the political economy of clientelism in this paper we argue that the political commitment problem provides an explanation for why much income redistribution takes an inefficient form particularly employment in the public sector a job is a credible way of redistributing when it provides rents such as in situations with moral hazard and employment is optimal ex post moreover a job is selective and reversible and thus ties the continuation utility of a voter to the political success of a particular politician we show that the need to make offers of employment incentive compatible leads to inefficiencies in the supply of public goods we also show that such inefficient redistribution becomes relatively attractive in situations with high inequality and low productivity inefficiency is increased when the stakes from politics are high when inequality is high and when money matters less than ideology in politics

economics versus politics pitfalls of policy advice abstract the standard approach to policy making and advice in economics implicitly or explicitly ignores politics and political economy and maintains that if possible any market failure should be

liquidity risk and occupational choices we explore which financial constraints matter the most in the choice of becoming an entrepreneur we consider a randomly assigned welfare program in rural mexico and show that cash transfers signi cantly increase entry into entrepreneurship we then exploit the cross household variation in the timing of these transfers and find that current occupational choices are significantly more responsive to the transfers expected for the future than to those currently received guided by a simple occupational choice model we argue that the program has promoted entrepreneurship by enhancing the willingness to bear risk as opposed to simply relaxing current liquidity constraints

privatisation in developing countries a review of the evidence and the policy lessons privatisation is widely promoted as a means of improving economic performance in developing countries however the policy remains controversial and the relative roles of ownership and other structural changes such as competition and regulation in promoting economic performance remain uncertain this article reviews the main empirical evidence on the impact of privatisation on economic performance in developing economies the evidence suggests that if privatisation is to improve performance over the longer term it needs to be complemented by policies that promote competition and effective state regulation and that privatisation works best in developing countries when it is integrated into a broader process of structural reform

women as policy makers evidence from a randomized policy experiment in india this paper uses political reservations for women in india to study the impact of women s leadership on policy decisions since the mid 1990 s one third of village council head positions in india have been randomly reserved for a woman in these councils only women could be elected to the position of head village councils are responsible for the provision of many local public goods in rural areas using a dataset we collected on 265 village councils in west bengal and rajasthan we compare the type of public goods provided in reserved and unreserved village councils we show that the reservation of a council seat affects the types of public goods provided specifically leaders invest more in infrastructure that is directly relevant to the needs of their own genders

on identification of bayesian dsge models this article is concerned with local identification of individual parameters of dynamic stochastic general equilibrium dsge models estimated by bayesian methods identification is often judged by a comparison of the posterior distribution of a parameter with its prior however these can differ even when the parameter is not identified instead we propose two bayesian indicators of identification the first follows a suggestion by poirier of comparing the posterior density of the parameter of interest with the posterior expectation of its prior conditional on the remaining parameters the second examines the rate at which the posterior precision of the parameter gets updated with the sample size using data simulated at the parameter point of interest for an increasing sequence of sample sizes t for identified parameters the posterior precision increases at rate t for parameters that are either unidentified or are weakly identified the posterior precision may get updated but its rate of update wi

buying votes vs supplying public services political incentives to under invest in pro poor policies this paper uses unique survey data to provide for the first time in the literature direct evidence that vote buying in poor economies is associated with lower provision of public services that disproportionately benefit the poor various features of the data and the institutional context allow the interpretation of this correlation as the equilibrium policy consequence of clientelist politics ruling out alternate explanations such as for example poverty driving both vote buying and health outcomes the data come from the philippines a country context that allows for measuring vote buying during elections and services delivered by the administrative unit controlled by winners of those elections the data reveal a significant robust negative correlation between vote buying and the delivery of primary health services in places where households report more vote buying government records show that municipalities invest less in basic health services for mothers and children and quite strikingly as a summary measure of weak service delivery performance a higher percentage of children are severely under weight

determinants of redistributive politics an empirical analysis of land reforms in west bengal india we investigate political determinants of land reform implementation in the indian state of west bengal using a village panel spanning 1974 1998 we do not find evidence supporting the hypothesis that land reforms were positively and monotonically related to control of local governments by a left front coalition vis vis the right centrist congress party combined with lack of commitment to policy platforms instead the evidence is consistent with a quasi downsian theory stressing the role of opportunism reelection concerns and electoral competition jel d72 013 017 q15

the proper scope of government theory and an application to prisons when should a government provide a service in house and when should it contract out provision we develop a model in which the provider can invest in improving the quality of service or reducing cost if contracts are incomplete the private provider has a stronger incentive to engage in both quality improvement and cost reduction than a government employee has however the private contractor s incentive to engage in cost reduction is typically too strong because he ignores the adverse effect on noncontractible quality the model is applied to understanding the costs and benefits of prison privatization

a rentier theory of subnational regimes fiscal federalism democracy and authoritarianism in the argentine provinces levels of subnational democracy vary significantly within countries around the world drawing on fiscal theories of the state the author argues that this variance is often explained by a type of rentierism that is not geographically determined by natural resources but politically created by certain fiscal federalism arrangements he posits that less democratic regimes are more likely in rentier provinces those that receive disproportionately large central government transfers and practically forgo local taxation intergovernmental revenue sharing rules that produce large vertical fiscal imbalances and favor the economically smaller districts provide their incumbents with generous fiscal federalism rents that allow them to restrict democratic contestation and weaken checks and balances statistical evidence from a panel data set of the argentine provinces strongly confirms this expectation even after controlling for standard alternative explanations such as level of development sensitivity analysis shows that this finding is extremely robust to alternative panel estimators qualitative and quantitative evidence suggests that the effect of heavy public spending on the economic autonomy of political actors is the main causal mechanism at work

stuck on stubble the non market value of agricultural byproducts for diversified farmers in morocco diversified agricultural households often use byproducts of one activity as inputs for another for crop livestock farmers cereal production provides grain and crop residue where the latter can be used as livestock feed to properly assess the cost of introducing new technologies into such systems one must value the implicit cost of byproducts which is made difficult by missing byproduct markets we estimate the shadow value of non market crop stubble using household data from morocco and find that stubble accounts for around one quarter of the value of cereal production in a normal rainfall year and three quarters in a drought year

bureaucracy and growth a cross national analysis of the effects of weberian state structures on economic growth the role of bureaucratic authority structures in facilitating economic growth has been a sociological concern since max weber s classic contributions almost 100 years ago using a recent and original data set we examine the characteristics of core state economic agencies and the growth records of a sample of 35 developing countries for the 1970 1990 period our weberianness scale offers a simple measure of the degree to which these agencies employ meritocratic recruitment and offer predictable rewarding long term careers we find that these weberian characteristics significantly enhance prospects for economic growth even when we control for initial levels of gdp per capita and human capital our results imply that weberianness should be included as a factor in general models of economic growth they also suggest the need for more attention by policymakers to building better bureaucracies and more research by social scientists on variations in how state bureaucracies are organized

separation of powers and political accountability political constitutions are incomplete contracts and therefore leave room for abuse of power in democracies elections are the primary mechanism for disciplining public officials but they are not sufficient separation of powers between executive and legislative bodies also helps to prevent the abuse of power but only with appropriate checks and balances checks and balances work by creating a conflict of interest between the executive and the legislature yet requiring both bodies to agree on public policy in this way the two bodies discipline each other to the voters advantage under appropriate checks and balances separation of powers also helps the voters elicit information

a system comparison approach to distinguish two nonseparable and nonnested agricultural household models this study distinguishes two nonseparable agricultural household models for a self employed farm household one assumes heterogeneity of farm and nonfarm labor and a competitive market for nonfarm labor the other assumes homogeneity of the two types of labor and a restricted market for nonfarm labor we compare demand systems that are derived from them which have different dependent variables and different numbers of equations we apply a cox type test to compare these complicated nonnested systems results show clearly that the former is better for japanese rice farming households comparison of price elasticities for those models verifies the importance of that test copyright 2008 oxford university press

local versus global separability in agricultural household models the factor price equalization effect of land transfer rights commonly employed global tests for separability between production and consumption decisions are theoretically inappropriate when the market failures creating non separabilities differentially constrain some but not all households simulated maximum likelihood estimates using chinese panel data reject the restrictions implied by a global separability test in favor of regime specific or local separability tests the estimates also show that a global approach to separability obscures the significant effect that less encumbered land transfer rights would have on shadow factor price equalization across households and allocative efficiency the findings on transfer rights suggest a resolution to the debate in china on further property rights reform copyright 2002 oxford university press

optimal discretionary monetary and fiscal policies in a country size heterogeneous monetary union abstract this paper develops a new keynesian model of a monetary union where atomistic small economies coexist with a large economy it explores how the level of public debt shapes non cooperative discretionary policies it evaluates welfare losses for small and large member countries the paper demonstrates that higher public debt levels hamper business cycle stabilization for the union as a whole and in particular penalize the stabilization performance of small country members while cooperation and monetary leadership is preferable to fiscal leadership for the union as whole and for the small countries the big country prefers fiscal leadership where it explores a larger strategic power vis a vis the common monetary policy authority political support for cooperation may be hard to achieve under low debt levels cooperative stabilization outcomes are relatively similar to the non cooperative ones

nominal price rigidity money supply endogeneity and business cycles abstract this paper investigates the ability of nominal price rigidity to explain the co movement of inflation with the cyclical component of output observed in the post war u s data a dynamic general equilibrium model is constructed with the introduction of monopolistic competition and nominal price rigidity in a standard real business cycle model allowing for an endogenous money supply rule it is then demonstrated that sticky price models can explain the observed associations between movements in inflation and output much better than flexible price models this result depends little on whether money supply is assumed to be endogenous or not

estimating labor supply and production decisions of self employed farm producers abstract this paper proposes a model oriented towards integrating farm households production and consumption decisions into a unified theoretical and econometric framework it is argued that in contrast with other forms of economic organization farm households utility and profit maximization decisions are not likely to be independent econometric estimation of a farm household model using canadian data suggests that utility and profit maximizing decisions are not indeed independent and moreover that there are significant gains in explanatory power and efficiency by estimating the consumption and production equations jointly

monetary policy regime shifts new evidence from time varying interest rate rules i introduction interest rate policies are complex decisions they rely on a multitude of indicators and models and are by nature associated to events not always captured by relatively simple econometric tools nonetheless there is now a widespread consensus that the class of simple policy rules examined by recent microfounded models of the economy generates stabilization properties that are very close to those of optimal feedback rules woodford 2003 feedback rules nowadays are customary tools for monetary policy analysis furthermore rule based policymaking is generally accepted as the reference framework of monetary policy strategies bank of england 1999 european central bank 2004 monetary policy reaction functions summarize the importance that policymakers attach to policy objectives as well as their views on the structure of the economy traditionally those functions are estimated as constant parameters policy rules this is a plausible simplification but a number of reasons suggest that rules should allow for instability and parameter variation over time constant parameter reaction functions might blur the role played by various real world factors 1 model uncertainty 2 conflicting objectives 3 shifting preferences on policymakers choices and 4 nonlinearities in particular reduced form policy models that do not allow for shifts and asymmetries in behavioral relationships could produce misleading results dynamic stochastic general equilibrium dsge models represent one potentially promising way of overcoming these problems this increasingly popular approach is based on microfounded descriptions of the economy recent studies also provide novel techniques to estimate and evaluate linearized dsge models using bayesian methods del negro et al 2007 the bayesian framework represents a natural setup to account for model and parameter uncertainty however the dsge approach imposes a large number of restrictions on the data in the specific context of interest rate rules its ability to generate qualitative and robust assessments on monetary policy conduct appears problematic this article provides some new evidence on interest rate policies in five large economies united states united kingdom germany france and italy through the implementation of a time varying parameters approach tvp henceforth we estimate policy rules as summarized by simple reaction functions defined in terms of expected inflation and output gaps in contrast with most existing analyses we employ a tvp methodology based on the kalman filter algorithm to estimate our instrument rules in practice we allow the policy rules coefficients to vary over time what we obtain are estimates of the state vector for each observation in our sample these estimates can then describe the evolution of monetary policy over time moreover we evaluate the conditional variance of interest rates implied by our tvp methodology a host of factors may cause shifts in the estimated parameters of monetary policy reaction functions some of them may be due to institutional reforms like the introduction of inflation targets or the move to an exchange rate peg or a fixed exchange rate in estimating reaction functions defined in terms of final policy objectives one aims at capturing the relative emphasis placed by policymakers on the attainment of output and inflation targets over time such emphasis might evolve therefore one needs to model the observer s view on the likelihood that these shifts are smooth transitions or abrupt regime changes by allowing the weights of the policy rule to vary only gradually we are able to identify relevant shifts in policy conduct regardless of their exact configuration as argued at length in the next section our approach is better suited than conventional fixed parameter techniques to deal with lucas critique and more in general with the issue of structural change

has democratization reduced infant mortality in sub saharan africa evidence from micro data does democracy help babies survive in sub saharan africa by using retrospective fertility surveys conducted in 28 african countries i compare the survival of infants born to the same mother before and after democratization to disentangle the effect of democracy from that of changes in population characteristics which is infeasible with country level statistics on infant mortality i find that infant mortality falls by 1 2 percentage points 12 of the sample mean after democratization in the post cold war period relevant aspects of democracy appear to be the combination of multiparty elections and leadership change

voting technology political responsiveness and infant health evidence from brazil this paper studies the introduction of electronic voting technology in brazilian elections estimates exploiting a regression discontinuity design indicate that electronic voting reduced residual error ridden and uncounted votes and promoted a large de facto enfranchisement of mainly less educated citizens estimates exploiting the unique pattern of the technology s phase in across states over time suggest that as predicted by political economy models it shifted government spending toward health care which is particularly beneficial to the poor positive effects on both the utilization of health services prenatal visits and newborn health low weight births are also found for less educated mothers but not for the more educated

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

state corroding federalism competition among local governments in a decentralized political system is often thought to discipline lazy or corrupt officials improving public good provision and increasing welfare some scholars note possible distortions due to spillovers or a race to the bottom but suggest that central transfers or regulations can remedy these both arguments take for granted a framework of constitutional order in which the central government can collect taxes allocate transfers and enforce regulations autonomously but what if it can t we show that if central enforcement capacity is endogenous interjurisdictional competition may itself erode the center s ability to channel competition in welfare enhancing directions regional governments may compete for capital by shielding firms from central tax collectors bankruptcy courts or regulators the equilibrium result is weaker central law enforcement and usually lower welfare interjurisdictional competition corrodes the state we illustrate with three examples from russia china and the us of cases in which such competition apparently encouraged subnational politicians to help firms evade central taxes or regulations

separation hypothesis tests in the agricultural household model in an agricultural household model farmers production decisions can be either separated or nonseparated from preferences since previous studies on agricultural household behavior and policy effects have shown that the model with separation yields different results than the model with nonseparation it is important to have a test to identify the correct model this paper provides new tests that extend current tests in two directions first the new tests avoid issues that current tests have to address such as simultaneity bias and the estimation of the production function second the new tests make use of more information implied from the separation hypothesis than current tests

active and passive waste in government spending evidence from a policy experiment we propose a distinction between active and passive waste as determinants of the cost of public services active waste entails utility for the public decision maker whereas passive waste does not we analyze purchases of standardized goods by italian public bodies and exploit a policy experiment associated with a national procurement agency we find that i some public bodies pay systematically more than others for equivalent goods ii differences are correlated with governance structure iii the variation in prices is principally due to variation in passive rather than active waste and iv passive waste accounts for 83 percent of total estimated waste

estimated general equilibrium models for the evaluation of monetary policy in the us and europe a persistent criticism of general equilibrium models of monetary policy which incorporate nominal inertia in the form of the new keynesian phillips curve nkpc is that they fail to capture the extent of inflation inertia in the data in this paper we derive a general equilibrium model based on optimising behaviour but which also implies a data consistent nkpc specifically our model accounts for nominal inertia in both price and wage setting as well for habits in consumption using us and european data from 1970 to 1998 our parameter estimates reveal that i there is relatively more inertia in price setting in europe ii wage contracts last longer in the us iii the extent of backward looking behaviour in price and wage setting is statistically significant but small in both the us and europe and iv significant habits effects are present in european consumption finally we simulate the effects of monetary policy and find that while the magnitude of the impact of monetary policy on the endogenous variables in our estimated models are similar to other econometric studies the dynamic paths for variables display less inertia than is typically found in studies which use output gaps to proxy changes in marginal costs

decentralization of governance and development all around the world in matters of governance decentralization is the rage even apart from the widely debated issues of subsidiarity and devolution in the european union and states rights in the united states decentralization has been at the center stage of policy experiments in the last two decades in a large number of developing and transition economies in latin america africa and asia the world bank for example has embraced it as one of the major governance reforms on its agenda for example world bank 2000 burki perry and dillinger 1999 take also the examples of the two largest countries of the world china and india decentralization has been regarded as the major institutional framework for the phenomenal industrial growth in the last two decades in china taking place largely in the nonstate nonprivate sector india ushered in a landmark constitutional reform in favor of decentralization around the same time it launched a major program of economic reform in the early 1990s on account of its many failures the centralized state everywhere has lost a great deal of legitimacy and decentralization is widely believed to promise a range of benee ts it is often suggested as a way of reducing the role of the state in general by fragmenting central authority and introducing more intergovernmental competition and checks and balances it is viewed as a way to make government more responsive and efe cient technological changes have also made it somewhat easier than before to provide public services like electricity and water supply relatively efe ciently in smaller market areas and the lower levels of government have now a greater ability to handle certain tasks in a world of rampant ethnic cone icts and separatist movements decentralization is also regarded as a way of diffusing social and political tensions and ensuring local cultural and political autonomy these potential benee ts of decentralization have attracted a very diverse range

price level versus inflation targeting abstract this paper shows that price level targeting outperforms inflation targeting in the standard new keynesian model under the assumption that the central bank is forced to operate in an environment characterized by discretion in the benchmark case with no persistence in the shocks the commitment solution can be fully replicated intuitively price level targeting introduces history dependence and a stationary level of prices both of which are prominent features of the commitment solution

speed limit policies the output gap and optimal monetary policy in a standard new keynesian model a myopic central bank concerned with stabilizing inflation and changes in the output gap will implement a policy under discretion that replicates the optimal timeless perspective precommitment policy by stabilizing output gap changes the central bank imparts inertia into output and inflation that is absent under pure discretion even a fully optimizing i e non myopic central bank operating in a discretionary policy environment achieves better social outcomes if it focuses on inflation and changes in the output gap than are achieved under inflation targeting this abstract was borrowed from another version of this item

local inequality and project choice theory and evidence from ecuador this paper provides evidence consistent with elite capture of social fund investment projects in ecuador exploiting a unique combination of data sets on village level income distributions social fund project administration and province level electoral results we test a simple model of project choice when local political power is unequally distributed in accordance with the predictions of the model poorer villages are more likely to receive projects that provide excludable private goods to the poor such as latrines controlling for poverty more unequal communities are less likely to receive such projects consistent with the hypothesis of elite capture these results are sensitive to the specific measures of inequality and elite power used in the empirical analysis and are strongest for expenditure shares at the top of the distribution

exposing corrupt politicians the effects of brazil s publicly released audits on electoral outcomes author s finan frederico ferraz claudio abstract this paper examines the extent to which access to information enhances political accountability based upon the results of brazil s recent anti corruption program that randomly audits municipal expenditures of federally transferred funds it estimates the effect of the disclosure of local government corruption practices upon the re election success of incumbent mayors in municipal elections comparing municipalities which were randomly audited before the elections with those audited after the analysis shows that the disclosure of audit results had a significant impact on the re election rates of mayors found to be corrupt for a one standard deviation increase in reported corruption the audit policy reduced the incumbent s likelihood of re election by 25 percent this effect is more pronounced in municipalities where radio stations are present and higher levels of corruption are identified these findings highlight the value of information and the role of the media in reducing informational asymmetries in the political process thus enabling voters to not only hold corrupt politicians accountable but also to reward non corrupt politicians

second best institutions the focus of reforms in the developing world has moved from getting prices right to getting institutions right this reflects the recognition that markets are unlikely to work well in the absence of a predictable and legitimate set of rules that support economic activity and dis pense its fruits governance reforms have become the buzzword for bilateral donors and multilateral institutions in much the same way that liberalization privatization and stabiliza tion were the mantras of the 1980s but what kind of institutions should reform ers strive to build it is easier to list the func tions that good institutions perform than it is to describe the shape they should take desirable institutions provide security of property rights enforce contracts stimulate entrepreneurship foster integration in the world economy maintain macroeconomic stability manage risk taking by financial intermediaries supply social insurance and safety nets and enhance voice and account ability but as the variety of institutional forms that prevail in the advanced countries themselves suggests richard freeman 2000 peter hall and david soskice 2001 each one of these ends can be achieved in a large number of different ways rodrik 2007a

migration and rural welfare the impact of potential policy reforms in europe summary this paper uses an agricultural household model in an imperfect market environment and data from burkina faso to explore the impact of potential immigration policy reforms in europe on the welfare of rural households simulation results demonstrate that in contrast to continental migration increased intercontinental migration has strong positive household welfare effects similarly an increase in the stay abroad of intercontinental migrants impacts positively on welfare of the migrant sending household results of these simulations lend support to the introduction of a tmp which would in addition to facilitating migration control in host economies improve the welfare of sending households by allowing for increased engagement in intercontinental migration the temporary nature of such a program would ensure that dutch disease effects would be mitigated through eventual migrant return

federalism as a commitment to reserving market incentives the authors advance a new perspective in the study of federalism their approach views federalism as a governance solution of the state to credibly preserving market incentives market incentives are preserved if the state is credibly prevented from compromising on future economic success and from bailing out future failures the salient features of federalism decentralization of information and authority and interjurisdictional competition help provide credible commitment or these purposes in addition the authors suggest that some federalism are self sustaining

peasant household behaviour with missing markets some paradoxes explained a model of peasant household behavior under varying degrees of household specific food and labor market failures is constructed to show that these structural features can explain several well known patterns of peasant response which have often been attributed to peculiar motives presumed specific to peasants the model explains sluggish response to cash crops prices and high instability in perceived food and labor scarcities the key role of manufactured consumer goods prices in stimulating peasants effort in cash crops production the effectiveness of taxation as opposed to incentives in stimulating cash crops production and the key role of technological change in food production to enhance cash crop production results are obtained analytically in the case of one market failure and by numerical simulation with more than one

optimal simple and implementable monetary and fiscal rules welfare maximizing monetary and fiscal policy rules are studied in a model with sticky prices money and distortionary taxation the ramsey optimal policy is used as a point of comparison the main findings are the size of the inflation coefficient in the interest rate rule plays a minor role for welfare it matters only insofar as it affects the determinacy of equilibrium optimal monetary policy features a muted response to output interest rate rules that feature a positive response to output can lead to significant welfare losses the welfare gains from interest rate smoothing are negligible optimal fiscal policy is passive the optimal monetary and fiscal rule combination attains virtually the same level of welfare as the ramsey optimal policy

farm income variability and the supply of off farm labor if farmers are risk averse greater farm income variability should increase off farm labor supply this effect is confirmed for a sample of kansas farmers off farm employment of farmers and their spouses is also found to be significantly influenced by farm experience off farm work experience farm size leverage efficiency and farm specific education in addition farm operators and spouses who receive significant income support through government farm programs are less likely to work off the farm this may suggest that policy changes reducing farm income support payments may increase off farm employment of farmers and their spouses

using shadow wages to estimate labor supply of agricultural households with few exceptions most studies of the labor demand and supply decisions of agricultural households in developing countries have relied on the empirical advantages of separability given the questionable nature of some of the assumptions sufficient for separability i apply a recent methodology that accounts for the simultaneity between the production and consumption decisions of a farm household using data from rural india direct estimates of the marginal productivities shadow wages of family male and female labor are derived from a cobb douglas agricultural production function the estimated shadow wages and income are then used as regressors in a structural model of labor supply

estimating central bank preferences under commitment and discretion this paper explains u s macroeconomic outcomes with an empirical new keynesian model in which monetary policy minimizes the central bank s loss function the presence of expectations in the model forms a well known distinction between two modes of optimization termed commitment and discretion the model is estimated separately under each policy using maximum likelihood over the volcker greenspan bernanke period comparisons of fit reveal that the data favor the specification with discretionary policy estimates of the loss function weights point to an excessive concern for interest rate smoothing in the commitment model but a more balanced concern relative to inflation and output stability in the discretionary model

shadow wages and shadow income in farmers labor supply functions this article extends the current literature on estimating the labor supply function in agriculture by providing a different method to derive the shadow wage and shadow income the method is based on the observation that the shadow wage is the marginal product of labor at the optimal point of both farm and household production functions thus under certain assumptions on the functional form of the production functions both the shadow wage and shadow income can be derived without estimating the production function using a sample of vietnamese farmers the results from the new method are shown to be consistent with the theory

should the euro area be run as a closed economy the european economic and monetary union emu has created a new economic area larger and closer with respect to the rest of the world area specifi cs hocks are thus more important in emu than country specific shocks used to be in the previous states e g in germany it is thus not surprising that the models used to determine optimal monetary policy in the euro area for instance smets and wouters 2004 assume that this works essentially as a closed economy hit by domestic shocks i e the same assumption made in standard models of u s monetary policy see e g christiano et al 1999 where all shocks are domestic with the only possible exception of energy price shocks this paper studies monetary policy in the euro area looking at the variable most directly related to current and expected monetary policy the yield on long term government bonds we explore how the behaviour of european long term rates has been affected by emu and whether the response of long term rates to monetary policy has got any closer to that consistent with a closed economy we find that the level of long term rates in europe is almost entirely explained by u s shocks and by the systematic response of u s and european variables to these shocks the systematic component of european monetary policy responds to u s variables more than it does to local variables this was true for the bundesbank before emu and remains true for the ecb since the start of emu we also find that unpredictable fluctuations in long term rates are driven by shocks to term premia not to monetary policy this means that the ecb can affect long rates only through the systematic component of its monetary policy which as we have seen mostly responds to u s variables monetary policy shocks induced by the ecb have virtually no effect on long rates claiming that monetary policy in the euro area can be determined as if the region were a closed economy is thus not consistent with the empirical evidence on

water for life the impact of the privatization of water services on child mortality while most countries are committed to increasing access to safe water and thereby reducing child mortality there is little consensus on how to actually improve water services one important proposal under discussion is whether to privatize water provision in the 1990s argentina embarked on one of the largest privatization campaigns in the world including the privatization of local water companies covering approximately 30 percent of the country s municipalities using the variation in ownership of water provision across time and space generated by the privatization process we find that child mortality fell 8 percent in the areas that privatized their water services and that the effect was largest 26 percent in the poorest areas we check the robustness of these estimates using cause specific mortality while privatization is associated with significant reductions in deaths from infectious and parasitic diseases it is uncorrelated with deaths from causes unrelated to water conditions

a theory of dual labor markets with application to industrial policy discrimination and keynesian unemployment this paper develops a model of dual labor markets based on employers need to motivate workers in order to elicit effort from their workers employers may find it optimal to pay more than the going wage this changes fundamentally the character of labor markets the model is applied to a wide range of labor market phenomena it provides a coherent framework for understanding the claims of industrial policy advocates it also can provide the basis for a theory of occupational segregation and discrimination that will not be eroded by market forces finally the model provides the basis for a theory of involuntary unemployment

regime switches agents beliefs and post world war ii u s macroeconomic dynamics the evolution of inflation and output over the last 50 years is examined through the lens of a micro founded model that allows for changes in the behavior of the federal reserve and in the volatility of structural shocks agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion underlying the macroeconomy the results support the view that there were regime switches in the conduct of monetary policy however the behavior of the federal reserve is identified by repeated fluctuations between a hawk and a dove regime instead of by the traditional pre and post volcker structure counterfactual simulations show that if agents had anticipated the appointment of an extremely conservative chairman inflation would not have reached the peaks of the late 70s and the inflation output trade off would have been less severe these beliefs counterfactuals are new in the literature finally the paper provides a bayesian algorithm to handle the technical difficulties that arise in a rational expectations model with markov switching regimes

federalism and the soft budget constraint the government s incentives to bail out inefficient projects are determined by the trade off between political benefits and economic costs the latter depending on the decentralization of government two effects of federalism are derived first fiscal competition among local governments under factor mobility increases the opportunity costs of bailout and thus serves as a commitment device the competition effect second monetary centralization together with fiscal decentralization induces a conflict of interests and thus may harden budget constraints and reduce inflation the checks and balance effect the authors analysis is used to interpret china s recent experience of transition to a market economy copyright 1998 by american economic association

decentralized targeting of an antipoverty program abstract developing country governments often delegate authority over the targeting of antipoverty programs to community organizations while retaining control over how much goes to each community we offer a theoretical characterization of the information structure in such programs and the interconnected behavior of the various players our model motivates an econometric specification for explaining distributional outcomes results for bangladesh s food for education ffe program indicate that within village targeting improved with program size lower land inequality less remoteness fewer shocks and less private redistribution there is no sign that the center took account of village attributes conducive to reaching the poor

estimating central banks preferences from a time varying empirical reaction function abstract we estimate monetary policy reaction functions for the united states the united kingdom and germany using a markov switching model that allows for shifts in the coefficients of the central bank s reaction function as well as for independent shifts in the residual variance the results indicate that central bank policy can be characterized as falling into a low and a high inflation regime over time all central banks have assigned changing weights to inflation and the output gap switching in the residual variance turns out to be important for the fit of the model as a reaction function is a reduced form coefficients embody preference parameters as well as parameters characterizing the structure of the economy to recover the central banks preferences we estimate the preference parameters jointly with a small model of the economy the results show that the bundesbank has placed a relatively higher weight on inflation than the fed moreover for the bundesbank and the fed the differences between both regimes seem to originate mainly from a changing preference for interest rate smoothing

economic development as self discovery in the presence of uncertainty about what a country can be good at producing there can be great social value to discovering costs of domestic activities because such discoveries can be easily imitated we develop a general equilibrium framework for a small open economy to clarify the analytical and normative issues we highlight two failures of the laissez faire outcome there is too little investment and entrepreneurship ex ante and too much production diversification ex post optimal policy consists of counteracting these distortions to encourage investments in the modern sector ex ante but to rationalize production ex post we provide some informal evidence on the building blocks of our model

the optimal inflation rate in new keynesian models should central banks raise their inflation targets in light of the zero lower bound we study the effects of positive steady state inflation in new keynesian models subject to the zero bound on interest rates we derive the utility based welfare loss function taking into account the effects of positive steady state inflation and solve for the optimal level of inflation in the model for plausible calibrations with costly but infrequent episodes at the zero lower bound the optimal inflation rate is low typically less than two percent even after considering a variety of extensions including optimal stabilization policy price indexation endogenous and statedependent price stickiness capital formation model uncertainty and downward nominal wage rigidities on the normative side price level targeting delivers large welfare gains and a very low optimal inflation rate consistent with price stability these results suggest that raising the inflation target is too blunt an instrument to efficiently reduce the severe costs of zero bound episodes

credit and efficiency in centralized and decentralized economies we study a credit model where because of adverse selection unprofitable projects may nevertheless be financed indeed they may continue to be financed even when shown to be low quality if sunk costs have already been incurred we show that credit decentralization offers a way for creditors to commit not to refinance such projects thereby discouraging entrepreneurs from undertaking them initially thus decentralization provides financial discipline nevertheless we argue that it puts too high a premium on short term returns the model seems pertinent to two issues soft budget constraint problems in centralized economies and differences between anglo saxon and german japanese financing practices

effects of the internal wage on output supply a structural estimation for japanese rice farmers farmers are offered a higher wage rate by their off farm employers than the rate of remuneration they receive for their labor on their own family farms in japan however it is not possible for them to work for as many hours as they want for their off farm employers at the offered wage rate hence they perceive that they face an imperfectly competitive market for labor with only limited opportunities for wage employment see for example arayama 1986 kang and maruyama 1992 markets for their output and factors of production are observed to be perfectly competitive thus the state of the markets they face proves to be similar to the one producer consumer households face in the circumstances addressed in section 2 2 of the preceding chapter since the market for labor is not a perfectly competitive one because it offers only limited opportunities for wage employment the market wage rate ceases to be relevant in organizing their family farms and in making their choice over their level of consumption they are obliged to form an internal wage rate on their own for these purposes within their households the analytical results in section 2 2 show that the internal wage rate proves to be lower than the market rate and renders their supply of output and their demand for factors of production less elastic than in the instance in which all relevant markets are perfectly competitive in extreme cases it gives rise to a downward sloping supply function of output and upward sloping demand functions for the factors of production

quantifying and sustaining welfare gains from monetary commitment abstract our objectives are to quantify the stabilization welfare gains from commitment to examine how commitment to an optimal rule can be sustained as an equilibrium to find a simple interest rate rule that approximates the optimal commitment one we utilize an empirical micro founded euro area dsge model a quadratic approximation of household utility as the welfare criterion employing a nominal interest rate lower bound in contrast to previous studies we find significant commitment stabilization gains of around a 0 4 0 5 equivalent permanent consumption increase and with higher price stickiness gains over 2 we find that a simple optimized commitment rule responding to inflation and the real wage mimics the optimal one

state and development the need for a reappraisal of the current literature this essay tries to bring out some of the complexities that are overlooked in the usual treatment of the state in the institutional economics literature and supplement the latter with a discussion of some alternative approaches to looking at the possible developmental role of the state it refers to a broader range of development goals including the structural transformation of the economy and focuses on problems like the resolution of coordination failures and collective action problems the conflicting issues of commitment and accountability and the need for balancing the trade offs they generate some ingredients of state capacity and political coalition building usually missed in the literature the possible importance of rent sharing in a political equilibrium the advantages and problems of political centralization and decentralization and the multidimensionality of state functions that may not be addressed by markets or private firms

strengthening state capabilities the role of financial incentives in the call to public service we study a recent recruitment drive for public sector positions in mexico different salaries were announced randomly across recruitment sites and job offers were subsequently randomized screening relied on exams designed to measure applicants intellectual ability personality and motivation this allows the first experimental estimates of i the role of financial incentives in attracting a larger and more qualified pool of applicants ii the elasticity of the labor supply facing the employer and iii the role of job attributes distance attractiveness of the municipal environment in helping fill vacancies as well as the role of wages in helping fill positions in less attractive municipalities a theoretical model guides each stage of the empirical inquiry we find that higher wages attract more able applicants as measured by their iq personality and proclivity towards public sector work i e we find no evidence of adverse selection effects on motivation higher wage offers also increased acceptance rates implying a labor supply elasticity of around 2 and some degree of monopsony power distance and worse municipal characteristics strongly decrease acceptance rates but higher wages help bridge the recruitment gap in worse municipalities

accountability and decentralisation in government an incomplete contracts model this paper approaches the question of the appropriate level of decentralisation of power in government as a problem in the allocation of control rights under incomplete contracts the model of the paper compares allocations of power to local central and regional government as alternative means of motivating governments to act in the interests of citizens centralisation allows benefits from policy coordination but has costs in terms of diminished accountability which can be precisely defined as the reduced probability that the welfare of a given region can determine the re election of the government the model is extended to allow for conflicts of interest within regions and externalities between central and local governments in a federation it is also applied to determining levels of fiscal transfer between localities and to circumstances where governments may act as leviathans appropriating resources for their own use

the structural dynamics of output growth and inflation some international evidence we examine the dynamics of output growth and inflation in the us euro area and uk using a structural time varying coefficient var there are important similarities in structural inflation dynamics across countries output growth dynamics differ swings in the magnitude of inflation and output growth volatilities and persistences are accounted for by a combination of three structural shocks changes over time in the structure of the economy are limited and permanent variations largely absent changes in the volatilities of structural shocks matter

shadow wages and peasant family labour supply an econometric application to the peruvian sierra a striking feature of developing economies is the large proportion of the work force that is self employed lack of widespread labor market participation in the agricultural sector can pose a major obstacle to the empirical implementation of economic models of the peasant household whether because wage data are simply not available or because the assumptions required to make use of wage data stretch the bounds of credulity this paper develops a methodology for estimating a structural labor supply model for primarily self employed peasant households which holds under a general agricultural technology and set of labor market conditions the unique feature of the approach is that the opportunity cost of time or shadow wage of household workers is explicitly estimated from an agricultural production function and is subsequently used to identify a set of structural labor supply parameters recent household survey data from rural peru is employed to estimate and perform various diagnostic tests on the model the empirical findings lend support to the hypothesis that peasant households allocate their members time as if to maximize a family utility function and moreover demonstrate the tractability of the shadow wage methodology and its usefulness in estimating more elaborate time allocation models

an empirical assessment of optimal monetary policy in the euro area we estimate a new keynesian dsge model for the euro area under alternative descriptions of monetary policy discretion commitment or a simple rule after allowing for markov switching in policy maker preferences and shock volatilities this reveals that there have been several changes in euro area policy making with a strengthening of the anti inflation stance in the early years of the erm which was then lost around the time of german reunification and only recovered following the turmoil in the erm in 1992 the ecb does not appear to have been any more conservative as aggregate euro area policy was under bundesbank leadership the estimates also suggest that the most appropriate description of policy is that of discretion with no evidence of commitment in the euro area as a result although both good luck and good policy played a role in the moderation of inflation and output volatility in the euro area the welfare gains would have been substantially higher had policy makers been able to commit adopting a flexible price level target would lead to outcomes close to commitment

traveling agents political change and bureaucratic turnover in india abstract we develop a framework to empirically examine how politicians with electoral pressures control bureaucrats with career concerns and the consequent implications for bureaucrats career investments unique microlevel data on indian bureaucrats support our key predictions politicians use frequent reassignments transfers across posts of varying importance to control bureaucrats high skilled bureaucrats face less frequent political transfers and lower variability in the importance of their posts we find evidence of two alternative paths to career success officers of higher initial ability are more likely to invest in skill but caste affinity to the politician s party base also helps secure important positions

targeting nominal income growth or inflation within a simple new keynesian model emphasizing forward looking behavior of private agents i evaluate optimal nominal income growth targeting versus optimal inflation targeting when the economy is mainly subject to shocks that do not involve monetary policy trade offs for society inflation targeting is preferable otherwise nominal income growth targeting may be superior because it induces inertial policy making which improves the inflation output gap trade off somewhat paradoxically inflation targeting may be relatively less favorable the more society dislikes inflation and the more persistent are the effects of inflation generating shocks jel e42 e52 f58

were there regime switches in u s monetary policy working paper 2004 14 june 2004 abstract a multivariate model identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances is confronted with u s data since 1959 the best fit is with a model that allows time variation in structural disturbance variances only among models that also allow for changes in equation coefficients the best fit is for a model that allows coefficients to change only in the monetary policy rule that model allows switching among three main regimes and one rarely and briefly occurring regime the three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed and the differences in policy behavior are substantively interesting though statistically ill determined the estimates imply monetary targeting was central in the early 80s but was also important sporadically in the 70s the changes in regime were essential neither to the rise in inflation in the 70s nor to its decline in the 80s jel classification e52 e47 c53 key words counterfactuals lucas critique policy rule monetary targeting simultaneity volatility model comparison i the debate over monetary policy change in an influential paper clarida gali and gertler 2000 cgg presented evidence that us monetary policy changed between the 1970 s and the 1980 s indeed that in the 70 s it was drastically worse they found that the policy rule apparently followed in the 70 s was one that when embedded in most stochastic general equilibrium models would imply non uniqueness of the equilibrium and hence vulnerability of the economy to sunspot fluctuations of arbitrarily large size their estimated policy rule for the later period on the other hand eliminated this indeterminacy these results are a possible explanation of the volatile and rising inflation of the 70 s and of its subsequent decline the cgg analysis has two important weaknesses one is that it fails to account for stochastic volatility us macroeconomic variables and particularly the federal funds rate have gone through periods of tranquility and of agitation with forecast error variances varying greatly from period to period ignoring such variation does not lead to inconsistent estimates of model parameters when the forecasting equations themselves are constant but it strongly biases toward a finding of changed parameters tests of the stability of the forecasting equations the other weakness is that the cgg analysis rests on powerful and implausible identifying assumptions they require that we accept that the response of the monetary authority to expected future inflation and output does not depend on the recent history of inflation money growth or output it is hard to understand why this should be so especially in the 70 s when monetarism was a prominent theme in policy debates congress was requiring reports from the fed of projected time paths of monetary aggregates and financial markets were reacting sensitively to weekly money supply numbers the requirement for existence and uniqueness of equilibrium in dynamic models is that the monetary policy rule show a more than unit response of interest rates to the sum of the logs of all nominal variables that appear on the right hand side of the reaction function if we force a particular measure of expected future inflation to proxy for all the nominal variables that actually appear independently in the reaction function we are bound to get distorted conclusions on the one hand because expected future inflation will be a noisy measure of the full set of nominal influences on policy we might get downward bias in our estimates from the usual errorsin variables effect on the other hand to the extent that expected future inflation like most expected future values shows less variation than current nominal variables we could find a mistaken scaling up of coefficients

local identification in dsge models abstract the issue of identification arises whenever structural models are estimated lack of identification means that the empirical implications of some model parameters are either undetectable or indistinguishable from the implications of other parameters therefore identifiability must be verified prior to estimation this paper provides a simple method for conducting local identification analysis in linearized dsge models estimated in both full and limited information settings in addition to establishing which parameters are locally identified and which are not researchers can determine whether the identification failures are due to data limitations such as lack of observations for some variables or whether they are intrinsic to the structure of the model the methodology is illustrated using a medium scale dsge model

what is wrong with taylor rules using judgment in monetary policy through targeting rules it is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule e ither ageneral targeting rule explicit objectives for monetary policy or a specific targeting rule a criterion for the forecasts of the target variables to be fulfilled essentially the equality of the marginal rates of transformation and substitution between the target variables targeting rules allow the use of judgment and extramodel information are more robust and easier to verify than optimal instrument rules and they can nevertheless bring the economy close to the socially optimal equilibrium

clientelism and voting behavior evidence from a field experiment in benin the author conducted a field experiment in benin to investigate the impact of clientelism on voting behavior in collaboration with four political parties involved in the 2001 presidential elections clientelist and broad public policy platforms were designed and run in twenty randomly selected villages of an average of 756 registered voters using the survey data collected after the elections the author estimated the effect of each type of message by comparing voting behavior in the villages exposed to clientelism or public policy messages treatment groups with voting behavior in the other villages control groups the author found that clientelist messages have positive and significant effect in all regions and for all types of candidates the author also found that public policy messages have a positive and significant effect in the south but a negative and significant effect in the north in addition public policy messages seem to hurt incumbents as well as regional candidates finally the evidence indicates that female voters tend to have stronger preference for public policy platforms than male voters

are land reforms granting complete property rights politically risky electoral outcomes of mexico s certification program abstract what is the impact on voting behavior of strengthening property rights over agricultural land to answer this question we use the 14 year nationwide rollout of mexico s land certification program procede and match affected communities ejidos before and after the change in property rights with voting outcomes in corresponding electoral sections across six federal election cycles we find that in accordance with the investor class theory granting complete property rights induced a conservative shift toward the pro market party equal to 6 8 percent of its average share of votes over the period this shift was strongest where vested interests created larger expected benefits from market oriented policies as opposed to public transfer policies we also find that beneficiaries failed to reciprocate through votes for the benefactor party we conclude that in the mexican experience engaging in a land reform that strengthened individual property rights over agricultural land was politically advantageous for the right wing party