Abhijit Banerjee, MIT and NBER, Nils Enevoldsen, MIT, Rohini Pande, Harvard University and NBER, and Michael Walton, Harvard University

Information as an Incentive: Experimental Evidence from Delhi

Do anticipated performance disclosures influence politician behavior and, in turn, party and voter behavior? Two years prior to Delhi's 2012 municipal elections, a random sample of councillors were informed that a leading daily newspaper will report on their performance just before elections and to enhance credibility a sub-sample also received midterm report cards. To check whether improved information directly influences councillor performance, Banerjee, Enevoldsen, Pande, and Walton implemented a cross-cutting experiment wherein treated councillors received 'for your eyes only' audit reports on the condition of toilets and garbage dumps in slums present in their wards. A final source of variation arises from the unanticipated expansion of gender quotas four months before the elections - the fraction of wards reserved for women was raised from 33% to 50%. There are four findings. First, in high slum density wards disclosures caused councillors to move spending closer to slum-dweller preferences. Second, the public nature of disclosures matter: the 'for your eyes only' audit report card intervention led to a limited and, arguably, perverse effect wherein the incidence of closed toilets rose in treatment wards. Third, newspaper disclosures influenced party ticket allocation. Specifically, treated incumbents who undertook more pro-poor spending but were unable to recontest from own ward due to gender quotas were more likely to receive a party ticket for a different ward. Fourth, councillors who were subject to anticipated performance disclosures benefited electorally in the 2012 elections.

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Dongsoo Kang and Changwoo Nam, Korea Development Institute

Conflicts of Interest between Government and Creditors in Corporate Restructuring: Case of Korea

Kang and Nam examine the political economy problems that may arise in the major worst performing industries that cause the low growth in the Korean economy in recent years. In particular, the issue of conflicts of interest in the corporate restructuring system, in which the government can intervene through government-owned banks, is examined historically. In addition, the empirical analysis shows that government intervention through government-owned banks can reduce the efficiency of corporate restructuring by using financial data of companies that went into workout program and court receivership.

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Ippei Fujiwara, Keio University, and Shunsuke Hori, University of Tokyo

Aging and Deflation

How does the grayer society affect the political decision making regarding inflation rate in the long-run? Is deflation preferred as the society gets older? In order to answer to these questions, Fujiwara and Hori first compute the optimal inflation rates in the stationary population for young and old respectively, by using a New Keynesian model with the overlapping generations. Then, they explore how the weighted average of optimal inflation rates by population has developed with the on-going societal aging in Japan. Older individuals prefers lower inflation rates as aging deepens. The fluctuations in the weighted average of optimal inflation rates are, however, very small compared to those found in the data. Since the researchers' focus is on the long-run optimal inflation rate by the Ramsey planner, they deliberately abstract heterogeneous impacts from surprise inflation via nominal asset holdings as empirically examined in Doepke and Schneider (2006). The result in the study implies that if there exists any political bias toward deflation in the grayer society, it should be due not to the optimal inflation rates in the long-run but to nominal contracts in financial transactions.

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Kenichi Ueda, University of Tokyo

Tail-Risk Dumping

Ueda analyzes a banking crisis and related policy issues from a viewpoint of equilibrium contracts by providing a micro-foundation of typical macro models with financial frictions. Namely, it characterizes equilibrium contracts and their consequences in a simple one-period general equilibrium model with ex ante identical agents who endogenously choose to be depositors, borrowers, and bankers. Assuming costly state verification, the equilibrium loan and deposit contracts become a standard debt type. Limited liability with a simple asset seizure rule makes the equilibrium bank capital to be positive, creating a sizable banking sector. In equilibrium, income is shared incompletely among depositors, borrowers, and bankers, unlike "big household" assumption in typical macro models. In particular, when a large negative productivity shock hits, borrowers and bankers walk away with predetermined retained assets. Then, depositors have to assume all the tail risk (tail-risk dumping). Here, bank bailouts that insure deposits by consumption tax contingent on ex post shocks are welfare improving. This optimality of bailouts relies on the assumption that borrowers can walk away easily from their debts. However, a simple and speedy bankruptcy procedure is itself optimal if otherwise a debt overhang problem emerges.

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Zhenyu Cui, Stevens Institute of Technology, and Nobuo Akai, Osaka University,

Corruption, Political Stability and Efficiency of Government Expenditure on Health Care - Evidence from Asian Countries

Cui and Akai explore the efficiency of government expenditure on health care by Asian countries and the impact of political factors on the efficiency. For Asian countries, it is of great importance for governments to convert the economic development to the improvement of residents’ welfare and health condition. Though it is often said that political factors may affect the efficiency, their effects have not been clarified enough, especially in Asia. The research first calculates the efficiency score with Data Envelopment Analysis. After that, the researchers explore the impact of political and other factors with regression. With the result of the calculation, the research found that the degree of corruption has a negative effect on the efficiency of health care expenditure, while stable political condition and democracy affects the efficiency positively, which suggests that anti-corruption measures, stable political conditions and democratic system are favorable for the improvement of the efficiency of expenditure on health care of Asian countries.

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Weijia Li, University of California, Berkeley; Gerard Roland, University of California, Berkeley, CEPR and NBER; and Yang Xie, University of California, Riverside

Crony Capitalism, the Party-State and Political Boundaries of Corruption

What is the connection between crony capitalism, corruption, and the state apparatus in an autocracy? How much does corruption help the economy and when does it undermine state power? Li, Roland, and Xie investigate those questions by building a model that, instead of looking at the state as a black box, analyzes the link between various positions in the hierarchy of an autocratic state. The model is inspired by the party-state in China where crony capitalism and corruption play a central role in the economy. The researchers show how the state's distortionary role in the economy encourages corruption between local officials and businesses, and how this corruption creates vertical corruption chains in the party-state hierarchy that threaten loss of political control by the Center over the hierarchy. The researchers show the trade-off between the incentive effects of corruption and the danger of loss of control, leading de facto to define boundaries of corruption. The response by the Center to too high corruption depends on the power distribution within the Center and the de facto dependence of central leaders on support by provincial officials. The results are consistent with recent developments in China.

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Henry S. Farber and Ilyana Kuziemko, Princeton University and NBER, Daniel Herbst, Princeton University, and Suresh Naidu, Columbia University and NBER, "Unions and Inequality Over the Twentieth Century: New Evidence from Survey Data

Unions and Inequality Over the Twentieth Century: New Evidence from Survey Data (NBER Working Paper No. 24587)

It is well-documented that, since at least the early twentieth century, U.S. income inequality has varied inversely with union density. But moving beyond this aggregate relationship has proven difficult, in part because of the absence of micro-level data on union membership prior to 1973. Farber, Herbst, Kuziemko, and Naidu develop a new source of micro-data on union membership, opinion polls primarily from Gallup (N ≈ 980, 000), to look at the effects of unions on inequality from 1936 to the present. First, they present a new time series of household union membership from this period. Second, they use these data to show that, throughout this period, union density is inversely correlated with the relative skill of union members. When density was at its peak in the 1950s and 1960s, union members were relatively less-skilled, whereas today and in the pre-World War II period, union members are equally skilled as non-members. Third, the researchers estimate union household income premiums over this same period, finding that despite large changes in union density and selection, the premium holds steady, at roughly 15-20 log points, over the past eighty years. Finally, the researchers present a number of direct results that, across a variety of identifying assumptions, suggest unions have had a significant, equalizing effect on the income distribution over our long sample period.

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Sunjoo Hwang, Hwa Ryung Lee, and Keeyoung Rhee, Korea Development Institute

The Effects of Revolving Doors on Financial Regulators’' Enforcement Decisions: Evidence from Korea

Hwang, Lee, and Rhee analyze a unique data set to examine the economic motivations of financial firms for hiring ex- regulators as executives. In particular, the researchers investigate the effect of revolving door for the Financial Supervisory Service in South Korea. On the one hand, ex-regulators' expertise accumulated during their career may help firms to improve prudential management (the "schooling" hypothesis). However, the analyses of Non-performing ratio and Return on Risk-Weighted Assets reveal no such effect. Rather, regulatory actions become less likely for firms which hired ex-regulators in the previous quarter. The results are consistent with the "collusion" hypothesis in which current regulators give undue favor to a firm in expectation of being hired as an executive by the firm after retirement.

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Ying Bai, The Chinese University of Hong Kong, and Ruixue Jia, University of California, San Diego

The Oriental City: Political Hierarchy and Regional Development in China, AD 1000-2000

Because regime changes in China between AD1000 and 2000 systematically altered the relative importance of different regions in the political hierarchy, tracing the evolution of Chinese provincial capitals and economic activities during this period throws light on how political factors shape economic geography. In particular, Bai and Jia show that economic advantages driven by political factors do not persist, rather, losing (gaining) capital status is associated with worse (better) economic development as measured by population density and urbanization. This pattern is further supported by exploiting variation arising from relocation of national capitals and redivision of provincial boundaries due to regime changes as an instrument for provincial capitals. To explain the politico-economic link, the researchers show that the spatial importance of a region (e.g., centrality in the transportation networks) mirrors its status in the political hierarchy, which partially accounts for the rise and fall of certain regions in the long run.

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Meng-Chun Liu and Chia-Hsuan Wu, Chung-Hua Institution for Economic Research

Taiwan's Import Protection after Acceding to the WTO

During its significant democratic transition, Taiwan has obtained WTOmembership in 2002 in order to escape from its recent international protectionism and diplomatic isolation. In the dimension of public policy-making, Taiwan's trade policy needs not only are consistent with existing WTO rules but also reveal the outcomes of competition among domestic common interest groups. The question that Liu and Wu pose is whether the decisive role of the state in formulating trade policy is now strongly influenced by common interest groups. In an effort to investigate this issue, this study undertakes a case study comparison of the formulation of Taiwan's tariff and non-tariff measures (NTMs) during the democratic transition. The study therefore employs a political economy approach to quantitatively examine the influences of interest groups on the formation of Taiwan's trade policies in its new WTO membership regime. Using data on Taiwan's manufacturing industry with trade protection for 2009 and 2013, this study applies a simultaneous Tobit technique to review the joint determinants of Taiwan's tariffs and NTMs with the import penetration levels. As shown in the empirical evidence of the study, Taiwan's tariffs and NTMs are complementary in setting trade protection in both 2009 and 2013, which in turn suggests that Taiwan's trade policies have been subject to the constraints of international agreements and pressure from international interest groups, especially in the formation of Taiwan's tariffs, rather than the establishment of import restrictions. The empirical results also reflect a case where after joining the WTO, Taiwan's trade protection regime has been, to a significant extent, influenced by the domestic common interest groups. In Taiwan's newly democratic society, private interest groups can now engage in lobbying for policies that benefit their own interests. The private sector has been actively participating in public policymaking, while the state's authoritarian power has declined. Finally, to some extents, both tariffs and NTMs are utilized to relieve industries of their difficulties. However, the antidumping duties have been more effectively adopted in Taiwan. This contingent form of trade protection significantly replaces the role of NTMs in Taiwan. As shown in this empirical evidence, an industry with monopolistic powers tends to have trade protection with NTMs rather than tariffs in order to benefit more its own interests from import protection.

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Chen Lin, University of Hong Kong; Randall Morck, University of Alberta Edmonton; Bernard Yeung, National University of Singapore; and Xiaofeng Zhaod, Lingnan University, "Anti-Corruption Reforms and Shareholder Valuations: Event Study Evidence from China "

Anti-Corruption Reforms and Shareholder Valuations: Event Study Evidence from China

Consistent with reduced expected corruption adding value overall, Chinese shares rose sharply on the December 4th 2012 launch of major anti-corruption reforms, which started by curtailing extravagant spending by or for Party cadres. Lin, Morck, Yeung, and Zhao find that SOEs gain broadly, consistent with the reform cutting their top managers' (all Party cadres) spending on private benefits. NonSOEs gain in more liberalized provinces, consistent with reduced expected bribes to officials (also Party cadres) for getting business done. NonSOEs lose in provinces where market institutions remain weak, consistent with bribes for "greasing bureaucratic gears" still being a key resource allocation mechanism there. Firm level regressions reveal more productive nonSOEs in more growth potential and external finance-dependent industries gaining more in more liberalized provinces, consistent with investors expecting reduced corruption to complement and perhaps intensify the development of market institutions.

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Xiangyu Shi, Yale University; Tianyang Xi, Peking University; Xiaobo Zhang, Peking University and IFPRI; and Yifan Zhang, Chinese University of Hongkong

Moving "Umbrella": Bureaucratic Transfers, Collusion and Rent-Seeking in China

The collusion between firms and government officials is ubiquitous but hard to empirically assess. Shi, Xi, Zhang, and Zhang study collusion by tracing the pattern of intercity investments after political turnovers. Exploring the feature of bureaucratic transfers in China and using a unique firm registry data, the researchers document a significant increase of new investments with a close tie to the moving leaders' previous jurisdiction. Further empirical investigations find evidence consistent with a collusion between leaders and firms: First, new registrations tying to moving leaders concentrate in high-renting sectors. Second, the firms tying to moving leaders have a higher survival rate provided that their patrons stayed in the same jurisdictions, but those firms are more likely to exit local markets once the patrons left. Thirdly, the connected firms tend to crowd out new entries and dampens innovation. And lastly, career-concerned motives seem to mitigate collusion.

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