rules stability and growth abstract this paper examines two systems of fiscal redistribution in the context of a growing economy subject to unexpected shocks rules and discretion under the former system the tax system is in place and is known to households contemplating investment decisions under the second redistribution is decided upon only after the investment decisions have been made i find that rules always lead to faster capital accumulation and growth but political support for them is only likely to occur in a stable economy income inequality adversely affects the likelihood of adopting rules especially so in an unstable economy

war and natural resource exploitation abstract we build a theoretical framework that allows for endogenous conflict behaviour i e fighting efforts and for endogenous natural resource exploitation i e speed ownership and investments while depletion is spread in a balanced hotelling fashion during peace the presence of conflict creates incentives for rapacious extraction as this lowers the stakes of future contest this voracious extraction depresses total oil revenue especially if world oil demand is relatively elastic and the government s weapon advantage is weak some of these political distortions can be overcome by bribing rebels or by government investment in weapons the shadow of conflict can also make less efficient nationalized oil extraction more attractive than private extraction as insecure property rights create a holdup problem for the private firm and lead to a lower license fee furthermore the government fights less intensely than the rebels under private exploitation which leads to more government turnover without credible commitment to future fighting efforts private oil depletion is only lucrative if the government s non oil office rents are large and weaponry powerful which guarantees the government a stronger grip on office and makes the holdup problem less severe

proprietary public finance and economic welfare abstract we develop a positive theory of public finance in which the objective of tax and spending policy is to extract rents for the incumbent ruler the analysis shows how dependence of the incumbent ruler s survival probability on his tax and spending policy can lower the equilibrium tax rate and increase the equilibrium amount of spending on productive public services but only until the minimum credible tax rate which depends on the ruler s endogenous survival probability becomes a binding constraint the central result of the analysis is that if a relatively benevolent tax and spending policy is both necessary and sufficient for a high survival probability then the ruler s equilibrium policy is relatively benevolent

the effect of concealed weapons laws an extreme bound analysis i introduction in a recent paper lott and mustard 1997 provide evidence on the relationship between concealed handgun laws often called right to carry or shall issue laws and crime they examine 16 years 1977 1992 of county level crime data from the fbi s uniform crime reports ucr and compare crime rates before and after the introduction of right to carry laws controlling for demographic factors and county level arrest rates they find that introducing right to carry laws resulted in significant reductions in the violent crimes of murder rape aggravated assault and robbery and increases in some property crimes such as burglary larceny and auto theft the latter increase is attributed to a substitution effect suggesting that potential criminals will at the margin switch from violent crimes that have now become more risky to them to property crimes where the probability of encountering an armed victim is much lower comparing these two effects coupled with a slight increase in accidental gunshots from individuals owning concealed handguns lott and mustard conclude that the social benefits of these laws exceed their costs economists who present one set of empirical results are always vulnerable to criticism that they could have selected another group of right hand side variables or modeled them in a different way lott and mustard s analysis has been criticized by black and nagin 1998 who re examine the data set choosing a different set of controls and a different model and reach different conclusions about the effects of the right to carry laws uncertainty about what to control for and how to do it has been called model uncertainty by leamer 1983 who suggests estimating the size of model uncertainty by testing the sensitivity of the particular results to many different possible model specifications this methodology is called extreme bound analysis in this paper we report extreme bounds from nearly 20 000 estimated regressions that vary the modeling choices made by lott and mustard we find support for the deterrence result from a broad set of specifications in particular we find strong support for the hypothesis that the right to carry laws are associated with a decrease in the trend in violent crime rates we do not find much support for a substitution effect into property crimes in what follows we first describe some econometric issues related to the problem of estimating the effect of the right to carry laws on crime rates we then report our extreme bound analysis and offer concluding remarks ii extreme bound analysis although behavioral theories can provide general guidance about the kinds of factors that should influence the crime rate they do not specifically determine which variables should be included in a regression analysis in addition conflicting theories typically suggest alternate model specifications in the context of crime rates for example we might expect higher crime rates in counties with higher unemployment and a larger percentage of young men age 18 30 following convention we call this a supply effect nagin 1978 however it is also possible that higher unemployment leads to the passage of right to carry laws or that right to carry laws are less likely to be enacted in areas with high percentages of young men age 18 30 we call this a demand effect omitted or unobserved demand or supply variables may induce a spurious correlation between the adoption of the right to carry laws and crime rates that has nothing to do with the supply of crime leamer 1983 suggests a formal specification search or extreme bound analysis to estimate the size of such model uncertainty surrounding certain regression results for example by including different right hand side variables in a supply of crime equation for murder leamer estimates an extreme bound interval for the deterrent effect of capital punishment that ranges from 29 to 12 murders prevented for every execution

natural resources democracy and corruption we study how natural resources can feed corruption and how this effect depends on the quality of the democratic institutions our game theoretic model predicts that resource rents lead to an increase in corruption if the quality of the democratic institutions is relatively poor but not otherwise we use panel data covering the period 1980 to 2004 and 124 countries to test this theoretical prediction our estimates confirm that the relationship between resource rents and corruption depends on the quality of the democratic institutions our main results hold when we control for the effects of income time varying common shocks regional fixed effects and various additional covariates they are also robust across different samples and to the use of various alternative measures of natural resources democracy and corruption

measuring positive externalities from unobservable victim precaution an empirical analysis of lojack lojack is a hidden radio transmitter device used for retrieving stolen vehicles because there is no external indication that lojack has been installed it does not directly affect the likelihood that a protected car will be stolen there may however be positive externalities due to general deterrence we find that the availability of lojack is associated with a sharp fall in auto theft rates of other crime do not change appreciably at least historically the marginal social benefit of an additional unit of lojack has been fifteen times greater than the marginal social cost in high crime areas those who install lojack however obtain less than 10 percent of the total social benefits leading to underprovision by the market

a review of recent books on credit risk the usual risk taxonomy has three types market risk credit risk and operational risk market risk arises from the movements in the level or volatility of market prices credit risk is the risk that an obligor borrower counterparty may be unable or unwilling to repay their debt and operational risk which is broadly a residual category is specified as the risk of direct or indirect loss resulting from inadequate or failed internal processes people and systems or from external events 1 credit risk makes up about 50 60 of the total risk in a typical large bank with market risk taking a smaller share 20 of the remainder than operational risk kuritzkes schuermann and weiner 2003 a securities firm or investment bank will likely have relatively more market than credit risk while insurers are somewhere in between yet the bulk of academic research has focused on market risk perhaps because data is plentiful and easy to obtain while credit risk has received less attention in the literature until recently indeed we have seen a veritable explosion of research over the past few years as the well established tools of pricing and portfolio management find their way to that vast realm of relatively illiquid credit assets it has attracted a diverse group of disciplines from traditional finance asset pricing to mathematical statistics to econometrics and because credit risk is the dominant risk for banks regulators pay particular attention to its measurement and management recently this has culminated in the proposed new basel capital accord bis 2001 2003 a radical restructuring of how credit risk is assessed and capital set against it 2 in this review i cover three books on credit risk which have appeared recently though these are far from the only books on this topic however they do represent in my view the best of the crop and illustrate the diverse set of issues and their treatments which have occupied the literature both academic and practitioner the review is organized around some of the key questions and themes of this literature and how they are addressed by these authors til schuermann ny frb org i would like to thank michelle gittelman sam hansen beverly hirtle hashem pesaran and mel weeks the editor for helpful comments and suggestions any views expressed represent those of the author only and not necessarily those of the federal reserve bank of new york or the federal reserve system this definition is used in the new basel capital accord bis 2001 547 the purpose of capital is to provide a cushion against losses for a financial institution the literature on the general rationale for capital regulation in financial institutions is extensive and has been the subject of several recent surveys santos 2001 ball and stoll 1998 berger herring and szego 1995

pricing risk adjusted deposit insurance an option based model this paper presents a methodology for arriving at empirical estimates of deposit insurance premiums from market data by using isomorphic relationships betweeen equity and a call option and insurance and a put option the data utilizes the market value of equity to solve for the asset value and its volatility market perceptions of fdic bailout policies are explicitly modeled so as to eliminate the bias in inverted values of assets and their volatility sensitivity analyses are performed to show that rank orderings based on premiums are robust to changes in specification thus facilitating allocation of aggregate premium across banks while economists have long argued in favor of risk adjusted deposit insurance as both more equitable and more efficient than the current system of flatrate premiums various recent developments have further contributed to an increasing dissatisfaction with the current system first both the banking industry and the government seem to be tending to the view that deregulation of the banking industry would be necessary in order to meet more sophisticated future demands on the industry as well as desirable as a policy means of stimulating greater competition among banks moreover a sudden rise in the incidence of bank failures 1 and the vulnerability of the u s banks to the socalled international debt crisis have served to bring to the fore concern about the health of the banking industry in the absence of deposit insurance riskier banks will be able to attract deposits only at higher rates and these higher costs of funding serve as built in market regulated incentives to limit excessive risk taking by banks as introduction of deposit insurance makes deposits equally risk free across banks these incentives disappear and regulation and close supervision of the banking industry must necessarily replace them as deterrents to excessive risk taking thus when insurance is offered at a flat premium regulation is designed to ensure that the risk posed to the insurer both asset and financial risk is appropriately uniform

the tragedy of the commons and economic growth why does capital flow from poor to rich countries we analyze a differential game in which all interest groups have access to a common capital stock we show that the introduction of a technology that has inferior productivity but enjoys private access may ameliorate the tragedy of the commons we use this model to analyze capital flight in many poor countries property rights are not well defined since safe bank accounts in rich countries the inferior technology are available to citizens of these countries they engage in capital flight we show that the occurrence of capital flight does not imply that opening the capital account reduces growth and welfare

the institutional and psychological foundations of natural resource policies abstractthe pressures of political interests which drive the resource curse are well understood but ordinary citizens are usually cast both as the innocent victims of this process and as the potential solution if only governments could be made more accountable to them this paper draws upon recent developments in social psychology to discuss the formation of mass opinions on two aspects of resource ownership one is the spatial assignment of ownership between local and national claims which has been a significant cause of conflict the other is the assignment of revenues between current consumption and future investment which has usually been excessively biased towards the former i suggest why in the absence of an active government communications policy to offset them known psychological biases may interact with resource discoveries to generate mass opinions which contribute to these problems

voracious transformation of a common natural resource into productive capital i analyze a power struggle where competing factions have private financial assets and deplete a common stock of natural resources with no private property rights i obtain a feedback nash equilibrium to the dynamic common pool problem and obtain political variants of the hotelling depletion rule and the hartwick saving rule resource prices and depletion occur too fast so substitution away from resources to capital occurs too fast and the saving rate is too high the power struggle boosts output but depresses sustainable consumption genuine saving is nevertheless zero in a fractionalized society world bank estimates may be too optimistic

voracity vs scale effect in a growing economy without secure property rights abstract this paper extends the standard model of growth with insecure property rights by introducing variable labor supply and increasing returns to scale it is assumed that capital stock is jointly owned by multiple interest groups and that each group participates in production activities by supplying its labor force in this setting there are two opposing factors that affect growth over consumption in the absence of secure property rights and the scale effect due to the presence of increasing returns the growth performance of the economy thus depends on which factor dominates

testing for the effects of concealed weapons laws specification errors and robustness abstract in 1997 john lott and david mustard published an important paper in which they found that right to carry concealed weapons laws reduce violent crime although lott and mustard appear to do all possible variations of the analysis a closer reading reveals that the study might suffer from several possibly important errors i reestimate the model and check for incorrect functional form omitted variables and possible second order bias in the t ratios lott and mustard s basic conclusions are generally robust with respect to these potential econometric problems overall right to carry concealed weapons laws tend to reduce violent crime the effect on property crime is more uncertain i find evidence that these laws also reduce burglary

a dynamic model of conflict and appropriation abstract this paper presents an extension of a static model of economic conflict analyzed by hirshleifer 1991 1995 and skaperdas 1992 to an infinite horizon differential game our aim is to highlight the strategic role of appropriation among a smaller group of agents in an intertemporal context the model yields the conclusion that there exists a unique linear nonlinear markov perfect equilibrium strategy even when strategies are defined over the entire state space we demonstrate that partial cooperation can be seen as a long run response to conflict moreover a decrease in the effectiveness of appropriation the depreciation rate of a common pool stock the rate of time preferences or an increase in the degree of noise improves the degree of partial cooperation and thus welfare in an anarchic society

more guns more crime this paper examines the relationship between gun ownership and crime previous research has suffered from a lack of reliable data on gun ownership i exploit a unique data set to reliably estimate annual rates of gun ownership at both the state and the county levels during the past two decades my findings demonstrate that changes in gun ownership are significantly positively related to changes in the homicide rate with this relationship driven almost entirely by an impact of gun ownership on murders in which a gun is used the effect of gun ownership on all other crime categories is much less marked recent reductions in the fraction of households owning a gun can explain one third of the differential decline in gun homicides relative to nongun homicides since 1993

model uncertainty and the effect of shall issue right to carry laws on crime in this paper we explore the role of model uncertainty in explaining the different findings in the literature regarding the effect of shall issue right to carry concealed weapons laws on crime in particular we systematically examine how different modeling assumptions affect the results we find little support for some widely used assumptions in the literature e g population weights but find that allowing for the effect of the law to be heterogeneous across both counties and over time is important for explaining the observed patterns of crime in terms of model uncertainty we find that there is substantial variation in the estimated effects for each model across all dimensions of the model space this suggests that one should be cautious in using the results from any particular model to inform policy decisions

resource curse or not a question of appropriability this thesis presents three self contained essays focusing on empirical questions in growth and development economics each article addresses specific questions on why countries perform differently in particular i analyse the effect of democracy on economic development the relationship between natural resources and growth and the efficiency of foreign development assistance in the first essay democracy consolidation and growth i analyse the effect of democracy on economic growth in this context i argue that an important aspect to consider is how consolidated political systems are put simply i find that it is not only a question of how democratic countries are but also how long they have been democratic in other words economic performance tends to improve with the duration of uninterrupted democracy the performance of autocracies on the other hand tends to deteriorate over time however for newly established political systems there seems to be a cost of being democratic this implies that democracies only bear their fruit after some time the analysis has important policy implications to overcome initial straits international assistance focused on democratic consolidation may be important and a very good investment in fostering long run development the second essay resource curse or not a question of appropriability together with anne boschini and jesper roine is concerned with the relation between natural resources and economic development for most laymen as well as for most economists it would seem reasonable that countries richly endowed in natural resources also benefit from this wealth however a large literature has found a systematic negative effect of natural resource abundance on economic growth we suggest that this so called resource curse is not determined by resource endowments alone but rather by the interaction between the type of resources a country possesses and the quality of institutions in the country this combination of factors determines what we call the appropriability of a resource the concept of appropriability captures the likelihood of natural resources leading to rentseeking corruption or conflicts which in turn will harm economic development our results suggest that if institutions are good enough the curse may be turned into a blessing this may explain why some countries such as norway and botswana tend to benefit from their resources while others such as angola and sierra leone do not the third and final essay of this thesis foreign sectoral aid fungibility growth and poverty reduction is a contribution to the aid efficiency literature which is concerned with the question of whether aid helps or hinders economic development foreign development assistance is often targeted on specific public expenditure sectors if this aid is not used in the sector for which it was granted e g health education it is said to be fungible and donors may end up financing something completely different from what they intended e g military expenditures the major concern about sectoral fungibility is that the alternative use of aid may be less productive or less socially useful however measuring fungibility is not sufficient to determine whether foreign sectoral aid fungibility is actually harmful what is important is how the funds treated as fungible are used the essay starts by obtaining estimates of fungibility for 57 countries the results suggest that sectoral aid is indeed largely treated as fungible by recipient countries next to assess the economic and health effects of fungibility these estimates are incorporated into an empirical model of aid and growth as well as into a model of aid and infant mortality altogether i find no evidence of more fungible sectoral aid leading to worse performance

cyclical expenditure policy output volatility and economic growth this article provides an empirical assessment of the relation between the cyclicality of fiscal expenditure policy output volatility and economic growth using a cross section of 88 countries over the period 1960 to 2004 identification of the effects of endogenous cyclical expenditure policy is achieved by exploiting the exogeneity of countries political and institutional characteristics which we find to be relevant determinants of the cyclicality of expenditures there are three main results first both pro and countercyclical expenditure policy amplify output volatility much in a way like pure fiscal shocks second output volatility due to variations in cyclical and discretionary fiscal policy is negatively associated with economic growth third there is no direct effect of cyclicality on economic growth other than through output volatility

optimal dutch disease growth models of the dutch disease such as those of krugman 1987 matsuyama 1992 sachs and warner 1995 and gylfason et al 1999 explain why resource abundance may reduce growth however the literature also raises a new question if the use of resource wealth hurts productivity growth how should such wealth be optimally managed this question forms the topic of the present paper in which we extend the growth literature on the dutch disease from a positive to a normative setting we show that the assumptions in the previous literature imply that the optimal share of national wealth consumed in each period needs to be adjusted down however some dutch disease is always optimal thus lower growth in resource abundant countries may not be a problem in itself but may be part of an optimal growth path the optimal spending path of the resource wealth may be increasing or decreasing over time and we discuss why this is the case

politics and economics in weak and strong states abstract while much research in political economy points out the benefits of limited government political scientists have long emphasized the problems created in many less developed nations by weak states which lack the power to tax and regulate the economy and to withstand the political and social challenges from non state actors i construct a model in which the state apparatus is controlled by a self interested ruler who tries to divert resources for his own consumption but who can also invest in socially productive public goods both weak and strong states create distortions when the state is excessively strong the ruler imposes such high taxes that economic activity is stifled when the state is excessively weak the ruler anticipates that he will not be able to extract rents in the future and underinvests in public goods i show that the same conclusion applies in the analysis of both the economic power of the state i e its ability to raise taxes and its political power i e its ability to remain entrenched from the citizens i also discuss how under certain circumstances a different type of equilibrium which i refer to as consensually strong state equilibrium can emerge whereby the state is politically weak but is allowed to impose high taxes as long as a sufficient fraction of the proceeds are invested in public goods the consensually strong state might best correspond to the state in oecd countries where taxes are high despite significant control by the society over the government

testing for unit roots in panel data are wages on different bargaining levels cointegrated theoritical considerations suggest that spillover forces equalize wages for similar jobs thus it is expected that firm wages are cointegrated with the corresponding wage rates on an industrial level in this paper we apply various unit root tests to a panel of wage data we show that the familiar techniques can be adopted to this type of data allowing for unobserved heterogeneity and common time effects our results suggest that firm and industry wages both possess a unit root in the autoregressive representation however ther is only weak evidence for a cointegration realtionship

politico economic equilibrium and economic growth abstract we propose a notion of dynamic politico economic equilibrium which builds on two key assumptions policies are determined sequentially and agents are fully rational in their roles as both consumers and voters we examine a simple model of endogenous growth and infinitely lived agents where taxes on income are endogenous and where growth critically depends on the initial distribution of asset holdings we relate our equilibrium definition and results to existing literature on time consistency and on political economy and growth we show that our equilibria are time consistent and we argue that the choice of equilibrium concept might have important quantitative implications

guns laws and public shootings in the united states abstractsince the late 1990s there have been increasing numbers of public shootings carried out with firearms in the united states these tragedies continually renew the regulatory debate concerning public safety while considering civil liberties using a unique data set we investigate whether laws correspond to whether an event occurs and the effects of event specific characteristics on public shooting outcomes in particular we analyse how state specific gun laws the types of firearms the shooting venues and the mental health of the gunman impact the outcomes of public shootings results show that most gun laws are unrelated to whether an event occurs in addition common state and federal gun laws that outlaw assault weapons are unrelated to the likelihood of an assault weapon being used during a public shooting event moreover results show that the use of assault weapons is not related to more victims or fatalities than other types of guns however the use of hand guns shot guns and high capac

why do some oil producing countries succeed in democracy while others fail summary empirical studies examining the effect of oil on democracy have shown contradictory results this paper offers an explanation in measuring the number of years between the beginning of oil production and the attainment of political independence in oil producing countries we found that the greater the number of years the higher the level of democracy ceteris paribus the types of resources exploited in the colonial period were shown to have influenced institutions nature and the formation of elite which acts to prevent subsequent political reforms this pattern is mitigated in countries that started producing oil far away from their independence

identifying future defaulters a hierarchical bayesian method abstract traditional methods of applying classification models into the area of credit scoring may ignore the effect from censoring survival analysis has been introduced with its ability to deal with censored data the mixture cure model one important branch of survival models is also applied in the context of credit scoring assuming that the study population is a mixture of never default and will default customers we extend the standard mixture cure model through 1 relaxing the independence assumption of the probability and the time of default 2 treating the missing defaulting labels as latent variables and applying an augmentation technique and 3 introducing a discrete truncated exponential distribution to model the time of default our full model is written in a hierarchical form so that the markov chain monte carlo method is applied to estimate corresponding parameters through an empirical analysis we show that both mixture models the standard mixture cure model and the hierarchical mixture cure model hmcm are more advanced in identifying future defaulters while compared with logistic regression it is also concluded that our hierarchical bayesian extension increases the model s predictability and provides meaningful output for risk management

comparative dynamics in a productive asset oligopoly abstract we build a subgame perfect nash equilibrium of a common property productive asset oligopoly and analyze separately the impact of a change in the implicit growth rate of the asset and a change in the number of firms exploiting the asset we show that the steady state level of asset can be a decreasing function of the asset s implicit growth rate this phenomenon arises when the initial stock of asset is below a certain threshold in the short run we show that firms exploitation rate can be a decreasing function of the implicit growth rate we study the impact of a change in the number of firms that share access to the asset reducing the number of firms can result in the long run in higher industry production in the short run it can result in an increase of the industry s exploitation and a decrease of the level of the asset s stock

savings and predation we contrast the relationship between predation and the savings of its potential victim in two different simple models in the first model predation is an exogenous event in which savings are expropriated with some fixed probability in such a setting the higher the probability of expropriation the lower are savings in the second model we endow the predatory agent with a decision whether to expropriate or to devote his efforts to some productive endeavor in this second model the endogenous probability of expropriation can easily be positively correlated with savings in addition we show that predation is more damaging to the savings and utility of the victim in the second model jel d91 d74

crime and social interactions the high variance of crime rates across time and space is one of the oldest puzzles in the social sciences this variance appears too high to be explained by changes in the exogenous costs and benefits of crime we present a model where social interactions create enough covariance across individuals to explain the high cross city variance of crime rates this model provides an index of social interactions which suggests that the amount of social interactions is highest in petty crimes moderate in more serious crimes and almost negligible in murder and rape

calibration of the default probability model abstract in this paper we study the calibration problem for the merton vasicek default probability model robert merton on the pricing of corporate debt the risk structure of interest rate journal of finance 29 1974 449 470 we derive conditions that guarantee existence and uniqueness of the solution using analytical properties of the model we propose a fast calibration procedure for the conditional default probability model in the integrated market and credit risk framework our solution allows one to avoid numerical integration problems as well as problems related to the numerical solution of the nonlinear equations

fiscal spending and economic growth some stylized facts using an event analysis this paper complements the cross country approach to the study of fiscal correlates of growth data on fiscal expenditures and growth for a database of 140 countries 118 developing countries over 1972 2005 are reorganized around turning points providing a summary but encompassing description of what is in the data for this sample the probability of occurrence of a fiscal event is about 10 and the probability of a growth event once a fiscal event had occurred is around 26 for developing countries fiscal events followed by growth events occur under situations of i significantly lesser deficit ii fewer resources devoted to non interest general public services and iii shift in primary expenditures toward transport communication after controlling for the growth inducing effects of positive terms of trade shocks and of trade liberalization reform probit estimates indicate that a growth event is more likely to occur in a developing country when surrounded by a fiscal event moreover the probability of occurrence of a growth event in the years following a fiscal event is greater the lower is the associated fiscal deficit confirming that success of a growth oriented fiscal expenditure reform is associate with a stabilized macroeconomic environment through limited primary fiscal deficit

the control of politicians in divided societies the politics of fear autocrats in many developing countries have extracted enormous personal rents from power in addition they have imposed inefficient policies including pervasive patronage spending i present a model in which the presence of ethnic identities and the absence of institutionalized succession processes allow the ruler to elicit support from a sizeable share of the population despite large reductions in welfare the fear of falling under an equally inefficient and venal ruler that favours another group is enough to discipline supporters the model predicts extensive use of patronage ethnic bias in taxation and spending patterns and unveils a new mechanism through which economic frictions translate into increased rent extraction by the leader these predictions are consistent with the experiences of bad governance ethnic bias wasteful policies and kleptocracy in post colonial africa

social polarization fiscal instability and growth abstract we present a dynamic model of fiscal policy in a simple growth framework where social polarization of preferences plays a central role in the evolution of fiscal instability and growth collapse in a highly polarized society a deficit occurs endogenously fiscal spending path becomes more volatile output collapses and economic growth rate is reduced along the transition path to a new lower level of output one novel feature is that the size of fiscal deficit the magnitude of fiscal volatility and the size of reduction in output and growth rate are explicitly shown to be increasing functions of the degree of social polarization this is because of the positive relationship between the polarization of preferences and the incentive for policymakers or socio economic groups to overexploit the government resources in a common pool setting polarization effect thereby we offer a fiscal instability channel that negatively links social polarization and growth which is an alternative yet distinct explanation for the empirical finding that social polarization is harmful to growth moreover we fully distinguish the incentive to engage in such short term policies under political uncertainty from that under polarization polarization and political uncertainty are shown to be distinct yet critical to the dynamic coordination failure in the common pool setting

fiscal decentralization in rentier regions evidence from russia summary the paper argues that governments in regions that rely heavily on intergovernmental transfers and natural resource rents face serious distortions in their incentive structure as a result such regions tend to have more fiscally centralized governments than the regional characteristics would suggest data on russian regions in the late 1990s early 2000s support this hypothesis advancing intraregional fiscal decentralization in rentier regions could reduce policy distortions and make the subnational environment more supportive of economic development

the voracity effect abstract we analyze an economy that lacks a strong legal political institutional infrastructure and is populated by multiple powerful groups powerful groups dynamically interact via a fiscal process that effectively allows open access to the aggregate capital stock in equilibrium this leads to slow economic growth and a voracity effect by which a shock such as a terms of trade windfall perversely generates a more than proportionate increase in fiscal redistribution and reduces growth we also show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks jel f43 o10 o23 o40

privately produced general deterrence in this study we use county data on private security establishments and employment for 1977 92 to test two hypotheses first we test whether private security deters crime second we test whether john lott and david mustard s estimates of the impact of shall issue laws on crime are biased because of a lack of controls for private security we find little evidence that private security reduces the crime rates for assault or larceny some estimates suggest murder robbery and or auto theft may be deterred by private security although these results are not robust of all the index crime categories only rape is estimated to have a consistent negative relationship with private security in addition we find little evidence that the lott and mustard results are biased because of a lack of controls for the private security measures employed in this study

cursed by resources or institutions natural resource abundant countries constitute both growth losers and growth winners and the main difference between the success cases and the cases of failure lays in the quality of institutions with grabber friendly institutions more natural resources push aggregate income down while with producer friendly institutions more natural resources increase income such a theory finds strong support in data a key question we also discuss is if resources in addition alter the quality of institutions when that is the case countries with bad institutions suffer a double resource curse as the deterioration of institutions strenghtens the negative effect of more natural resources

the determinants of asset stripping theory and evidence from the transition economies abstract during the transition from plan to market managers and politicians succeeded in maintaining control of large parts of the stock of socialist physical capital despite the obvious importance of this phenomenon there have been no efforts to model measure and investigate this process empirically this paper tries to fill this gap by putting forward theory and econometric evidence we argue that asset stripping is driven by the interplay between the firm s potential profitability and its ability to influence law enforcement our econometric results for about 950 firms in five transition economies provide support for this argument

the impact of expenditure rules on budgetary discipline over the cycle we study the impact of expenditure rules on the propensity for governments to deviate from their expenditure plans in response to surprising cyclical developments theoretical considerations suggest that due to political fragmentation in the budgetary process expenditure policy might be prone to a procyclical bias however this tendency may be mitigated by strictly enforced expenditure rules these hypotheses are tested against data from a panel of eu member states our key findings are that 1 deviations between actual and planned government expenditure tend to be positively related to output gap surprises and 2 expenditure rules reduce this procyclical bias these results are particularly pronounced when the analysis is confined to spending items with a high degree of budgetary flexibility

default estimation correlated defaults and expert information abstractcapital allocation decisions are made on the basis of an assessment of creditwor thiness default is a rare event for most segments of a bank s portfolio and datainformation can be minimal inference about default rates is essential for e cientcapital allocation for risk management and for compliance with the requirementsof the basel ii rules on capital standards for banks expert information is crucialin inference about defaults a bayesian approach is proposed and illustrated usingprior distributions assessed from industry experts a maximum entropy approach isused to represent expert information the binomial model most common in appli cations is extended to allow correlated defaults yet remain consistent with basel ii the application shows that probabilistic information can be elicited from expertsand econometric methods can be useful even when data information is sparse keywords bayesian inference basel ii risk management prior elicitation small probability estimation

why is fiscal policy often procyclical many countries especially developing ones follow procyclical fiscal policies namely spending goes up taxes go down in booms and spending goes down taxes go up in recessions we provide an explanation for this suboptimal fiscal policy based upon political distortions and incentives for less than benevolent government to appropriate rents voters have incentives similar to the starving the leviathan classic argument and demand more public goods or fewer taxes to prevent governments from appropriating rents when the economy is doing well we test this argument against more traditional explanations based purely on borrowing constraints with a reasonable amount of success

the effect of prison population size on crime rates evidence from prison overcrowding litigation simultaneity between prisoner populations and crime rates makes it difficult to isolate the causal effect of changes in prison populations on crime to break that simultaneity this paper uses prison overcrowding litigation in a state as an instrument for changes in the prison population the resulting elasticities are two to three times greater than those of previous studies a one prisoner reduction is associated with an increase of fifteen index i crimes per year while calculations of the costs of crime are inherently uncertain it appears that the social benefits associated with crime reduction equal or exceed the social costs of incarceration for the marginal prisoner

policy effectiveness in spatial resource wars a two region model abstract we develop a spatial resource model in continuous time in which two agents strategically exploit a mobile resource in a two region setup to counteract the overexploitation of the resource the tragedy of commons that occurs when players are free to choose where to harvest the regulator can establish a series of spatially structured policies we compare the equilibria in the case of a common resource with those that emerge when the regulator either creates a natural reserve or assigns territorial user rights to the players we show that when technological and preference parameters dictate a low harvesting effort the policies are ineffective in promoting the conservation of the resource and in addition they lead to a lower payoff for at least one of the players conversely in a context of higher harvesting effort the intervention can help to safeguard the resource preventing extinction while also improving the welfare of both players

declining predation during development a feedback process empirical evidence suggests that poorer countries have larger portions of predation we formulate a neoclassical growth model in which agents devote time either to produce or predate when the elasticity of substitution between labor and capital is lower than one the labor share rises with capital reducing the incentive to predate and increasing the incentive to produce throughout the transition consequently a feedback process between capital accumulation and predation arises which ampli es income di erences generated by di erences in productivity thus this paper helps understand why di erences among countries have remained stable and the key role that institutions play in development

why do more polarized countries run more procyclical fiscal policy abstract we study the cyclical behavior of fiscal policy to explain why some countries exhibit procyclical fiscal policy stances being expansionary in good times and contractionary in bad times we develop a model that links the polarization of preferences over fiscal spending to the procyclicality bias we then present evidence that social polarization as measured by income inequality and educational inequality is consistently and positively associated with fiscal procyclicality even after controlling for other determinants from existing theories we also find a strong negative impact of fiscal procyclicality on economic growth

the effects of state and federal background checks on state level gun related murder rates the purpose of the present study was to determine whether firearm background checks are significantly related to gun related murder rates the present study differs from prior research in several ways first a large longitudinal data set is used data for 50 states for the period 1980 2011 are examined second the effects of both federal and state background checks including state mandated private sales background checks are estimated finally a fixed effects model that controls for both state level and year specific effects is used results suggest that states that require dealer background checks have lower gun related murder rates than other states in addition after implementation of the brady act gun related murder rates fell however the results also suggest that for the entire period in question states with private sales background checks had higher gun related murder rates than states with no such background checks if one only looks the brady act period however then the private sales

what should fiscal councils do fiscal watchdogs so called fiscal councils have been proposed as a method to counter deficit bias of fiscal policy the paper analyses theoretically what role fiscal councils could play and surve

rent seeking market structure and growth we study the role of productive and unproductive entrepreneurship in economic growth in a setting where firms compete in both economic and political markets specifically firms compete for market share through cost reducing technological innovation and they vie for influence over government transfer policy through rent seeking activities we find that rent seeking affects growth in two ways it allows firms to ignore economic competition leading to less innovation and it alters the number of firms that are supported in equilibrium the former effect is negative while the latter is ambiguous we show how these effects depend on various characteristics of economic and political markets

default probability estimation via pair copula constructions abstract in this paper we present a novel approach for firm default probability estimation the methodology is based on multivariate contingent claim analysis and pair copula constructions for each considered firm balance sheet data are used to assess the asset value and to compute its default probability the asset pricing function is expressed via a pair copula construction and it is approximated via monte carlo simulations the methodology is illustrated through an application to the analysis of both operative and defaulted firms

institutions and the resource curse countries rich in natural resources constitute both growth losers and growth winners we claim that the main reason for these diverging experiences is differences in the quality of institutions more natural resources push aggregate income down when institutions are grabber friendly while more resources raise income when institutions are producer friendly we test this theory building on sachs and warner s influential works on the resource curse our main hypothesis that institutions are decisive for the resource curse is confirmed our results contrast the claims of sachs and warner that institutions do not play a role

appropriation violent enforcement and transaction costs a critical survey this paper focuses on the extension of transaction costs to appropriative activity and coercive power in the property rights approach it has been argued that including the costs of appropriation and violent enforcement in transaction costs is based on the assumption that coaseian bargaining can be extended to any institutional scenario i e voluntary as well as coercive exchange however voluntary transactions cannot capture the logic of coercive power this means that the assumption of an efficient political market is not valid and that the political coase theorem lacks the logical consistency to provide a cornerstone for political theory

the cyclical behaviour of fiscal policy evidence from the oecd this paper addresses the topic of cyclicality in scal policy in particular we show that the level of cyclicality varies across spending categories and across oecd countries in line with leading theories of scal cyclicality we show that countries with volatile output and dispersed political power are the most likely to run procyclical scal policies wage government consumption is highlighted as the most important channel by which these variables affect scal cyclicality

the varieties of resource experience natural resource export structures and the political economy of economic growth many oil mineral and plantation crop based economies experienced a substantial deceleration in growth following the commodity boom and bust of the 1970s and early 1980s this article illustrates how countries dependent on point source natural resources those extracted from a narrow geographic or economic base such as oil and minerals and plantation crops are predisposed to heightened economic and social divisions and weakened institutional capacity this in turn impedes their ability to respond effectively to shocks which previous studies have shown to be essential for sustaining rising levels of prosperity analysis of data on classifications of export structure controlling for a wide array of other potential determinants of governance shows that point source and coffee and cocoa exporting countries do relatively poorly across an array of governance indicators these governance effects are not associated simply with being a natural resource exporter countries with natural resource exports that are diffuse relying primarily on livestock and agricultural produce from small family farms do not show the same strong effects and have had more robust growth recoveries

natural resources rent seeking and welfare abstract a new and very simple mechanism to explain why natural resource abundance may lower income and welfare is developed in a model with rent seeking a greater amount of natural resources increases the number of entrepreneurs engaged in rent seeking and reduces the number of entrepreneurs running productive firms with a demand externality it is shown that the drop in income as a result of this is higher than the increase in income from the natural resource more natural resources thus lead to lower welfare

does the right to carry concealed handguns deter countable crimes only a count analysis can say abstract an analysis of the effects of right to carry laws on crime requires particular distributional and structural considerations first because of the count nature of crime data and the low number of expected instances per observation in the most appropriate data least squares methods yield unreliable estimates second use of a single dummy variable as a measure of the nationwide effect of right to carry laws is likely to introduce geographical and intertemporal aggregation biases into the analysis in this paper we use a generalized poisson process to examine the geographical and dynamic effects of right to carry laws on reported homicides rapes and robberies we find that the effects of such laws vary across crime categories u s states and time and that such laws appear to have statistically significant deterrent effects on the numbers of reported murders rapes and robberies

will rationing guns reduce crime abstract reducing the supply of guns does not necessarily decrease crime as many economists support this article explores hazards of gun control and offers an alternative solution for reducing crime that of enacting laws to permit the carrying of concealed handguns

do government purchases affect unemployment we estimate the effect of government purchases on unemployment in 20 oecd countries for the period 1980 2007 an increase in government purchases equal to one percent of gdp is found to reduce unemployment by about 0 3 percentage points in the same year the effect is greater and more persistent under less employment friendly labour market institutions and greater and more persistent under a fixed exchange rate regime than under a floating regime the effect is also greater in downturns than in booms the effect on unemployment reflects a corresponding positive effect of increased government purchases on the employment to population rate this article is protected by copyright all rights reserved

sensitivity analyses of the deterrence hypothesis let s keep the econ in econometrics abstract leamer and mcmanus applied extreme bound analysis eba in an empirical study of the deterrent effects of capital punishment and other penalties their analysis has questioned the validity of the deterrence hypothesis the thrust of our paper is twofold first by applying eba to well known econometric models of demand production and human capital investment our analysis exposes and illustrates the inherent flaws of eba as a method of deriving valid inferences about model specification second since the analysis shows leamer and mcmanus s inferences about deterrence to be based on a flawed methodology we offer an alternative theory based sensitivity analysis of estimated deterrent effects using similar data our analysis supports the deterrence hypothesis more generally it emphasizes the indispensable role of theory in guiding sensitivity analyses of model specification

to invest or insure how authoritarian time horizons impact foreign aid effectiveness in this article the author argues that the time horizon a dictator faces affects his incentives over the use of aid in three ways first dictators have a greater incentive to invest in public goods when they have a long time horizon second dictators with short time horizons often face the threat of challengers to the regime this leads them to forgo investment and instead consume state resources in two forms that harm growth repression and private pay offs to political opponents third dictators with short time horizons have a strong incentive to secure personal wealth as a form of insurance in case the regime falls using panel data on dictatorships in 71 developing countries from 1961 to 2001 the author finds that time horizons have a positive impact on aid effectiveness foreign aid is associated with positive growth when dictators face long time horizons and negative growth when time horizons are short

common failings how corporate defaults are correlated we test the doubly stochastic assumption under which firms default times are correlated only as implied by the correlation of factors determining their default intensities using data on u s corporations from 1979 to 2004 this assumption is violated in the presence of contagion or frailty unobservable explanatory variables that are correlated across firms our tests do not depend on the time series properties of default intensities the data do not support the joint hypothesis of well specified default intensities and the doubly stochastic assumption we find some evidence of default clustering exceeding that implied by the doubly stochastic model with the given intensities why do corporate defaults cluster in time several explanations have been explored first firms may be exposed to common or correlated risk factors whose co movements cause correlated changes in conditional default probabilities second the event of default by one firm may be contagious in that one such event may directly induce other corporate failures as with the collapse of penn central railway in 1970 third learning from default may generate default correlation for example to the extent that the defaults of enron and worldcom revealed accounting irregularities that could be present in other firms they may have had a direct impact on the conditional default probabilities of other firms our primary objective is to examine whether cross firm default correlation that is associated with observable factors determining conditional default probabilities the first channel on its own is sufficient to account for the degree of time clustering in defaults that we find in the data

the curse of the haven the impact of multinational enterprise on environmental regulation abstract we analyze the behavior of multinational enterprises in the context of resource rich and poor countries and regarding high and low income countries we depart from the pollution haven hypothesis and the resource curse the pollution haven hypothesis states that multinational enterprises move their dirty operations to countries with weak environmental regulation the resource curse holds that economic growth in countries abundant in natural resources is reduced we find that more polluting firms are relatively more often located in countries with weak environmental regulation however multinational enterprises do not have a significant impact on environmental regulation in the host country it appears that it is mainly the quality of institutions that drives both the pollution haven and the resource curse

investment in the absence of property rights the role of incumbency advantages in many situations the individuals who can generate some output must enter a contest for appropriating this output this paper analyses the investment incentives of such agents and the role of incumbency advantages in the contest depending on the advantages an increase in the productivity of the investment can decrease or increase the amount of investment the results are applied to autocrats investment behavior and job specific investment in organizations

political foundations of the resource curse in this paper we argue that the political incentives that resource endowments generate are the key to understanding whether or not they are a curse we show 1 politicians tend to over extract natural resources relative to the efficient extraction path because they discount the future too much and 2 resource booms improve the efficiency of the extraction path however 3 resource booms by raising the value of being in power and by providing politicians with more resources which they can use to influence the outcome of elections increase resource misallocation in the rest of the economy 4 the overall impact of resource booms on the economy depends critically on institutions since these determine the extent to which political incentives map into policy outcomes countries with institutions that promote accountability and state competence will tend to benefit from resource booms since these institutions ameliorate the perverse political incentives that such booms create countries without such institutions however may suffer from a resource curse

the competitive externalities and the optimal seignorage this study analyzes the inflation tax in an economy with several competing decisionmakers who can effectively print more money via the central bank the author derives the sequential rational expectation equilibrium and shows that the presence of competing decisionmakers increases the inflation rate and may put the economy on the wrong side of the inflation tax laffer curve the analysis is interpreted for a country consisting of several states or provinces where the centralized government system is weak similar results apply to the case of competing ministers in an economy where the central bank is weak copyright 1992 by ohio state university press

default estimation and expert information default is a rare event even in segments in the midrange of a bank s portfolio inference about default rates is essential for risk management and for compliance with the requirements of basel ii most commercial loans are in the middle risk categories and are to unrated companies expert information is crucial in inference about defaults a bayesian approach is proposed and illustrated using a prior distribution assessed from an industry expert the binomial model most common in applications is extended to allow correlated defaults a check of robustness is illustrated with an e mixture of priors

the political resource curse this paper studies the effect of additional government revenues on political corruption and on the quality of politicians both with theory and data the theory is based on a political agency model with career concerns and endogenous entry of candidates the data refer to brazil where federal transfers to municipal governments change exogenously at given population thresholds allowing us to implement a regression discontinuity design the empirical evidence shows that larger transfers increase observed corruption and reduce the average education of candidates for mayor these and other more specific empirical results are in line with the predictions of the theory jel d72 d73 h77 o17 o18

politics and the effectiveness of foreign aid abstract critics of foreign aid programs have long argued that poverty reflects government failure in this paper i test predictions for aid effectiveness based on an analytical framework that relates aid effectiveness to political regimes i find that aid does not significantly increase investment nor benefit the poor as measured by improvements in human development indicators but it does increase the size of government the impact of aid does not vary according to whether recipient governments are liberal democratic or highly repressive but liberal political regimes and democracies ceteris paribus have on average 30 lower infant mortality than the least free regimes this may be due to greater empowerment of the poor under liberal regimes even though the political elite continues to receive the benefits of aid programs an implication is that short term aid targeted to support new liberal regimes may be a more successful means of reducing poverty than current programs

swords or plowshares a theory of the security of claims to property this paper develops a general equilibrium model of the allocation of resources among appropriative and productive activities the model emphasizes the distinction between offensive weapons which are the instruments of predation and fortifications which provide defense against predation the analysis of this model shows how the equilibrium security of claims to property is determined the analysis focuses on the possibility of a nonaggressive equilibrium in which no resources are allocated to offensive weapons and claims to property are fully secure we also analyze the complex relation between economic welfare and the security of claims to property we find for example that a relatively poor agent could be better off in an equilibrium with less secure claims to property

corruption and the political economy of resource based development a comparison of asia and sub saharan africa we model how the supply and demand for bribes affects resource use by an economy and the reinvestment of resource rents in other assets this requires adjusting the world bank s measure adjusted net savings for any rent dissipation due to corruption the impacts of corruption on long run changes and periodic growth in the adjusted net savings rate are estimated across african and asian economies from 1970 to 2003 corruption rather than resource dependency per se affects negatively the ability of african countries to reinvest resource rents in the short term but for asian countries corruption is less important than point resources corruption influences long run growth in adjusted net savings rates in all countries and is also the pathway through which this growth is affected by patterns of resource use trade and abundance

oil windfalls and export diversification in oil producing countries evidence from oil booms abstract this paper examines the factors behind export diversification in oil countries specifically we investigate the impact of oil booms on export diversification through an empirical framework the paper finds that economy s export structure before the oil boom determines whether oil windfalls might affect the diversification process thus an oil boom negatively affects export diversification only if countries initially exhibit low levels of diversification in countries with a high level of diversification before the boom an oil boom has no impact on diversification these results are based on a large sample of 134 countries and are robust to various sensitivity analyses they are corroborated with data from the manufacturing sector which show that oil booms only reduce diversification in countries with a small manufacturing sector prior to the boom

status concern and the exploitation of common pool renewable resources we examine the impact of social status concern in a common pool renewable resource oligopoly a small number of players share access to a common pool resource and sell their production in a common market where they are oligopolists we depart from the mainstream literature on common pool resource oligopolies by considering that each player cares about her social status we allow for two channels to impact a player s welfare harvest and profits under the first channel a player has a bump in her utility when her harvest is larger than the average harvest of the rest of the players in this case we show that the presence of this channel exacerbates the tragedy of the commons under the second channel a player enjoys a bump in her utility if she manages to earn more profits than the average profits of the other players in this case we show that social status concern may temporarily alleviate the tragedy of the commons it results in a decrease of extraction over an interval of stock sizes

do corrupt governments receive less foreign aid critics of foreign aid programs argue that these funds often support corrupt governments and inefficient bureaucracies supporters argue that foreign aid can be used to reward good governments this paper documents that there is no evidence that less corrupt governments receive more foreign aid on the contrary according to some measures of corruption more corrupt governments receive more aid also we could not find any evidence that an increase in foreign aid reduces corruption in summary the answer to the question posed in the title is no

from the econometrics of capital punishment to the capital punishment of econometrics on the use and abuse of sensitivity analysis the academic debate over the deterrent effect of capital punishment has intensified again with a major policy outcome at stake about two dozen empirical studies have recently emerged that explore the issue donohue and wolfers 2005 claim to have examined the recent studies and shown the evidence not to be robust to specification changes we argue that the narrow scope of their study does not warrant this claim moreover focusing on our two studies that they have examined we show the deterrence findings to be robust while their work has serious flaws and their reporting appears to be selective the selectivity is biased towards showing no deterrence

commodity windfalls polarization and net foreign assets panel data evidence on the voracity effect this paper examines the effects that windfalls from international commodity price booms have on net foreign assets in a panel of 145 countries during the period 1970 2007 the main finding is that windfalls from international commodity price booms lead to a significant increase in net foreign assets but only in countries that are ethnically homogeneous in highly ethnically polarized countries net foreign assets significantly decreased to explain this asymmetry the paper shows that in ethnically polarized countries commodity windfalls lead to large increases in government consumption expenditures and political corruption the paper s findings are consistent with theoretical models of the current account that have a built in voracity effect