The Lisbon Meeting on Institutions and Political Economy hosts 20 reputed authors who will present their work. The papers can be downloaded here.
In the 2013 edition, the Banco de Portugal award for best paper, in the amount of 2.000 euros, was awarded to Policy Uncertainty, Irreversibility, and Cross-Border Flows of Capital, by Brandon Julio and Youngsuk Yook. Congratulations!
Session 1: Persistent Attitudes and Cultural Change
We argue that the partition of ethnic groups following the Scramble for Africa only matters for development when the size of the partitioned group is relatively small. This is because relatively small ethnic groups have a small room to affect nation politics and the nation building process fostering their support for informal institutions which in turn represents a transaction cost. Using ethnic-‐level data we provide evidence at support of the relationship between the size of the partitioned group and development. Furthermore the analysis of data from the Afrobarometer shows that the persistence of informal/tribal institutions is one of the potential channels through which the size of the partitioned group affects development.
JEL Code: O10
Keywords: Partition, Ethnic Groups, Institutions Development
We experimentally investigate the extent to which social observability of one’s actions and the possibility of social non-monetary judgment affect the decision to engage in rule breaking behavior. We consider three rule breaking scenarios — theft, bribery and embezzlement — in the absence of any formal enforcement mechanism. By involving a student sample characterized by cultural heterogeneity due to immigration of ancestors to the US, we are able to investigate whether the effectiveness of informal social enforcement mechanisms is conditional on the cultural background of the decision-maker. A total of 52 countries are represented in our sample, ranging from Low Rule of Law countries such as Liberia and Nigeria to High Rule of Law countries such as Sweden and Norway. Our data provide evidence that people with different cultural backgrounds do respond differently to increased social observability of their actions. In particular, while subjects that identify culturally with a High Rule of Law country respond to social obervability and judgment by lowering their propensities to engage in rule breaking, subjects that identify with Low Rule of Law countries do not. Our findings suggest that development policies that rely purely on social judgment to enforce behavior may not work with Low Rule of Law populations.
JEL Codes: C90; D73; K42; Z10
Keywords: Theft, Corruption, Social Enforcement, Culture, Experiments
Widespread polygyny and near universal marriage characterizes many African countries today, which under balanced sex ratios is made possible by men’s marrying late, and women’s marrying early – and often. But why would men marry n wives for 1/nth of the time instead of monogamously? Costs include prolonged bachelorhood, early widowhood, fatherless children and a high degree of step-parenting. We trace general polygyny in Africa to the history of slave trade, arguing that the temporary removal of young men permanently reduced stigma against old men marrying young women. Exploiting distances to the Atlantic slave market, data are supportive: polygyny in Africa delays first marriage for men but does not predict life-long bachelorhood; and substantially raises under-five mortality.
JEL codes: N00, N37, O10
Keywords: General polygyny, African slave trade, social norms, stigma, multiple equi-libria, infant and child mortality.
We investigate the long-term political effects of early exposure to Berlusconi’s TV network, Mediaset, exploiting its staggered introduction over the national territory and variation in signal reception due to idiosyncratic geomorphological factors. We find that municipalities exposed to Mediaset prior to 1985 exhibit greater electoral support for Berlusconi’s party – between 1 and 2 percentage points – when he first ran for office in 1994, relative to municipalities that were exposed only later on. The difference is extremely persistent, disappearing only with the elections of 2013 – about 20 years after the entry of Berlusconi into politics. Any effect of differential exposure before 1985 can hardly be explained by partisan bias in the news, as the latter were introduced on Mediaset channels only starting in 1991, at which time the network was available to the entire population. Instead, we present evidence that earlier exposure to commercial TV is associated with a substantial decline in civic participation between 1981 and 1991, which later favored the political success of Berlusconi.
Session 2: Institutional Design and Political Accountability
Accountability is a cornerstone of democracy. Does the way parties select their candidates matter? When should parties favor a selection procedure? To answer these questions, we develop a novel model of elections. Effort provision by politicians increases voter welfare but the power of electoral incentives, the precision of the mapping from effort to electoral success, varies. Parties want to win the election and can select their candidates throughout an effort-based competition or another, effort-independent, procedure. We identify the optimal selection procedure as a function of the power of electoral incentives and electoral rules (we consider plurality rule, closed-list and open-list proportional representation). We prove that the competitiveness of the selection procedure and the power of electoral incentives, but not the competitiveness of the selection procedure and the power of electoral incentives, but not the electoral rules themselves, are substitutes. Allowing voters to differ ideologically, we also highlight that the competitiveness and the degree of decentralization of the candidate selection procedure are distinct facets of this procedure.
To understand how electoral reform affects political outcomes, one needs to assess its total effect, incorporating how the reform affects the outcomes given the political status quo (the mechanical effects) and the additional reactions of political agents (the psychological effects). We propose a framework that allow us to ascertain the relative magnitude of mechanical and various psychological effects. The research design is based on pairwise comparisons of actual and counterfactual seat allocation outcomes. We use the design to analyze a nationwide municipal electoral reform in Norway, which changed the seat allocation method from D’Hondt to Modified Sainte-Laguë. Even though this electoral reform is of a relatively small magnitude, we document clear psychological effects.
This paper investigates the consequences of hierarchical tax and expenditure limitations (TELs) on local democratic processes. Based on a theoretical model where state limitation of local government policy elicits a move from private value (ideological bias) to common value (candidate competence) voting, I exploit time-series and cross-locality variation in TEL rules in over 7,000 Italian municipalities during the 2000s to identify their impact on voter turnout and political competition. The difference-in-differences estimation results show that TELs provoke: 1) a fall in voter turnout; 2) a fall in the number of mayor candidates; 3) a rise in elected mayors’ win margins. The evidence is compatible with the hypothesis of hierarchical tax and expenditure limitations fading the ideological stakes of local elections, emphasizing candidates’ valence, and favoring voters’ party line crossing, thus questioning the influential accountability postulate of the fiscal decentralization lore.
JEL codes: D72; H77; C23.
Keywords: local elections, voter turnout, tax and expenditure limitations, fiscal decentralization
Autocratic regimes often limit access to information concerning the outside world, to prevent their citizenry from learning about the com- paratively poor performance of their economy. In this paper, we analyze the use of censorship, and model it as a moral hazard problem, in the context of an augmented Solow growth model. We find that higher tech- nological backwardness, lower quality of domestic institutions, low level of income inequality and low costs of collecting information about foreign economies lead to more restrictive and comprehensive censorship. These findings are consistent with stories of socialist dictatorships, like the Soviet Union or North Korea, where very restrictive forms of censorship were/are used. We also explain why the most restrictive forms of censorship, like political isolationism, are less popular now. We assume that censorship reduces opportunities for adoption of technologies, which results in un- derdevelopment, higher vulnerability to negative shocks, and potentially higher political turbulence. To avoid this outcome, a political regime can prefer not to implement the most strict forms of censorship. This finding is in line with censorship policy which is applied in nowadays China.
Session 3: Economic Consequences of Policy Uncertainty
In the context of an emission trading scheme, we study how uncertainty over the environmental policy affects firms’ investment in low-carbon technologies. We develop a three period sequential model that combines the industry and the electricity sectors and encompasses both irreversible and reversible investment possibilities for the firms. Additionally, we explicitly model the policy uncertainty in the regulator’s objective function as well as the market interactions that give rise to an endogenous price of permits. We find that uncertainty reduces irreversible investment and that the availability of both reversible and irreversible technologies partially eliminates the positive effect of policy uncertainty on reversible technology found in previous literature. Furthermore, we provide a framework that allows to assess the efficiency of different implementations of such a scheme.
JEL classification: D78, D80, L51, Q58
Keywords: Emission Trading Scheme, low-carbon investment, policy uncertainty, mechanism design, irreversible and reversible investment
Theory and evidence suggest that in an environment of well-anchored expectations, temporary news or shocks to economic variables, should not affect agents’ expectations of inflation in the long term. Our estimated structural VARs show that both long- and short-term inflation expectations are sensible to policy-related uncertainty shocks. A rise of long-term inflation expectations in times of economic contraction, in response to such shocks, suggests that heightened policy uncertainty observed during the recent years indeed raises concerns about future inflation. Furthermore, both monetary and fiscal policy-related uncertainties are significant for the negative dynamics in citizens’ trust in the ECB.
JEL classification: E02, E31, E58, E63, P16
Keywords: Policy uncertainty, central banks, inflation expectations, structural VAR
We examine the effects of government policy uncertainty on economic activity by em- ploying the timing of national elections around the world and observing variation across different types of cross border capital flows. We find that policy uncertainty has a dampening effect on foreign direct investment (FDI) around the world. FDI flows from US companies to foreign affiliates drop significantly during election periods. The electoral patterns in FDI flows are more pronounced in countries with higher propensities for policy reversals and when election outcomes are more uncertain. Our results highlight that irreversibility is an important channel through which uncertainty affects investment decisions. Specifically, the electoral cycles are present in relatively irreversible FDI flows but not in foreign portfolio investment flows.
We assess the impact of U.S. trade policy uncertainty (TPU) toward China in a tractable general equilibrium framework with heterogeneous firms. We show that increased policy uncertainty reduces investment in export entry and technology upgrading, which in turn reduces trade flows and real income for consumers. We apply the model to analyze China’s export boom around its WTO accession and argue that in the case of the U.S. the most important policy effect was a reduction in TPU: granting permanent normal trade relationship status and thus ending the annual threat to revert to Smoot-Hawley tariff levels. We construct a theory-consistent measure of TPU and estimate that its elimination upon WTO accession can explain up to 1/3 of the observed Chinese export growth to the U.S. in 2000-2005 – the equivalent of an applied tariff reduction of up to 8.5 percentage points. We also estimate a welfare cost of U.S. TPU for its consumers.
Session 4: Diversity in Economics: Documentation, Measurement and Impact on Development and Institutions
Empirical studies that highlight the negative impact of ethnolinguistic diversity on economic, institutional and political development mostly rely on the traditional ethno-linguistic fragmentation (ELF) index based on the Herfindahl-index of concentration. Although the obvious drawback that it is able to take into account only the first spoken languages (mother tongues or home languages in the African context) and fails to consider additional ones has been articulated for a long time, due to lack of appropriate sources any of the existing measures could overcome this problem. Utilizing individual level data available for twenty Sub-Saharan African countries drawn from the 4th Round of the Afrobarometer Survey, we introduce the Communication Potential Index (CPI) that is able to control for polylingualism. The CPI is described as the probability that two randomly selected individuals in the society can communicate with each other based on commonly spoken languages. In order to demonstrate how to use the CPI as a potential heterogeneity measure to the existing indices on the one hand, or an accompanying variable that might counterbalance the negative effects of fragmentation on the other, we conduct empirical analysis on the relationship between diversity and the level of generalized trust. The basic statistical tools (correlation and OLS regression analyses), and the more advanced multilevel technique suggest that development research might benefit from this new index.
Keywords: Sub-Saharan Africa, communication potential, diversity measurement, generalized trust
Note: This paper is a preliminary version and a work-in-progress. Please do not cite.
We show that cultural dissimilarity dampens bilateral trade. More importantly, this paper is the first study to probe Huntington’s the Clash of Civilizations hypothesis from an economic perspective. We analyze the dynamics of the effect of cultural heterogeneity on the trade and provide evidence that the negative influence of cultural differences on trade is far more accentuated in the post-Cold War era than during the Cold War. For instance, two countries with distinct religious majorities have 35% lower bilateral import flows during the post-Cold War period compared to those countries sharing the same majority religion, whereas this effect is less than half, 16%, during the Cold War. In addition, we provide an explanation for the differential impact of cultural and ideological dissimilarities, we find that cold-war ideological blocs were the reason for the suppression of cultural differences. Therefore, cultural differences come to the forefront as a trade barrier only in the post-Cold War period, after the demise of ideological rivalries.
JEL Classification: F1, Z10
Keywords: Cold War, culture, economic clash, trade
We study the design of promotions in an organization where agents belong to groups that advance their cause. Examples and applications include political groups, ethnicities, agents motivated by the work in public sector and corruption. In an overlapping generations model, juniors compete for promotions. Seniors have two kinds of discretion: direct discretion which allows to immediately advance their cause and promotion discretion (“patronage”) which allows to bias the promotion decision in favour of the juniors from their group. The principal maximizes the juniors’ output by choosing the extent of the patronage. The main trade-off is that a higher patronage increases the attractiveness of the senior position but it discourages the effort since the promotion is not entirely merit-based. Various extensions and applications are discussed. In particular, we consider asymmetric and antagonistic groups, the principal preferring one group over the other and the two groups caring about the same cause but to a different extent.
JEL codes: D73, J70, J45, H41.
Keywords: motivated agents, contest, promotion, patronage, bureaucracy
A number of recent studies have shown that certain aspects of political behavior have a genetic component. In this study we investigated the effects of several candidate genes on the individual preferences toward the redistribution of income. We used a sample of over 2000 individuals, collected across six Russian regions. A measure of redistribution preferences was constructed based on six questions. For each individual we also gathered data on the polymorphisms of three genes MAOA, 5HTT, and COMT. We found that the 5HTT gene has a small but significant effect on the individual’s preference toward redistribution. We have shown that the individuals with two copies of the L allele prefer significantly more redistribution. Our study included controls for age, education, and income. We also included population fixed effects to control for genetic drift. The study is the first ever to identify specific genes that affect individual redistribution preferences.
Session 5: Labor Market Institutions: Dual Labor Markets, Minimum Wage and Unions
The decision to cease working is traditionally influenced by a wide set of socio-economic and environmental variables. In this paper, we study transitions out of work for 26 EU countries over the period 2004-2009 in order to investigate the determinants of retirement based on the Eurostat Survey on Income and Living Conditions (EU-SILC). Applying standard survivor analysis tools to describe exits into retirement, we do not find any significant differences in the patterns into retirement between the average euro area and EU non-euro area countries. Moreover, we find that shifts into retirement have increased during the onset of the 2009 economic and financial crisis. Income, together with flexible working arrangements, is found to be important as regards early retirement decisions, compared to retiring beyond the legal retirement age. Finally, we show that institutional measures (such as, state/health benefits, minimum retirement age) could not be sufficient alone if individuals withdraw earlier from the labour market due to a weakening of their health. Especially, these latter results are of importance for structural and macroeconomic policy, for instance, in increasing the employment of both people and hours worked against the background of population ageing.
JEL Classification: J14, J26, C41 Keywords: Retirement, ageing population, hazard model, duration analysis, EU countries.
Mandated employment protection reduces wages of workers by shifting both the demand and supply schedules. In a segmented labor market, a reform of employment protection is expected to have an asymmetric impact on wages of entry and incumbent jobs. We explore a reform that increased the employment protection of open-ended contracts for a well-defined subset of firms (treated), while leaving it unchanged for other firms (control). The causal evidence obtained with this quasi-experiment points to a reduction in wages for new open-ended and fixed-term contracts and no impact on wages of more tenured workers. The reductions estimated for entrants are on the -0.7 to -0.5 percentage points range. This result is consistent with a high degree of substitution between open-ended and fixed-term contracts and a high flexibility of wages of new matches. The impact on wages is heterogeneous across sectors and worker characteristics, such as gender, age, and skills.
JEL Codes: J31, J32, J63
Keywords: Wages, Two-tier systems, Quasi-experiment, Employment protection
Dismissal protection has experienced many statutory changes in Germany in the past decades. This paper estimates the effects of dismissal protection on the hazard of leaving the establishment using as identification that workers employed before the legal amendment maintained their previous dismissal protection. Utilizing linked employer-employee data (LIAB), the results hint to a higher hazard during the first six month of seniority and a smaller hazard thereafter if dismissal protection is granted. I do not find evidence for a positive effect of dismissal protection on matching quality.
Keywords: Job Security, Dismissal Protection, Cox Proportional Hazard
Under credit market imperfections, the marginal productivity of capital will not necessarily be equalized, resulting in misallocation and lower output. Preferential interest rate policies are often used to remedy the problem. This paper constructs a general equilibrium model with heterogeneous agents, imperfect enforcement and costly intermediation. Occupational choice and firm size are determined endogenously by an agent’s type (ability and net wealth) and credit market frictions. The credit program subsidizes the interest rate on loans and requires a fixed application cost, which might be null, in the form of bureaucracy and regulations. First, we find that the interest credit subsidy policy has no significant effect on output, but it can have negative effects on wages and government finances. The program is largely a transfer from households to a small group of entrepreneurs with minor aggregate effects. We include a transition analysis. Second, we provide quantitative estimates of the effects of reducing the frictions directly. When comparing differences in U.S. output per capita in baseline and simulations with counterfactually high frictions such as those observed in Brazil, intermediation costs and enforcement explain about 20-25% of the output gap.
JEL Classification: E60, G38, O11
Keywords: Financial frictions, Credit subsidy, Occupational choice, Development, Entrepreneur