, plunging a society into a vicious cycle of recurrent conflicts (a war trap). The incidence of conflict can be reduced by policies abating cultural barriers, fostering inter-ethnic trade and human capital, and shifting beliefs. Coercive peace policies such as peacekeeping forces or externally imposed regime changes have instead no persistent effects.
JEL classification: D74, D83, O15, Q34.
Keywords: beliefs, civil war, conflict, cultural transmission, ethnic fractionalization, human capital investments, learning, matching, peacekeeping, stochastic war, strategic complementarity, trade.
Insurgents in civil conflict typically target both government forces and civilians. This paper examines a rebel group’s strategic choices of the targets and the intensity of violence. In a simple theoretical framework, negative labour income shocks are predicted to: (i) increase violence against civilians to prevent them from being recruited as police informers; (ii) increase violence against the government through increased rebel recruitment, but only if the rebels’ tax base is sufficiently independent from local labour productivity. These theoretical predictions are confirmed in the context of India’s Naxalite conflict between 2005 and 2010. Exploiting variation in annual rainfall in a panel of district-level casualty numbers, I find that negative rainfall shocks: (i) increase Maoist violence against civilians; (ii) increase Maoist violence against security forces, but only in those districts in which the Maoists have access to key mineral resources.
Keywords: Conflict, Violence against Civilians, Organisation of Rebel Groups, Maoist Rebels in India, Income Shocks, Natural Resources.
This paper proposes a specific mechanism to explain differences in political institutions based on the asymmetric and uncertain costs of civil conflicts. Asymmetry implies that the net benefit of fighting an insurgency is not shared equally by elite’s members. But uncertainty implies that these benefits are more evenly distributed ex-ante. The members of the elite face a commitment problem: they would like to commit in advance to a strong response to insurgencies, but expost they have the incentives to block any response if the conflict mainly affects other members of the elite. One way of solving this is empowering the executive so he may react forcefully to conflicts, despite the opposition of some fraction of the elite. In the model this group has to decide on the constraints imposed on the executive. Fewer constraints lead to higher risk of expropriation. But more constraints lead to a suboptimal response to conflicts. The main prediction is that, conditional on asymmetric and uncertain costs, the higher is the likelihood of a civil conflict in the future, the lower are the constraints imposed on the executive. The paper validates empirically this implication using two types of evidence. First, it uses a sample of former colonies that became independent after WWII and geographic variables to identify the exogenous component of the likelihood of civil conflicts at the moment of the independence. Second, the model is used to explain the political events in The Americas after independence. Countries less prone to internal conflicts were the ones that imposed more constraints on the executive during the second half of the nineteenth century.
Somaliland has recently developed an unexpected democracy after seceding from chaos-ridden Somalia, while turning its port of Berbera into a success story, competing successfully with the long established ones in the Horn of Africa. A simple game-theoretic model is used to explain why the home-grown democratic institutions that developed in Somaliland are a key factor in making Berbera a credible outlet for the external trade of neighboring landlocked Ethiopia. The model shows that redistributing some of the resources from this trade is a key condition for sustaining this efficient political equilibrium.
Session 4: Issue Biases in Representative Democracies
The focus of this paper is the analysis of the persistent lawlessness attitude observed in institutionally weak economies even during period of structural market reforms, such as transition countries. The paper addresses a mechanism of information diffusion on institutional quality of the economy according to which the executive of the government (fully informed) confronts a continuum of agents (partially informed) keen to either strip assets or to build assets’ value. High uncertainty and high sunk costs in rule of law enforcement push the economy towards anarchy. On the contrary, if the assets’ value and the cost of asset-stripping are high, the economy will be characterised by rule of law enforcement. High institutional quality can increase the likelihood of rule of law enforcement if there is enough information about the strength of institutions. However, if good institutions and good information about institutions do not come together, there is scope for the co-existence of poor property rights protection and market reforms implementation. (JEL: D81, K42, P26)
Why is intraparty discipline higher in parliamentary than in presidential regimes? Does it matter for policy? We propose a model of pre-electoral politics in which parties choose not only their ideological position but also their internal discipline. Discipline reduces policy uncertainty for voters. We show that weak institutional constraints, as in a Presidential regime, induce parties to choose low levels of discipline. Tighter constraints or reduced voter polarization induces them to choose high levels of discipline. This highlights a multiplier effect of party discipline: the parties’ best responses amplify changes in institutional constraints. These effects find historical support in the evolutions of party discipline in the UK, the US, and France. We also show how polarization varies with institutions and voter preference heterogeneity. The latter prediction finds support in the observed dynamics of interparty polarization in the US.
Keywords: parties as brands, political regime, intraparty discipline, polarization
This paper examines whether the control of the regional layer of government by one party provides benefits for his co-partisans at the local level, both in terms of votes obtained at the local elections and in terms of inter-governmental transfers. Using a new database covering more than 2000 Spanish municipalities during two terms of office (2000-03 and 2004-07) and a Regression Discontinuity design, we document a very strong and robust effect: aligned local incumbents obtain around 20% more votes at the local elections and around 250% more per capita grants than similar unaligned incumbents. The effect is stronger when: regional elections are less competitive, the same party has controlled the regional government during many terms, there is monopoly in the allocation of transfers, and local governments are more dependent on transfers.
Keywords: C2, D72 JEL Codes: political parties, inter-governmental transfers, pork barrel
Session 5: Political Economy of Multi-layered Governments
Inspired by the current debate over the future of the monetary union in Europe, this paper provides a simple model for the determination of the conditions of survival of the common good, which requires the creation of an effective fiscal union. We highlight the importance of institutional design and varying decision weights for the enlargement of the space for consensus. Our model deepens the discussion of economic risk and political risk in fiscal federalism, and highlights the related roles of country heterogeneity and institutional design in enlarging the scope for cross country fiscal agreements.
JEL Classification: D70, D78, E62, F15 and H77
Keywords: autarky, consensus, fiscal union, heterogeneous countries, uncertainty and voting weights
This article offers an empirical answer to the question of which institutional arrangements can help to keep the accounts of sub-national governments in balance. I take into consideration the autonomy that these governments have in raising their revenues and fiscal rules as formulated in law or constitutions. The former works as an implicit constraint since governments with more autonomy might assume higher responsibility for accumulated deficits. The latter works as a direct explicit constraint on sub-national borrowing, but might be subject to endogeneity through preferences for fiscal responsibility. Therefore, my estimations take this potential source of bias into account by using IV techniques for fiscal rules. Results from my original dataset, covering full information for 14 years of all EU15 countries, show that the effectiveness of tools depends critically on the federal background. Fiscal rules work in unitary countries, while higher tax autonomy yields lower deficits in federations.
Keywords: sub-national deficits, fiscal rules, soft budget constraints, fiscal federalism
JEL Classification Numbers: H71, H74, E61
This paper argues that corruption in developing countries has deep historical roots; going all the way back to the characteristics of their colonial experience. The degree of European settlement during colonial times is used to differentiate between types of colonial experience, and is found to be a powerful explanatory factor of present-day corruption levels. The relationship is non-linear, as higher levels of European settlement resulted in more powerful elites (and more corruption) only as long as Europeans remained a minority group in the total population.
In this paper we study mediation when two countries might fight a war over the ownership of a resource. Under complete information mediation is always successful, but a little bit of asymmetric information or some imperfect observability may render mediation impossible