Political Economy

April 27, 2012
Alberto Alesina of Harvard University, Organizer

Nicola Gennaioli, CREI, and Joachim Voth, CREI, Barcelona

State Capacity and Military Conflict

In 1500, Europe was composed of hundreds of statelets and principalities, with weak central authority, no monopoly over the legitimate use of violence, and multiple, overlapping levels of jurisdiction. By 1800, Europe had consolidated into a handful of powerful, centralized nation states. Gennaioli and Voth build a model that simultaneously explains both the emergence of capable states and the growing divergence between European powers. In the model, the impact of war on the European state system depends on: 1) the capital intensity of war (which stands for the financial cost of war), and 2) a country's initial level of domestic political fragmentation. The authors emphasize the role of the "Military Revolution", which raised the cost of war. Initially, this caused more internally cohesive states to invest in state capacity, while other (more divided) states rationally dropped out of the competition. This led to both increasing divergence between European states, and greater average state building on the continent overall.

Erik Snowberg, California Institute of Technology and NBER, and Pietro Ortoleva, California Institute of Technology

Confidence and Overconfidence in Political Economy

Snowberg and Ortoleva studies the role of overconfidence in political behavior. They posit a simple model of overconfidence in beliefs that is founded on correlational neglect. The model predicts that overconfidence leads to ideological extremeness, increased voter turnout, and increased strength of partisan identification. Moreover, the model makes many nuanced predictions about the patterns of ideology in society, and across time. They test these predictions using novel survey data that allows for the measurement of overconfidence, and find that the predicted relationships are statistically and substantively important.

Mathieu Couttenier, Paris School of Economics, and Marc Sangnier, Sciences Po

Living in the Garden of Eden: Mineral Resources Foster Individualism

Couttenier and Sangnier explore the relationship between an abundance of mineral resources and individual values. Using discoveries of mineral resources in the United States since 1800, they find that the presence of such resources fosters individualism. Measuring individualism and the demand for redistribution by responses to questions from the General Social Survey, the authors show that individuals who live in states with a large endowment of mineral resources are more individualistic and support less redistribution by the government. Two channels appear to explain this: the experience channel, which arises because of direct observation of discoveries by individuals; and the transmission channel, demonstrating the persistence of specific values across generations. These results are robust to the introduction of various variables that may explain individualistic values.

Francesco Caselli, London School of Economics and NBER; Massimo Morelli, Columbia University; and Dominic Rohner, University of Zurich

The Geography of Inter-State Resource Wars

Caselli, Morelli, and Rohner establish a theoretical and an empirical framework to assess the role of resource endowments and their geographic location for inter-State conflict. The main predictions of the theory are that conflict tends to be more likely when at least one country has natural resources; when the resources in the resource-endowed country are closer to the border; and, in the case where both countries have natural resources, when the resources are located asymmetrically vis-a-vis the border. The authors test these predictions on a novel dataset featuring oil field distances from bilateral borders. Their empirical analysis confirms that the presence and location of oil are significant predictors of inter-State conflicts after WW2.

Sumit Agarwal, Federal Reserve Bank of Chicago; David Lucca, Federal Reserve Bank of New York; Amit Seru, University of Chicago and NBER; and Francesco Trebbi, University of British Columbia and NBER

Inconsistent Regulators: Evidence From Banking (NBER Working Paper No. 17736)

U.S. state chartered commercial banks are supervised alternately by state and federal regulators. Each regulator supervises a given bank for a fixed time period according to a predetermined rotation schedule. Agarwal, Lucca, Seru, and Trebbi examine differences between federal and state regulators for these banks and find that federal regulators are significantly less lenient, downgrading supervisory ratings about twice as frequently as state supervisors. Under federal regulators, the banks report higher nonperforming loans, more delinquent loans, higher regulatory capital ratios, and lower returns on assets. There is a higher frequency of bank failures and problem-bank rates in states with more lenient supervision relative to the federal benchmark. Some states are more lenient than others. Regulatory capture by industry constituents and supervisory staff characteristics can explain some of these differences. These findings suggest that inconsistent oversight can hamper the effectiveness of regulation by delaying corrective actions and by inducing costly variability in operations of regulated entities.

Abhijit Banerjee and Esther Duflo, MIT and NBER; Daniel Keniston, Yale University; Raghabendra Chattopadhyay, IIM Calcutta; and Nina Singh, Rajasthan Police

Can Institutions be Reformed from Within? Evidence from a Randomized Experiment with the Rajasthan Police

Institutions in developing countries, particularly those inherited from the colonial period, are often thought to be subject to strong inertia. Banerjee, Duflo, Keniston, Chattopadhyay, and Singh present the results of a unique randomized trial testing whether these institutions can be reformed through incremental administrative change. The police department of the state of Rajasthan, India collaborated with researchers at U.S. and Indian universities to design and implement four interventions to improve police performance and the public's perception of the police in 162 police stations (covering over one-fifth of the State's police stations and personnel): 1) placing community observers in police stations; 2) a freeze on transfers of police staff; 3) inservice training to update skills; and 4) weekly duty rotation with a guaranteed day off per week. These reforms were evaluated using data collected through two rounds of surveys including police interviews, decoy visits to police stations, and a large-scale public opinion and crime victimization survey—the first of its kind in India. The results illustrate that two of the reform interventions, the freeze on transfers and the training, improved police effectiveness and public and crime victims' satisfaction. The decoy visits also led to an improvement in police performance. The other reforms showed no robust effects. This may be due to constraints on local implementation: the three successful interventions did not require the sustained cooperation of the communities or the local authorities (the station heads) and they were robustly implemented throughout the project. In contrast, the two unsuccessful interventions, which required local implementation, were not systematically implemented.

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