Society for Institutional & Organizational Economics
How does increasing the skill of some workers affect the output of the organization as a whole? To answer this question, we study the effects of a randomized training program that occurred in a Colombian government agency. While trained workers substantially improved their individual production, we find that spillovers affecting managers' productivity are nearly as large as the direct gains from training. We use email data to understand the mechanism behind these spillovers and find that two changes explain the benefits for managers. First, trained workers send fewer emails to their bosses, and boss productivity increases as emails decline. Second, relatively senior trained frontline workers form an informal helping layer between junior frontline workers and managers, providing assistance to untrained workers and further reducing managers' need to offer help. In our setting, accounting for intra-organization spillovers doubles the implied return from upskilling workers.
A distinct feature of MNCs is a three-tier organizational structure: foreign managers (FMs) supervise domestic managers (DMs) who supervise production workers. Language barriers between FMs and DMs could impede transfers of management knowledge. We develop a model in which DMs learn general management by communicating with FMs, but communication effort is non-contractible. These conditions generate sub-optimal communication within the MNC. If communication is complementary with language skills, the planner could raise welfare by subsidizing foreign language acquisition. We experimentally assess the validity of the general skills and the complementarity assumptions in Myanmar, a setting where FMs and DMs communicate in English. The first experiment examines the general skills assumption by asking prospective employers at domestic firms to rate hypothetical job candidates. They value candidates with both higher English proficiency and MNC experience, a premium driven, in part, by frequent interactions with FMs. The second experiment examines the complementarity assumption by providing English training to a random sample of DMs working at MNCs. At endline, treated DMs have higher English proficiency, communicate more frequently with their FMs, are more involved in firm management, and perform better in simulated management tasks. Organizational barriers within MNCs can thus hinder knowledge transfers and lead to an under-investment in English relative to the social optimum.
This paper uses novel, firm-level measures derived from communications metadata before and after a CEO transition in 102 firms to study if CEO turnover impacts employees’ communication flows. We find that CEO turnover leads to an initial decrease in intra-firm communication, followed by a significant increase approximately five months after the CEO change. The increase is driven primarily by vertical (i.e. manager to employee) communication. Greater increase in communication after CEO change are associated with greater increases in firm market returns.
When is general training under-provided? We study this classic question in a model of a competitive labour market. Workers vary in firm-specific and general skills. Firms’ choices of information disclosure play a key role. Disclosing general human capital information on bad matches, but revealing nothing about good matches, leads to an efficient allocation of workers. This also creates adverse selection that enables workers to pay for efficient training. This information structure resembles the outplacement support commonly found in professional services firms. Moreover, it implies that wages of released workers can be higher than wages of those who are retained.
We derive optimal contests for environments where output takes the form of breakthroughs and the principal has an informational advantage over the contestants. Whether or not the principal is able to provide real-time feedback to contestants, the optimal prize allocation is egalitarian: all agents who have succeeded in a pre-specified time interval share the prize equally. When providing feedback is feasible, the optimal contest takes a stark cyclical form: contestants are fully apprised of their own success, and at the end of each fixed-length cycle, they are informed about peer success as well.
In each period of our two-period principal-agent model, the agent adopts either a new or known idea and exerts implementation effort. The output depends on both effort and the quality of the adopted idea. While exerting effort, the agent can acquire know-how that is partially wasted upon changing ideas between the two periods. The principal decides whether to make the organization transparent or opaque, i.e., whether interim performance measures are observable or not to both parties. We show that transparency facilitates innovation, but may reduce the final output if the project requires more effort rather than quality idea. Counterintuitively, transparency can reduce the expected final output even more if the acquired know-how becomes less idea-specific or if the interim performance measure becomes more precise.
Measures of firm performance and corporate governance are well known to be positively correlated, and performance-sensitivity of compensation increases in firm performance. We describe how governance affects stock prices, and in turn, how stock prices affect governance, and how compensation is affected by both of these. We present a model of firm financing structure that permits a unified analysis of corporate governance, pay sensitivity of the agent's compensation, and how these relate to stock prices and other securities issued by the firm. Our main results show why corporate governance and stock prices are positively correlated, and how governance and pay sensitivity are substitutes, which rationalises these empirical observations. Our setting allows us to analyse the impact of policy interventions like the Sarbanes-Oxley Act. We also propose a measure of governance in terms of observables of the securities the firm issues.
This paper studies the implications of persistent private information on a firm’s optimal financing and investment policies. In a dynamic agency model, an investor supplies capital to an entrepreneur with an opaque production technology. The investor observes neither the true productivity of the technology nor the actual amount of the output produced. The entrepreneur can generate private benefit from misreporting productivity and diverting output, both of which bear a persistent negative effect on the long-term growth of the technology. In contrast to the predictions of standard investment models, the persistence of the agency friction rationalizes over-investment especially among firms with a strong history of cash flow but a low Tobin’s q, and reconciles the optimal financing policy with the empirical observations of a strong investment-cash-flow sensitivity and a weak or even negative investment-q sensitivity.
An expert advises a sequence of principals on their actions to match a hidden, randomly evolving state. The expert privately knows her competence. The principals learn about the state and the expert's competence from past advice and past action outcomes, both publicly observable. I find that the equilibrium can feature a "crisis of expertise," in which principals dismiss a competent expert's correct advice and rely only on public information. Notably, the crisis happens precisely when the quality of public information is low, and thus when the competent expert's knowledge is much needed. I discuss policy implications for alleviating the crisis.
This paper theoretically investigates how an increase in the supply of homogenous workers can raise wages, generating new insights on potential drivers for the observed non-negative wage effects of immigration. We develop a model of a labor market with frictions in which firms can motivate workers only through informal incentives. A higher labor supply increases firms' chances of filling a vacancy, which reduces their credibility to compensate workers for their effort. As a response, firms endogenously generate costs of turnover by paying workers a rent, and this rent is higher if an increase in labor supply reduces a firm's credibility. By this effect, a higher labor supply — for example caused by immigration — can increase workers' compensation. Moreover, an asymmetric equilibrium exists in which native workers are paid higher wages than immigrants and work harder. In such an equilibrium, an inflow of immigrants increases productivity, profits, and employment.
Most organizations rely on managers to identify talented workers, but worker departures can be costly and managers are typically not rewarded for developing talent. Consequently, managers may have incentives to hoard talented workers, jeopardizing the efficient allocation of talent within firms. This study demonstrates the existence of talent hoarding by using the universe of application and hiring decisions at a large manufacturing firm. When managers rotate to a new position and temporarily stop hoarding talent, workers’ applications for promotions increase by 128%, suggesting that managers deter a large group of workers from applying. Talent hoarding leads to misallocation of talent within the firm and is particularly consequential for women. Marginal female applicants, who would not have applied in the absence of manager rotations, are almost twice as likely to land a promotion, and ultimately outperform their male counterparts in their new positions. These findings demonstrate the importance of applications as a mediating mechanism for talent hoarding: the gender gap in career progression among marginal applicants is 91% smaller than in the counterfactual in which they do not apply.
Can artificial intelligence (AI) create complementarity with human employees by assisting them at work, and if so, how and when? We examine AI assistance in a sequential division of labor within organizations, wherein AI handles the initial portion of a task that is repetitive and well-codified so that employees can focus on subsequent higher-level problem solving. This organizational design can help overcome both AI’s limitations in performing higher-level problem solving and humans’ boredom with repetitive work. We provide causal evidence from a field experiment in a telemarketing firm which randomly assigned AI assistance to generate sales leads in the first stage (a well-codified and repetitive portion of the sales task) and then handed over the leads to human employees for sales persuasion in the second stage (which required higher-level problem solving). We find that AI assistance can significantly increase employee creativity in answering customers’ questions, but only for top employees serving difficult customers. Moreover, AI assistance increases employee efficiency only for bottom employees serving easy customers. In both cases, AI assistance increased employee performance. We thus highlight employee capabilities and customer types as critical scope conditions for attaining complementarity between AI and humans in problem solving. Policy simulation results suggest that the AI-human team can be optimized by matching AI assistance with the right employees and the right customers. These findings offer useful implications for organizations to generate augmented intelligence and achieve optimal performance from AI-human collaborations.
Tournaments are often used to improve performance in innovation contexts in which teams perform non-routine tasks. Tournaments may not only be effective because they provide monetary incentives but also because they render teams' identity and social image concerns salient. This study provides causal evidence on the relative importance of these behavioral aspects vis-a-vis monetary prizes in a non-routine task. Using a natural field experiment with more than 1,700 participants, we exogenously vary salience of team identity, social-image concerns, and whether teams face monetary incentives. We find that increased salience of team identity alone does not improve team performance. Social image due to a public ranking affects mostly top-performing teams, whereas additional monetary incentives improve outcomes for all teams across the performance spectrum. Further, the introduction of tournaments does not reduce teams' willingness to explore original solutions and does not crowd out intrinsic motivation to perform similar tasks in the future.
This paper investigates the impact of management incentives on firm cartels. It is usually the manager which acts on behalf of the owner and is running the firm. To mitigate the agency problem, the owner puts corporate governance mechanism in place, which incentivize managers to align their interest with that of the firm’s shareholders. While this is beneficial for the firm performance in the first place, the structure of these contracts might change the attraction of collusion for managers. Consequently, we analyze how manager remuneration schemes impact their incentives for collusion, cartel formation and stability. Exploiting different data sources allows us to identify the managers remuneration schemes and cartels within the United States. We find that higher long-term incentives of managers indeed affect collusion. Our analysis shows that a higher degree of manager's long-term incentives leads to (i) a higher probability of a firm's cartel participation, (ii) a higher probability of forming a cartel and (iii) no effect on the termination of a cartel.
This paper studies the impact of managerial incentives on the allocation of capital. We provide empirical evidence that short-termist incentives cause capital misallocation within firms, using a within-firm estimator and a US accounting reform as an exogenous shock to managers' incentives. Managers shift investments towards more short-lived assets, effectively reducing the durability of firms' capital stocks. We then build a model of firm investments with incentive frictions that we calibrate to the US economy. Our outcomes imply that the pass-through from incentives to investments is large: more short-termist incentives raise wedges between the marginal products of capital goods, causing declines in output and real wages.
Using a representative survey of U.S. lawyers, we document a sizeable gender gap in early partnership aspirations, which explains half of the later gender promotion gap. We propose a model to understand aspirations and then empirically test it. We show that aspirations induce greater effort and increase regret if a promotion is not obtained. Furthermore, aspirations are linked to fertility choices and workplace experiences (mentoring and discrimination). Facing harassment or demeaning comments at an early career stage affects later promotion, mediated via a change in aspirations. We highlight that measuring aspirations, and understanding how they are formed, is key to explaining gender career gaps.
In this paper, we investigate the market for CEO and top managers in the non-profit and charities sector. Using data from charitynavigator.org, we document two new stylized facts not documented before in the literature. First, we find that female CEOs are more likely to receive compensation than their male counterparts. Second, conditional on receiving compensation, female CEOs receive 6% to 8% lower total compensation than male CEOs do. These findings are robust to the inclusion of charity classification fixed effects (between estimator) and charity and title fixed effects (within estimator). Further in-depth exploration of the results shows that interestingly enough, the gender pay gap is only present in the largest charities (top quintiles in the expense and revenue distribution). Our investigation of potential mechanisms suggests perceived differentiation of male and female CEOs as well as CEO impact on charity performance as potential channels explaining the observed gender gap in CEO pay.
We show that the increasingly popular use of subjective assessments of employee "potential" contributes to gender gaps in promotion and pay. Using data on management-track employees from a large retail chain, we find that women receive substantially lower potential ratings despite receiving higher job performance ratings. Differences in potential ratings account for 30-50% of the gender promotion gap. Women's lower potential ratings do not appear to be based on accurate forecasts of future performance: women outperform male colleagues with the same potential ratings, both on average and conditional on promotion. Yet, even in these cases, women's subsequent potential ratings remain low, suggesting that firms persistently underestimate the potential of female employees.
We investigate the determinants of promotions in a financial institution to uncover the micro mechanisms that lead to promotion gaps in knowledge work. Bankers are highly educated; at entry in the internal labor market, more than 50% are women. The promotion rate of women is lower than the one of men, in particular, at the beginning of careers. Bankers work in project teams together with lawyers and economists. Analyzing almost 10,000 investment projects, we find a substantial promotion gap for women. Crucial for careers are assignments to the job of operation leader, which provide visibility to the upper echelons of the organization. Assignments to these jobs which is carried out by supervisors, however, favors men.
COVID-19 is among the most salient issues in the world presently, and for many current executives, it is likely to be among the greatest challenges they will face. Upon entering the U.S. context, the disease was immediately subject to the process of affective polarization, with clear partisan splits forming around perceptions of its risks that did not relate to science. We explore whether firms’ preexisting political positioning affected how they voluntarily disclosed to their investors on a novel, affectively polarized issue by examining whether firms’ disclosure of COVID-19 risks covaries with their partisan political giving. Analyzing conference call and campaign contribution data for the S&P 500, we find a positive association between a firm’s contributions to Democrats and its disclosure of COVID-19 risks.
The spread of COVID-19 has disrupted firm operations on a global scale. Using a comprehensive data set that observes over 3,000 firms in several developing countries shortly before and after the pandemic, we relate firms' structured management practices to post-COIVD outcomes, and report four main findings. First, structured management practices are associated with more limited downside impacts of crisis on firm sales and firm closures in manufacturing but not in services. Better managed manufacturing fims, on average, experience a smaller reduction in sales. Second, in both manufacturing and services, structured management practices are correlated with a firm's ability to adjust or convert product mix and shift to online work arrangements. Third, management practices are not correlated with a firm's ability to adjust on employment margins. Fourth, the resilience of better managed firms is related primarily to incentive practices, and is uncorrelated with operations or targeting practices. Monitoring practices show a modest correlation with a firm's ability to switch to remote work arrangements.
For religious organizations, in-person gatherings are at the heart of their activities, yet they have been identified as some of the early hot spots of the SARS-CoV-2 pandemic. This study investigates U.S. churches' response to the pandemic by looking at their public Facebook activity. The share of churches that offer an online church activity on a given Sunday more than doubled within two weeks at the beginning of the pandemic and stayed well above baseline levels. Online church activities are positively correlated with the local pandemic situation at the beginning, but uncorrelated with most state interventions. We investigate heterogeneity in the church responses and find that church size and worship style explain differences consistent with churches facing different demand and cost structures. Local voting behavior, on the other hand, explains little of the variation, suggesting that decisions to move online are not reflective of partisan politics.
We consider a principal-agent relationship with adverse selection. Principals pay informational rents due to asymmetric information and sell their output in a homogeneous Cournot-oligopoly. We find that asymmetric information may mitigate or more than compensate for the welfare reducing impact of market power. We further show that welfare in a setting with adverse selection may be higher than the maximized welfare level attainable in a world with perfect observability.
We study the role of risk in strategic information transmission. Revisiting the choice between delegation and communication, we find that a uniform scaling of variance has no effect on the optimal choice of authority, and thus is no adequate measure of risk. We then consider the effect of the shape of the distribution, in particular, the weight in the tails. We find that a high risk of extreme events diminishes the quality of information sharing. As a result, delegation of authority becomes relatively more attractive compared to communication in environments with more weight in the tails.
I examine whether stochastic contracts benefit the principal in the setting of moral hazard and loss aversion. Incorporating that the agent is expectation-based loss averse and allowing the principal to add noise to performance signals, I find that stochastic contracts reduce the principal's implementation cost in comparison to deterministic contracts. The optimal stochastic contract pays a high wage whenever good signals are realized and with a positive probability when bad signals are realized. Surprisingly, if performance signals are highly informative about the agent's action, stochastic contracts strictly dominate the optimal deterministic contract for almost any degree of loss aversion. The findings have an important implication for designing contracts for loss-averse agents: the principal should insure the agent against wage uncertainty by employing stochastic contracts that increase the probability of a high wage.
This paper studies how an informed sender with state-independent preferences persuades receivers to approve his proposal with verifiable information. I find that every equilibrium outcome is characterized by each receiver's set of approved states that satisfies this receiver's obedience and the sender's incentive-compatibility constraints. That allows me to describe the complete equilibrium set. In the sender-worst equilibrium, information unravels, and receivers act as if fully informed. The sender-preferred equilibrium outcome is the commitment outcome of the Bayesian persuasion game. In the leading application, I study targeted advertising in elections and show that by communicating with voters privately, a challenger may win elections that are unwinnable with public disclosure. The more polarized the electorate, the more likely it is that the challenger swings an unwinnable election with targeted advertising.
We study the effect of raising the level and the transparency of financial incentives offered to local agents for acquiring clients of a new banking product on take-up. We find that paying agents higher incentives increases take-up, but only when the incentives are unknown to prospective clients. When disclosed, higher incentives instead have no effect on take-up, despite greater agent effort. This is explained by the financial incentives conveying a negative signal about the reliability and trustworthiness of the product and its providers to potential clients. In contexts with limited information about a new technology, financial incentives can thus affect technology adoption through both a supply-side effect (more agent effort) as well as a demand-side signaling effect (change in demand perceptions). Organizations designing incentive schemes should therefore pay close attention to both the level and the transparency of such incentives.
Many firms claim that "social impact" influences their strategies. I develop a structural model that quantifies social impact as the sum of the surpluses to a firm and its stakeholders. Using data from a for-profit firm whose prosocial expenditures are measurable and salient to consumers, I find that the firm spends prosocially beyond profit-maximization, which substantially increases welfare. Incentivizing a standard profit-maximizing firm to behave similarly would require subsidies for 55% of the prosocial expenditures because consumers' willingness-to-pay is relatively inelastic to prosocial expenses. Therefore, social impact resembles a self-imposed welfare-enhancing tax with limited pass-through.
This paper studies whether public sector organizations can strengthen the mission motivation of their workers and get them to exert effort on the job. I implement a field experiment in partnership with the Department of Health in Pakistan, where I randomly emphasize the public health mission to community health workers, provide performance-linked financial incentives, or do both. The mission treatment improves worker performance across incentivized (home visits) and non-incentivized tasks, while financial incentives improve performance only on the incentivized task. Financial incentives also become less effective at increasing home visits when combined with the mission treatment. Finally, the mission treatment improves downstream child health outcomes---there is a lower prevalence of diarrhea and higher vaccination rates. These results highlight that promoting an organization's mission can be a powerful motivator for public workers, especially in weakly institutionalized environments.
We implement a lab-in-the-field experiment with 334 Turkish loan officers to document gender discrimination in small business lending and to unpack the mechanisms at play. Each officer reviews multiple real-life loan applications in which we randomize the applicant's gender. While unconditional approval rates are the same for male and female applicants, loan officers are 26 percent more likely to require a guarantor when we present the same application as coming from a female instead of a male entrepreneur. A causal forest algorithm to estimate heterogeneous treatment effects reveals that this discrimination is strongly concentrated among young, inexperienced, and gender-biased loan officers. Discrimination mainly affects female loan applicants in male-dominated industries, indicating how financial frictions can perpetuate entrepreneurial gender segregation across sectors.
Inclusive policies that implement inter-group contact has been found to increase or to decrease discrimination in the empirical literature. These conflicting results might originate from differences in addressed types of discrimination – i.e. whether discriminatory behavior arises from differences in tastes or beliefs – and differences in contact’s capacity to alter tastes and beliefs. This article investigates the causal effect of contact on statistical and taste-based discrimination as well as on the associated anticipation effects of the latter. In our experiment, republicans and democrats are assigned to teams comprising out-group members or to remain in homogeneous teams, interact in a cooperative task, and subsequently play different games apt to elicit their discriminatory tastes and beliefs about out-groups. Our contact intervention remedied taste-based discrimination by about 45%, and had no significant impact on inter-group trust and on statistical discrimination. Derived lessons for policymakers concerned with the reduction of discrimination involve features that inclusive policies should strive for by changing preferences or beliefs, and thereby reducing different types of discrimination.
Do managers’ gender attitudes affect gender gaps within the workplace? Building on previous work showing that parenting daughters affects fathers’ gender attitudes, we exploit birth events within firms and show that females’ relative earnings and employment increase by 4.4% and 2.9% in firms where male managers experience the birth of their first daughter. These effects are driven by a change in the gender mix of new hires and by an increase in managers’ propensity to hire women with post-secondary education, who work full time, and who are high earners relative to the firm’s salary distribution. Finally, as we do not find any effect on firm performance, we conclude that the observed improvement in gender equality did not undermine firm efficiency.
The strength of personal values and how these penetrate firm organization is measured through a survey of 1500 Danish CEOs. We construct a measure of value-based leadership and investigate the impact on firm outcomes and firm policies. First, value-based leadership is more common in family firms and with female leadership, but not correlated to leaders' IQ nor to management practices. Second, value-based leadership is positively correlated to firm performance. Causal evidence is provided through the analysis of CEO changes and CEO hospitalizations. Third, value-based leaders build more resilient organizations in a pandemic crisis and generate less conflicts, lower employee turnover and have a flatter organizational structure in normal times. Taken together, leaders' personal values and how they spread through organizations are important factors in explaining the value they bring to their firms.
How does task expertise affect the allocation of attention? Our theory argues that when attention is scarce, expertise and attention are complements: a manager optimally focuses her attention on tasks in which she has relatively more expertise; she "manages with style." In contrast, when attention is abundant, attention and expertise become substitutes: a manager shifts her attention towards tasks she has less expertise in; she "manages against her style." Using micro-level data on managers from two unrelated companies, and employing various measures of time stress and managerial attention, we find converging and supporting evidence. A manager’s attention capacity determines whether she "manages with style," or "against it." While current behavioral approaches view "managing with style" as prevalent and biased, our theory and findings suggest, instead, that it is contingent and optimal.
Existing empirical research suggests worker output and workload are positively correlated, but how the two are related is not yet well understood. We study how workload affects performance outcomes and how workers adjust labor input and organize tasks in response to workload. We do so using a dynamic multi-tasking model with labor-leisure and quality-quantity choices in which the production environment allows for efficiencies of scale. We find that in heterogeneous contexts, where there is more learning within projects than within the same step across projects, it is optimal to work sequentially, completing one project before starting the next. In contrast, in homogeneous contexts, in which learning within the same step across projects is relatively stronger, it is optimal to work in batches, completing the same step across projects. Output increases with workload in either context, but while timeliness may decrease in heterogeneous contexts, quality and timeliness are expected to increase in homogeneous contexts because higher workload increases the efficiency of batch work. We provide empirical evidence of the theoretical predictions using detailed workload, productivity, time and internet use data of insurance claims examiners across two departments that handle heterogeneous and homogeneous claims respectively, and who face plausibly exogenous variation in workload. We show evidence consistent with examiners working sequentially in the heterogeneous context and working in batches in the homogeneous context. A one standard deviation increase in workload increases output by 2.8% in the heterogeneous context and 9.3% in the homogeneous context, while tardiness decreases and quality increases in the latter context only.
We propose a model of strategic delegation in professional labor markets with heterogeneous workers. A big firm, competing with fringe firms, decides whether to exercise its market power to suppress wages. Alternatively, it may choose to delegate hiring to agents (divisions), thereby committing to bid more fiercely for workers. This reduces the incentive for fringe firms of going toe-to-toe with the big firm. In equilibrium, the big firm chooses to delegate unless (a) it is too large, (b) not productive enough, or (c) too productive. While a more productive big firm delegates more often, the optimal number of agents it delegates to decreases in the big firm's productivity. The presence of big firms does not substantially lower social welfare, unless its size exceeds the tipping point beyond which it chooses not to delegate. The introduction of a minimum wage in a professional labor market induces the big firm to delegate more aggressively, increasing match quality. Thus, social welfare may increase despite a drop in employment.
The role of organization structure has been of great interest to stakeholders interested in boosting firm productivity and profits. As organizational architecture affects the level of interaction among workers, who often realize heterogenous compensation for their effort, different processes of social comparison are likely to emerge under varying structures. This paper contributes to a nascent literature on these processes, investigating how firms' organizational choices are influenced by envy. It considers a principal-two agent model where ex-ante identical agents either work jointly in a single unit, or separately in different units of a firm. It is posited that envy arises only in the first case, and the paper derives the optimal organizational form depending on technology complementarity, envy, and financial constraints on the agents' side. It identifies conditions under which there is always a Nash equilibrium of the effort choice among the agents under joint production. The findings of the model are that while joint production can take advantage of technological complementarities, with unlimited liability, this advantage decreases with envy. When liability is limited, however, the envy effect moves in opposite direction and therefore with complementarity factor increase agents' effort level, such that joint production is always preferable for the principal. Furthermore, the paper shows that individual bonus schemes outperform group bonus schemes as long as rent is earned.
In many organizations, members need to be assigned to certain positions, whether these are legislators to committees, executives to roles, or workers to teams. I show that these assignment problems lead to novel questions about institutional stability. Will the set of agents being assigned prefer or vote in favor of some alternative allocation over their current allocation thereby lobbying to reform the institution? I explore questions of institutional stability where the choice of the institution (i.e., the matching mechanism) is chosen and agreed upon by the very people who are assigned by the assignment procedure. I endogenize an institution's choice of assignment procedures by analyzing an important sub-case of social choice that I call a social allocation choice problem. I discuss a variety of voting rules (plurality, majority, and unanimity) and their institutional stability counterparts in matching theory (popular matching, majority stability, and pareto efficiency). The novel property of majority stability is introduced and its existence and robustness to correlated preferences and interdependent preferences are analyzed. Chains of envy are necessary to overcome the packing problem that arises in reallocating a majority to a new set of assignments under an alternative allocation. This makes majority stability, in sharp contrast to plurality rule, strikingly robust to correlated preferences.
We use data on a large wave of directed hospital mergers and closures in Ontario to investigate the impact of hospital reorganization on patient welfare. We estimate a model of patient hospital choice on data collected before the reorganization, finding that both distance and hospital quality are determinants of choice. The model is then used to simulate the short-run and long-run welfare impact of reorganization. Results suggest that cost savings and efficiency are not the only factors to consider when restructuring in settings where patients do not pay for services. Hospital access and quality must be considered.
We study how prices and delivery times respond to the statutory centralization of procurement. Our data set contains information on each purchase order of stan- dardized medical devices by all the hospitals in one Italian region. We estimate the effects of centralization in a difference-in-differences design leveraging the stag- gered implementation of the statutory centralization for a sub-set of medical devices. We document that centralization generated a trade-o between prices and delivery times. Centralized medical devices are 15% less expensive, but are delivered with slightly longer (20%) waiting time, compared to non-centralized devices. To learn more about the mechanism we match purchase orders with contract level data, and nd that the reduction in prices might be associated to bulk purchasing from a limited sub-set of suppliers.
When deciding whether to introduce market-based prices into a regulated market, a regulator faces the following tradeoff: profit incentives may reduce costs through the more efficient allocation of resources, but the presence of market power may lead to increased markups. We use a detailed dataset on electricity transactions to investigate the impact of market-based deregulation in the context of the U.S. electricity sector. We find that the increase in markups dominates despite modest efficiency gains, leading to higher prices to consumers. Deregulation does not necessarily lead to lower prices to consumers. A consumer-oriented regulator may prefer to regulate rates to be consumer friendly, rather than let prices be subject to market power.
This paper provides evidence that broad outsourcing scope, whereby a buyer assigns a large share of its outsourced activities to a single supplier, increases both parties’ willingness to cooperate with each other. We also provide evidence that the effect of such broad scope on mutual cooperation is greater when externalities between suppliers, which are internalized in broad scope relationships, are more important. We document these effects in the context of outsourcing agreements between major and regional airlines in the US, where we measure cooperation as landing time slot exchanges during inclement weather. Because outsourcing scope – the share of a major’s routes that are assigned to a regional – varies across airports within a given outsourcing relationship, we are able to include relationship fixed effects in our regressions. This rare feature of our data allows us to separate the externality internalization mechanism from alternative mechanisms that operate at the interorganizational relationship level, and hence do not vary within a relationship, including dependence balancing, self-enforcing agreements, and interorganizational trust. To the best of our knowledge, this is the first empirical study showing that broad outsourcing scope governs bilateral interfirm cooperation, and isolating a precise mechanism through which it does so.
International contracts are difficult to enforce, in particular in the presence of weak institutions. Resource rich economies can hold-up multinational oil companies by renegotiating tax payments after investments occurred. Anticipating such events, firms can avoid such hold-ups by devising self-enforcing agreements and relying on future gains from trade. Theoretically, this can be achieved by back-loading investments, production and tax flows. Using the universe of contracts between resource rich economies and the seven largest multinationals (Big Oil) since 1950, we show that contracts between the multinationals and resource rich economies with weak institutions are back-loaded relative to countries with strong institutions. This pattern is robust to a variety of definitions, choices of sub-samples and a large number of controls. By exploiting the timing of the first oil price shock, we show that the back-loading in countries with weak institutions only emerges in the data in early 1970s, while we do not find any evidence for back-loading between 1950 and 1970. We attribute this to binding political constraints which would not allow the US to use its military power to enforce contracts since the early 1970s and which became public knowledge during the events surrounding the Yom Kippur War in 1973.
We propose a micro-founded theory of diversified firms and offer supporting evidence. The theory suggests that diversified firms exist because they allow better deployment of factors that, because of sub-additive contracting costs, are hard to trade in fractions. Firms diversify into industries in which these factors are more productive than any alternatives available in the factor market. The theory portrays diversified firms as mechanisms that, like markets, allow specialization by enabling factors to be used on a larger scale. It identifies specific similarities in the factor demands and behaviors of the individual businesses constituting these firms and predicts that the productivity of a merged entity is below that of the acquirer, even when the merger is optimal.
We present a mechanism based on managerial incentives through which common ownership affects product market outcomes. Firm-level variation in common ownership causes variation in managerial incentives and productivity across firms, which leads to intra-industry and intra-firm cross-market variation in prices, output, markups, and market shares that is consistent with empirical evidence. The organizational structure of multiproduct firms and the passivity of common owners determine whether higher prices under common ownership result from higher costs or from higher markups. Using panel regressions and a difference-in-differences design we document that managerial incentives are less performance-sensitive in firms with more common ownership.
In this study we examine the effectiveness of innovation alliances under conditions of task uncertainty. Drawing from the organization design literature, we argue that task uncertainty increases coordination difficulties between alliance partners even when problems of cooperation owing to incentive, ownership and appropriation conflicts are not in evidence. We further suggest that co-development alliances requiring stronger task interdependence, and public-private alliances involving different organizational types, amplify the coordination difficulties under task uncertainty. Using global data on the drug development history of 2,976 antibacterial agents in the period 1995-2018, we find that the likelihood that a drug progresses from one development phase to the next is lower for drug development with alliances compared to solo efforts. Further, alliances between private sector partners outperform public-private alliances, and co-development alliances are less effective relative to more arm’s length arrangements. These findings draw attention to the understudied role of coordination in alliances, while highlighting the salience of task uncertainty distinct from behavioral or environmental uncertainty in innovation contexts.
It is a core principle of antitrust law and theory that reduced market concentration lowers the risk of anticompetitive behavior. We demonstrate that this principle is fundamentally incomplete. Traditional models assume that firms interact only as competitors. We examine and model “Collaborative Industries,” which afford rival firms opportunities to meaningfully collaborate. For example, in some industries, firms compete to win business, but then work together to complete production (e.g., through subcontracting). Firms in Collaborative Industries have powerful ways to reward or punish each other beyond raising or lowering the prices they offer to customers. These mechanisms create much greater scope for collusion than economic models conventionally recognize. We show that Collaborative Industries can sustain anticompetitive collusive behavior no matter how unconcentrated the industry becomes. In some instances, lower market concentration makes collusion easier; smaller firms may be more dependent on collaboration with rivals and thus may be easier to punish if they undercut collusion. These results run directly counter to the conventional wisdom, gleaned from models of non-Collaborative Industries, that permeates antitrust law.
We jointly study firm boundaries and the allocation of decision rights within them by confronting an incomplete-contracts model with data on vertical integration and delegation for thousands of firms around the world. Integration has an option value: it confers authority to delegate or centralize decision rights, depending on who can best solve problems that arise in the course of an uncertain production process. The model can explain why more vertically integrated firms tend to delegate more, as observed in our data. In line with the model’s predictions, we find that firms are more likely to integrate suppliers that produce more valuable inputs and operate in industries with more dispersed productivity, and that firms delegate more decisions to integrated suppliers that produce more valuable inputs and operate in more productive industries.
How quickly producers can adjust their workforce with changing demand is important for aggregate productivity. Labor outsourcing allows quick adjustments but potentially exposes sensitive information to outsiders, which may deter producers from outsourcing if the legal system does not adequately protect secret information. I quantify the impact of trade secret protection on labor outsourcing, and consequently, on aggregate productivity. First, using event studies and difference-in-differences around the staggered adoption of the Uniform Trade Secrets Act, I show that better trade secret protection leads to increased outsourcing. Second, to quantify the resulting gains in productivity, I build a structural model of outsourcing and multi-industry dynamics and estimate it with data from the U.S. manufacturing sector. I decompose the cross-state differences in labor outsourcing into differences in firing cost, industry composition, demand volatility, and trade secret protection. Strengthening trade secret protection for all states to match the state with the strictest protection would increase outsourcing employment by 29% and aggregate output by 0.8%.
This paper examines the structure of international Just-in-Time (JIT) supply chains. Using information about JIT supply chain management for a large panel of French manufacturers I first document that JIT is widespread across all industries and accounts for roughly two thirds of aggregate employment and trade. Next, I establish two novel stylized facts about the structure of JIT supply chains: They are more concentrated in space (1) and more vertically integrated both domestically and internationally (2), than their `traditional' counterparts. I rationalize these patterns in a framework of sequential production where failure to coordinate adaptation decisions in the presence of upstream and demand shocks leads to inventory holding. In JIT supply chains, information about downstream demand conditions is shared throughout the supply chain, which facilitates coordination. The associated inventory saving effect is stronger when firms are close to each other, so that the supply chain reacts quickly to changes in demand; and when they are part of the same company, so that incentives for adaptation are aligned. Guided by further predictions of the model, I present empirical evidence that these organizational complementarities depend on inventory holding costs, demand persistence, and the ability to push inventories upstream via contractual penalties. Finally, I discuss long term implications of Brexit and COVID-19 for the structure of international supply chains based on my findings.
Governments often delegate the fight for control over natural or political resources to local armed groups. This paper presents a model of proxy war in which governments delegate conflict by sending non-negotiable offers to militias. Contracts are composed of monetary transfers and of a sharing rule of political influence. Armed groups are positioned along a continuum representing the ideological misalignment between each militia and its government sponsor. Using a principal-agent model with two principals and two agents, I characterize the optimal contracts under complete and incomplete information about the militias' ideological positions. The analysis shows that with incomplete information armed groups receive lower transfers but are left with higher political independence. When governments strategically choose whether to fight by delegation or engage directly in conflict, the equilibria can be characterized in function of the local support to militias. If governments compete to recruit the same armed group, the militia generally carves out higher rents and pledges allegiance to the government ideologically closer.
We consider a setting where groups of agents interact, any group member’s action inducing an externality in the same group, and aggregate action in one group induces an externality in other groups. The interplay between in-group and out-group interactions is shown to affect the comparison between the decentralized and the cooperative outcomes, and also the effect of the fundamentals on individual decisions and welfare, compared to the case where there is no in-group or out-group interaction. Moreover, group characteristics greatly influence the capacity of group-level cooperation to alleviate the inefficiency problems driven by decentralization. Finally, we identify cases where inter-group relocation policies result in efficiency gains, and highlight how this crucially depends on the existence and nature of in-group and out-group interactions. All results stress the importance to acknowledge interactions between potential collective action problems.
This paper studies the impact of social learning on the formation of close-knit communities. It provides empirical support to the hypothesis, put forth by the historian Fred Shannon in 1945, that local soil heterogeneity limited the ability of American farmers to learn from the experience of their neighbors, and that this contributed to their ``traditional individualism.'' Consistent with this hypothesis, I establish that historically, U.S. counties with a higher degree of soil heterogeneity displayed weaker communal ties. They were also characterized by higher agricultural diversity and a lower rate of adoption of fertilizers, which is consistent with soil heterogeneity limiting the scope of farmers' social learning. I provide causal evidence on the formation of this pattern in a Difference-in-Differences framework, documenting a reduction in the strength of farmers' communal ties following migration to a soil-heterogeneous county, relative to farmers that moved to a soil-homogeneous county. Using the same design, I also show that soil heterogeneity did not affect the social ties of non-farmers. The impact of soil heterogeneity is long-lasting, still affecting culture today. These findings suggest that, while understudied, social learning is an important determinant of culture.
Although the effect of trust on local cooperation is well-documented, little is known about how trust influences global cooperation. Building on a large body of theoretical and experimental literature, we hypothesize that trust shared in a society may positively affect global cooperative behavior. We provide empirical evidence in the context of climate change that an increase in trust is associated with a larger reduction in CO2 emissions across countries, controlling for country fixed effects and a number of time-varying factors. As a falsification test, we estimate the relationship on an earlier period when there was no concern of man-made climate change (before the 1980s) and find no impact of trust on CO2 emissions during that period.
Much economic activity in developing countries takes place in groups whose members are associated through social networks. Group sales can connect small-scale producers to broader markets, but introduce opportunities for free-riding. We explore the effect of collective incentives on group production among rural Indian dairy cooperatives. In a randomized evaluation, we find village-level cooperatives can solve internal collective action problems to improve production quality. However, some village elites decline payments when they cannot control information dis- closure. Opting out reflects frictions in allocating surplus within a social network, and suggests some transparency-based efforts to limit elite capture may undermine policy goals.
Open access is a defining feature of cyberspace that challenges the conventional wisdom on property rights. This paper presents a case where property rights may lead to the failure of the commons in cyberspace. We consider a game theoretic model of competing creations in which a freelance creator decides whether to choose open access in the shadow of a threat of litigation from the copyright holder, and competition between open access and its proprietary alternative allows a continuum of users to choose between voluntary contributions or royalty payment. When individuals are heterogeneous in social preference, the model exhibits two distinct equilibria: a reproduction equilibrium and an original contribution equilibrium. Copyright law can dramatically change the set of equilibria. Enforcing authorized use without considerable limitations on the owner's exclusive rights may erode the original contribution equilibrium completely. The key predictions of the model are then tested and supported by data from Github. A takedown notice has a persistent negative effect on subsequent sharing, and repositories shared by foreign users attract fewer contributions as their home countries improve upon software piracy prevention. Our findings caution against a secure property rights system in cyberspace.
There has been a heated debate related to the effects of business background on ethical behavior. According to some authors, students majoring in business courses – such as accounting, economics, and management – would be more likely to free ride or defect from coalitions in collective action situations, given the emphasis of such courses on individualistic values. Other authors have challenged that view, presenting empirical evidence that questions the link between business education and opportunistic behaviors. The present paper revisits this debate, by studying the impact of business education on rule compliance in a specific type of information commons (libraries). Employing a novel dataset related to more than 700,000 library transactions during a 10-year period (2006-2015), I correlate business background with users’ compliance behavior, while controlling for their time-invariant characteristics. I find no evidence of a significant effect of business education on rule compliance in this specific setting. The results reported in the paper have important implications for ethical theories in business and economics, with an emphasis on standard explanations of organizational behavior.
We provide new evidence on how conflict adversely affects economic outcomes. Specifically, we ask whether and how the production network is a first-order determinant of the propagation of conflict to firms outside of conflict zone. Using microdata on Indian manufacturing plants and geo-coded information on Maoist insurgency, we first provide an estimate of the direct exposure to conflict. Firms located in conflict affected areas suffer a loss of approximately 8% of their output. Estimating structurally a general equilibrium model of production networks, we then obtain an estimate for the overall macroeconomic impact of the Maoist insurgency by taking this propagation effects into account. We find that the Maoist insurgency resulted in an average yearly 1.5% decline in aggregate output of Indian’s manufacturing sector. Only the 40% of this loss is due to direct exposure to conflict, whereas the remaining 60% explained by the indirect exposure to conflict through the network production.
Urban mobility free-floating sharing services (e.g. cars, bikes, scooters) have recently emerged in several metro cities of the world, providing alternative individual transportation and affecting their citizens’ daily routine. In order to preserve the advantages and the sustainability of this typical self-service, opportunistic behaviors of its users must be constrained and collective actions incentivized. The governance of these services, enabled by new advances in information technology, has made the means available for the implementation of several strategies. But which are the most efficient to mitigate the negative externalities and improve the creation of value for the community of users and the entrepreneur? To answer this question this study analyzes the effects of changes in the rules of use of a dock-less bike sharing service in São Paulo city, Brazil, by adapting the Institutional Analysis Development (IAD) framework. A scientific insight enabled the empirical test of this new service through this traditional analytical tool to explain how its governance is capable of orchestrating exogenous and endogenous factors that influence its economic results. Apart from extending Polycentric Governance scientific practices to this new field of business strategy, this study also provides managerial contributions.
I show that in a representative democracy, the predominance of high-income citizens in the legislature may imply that no legislator supports the redistribution policy low-income citizens prefer. Provided redistribution is the salient policy issue, the predominance of high-income citizens cannot arise if low-income citizens still support more redistribution once in office - they must join high-income citizens in opposing it. I formalize the underlying logic using office-holding premia. High-income citizens can only predominate the legislature if high premia induce low-income citizens to oppose more redistribution once in office. Therefore, all legislators oppose more redistribution, irrespective of their income background.
We study the optimal design of regulation for innovative activities which can have negative social repercussions. We compare two alternative regimes which may provide firms with different incentives to innovate and produce: lenient authorization and strict authorization. We find that corruption plays a critical role in the choice of the authorization regime. Corruption exacerbates the costs of using lenient authorization, under which production of socially harmful goods is always authorized. In contrast, corruption can be socially beneficial under strict authorization, since it can mitigate an over-investment problem. Hence, more pervasive corruption favors the adoption of a strict authorization regime and may increase welfare.
The organizational structure of the bureaucracy is a key determinant of policy outcomes. Bureaucratic agencies exhibit wide variation in their organizational capacity, which allows politicians to strategically shape policy implementation. This paper examines what bureaucratic structure implies for the ability of voters to hold politicians electorally accountable. It explicitly models differences in organizational capacity across bureaucratic agencies and considers a problem where a politician must decide not only which policy to choose but which agency, or combination of agencies, will implement it. The choice of implementation feeds back into the choice of policy and this, in turn, affects how voters perceive the performance of the incumbent. This creates a chain of interdependence from agency structure to policy choice and political accountability. The formal model shows that the variation in organizational capacity serves the interests of voters by improving electoral control of politicians.
Using the alphabetic allocation of seats in the European Parliament, we show that former employees of interest groups influence the voting behavior of their col- leagues when sitting together. When the subject of the vote is relevant to the interest group, the probability of the nearby colleagues of casting the same vote increases by 2.4% and that of abstention decreases by 9%, while no effect is detected for other vote subjects. These probabilities increase for votes about budgetary allocations and they are comparable to those of sitting beside party motion leaders. Revolving doors are problematic for the political process also when working in reverse.
New technologies are poised to transform regulatory enforcement by automating costly inspections and driving violation detection rates to 100%. We conduct a randomized field experiment to evaluate the adoption of smart meters for enforcing outdoor water-use regulations in a major US city facing water scarcity. We randomize 88,905 households into 12 groups varying enforcement method (automated or visual inspection) and fine levels. Automated enforcement decreases water use by 3% and violations by 17%. However, due to imperfect deterrence, fines increase by 13,800% and customer service calls increase by 545%, leading to backlash that might make maximum enforcement politically untenable.
The growing concentration in markets raises important questions about the political power of large firms and concentrated industries. Indeed, many scholars and activists have sounded alarms about the dangers of monopoly for democracy and have called for reforming antitrust law to consider the political implications of greater market power. But to date, there has been little systematic evidence linking increased economic concentration to democratic harms in established democracies. This paper reports on the beginnings of our effort to fill this gap by exploring the correlation between the economic concentration of an industry and the lobbying expenditures of its firms. Linking lobbying data with industry-wide and firm-specific economic data, we investigate whether lobbying expenditures have become more concentrated over time and whether this concentration in the political market is associated with concentration in economic markets. We have two primary analyses. The first is an analysis of the correlates of lobbying-expenditure concentration. The second is a case study of six dominant firms in the information technology industry. Our preliminary results are mixed but do not suggest a strong relationship between the concentration of economic and political markets. We also outline the many additional avenues of inquiry opened up by our data that we are currently pursuing.
The literature on the Supreme Court has used static models of voting to estimate the policy preferences of justices that largely ignore the role of precedent, a dynamic component in justices' decision-making process that could help explain part of their voting behavior. I formulate and structurally estimate a dynamic game-theoretic model of decision-making on the U.S. Supreme Court that can infer the preferences of individual justices over ideology versus the weight they place on respecting precedent. I find that justices who experience a high cost of deviating from precedent are more ideological when their votes are likely to be pivotal. Taking the model to data, I find that precedent plays a sizable role in explaining justices' voting behaviors with significant heterogeneity across justices and legal issues. Moreover, incorporating precedent in the analysis changes the ideology estimates for about one-third of the justices in the sample. I use these estimates to simulate counterfactual outcomes for policy proposals, such as court-packing and judicial term limits.
We study a policy during the Bush Administration intended to better control the day-to-day decisions of federal prosecutors, reducing their discretion and increasing the severity of sentencing. We present three main findings. First, using detailed biographical data on US Attorneys appointed by President Bush, we show that Senators' veto power influences how politicized (though not how qualified) the appointed US Attorney is. This shows that inter-branch and inter-party checks can keep expert bureaucracies apolitical. Second, using detailed administrative data from the Department of Justice's internal case monitoring database, we show that only the offices with politicized US Attorneys actually implemented the policy. This shows that managers' commitment is essential for enacting organization-wide reforms. Finally, we show these same offices saw a significant increase in the departure rate of front-line prosecutors following implementation. This shows that exercising political control over bureaucratic decisions entails a large personnel cost.
Are elected politicians treated more leniently when facing criminal charges? I present evidence of judicial discretion in the world's largest democracy, India. I analyze whether pending criminal cases of politicians marginally winning the election are more likely to be closed without a conviction compared to cases from politicians marginally losing the election. I find that winning office increases the chances of a favorable outcome only for politicians from the ruling party. Evidence suggests that the misuse of executive powers and witnesses turning hostile are among the main explanations for this result.
Can citizen-led protests successfully increase redistributive efforts of governments? We study the effects of protests on redistribution under revenue sharing schemes using evidence from Nigeria. We digitized twenty-six years of public finance data from 1988 to 2016 to examine the effects of protests on intergovernmental transfers. We use new survey data to assess the links between transfers, public service provision and tax morale. The results show that protests are associated with increases in intergovernmental transfers in areas aligned with disbursing governments. Residents from areas with higher shares of revenues from transfers report lower public service provision and reduced tax morale.
This paper investigates the effects of police response times on repeat victimization in domestic violence. Given that rapid response policing has been shown to increase the likelihood and severity of criminal sanctions against offenders, theory offers two opposing views on the direction of the effects for repeat victimization of domestic violence. Standard economic theories of crime predict that rapid response policing might have a deterrence effect: by resulting in tougher sanctions for an initially committed act of domestic violence, it may prevent offenders from re-victimizing their partners in the future. Yet, it is also possible that rapid response policing causes a backlash effect: by increasing the likelihood of criminal sanctions, such as arrest, it may increase the risk of retaliatory violence by perpetrators, whereby the frequency of and severity of future domestic violence episodes increases. With these two competing hypotheses in mind, we examine how rapid response policing affect domestic violence domestic violence dynamics. Using unique administrative data on 911 calls in the UK for a period of seven years, we show that a 10 percent longer police response times decrease the likelihood of repeat victimization by 4 percent. We also find that longer response times increase the stringency of legal actions. To establish causality, we exploit call-level variation in response times due to exogenous changes in capacity constraints of officers attending other crimes taking place in the hour prior to the call.
This paper studies the extent and causes of nepotism in the Mexican judiciary. On average, the arrival of a judge into a judicial circuit results in the hiring of 0.05 relatives to key court positions within the following year, a figure which is probably a lower bound of the overall effect. The observed nepotism is concentrated among judges who have been sanctioned for administrative offenses, which indicates that the hiring of relatives is motivated by rent-seeking rather than by efficiency purposes. Importantly for personnel policy, the effect is concentrated among judges who are assigned to courts located in their state of birth—where jobs might be closer to a wider family network— and among appeal judges—who may have access to larger institutional resources and face lower career incentives.
Dissatisfaction with political representation in established democracies goes hand in hand with a craze towards representatives coming from the "civil society" referred to as political outsiders. We explore whether their access to key political positions results in noticeable changes. Specifically, we investigate whether they differ in terms of ability and policy preferences from experienced politicians whose definition and measurement constitute empirical challenges. Our analysis relies on original data on the activity of over 1,000 members of the French Parliament (MPs) between 2012 and 2020. First, we compute a non-parametric multi-dimensional index measuring MPs' legislative activity. Results suggest that the activity of new MPs follows a learning curve and takes time to catch-up with experienced counterparts. However, sitting in Parliament for too long also has a negative impact on activity. Second, we define a new methodology that assesses differences in policy preferences between new and reelected MPs. Evidence reveals that (i) the dynamics of political parties explains much of the voting behavior differences between newly elected and reelected MPs, and that (ii) the voting behavior of new MPs depends strongly on the degree of competition that the MP faces in legislative elections.
Monitoring is a common tool used to mitigate agency problems. Monitors themselves, however, may be biased or corrupt, in particular if they feel obliged to please the party that appoints them. In this paper, I evaluate whether shifting control over auditor assignments improves monitoring effectiveness and impacts outcomes of the audited party. In 2011, Italy switched from allowing mayors to appoint municipal auditors to a system of random assignment, to strengthen oversight and ensure the financial soundness of municipal budgets. My identification exploits the reform's staggered introduction across municipalities in a generalized difference-in-differences setting. I obtain three main findings. First, treated municipalities increase their net surpluses by 9\% and debt repayments by 8\%, in accordance with national government objectives. Second, the improvement is achieved through revenue-based consolidation, rather than by cutting expenditures. Third, treatment effects are significantly larger for municipalities that were more at risk of collusion before the reform, and for those that are matched to a more distant or less connected auditor. Taken together, these findings provide novel quantitative evidence on the importance of independence in auditing, and highlight the improvement in outcomes that may result from changes in the design of monitoring institutions.
Relying on surveys managed by the OECD among its members states since the early 2010’s, we apply textual analysis to the description of the status of regulatory agencies (RAs) in different European countries and sectors, together with characterization of their relationships with various stakeholders, and of their duties and means. Four independent dimensions seems to characterize regulatory governance regimes: the independence from the government; the level of discretion of the RA; the scope of its market monitoring capabilities; its ability to ensure transparency of the supply side. Our regulatory governance indicators exhibit significant correlations with industry evolutions and performances. Strong contrasts exist however across industries. This might reflect partly differences in terms of "maturity". Younger RAs seems characterized by more informality and an access to a poorer set of regulatory tools. However, it is not for sure that sectoral regulators are converging toward a common model, since they are operating in industries with highly contrasted economies which might result in contrasted agendas for the RA. In the e-communication sector, regulatory governance seems critical to the performance in terms of quality of service (broadband), while in the electricity industry, the main objective of the RAs seems to be the price of energy, even at the cost of the environmental quality of electricity. In the transportation industries (air and rail), the focus is on the volume/development of traffic and on the enhancement of safety. As compared to previous studies, our results differ on two main grounds. First, we point out that the degree of discretion of RA's powers matters (in addition to independence). We also highlight that RAs have to promote transparency (in addition to designing markets and setting tariffs). Over the past years in Europe, the most significant evolutions have concerned these two overlooked dimensions of regulatory governance.
This paper explains how to use the calculus of consent framework to think more rigorously about self-governance, and applies this framework to the issue of evaluating federal regulatory agencies. Robust political economy is the idea that institutions should be designed to work well even under weak assumptions about decision-makers’ knowledge and benevolence. I show how the calculus of consent can be used to analyze both incentives and knowledge problems. The calculus is simultaneously a theory of self-governance and a tool for robust political economy analysis. Applying this framework to the case of public administration leads to the conclusion that private goods (such as medicine) tend to be over-regulated, public goods tend to be under-regulated (such as enabling too much pollution), and regulatory agencies tend to be over-centralized (most of them should either be replaced with certification markets or moved to state level).
This paper investigates the role of deep historical elements in shaping intergovernmental tax arrangements as an alternative to the various modern-day features suggested by economic theories. We connect historical elements and key explanatory factors embedded in ethno-cultural diversity and geography to new indicators measuring the taxing rights of sub-national governments in many countries. We estimate the effects of economically relevant and historical institutional variables on the current design of the multi-layer tax structure across more than 70 countries in Africa, the Middle East, and Asia. The results confirm the relevance of the historical variables. Sub-national governments in countries with a higher degree of pre-colonial state centralization tend to have greater discretionary power over tax matters today. The path out of colonization also matters: countries that have experienced a violent independence movement tend to have a more centralized tax structure. Contrary to the conventional view, ethno-cultural diversity falls short in explaining multi-layer tax arrangements. However, the standard economic theories are not all irrelevant: country size and terrain ruggedness tend to imply greater decentralization of tax-related decisions. The results are robust to an extensive set of control variables and a range of IV-GMM estimations using ecological diversity, the Tsetse suitability index, and Neolithic transition timing as instrumental variables for pre-colonial centralization.
We study a model of the rise and fall of illiberal democracies. Voters value both liberty and economic security. In times of crisis, voters may prefer to elect an illiberal government that, by violating constitutional constraints, offers greater economic security but less liberty. However, violating these constraints allows the government to manipulate information, in turn reducing electoral accountability. We show how elements of liberal constitutions induce voters to elect illiberal governments that remain in power for inefficiently long---including forever. We derive insights into what makes constitutions stable against the rise of illiberal governments. We extend the model to allow for illiberal governments to overcome checks and balances and become autocracies. We show that stronger checks and balances are a double-edged sword: they slow down autocratization but may make it more likely. We discuss the empirical relevance of our theoretical framework and its connection to real world examples.
Political leaders differ considerably in the degree to which they consolidate power, but what gives rise to these variations still remains under-theorized. This article studies how informal political constraints associated with leadership turnovers shape intra-elite power dynamics. We argue that aging leaders’ efforts to manage the succession problem create an important, yet impermanent check on the power of subsequent leaders. To test this argument, we use the massive text corpus of Google Ngram to develop a new quantitative measure of power for a global sample of autocratic regime leaders and elites between 1950 and 2019, and employ a research design that leverages within-leader variations in predecessors’ influence for identification. We show that incumbent leaders’ ability to consolidate power becomes more limited when operating in an environment where influential former leaders are present. Further analyses suggest that the presence of former leaders is most effective in reducing incumbents’ ability to unilaterally appoint or remove high-level military and civilian personnel. These findings have implications for our understanding of the dynamics of power-sharing and institutional change in autocracies.
Political authority produces civil peace because a functioning state monopolizes violence (Weber, 1994; Acemoglu et al. 2012). Hobbes argues that against the war of "all against all", the only guardian is a sovereign with unlimited power. In this paper, we turn Hobbes's argument on its head. In a very general setup, we show that a Hobbesian kingship is the ultimate cause of perpetual civil wars. The Hobbesian fight over the kingship can only be prevented by a unanimous democracy. An extended model demonstrates that the unanimous democracy is stabilized by a separation between the executive and the legislature. A majoritarian democracy can prevent Hobbesian wars through a separation between the executive and the judiciary, but only after socioeconomic modernization. Thus, the extended model explains how the separation of powers evolves over the modernization process and why pre-modern democracies embed much stronger veto power than modern democracies (Finer, 1997; Stasavage, 2020).
Policy learning, often involving experimentations, is an essential component of government's decision making. In this project, we aim to describe and understand China's policy experimentations, which are speculated by many to have played a vital role in fostering China's reform and growth. We collect comprehensive data on policy experimentations conducted in China over the past 4 decades by 139 ministries and commissions. We document three main results. First, a substantial share of policy experimentations deviate from representative experimentation sites selection as they over-sample more developed jurisdictions. Second, while the observed deviation from representativeness cannot be justified by a range of models of optimal experimentation design, about half of such deviation can be attributed to misaligned incentives between the central and local governments. Third, deviation from representativeness results in implemented policies that systematically favor more developed regions, because the central government does not adjust for positive selection and discard irrelevant information when evaluating experimentation outcomes. Taken together, these results suggest that policy experimentations take place under various political and bureaucratic constraints, which could limit the scope and bias the direction of policy learning.
We study mechanisms and consequences of institutional capture using novel hand-collected data from the Florentine Republic. In the 14th-15th centuries, political offices were assigned in Florence by a system combining elections and lottery, which ensured for several decades a substantial alternation of power. During the 1420s, after a fiscal crisis, the Medici family became the first lender of the Republic, acquired a leading position in the city, and de facto captured the office allocation mechanism, while leaving the political institutions formally unchanged. Employing individual level information on wealth, political participation, and party affiliation, we document how the Medici manipulated office assignment and show that, under their regime, participation into politics predicted individual wealth. By comparing results for the periods before and after the institutional capture and using complementary data sources on voluntary loans to the Republic, we provide several pieces of evidence that explain our findings in terms of patronage and rent-extraction.
We examine the origins, persistence, and economic consequences of institutional structures of agricultural production. We compare farms in the Argentine Pampas and US Midwest, regions of similar potential input and output mixes. The focus is on 1910-1914, during the international grain trade boom and when census data are available. The Midwest was characterized by small farms and family labor. Land was a commercial asset and traded routinely. The Pampas was characterized by large landholdings and use of external labor. Land was a source of status and held across generations. Status attributes could not be easily monetized for trade, reducing market exchange, limiting entry, and hindering farm restructuring. Differing land property rights followed from English and Spanish colonial and post-independence policies. Geo-climatic factors cannot explain dissimilarities in farm sizes, tenancy, and output mixes, suggesting institutional constraints. Midwest farmers also were more responsive to exogenous signals. There is evidence of moral hazard on Pampas farms. Conjectures on long-term development are provided.
Competitive exams are a standard method for selecting civil servants. Yet, evidence on the effectiveness of such approach is mixed, and lack of personnel data limits our understanding of the mechanisms underlying this varying success. We digitize personnel and financial data to study the impacts of the 1883 Pendleton Act, which mandated exams for some employees in the largest US customs-collection districts. The reform improved targeted employees’ professional background and reduced turnover. However, it did not increase cost-effectiveness in revenue collection. An unintended consequence of the reform was to induce hiring in exempted positions, provoking distortions in districts’ personnel structure. Our results illustrate the importance of considering the incentives of all involved parties when designing reforms.
Two players with conflicting interests make investments and then decide whether to trigger a conflict or maintain peace. In case of conflict, these investments determine the players’ fighting strength and hence their payoffs. In case of peace, preexisting common political institutions determine the players’ payoffs as a function of their investments. We consider the set of political institutions with full information and full commitment and characterize the set of investments compatible with peace. We show that, to maintain peace, the most efficient political institutions may nonetheless distort the players’ investments away from the first-best levels. We find conditions under which this distortion is so large, that political institutions capable of maintaining peace do not exist. Therefore, we provide a novel explanation to why rational players may engage in an inefficient conflict, and to why inefficient political institutions exist.
We synthesize two differences in the power structure of society between Imperial China and Premodern Europe: the Ruler’s absolute power was weaker in Europe, while in China the People were more comparable with the Elites regarding their power and rights. Why was a more symmetric Elite–People relationship compatible with a stronger, not weaker absolute power of the Ruler? We analyze a model of autocratic stability, where we read a stronger absolute power of the Ruler as conditioning more power and rights of the ruled on the Ruler’s will. We show that the stronger the absolute power, the more a more balanced Elite–People relationship will stabilize the autocratic rule, and the greater the Ruler’s incentive to promote such balance, thereby answering the question. Discussion and stylized facts support the theory’s relevance. The theory helps understand the relationship between components of inclusive institutions and the logic behind autocratic stability.
Costly conflict activities are economically very significant, yet the assumption of perfect and costless enforcement of property rights dominates much of economics research. Conflict follows directly from the methodological principle of self-interest and taking it into account in modeling leads to very different findings than in its absence: in straightforward extensions of basic models of exchange, compensation is inversely related to marginal productivity; prices depend on relative power, as well as on preferences, endowments, and technology; exchange itself can be foreclosed by enforcement costs; wage subsidies, land reform and other seemingly inefficient arrangements can be rationalized as appropriate policies in second-best settings; and comparative advantage is distorted in the presence of conflict. Moreover, the costs of conflict are not inevitable as they critically depend on governance and norms. Overall, in the presence of conflict and appropriation Nirvana or first-best models are not empirically plausible. Attributes of modern states such as law, checks and balances, and the bureaucratic form of organization can partly be thought of as restraining conflict and appropriation. These restraints are better than the typical governance alternative, which is personalized, proprietary governance and typically involves autocratic, amateurish, and corrupt rule.
We study how weak constraints on the government affect private contracts and the ownership of firms. To discourage expropriation, a social contract must give the government a stake in firm output. However, this reduces the firm owners’ incentives to honor business contracts with suppliers, undermining their credibility. This tension disappears if suppliers contract directly with the government, which we interpret as a state-owned firm. Our model therefore predicts that under weak political institutions, contracting with the government may be second-best efficient if private business contracts are not verifiable, and hence require self-enforcement. We discuss evidence on privatizations in developing countries, and on the emergence of private firms in East Asia, which is consistent with our model’s predictions. Our model has broader implications for contracting in the shadow of power, including the effect of corporate governance on the design of intra-firm hierarchies.
Recent scholarship contends that ancient Mediterranean economies were able to grow intensively. A common explanation is Smithian growth spurred by reductions in transaction costs and increased trade flows. This paper argues that an ancient Greek institution, proxenia, was among the innovations that allowed such growth in the period 500-0 BCE. Proxenia entailed a Greek city-state declaring an individual from a different city to be a 'public friend', a status that conferred both duties and privileges. Arguably, the functions performed by beneficiaries of proxenia facilitated economic transactions between communities. Text, network and regression analyses confirm the economic significance of proxenia and establish a strong relation between its institutional network and trade intensity. This provides indirect evidence supporting a secular process of market expansion and Smithian growth.
Can seemingly unimportant factors influence voting decisions by making certain issues salient? We study this question in the context of Argentina’s 2015 presidential elections by examining how the quality of the infrastructure of the school where citizens were assigned to vote influenced their voting choice. Exploiting the quasi-random assignment of voters to ballot stations located in different public schools in the City of Buenos Aires, we find that individuals assigned to schools with poorer infrastructure were significantly less likely to vote for Mauricio Macri, the incumbent mayor then running for president. The effect is larger in low-income areas - where fewer people can afford private substitutes to public education - and in places where more households have children in school age. The effect is unlikely to be driven by information provision, since information on public school infrastructure was readily available to parents before elections. An alternative interpretation is that direct exposure to poor school infrastructure at the time of voting makes public education - and the poor performance of the incumbent - more salient.
Citizens have used mass protests in democratic countries in order to signal their preferences or even to show their general dissatisfaction with the incumbent government. We propose a theory of protests as a Bayesian persuasion mechanism and we ask what are the conditions such that protests can be an efficient tool for accountability. We think about accountability in two ways. First, we see accountability purely as persuasion, as incumbents responding to the demands from the street. Secondly, we think about accountability in the sense of citizens reelecting incumbents that are responsive to the demands of the street with higher probability. We show that protests that don’t have a clear demand – and so may face a noisy communication channel, are not only less efficient, but they can be ex-ante inefficient as persuasion mechanism. Moreover, we show that less clear demands also lead to citizens replacing more the incumbent, which will be perceived as less responsive to the demands from the street. We then examine the effects of the large street protests that took place in Brazil in 2013 in both voters and federal legislators behavior. Consistent with the model, we find that there is heterogeneous effect of protests in terms of allocation of amendments related to protests demands, proposal of bills and presence in plenary sessions. Moreover, on average, protests reduced the probability of reelection of the incumbent. The data also allowed us to see interesting features of voters following the protests, such as decrease in turnout, increase in ”protest votes” (null votes), and decrease in incumbents’ vote share.
We study how door die threats ending negotiations affect gridlock and welfare in the ratification of deals/treaties between opposing parties. Failure to agree in any period, as usual, implies a status-quo disagreement payoff and a continuation of the negotiation: a renegotiated amended agreement to be ratified next period. However, under brinkmanship, agreement failure in any period may precipitate instead a "hard" outcome, worse than the status-quo and than any feasible agreement. Such brinkmanship threats improve the scope for agreement, but also entail costs as we show. With symmetric parties only more extreme brinkmanship is beneficial: when an agreement is unlikely to begin with mild brinkmanship only reduces welfare by increasing the equilibrium chance of a hard outcome. If a party is advantaged it typically benefits even from mild threats, as the expected agreement shifts in its favor, while only extreme brinkmanship threats can benefit the disadvantaged party.
This paper tries to understand the workings of economies in which an (endogenous) subset of voters support certain (“tribal”) candidates regardless of their policies; and politicians choose whether or not to run on a tribal ticket. Two political regimes emerge. Non-tribal politics is characterized by centrist policies. Tribal politics produces extreme policies, typically from the right, despite the fact that the tribal base is from the lower middle class. Allowing policy in one period to determine the income distribution in the next, the economy either converges to a steady state or cycles between tribal and non-tribal regimes, depending on the vote share of the minority group, the scope for redistributive policy, and the salience of inter-group disparities.
This paper examines the effect of political favoritism on economic inequality in the short run and political polarization in the long run. We exploit the sudden death of an authoritarian leader – President Chiang Ching-Kuo of Taiwan – in 1988 to generate plausibly exogenous variation in partiality. We find that Chiang’s nationalist regime conducted political favoritism broadly toward political immigrants via cronyism (allocating public sector positions) and also differentially toward specific subgroups of political immigrants via wage discrimination (offering higher payroll to these subgroups within the public sector). Favoritism led to a 7.2 percent immigrant payroll premium, which accounted for nearly three quarters of the immigrant-native payroll gap at the time. This in turn propelled overall income inequality by 4.5 percent. Moreover, political favoritism breeds political polarization in the long run by pulling apart the political views of immigrants and natives. Compared with natives, immigrants who were exposed to favoritism tend to adopt political positions that are aligned with the nationalist party today: they are more likely to support unification with China, and are more inclined to trust the mainland Chinese government and its citizens. Exposed immigrant (native) swing voters are also more (less) likely to vote for the nationalist party today.
This paper documents several new facts about the Soviet Great Famine, 1932–33. There was no aggregate food shortage. Regional mortality rates were unrelated to per capita food production, but positively associated with ethnic Ukrainian population share. Political loyalty to and peasant resistance against the regime were positively associated with famine mortality and state food procurement in regions populated by ethnic Ukrainians. The findings show that, all else equal, ethnic Ukrainians suffered disproportionally high famine mortality and imply ethnic bias in famine-era policies. A back-of-the-envelope calculation indicates that ethnic bias against Ukrainians explains 77% of famine deaths in Russia, Ukraine and Belarus, and 92% in Ukraine.
A central question in development economics is whether there are adequate checks and balances on the executive. This paper provides causal evidence on how increasing constraints on the executive, through the removal of Presidential discretion in judicial appointments, promotes the rule of law. The age structure of judges at the time of the reform and the mandatory retirement age law provide us with an exogenous source of variation in the removal of Presidential discretion in judicial appointments. According to our estimates, Presidential appointment of judges results in additional land expropriations by the government worth 0.14 percent of GDP every year.
What was the impact of military conflict on economic inequality? This paper presents new evidence about the relationship between military conflicts and economic inequality in preindustrial Germany, between 1400 and 1800. I argue that ordinary military conflicts increased economic inequality. Warfare raised the financial needs of towns in preindustrial times, leading to more resource extraction from the population. This resource extraction happened via inequality-promoting channels, such as regressive taxation. Only in truly major wars destruction might outweigh extraction, and reduce inequality. To test this argument a novel panel dataset is constructed combining information about economic inequality in 75 localities and more than 700 conflicts over four centuries. The analysis finds that the many ordinary conflicts – paradigmatic of life in the preindustrial world – were continuous reinforcers of economic inequality. The findings suggests that there existed two countervailing effects of conflicts on inequality: destruction and extraction. I confirm that the Thirty Years’ War was indeed a great equaliser, but this was an exception and not the rule.
This paper studies the origins and function of customs that are manifestations of concern over women's chastity, such as a particularly invasive form of female genital cutting, restrictions on women’s freedom of mobility, and norms about their sexual behavior. The analysis tests the anthropological theory that a particular form of pre-industrial subsistence – pastoralism – favored the adoption of such customs. Pastoralism was characterized by heightened paternity uncertainty due to frequent and often extended periods of male absence from the settlement, implying larger payoffs to imposing restrictions on women’s sexuality. Using within-country variation across 500,000 women in 34 countries, the paper shows that women from historically more pastoral societies (i) are significantly more likely to have undergone infibulation, the most invasive form of female genital cutting; (ii) adhere to more restrictive norms about women’s promiscuity; (iii) are more restricted in their freedom of mobility. Instrumental variable estimations that make use of the ecological determinants of pastoralism support a causal interpretation of the results. The paper further shows that the mechanism behind these patterns is indeed male absence, rather than male dominance, per se, or historical economic development.
Can contemporary female HIV rates be traced back to women’s position in ancestral societies ? In matrilineal kinship organizations, lineage and inheritance are traced through female members and children integrate the kin group of their mother rather than their father. Ethnographic accounts suggest that in matrilineal kinship structures, women benefit from greater autonomy and spousal cooperation is reduced. I test the hypothesis that, by affecting women’s sexual and contraceptive behaviours, ancestral matrilineality has a causal impact on the prevalence of female HIV. Using variation in ethnic groups’ ancestral kinship organizations within Sub-Saharan African countries, I find that females originating from ancestrally matrilineal ethnic groups are today more likely to be infected by HIV. This finding is robust to the inclusion of subnational fixed effects, as well as a large set of cultural, historical, geographical, and environmental factors. I find consistent results using a number of alternative estimation strategies, including a geographic regression discontinuity design at ethnic boundaries and an instrumental variable strategy. Matrilineal females’ riskier sexual and contraceptive behaviours constitute the main explanatory mechanisms. These results call for policies moving beyond the “one-size-fits-all” strategy and taking local cultural contexts into account.
During the 1910s, twelve U.S. states passed and implemented the country’s first minimum-wage laws. They covered only female employees, often in a subset of industries. We study the impact of this regulation using full-count Census data. Our identification strategy compares county-industry trends in county-pairs that straddle state borders. We find that female employment decreased by at least 3.1% at the county-industry level. Across counties, we find that the own-wage elasticity of labor demand varies from around –1.6 to 0.8 as a function of the local cross-industry concentration. Affected female workers switch industries or drop out of the labor force. The latter channel is driven exclusively by married women. We document a rise in male labor demand, and we investigate the channels of substitution between men and women. While on average men and women are gross substitutes, we find evidence that the margin of substitution is driven by the replacement of women in low-rank occupations with men in middle- or high-rank occupations
We propose to explain the gender gap in competitiveness often found in economic experiments with a theoretical framework rooted in evolutionary psychology: Women evolved adaptations to trade off the motivation to acquire resources in competitive environments for effort dedicated to invest directly into offspring, to attract and retain mates, and to not alienate potential allies. Such a tradeoff does not appear binding with the same intensity for men. We offer some initial tests of this idea by conducting a series of experiments using cash and vouchers (in-kind payments dedicated to either children’s needs, gender specific interests or gender neutral interests) to reward subjects at different life stages (parents and non-parents) from countries differing in economic development and culture (China, Togo, Sierra Leone, Bosnia and Colombia). Our main hypothesis is that the type of reward used in the experiment matters, as different types (cash or voucher) may induce specific frames which activate the motivation to compete in different domains of interest, with behavioral predictions that depend on an individual’s sex and life stage (parent and non-parent). Consistent with this view, our results on parents from China, Togo, and Sierra Leone show that, once the incentives are switched from cash to child-benefitting, sex differences in competitiveness disappear. Data on non-parents from Bosnia show that, once cash is substituted by gender stereotypical vouchers (e.g. beauty supplies or sporting goods), gender differences substantially decrease. Importantly, economic and cultural elements matter, as not all societies exhibit a gender gap to start with (Colombia and Nana Benz of Togo).
This paper investigates the real consequences of a system of unscientific, illogical religious beliefs in Vietnam. They prescribe that the matching of husband and wife can be auspicious or inauspicious depending on the pair of their birth years. First, we estimate a structural model of assortative marriage matching market, and show that such beliefs in marriage fortune matter to people’s marriage matching, as much as 15% of how much the age and education profile matters. Second, based on this model, we derive a control function for selection into marriage to estimate the effect of auspicious matches on household outcomes, free of the selection bias. We find that auspicious matches increase household expenditure and income by about 3%, and reduces school dropouts without changing the number and composition of children. The likely mechanism operates on relatives’ transfers in case of a negative shock: auspicious couples receive much more transfer when, say, the family suffers from a health shock. Third, we discuss how such testable, unscientific beliefs can persist when their refutation depends on actions 2-3 steps off the equilibrium path.
How do people form their beliefs about long-term processes in life that they later pass on to the next generation? This paper aims to study long-term memory of Kenyan women and men when it comes to their past reproductive desires 10 years ago and intergenerational transmission of their beliefs to the next generation. The study relies on survey experiments around respondents' recall behavior in a large, ongoing survey that makes use of past information about respondents' desired number of children from a survey when respondents were in their early 20s. Respondents' memory is inaccurate and biased, at least partly so for motivated reasons. Those who have more children than they initially desired are likely not to remember so and to avoid information about their past desires -- what is more, those who are not aware of their excess fertility would also advice the next generation to have more children than those with accurate memory. This combination of motivated memory and intergenerational transmission has the potential to contribute to cultural persistence and might also be behind the persistence of traditions such as female genital mutilation.
This paper studies discrimination in financial markets in the context of the "Dreyfus Affair" in 19th century France. We analyze the market performance of firms with Jewish board members. Building on empirical evidence and a model with antisemitic and unbiased agents, we show how investors betting on firms with Jewish connections earned higher returns during the media campaign organized to rehabilitate Dreyfus, the Jewish officer at the center of the Affair. Our paper provides novel evidence that discrimination can affect stock prices and create rents for some market participants. While these rents may attract betting against discriminators, the uncertainty surrounding discriminatory beliefs can limit the extent of arbitrage and allow discrimination to survive in the long run.
Did Trump rallies aggravate anti-Black racism? Using data from nearly 12 million traffic stops, we show that the probability that a police officer stops a Black driver increases by 5.1% after a Trump rally during his 2015-2016 campaign. The effect is immediate, specific to Black drivers, lasts for up to 50 days after the rally, and is not due to changes in drivers' behavior. The effects are significantly larger among racially biased officers, in areas with more racist attitudes today, that experienced more racial violence during the Jim Crow era, or that relied more heavily on slavery. Results from a 2016 online experiment show that Trump's inflammatory campaign speech, although not explicitly mentioning Black people, specifically aggravated respondents' prejudice that Black people are violent. We find that the same words also increase the effect of a Trump rally among racially biased officers. We take this as evidence that although not explicitly anti-Black, Trump's campaign radicalized racial prejudice against Black people -- through a phenomenon known as dog-whistling -- and the expression of such prejudice in a critical and potentially violent dimension: police behavior.
We study how narratives for racial violence develop and persist in the postbellum US South, where racial mixing was socially taboo and legally prohibited. We posit that after the Civil War, social anxiety about racial mixing is heightened in places with more missing white men, lowering the cost of violence accompanied by narratives that depict Black men as sexual predators. We test this prediction by constructing a novel database of lynchings, which we combine with publicly available information to form a comprehensive dataset of anti-Black violence from 1865-1930. We find that from 1865 to 1880, the probability of a lynching for a sexual offense is 37 percent higher in counties that experienced the average shock to white male casualties. The effect persists and is exacerbated in times of economic downturn. We perform a series of robustness checks, which confirm that the results are not confounded by crime, migration, or other economic impacts of the war. Our findings have important implications for understanding how narratives for racial violence develop and persist, and further elucidate the prevalence of social anxiety around Black male sexuality in the postbellum US, a sentiment that endures today.
Recent theories of the Long Divergence between Middle Eastern and Western European economies focus on Middle Eastern (over-)reliance on religious legitimacy, use of slave soldiers, and persistence of restrictive proscriptions of religious (Islamic) law. These theories take as exogenous the cultural values that complement the prevailing institutions. As a result, they miss the role of cultural values in either supporting the persistence of or inducing change in the economic and institutional environment. In this paper, we address these issues by modeling the joint evolution of institutions and culture. In doing so, we place the various hypotheses of economic divergence into one, unifying framework. We highlight the role that cultural transmission plays in reinforcing institutional evolution toward either theocratic or secular states. We extend the model to shed light on political decentralization and technological change in the two regions.
What drives change in a society's values? From Marx to modernization theory, scholars have often highlighted a connection between structural transformation and value change, yet the links connecting the two processes are not always precisely identified. We argue that one of the ways through which changes in fundamentals lead to change in social values is by altering the distribution of economic power, and, by extension, the relative influence of values held by different groups in society. We study the case of the movement for the abolition of slavery in late 18th and early 19th century England, one of history’s most well-known campaigns for social change, and an instance of massive shift in public opinion on a morally charged topic over only a few decades. Using geocoded data on anti-slavery petitions, MP voting behavior in Parliament and economic activity, we show that support for abolition was strongly connected to the rise of the industrial class. We rely on a large corpus of newspaper articles and the analysis of parliamentary speeches to understand the relative contribution of economic and ideological factors in the anti-abolitionist stance of the new industrial bourgeoisie.
A long tradition in social sciences scholarship has established that kinship-based institutions undermine state building. I argue that kinship networks, when geographically dispersed, cross-cut local cleavages and allow elites to internalize the gains to others from regions far from their own. Dispersed kinship networks, therefore, align the incentives of self-interested elites in favor of state building. I evaluate my argument by examining elite preferences during a state-building reform in 11th century China. I map politicians’ kinship networks using their tomb epitaphs and collect data on their political allegiances from archival materials. Statistical analysis and narrative evidence demonstrate that dispersed kinship networks align elites’ family interests with state interests and incentivize elites to support building a strong central state. My findings highlight the importance of elite social structure in facilitating state development and help understand state building in China – a useful, yet understudied, counterpoint to the Euro-centric literature.
How do societies learn and maintain social norms? Here we use multi-agent reinforcement learning to investigate the learning dynamics of enforcement and compliance behaviors. Artificial agents populate a foraging environment and need to learn to avoid a poisonous berry. Agents learn to avoid eating poisonous berries better when doing so is taboo, meaning the behavior is punished by other agents. The taboo helps overcome a credit-assignment problem in discovering delayed health effects. By probing what individual agents have learned, we demonstrate that normative behavior relies on a sequence of learned skills. Learning rule compliance builds upon prior learning of rule enforcement by other agents. Critically, introducing an additional taboo, which results in punishment for eating a harmless berry, further improves overall returns. This “silly rule” counterintuitively has a positive effect because it gives agents more practice in learning rule enforcement. Our results highlight the benefit of employing a computational model focused on learning to implement complex actions.
We examine the hypothesis from anthropology that the economic requirements of mobile pastoralism made pastoralists highly interdependent within groups but hostile to individuals beyond the radius of extended kin. We find that historical reliance on mobile pastoralism led to the emergence of in-group oriented and family-centered individuals. Specifically, mobile pastoralism explains part of the contemporary variation in in-group relative to out-group trust. This result is valid across countries, between residents of the same country, among second-generation migrants and with an instrumental variable strategy. We also examine the implications of this cultural trait for cooperation and firm development. In a quasi-experimental setting, we find that individuals from mobile pastoralist groups are perceived as more hostile and suspicious. Additionally, we find that greater reliance on mobile pastoralism is associated with less objective promotion criteria within firms and smaller firm size, suggesting that in-group trust bias may affect firm development. This paper contributes to our understanding of how forms of economic production shape the scope and extent of trust.
This paper revisits the role of human capital for economic growth among pre-modern ethnic groups. We hypothesize that exposure to rare natural events drives curiosity and prompts thinking in an attempt to comprehend and explain the phenomenon, thus raising human capital and, ultimately, pre-modern growth. We focus on solar eclipses as one particular trigger of curiosity and empirically establish a robust relationship between their number and several proxies for economic prosperity: social complexity, technological level and population density. Variation in solar eclipse exposure is exogenous as their local incidence is randomly and sparsely distributed all over the globe. Additionally, eclipses' non-destructive character makes them outperform other uncanny natural events, such as volcano eruptions or earthquakes, which have direct negative economic effects. We also offer evidence compatible with the human capital increase we postulate, finding a more intricate thinking process in ethnic groups more exposed to solar eclipses. In particular, we study the development of written language, the playing of strategy games and the accuracy of the folkloric reasoning for eclipses.
Universally, social norms prescribe behavior and attitudes, but societies differ widely in how strictly individuals hold to the norms and sanction those who do not. This paper shows that large adverse events, henceforth “disasters”, lead to tighter social norms. To establish this result, I combine data on the occurrences of conflicts, epidemics, and natural and economic disasters with the World Value Surveys, European Social Surveys, and Gallup World Polls. I use this data set to estimate the effect of disasters on the tightness of social norms in two ways: (i) investigating event-studies that compare individuals interviewed in the weeks before and after the same disaster; and (ii) examining variation in individuals’ past exposure to disasters across countries and cohorts while controlling for country-, cohort-, and life-cycle-specific factors. The event-studies demonstrate that disasters tighten social norms by 9 percent of a standard deviation. The analysis of cross-country variation shows that the effect can persist for decades and is transmitted to the subsequent generation. The results are consistent with a conceptual framework in which disasters increase the returns to coordination within groups and suggest that past exposure to disasters partially explains within-group cohesion and intolerance for non-conformism.
Why did the Black Lives Matter (BLM) movement gain unprecedented momentum in the midst of a pandemic? In this paper, we use county level variation in the timing and magnitude of exposure to COVID-19 to causally identify its effect on protests. Using super spreader events as a source of plausible exogenous variation, we find that counties that are more affected by the pandemic also experience a higher level of protest following the murder of George Floyd. We present several alternative identification strategies and a battery of robustness checks to confirm the validity of our results. We find that the effect is mainly driven by the mobilization of new allies that join the movement for the first time during the pandemic. Around half of the counties that protested never had any BLM protest before. Our evidence suggests that this change can be attributed to a rise in the salience of racial inequalities in the United States. At the same time, counties that traditionally engaged in protest (urban counties with large Black population shares) respond less to an increase in COVID-19 exposure as they are also the ones most severely affected by the pandemic and caught in what we call the "protest poverty trap".
This paper investigates the relationship between local religiosity and episodes of persecutions in a sample of over 2,100 European cities during 1100-1850. We measure the hold of local religion by employing a novel proxy: the existence of the cults of saints in early Western Christianity (pre-1100). Our findings show that cities with an established cult of a saint are associated with a 16 and 10 percentage points (pp) increase in the likelihood of witch trials and killings and were 11 pp more likely to engage in Jewish persecutions. However, cities with more progressive gender norms, measured by the presence of a female saint cult, are less likely to persecute witches compared to male-only saint cities. Our baseline relationship persists after controlling for a range of city-level economic, geographic and institutional characteristics and after accounting for other major confounders. We find two plausible mechanisms behind the saints-persecution relationship: (i) changes in norms induced by longer exposure to Christianity; and (ii) proximity of religious groups due to congruence of religious festivities.
A protracted legislative battle culminated in the abolition of slavery in Brazil in 1888. We build a new data set of roll-call votes on 1884-1888 emancipation bills in the legislature, and connect it to local features of the districts. This allows us to unpack how the material interests of each of the 122 electoral districts coalesced into an abolitionist coalition. Our results help reconcile previous theories of labor coercion. We find slavery-intensive districts opposed emancipation. In line with a labor demand effect, we also find more support for emancipation where immigrants provided an alternative source of labor, and in line with an outside option effect, where slaves could more easily escape. A two-pronged instrumental variables strategy that uses variation in (a) history and geography and (b) heteroskedasticity with respect to the regressors supports a causal interpretation of our main results.
Social media affects not only the way we consume news, but also the way news is produced, including by traditional media outlets. In this paper, we study the propagation of information from social media to mainstream media, and investigate whether news editors are influenced in their editorial decisions by stories popularity on social media. To do so, we build a novel dataset including a representative sample of all tweets produced in French between July 2018 and July 2019 (1.8 billion tweets, around 70% of all tweets in French during the period) and the content published online by about 200 mainstream media during the same time period, and develop novel algorithms to identify and link events on social and mainstream media. To isolate the causal impact of popularity, we rely on the structure of the Twitter network and propose a new instrument based on the interaction between measures of user centrality and news pressure at the time of the event. We show that story popularity has a positive effect on media coverage, and that this effect varies depending on media outlets’ characteristics. These findings shed a new light on our understanding of how editors decide on the coverage for stories, and question the welfare effects of social media.
Do men and women persuade differently? Are they evaluated differently? Using a novel data set of 1517 speech transcripts, evaluation scores and demographic data from highest-profile intervarsity debate tournaments, this research investigates spoken verbal tactics across genders and any ensuing impacts on their performance evaluations. I find significant variation in speech patterns across genders. Female speakers use more personal and disclosing speaking style, with more hedging phrases and disfluencies in their speeches. In their answers to questions from opponents during their speeches, they negate less while having notably longer and more vague answers. Evaluation-wise, across debates, having less analytical speaking style and more positive sentiment is associated with higher scores for female speeches. Within debates, except for disfluencies, there is no robust evidence of gender-specific evaluation standards. These findings suggest that women receive lower scores than men because their speeches contain more score-reducing and fewer score-enhancing features, rather than discrimination.
Can stereotypes in entertainment media explain the recent rise in negative sentiment against foreigners? Despite close economic ties, anti-Japanese sentiment is high in China. I assemble detailed information on Chinese TV broadcasts during 2012 and document that around 20 percent of all TV shows aired during prime time were historical TV dramas set during the Japanese occupation of China during World War II. To identify the causal effect of media on sentiment, I exploit high-frequency data and exogenous variation in the likelihood of viewing Sino-Japanese war dramas due to channel positions and substitution between similar programmes. I show that exposure to these TV shows lead to a significant increase in anti-Japanese protests and anti-Japanese hate speech on social media across China. These effects are driven by privately rather than state-produced TV shows. Using high-frequency internet search data, I show suggestive evidence that exposure to these historical TV dramas only reduces consumption of conspicuously Japanese goods.
Is ethnic diversity good or bad for economic development? Most empirical studies find corrosive effects. In this paper, I show that ethnic diversity need not spell poor development outcomes–a history of within-group heterogeneity can turn ethnic diversity into an advantage for development. I collect new data on a natural experiment from Peru's colonial history: the forced resettlement of native populations in the 16th century. This intervention forced together various ethnic groups in new jurisdictions. Where these groups were composed of more heterogeneous subpopulations, working in different ecological zones of the Andes prior to colonization, ethnic diversity has systematically lower costs and may even become advantageous. Cultural transmission is one likely channel. Specifically, where different ethnic groups were composed of more heterogeneous subpopulations, they engage in more reciprocal behavior and exhibit more open attitudes toward out-group members.
This article examines the effects of mass emigration on human capital accumulation at origin throughout a century. The context is the Galician diaspora, a massive episode with the equivalent of 60% of the region's 1900 population emigrating to Latin America during 1900-30. I construct a database of all Galician municipalities combining newly-digitized historical data with contemporary census and survey data and exploit two sources of plausibly exogenous variation for identification: pioneer emigration caused by extreme rainfall and changes in economic growth in the main migrant destinations. I find that while emigration depressed literacy rates at origin in the short run, its impact became positive after one decade and led to gains in human capital that still persist one hundred years later. I provide evidence on two novel mechanisms of how emigrants can increase human capital in the long run. Galician emigrants funded associations that financed the construction of schools in their hometowns and diffused norms conducive to a persistent change in beliefs about the value of education.
This paper studies the transmission of political ideologies between two countries. I study the diffusion of Populism in Argentina from 1946 through the lenses of the Italian mass migration wave (1880-1945). I hypothesize that populist aspects of Mussolini's Fascist ideology spread to Argentina through migrants, contributing to the rise of Peronism. I focus on Italo-Argentine members of the Argentine parliament and reconstruct their Italian province of origin leveraging on the distribution of surnames and machine learning techniques. Exploiting the timing of migration, a plausibly exogenous measure of exposure to Fascism, and the occurrence of strong earthquakes as push factor for migration, I show that Italo-Argentine MPs with ancestors migrated during Mussolini's rise have a higher probability to be affiliated to the Peronist party. Findings are robust to samples perturbations, placebo tests, and several specification checks, and are mostly significant when looking at recent years. I provide suggestive evidence that ideological transmission occurred by means of a combination of vertical transmission along family lines and transmission through migrants' associations in Argentina and nationalist policies.
This paper addresses whether kinship networks promote or impede entrepreneurship in the Central Asian Republic of Kyrgyzstan. We conducted a survey of firm managers/entrepreneurs about their business networks, resources they receive from and provide to their contacts, their firm’s performance, and the business environment they face. Our data indicate that receiving help from kin connections increases profitability, while providing help to kin decreases it. While kin-reliant firms grow slower than firms with a lower degree of kin assistance, the former grow faster than firms that do not have access to business networks. In addition, kin connections and firm performance are unrelated for firms that have adopted best business practices. Our results demonstrate that directly measuring both receipt and provision of help from/to kin helps resolve the ambiguity of findings in the broader literature regarding the net effects of kin networks on firm performance: the two forms of network use are positively correlated, yet have opposite effects.
The spatial distribution of economic activity depends largely on market access and history, but countries differ greatly in the extent to which their geographies reflect these two determinants. What explains these differences? This paper explores this question using a staggered lifting of restrictions on direct trade with Europe across the Spanish Empire. I combine a difference-in-differences approach with a dynamic spatial equilibrium framework and detailed georeferenced data on maritime travel from historical logbooks to examine this issue. I show that the increase in market access induced by the reform led to a substantial reconfiguration of the economic geography in places that were initially less densely settled. Moreover, I show that modern-day settlement patterns depend less on pre-colonial population density and more on coastal access in areas subjected to the reform. Taken together, the findings show that a key determinant of persistence in economic geography is the level of development of a country as it opens up to trade.
This paper studies the causal effect of technology transfer on early industrial development. Between 1950 and 1957, the Soviet Union supported the “156 Projects” in China for the construction of technologically advanced, large-scale, capital-intensive industrial facilities. We exploit idiosyncratic delays in project completion, due to which some projects received Soviet technology and know-how, while some others were eventually realized by China alone using domestic technology. We find that the Soviet technology had large and persistent effects on plant performance, and know-how diffusion by Soviet experts further boosted firm outcomes. The intervention generated horizontal and vertical spillovers and production reallocation from state-owned to privately-owned companies since the late 1990s.
Much of modern development efforts are channeled through traditional local governance. Yet, despite their importance as politician-bureaucrats, local leaders are rarely paid a living wage. This paper studies the effect of awarding chiefs cultivation rights over village rice land, a stable revenue generating asset, during their term of office. I use a fuzzy spatial regression discontinuity design to exploit a historical natural experiment in Java where in the nineteenth century a homogeneous region was split, and in one part chiefs were awarded cultivation rights but not in the other. To measure political outcomes, I collect original data from the field tracing the modern electoral history of 931 chiefs in 193 villages. Higher land rents cause positive chief performance and economic development. Chiefs raise more funds and construct more public goods such that areas under their control are richer and more developed even today. I find evidence consistent with historically positive political selection as a key mechanism. Higher rents attracted better quality chiefs in the past. These chiefs were so effective at educational provision that the entire village today remains more educated. As a result, despite higher land rents attracting a higher quality pool of candidates today, neither candidates nor chiefs today are more selected compared to the average villager. Instead, positive development outcomes today are shaped by the selection of chiefs whose interests are aligned away from supra-village elite interests. Overall, my findings provide evidence that paying local leaders from a stable source of local revenue can be good for economic development.
During the 19th century the U.S. government privatized nearly a billion acres of land. Initially, settlers and investors could purchase unrestricted amounts of land. Following the 1862 Homestead Act, settlers could also claim up to 160 acres of federal land for free after five years of residency and cultivation. Despite its historical importance and vast scale, evidence of the causal effect of the act on economic development is limited. This study utilizes two empirical strategies to examine the long-run impacts of the act. First, we exploit plausibly exogenous variation along the 1862 frontier resulting from the time of enactment and the patterns of prior land privatizations. Second, we utilize regression discontinuity at the boundaries of former Native Americans tribal land, on which subsequent homesteading was prohibited. Results from both designs indicate that the Homestead Act had a negative effect on development. Areas more exposed to homesteading have lower property values, lower income, and lower levels of education attainment in today. Using census data from the period of initial settlement, we find no evidence of selective sorting on observable demographics. To further explore channels, we study the dynamics of development, the patterns of land ownership, and the geographic and economic mobility of homesteaders relative to land purchasers.
I study politicians' responses to the decentralization of land governance in Burkina Faso. To what extent are politicians motivated by private rents versus a concern with constituent welfare? I develop a theoretical model and test its implications using municipal elections during the experimental pilot phase of a land governance decentralization reform. I find that 0.8 additional political parties contest elections in municipalities randomly slated to receive pilot-phase local land offices, although voter turnout is lower than expected and elections do not become meaningfully more competitive. After implementation and documentation of land rights, both parties and voters behave similarly to their control municipality counterparts. From this pattern, and by examining heterogeneity in political responses according to different tensions emerging from customary land rights systems, I argue that politicians are not only driven by their own private rents, but also demonstrate a policy-centric focus on constituent welfare. This speaks to a trade-off inherent in decentralization: despite potential efficiency gains and increased accountability to local citizens, more localized government could be more vulnerable to elite capture, so the motivations of those elites are important.
Economic theory suggests that leaders may play a key roles in enabling social movements to overcome collective action problems through a variety of distinct mechanisms. Empirical tests of these theories outside the lab are scarce due to both measurement and identification challenges. We conduct multiple field experiments to test theories of leadership in the context of Myanmar’s burgeoning labor union movement. We collaborate with a confederation of labor unions as it mobilizes garment workers in the run-up to a national minimum wage negotiation. We present three sets of results. First, we document that union leaders differ from union members and non-members along several traits that psychologists and organizational sociologists have associated with ability to influence collective outcomes. Second, we randomly embed leaders in group discussions on workers’ preferred and expected minimum wage levels. A leader's presence in the group improves group engagement and increases workers’ consensus around the unions’ preferred minimum wage levels. Third, we conduct a mobilization experiment in which workers are invited to participate in an unannounced activity that features strategic complementarity in turnout. Leaders influence participation through both coordination and social pressure mechanisms rather than by simply motivating workers.
This paper measures excess labor supply in equilibrium. We induce hiring shocks-which employ 24% of the labor force in external month-long jobs-in Indian local labor markets. In peak months, wages increase instantaneously and local aggregate employment declines. In lean months, consistent with severe labor rationing, wages and aggregate employment are unchanged, with positive employment spillovers on remaining workers-indicating that over a quarter of labor supply is rationed. At least 24% of lean self-employment among casual workers occurs because they cannot find jobs. Consequently, traditional survey approaches mismeasure labor market slack. Rationing has broad implications for labor market analysis.
A classic problem faced by organizations is to decide how to distribute incentives among their different layers. By means of a field experiment with a large public-health organization in Sierra Leone and a structural model, we show that financial incentives maximize output when they are equally shared between a front-line worker and her supervisor. Compared to incentive schemes that target exclusively the worker or the supervisor, this intervention significantly raises the number of completed health visits by 61 percent. Also, the shared incentive uniquely improves overall health-service provision and disease incidence. We use these experimental results to structurally estimate a model of service provision and find that shared incentives are effective because (i) worker and supervisor effort are highly complementary, and (ii) contracting frictions discourage transfers between agents. These features have several implications for optimal incentive design. For example, the strong effort complementarity increases the relative effectiveness of schemes that incentivize joint output compared to schemes that directly reward agents for their effort.
This paper examines the role of trade in the development of city-states. I first combine the Hecksher-Ohlin model of trade with the Tullock model of conflict to show how potential crop diversity interacts with trade to affect both production, appropriation, and defense. I then examine how the spatial-covariance of vegetation affects the adoption of coined money, entering battles, and unifying politically within ancient Greece. For all outcomes, semi-parametric hypothesis-tests show the spatial-covariance terms are both economically and statistically significant, but not whether there is more or less of any key crop.
Intellectual property (IP) institutions have been a salient topic of economic research and a prime cause of political disputes, including the latest U.S.-China trade war. In this paper, we investigate the effects of trademark protection, an under-examined form of IP protection, by exploring a historical precedent: China's trademark law of 1923---a law enacted not to protect the domestic economy; but an unanticipated, disapproved response to end conflicts between foreign powers. Exploiting a unique, newly digitized firm-level dataset from Shanghai in 1870-1941 and bilateral product-level data on Chinese imports in 1920-1928, we show that the trademark law spurred employment and trade growth, domestic integration, and brand advertising for Western firms with greater dependence on trademark protection. In contrast, Japanese businesses, who had frequently been accused of counterfeiting, experienced employment contractions. Finally, we show that previous attempts by foreign powers to strengthen trademark protection --- such as extraterritoriality rights, bilateral commercial treaties, and an unenforced legal trademark code --- were ultimately unsuccessful.
Markets in low-income countries often display long tails of inefficient firms and significant misallocation. This paper studies Rwandan coffee mills, an industry initially characterized by widespread inefficiencies that has recently seen a process of consolidation in which exporters have acquired control of a significant number of mills giving rise to multi-plant groups. We combine administrative data with original surveys of both mills and acquirers to understand the consequences of this consolidation. Difference-in-difference results suggest that, controlling for mill and year fixed effects, a mill acquired by a foreign group, but not by a domestic group, improves both productivity and product quality. The difference in performance is not accompanied by changes in mill technology or differential access to finance. Upon acquisition, both foreign and domestic group change mills' managers. Foreign groups, however, recruit younger, more educated and higher ability managers, pay these managers a higher salary (even conditional on manager and mill characteristics) and grant them more autonomy. These “better” managers explain about half of the better performance associated with foreign ownership. The difference in performance reflects superior implementation, rather than management knowledge: following an acquisition, managers in domestic and foreign groups try to implement the same management changes but managers in domestic groups report significantly higher resistance from both workers and farmers and fail to implement the changes. The results have implications for our understanding of organizational change and for fostering market development in emerging markets.
The trade route between Manila and Mexico was a monopoly of the Spanish Crown for more than 250 years. The ships that sailed this route---the Manila Galleons were "the richest ships in all the oceans", but much of the wealth sank at sea and remain undiscovered. We introduce a newly constructed dataset of all of the ships that traveled this route. We show formally how monopoly rents that allowed widespread bribery would have led to overloading and late ship departure, thereby increasing the probability of shipwreck. Empirically, we demonstrate not only that these late and overloaded ships were more likely to experience shipwrecks or to return to port, but that such effect is stronger for galleons carrying more valuable, higher-rent, cargo. This sheds new light on the costs of rent-seeking in European colonial empires.
In their seminal 2001 work, Acemoglu, Johnson, and Robinson (AJR) argued that institutions influence economic development, using the logarithm of settler mortality as an instrument to establish a causal effect. A number of economists and other social scientists have challenged this work in terms of both data and identification strategy. One of these criticisms concerned the IV estimated coefficients and standard errors, which were nearly twice as large as the OLS coefficients and standard errors. My research uses machine learning to test the robustness of AJR’s findings. Using the AJR dataset, which I randomly divide into training data and testing data, I am able to predict the average protection against expropriation risk from settler mortality. These predicted values of property rights protection are then regressed on per capita GDP growth. My results indicate a strong and positive effect of property rights protection on growth, consistent with AJR’s earlier results. Moreover, the use of machine learning to obtain institutional values yields estimates close to the OLS estimates, unlike AJR. Removing African countries and neo-European countries such as Canada, Australia, USA, and New Zealand does not alter the sign and significance of the coefficient of interest. These results suggest that machine learning can be helpful to economists facing data issues.
Do pandemics have lasting consequences for political behavior? The authors address this question by examining the consequences of the deadliest pandemic of the last millennium: the Black Death (1347–1351). They claim that pandemics can influence politics in the long run if the loss of life is high enough to increase the price of labor relative to other factors of production. When this occurs, labor-repressive regimes, such as serfdom, become untenable, which ultimately leads to the development of proto-democratic institutions and associated political cultures that shape modalities of political engagement for generations. The authors test their theory by tracing the consequences of the Black Death in German-speaking Central Europe. They find that areas hit hardest by that pandemic were more likely to adopt inclusive political institutions and equitable land ownership patterns, to exhibit electoral behavior indicating independence from landed elite influence during the transition to mass politics, and to have significantly lower vote shares for Hitler’s National Socialist Party in the Weimar Republic’s fateful 1930 and July 1932 elections.
This paper examines the impact of cultural institutions in India on women’s health and development. It investigates a particular cultural institution - the religious norm that bans cattle slaughter and beef sale/possession in much of India. The majority of the Indian population belongs to religions that consider cows to be sacred. In several sacred Hindu texts, the avoidance of beef consumption is established and regularly reinforced as one of the most important practices. The earliest known reference to a legal ban on cow slaughter is an engraving dated 412 CE on a stupa in Sanchi, Madhya Pradesh, during the reign of Chandragupta II of the Gupta dynasty. Studying the effects of such historical religious norms is important but challenging. For this purpose, we compile the first-ever historical state-level panel data on legislation banning cattle slaughter and beef sale/possession in India from 1950 to the present. We collect and assemble legislative data from 26 Indian states in many different local languages, along with federal documents. We devise a variety of identification strategies to get a sense of the causal effect of beef bans. For instance, we look at state level rollout of beef bans over time and compare the effects on upper caste Hindus, Sikhs, and Jains ( who traditionally don’t consume beef) with the effects on lower caste Hindus, Muslims, and Christians (who traditionally do consume beef). We then combine our data on cultural institutions with 1) household and individual level data on beef consumption from national sample surveys and 2) biomarkers from demographic and health surveys. Using a triple difference-in-differences model, we show that beef bans reduce beef consumption, and reduce women’s hemoglobin in communities that traditionally eat beef.
This paper studies how bureaucratic nepotism works in developing countries. By linking confidential information on bureaucrat's family ties and administrative employer-employee records on the universe of civil servants in Colombia (2011-2017), I document how family connections within the public administration distort the process of hiring, promotion, and compensation of civil servants. I provide evidence on the pervasiveness of close family ties and how they are negatively related to the performance of bureaucrats and governmental agencies. As oppose to the literature on political patronage, I emphasize the role of family connections to top non-elected bureaucrats in shaping public employment outcomes. I evaluate the anti-nepotism legislation introduced in 2015 and its impact on the nepotistic returns to family connections. I find evidence on the limited effectiveness of the reform and highlight the mechanisms through which bureaucrats were able to bypass the reform substituting different margins of favouritism and reshuffling within the public administration.
How do gangs compete for extortion? Using detailed data on individual extortion payments to gangs and sales from a leading wholesale distributor of consumer goods and pharmaceuticals in El Salvador, we document new evidence on the determinants of extortion payments and the economic costs of extortion via pass-through. We exploit a 2016 non-aggression pact between gangs to examine how collusion affects extortion in areas where gangs previously competed. While the non-aggression pact led to a large reduction in violence, we find that it increased extortion by 15% to 20%. Much of the increase in extortion was passed-through to retailers and consumers: we find a large increase in prices for pharmaceutical drugs and a corresponding increase in hospital visits for chronic illnesses. The results shed light on how extortion rates are set and point to an unintended consequence of policies that reduce competition between criminal organizations.
Fiscal modernization is key for long-run economic development. What then enables fiscal modernization? This is the first study to estimate the effect of state capacity expansion on labor coercion as taxation, a practice known as corvée labor. To do so, I construct a new database covering eighteen Javanese provinces over thirty-two years (1874-1905) during the period of Dutch colonial rule. I document the importance of corvée labor and find that national-level policy centralized state finances by gradually replacing corvée with a poll tax. At the same time, however, local state capacity expansion, primarily indigenous officials working as agents for the state, slowed the movement away from corvée. The relationship between state capacity expansion and fiscal modernization therefore depends on what part of the state is expanding. Opposing interests of different state actors can be key in understanding fiscal modernization and public labor coercion, so it is imperative to break open the black box of state capacity and analyze specific actors within the state.
How do severe shocks, such as war, alter the economy? We study how a country's production network is affected by a devastating but localized conflict. We use novel transaction-level data on Ukrainian railway shipments, complemented by administrative data on firms, to document the effect of war on firms and interfirm trade. First, we document substantial propagation effects-trade declines even between firms outside the conflict areas if one of them had traded with the conflict areas before the war. Our estimates suggest that the magnitude of the second-degree effect of conflict is one-third of the first-degree effect. Second, we study firm-level consequences of a change in production network structure. Firms that, for exogenous reasons, become more central in the production network after the start of the conflict receive a lasting boost to their revenues and a temporary one to their profits. A temporary increase in markups suggests a rise in market power as one of the mechanisms. Finally, in a production networks model, we separate the effects of exogenous firm removal and subsequent endogenous network adjustment on firm revenue distribution. At the median of the distribution, network adjustment compensates for 72% of network destruction.
Bureaucracies often design rules and constrain discretion to avoid nepotism. Yet such rules may not be necessary in cases where the interests of the decision-maker and the bureaucracy are aligned. I examine discretionary promotions of junior Pakistan Administrative Services (PAS) bureaucrats, in a setting where corruption and nepotism are viewed as the norm. I compile unique data on the abilities of junior officers, including both publicly available recruitment exam rank and information on job performance that is private to senior officials. Results show that seniors use both public and private information meritocratically in making these fast-track promotions. Despite no explicit incentives, seniors are equally meritocratic when choosing and promoting juniors for other teams as for their own teams. This is consistent with implicit incentives aligning incentives.
Delays in government to person payments limit their protective value. In a field experiment spanning the entirety of two Indian states, we randomized bureaucrats’ access to a mobile phone based e-management platform for India’s flagship workfare program. We randomized which levels of the administrative hierarchy received access to the app, called PayDash. PayDash provided real-time updates on the status of pending payments, identified responsible officers, and enabled immediate follow-up via WhatsApp and phone calls. We have three findings: first, processing times were reduced by 11% of the pre-intervention control mean in treatment areas, with gains concentrated in high payment delay areas. Second, we observe substitutability in providing PayDash at different levels of the bureaucratic hierarchy, suggesting reduced information frictions, not simply improved monitoring, underlie performance gains. Finally, officer transfers - a costly form of incentivizing bureaucrats - declined by 23% in treatment areas.
We study a large-scale land titling reform implemented as a randomized control trial to isolate its causal effects on litigation. The reform consisted of demarcating land parcels, registering existing customary rights, and granting additional legal protection to rightholders. We find that ten years after implementation, the reform doubled the likelihood of households experiencing land-related litigation, but disputes do not escalate into more frequent violent episodes. We suggest that this litigation increase is likely to reflect the complementarity of land titling by registration and by judicial procedures aimed at further clarifying property rights, as the reform registered titles to all parcels but left many of these titles subject to adverse claims. This raised the demand for complementary litigation aimed at perfecting titles for low value parcels which, under the customary system, it was individually optimal to keep unclarified. Consistent with this explanation, we find that the observed increase in litigation takes place among households characterized by low levels of wealth and market integration, who are likely to own land of lower value.
This paper presents the introduction of high-profile enforcement as an important, overlooked driver of regulatory compliance. Compared to policy interventions commonly examined in the economics of crime literature, this type of enforcement is not only more likely to provide exogenous variation in actors’ perceived cost of non-compliance, but also requires significantly less resources from policy makers and enforcement agencies. We examine the possible compliance-enhancing effects of the high-profile investigation and indictment of Paul Manafort starting from June, 2017 for non-compliance with the Foreign Agents Registration Act (FARA). Using a difference-in-differences design comparing compliance under FARA to compliance under the Lobbying Disclosure Act, we demonstrate that that news of Manafort's investigation and subsequent indictment led to an economically large, sustained increase in FARA compliance by corporate lobbyists. These findings are especially relevant to the many white-collar anti-corruption laws for which enforcement has historically been very low.
Soft law governance relies on nongovernmental institutions that establish and implement voluntary standards. Compared with traditional hard law solutions to societal and economic problems, soft law alternatives promise to be more politically feasible to establish and then easier to adapt in the face of changing circumstances. They may also seem more likely to be flexible in what they demand of targeted businesses and other entities. But can soft law actually work to solve major problems? This Article considers the value of soft law governance through the lens of three major voluntary, nongovernmental initiatives that address environmental concerns: (1) ISO 14001 environmental management systems; (2) sustainable forest certification systems; and (3) LEED standards for energy efficient buildings. Taken together, these case studies indicate that, even though soft law governance may hold considerable theoretical appeal, it can also be quite limited in what it actually achieves. Decision-makers should rely on soft law governance only with full recognition of its limitations as well as its alluring characteristics.
Over the last three decades, the art market has undergone a remarkable transformation. Before the 1990s, artworks were sold with hardly any concern about whether they had been stolen or looted, whereas now any reputable gallery or auction house checks the “provenance” of any substantial work before sale to ensure there is nothing problematic in the chain of title. This transformation reflects interlocking changes in law, norms, and institutions. New York’s and more broadly the U.S. courts’ application of American substantive law has destabilized title to stolen and looted goods worldwide because American statutes of limitations generally provide weaker protection for those who possess stolen or looted goods even in good faith. Application of American law has had a profound effect, especially for the high end of the market because even European or Asian investors who purchase art outside of the U.S. may eventually want to sell or display their works in the U.S. Defective title under American law thus affects prices world-wide. The tightening and broader application of American law reflects both long-standing legal principles and changes in social norms towards the redress of historical wrongs, most notably prominent campaigns relating to art confiscated or sold under duress in Nazi Germany. New institutions, most importantly the Art Loss Register (ALR) searchable database of stolen and looted art, have also changed perceptions about minimum standards for good faith purchase, which in turn affected both social norms and litigation. These new norms, in combination with the information provided by the ALR, have influenced the market even for less valuable art, for which sale or display in the U.S. is not a relevant consideration and for which the threat of costly legal action is not credible.
This study offerss a unique mixed-method investigation of the origin of self-governed neighborhood communities in authoritarian China’s megacities. We find a prevalent collective action problem with respect to neighborhood self-governance, but so too do we present evidence that the local government helps homeowners overcome this problem and govern themselves more effectively. Our data also reveal that democratized neighborhoods have better governing outcomes than do non-democratized ones, as evidenced by more effective homeowner control over neighborhood affairs, greater respect for democratic principles, and a higher degree of community identity. Owing to these positive outcomes, homeowner activists in democratized neighborhoods develop deeper trust in their local government than do their counterparts in non-democratized neighborhoods. Most pointedly, we find an authoritarian regime may genuinely support neighborhood self-governance in the interest of building political trust, thereby complicating the conventional view that such regimes either repress civic engagement or manipulate civic organizations for political control.
The expansion of China-based multinational companies (MNCs) present new theoretical and policy questions. A pressing one, in light of the rising tensions between China and the US, concerns Chinese MNCs’ capacity to navigate the intricate US legal system. This article begins to address the question by analyzing Chinese MNCs’ US legal managers. Survey data and in-depth interviews reveal considerable heterogeneity in the US legal management positions at the MNCs, and among those having established such positions, a significant minority chose to deploy expatriates instead of relying on local recruits. Moreover, due to home-state institutional pressure and high transaction and agency cost, state-owned Chinese MNCs are more likely to assign trusted colleagues to supervise the US legal matters. The findings contribute to ongoing debates about Chinese MNCs and outbound investment, US-China relations, state-owned enterprises, corporate legal capacity of MNCs, and human resource management in specialty areas.
This paper identifies factors that may lead businesses to advocate for transnational regulation addressing business conduct. While businesses may initially resist such regulation, they may opt for it in situations of differential regulation that raises their costs relative to their peers. Transnational regulation offers them a means to reduce competitive losses by distributing compliance costs on to peers. Differential regulation is necessary but insufficient to result in corporate advocacy for an international agreement or other form of transnational regulation. Instead, other factors influence the strength or weakness of those preferences for transnational regulation, such as (a) extent of global footprint, (b) net gain or loss resulting from heightened compliance costs, (c) targets for regulatory change: (domestic, foreign, or global), d) pathways for regulatory change (private ordering, lobbying, and transnational), and (e) market participation rates. These factors explain business preferences for transnational regulation when that company is regulated in a jurisdiction that mandates a higher standard. It also explains that similar factors may also lead companies incorporated in unregulated jurisdictions to prefer transnational regulation when they adhere to a higher standard because of standardization drivers and susceptibility to private regulation.
In international agreements, states use language that has stood the test of time. Such settled language may be efficient and further legal certainty but may also have a dark side. In private contracts, boilerplate is Janus-faced: efficiency and certainty; but also take-it-or-leave-it unilateralism. In that context, boilerplate has been found to confer significant advantages on companies at the expense of consumers. By contrast, we know little about boilerplate’s role in public international law, despite its theoretical and practical importance. How boilerplate operates in international law could differ substantially from domestic law. This paper develops a theory on boilerplate in public international law and asks: (1) how does boilerplate affect bargaining, and (2) why do states use boilerplate? (3) where does boilerplate come from and what are the patterns of its diffusion; and (4) how does boilerplate contribute to international law making. It challenges the conventional wisdom that international agreements are closely negotiated and highly responsive to varying constellations of national interests and country circumstances. The implications for the negotiation of agreements and for international cooperation could be significant.
The “California Effect” is a recurring trope in discussions about regulatory interdependence. This effect predicts that businesses active in multiple jurisdictions sometimes adopt the strictest standards that they face in any jurisdiction globally, even if the law does not require global compliance. There is a substantial literature that assumes the existence of California Effects both at the interstate level in the United States and the international level. However, empirical evidence documenting their existence and strength is scarce. This paper investigates the existence of California Effects in data privacy law, a field in which these effects have been said to be particularly influential. Its main goal is to understand the extent to which EU law influences transactions between U.S. online services and consumers. Using a range of computational and traditional quantitative techniques, the paper tracks changes in almost 700 webpages’ privacy policies. The analysis covers two years starting in November 2017, a period that saw the enactment of a new, sweeping data privacy law in the EU. Contrary to what many assume, the analysis reveals that most U.S. online services treat U.S. consumers and EU consumers differently, with EU consumers enjoying higher levels of protection. This result indicates that the impact of EU law on the operations of U.S. online services is limited. Moreover, it suggests that California Effects driven by costs of differentiation might be less important than is commonly assumed, at least in data privacy law. The paper also discusses the implications of these findings for researchers and policymakers.
To prevent market tipping, which inhibits innovation, there is an urgent need to mandate sharing of user information in data-driven markets. Existing legal mechanisms to impose data sharing under EU competition law and data portability under the GDPR are not sufficient to tackle this problem. Mandated data sharing requires the design of a governance structure that combines elements of economically efficient centralization with legally necessary decentralization. We identify three feasible options. One is to centralize investigations and enforcement in a European Data Sharing Agency (EDSA), while decision making power lies with National Competition Authorities in a Board of Supervisors. The second option is to set up a Data Sharing Cooperation Network coordinated through a European Data Sharing Board, with the National Competition Authority best placed to run the investigation adjudicating and enforcing the mandatory data-sharing decision across the EU. A third option is to mix both governance structures and to task national authorities to investigate and adjudicate and the EU-level EDSA with enforcement of data sharing.
The rise of data protection laws is one of the most profound legal changes of this century. Yet, despite their nominal force and widespread adoption, available data indicates that these laws recurrently suffer from an enforcement gap—that is, a wide disparity between the stated protections on the books and the reality of how companies respond to them on the ground. This raises the question: what accounts for this gap and what can be done to improve the performance of these laws? This Article begins by describing three core building blocks of data protection regimes in the United States and Europe—namely, market forces, tort liability and regulatory enforcement—that these jurisdictions combine in different ways to ensure that companies act in accordance consumers’ privacy preferences. It then identifies two key reasons—particularly deep information asymmetries between companies and consumers/regulators, and high levels of market power in many data markets—that enable companies to behave strategically to protect private interests and undermine legal compliance. The conclusion looks at the institutional design of antitrust and anti-fraud laws, two regulatory regimes that face similar challenges in their implementation, to argue that an effective online privacy regulatory system should be built around three key principles. First, the system must multiply monitoring and enforcement resources, and antitrust demonstrates how litigation can fund sophisticated civil-society intermediaries that safeguard consumers. Second, the system must bring violations to light, and anti-fraud policies demonstrate the importance of establishing effective whistleblower programs for data protection. Third, the system must increase governmental accountability, and antitrust provides examples on how to promote public transparency without sacrificing enforcement capacity.
This paper studies the mechanisms that allow political elites from a non-democratic regime to survive a democratic transition and argues that connections is one of them. We document this phenomenon using the transition from the Vichy regime back to democracy in post-World War II France. The politicians who had supported the Vichy regime were purged in a two-stage process whereby local courts, Comités départementaux de libération (CDLs) and a national court, the Jury d'Honneur, sequentially decided on the case of each defendant. First, we show that the Jury was more likely than the CDLs to clear parliamentarians who were Law graduates, a historically powerful group in French politics. The difference in clearance rates between Law graduates and other defendants was 10 percentage points higher in front of the Jury than in front of the CDLs. The Jury overruled the decision of the CDLs to purge Law graduates in 26.36% of the cases whereas it only did so in 15.97% of the cases for other defendants. This Law graduate advantage was consequential and created elite persistence, as it mainly appeared when defendants intended on continuing their political careers. Second, a systematic analysis of the still-classified 17,589 documents of the Jury contained in the dossiers of the defendants is consistent with the hypothesis that the connections of Law graduates to the Jury was a major driver of their advantage and of their ability to avoid the purge. We consider and rule out a series of alternative mechanisms.
This paper evaluates the historical roots of representative forms of governance. We argue that the two most important representative institutions invented in medieval Europe—communes and parliaments—emerged in a sequenced bargain over war and trade. Communes emerged first, when merchants offered attractive enough sums in exchange for rights of self-government. In the process, communes became important new actors in tax collection (given the absence of tax-collecting bureaucracies). Soon after, monarchs sought to reduce their costs of negotiating the "extraordinary" taxes that financed their wars. Rather than negotiate individually with each of their newly important towns, they summoned urban representatives to their pre-existing noble councils, creating parliaments. Exploiting two new panel datasets, our empirical analyses show how war and trade combined to motivate the formation first of communes and then of parliaments.
We examine how fiscal legibility, the ability of a central government to observe local economic conditions for the purposes of taxation, shapes political centralization. When a ruler is unable to observe economic conditions, it can be preferable to grant autonomy to local intermediaries in charge of tax collection to encourage better performance. As a ruler's ability to observe local conditions improves, so does the ability to monitor and sanction underperforming intermediaries. This enables the ruler to tighten control over tax collection, retain more revenue, and establish a more direct state presence. This shift also encourages the ruler to invest in further enhancing fiscal legibility over the longer term. We present a dynamic principal-agent model to illustrate this argument and provide empirical support for the theory using subnational panel data on local political institutions in colonial Mexico. We focus on the effects of a technological innovation that drastically improved the Spanish Crown's ability to observe local economic production: the introduction of the patio process to refine silver. We show that the transition to direct rule differentially increased in mining districts following this technological innovation and that these areas saw greater investments in improving state informational capacity over the long term.
We analyze a model of political competition, in which the uninformed median voter chooses whether to follow or ignore the advice of the elite that forms endogenously to aggregate information. In equilibrium, information transmission is possible only if voters trust the elite's endorsement of potentially biased candidates. When inequality is high, the elite's informational advantage is minimized by the voters' distrust. When inequality reaches a certain threshold, the trust, and thus the information transmission, breaks down completely. Finally, the elite size and thus the extent of information aggregation depends on the amount of trust they can maintain.
We extend the canonical two-state, two-action model of Bayesian persuasion to explore the interaction among censorship, propaganda, and repression in autocracies. Censorship renders propaganda (persuasion) more effective but blocks information useful to the government in deciding whether to repress. When the government has the capacity to implement any censorship level with precision, propaganda is uninformative in equilibrium; repression is a last resort when censorship fails. When the government instead implements censorship with error, propaganda is informative when the cost of repression is high. Our analysis highlights that information manipulation and repression may occur in tandem and that the option to repress affects the nature of censorship and propaganda.
The 2015-2017 Russian Internet Research Agency’s coordinated information operation is one of the earliest and most studied of the social-media age. A set of 38 city-specific inauthentic “Newsfeeds” made up a large, under-analyzed part of its English-language output. We label 1000 tweets from the IRA Newsfeeds and a matched set of real news sources from those same cities with up to five labels indicating the tweet represents a world in unrest and, if so, of what sort. We train a natural-language classifier to extend these labels to 268k IRA tweets and 1.13m control tweets. Compared to the controls, tweets from the IRA were 34 percent more likely to represent unrest, especially crime and identity danger, and this difference jumped to about twice as likely in the months immediately before the election. Agenda-setting by media is well known and well- studied, but this weaponization by a coordinated information operation is novel.
The widespread presence of criminal organizations in strong states presents a theoretical and empirical puzzle. How do criminal organizations — widely believed to thrive in weak states — expand to states with strong capacity? I argue that criminal groups expand where they can strike agreements with local actors for the provision of illegal resources they control, and that this practice is particularly profitable in strong states where using illegal resources is risky. Using a novel measure of organized crime presence, I show, first, that increases in demand for unskilled labor, and in criminals’ capacity to fill it by exploiting migrants allowed southern Italian mafias to expand to the north; and second, that mafia expansion gave a persistent electoral advantage to political parties collaborating with them. This suggests that criminal organizations should be reconceptualized not only as substitutes for weak states but also as complements to strong states.
Candidates’ placements in polls or past elections can be powerful coordination devices. Using a regression discontinuity design in French two-round elections, we show that candidates who place first by only a small margin in the first round are more likely to stay in the race, win, and win conditionally on staying in than those who come in a very close second. The impacts are even larger for ranking second instead of third, and also present for third instead of fourth. Rankings’ effects are largest when candidates have the same political orientation (making coordination more important), but remain strong when two candidates only qualify for the second round (and coordination is not needed). They stem from allied parties agreeing on which candidate should drop out, voters coordinating their choice, and the “bandwagon effect” of desiring to vote for the winner. We find similar results in two-round elections of 19 other countries.
Can machine learning support better governance? In the context of Brazilian municipalities, 2001-2012, we have access to detailed accounts of local budgets and audit data on the associated fiscal corruption. Using the budget variables as predictors, we train a tree-based gradient-boosted classifier to predict the presence of corruption in held-out test data. The trained model, when applied to new data, provides a prediction-based measure of corruption that can be used for new empirical analysis or to support policy responses. We validate the empirical usefulness of this measure by replicating and extending some previous empirical evidence on corruption issues in Brazil. We then explore how the predictions can be used to support policies toward corruption. Our policy simulations show that, relative to the status quo policy of random audits, a targeted policy guided by the machine predictions could detect almost twice as many corrupt municipalities for the same audit rate. Similar gains can be achieved for a politically neutral targeting policy that equalizes audit rates across political parties.
Governments around the world spend an enormous amount of money on R&D. A large part of this investment is wasted, flooding the system with patents that never result in any actual innovation. This effect is especially pronounced in countries with the low level of government accountability. To reconcile the growth of “lemon patents” with the genuine desire of the government to spur innovation, I offer a game-theoretic model, in which the government has a significant stake in technological development and invests in R&D, even if this simultaneously encourages the growth of “lemons”. I illustrate the mechanism by demonstrating the causal impact of Russia’s government policy, which resulted in a simultaneous increase in the number of high-quality patents and a decrease in the share of such patents in the patent pool.
While the existing literature focuses on how revolving-door officials deliver favorable government treatment to firms after leaving public office, this paper theorizes that the post-government career concerns of public officials distort public resource allocation while still in office. To test this theory, I construct a new dataset that links over 98,000 corporate subsidy programs approved by multiple levels of governments with revolving-door officials who joined publicly listed Chinese firms between 2007 and 2019. I show that forward-looking officials provide sizable favorable subsidies to their future employers. To verify the exchange of favors, I document that firms repay public officials who have provided favorable subsidies by hiring and paying them enormous amounts of cash compensation. Finally, I find that the reputation cost is the mechanism through which this quid pro quo relationship is sustained.
This paper analyses 3 million UK Parliament speeches between 1972 and 2011 to understand how the migration flow of immigrants affect the incumbent’s behaviour towards existing and prospective immigrants. As a legacy of the British Empire, the immigrants from commonwealth countries in the UK have a right to vote in the national elections, while the non-commonwealth immigrants do not have this enfranchisement power. I find an increase in the share of enfranchised immigrants makes the incumbent spend more time in the Parliament talking about existing immigrants, address existing immigrants with positive emotion and vote to make future immigration tougher. An increase in disenfranchised immigrants leads to the opposite effect. The enfranchised immigrants undertake more socio-political actions (signing a petition, participating in protests, contacting a politician etc.) compared to disenfranchised immigrants, which drives the incumbent’s behaviour. Disenfranchised immigrants only catch up with the enfranchised immigrants after naturalisation.
We walk in the footsteps of the pioneers of the nonviolent approach to provide a reinterpretation of the histories of the great movements of the twentieth century from a game theoretic perspective, bringing to bear a host of new quantitative analyses to understand the challenges they faced, when they were successful at overcoming them and why. We develop a simple conceptual framework for understanding the strategies available to both the leaders and the followers of political movements, the media and outside audiences, as well as the regimes that they seek to influence, and how these decisions interact. We use this framework to highlight the presence of three key tensions that exist in many political movements. These tensions include: those between the allure of violence and the seeming pedestrianism of nonviolence, between the need for numbers and the need for focus, and between organizations that depend on grassroots mobilization versus hierarchies and leadership. In light of the framework and new quantitative evidence, we then retrace and re-examine the decisions of the participants of the Indian Independence Movement in each of their three great nonviolent drives for change—the Non-Cooperation Movement of the 1920s, the Civil Disobedience Movement of the 1930s and the Quit India Movement of the 1940s—and how they succeeded or failed in addressing these tensions. At each step, we also discuss both grand strategy and the effectiveness of local tactics. We next compare the Indian experience with the movements that came after, including the Civil Rights Movement in the United States, the Arab Spring and recent protests around the world. Finally, we draw on what we have learned to suggest ideas for better implement nonviolent protests today.
We study whether demonstrating against a party can affect election results. To do so, we use the demonstrations that were held on May 1, 2002 in France, between the two rounds of a presidential election where far-right leader Jean-Marie Le Pen competed against right of center incumbent Jacques Chirac. Around 350 demonstrations took place across France on the same day to call for a mobilization against the far right. Using variation in rainfall as an exogenous source of variation in rally attendance, we find that a larger number of partici-pants reduced the number of votes of Jean-Marie Le Pen and the number of invalid ballots, and increased the number of votes for Jacques Chirac. We further observe that the effects of demonstrations were not limited to the municipalities in which they took place but also af-fected the outcomes of other municipalities. Regarding possible mechanisms, we provide suggestive evidence that demonstrations signaled that voting for the far right was socially unacceptable and changed voters’ perceptions of Le Pen’s policies.
Voters are frequently ill-equipped to monitor politicians' actions. Politicians are expected to implement projects, whose benefits sometimes partially accrue to interest groups and not entirely to voters. Since implementing projects is costly, interest groups have an incentive to subsidise policy-making. This paper shows how these considerations interact in a two-periods political agency model with moral hazard and adverse selection. I show how the existence of self-interested interest groups and their involvement in the policy-making process affect voters' welfare. I also show why voters do not fully monitor politicians in the presence of interest groups that might capture projects' benefits.
This paper studies the voting patterns of members of the U.S. Congress on financial regulation between 1991 and 2014. It uses the most comprehensive dataset assembled on campaign contributions from the financial sector and it is the first study on this subject taking a long-term perspective. This long-term approach on a binary dependent variable regression with unbalanced panel data allows me to address the problem of endogeneity in a new and more rigorous manner. This happens because I have multiple votes on the same bill. I find that campaign contributions are the strongest driver of congressional voting. This variable increases the likelihood of voting in favour of deregulatory bills.
Focusing on environmental legislation since 1970s, this paper seeks to identify economic and political causes of party polarization in the US Congress. Three questions guide the analysis. First, why did environmental polarization emerge from initial bipartisanship? Second, why did Republicans become anti-environmental and Democrats pro-environmental? Third, what is the relative role of economic and party forces in explaining environmental polarization? The theoretical framework extends stochastic electoral competition models by incorporating new interest groups into political parties. The model allows us to explain the rise in environmental polarization, the role of interest groups in mitigating the effects of income on environmental voting, and the role of party in shaping votes. Our empirical analysis combine data on congressional environmental votes from 1971 to 2016 with data on legislator characteristics, congressional district economic and demographic information, and interest group contributions. The empirical analysis confirms that party polarization emerged over time from initial bipartisanship, but also finds evidence that economic forces play a role in environmental voting. More results.
We propose a view of firms as subsocieties that are shaped by shared perceptions of purpose and justice. Applying insights from political and legal theory, we discuss how employees are members of these mini-societies who have exchanged certain rights, such as formal authority over their work and compensation structure, for the benefits of membership in the firm. For these employees, expectations arise that are similar to those held by members of civic society at large; namely, that norms of justice and common social aims will be upheld. This view suggests a unique role for those who own and manage firms, as well as a different mechanism from standard theories of the firm for shaping firm boundary decisions. Boundary choices, in addition to their efficiency effects as described by existing theories, are also evaluated by employees for consistency with the espoused purpose and standards of justice of the firm. In general, this subsociety perspective suggests that theories of the firm should account for both societal and efficiency effects when assessing optimal governance of transactions.
This study analyzes the relationship between acquisitions—a centerpiece of corporate strategy—and employees’ sense of purpose. Using data from more than 1.5 million employees, we find that purpose is substantially weaker in companies following recent acquisitions. This association is driven by unique acquisitions and those with opaque disclosed rationales. We explore the performance implications of this relationship. We first isolate the component of purpose directly attributable to the deal, and then relate this component to subsequent performance. We find that deals associated with stronger purpose outperform, and those with weaker purpose do not. Together, our evidence suggests a possible tension between strategic and motivational determinants of acquisition success: while firms benefit strategically from uniqueness, it may also erode the sense of purpose within firms.
This contribution welcomes Williamson’s invitation to continue to ‘push the boundaries’ of his ‘science of economic organization’, integrating economics, organization and law. The essay reviews the boundary expanding revisions of Williamson’s model (by himself and others) highlighting the issues and areas where the integration with organizational and juridical theories has been more successfully performed, and areas calling for future research. A substantive proposition resulting from this analysis is that if the notion of contract is extended (using law more intensively), and if the notion of the firm is disentangled by that of hierarchy (using organization theory more intensively), the contractarian approach developed by Williamson becomes more robust in explaining and designing also knowledge intensive and pluralist forms of economic organization, and less specific to the vertically integrated and hierarchical industrial enterprises that stimulated its birth.
A central theoretical premise is that firms internalize transactions that are not suited for formal contracting. Yet, there is growing evidence that firms rely on formal contracts to govern some of their transactions within the firm. This paper discusses why firms use formal contracts between units and develops a set of propositions for when formal contracts arise. Internalization does not eliminate transactional problems and informal agreements for transactions between units often suffer from problems in understanding what the other unit will do and whether it will actually do what it promises. We argue that many of the features that make formal contracts valuable tools for market exchange are beneficial within firms, even if court enforcement of the contract is not possible. We suggest that formal contracts between units serve as communication and commitment devices that address coordination and incentive problems within the firm by providing clarity and credibility on the rights allocated to the units in the transaction.
In this study, we examine the antecedents of successful collective action. Using a simulation-based approach, we examine contributions to a public-goods game while varying three parameters among actors: extent of cooperativeness (or the strength of social norms), heterogeneity of claims, and heterogeneity of capabilities. Our results show that cooperativeness is neither necessary nor sufficient for collective action; where actors are heterogenous, collective action may fail despite strong norms of cooperativeness. Moreover, in a context with high actor heterogeneity, a meritocratic system that links claims to capabilities and encourages everyone to act in their own self-interest may outperform a more cooperative system. Our study thus offers a rigorous theoretical analysis of the structural conditions that enable collective action by stakeholders and produce successful social movements.
We study the impact of corporate ownership and community conditions on firm environmental pollution. While the existing literature often thinks of environmental pollution as a unitary construct, we emphasize the distinction between toxic emissions, which have immediate but locally bounded impact, and greenhouse gas (GHG) emissions which have gradual but global impact, producing climate change. Using a facility-level panel of all manufacturing facilities in the US from 2010-2018, and leveraging within-facility changes in ownership status, we show that locally owned firms have lower levels of toxic emissions, but they are also less likely to report GHG emissions, and have higher levels of such emissions when they do report them, with these effects being stronger where the owner is not only headquartered locally, but has operations limited to that state. Our study suggests that while the pressures of local embeddedness may drive firms to be more environmentally responsible towards their local community, they also make firms more indifferent to their global environmental impact.
How do firms design incentives compatible with environmental protection? The new institutional economics identifies the challenges of governing common-pool resources and the difficulties of internalizing environmental externalities into regular market transactions. New stakeholder management theory suggests that firms may avoid the tragedy of the commons through the formation of a polycentric governance structure among stakeholders. This paper evaluates these theoretical claims by analyzing the activities of Natura, a Brazilian cosmetics company, regarding Amazon rainforest preservation. We argue that Natura internalizes positive externalities arising from environmental protection by sharing value with stakeholders in rural Amazon communities. To test this proposition, the paper presents a differences-in-differences analysis comparing forest preservation in the municipalities that Natura entered versus those in which it did not. The study employs an instrumental variable based on missing satellite images, which Natura relies upon to make decisions about entry into different municipalities. Quantitative results show that Natura’s entry into a municipality helps to preserve forested areas. Analysis of three mechanisms using information on crop yields ties Natura’s involvement with stakeholder decisions to cultivate forest-generated crops rather than to engage in clear-cutting. This study evidences how firms can foster environmental protection through Coasean mechanisms.
We study how nonmarket actions taken by firms to shape the regulatory environment may impact their strategic market behavior. Studies have shown that corporate political activities (CPAs) can affect policy outcomes and firm value, but their influence on market actions remains underexplored. We propose that firm donations to politicians are associated with reduced investment in new technology infrastructure resources. We also argue that the size of the local market mitigates this effect while the positive local political environment intensifies the negative relationship. Our findings elucidate how firms implement their integrated strategies with both market and nonmarket actions and the important role that the nested nature of the larger political environment and local-level heterogeneity plays in shaping those strategies.
Many of a firm’s most important informational or relational resources are at risk of diffusion to its competitors because they are embedded in the firm’s human capital. Using novel firm- and worker-level data, we present descriptive evidence on the adoption of and outcomes associated with four post-employment restrictive covenants (PERCs) that limit the diffusion of such resources to competitors: non-disclosure agreements (NDA), non-solicitation agreements, non-recruitment agreements, and non-compete agreements. We find that firms tend to adopt these PERCs together, with just three combinations (no PERCs, only an NDA, all four) covering more than 82% of workers and 70% of firms. We examine two rationales for why firms might bundle PERCs together—value creation and pure value capture—and draw out and test their implications both for worker and firm outcomes and for adoption. Our results suggest that pure value capture is the likely rationale for bundling PERCs with the average worker, while value creation is more applicable to top managers. Finally, we document how studying just one PERC can be misleading when such PERCs are bundled.
Research suggests that increased digitization of the labor market, combined with the changing demand for skill, has altered the job-search process. This article argues that these changes have led to increased investments in firm-driven search for talent (or `outbound recruiting'). We investigate this question by proposing a two-sector labor market model and using two data sets, one new, to corroborate our predictions. First, we conduct a nationally representative survey of over 13,000 American workers. We find that nearly 18 percent of all employed workers in the US were hired into their present company by their employer's outbound recruiting effort, a substantial increase over the 4.2 percent observed in prior surveys. Using a post-COVID survey, we find similar results. Moreover, the share of hiring driven by firm-driven search is greatest among higher-income workers, at 20.3 percent, and those with STEM and business degrees, at 20 percent. Considerable regional variation also exists with over a quarter of Silicon Valley workers hired in this manner, but only 14.5 percent of those in Rochester. Second, we complement our worker-level results by analyzing a large sample of job postings in the US economy over the past decade. We find that firms, especially those relying on high-skilled labor, are increasingly developing capabilities to better hunt for talent---hiring more recruiters with skill in online search. Given the growth of this practice, we discuss implications for research on firm strategy and labor markets.
This paper addresses how knowledge scaling–the simultaneous deployment of the same knowledge resource across multiple organizational units–reshapes human capital management. Specifically, we examine acquisitions as sharp opportunities for organizations to scale knowledge and to reconfigure resources. The main argument in this paper is that knowledge scaling may create incentives for organizations to specialize workers on tasks that complement the knowledge being scaled while also weakening the worker-organization relationship when if such tasks rely less on worker-level knowledge that is less specific to the worker (e.g. tacit knowledge and experience). We articulate and find empirical support for these ideas in the context of private post-secondary education in Brazil, where educational groups engaged in a wave of acquisitions between 2006 and 2014 and scaled standardized courseware, pedagogical practices, and managerial processes to target units. Empirically, we combine in-depth interviews to econometric analyses using a unique dataset with information about characteristics of universities, faculty labor contracts, and acquisitions in the Brazilian private higher education market. Our results show that beyond performance gains, knowledge scaling increased the specialization of faculty work arrangements around teaching and led to a sustained increase in turnover rate. This paper contributes to the literatures on resource reconfiguration and on the multi-level nature of strategic human capital by advancing how a firm-level strategy to scale knowledge resources reshapes the nature of how organizations deploy workers as valuable resources.
Public-private partnerships (PPPs) are promising strategic solutions in filling the infrastructure gap. We disentangle two investment decisions: entry decision and entry mode decision. We also make a distinction between different levels of institutional environment: political structure and specific legal rules. In this paper, we focus on demand risk allocation in PPPs as a critical entry mode decision. We also study the effects of a stand-alone PPP law and institutional constraints on the government, as two different levels of institutional context, on risk allocation. Our findings suggest that PPP law is negatively associated with the propensity of transferring demand risk to private partners. Moreover, we show that not only are institutional constraints positively related to risk transfer, but they also moderate the relationship between PPP law and demand risk distribution.
We conduct a conjoint experiment with a nationally representative sample of 3,010 US residents to assess their opinions on the acquisition of domestic companies by foreign firms. On average, US residents are 16 percentage points less likely to support a foreign firm as the preferred acquirer to an American company, compared to an identical domestic firm. We also show that there is a tension between nationalistic preferences and economic incentives. Still, it is quite hard for foreign firms to overcome their disadvantage by offering more favorable deal conditions. Additionally, we demonstrate that liability of foreignness (LOF) is considerably more complex than previously theorized by showing that LOF is not only a firm-level phenomenon, but also runs at the ownership level. Finally, we argue that both practitioners and strategy and IB scholars should pay more attention to the effects of public opinion, as understanding how the local population feel about foreign acquisitions can be quite important to managers when planning their international expansions and when entering negotiations to acquire a foreign company.
A platform's success depends crucially on generating and growing positive network externalities among its various user sides. However, actions undertaken by the platform to generate and manage positive network externalities simultaneously generate political externalities, as platform users are also political agents, and constituents of states. We explain how these political externalities are caused by platform actions and examine their impact at two levels: individuals i.e., platform users and other state constituents, and states. We analyze the interplay of positive network externalities and (negative) political externalities for the platform as it potentially changes user membership and participation on the platform, and triggers changes in the platform's non-market environment as a result of interventions by states. Finally, we draw implications for platform strategy and policy.
Although franchise and management contracts constitute the dominant way of organizing business-to-business relationships within hotel chains, no study has compared their relative performance. This paper aims to explain their differences and assess their impact on online scores, currently a key performance indicator in the hotel industry. We argue that franchises are less effective than management contracts for operating upscale hotels due to the relative advantages that the latter have in transferring and enforcing tacit knowledge, typically embedded in skilled staff and very relevant in such quality-tier hotels. Conversely, franchising is better for large hotels because, first, its incentive structure better addresses managerial shirking (typically more severe as hotel size increases) and, second, it offers advantages when the normalization of business procedures is key to success (as is true for large establishments). Our empirical findings broadly support these arguments in a dataset of 220 Spanish hotel groups, also providing evidence that no single organizational solution fits all situations.
Why do firms outsource research and development (R&D) for some products while conducting R&D in-house for similar ones? An innovating firm risks cannibalizing its existing products. The more profitable these products, the more the firm wants to limit cannibalization. We apply this logic to the organization of R&D by introducing a novel theoretical model in which developing in-house provides the firm more control over the new product's location in product space. An empirical analysis of our testable predictions using pharmaceutical data concerning patents, patent expiration, and outsourcing at various stages of the R&D process supports our theoretical findings.
Does a toxic organizational culture focused on performance lead to misconduct? To address this question, we build on Merton's strain theory and theorize the relationship between organizational culture, structure and misconduct. We first theorize that organizations with cultures characterized by strong performance pressure are more likely to engage in misconduct. Then we consider how organizational structure moderates this relationship, which we hypothesize is weaker in more formalized organizations and stronger in more decentralized organizations. To test these hypotheses, we analyzed the regulatory and law violations of 880 publicly traded firms in the United States and measured organizational culture and structure through a natural language processing (NLP) analysis of the firms’ employee reviews on Glassdoor. The empirical results lend support to our hypotheses. Organizations with high performance pressure are 68 percent more likely to be fined for misconduct than organizations with low performance pressure. The moderation effect of organizational structure is fully supported for decentralization, but only partially supported for formalization.
Rapid international migration of the past decade has led to significant movement of people and firms between countries. As a result, people and business entities with different cultural values have to work together, often under the roof of one organization. Of all cultural components, trust is particularly important for multinational ventures since foreign parties often rely on informal agreements due to difficulty in implementation and enforcement of formal contracts. Trust normally determines the level of authority delegated to other individuals. In this paper, we examine how the asymmetry of generalized trust between home and host regions affects the performance of international firms. Specifically, we focus on the relationships between foreign owners and host country managers in multinational organizations and investigate what happens to firm performance when an owner and a manager come from regions with different levels of generalized trust and presumably have different trust to each other. We find that such trust asymmetry has a significant impact on organizational performance: firms with “under-trusted” managers do worse than other similar ventures. Providing a manager with a “credit” of trust, however, has no negative implications. We attribute the detrimental impact of “under-trust” to a lack of authority delegation, limited information sharing, excessive monitoring and micro-management, and reduced work motivation of managers.
We propose a multilevel model in which pro-market institutions dampen the growth aspirations of entrepreneurs with formally transmitted human capital, while they augment the aspirations of entrepreneurs with human capital acquired in the marketplace. Further, we posit that this mechanism will be triggered when the entrepreneurs’ socio-cognitive trait of fear of failure is low, which could otherwise preclude a role of institutions. We test our predictions on a dataset of individual- and country-level characteristics obtained from the Global Entrepreneurship Monitor and World Development Indicators for the period 2005–2016. Results confirm our predictions and pave the way to institutional adaptive policymaking.
Job satisfaction is an important determinant of health outcomes like depression and morbidity, as well as employee turnover and engagement. Using unique employee-establishment data, we focus on a particular aspect of job satisfaction – an individual’s satisfaction with their workplace decision-making power. Consistent with our prediction, we find a casual relationship between an employee’s ethnic/culturally inherited preference for individualism, their authority and how satisfied they are with their power at the workplace. To account for potential endogeneity, we instrument for decision authority using equivalent workers in a different but similar country. Our estimates also account for establishment random effects, a worker’s earnings and other individual characteristics. A placebo test, using overall job satisfaction, provides reassurance we have identified a specific relationship between an individual’s inherited individualism, their decision authority and satisfaction with their power.