guarding the guardians good government requires some restraints on the powerful but how can those be impose if there is no one above them this paper studies the equilibrium allocation of power and resources established by self interested incumbents under the threat of rebellions from inside and outside the group in power commitment to uphold individuals rights can only be achieved if power is not as concentrated as incumbents would like it to be ex post power sharing endogenously enables incumbents to commit to otherwise time inconsistent laws by ensuring more people receive rents under the status quo and thus want to defend it

the international telecommunications regime the political roots of regimes for high technology the international telecommunications regime provided a multilateral framework that reinforced domestic monopolies and bilateral cartel arrangements in the global market the regime s epistemic community believed that telecommunications services and equipment were best supplied by national monopolies and that international communications by telephone telegram and telex should be jointly provided by monopolists strong domestic political incentives reinforced this cognitive framework when technological innovation triggered a successful political attack on the domestic regulation of telecommunications in a few key countries the stage was set for a global challenge to the intellectual and political foundations of the regime two paths to reform have emerged their significance can be assessed by looking at changes in the distribution of benefits from the regime changes in the manner in which governments delegate power to the regime and shifts in the epistemic community associated with the regime

occupational choice and the process of development this paper models economic development as a process of institutional transformation by focusing on the interplay between agents occupational decisions and the distribution of wealth because of capital market imperfections poor agents choose working for a wage over self employment and wealthy agents become entrepreneurs who monitor workers only with sufficient inequality however will there be employment contracts otherwise there is either subsistence or self employment thus in static equilibrium the occupational structure depends on distribution since the latter is itself endogenous we demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long run effects in one case the economy develops either widespread cottage industry self employment or factory production employment contracts depending on the initial distribution in the other example it develops into prosperity or stagnation

oligarchy democracy inequality and growth abstract this paper analyses the dynamics of inequality democratization and economic development in a political economy model of growth where education is both the engine of growth and a determinant of political participation in a context with imperfect capital markets we investigate the incentives for an educated oligarchy to subsidize the poor s education and to initiate a democratic transition we characterize the equilibrium patterns of political institutions income distribution and growth as a function of the initial income and inequalities in particular we identify circumstances under which the elite promotes the endogenous emergence of a middle class for purely political economy reasons a simple linear infinite horizon framework is then presented in this setting we discuss the importance of historical dependence for long run social stratification and redistribution

life is unfair in latin america but does it matter for growth summary i analyze the effect of inequality on economic growth in latin america where inequality is measured as the area of family farms as a percentage of the total area of agricultural holdings using data from 18 latin american countries during 1960 2004 i find that inequality has a nonlinear effect on economic growth overall for the countries included in this analysis the share of family farms has a positive significant effect on economic growth these findings are robust to controlling for several factors using a different indicator of inequality land gini and addressing for endogeneity

financial liberalization and reversals political and economic determinants what accounts for the dynamics of financial reforms this paper identifies the political regime as one of the main factors focusing on democratization and financial reform it puts forward novel evidence for a u shaped relation across countries and over time for different reform measures and a wide range of estimators partial democracy is a main obstacle to financial reforms and democratization when incomplete may lead to severe financial reform reversals nauro f campos and fabrizio coricelli

political economy of growth with a taste for status abstract this paper investigates the political economy of growth when individuals prefer high levels of relative consumption a pivotal voter determines the equilibrium tax on capital the revenues from which fund the provision of productive public goods the taste for status and the distributions of wealth and political power interact to generate stylized versions of oligarchies middle class democracies and populist democracies a rise in the taste for status increases the role of distributional concerns in policy preferences lowering growth in an oligarchy or populist democracy but increasing it in a middle class democracy in addition the egalitarian redistribution of wealth or political power causes growth to first rise and then fall as the equilibrium tax rate approaches and then exceeds its growth maximizing level generating inverse u shaped relationships between democracy and growth and inequality and growth

political selection and persistence of bad governments we study dynamic selection of governments under different political institutions with a special focus on institutional flexibility a government consists of a subset of the individuals in the society the competence level of the government in office determines collective utilities e g by determining the amount and quality of public goods and each individual derives additional utility from being part of the government e g rents from holding office we characterize the dynamic evolution of governments and determine the structure of stable governments which arise and persist in equilibrium in our model perfect democracy where current members of the government do not have veto power over changes in governments always leads to the emergence of the most competent government however any deviation from perfect democracy to any regime with incumbency veto power destroys this result there is always at least one other less competent government that is also stable and can persist forever and even the least competent government can persist forever in office we also show that there is a nonmonotonic relationship between the degree of incumbency veto power and the quality of government in contrast in the presence of stochastic shocks or changes in the environment a regime with less incumbency veto power has greater flexibility and greater probability that high competence governments will come to power this result suggests that a particular advantage of democratic regimes with a limited number of veto players may be their greater adaptability to changes rather than their performance under given conditions finally we show that royalty like dictatorships may be more successful than junta like dictatorships because in these regimes veto players are less afraid of change

inequality democracy and institutions a critical review of recent research this paper surveys the theoretical and empirical literature on the effect of economic and political inequality on institutions the current understanding suggests that unequal societies develop exploitative and inefficient institutions empirical research which is scant and has mainly concentrated at cross national level supports to some extent the existence of an inverse relationship between inequality and institutions but more analysis is needed future empirical research should undertake country state and micro level analysis which are a necessary complement to aggregate level studies the effect of inequality could also take place indirectly through the influence of inequality on democratization

unequal societies income distribution and the social contract this paper develops a theory of inequality and the social contract aiming to explain how countries with similar economic and political fundamentals can sustain such different systems of social insurance fiscal redistribution and education finance as those of the united states and western europe with imperfect credit and insurance markets some redistributive policies can improve ex ante welfare and this implies that their political support tends to decrease with inequality conversely with credit constraints lower redistribution translates into more persistent inequality hence the potential for multiple steady states with mutually reinforcing high inequality and low redistribution or vice versa

the rise of europe atlantic trade institutional change and economic growth the rise of western europe after 1500 is due largely to growth in countries with access to the atlantic ocean and with substantial trade with the new world africa and asia via the atlantic this trade and the associatedcolonialism affected europe not only directly but also indirectly by inducing institutional change where initial political institutions those established before 1500 placed significant checks on the monarchy the growth of atlantic trade strengthened merchant groups by constraining the power of the monarchy and helped merchants obtain changes in institutions to protect property rights these changes were central to subsequent economic growth

princes and merchants european city growth before the industrial revolution as measured by the pace of city growth in western europe from 1000 to 1800 absolutist monarchs stunted the growth of commerce and industry a region ruled by an absolutist prince saw its total urban population shrink by one hundred thousand people per century relative to a region without absolutist government this might be explained by higher rates of taxation under revenue maximizing absolutist governments than under nonabsolutist governments which care more about general economic prosperity and less about state revenue

democracy diversification and growth reversals there exists convincing evidence that democratic countries are less volatile this conclusion is usually reached with respect to volatility as measured by the standard deviation of annual growth rates of per capita gdp which includes both low and high frequency fluctuations however recently several studies have documented that significant changes in trend growth such as growth accelerations that last a decade or similar periods of negative growth are quite common in this paper we ask whether democracy also has a stabilizing effect on trend volatility i e whether more democratic countries experience fewer and milder swings of trend growth we find a common phenomenon medium term reversals of growth that is periods of exceptionally high growth are on average followed by periods of exceptionally low growth and vice versa the propensity to experience large swings of trend growth is not uniform across countries less democratic countries are more susceptible to it when compared with factors commonly associated with volatility such as measures of quality of institutions macroeconomic policies and financial development we find that democracy is the most robust predictor of a country s propensity for growth reversals we construct a model in which non democracies have high barriers of entry for new firms this leads to less sectoral diversification fewer sectors are operated but more resources are channeled to each in an uncertain environment this leads to infrequent but large growth accelerations when one of the few sectors operated is successful however these accelerations are followed by large declines when fortunes change in favor of the missing sectors we present empirical evidence that confirms the positive relationship between democracy and industrial diversification

the euro changeover and its effects on price transparency and inflation despite the expectations of economists that the euro changeover would have no effect on prices european consumers perceived the opposite to shed some light on this puzzle we develop a model of imperfect information in which cheaper goods experience higher price growth after the changeover retailers aware of consumers difficulties in adopting the new currency use currency changeovers to increase profits by increasing prices the lower the price transparency after the changeover the higher the euro related inflation using data on inflation eurostat and price levels economist intelligence unit we show that although the euro changeover did not significantly increase inflation it nevertheless had a distortionary effect on prices after the changeover cheaper goods had higher inflation and this effect was stronger in countries in which people found dealing with the new currency problematic

large newsvendor games we consider a game called newsvendor game where several retailers who face a random demand can pool their resources and build a centralized inventory that stocks a single item on their behalf profits have to be allocated in a way that is advantageous to all the retailers a game in characteristic form is obtained by assigning to each coalition its optimal expected profit we consider newsvendor games with possibly an infinite number of newsvendors we prove in great generality results about balancedness of the game and we show that in a game with a continuum of players under a nonatomic condition on the demand the core is a singleton for a particular class of demands we show how the core shrinks to a singleton when the number of players increases

multivariate test for forecast rationality under asymmetric loss functions recent evidence from mms survey of inflation output forecasts abstract we propose a multivariate test for forecast rationality under asymmetric loss functions and test jointly the rationality of inflation output forecasts of the mms survey for the us our results indicate that even though the rationality of the forecasts individually may be rejected under two popular univariate asymmetric loss functions linlin and linex there is evidence that rationality of the joint forecasts of inflation and output cannot be rejected we find that allowing for multivariate asymmetric loss functions does improve the evidence for rationality

oligarchic versus democratic societies this paper develops a model to analyze economic performance under different political regimes an oligarchic society where political power is in the hands of major producers protects their property rights but also tends to erect significant entry barriers against new entrepreneurs democracy where political power is more widely diffused imposes redistributive taxes on producers but tends to avoid entry barriers when taxes in democracy are high and the distortions caused by entry barriers are low an oligarchic society achieves greater efficiency because comparative advantage in entrepreneurship shifts away from the incumbents the inefficiency created by entry barriers in oligarchy deteriorates over time the typical pattern is one of rise and decline of oligarchic societies an oligarchic society may first become richer but later fall behind a similar democratic society i also discuss how democracies may be better able to take advantage of new technologies how within elite conflict in oligarchies might cause a transition to democracy and how the unequal distribution of income may keep inefficient oligarchic institutions in place jel p16 o10

does natural resource abundance increase latin american income inequality abstract why is income inequality higher in latin america than in east asia is this phenomenon related to the region s natural resource abundance is it a contributor to latin america s slow and narrowly focused human capital accumulation if so can anything be done to reverse the latin american trends or should we think of the region s fate as unalterable to help answer these questions this paper draws upon standard trade theory and cross sectional empirical analysis to demonstrate that natural resource intensive sectors particularly permanent agriculture absorb capital that might otherwise flow to manufacturing this depresses workers incentive to accumulate skill and delays industrialization

dictators and oligarchs a dynamic theory of contested property rights in an economy with weak economic and political institutions the major institutional choices are made strategically by oligarchs and dictators the conventional wisdom presumes that as rent seeking is harmful for oligarchs themselves institutions such as enforcement of the property rights will emerge eventually we explicitly model a dynamic game between oligarchs and a dictator who can contain rent seeking the oligarchs choose either a weak dictator who can be overthrown by an individual oligarch or a strong dictator who can only be replaced via a consensus of oligarchs in equilibrium no dictator can commit to both i protecting the oligarchs property rights from the other oligarchs and ii not expropriating oligarchs himself we show that a weak dictator does not limit rent seeking a strong dictator does reduce rent seeking but also expropriates individual oligarchs we show that even though eliminating rent seeking is pareto optimal weak dictators do get appointed in equilibrium and rent seeking continues this outcome is especially likely when economic environment is highly volatile

international trade and institutional change medieval venice s response to globalization international trade can have profound effects on domestic institutions we examine this proposition in the context of medieval venice circa 800 1600 early on the growth of long distance trade enriched a broad group of merchants who used their newfound economic muscle to push for constraints on the executive that is for the end of a de facto hereditary doge in 1032 and the establishment of a parliament in 1172 the merchants also pushed for remarkably modern innovations in contracting institutions that facilitated longdistance trade for example the colleganza however starting in 1297 a small group of particularly wealthy merchants blocked political and economic competition they made parliamentary participation hereditary and erected barriers to participation in the most lucrative aspects of long distance trade over the next two centuries this led to a fundamental societal shift away from political openness economic competition and social mobility and toward political closure extreme inequality and social stratification we document this oligarchization using a unique database on the names of 8 178 parliamentarians and their families use of the colleganza in the periods immediately before and after 1297 we then link these families to 6 959 marriages during 1400 1599 to document the use of marriage alliances to monopolize the galley trade monopolization led to the rise of extreme inequality with those who were powerful before 1297 emerging as the undisputed winners jel codes d02 f10 n43

why did the west extend the franchise democracy inequality and growth in historical perspective during the nineteenth century most western societies extended voting rights a decision that led to unprecedented redistributive programs we argue that these political reforms can be viewed as strategic decisions by the political elite to prevent widespread social unrest and revolution political transition rather than redistribution under existing political institutions occurs because current transfers do not ensure future transfers while the extension of the franchise changes future political equilibria and acts as a commitment to redistribution our theory also offers a novel explanation for the kuznets curve in many western economies during this period with the fall in inequality following redistribution due to democratization i introduction the nineteenth century was a period of fundamental political reform and unprecedented changes in taxation and redistribution britain for example was transformed from an oligarchy run by an elite to a democracy the franchise was extended in 1832 and then again in 1867 and 1884 transferring voting rights to portions of the society with no previous political representation the decades after the political reforms witnessed radical social reforms increased taxation and the extension of education to the masses moreover as noted by kuznets inequality which was previously increasing started to decline during this period the gini coefficient for income inequality in england and wales had risen from 0 400 in 1823 to 0 627 in 1871 but fell to 0 443 in 1901 two key factors in the reduction in inequality were the increase in the proportion of skilled workers williamson 1985 and the redistribution of income toward the poorer segments of the society for example taxes rose from 8 12 percent of national product in 1867 to 18 8 percent by 1927 and the progressivity of the tax system increased substantially see lindert 1989

labor supply effects of the recent social security benefit cuts empirical estimates using cohort discontinuities abstract in response to a crisis in social security financing two decades ago congress implemented an increase in the normal retirement age nra of 2 months per year for cohorts born in 1938 and after these cohorts began reaching retirement age in 2000 this paper studies the effects of these benefit cuts on recent retirement behavior the evidence suggests that the mean retirement age of the affected cohorts has increased by about half as much as the increase in the nra if older workers continue to increase their labor supply in the same way there might be important implications for the estimates of social security trust fund exhaustion that have played such a major role in recent discussions of social security reform

vested interests in a positive theory of stagnation and growth we study a positive theory of stagnation and growth aimed at understanding the large variations in growth outcomes across actual economies the theory points to the fundamental role played by vested interests in determining policies which are key to the growth process some agents seek to prevent the adoption of new technologies we develop a model of technology adoption and show how technological innovation may sow the seeds of its own destruction in particular we find that the equilibrium is characterized by a long cycle of stagnation and growth over this cycle incumbents are phased out of the economy will new innovation occur in formalizing our theory we make a methodological contribution by characterizing dynamic voting equilibria when voters must forecast the effects of different current policies on future prices and policy outcomes

estimating the value of proposal power this paper investigates the role of proposal power in the allocation of transportation projects across u s congressional districts in 1991 and 1998 the evidence supports the key qualitative prediction of legislative bargaining models members with proposal power those sitting on the transportation authorization committee secure more project spending for their districts than do other representatives support for the quantitative restrictions on the value of proposal power is more mixed i then empirically address several alternative models of legislative behavior including partisan models informational roles for committees models with appropriations committees and theories of committees as preference outliers

distributive politics and economic growth a crude distinction between economics and politics would be that economics is concerned with expanding the pie while politics is about distributing it in this paper we analyze the relationship between the two we focus on how an economy s initial configuration of resources shapes the political struggle for income and wealth distribution and how that in turn affects long run growth our main conclusion is that inequality is conducive to the adoption of growth retarding policies we derive this result from a simple political economy model of growth and present cross country evidence consistent with it the key feature of our model is that individuals differ in their relative factor endowments we distinguish between two types of factors an accumulated factor called capital and a nonaccumulated factor called labor growth is driven by the expansion of the capital stock which is in turn determined by individual saving decisions long run growth is endogenous as the aggregate production function is taken to be linearly homogeneous in capital and productive government services taken together the provision of government services is financed by a tax on capital because government services are productive a small tax on

income and democracy existing studies establish a strong cross country correlation between income and democracy but do not control for factors that simultaneously affect both variables we show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and vari ous measures of democracy we present instrumental variables estimates that also show no causal effect of income on democracy the cross country corre lation between income and democracy reflects a positive correlation between changes in income and democracy over the past 500 years this pattern is con sistent with the idea that societies embarked on divergent political economic development paths at certain critical junctures jel d7 e 1