Essays in historical political economy
Keywords: Business.

In this dissertation, I focus on historical events that are both important in their own right and can also offer answers to contemporary questions in Economics and Political Science. Two themes are present in this thesis, one substantive and one methodological. First, I study how personal relationships shaped political institutions. Then and now, agents' incentives are partially driven by whom they interact with, whom they know, and whom they like. These incentives, in turn, sustained or damaged the most important political institutions of history, such as the Spanish Empire or the European medieval international system. Understanding the role of personal relationships is essential to understanding the persistence and change of institutions throughout history. Second, I have found that historical frictions in communication or transport are often allies in the search for knowledge. Communication delays or interruptions make it possible to isolate causal forces in ways that would be unthinkable in the modern world, where causes, effects, and strategic adaptations can happen simultaneously. In the chapter "Building Loyalty through Personal Connections: Evidence from the Spanish Empire", I show that central rulers strategically promoted personal ties to the center and discouraged ties to local elites, ensuring that personal loyalties and loyalty to the Empire were aligned. My research shows that institutional design needs to account for relationships in settings with very high communication or monitoring costs, sometimes encouraging and sometimes suppressing them. In particular, I focus on the relationship between audiencia ministers (high-ranking colonial officials) and their superiors in the Council of the Indies in Spain. First, I establish that connections between audiencia ministers and local elites were discouraged in colonial legislation. Second, I use councilors' entries and exits as within-official shocks to connections to estimate their effect on promotions and performance. I find that connected ministers were more likely to be promoted and raised more revenue. On the other hand, ministers with more links to local elites collected less revenue. In summary, personal loyalties affected policy in the Spanish Empire. Central rulers were aware of that fact and strategically shaped the social networks of high-ranking officers in order to foster their policy goals. Like most of the literature on connections, I classify two individuals as connected if they have shared professional or educational backgrounds. Unlike most of the literature, I ensure that the historical evidence supports that these individuals had sustained in-person interactions. Moreover, my paper is the first to validate the measure of connections by showing that it predicts endogenous acts of friendship: being a reference in a job application, being the best man at a wedding or a godfather at a child's baptism, or procuring a job. I show that my measure of connections is four times more likely to predict a friendship than more indirect measures used in the literature. To do this validation, I use a dataset of the Spanish bureaucracy and elite collected by historians and never before used in political science or economics. It includes half a million "actions" (births, deaths, baptisms, job applications, promotions). Since many of these actions are relational (weddings, godparents, references), I can recreate political networks. This chapter also shows how historical information frictions can help us answer contemporary questions. I use connections between councilors and ministers established years before, either in school or when the councilors were still working in the Americas. The immense distances of the Spanish Empire made it hard to develop new relationships. In an almost frictionless world (with Internet and air travel), anyone who wanted to meet a newly appointed councilor of the Indies could have met them right away, and all connections (and all non-connections) would have been endogenous. "Markets under Siege: How Differences in Political Beliefs Can Move Financial Markets" studies international relations and financial markets. In this chapter (with Saumitra Jha and Peter Koudijs), we show that differences in political beliefs, particularly about the benefits of war and peace, move equilibrium prices. During the Siege of Paris by the Prussian army (1870-71) and its aftermath, the price of the French 3% sovereign bond (rente) differed persistently between markets in Paris and elsewhere in France. These differences were large, reaching the equivalent of almost 1% of the French GDP in overall value. We trace the disagreement to the fact that agents inside Paris considered war was the best way to obtain better peace terms, and agents outside thought negotiations were better. First, we show that Parisians were disproportionately pro-war with election data. Second, prices were higher in Paris as long as French resistance continued, but these patterns reversed when the French surrendered and started negotiating peace terms. When the onerous indemnity (25% of French GDP) was announced, outside prices converged to Paris. Third, we show that while the price inside Paris responded more to war events, the price outside of Paris responded more to events conducive to peace. We also show that price patterns are inconsistent with alternative explanations, such as liquidity shocks and different information sets. More generally, asset prices and financial data have been relatively underused in the historical political economy literature despite their enormous potential. Asset prices reflect beliefs and hopes about the future, very often about things researchers care about. For example, the price of sovereign debt reflects whether the marginal investor believes her government can honor its obligations. And asset prices are available to us. It would be impossible to find polling data to capture representative sentiments about war and peace in nineteenth-century France, but we could collect daily prices for many assets in Paris, Lyon, and Bordeaux. This chapter also exemplifies how historical information frictions can be our allies. It would be impossible to find a four-month period in which arbitrage between two financial markets gets suspended in modern times. By observing two markets temporarily separated from each other, we can compare them and find out how different political beliefs led to price differences in equilibrium. "Dynastic Marriages and War", joint with Antonella Bandiera and Valentín Figueroa, also studies the effects of political networks. We show that a marriage between two ruling families had a (surprisingly) positive impact on the probability of war between the two countries. For identification, we take advantage of the fact that the gender and precise timing of the birth of royal princes was random. More precisely, monarchs could not coordinate the timing and gender of their offspring to produce royal marriages. Therefore, two royal houses with "compatible pairs" (different gender offspring with similar ages) are more likely to produce a wedding. We use the number of compatible pairs as an instrument of predicted marriages. We find a large and positive relationship between instrumented marriages and war between the two royal houses. Our findings may seem counter-intuitive at first, but we argue that dynastic marriages lead to the internationalization of succession disputes. In other words, by marrying their children to foreigners, European rulers exported claims to rule their countries. Prominent examples include the Hundred Years War and the War of Spanish Succession. Therefore, this chapter also studies how close personal ties shaped political structures