Moral Hazards,Bankruptcy Costs,and International Financial Capital Mobility*

Using a model with moral hazard and bankruptcy costs, we show that the direction of intertemporal trade between countries depends on differences in their autarkic distributions of wealth. We also examine the consequences of redistribution policies and bail‐out policies in this framework. We show that, in the presence of bankruptcy cost and capital market imperfections due to moral hazard, the very rich and the very poor do not undertake any risk and choose to be passive lenders. Only individuals whose wealth lies within an intermediate range choose to become entrepreneurs. Redistributive policies influence the supply of entrepreneurship and autarkic interest rates.     

The effectiveness of fiscal institutions: International financial flogging or domestic constraint?

Many have argued that financial markets are crucial in ensuring that governments maintain sustainable fiscal balances - the so called ‘market discipline hypothesis’. A recent version of this theory holds that both fiscal rules and fiscal transparency are necessary to enable markets to discipline overspending governments. I argue, however, that while these fiscal institutions are effective at improving governments fiscal balances, financial markets are likely not the causal mechanism which discipline governments’ fiscal policies. Instead, I propose that fiscal rules and transparency promote better budget balances because domestic political actors use fiscal institutions to constrain executive policymaking. I test these competing hypotheses of why these fiscal institutions are effective – financial markets vs political competition – and find that country budget balances are increased not as a consequence of financial markets, but when the level of political competition and civil society engagement is sufficiently high. These results are robust to accounting for the possible selection bias of who adopts fiscal institutions.     

Why not a political Coase theorem? Social conflict, commitment, and politics

Do societies choose inefficient policies and institutions? An extension of the Coase theorem to politics would suggest the answer is no. This paper discusses various approaches to political economy and develops the argument that there are strong empirical and theoretical grounds for believing that inefficient policies and institutions are prevalent. We conclude that these inefficient institutions and policies are chosen because they serve the interests of politicians or social groups that hold political power at the expense of the rest. The theoretical case depends on commitment problems inherent in politics; parties holding political power cannot make commitments to bind their future actions because there is no outside agency with the coercive capacity to enforce such arrangements. Journal of Comparative Economics 31 (4) (2003) 620–652.     

Markovian Social Security in Unequal Societies

In this paper, we develop a dynamic political‐economic theory of social security. We analytically characterize a Markov perfect equilibrium and find that the interaction between Markovian tax policy and tax distortion on private investment in human capital shapes an intertemporal policy rule, linking taxes positively over time. By allowing current taxpayers to influence their own future social security benefits, the positive intertemporal tax linkage provides political support for social security. Moreover, this positive tax linkage leads to a negative correlation between wage inequality and the size of a nation's social security system, consistent with the empirical pattern observed across OECD countries.     

Electoral Systems, Legislative Process, and Income Taxation

We characterize the equilibrium income tax schedules and the optimality conditions under two types of political institutions, a two-party plurality system with a single district, and one with multiple districts where tax policies are determined through a legislature. It is shown that the exogenous social welfare functions in the optimal taxation literature can be endogenously determined by explicitly modeling the political institutions, which put different welfare weights on different subsets of the population. This paper also extends the Coughlin probabilistic voting model and the Baron–Ferejohn legislative bargaining model to a function space.     

Do Institutions Cause Growth?

We revisit the debate over whether political institutions cause economic growth, or whether, alternatively, growth and human capital accumulation lead to institutional improvement. We find that most indicators of institutional quality used to establish the proposition that institutions cause growth are constructed to be conceptually unsuitable for that purpose. We also find that some of the instrumental variable techniques used in the literature are flawed. Basic OLS results, as well as a variety of additional evidence, suggest that (a) human capital is a more basic source of growth than are the institutions, (b) poor countries get out of poverty through good policies, often pursued by dictators, and (c) subsequently improve their political institutions.     

Public finance and the optimal speed of transition*

We develop a general equilibrium model that jointly considers the influence of capital accumulation constraints and of labour market frictions on the process of transition. We endogenize the economic and budgetary costs of different government policies and show that, early in transition, governments ought to subsidize state firms. Provided that intertemporal commitment is feasible, this policy limits the initial output fall, which relaxes capital accumulation constraints, accelerates transition, and increases welfare. Moreover, by resorting to indirect – instead of direct – taxes, governments can bring the path of transition closer to the first best. Yet, political pressures may induce a policy of suboptimal subsidization.     

Political instability and labour market institutions

This paper investigates the relationship between political instability and labour market institutions. We develop a theoretical model in which political instability creates incentives for a government to introduce labour market regulation in the economy. The distortionary effect of regulation on unemployment effectively puts a constraint on the design of fiscal and public policies. We empirically investigate these predictions using panel data for 21 OECD countries for the period 1985–2006. Our results are consistent with the view that political instability is associated with more regulated labour markets, lower labour taxation, and lower unemployment benefit replacement rates.     

Privatisation in Russia Has Led to Criminalisation

Abstract
Russia has recently embarked on a dramatic program of privatisation as part of the process of shock therapy which aims to convert the command economy to a market economy. This program has been undertaken in the absence of a well-developed set of institutions needed for the proper functioning of a market economy. These institutions include a legal system, a related system of property rights, a credit system, a system of commercial banks, classified advertising, an accounting system and others including a sound currency and a social safety net. In the absence of these institutions the incentives facing agents in economic transactions have been perverted. This has led to criminalisation of the economy, dramatic falls in production, loss of confidence in all aspects of commerce, and political instability. The recent Russian experience of privatisation has important lessons for other economies in transition, for developing economies and for economic theory.     

THE POLITICAL ECONOMY OF BUDGET DEFICITS

In Leachman et al. (2005) we use the multicointegration approach to test for sustainable fiscal budgeting processes in a stochastic setting in 15 industrialized countries. In this paper, we extend the analysis in order to rank these same countries as well as an additional three, according to the degree to which their budget processes are sustainable. Rankings are related to theories regarding the political economy of budget deficits. Evidence clearly indicates that fiscal performance is better where fiscal budgeting institutions are strong. Additionally, we find that in conjunction with fiscal strength, greater degrees of federalism positively affect intertemporal budget management.     

An African Growth Trap: Production Technology and the Time-Consistency of Agricultural Taxation, R&D and Investment

Why do so many African governments consistently impose high tax rates and make little investment in productive public goods, when alternative policies could yield greater tax revenues and higher national income? The authors posit and test an intertemporal political economy model in which the government sets tax and R&D levels while investors respond with production. Equilibrium policy and growth rates depend on the initial cost structure. It is found that in many (but not all) African countries, low tax/high investment regimes would be time‐inconsistent, primarily because production technology requires relatively large sunk costs. For pro‐growth policies to become sustainable, new political commitment mechanisms or new production techniques would be needed.     

Superneutrality, indeterminacy and endogenous growth

In this paper, we explore the possibility of having money as a source of indeterminacy in endogenous growth models. We adopt the simple Ak model of endogenous growth to be the main analytical vehicle whose balanced growth paths do not display local indeterminacy. Money is introduced via either a general cash-in-advance (CIA) constraint or a pecuniary transactions costs (PTC) technology. It is shown that local indeterminacy of the dynamics is due to the presence of an intertemporal substitution effect on capital accumulation that works against and dominates the conventional inflation effect of Tobin [1965, Money and economical growth. Econometrica 33(4), Part 2, 671]. If money is growth-rate superneutral, then the intertemporal substitution effect is absent so that local indeterminacy cannot occur. Finally, the strength of the intertemporal substitution effect depends positively on the intertemporal elasticity of substitution in consumption.     

Democracy,Rule of Law,Corruption Incentives,and Growth

We bridge the gap between the standard theory of growth and the mostly static theory of corruption. Some public investment can be diverted from its purpose by corrupt individuals. Voters determine the level of public investment subject to an incentive constraint equalizing the returns from productive and corrupt activities. We concentrate on two exogenous institutional parameters: the “technology of corruption” is the ease with which rent‐seekers can capture a proportion of public spending. The “concentration of political power” is the extent to which rent‐seekers have more political influence than other people. One theoretical prediction is that the effects of the two institutional parameters on income growth and equilibrium corruption are different according to the constraints that are binding at equilibrium. In particular, the effect of judicial quality on growth should be stronger when political power is concentrated. We estimate a system of equations where both corruption and income growth are determined simultaneously and show that income growth is more affected by our proxies for legal and political institutions in countries where political rights and judicial institutions, respectively, are limited.     

States as Ecologies of Political Enterprises

This paper seeks to overcome an antinomy within the theory of political economy: while market outcomes are treated as resulting from polycentric competition, political outcomes are treated as resulting from hierarchic planning. We seek to overcome this antinomy by treating political outcomes as likewise resulting from polycentric competition, taking due account of relevant institutional differences. For example, a parliamentary assembly is treated as an extra-ordinary form of investment bank that intermediates between the sponsors of enterprises and those within the citizenry who have means to support those enterprises. What results is a theory in which political programs emerge in largely bottom-up fashion through complex networks of transactions. Much of the inspiration for this paper arises from the Italian School of Public Finance, particularly Mazzola, Montemartini, Pantaleoni and de Viti de Marco.     

A political economy approach to endogenous industrial policies

This paper uses a political economy perspective to study the endogenous formation of economic policies and its interplay with political institutions. This paper provides a novel view that both the institutions and economic development status are essential factors in endogenously determining economic policies. The model aims to explain both the differences in the degree of adopting industrial policies as well as the differences in the types of industrial policies being implemented. Using a concise framework with two country-specific characteristics, the baseline model can capture three main types of industrial policy platforms of interest. In a country where voters’ political awareness is positively skewed and press freedom is relatively low, pro-heavy industry policies would be present most of the time; South Korea is representative of this type of countries. In a country where voters’ political awareness is positively skewed and press freedom is relatively high, there is usually an active industrial policy, though the target of the policy changes over time. Specifically, the policy is favoring the industry of which the industry-specific TFP is relatively high; Japan is representative of this type of countries. In a country where voters’ political awareness is negatively skewed and press freedom is relatively high, there is usually no active industrial policy; the U.S. is representative of this type of countries.     

双重二元结构下化解西部农村融资难的对策——基于演化博弈理论的研究

长期的赶超战略使我国形成了城乡和东西叠加的双重二元结构。本文通过对双二元结构下的政府政策与西部农村金融机构的支农行为进行演化博弈分析,得出如下结论:政府的激励、约束政策以及西部农村金融机构支农的净损失是影响机构支农和政府缩小双重二元结构差距目标实现的决定因素;在实现政府目标的初期,约束政策较激励政策更有效;随着政府目标实现程度的提高,激励政策将发挥更大效用;目前政府实行的单向激励政策作用不大;现阶段政府应该在强化约束政策的同时进一步加大激励政策力度,使西部农村金融机构在积极支农的同时实现可持续发展。     

Political instablility and seigniorage: An inseparable couple — or a threesome with debt?

In the literature, political instability is shown to raise seigniorage and/or debt, but there is no debt‐seigniorage trade‐off. However, what happens when the IMF gets involved? Based on a political economy model of intertemporal public finance this paper presents qualitatively new and robust results. First, political instability causes myopic government behaviour and produces more debt, not more seigniorage. Second, IMF policies requiring debtor countries to achieve both monetary and fiscal stability at the same time are ineffective. Third and surprisingly at first sight, debt conditionality aiming at monetary stability is particularly effective in heterogeneous societies with unstable governments.     

An Economic Theory of the Evolution of Governance and the Emergence of the State

Individual's desires to expand wealth in the face of scarcity underlie the evolution of rules and institutions of governance, as individuals attempt to reduce the transactions costs that impede coordination and motivation in an uncertain world. Some wealth-seeking individuals have or develop comparative advantages in violence, however, and behavioral rules and governing institutions may evolve to coordinate joint production of extortion too. The process by which such institutions evolve into a state is discussed. To illustrate the plausibility of this theory, various historical and modern state and non-state governance institutions are shown to be consistent with it.     

Debt Neutrality and the Infinite–Lived Representative Consumer

In this paper, we study the intertemporal equilibria of an infinite–lived representative agent model with public debt. We show that for a given path of government expenditures, there generally exists a continuum of equilibria depending on various debt policies. These equilibria are characterized by different paths of consumption and leisure. Two examples illustrate the results: in the first one consumption and leisure may converge to zero, in the second one consumption goes to infinity while leisure goes to its maximum value. In a third example with externalities à la Romer, the standard intertemporal equilibrium with zero public debt may be dominated by other intertemporal equilibria.     

Political Connections and Firm Performance in Chinese Companies

This study uses panel data analysis to examine the relationship between political connections and firm performance in Chinese firms from 2004 to 2008. We define firm‐level political connections and demonstrate a robust result for the positive relationship between political connections and firm performance. In addition, we integrate the effects of ownership structure, related‐party transactions and political connections into our analysis and continue to show a positive relationship. We show that political connections dampen the negative effect on firm value of related‐party transactions. Finally, we demonstrate channels through which the benefits of political connections are realized in terms of greater cash holdings, larger long‐term loans, lower financing costs, larger sales and lower sales costs. Our results indicate that state‐owned and non‐state‐owned enterprises use political connections equally effectively to enhance performance.