Politics and economics in weak and strong states

While much research in political economy points out the benefits of “limited government,” political scientists have long emphasized the problems created in many less-developed nations by “weak states,” which lack the power to tax and regulate the economy and to withstand the political and social challenges from non-state actors. I construct a model in which the state apparatus is controlled by a self-interested ruler, who tries to divert resources for his own consumption, but who can also invest in socially productive public goods. Both weak and strong states create distortions. When the state is excessively strong, the ruler imposes such high taxes that economic activity is stifled. When the state is excessively weak, the ruler anticipates that he will not be able to extract rents in the future and underinvests in public goods. I show that the same conclusion applies in the analysis of both the economic power of the state (i.e., its ability to raise taxes) and its political power (i.e., its ability to remain entrenched from the citizens). I also discuss how under certain circumstances a different type of equilibrium, which I refer to as “consensually strong state equilibrium,” can emerge whereby the state is politically weak but is allowed to impose high taxes as long as a sufficient fraction of the proceeds are invested in public goods. The consensually strong state might best correspond to the state in OECD countries where taxes are high despite significant control by the society over the government.     

Competing engines of growth: Innovation and standardization

We study a dynamic general equilibrium model where innovation takes the form of the introduction of new goods whose production requires skilled workers. Innovation is followed by a costly process of standardization, whereby these new goods are adapted to be produced using unskilled labor. Our framework highlights a number of novel results. First, standardization is both an engine of growth and a potential barrier to it. As a result, growth is an inverse U-shaped function of the standardization rate (and of competition). Second, we characterize the growth and welfare maximizing speed of standardization. We show how optimal protection of intellectual property rights affecting the cost of standardization vary with the skill-endowment, the elasticity of substitution between goods and other parameters. Third, we show that, depending on how competition between innovating and standardizing firms is modelled and on parameter values, a new type of multiplicity of equilibria may arise. Finally, we study the implications of our model for the skill premium and we illustrate novel reasons for linking North–South trade to intellectual property rights protection.     

Economies of scale and trade policy: The median voter model revisited

Why do some political economy models perform so poorly in predicting actual trade policy? Do scale economies provide the missing puzzle to our understanding of the anti-trade bias? By integrating economies of scale in production, this paper theoretically reinstates the median voter model as in Mayer [Mayer, W. (1984). Endogenous tariff formation. The American Economic Review, 74, 970–985] as a suitable political economy model in predicting trade policy. The modified model generates the scope for the anti-trade bias and predicts that sometimes economic, rather than political, considerations may lead to restrictive trade.     

Markets versus governments

We provide a simple framework for comparing market allocations with government-regulated allocations. Governments can collect information about individuals’ types and enforce transfers across individuals. Markets (without significant government intervention) have to rely on transactions that are ex post beneficial for individuals. Consequently, governments achieve better risk sharing and consumption smoothing than markets. However, politicians in charge of collective decisions can use the centralized information and the enforcement power of government for their own benefits. This leads to political economy distortions and rents for politicians, making government-operated allocation mechanisms potentially worse than markets. We provide conditions under which it is ex ante beneficial for the society to tolerate the political economy distortions in exchange for the improvement in risk sharing. For example, more effective controls on politicians or higher discount factors of politicians make governments more attractive relative to markets. Moreover, when markets cannot engage in self-enforcing risk-sharing arrangements and income effects are limited, greater risk aversion and greater uncertainty make governments more attractive relative to markets. Nevertheless, we also show theoretically and numerically that the effect of risk aversion on the desirability of markets may be non-monotonic. In particular, when markets can support self-enforcing risk-sharing arrangements, a high degree of risk aversion improves the extent of risk sharing in markets and makes governments less necessary. The same pattern may also arise because of “income effects” on labor supply. Consequently, the welfare gains of governments relative to markets may have an inverse U-shape as a function of the degree of risk aversion of individuals.     

Holdups and Efficiency with Search Frictions

A natural holdup problem arises in a market with search frictions: Firms have to make a range of investments before finding their employees, and larger investments translate into higher wages. In particular, when wages are determined by ex post bargaining, the equilibrium is always inefficient: Recognizing that capital-intensive production relations have to pay higher wages, firms reduce their investments. This can only be prevented by removing all the bargaining power from the workers, but this, in turn, depresses wages below their social product and creates excessive entry of firms. In contrast to this benchmark, we show that efficiency is achieved when firms post wages and workers can direct their search toward more attractive offers. This efficiency result generalizes to an environment with imperfect information where workers only observe a few of the equilibrium wage offers. We show that the underlying reason for efficiency is not wage posting per se, but the ability of workers to direct their search toward more capital-intensive jobs.     

Directed Technical Change

For many problems in macroeconomics, development economics, labour economics, and international trade, whether technical change is biased towards particular factors is of central importance. This paper develops a simple framework to analyse the forces that shape these biases. There are two major forces affecting equilibrium bias: the price effect and the market size effect. While the former encourages innovations directed at scarce factors, the latter leads to technical change favouring abundant factors. The elasticity of substitution between different factors regulates how powerful these effects are, determining how technical change and factor prices respond to changes in relative supplies. If the elasticity of substitution is sufficiently large, the long run relative demand for a factor can slope up.
I apply this framework to develop possible explanations to the following questions: why technical change over the past 60 years was skill biased, and why the skill bias may have accelerated over the past 25 years? Why new technologies introduced during the late eighteenth and early nineteenth centuries were unskill biased? What is the effect of biased technical change on the income gap between rich and poor countries? Does international trade affect the skill bias of technical change? What are the implications of wage push for technical change? Why is technical change generally labour augmenting rather than capital augmenting?     

Asymmetric business cycles: Theory and time-series evidence

We offer a theory of economic fluctuations based on intertemporal increasing returns: agents who have been active in the past face lower costs of action today. This specification explains the observed persistence in individual and aggregate output fluctuations even in the presence of i.i.d shocks because individuals respond to the same shock differently depending on their recent past experience. The exact process for output, the sharpness of turning points and the degree of asymmetry are determined by the form of heterogeneity. Our general formulation, under certain assumptions, reduces to a number of popular state space (unobserved components) models. We find that on US data our general formulation performs better than many of the existing econometric models, largely because it allows sharper downturns and more pronounced asymmetries than linear models, and is smoother than discrete regime shift models. Our estimates imply that only modest intertemporal returns are needed for our model to explain US GNP, and that heterogeneity across agents plays an important role in the propagation of business cycle shocks.     

制度:长期增长的根本原因

本文阐释这样一个经验的和理论的观点:经济制度不同是经济发展不同的根本原因。我们开发一个基本的框架,用以考察各国经济制度不同的原因。经济制度决定经济行为者的动机以及对他们的约束,而且影响着经济结果。经济制度是基于其后果的考虑而进行的社会选择。因为不同的集团和个人所受益的经济制度是不同的,所以在这些社会选择上存在冲突,冲突的最终解决结果有利于拥有较大政治权力的集团。社会政治权力的分配是由政治制度和资源分配决定的。虽然合法政治权力由政治制度决定,但是具有较大经济力量的集团通常拥有较大的实际政治权力。因为现行经济制度影响资源的分配,而且当前拥有实际政治权力的集团会竭力变革政治制度以便在将来增加他们的合法政治权力。所以,这一合适的理论框架——其中我们将政治制度和资源分配以常量对待——是动态的,这些常量本身随着时间的推移而变化,如果政治制度将权力分配给从普遍产权的实施中受益的集团,或者政治制度建立了对权力持有者的有效约束,或者权力持有者抽取的租金相对较少,则促进经济增长的经济制度就会出现。     

The Political Economy of the Kuznets Curve

The paper provides a political economy theory of the Kuznets curve. When development leads to increasing inequality, this can induce political instability and force democratization on political elites. Democratization leads to institutional changes which encourage redistribution and reduce inequality. Nevertheless, development does not necessarily induce a Kuznets curve, and it is shown that development may be associated with two types of nondemocratic paths: an "autocratic disaster," with high inequality and low output, and an "East Asian Miracle," with low inequality and high output. These arise either because inequality does not increase with development, or because the degree of political mobilization is low.