Political Economy

April 23, 2010
Alberto Alesina of Harvard University, Organizer

Allan Drazen, University of Maryland and NBER, and Ethan Ilzetzki, London School of Economics
Kosher Pork

Both conventional wisdom and leading academic research view pork barrel spending as antithetical to responsible policymaking in times of crisis. Drazen and Ilzetzki present an alternative view. When agents are heterogeneous in their ideology and in their information about the economic situation, allocation of pork may enable passage of legislation appropriate to a crisis that might otherwise not pass. Pork "greases the legislative wheels" not by bribing legislators to accept legislation they view as harmful, but by conveying information about the necessity of policy change, where it may be impossible to convey such information in the absence of pork. Pork may be used for this function in situations where all legislators would agree to forgo pork under full information. Moreover, when government has high pre-existing fiscal obligations (say from debt service), pork will be observed when the public good is most valuable precisely because the public good is valuable and the informed agenda setter wants to convey this information.

Quamrul Ashraf and Oded Galor, Brown University
The "Out of Africa" Hypothesis, Human Genetic Diversity, and Comparative Economic Development

Ashraf and Galor argue that deep-rooted factors, determined tens of thousands of years ago, had a significant effect on the course of economic development from the dawn of human civilization to the contemporary era. They advance and empirically establish the hypothesis that in the course of the exodus of Homo sapiens out of Africa, variation in migratory distance from the cradle of humankind to various settlements across the globe affected genetic diversity and has had a direct long-lasting effect on the pattern of comparative economic development that could not be captured by contemporary geographical, institutional, and cultural factors. In particular, the level of genetic diversity within a society is found to have a hump-shaped effect on development outcomes in the pre-colonial era, reflecting the trade-off between the beneficial and the detrimental effects of diversity on productivity. Moreover, the level of genetic diversity in each country today (that is, genetic diversity and genetic distance among and between its ancestral populations) has a similar non-monotonic effect on the contemporary levels of income per capita. While the intermediate level of genetic diversity prevalent among the Asian and European populations has been conducive for development, the high degree of diversity among African populations and the low degree of diversity among Native American populations have been a detrimental force in the development of these regions. Further, the optimal level of diversity has increased in the process of industrialization, as the beneficial forces associated with greater diversity have intensified in an environment characterized by more rapid technological progress.

Enrico Spolaore, Tufts University and NBER, and Romain Wacziarg, UC, Los Angeles and NBER
War and Relatedness

Spolaore and Wacziarg examine the empirical relationship between the occurrence of interstate conflicts and the degree of relatedness between countries, showing that genetically closer populations are more prone to go to war with each other, even after controlling for a wide set of measures of geographic distance and other factors that affect conflict, including trade and democracy. The researchers provide a theoretical framework consistent with these findings. In their model, genealogical relatedness between populations has a positive effect on their conflict propensities because more closely related populations, on average, share a wider set of common issues over which disputes may emerge.

Alberto Alesina,Harvard University; and Eliana La Ferrara, Bocconi University
A Test of Racial Bias in Capital Sentencing

Alesina and La Ferrara propose a test of racial bias in capital sentencing based upon patterns of judicial errors in lower courts. They model the behavior of the trial court as minimizing a weighted sum of the probability of sentencing an innocent and that of letting a guilty defendant go free. They define racial bias as a situation where the relative weight on the two types of errors is a function of the race of the defendant, or of the victim, or of the combination of the two. The key prediction of the model is that if the court is unbiased, ex post the error rate should be independent of the race of the defendant and/or the victim. They test this prediction using an original dataset that contains the outcomes of all capital appeals that became final between 1973 and 1995, together with the race of the defendant and of the victim(s). They do not find evidence of bias when looking at the race of the defendant per se. However, in Habeas Corpus cases they find strong and robust evidence of bias against minority defendants who killed white victims: in the full sample, the probability of error in these cases is 10 percentage points higher than for minority defendants who killed minority victims. If they restrict the analysis to Southern states, this difference becomes 15.4 percentage points.

Deniz Igan, Prachi Mishra, and Thierry Tressel, IMF
A Fistful of Dollars: Lobbying and the Financial Crisis

Has lobbying by financial institutions contributed to the financial crisis? Igan, Mishra, and Tressel use detailed information on financial institutions' lobbying and mortgage lending activities to answer this question. They find that lobbying was associated with more risk taking during 2000-7 and worse outcomes in 2008. In particular, lenders lobbying more intensively on issues related to mortgage lending and securitization: 1) originated mortgages with higher loan-to-income ratios; 2) securitized a faster growing proportion of their loans; and 3) had faster growing loan portfolios. Delinquency rates in 2008 were higher in areas where lobbying lenders' mortgage lending grew faster. These lenders also experienced negative abnormal stock returns during key events of the crisis. Finally, lobbying lenders' stock prices increased more with the bailout announcement than non-lobbying lenders' did, and being a lobbying lender was associated with a higher probability of being bailed out. These findings are robust to controlling for unobserved lender and area characteristics as well as changes in macroeconomic and local conditions over time. They suggest that political influence of the financial industry played an important role in the accumulation of risks.

Francesco Giavazzi, Bocconi University and NBER; Fabio Schiantarelli, Boston College; and Michel Serafinelli, UC, Berkeley
Attitudes, Policies, and Work

Giavazzi, Schiantarelli, and Serafinelli study whether cultural attitudes towards gender, the young, and leisure are significant determinants of the evolution over time of the employment rates of women and of the young, and of hours worked in OECD countries. Beyond controlling for a larger menu of policies, institutions, and structural characteristics of the economy than has been done so far, this analysis improves upon existing studies of the role of "culture" for labor market outcomes by dealing explicitly with the endogeneity of attitudes, policies, and institutions, and by allowing for the persistent nature of labor market outcomes. The researchers find that culture still matters for women's employment rates and for hours worked. However, policies and other institutional or structural characteristics are also important. Attitudes towards youth independence do not appear to be important in explaining the employment rate of the young, though. In the case of women's employment rates, the policy variable that is significant along with attitudes is the OECD index of employment protection legislation. For hours worked, the policy variables that play a role, along with attitudes, are the tax wedge and unemployment benefits. The quantitative impact of these policy variables is such that changes in policies have at least the potential to undo the effect of variations in cultural traits on labor market outcomes.