Political Economy Program Meeting

November 13, 2009
Pedro Dal Bó and Romain Wacziarg, Organizers

Bard Harstad, Northwestern University
The Dynamics of Climate Agreements

Harstad provides a novel dynamic model with private provision of public bads and investments in technologies. The analysis is tractable and the MPE unique. By adding incomplete contracts, he derives implications of and for international climate treaties. While the non-cooperative equilibrium is bad, short-term agreements are worse because of hold-up problems. A long-term agreement should be more ambitious if it is relatively short-lasting and the technological externality large. The length itself should increase in this externality. With renegotiation, the outcome is first best. The technological externalities are related to trade agreements, making them strategic substitutes to climate treaties.

Fernanda Brollo and Tommaso Nannicini, Bocconi University; Roberto Perotti, Universita' Bocconi and NBER; and Guido Tabellini, IGIER
The Political Resource Curse

Brollo, Nannicini, Perotti, and Tabellini study the effect of additional government revenues on political corruption and on the quality of politicians, both with theory and data. The theory is based on a version of the career concerns model of political agency with endogenous entry of political candidates. The evidence refers to municipalities in Brazil, where federal transfers to municipal governments change exogenously according to given population thresholds. The authors exploit a regression discontinuity design to test the implications of the theory and identify the causal effect of larger federal transfers on political corruption and the observed features of political candidates at the municipal level. In accordance with the predictions of the theory, they find that larger transfers increase political corruption and reduce the quality of candidates for mayor.

Lauren Cohen and Joshua D. Coval, Harvard University and NBER; and Christopher Malloy, Harvard Business School
Do Powerful Politicians Cause Corporate Downsizing?

Cohen, Coval, and Malloy use a new empirical approach for identifying the impact of government spending on the private sector. Their key innovation is to use changes in Congressional committee chairmanship as a source of exogenous variation in state-level federal expenditures. In doing so, they show that fiscal spending shocks appear to significantly dampen corporate sector investment and employment activity. These corporate behaviors follow both Senate and House Committee chair changes, are partially reversed when the Congressman resigns, and are most pronounced among geographically-concentrated firms. The effects are economically meaningful and the mechanism - entirely distinct from the more traditional interest rate and tax channels - suggests new considerations in assessing the impact of government spending on private sector economic activity.

Kaivan Munshi, Brown University and NBER; and Mark Rosenzweig, Yale University
The Efficacy of Parochial Politics: Caste, Commitment, and Competence in Indian Local Governments

Munshi and Rosenzweig explore the possibility that community involvement in politics need not necessarily worsen governance and, indeed, can be efficiency-enhancing when the context is appropriate. Complementing the new literature on the role of community networks in solving market problems, they test the hypothesis that strong traditional social institutions, exemplified by the sub-caste in the Indian context, can discipline the leaders they put forward, successfully substituting for political parties when they are ineffective. Using new data on local governments at the ward level over multiple terms, and exploiting the randomized election reservation system, they provide support for the theoretical prediction that the level of public goods received should increase discontinuously, with an accompanying change in leader characteristics, when the population share of the most numerous sub-caste eligible to contest the election in a ward crosses a threshold level. This improvement in leadership competence occurs without apparently diminishing leaders' responsiveness to their constituency.

Raquel Fernandez, New York University and NBER
Women's Rights and Development

Why has the expansion of women' economic and political rights coincided with economic s development? Fernandez investigates this question, focusing on a key economic right for women: property rights. The basic hypothesis is that the process of development (that is, capital accumulation and declining fertility) exacerbated the tension in men' conflicting interests as husbands versus fathers, ultimately resolving them in favor of the latter. As husbands, men stood to gain from their privileged position in a patriarchal world whereas, as fathers, they were hurt by a system that afforded few rights to their daughters. The model predicts that declining fertility would hasten reform of women' property rights whereas legal systems that were initially more favorable to women would delay them. The theoretical relationship between capital and the relative attractiveness of reform is non-monotonic but growth inevitably leads to reform. Fernandez explores the empirical validity of the theoretical predictions by using cross-state variation in the United States in the timing of married women obtaining property and earning rights between 1850 and 1920.

Jeffrey Butler, Einaudi Institute for Economics and Finance; Paola Giuliano, University of California , Los Angeles and NBER; and Luigi Guiso, European University Institute
The Right Amount of Trust

A vast literature has investigated the relationship between trust and aggregate economic performance. Butler, Giuliano, and Guiso investigate the relationship between individual trust and individual economic performance. They find that individual income is hump-shaped in a measure of intensity of trust beliefs available in the European Social Survey. They show that heterogeneity of trust beliefs in the population, coupled with the tendency of individuals to extrapolate beliefs about others from their own level of trustworthiness, could generate the non-monotonic relationship between trust and income. Highly trustworthy individuals think others are like them and tend to form beliefs that are too optimistic, causing them to assume too much social risk, to be cheated more often, and ultimately to perform less well than those who happen to have a trustworthiness level close to the mean of the population. On the other hand, the low-trustworthiness types form beliefs that are too conservative and thereby avoid being cheated, but give up profitable opportunities too often and, consequently, underperform. The estimates here imply that the cost of either excessive or too little trust is comparable to the income lost by foregoing college. Furthermore, the authors find that people who trust more are cheated more often by banks as well as when purchasing goods second hand, when relying on the services of a plumber or a mechanic, and when buying food. The researchers complement the survey evidence with experimental evidence showing that own trustworthiness and expectations of others' trustworthiness in a trust game are strongly correlated and that performance in the game is hump-shaped.

NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us