the joint production of confidence endogenous regulation and nineteenth century commercial bank clearinghouses during the nineteenth century deposits increased relative to bank notes c ausing increased information asymmetry problems in banking this pape r describes how bank clearinghouses lowered these costs by monitoring bank activities and establishing mechanisms of managerial control i n effect regulating bank behavior such actions enforced the loca l one to one exchange rate between deposits and specie clearinghouse s increased regulation during financial panics creating and enforcin g a risk sharing device loan certificates for addressing panic rela ted information problems this paper concludes that the market s capacity to control bank managers depends on the banking product mix and more generally on information costs copyright 1987 by ohio state university press

democracy and development the devil in the details does democracy promote economic development this paper reviews recent attempts to address this question that exploited within country variation it shows that the answer is largely positive but also depends on the details of democratic reforms first the sequence of economic vs political reforms matters countries liberalizing their economy before extending political rights do better second different forms of democratic government lead to different economic policies and this might explain why presidential democracy leads to faster growth than parliamentary democracy third it is important to distinguish between expected and actual political reforms taking expectations of regime change into account helps identify a stronger growth effect of democracy

expectations and arms races recent empirical studies of arms races have produced two puzzling results first for several important arms races particularly the u s ussr case there appears to be no interaction arms acquisition appears to be driven only by internal factors second in several cases nations appear to be responding to the current military expenditures of their opponent this statistical result presents interpretation problems since nations do not know the current defense expenditure of their opponent at the time that they make their own military expenditure decision a number of interpretations for these results have been provided they include inappropriate model specification inappropriate operationalization of military threat and error ridden military expenditure data nevertheless the results persist and conflict with our more substantive and intuitive understanding of arms processes a process based upon expectations of current arms expenditures of the opponent is developed to deal with this puzzle in this paper several alternative expectation mechanisms are formulated and tested for a number of contemporary arms races

competitive monies and the suffolk bank system a contractual perspective in recent years a number of monetary economists have begun to focus research on an old topic the economics of private money or free banking much of this literature is motivated by a sense that competitive markets may well prove superior to government regulation in coping with the problems inherent in a laissez faire monetary system noting this robert king in his recent survey paper suggests that the central focus of future research in this area must be the types of monetary institutions that the private market will deliver 10 123 by monetary institutions king presumably means the contractual mechanisms utilized in production and exchange relationships involving private money this paper examines one mechanism the so called suffolk bank system which the market did deliver in new england from around 1820 to just before the civil war while most historians have looked favorably on the suffolk mechanism almost all have mischaracterized the underlying rationale for the system in particular most analysts have interpreted the establishment of the suffolk bank s note redemption program as a response to gresham s law bad money drives out good money however the conditions of 19th century banking in new england and elsewhere as well prior to the establishment of the suffolk system rule out any application of gresham s law prior studies have also neglected the importance of evolutionary changes in the suffolk bank system over the first five years of its existence what we will label suffolk i was largely unsuccessful both in terms of its profitability and its capacity to control the behavior of the banks participating in the system several contract adaptations introduced in 1824 accounted for a sharp reversal in the fortunes of the suffolk bank system it is suffolk ii which has gained the accolades of bank historians ironically suffolk ii increased the prospects for a gresham s law kind of outcome of the sort emphasized by akerlof 1 however the contract structure of suffolk ii involved properties sufficient to allow that suffolk

the aging population and the size of the welfare state is there a puzzle abstract razin sadka and swagel razin asaf efraim sadka and phillip swagel 2002 the aging population and the size of the welfare state the journal of political economy vol 110 no 4 pp 900 918 unveil a puzzling fact the welfare state appears to be shrinking even as the dependency ratio rises while they formulate an elegant political economy model to explain the coexistence of an aging population and declining transfers the resolution of the puzzle turns out to be much simpler labor tax rates and per capita transfers are negatively correlated with the dependency ratio in advanced economies only because this measure includes children as well as retirees both labor tax rates and per capita transfers in advanced economies are in fact historically positively correlated with the ratio of retirees to the working age population and negatively correlated with the ratio of children to the working age population increasing the number of retirees shifts preferences toward higher taxes and transfers by increasing the fraction of the population that receives transfers in contrast workers with more children prefer to spend more of their lifetime income while raising dependents so they prefer smaller public pension systems these results suggest that fiscal leakage from workers to retirees is not required to explain the broad trends in the transfer policies of advanced economies

communication in federal politics universalism policy uniformity and the optimal allocation of fiscal authority the paper presents a positive model of policy formation in federal legislatures when delegates engage in the strategic exchange of policy relevant information depending on the type of policy under consideration communication between delegates generally suffers from a bias that makes truthful communication difficult and sometimes impossible this generates inefficient federal policy choices that are often endogenously characterized by overspending universalism and uniformity building on these findings i develop a theory of fiscal de centralization which revisits the work of oates in a world of incomplete information and strategic communication empirical results from a cross section of us municipalities are consistent with the predicted pattern of spending

voting inequality and redistribution this paper surveys models of voting on redistribution under reason able assumptions the baseline model produces an equilibrium with the extent of redistributive taxation chosen by the median income earner if the median is poorer than average redistribution is from rich to poor and increasing inequality increases redistribution however under different assumptions about the economic environment redistribution may not be simply rich to poor and inequality need not increase redistribution several lines of argument are presented in particular political participation public provision of private goods public pensions and tax avoidance or evasion

electoral rules political competition and fiscal expenditures regression discontinuity evidence from brazilian municipalities we exploit a discontinuity in the rules of brazilian mayoral elections to investigate whether political competition has a causal impact on fiscal policy choices in municipalities with fewer than 2

the provision of public goods under alternative electoral incentives politicians who care about the spoils of office may underprovide a public good because its benefits cannot be targeted to voters as easily as pork barrel spending we compare a winner take all system where all the spoils go to the winner to a proportional system where the spoils of office are split among candidates proportionally to their share of the vote in a winner take all system the public good is provided less often than in a proportional system when the public good is particularly desirable we then consider the electoral college system and show that it is particularly subject to this inefficiency

redistributing income under proportional representation although majoritarian decision rules are the norm in legislatures relatively few democracies use simple majority rule at the electoral stage adopting instead some form of multiparty proportional representation moreover aggregate data suggest that average income tax rates are higher and distributions of posttax income flatter in countries with proportional representation than in those with majority rule while there are other differences between these countries this paper explores how variations in the political system per se influence equilibrium redistributive tax rates and income distributions a three party proportional representation model is developed in which taxes are determined through legislative bargaining among successful electoral parties and the economic decision for individuals is occupational choice political economic equilibria for this model and for a two party winner take all majoritarian system are derived and compared

the origins of state capacity property rights taxation and politics economists generally assume that the state has sufficient institutional capacity to support markets and levy taxes this paper develops a framework where policy choices in market regulation and taxation are constrained by past investments in legal and fiscal capacity it studies the economic and political determinants of such investments demonstrating that legal and fiscal capacity are typically complements the results show that among other things common interest public goods such as fighting external wars as well as political stability and inclusive political institutions are conducive to building state capacity some correlations in cross country data are consistent with the theory

electoral rules and environmental policy abstract this paper investigates the effect of electoral rules on environmental policymaking using several estimators from the program evaluation literature we find that governments set stricter environmental policies under proportional as opposed to majoritarian systems

the economic effects of constitutions replicating and extending persson and tabellini persson and tabellini the economic effects of constitutions the mit press cambridge 2003 show that presidential regimes and majoritarian election systems have important economic effects here the number of countries is expanded and more recent data is used in replicating and extending their analyses we find that the effect of presidential regimes vanishes almost entirely with regard to electoral systems the original results are largely confirmed majoritarian as opposed to proportional electoral systems lead to lower government expenditure lower levels of rent seeking but also lower output per worker the institutional details such as the proportion of candidates that are not elected on party lists and district size are particularly important

exploring different views of exchange rate regime choice the empirical distinction between de facto and de jure exchange rate regimes raises a number of interesting questions which factors may induce a de facto peg why do countries enforce a peg but do not announce it why do countries break their promises we show that a stable socio political environment and an efficient political decision making process are a necessary prerequisite for choosing a peg and sticking to it challenging the view that sees the exchange rate as a commitment device policymakers seem rather concerned with regime sustainability in the face of adverse economic and socio political fundamentals

constitutional rules and fiscal policy outcomes we investigate the effect of electoral rules and forms of government on fiscal policy outcomes in a large sample of democracies we rely on different estimation methods to address prospective problems of statistical inference due to non random selection of these constitutional rules the findings are consistent with our theoretical priors presidential regimes induce smaller governments than parliamentary democracies while majoritarian elections lead to smaller governments and smaller welfare programs than proportional elections

the efficiency of self regulated payments systems learning from the suffolk system this paper analyzes the operation of the suffolk system an interbank note clearing network operating throughout new england from the 1820s through the 1850s banks made markets in each other s notes at par which allowed new england to avoid discounting of bank notes in trade privately enforced regu lations prevented free riding in the form of excessive risk taking observers of the suffolk system have been divided some emphasized the stability and effi these arrangements others argued that the arrangements were motivated by rent seeking on the part of boston banks and were primarily coervice and exploitative in the neighboring mid atlantic states regulations limited the potential for developing a regional clearing system centered in new york city on the model of the suffolk system this difference makes it possible to compare the performance of banks across regulatory regimes to judge the relative merits of the sanguine and jaundiced views of the suffolk system evidence supports the sanguine view new england s banks were able to issue more notes and these notes traded at uniform and low discount rates compared to those of other banks an examination of the balance sheets and stock returns of boston and new york city banks indicates that the stock market perceived that bank lending produced less risk for bank debt holders in boston than in new york the benefits of the system extended outside of boston peripheral new england banks displayed high propensities to issue notes and wer able to maintain low specie reserves boston banks did not show high profit rates or high ratios of market to book values of equity thus there is no evidence that boston banks extracted rents from their control of the payments system this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

the size and scope of government comparative politics with rational politicians we try to demonstrate how economists may engage in research on comparative politics relating the size and composition of government spending to the political system a downsian model of electoral competition and forward looking voting indicates that majoritarian as opposed to proportional elections increase competition between parties by focusing it into some key marginal districts this leads to less public goods less rents for politicians more redistribution and larger government a model of legislative bargaining and backward looking voting indicates that presidential as opposed to parliamentary regimes increase competition between both politicians and voters this leads to less public goods less rents for politicians less redistribution and smaller government we confront these predictions with cross country data from around 1990 controlling for economic and social determinants of government spending we nd strong and robust support for the prediction that the size of government is smaller under presidential regimes and weaker support for the prediction that majoritarian elections are associated with less public goods

electoral systems and public spending we study the effects of electoral institutions on the size and composition of public expenditure in oecd and latin american countries we emphasize the distinction between purchases of goods and services which are easier to target geographically and transfers which are easier to target across social groups we present a theoretical model in which voters anticipating government policymaking under different electoral systems have an incentive to elect representatives more prone to transfer public good spending in proportional majoritarian systems the model also predicts higher total primary spending in proportional majoritarian systems when the share of transfer spending is high low after dee ning rigorous measures of proportionality to be used in the empirical investigation we e nd considerable support for our predictions

defense spending economic structure and growth evidence among countries and over time there is no way of telling from economic theory whether a greater military effort will slow down or accelerate output growth the results of a single empirical study have been used to support the widely held belief that in poor countries a high share of defense in gdp is associated with a high growth rate this paper shows that as is often the case such conventional wisdom is wrong across countries a greater defense burden is associated with slower growth in a regression equation estimated for 69 countries over some or all of the period 1952 70 an increase of 10 percentage points in the defense burden share of defense in gdp leads to a reduction of annual growth by 0 13 a nontrivial loss as we discuss in detail below growth retardation to approximately the same extent also is recorded in regional regression estimates though precise coefficients differ from area to area besides slowing the growth rate a changing defense burden has other macroeconomic effects for the same sample of countries and time period increases in military spending are associated with lower saving and investment shares in gdp a greater tax burden and a shift in economic activity from agriculture including food production toward the manufacturing sector when estimated econometrically the extent to which defense spending replaces investment is consistent in magnitude with the growth rate reductions mentioned above in describing these results more thoroughly in section i we review informally the channels through which arms spending can affect the growth rate and present a simple formal model in section ii the resulting reduced form equation is estimated empirically in section iii with the findings summarized above to measure other effects of military outlays on the economic structure we go on in section iv to incorporate the defense burden into the regression equations and data

a framework for analyzing efficiency risks costs and innovations in the payments system the market for payment instruments such as cash checks and electronic funds transfers is one of the largest most important and economically interesting markets in the economic system virtually every economic transaction requires the use of a payment instrument therefore on a value basis the demand for payment instruments equals the demand for all other goods services assets and other financial instruments traded in the economy combined in a monetary economy the buyers and sellers of any commodity must not only agree on the price and quantity to be exchanged but must also concur on the payment method that will be employed in the exchange that is every commodity buyer takes on the role of a payor and every commodity seller takes on the role of a payee and they jointly demand a payment instrument of equal value to the commodities exchanged the size of payments markets is illustrated in table 1 which shows transactions

social democracy christian democracy constitutional structure and the welfare state the literature on the determinants of welfare state effort displays many inconsistencies and contradictins this article takes imoprtant stepts toward resolving these issues with the use of pooled

over optimism in forecasts by official budget agencies and its implications the paper studies forecasts of real growth rates and budget balances made by official government agencies among 33 countries in general the forecasts are found i to have a positive average bias ii to be more biased in booms and iii to be even more biased at the 3 year horizon than at shorter horizons this over optimism in official forecasts can help explain excessive budget deficits especially the failure to run surpluses during periods of high output if a boom is forecasted to last indefinitely retrenchment is treated as unnecessary many believe that better fiscal policy can be obtained by means of rules such as ceilings for the deficit or better yet the structural deficit but we also find iv countries subject to a budget rule in the form of euroland s stability and growth pact sgp make official forecasts of growth and budget deficits that are even more biased and more correlated with booms than do other countries this effect may help explain frequent violations of the sgp the question becomes how to overcome governments tendency to satisfy fiscal targets by wishful thinking rather than by action chile in 2000 created structural budget institutions that may have solved the problem independent expert panels insulated from political pressures are responsible for estimating the long run trends that determine whether a given deficit is deemed structural or cyclical the result is that chile s official forecasts of growth and the budget have not been overly optimistic even in booms unlike many countries in the north chile took advantage of the 2002 7 expansion to run budget surpluses and so was able to ease in the 2008 9 recession

vegetable spirits and energy policy this study investigates the extent to which the 2005 energy policy act specifically the ethanol mandate contributed to the rise in farmland values we use the location of new ethanol plants to identify the capitalization effect of the mandate by these spatially advantaged operations we use a difference in difference propensity score matching estimator to control for the non random selection of ethanol production facilities the empirical strategy uses farmland parcel values from the 2001 7 june agriculture survey we find that new ethanol facilities had no effect on nearby farmland values prior to the mandate but had statistically significant effects after the policy copyright 2013 oxford university press

costs of taxation and the size of government existing theory on the form of government suggests that a parliamentary system promotes a larger size of government than does a presidential system this paper extends the existing theory by allowing for distortionary taxation a main result is that if taxation is sufficiently distortionary the parliamentary system may promote a smaller size of government than the presidential system the proposed mechanism appears consistent with several empirical patterns in the data that cannot be explained by other theories

constitutional political economy in the european union this article surveys recent research in constitutional political economy in europe although not all of theworks discussed necessarily focus only on european constitutional issues or are written by europeans european constitutional issues figure importantly in each area surveyed the article examines the literatures linking constitutional institutions to economic growth government size government deficits and corruption bicameralism direct democracy and federalism three exclusively european topics also are covered constitutional issues in the transition countries the structure of the european union and the draft constitution for the european union

comparative politics and public finance we propose a model with micropolitical foundations to contrast different political regimes compared to a parliamentary regime the institutions of a presidential congressional regime produce fewer incentives for legislative cohesion but more separation of powers these differences are reflected in the size and composition of government spending a parliamentary regime has redistribution toward a majority less underprovision of public goods and more rents to politicians a presidential congressional regime has redistribution toward powerful minorities more underprovision of public goods but less rents to politicians the size of government is smaller under a presidential regime this last prediction is consistent with cross country data

the importance of the electoral rule evidence from italy abstract we test the effect of an important electoral reform implemented in italy from 1993 to 2001 that moved the system for electing the parliament from purely proportional to a plurality rule for 75 of the seats we do not find any effect on either the number of parties or the stability of governments the two main objectives of the reform that remained unchanged at their pre reform level

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

does the size of the legislature affect the size of government evidence from two natural experiments this paper makes use of regression discontinuity designs to estimate the effect of the number of legislators on the size of government the results indicate a negative effect i e the larger the size of the legislature the smaller is the size of government this runs counter to conventional wisdom one potential explanation is that more legislators can better control a budget maximizing bureaucracy i present evidence that is consistent with the proposed mechanism

the effects of party competition on budget outcomes empirical evidence from local governments in spain this paper investigates the link between local budget outcomes and the intensity of party competition measured as the margin of victory obtained by the incumbent in the previous local election i e the difference between the vote share and 50 two competing hypotheses are tested in the paper on the one hand the leviathan government hypothesis suggests that the lower the intensity of party competition is the greater is the increase in the size of the local public sector irrespective of the ideology of the party in power on the other hand the partisan government hypothesis suggests that the incumbent will find it easier to advance its platform when intensity of competition is low i e parties on the left right will increase decrease the size of the local public sector when the intensity of the challenge from the opposition is low these hypotheses are tested with information on spending own revenues and deficit for more than 500 spanish local governments over 8 years 1992 1999 and information on the results of two local electoral contests 1991 and 1995 the evidence favors the partisan hypothesis over the leviathan one we found that for left wing governments spending taxes and deficits increased as the electoral margin increases whereas for right wing governments a greater margin of victory led to reductions in all these variables

the political economy of intergovernmental grants evidence from a maturing democracy we evaluate the impact of political forces in the allocation of intergovernmental grants in portugal as it matured from a young to an established democracy using a large and unexplored dataset we show that political variables condition the granting system and that their importance changed over time while tactical manipulation in the distribution of grants among municipalities seems to exist only in the early years of democracy opportunistic effects are stronger in the latter years we argue that the latter effect is due to a change in the political environment and to the electorate s lack of information on intergovernmental grants

seat vote curves loyalty effects and the provincial distribution of canadian government spending federal government spending in the canadian provinces for 1962 2002 is examined with emphasis on the role of seat vote elasticities in majoritarian electoral systems fixed effects regressions establish that per capita federal spending in a province increases with political competition as measured by provincial seat vote elasticities and with loyalty to the federal government as measured by the degree of provincial support for the federal government however too much loyalty can be counter productive because very loyal provinces are uncompetitive with low seat vote elasticities

ideology and the size of us state government this paper theorizes that the impact of ideology on the size of us state governments increases with state income this idea is tested using state level ideology data derived from the voting behavior of state congressional representatives empirically the interaction of ideology and mean income is a key determinant of state government size at 1960s levels of income the impact of ideology is negligible at 1997 levels of income a one standard deviation move towards the left of the ideology spectrum increases state government size by about half a standard deviation estimated income elasticities differentiated by state and time are found to be increasing with ideology and diminishing with income as predicted by the theory

the size and composition of government expenditure abstract this paper tests several leading hypotheses on determinants of government expenditure the purpose is to avoid omitted variables bias by testing the prominent theories in a comprehensive specification to identify persistent puzzles for the current set of theories and to explore those puzzles in greater depth by looking at the composition of government expenditure and the level of government at which it takes place as well as its magnitude using government financial statistics data from the imf covering over 100 countries from 1970 2000 i look at cross sectional and inter temporal variation in government expenditure and both individual categories of expenditure such as defense education health care and different levels of government central and local among other results i find a new explanation for wagner s law widespread evidence that preference heterogeneity leads to decentralization rather than outright decreases in expenditures that a great deal of the expenditure associated with increased trade openness is not in categories that explicitly insure for risk and evidence that both political access and income inequality affect the extent of social insurance

another look at growth and defense in less developed countries lim challenges evidence showing that defense spending encouraged the economic growth of 44 less developed countries ldcs over the 1950 65 periods by reexamining the relationship between defense and growth for 54 ldcs over the 1965 73 period regional analyses cover 21 african 13 western hemisphere 11 asian and 9 middle eastern and southern european ldcs the results show that defense spending was detrimental to economic growth although adverse effects that were marked in africa and the western hemisphere were absent in asia the middle east and southern eurpoe 4 references 2 tables

military expenditure spin off and economic development abstract this paper analyses the strategic causes and the economic spin off effects of military expenditure in less developed countries a formal optimising model is used to show that defence burden in ldcs may be analysed principally in terms of strategic factors such as security and threat and is determined relatively autonomous of economic factors given this autonomousness we scrutinise the widely held belief that defence expenditure has a substantial spin off in the form of technological progress r d skill creation effective demand all of which has positive developmental effects econometric evidence for india shows that such claims are exaggerated and economic spin off from defence to development is weak

policy volatility institutions and economic growth abstract in this paper we present evidence that policy volatility exerts a strong and direct negative impact on growth using data for 93 countries we construct measures of policy volatility based on the standard deviation of the residuals from country specific regressions of government consumption on output undisciplined governments that implement frequent and large changes in government spending unrelated to the state of the business cycle generate lower economic growth we employ both instrumental variables and panel estimation to address concerns of omitted variables and endogeneity a 1 standard deviation increase in policy volatility reduces long term economic growth by about 0 74 in the panel regressions and by more than 1 percentage point in the cross section

defence spending and growth in greece 1974 90 some preliminary econometric results during the period 1974 90 greece has allocated an average of 6 4 of gdp to defence yearly the greek defence burden is currently the highest among european union and nato members at the same time the greek economy has exhibited the lowest rates of growth and it is plagued by persistent economic problems this paper using disaggregated military spending data investigates its economic effects during the period 1974 90 preliminary results reported here are inconclusive

the political economy of fiscal deficits a survey this paper surveys recent literature both theoretical and empirical regarding political explanations for fiscal deficits political economy suggests conflicts of interest may lie behind the emergence of deficits 1 opportunistic politicians generate deficits to win elections even in conflict with general welfare 2 conflicts of interests between politicians partisan preferences create incentives for at least some incumbents to run deficits and 3 conflicts of interest between different social groups or regions generate tensions in the allocation of government resources leading to overspending this paper reviews these different strands of the literature it also covers contributions that highlight the crucial role of budget institutions in determining the extent to which the political motivations to generate deficits are indeed translated into poor fiscal outcomes promising avenues for future research are highlighted

natural resources a curse on education spending abstract in line with the rising interest in harnessing natural resource revenues for economic and human development through productive government investments this paper aims to address an important blind spot in our understanding of the resource curse by contributing innovative insights on how natural resource wealth impacts government priorities and expenditure practices using a large panel dataset of 140 countries covering the period from 1995 to 2009 we find an adverse effect of resource dependence on public education expenditures relative to gdp that is robust to controlling for a range of additional covariates furthermore our findings indicate that this resource curse effect on the government prioritization of education mainly stems from point source natural resources these results are of particular importance for the sustainable management of natural resource wealth in developing countries as they could achieve especially high returns by investing resource revenues in public goods such as education while this paper underlines the importance of institutions and government accountability our findings also raise questions on the role of the private sector as a partner in development as the extractives industry could consider increasing funding for education through corporate social responsibility csr initiatives

scottish banking before 1845 a model for laissez faire during the free banking era in eighteenth and early nineteenth century scotland there were a number of legal restrictions affecting the evolution of the system scottish banking was characterized by restrictions on small denomination and interest bearing notes there were also restrictions inhibiting the development of capital markets and entry into banking furthermore the bank of england operated as a shadow central bank for the scottish system these considerations call into question the use of the scottish banking experience as the appropriate model for laissez faire and as evidence against the legal restrictions theory of money and the new monetary economics copyright 1989 by ohio state university press