An economic theory of foreign interventions and regime change

I construct a theory of foreign interventions in which a home country's main trade partner may influence the course of regime change. The foreign country intervenes in support of the group that draws the largest gains from trade, since such a group is willing to concede most in trade agreements. But interventions are more than offset by the domestic political system, which supports in power the group that concedes least (economic nationalism). I allow for geopolitical competition between the main trade partner and a second foreign country as well as for domestic ideological preferences over the two and look at how geopolitical competition interacts with the economic mechanism described above. My results help interpret some of the patterns of Western interventions in the 20th century and the role of economic nationalism in regime change. Furthermore, they help explain why the Cold War strengthened the West's preference for incumbent elites, even when the oppositions did not have a strong communist ideology. I provide detailed historical evidence in favour of my arguments.     

Endogenous insecurity and economic development

We explore the implications of endogenous credit market imperfections for the endogenous relationship between investment insecurity and the process of economic development. In the initial stages of development, the fraction of agents engaged in nonproductive diversionary activities (e.g. rent-seeking) grows as the opportunities to gain from diversionary activities expand. In later stages, however, diversion falls as capital market imperfections are overcome and productive activities become more secure and more profitable. We detail the forces that determine whether the insecurity generated by an economy's early development will choke off the growth process. We also compare the cost-effectiveness of alternative policies designed to prevent diversion.     

Endogenous lifetime and economic growth

Endogenous mortality is introduced in a two-period overlapping generations model: probability of surviving from the first period to the next depends upon health capital that is augmented through public investment. High mortality societies do not grow fast since shorter lifespans discourage savings; development traps are possible. Productivity differences across nations result in persistent differences in capital-output ratios and relatively larger gaps in income and mortality. High mortality also reduces returns on education, where risks are undiversifiable. When human capital drives economic growth, countries differing in health capital do not converge to similar living standards, ‘threshold effects’ may also result.     

Anticipating Nelson and Winter: Jack Downie's theory of evolutionary economic change

An Evolutionary Theory of Economic Change , by Richard Nelson and Sidney Winter continues to have great influence on evolutionary economic thought. While their modeling techniques and the breadth of their vision for evolutionary theorising must be seen as seminal and effective innovation in economic theory, they were not the first inventors of such a theory. Close examination reveals that much of the economic theory was anticipated by Jack Downie whose book, The Competitive Process, was published in 1958. The extent of anticipation is remarkable, with not merely the two elements of population ecology, selection and mutation, but the way in which they are theorised to work being replicated by Nelson and Winter.     

Endogenous legal traditions and economic outcomes

Outcomes are deeply influenced by the set of institutions used to aggregate the citizens’ preferences over the harshness of punishment, i.e., the legal tradition. I show that while under common law appellate judges’ biases offset one another at the cost of legal uncertainty, under civil law the legislator chooses a certain legal rule that is biased only when he favors special interests, i.e., when preferences are sufficiently heterogeneous and/or political institutions are sufficiently inefficient. Thus, common law can produce better outcomes only under this scenario. To test this prediction, I construct a novel continuous measure of legal traditions for 49 transplants, many of which reformed the transplanted institutions, and I devise an instrumental variables approach dealing with the endogeneity of both legal and political institutions. The evidence I obtain is robust across several strategies, confirms the model implications, and stresses the relevance of distinguishing between proxies measuring only the technological efficiency of the law and those picking up also the citizenry’s satisfaction with its cultural content.     

Coevolution of economic behaviour and institutions: towards a theory of institutional change

Traditionally, economics has regarded institutions, notably norms and regulations, as fixed or exogenous. Surprisingly few insights on institutional evolution from natural and social sciences have made their way into economics. This article gives an overview of evolutionary theories of institutions in biology, sociology, anthropology and economics. These theories are subsequently compared with non-evolutionary theories of institutions. Next, the insights and approaches are integrated into a framework for analysis of institutions based on the notion of coevolution.JEL Classification: B52, D10, D70, D64, Z13J.C.J.M. van den Bergh     

Endogenous sector-biased technical change and perpetual and transient structural change

This paper provides a new definition of structural change and then categorizes such changes into two types. Transient structural change is related to the short-term adjustment of sectoral labor employment, while perpetual structural change concerns the long-run trends of labor reallocation among sectors. If we focus on supply-side reasons, we find that the one and only fundamental driving force of perpetual structural change is sector-biased technical change. We also investigate the structural parameters of the model that determine the direction of sector-biased technical change.     

Endogenous induced technical change and the costs of Kyoto

We present a model for climate change policy analysis which accounts for the possibility that technology evolves endogenously and that technical change can be induced by environmental policy measures. Both the output production technology and the emission–output ratio depend upon a stock of knowledge, which accumulates through R&D activities. Two versions of this model are studied, one with endogenous technical change but exogenous environmental technical change and the other with both endogenous and induced technical change. A third version also captures technological spillover effects. As an application, the model is simulated allowing for trade of pollution permits as specified in the Kyoto Protocol and assessing the implications in terms of cost efficiency, economic growth and R&D efforts of the three different specifications of technical change.     

Endogenous economic growth with disembodied knowledge

Mainstream endogenous growth models assume that new knowledge is embodied into either new intermediate or final goods, monopolistically supplied by the patent holder. Recent technological progress, however, often gives rise to pure intellectual contents, such as software codes or business models, directly usable in the production of final goods. Once a content of this type has been produced, it is in fixed supply, that is, the inventor can only rent it out (or sell it) or not; hence, the quantity restriction typical of monopoly cannot arise, while competition is viable. We show that, however, as long as the inventor owning a patent can control through license activation devices the access to the intellectual content of the workers using her invention in the final goods production, monopolistic exploitation becomes viable and will occur. It turns out that in this framework, the income share of labor is smaller than in the Lab‐Equipment economy, which represents the setting closest to our model. Moreover, with elastic labor supply labor employment is also negatively impacted. This implies that some standard public policies devised for correcting inefficiencies in development may perform poorly in this framework.     

Endogenous institutional change after independence

Independence from colonial rule was a key event for both political and economic reasons. We argue that newly independent countries often inherited sub-optimal institutional arrangements, which the new regimes reacted to in very different ways. We present a model of endogenous changes in property rights institutions where an autocratic post-colonial elite faces a basic trade-off between stronger property rights, which increases the dividends from the modern sector, and weaker property rights that increases the elite's ability to appropriate resource rents. The model predicts that revenue-maximizing regimes in control of an abundance of resource rents and with insignificant interests in the modern sector will rationally install weak institutions of private property, a prediction which we argue is well in line with the experience of several developing countries.     

Endogenous mortality, human capital and economic growth

We consider growth and welfare effects of lifetime-uncertainty in an economy with human capital-led endogenous growth. We argue that lifetime uncertainty reduces private incentives to invest in both physical and human capital. Using an overlapping generations framework with finite-lived households we analyze the relevance of government expenditure on health and education to counter such growth-reducing forces. We focus on three different models that differ with respect to the mode of financing of education: (i) both private and public spending, (ii) only public spending, and (iii) only private spending. Results show that models (i) and (iii) outperform model (ii) with respect to long-term growth rates of per capita income, welfare levels and other important macroeconomic indicators. Theoretical predictions of model rankings for these macroeconomic indicators are also supported by observed stylized facts.     

Adam Smith's theory of economic history and economic development

Abstract

The aim of the paper is to show that Smith has a theory of economic history grounded in a politico-economic modeling (as well as a sort of economic theoretical modeling). In terms of the politico-economic approach, in the Wealth of Nations (Book III.ii–iv) Smith tried to offer a systematic account of economic development from feudalism to capitalism in Europe. These lead to suggest that the seeming internal inconsistency between the natural and the actual courses of progress in Book III may be resolved, and that Smith may be treated as a precursor of Douglass North, who stressed an inextricable link between the polity and the economy in economic history.     

Pareto and contemporary economic theory

This paper provides explanations for Pareto’s apparently contradictory approach to demand theory in simultaneously insisting that measurability of utility is not needed to explain the equilibrium of consumers in competitive markets, and embracing concavifiability and thus measurability of utility when this implies restrictions on consumers’ behavior such as the law of demand. It also treats his method of calibrating an aggregate demand function by employing his law of income distribution, so as to reproduce “Gregory King’s law”. Finally, some disputed issues are dealt with concerning the nature of Pareto’s contributions to welfare economics. (JEL: B13, D11, D60).     

DUP activities and economic theory

This paper considers the theory of Directly Unproductive Profit Seeking (DUP) activities, examining its implications for economic theory. Two classes of DUP activities are distinguished: one where the DUP activity is triggered by policy which is itself exogenously specified (e.g., tariff-revenue seeking resulting from pre-specified tariff); the other where DUP activity endogenises policy fully (e.g., tariff seeking). Implications for both positive and normative argumentation in economic theory are considered in depth for both these classes of DUP activity.