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2013

Poverty and Self-Control
DRI Working Paper No. 91
By B. Douglas Bernheim, Debraj Ray, and Sevin Yeltekin
The absence of self-control is often viewed as an important correlate of persistent poverty. Using a standard intertemporal allocation problem with credit constraints faced by an individual with quasi- hyperbolic preferences, we argue that poverty damages the ability to exercise self-control. Our theory invokes George Ainslie’s notion of “personal rules,” interpreted as subgame-perfect equilibria of an intrapersonal game played by a time-inconsistent decision maker. Our main result pertains to situations in which the individual is neither so patient that accumulation is possible from every asset level, nor so impatient that decumulation is unavoidable from every asset level. Such cases always possess a threshold level of assets above which personal rules support unbounded accumulation, and a second threshold below which there is a “poverty trap”: no personal rule permits the individual to avoid depleting all liquid wealth. In short, poverty perpetuates itself by undermining the ability to exercise self-control. Thus even temporary policies designed to help the poor accumulate assets may be highly effective. We also explore the implications for saving with easier access to credit, the demand for commitment devices, the design of accounts to promote saving, and the variation of the marginal propensity to consume across classes of resource claims.

2012

The European Origins of Economic Development
DRI Working Paper No. 90
By William Easterly and Ross Levine
A large literature suggests that European settlement outside of Europe shaped institutional, educational, technological, cultural, and economic outcomes. This literature has had a serious gap: no direct measure of colonial European settlement. In this paper, we (1) construct a new database on the European share of the population during the early stages of colonization and (2) examine its impact on the level of economic development today. We find a remarkably strong impact of colonial European settlement on development. According to one illustrative exercise, 47 percent of average global development levels today are attributable to Europeans. One of our most surprising findings is the positive effect of even a small minority European population during the colonial period on per capita income today, contradicting traditional and recent views. There is some evidence for an institutional channel, but our findings are most consistent with human capital playing a central role in the way that colonial European settlement affects development today.

Liquidity Traps and Expectation Dynamics: Fiscal Stimulus or Fiscal Austerity?
DRI Working Paper No. 89
By Jess Benhabib, George W. Evans, and Seppo Honkapohja
Abstract: We examine global dynamics under infinite-horizon learning in New Keynesian models where the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja (2008), the intended steady state is locally but not globally stable. Unstable deflationary paths emerge after large pessimistic shocks to expectations. For large expectation shocks that push interest rates to the zero bound, a temporary fiscal stimulus or a policy of fiscal austerity, appropriately tailored in magnitude and duration, will insulate the economy from deflation traps. However “fiscal switching rules” that automatically kick in without discretionary fine tuning can be equally effective

Discovering Law: Hayekian Competition in Medieval Iceland
DRI Working Paper No. 88
By Carrie B. Kerekes and Claudia R. Williamson
Abstract: It is commonplace to assume that legal institutions must be established and enforced by government. The general consensus, even among defenders of free markets, is that some minimal government need exist to provide law. However, between 930 and 1262 the Icelandic Commonwealth (or Free State) functioned in the absence of a coercive state, relying instead on market mechanisms and private institutions. An elaborate legal system developed that guided social interaction and coordinated conflict resolution, without a central government. This article utilizes Hayek’s theory of competition as a discovery process to examine the general social structure and private legal institutions within Medieval Iceland. The goal is to provide an economic theoretical lens to more adequately explain the particular private legal institutions that enabled Iceland to function successfully without a central government for over 300 years.

Think Tanks
DRI Working Paper No. 87
By Peter T. Leeson, Matt E. Ryan and Claudia R. Williamson
Abstract: This paper is the first to investigate the relationship between think tanks and economic policy empirically. We use panel data for the US states to examine state-based, free market (SBFM) think tanks’ relationship to eight key economic policy objectives. We find little evidence that SBFM think tanks are associated with more “pro-market” policies along the policy dimensions they aim to influence. However, we find stronger evidence that SBFM think tanks are associated with more “pro-market” citizen attitudes about the role of government vs. markets in economic policy. These results suggest that if think tanks’ connection to economic policy is important at all, its importance may be long term and operate via the channel of “ideas.” In contrast to think tanks, we find evidence that political lobby groups are associated with current policy. This may reflect the fact that, unlike think tanks, lobby groups are legally permitted to lobby for policy changes directly. Thus they don’t need to engage in a long-run “battle of ideas” to secure desired policy outcomes.

Eroding the Culture of Contracting: Aid, Not Trade?
DRI Working Paper No. 86
By Christopher J. Coyne and Claudia R. Williamson
Abstract: We analyze how two well-known development policies—international trade and aid—affects the ‘culture of contracting.’ The culture of contracting refers to those cultural characteristics—trust, respect, level of self-determination, and level of obedience—which allow for the impersonal exchange necessary for growth and development. Theoretically, trade and aid may affect the culture of contracting for better or worse. We empirically analyze both possibilities and find that international trade generates, on net, positive effects while foreign aid generates negative effects on the culture of contracting. The more open a country is to trade and the less aid it receives, the more likely it is to possess a stronger culture of contracting.

Property Rights and Intra-Household Bargaining
DRI Working Paper No. 85
By Shing-Yi Wang
Abstract: This paper examines whether an individual-level transfer of property rights increases the individual’s bargaining power within the household. The question is analyzed in the context of a housing reform that occurred in China that gave existing tenants the opportunity to purchase the homes that they had been renting from their state employers. The rights to each housing unit were granted to a particular employee, so property rights were de ned at the individual level rather than the household level. The results indicate that transferring ownership rights to men increased household consumption of some male-favored goods and women’s time spent on chores. Transferring ownership rights to women decreased household consumption of some male-favored goods.

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2011


The Role of Growth Slowdowns and Forecast Errors in Public Debt Crises
DRI Working Paper No. 84
By William Easterly
Abstract: According to the well‐known arithmetic of debt dynamics, a growth slowdown results in rising debt ratios if fiscal policy does not adjust. This mechanical effect plays a role in a surprisingly wide variety of public debt crises, from the Latin American debt crisis of the 80s and 90s to the low income HIPC crisis of the same period to the current Eurozone debt crisis and US debt crisis. Growth slowdowns often result in growth projections by fiscal authorities that are too optimistic, one of the possible reasons for which fiscal policy fails to adjust. Sound forecasting practices of projecting mean reversion and being more conservative the worse the debt situation are ignored in some major debt crises.

The Amplification Effect: Foreign Aid’s Impact on Political Institutions
DRI Working Paper No. 83
By Nabamita Dutta, Peter T. Leeson and Claudia R. Williamson
Abstract: How does foreign aid affect recipient countries’ political institutions? Two competing hypotheses offer contradictory predictions. The first sees aid, when delivered correctly, as an important means of making dictatorial recipient countries more democratic. The second sees aid as a corrosive force on recipient countries’ political institutions that makes them more dictatorial. This paper offers a third hypothesis about how aid affects recipients’ political institutions that we call the “amplification effect.” We argue that foreign aid has neither the power to make dictatorships more democratic nor to make democracies more dictatorial. It only amplifies recipients’ existing political institutions. We investigate this hypothesis using panel data for 124 countries between 1960 and 2009. Our findings support the amplification effect. Aid strengthens democracy in already democratic countries and dictatorship in already dictatorial regimes. It doesn’t alter the trajectory of recipients’ political institutions.

Climate and Civil War: Is the Relationship Robust?
DRI Working Paper No. 82
By Marshall Burke, John Dykema, David Lobell, Edward Miguel and Shanker Satyanath 
Abstract: A recent paper by Burke et al. (henceforth “we”) finds a strong historical relationship between warmer than-average temperatures and the incidence of civil war in Africa (Burke et al. 2009).  These findings have recently been challenged by Buhaug (2010) who finds fault with how we controlled for other potential explanatory variables, how we coded civil wars, and with our choice of historical time period and climate dataset.  We demonstrate that Buhaug’s proposed method of controlling for confounding variables has serious econometric shortcomings and show that our original findings are robust to the use of different climate data and to alternate codings of major war. Using Buhaug’s preferred climate data under sound econometric assumptions yields results that suggest an even stronger relationship between temperature and conflict for the 1981-2002 period than we originally reported.  We do find that our historical relationship between temperature and conflict weakens over the last decade, a period of unprecedented African economic growth and very few large wars.

Understanding Transitory Rainfall Shocks, Economic Growth and Civil Conflict
DRI Working Paper No. 81
By Edward Miguel and Shanker Satyanath
Abstract: Miguel, Satyanath and Sergenti (2004) use rainfall variation as an instrument to show that economic growth is negatively related to civil conflict in sub-Saharan Africa. In the reduced form regression they find that higher rainfall is associated with less conflict. Ciccone (2010) claims that this conclusion is ‘erroneous’ and argues that higher rainfall levels are actually linked to more conflict. In this paper we show that the results in Ciccone’s paper are based on incorrect STATA code, outdated conflict data, a weak first stage regression and a questionable application of the GMM estimator. Leaving aside these data and econometric issues, Ciccone’s surprising results do not survive obvious robustness checks. We therefore conclude that Ciccone’s main claims are largely incorrect and reconfirm the original result by Miguel, Satyanath and Sergenti (2004), finding that adverse economic growth shocks, driven by falling rainfall, increases the likelihood of civil conflict in sub-Saharan Africa.

Ethnicity and Conflict: An Empirical Study
DRI Working Paper No. 80
By Joan Esteban, Laura Mayoral and Debraj Ray
Abstract:  This paper examines the impact of ethnic divisions on conflict. The empirical specification is informed by a theoretical model of conflict (Esteban and Ray, 2011) in which equilibrium con ict is related to just three distributional indices of diversity: ethnic polarization, ethnic fractionalization, and a Greenberg-Gini index constructed across ethnic groups. Our empirical findings verify that these distributional measures are signi cant correlates of conflict. The underlying theory permits us to use these results to make inferences about the relative importance of public goods in conflict, as well as the extent of within-group cohesion in conflictual activity. These e ects are further strengthened as we introduce country-specifi c measures of group cohesion and the relative importance of public goods, and combine them with the distributional measures exactly as specified by the theory.

Linking Conflict to Inequality and Polarization
DRI Working Paper No. 79
By Joan Esteban and Debraj Ray 
Abstract: In this paper we study a behavioral model of con ict that provides a basis for choosing certain indices of dispersion as indicators for conflict. We show that a suitable monotone transform of the equilibrium level of con ict can be proxied by a linear function of the Gini coeffcient, the Herfindahl-Hirschman fractionalization index, and a speci c measure of polarization due to Esteban and Ray.

Reestablishing the Income-Democracy Nexus
DRI Working Paper No. 78
By Jess Benhabib, Alejandro Corvalan and Mark M. Spiegel
Abstract: A number of recent empirical studies have cast doubt on the “modernization theory” of democratization, which posits that increases in income are conducive to increases in democracy levels.  This doubt stems mainly from the fact  that while a strong positive correlation exists between income and democracy levels, the relationship disappears when one controls for country fixed effects.  This raises the possibility that the correlation in the data reflects a third causal characteristic, such as institutional quality.  In this paper, we reexamine the robustness of the income-democracy relationship.  We extend the research on this topic in two dimensions:  first, we make use of newer income data, which allows for the construction of larger samples with more within-country observations.  Second, we concentrate on  panel estimation methods that explicitly allow for the fact that the primary measures of democracy are censored with substantial mass at the boundaries, or binary censored variables. Our results show that when one uses  both the new income data available and a properly non linear estimator, a statistically significant positive income-democracy relationship  is robust to the inclusion of country fixed effects.

Reconstructing Empire in British and French Africa
DRI Working Paper No. 77
By Frederick Cooper
Abstract: It was indeed empire that European leaders at the end of World War II needed to reconstruct. They had come very close to losing a struggle with another form of empire, the Nazi Reich, and in South East Asia they had lost valued territories to a country that had dared to play the empire-game with them — Japan. At the same time, both British and French leaders felt, with some reason, that they had been saved by their empires: by the resources in men and material contributed by the dominions and colonies of Great Britain and by the symbolic importance of French Equatorial Africa’s refusal to follow Vichy, followed by the contributions of North African territories and diverse African people to the reconquest of European France from the Mediterranean. Both post-war governments acknowledged the dilemma they faced: their physical and moral weakness at war’s end meant they had to find new bases to relegitimate empire, and their economic weakness meant they needed the production of empire all the more. Both were acutely conscious that another war might make them dependent on empire yet again. Leaders of political movements in the colonies were aware of exactly these points too.

Benevolent Autocrats
DRI Working Paper No. 76
By William Easterly
Abstract:  Benevolent autocrats are leaders in non-democratic polities who receive credit for high growth. This paper asks two questions: (1) do theory and evidence support the concept of “benevolent autocrats”? (2) Regardless of the answer to (1), why is the “benevolent autocrats” story so popular? This paper’s answer to (1) is no. Most theories of autocracy portray it as a system of strategic interactions rather than simply the unconstrained preferences of the leader.  The principal evidence for benevolent vs. malevolent autocrats is the higher variance of growth under autocracy than under democracy. However, the variance of growth within the terms of leaders swamps the variance across leaders, and more so under autocracy than under democracy. The empirical variance of growth literature has identified many correlates of autocracy as equally plausible determinants of high growth variance. The growth effects of exogenous leader transitions under autocracy are too small and temporary to provide much support for benevolent autocrats. This paper addresses question (2) by analyzing the political economy of development ideas that makes benevolent autocrats a politically convenient concept. It also identifies cognitive biases that would tend to bias perceptions in favor of benevolent autocrats. The answers to (2) do not logically disqualify the benevolent autocrats story, but combined with (1) they suggest much greater skepticism about many claims for benevolent autocrats.

Marriage Networks, Nepotism and Labor Market Outcomes in China
DRI Working Paper No. 75
By Shing-Yi Wang
Abstract: This paper considers the potential role of marriage in improving labor market outcomes through the expansion of an individuals’ networks. I focus on the impact of a father-in-law on a young man’s career using panel data from China. Particular features of the Chinese context allows for an identification strategy that isolates the network effects related to a man’s father-in-law by comparing the post-marriage death of a father-in-law with the death of a mother-in-law. The estimates suggest that the loss of the father-in-law translates into a decrease in a man’s earnings by 20%. Furthermore, the evidence indicates that the decline in wages can be attributed to nepotism rather than a decline in job information.

Civil War Exposure and Violence
DRI Working Paper No. 74
By Edward Miguel, Sebastian M. Saiegh and Shanker Satyanath
Abstract: In recent years scholars have begun to focus on the consequences of individuals’ exposure to civil war, including its severe health and psychological consequences. Our innovation is to move beyond the survey methodology that is widespread in this literature to analyze the actual behavior of individuals with varying degrees of exposure to civil war in a common institutional setting. We exploit the presence of thousands of international soccer (football) players with different exposures to civil conflict in the European professional leagues, and find a strong relationship between the extent of civil conflict in a player’s home country and his propensity to behave violently on the soccer field, as measured by yellow and red cards. This link is robust to region fixed effects, country characteristics (e.g., rule of law, per capita income), player characteristics (e.g., age, field position, quality), outliers, and team fixed effects. Reinforcing our claim that we isolate the effect of civil war exposure rather than simple rule-breaking or something else entirely, there is no meaningful correlation between our measure of exposure to civil war and soccer performance measures not closely related to violent conduct. The result is also robust to controlling for civil wars before a player’s birth, suggesting that it is not driven by factors from the distant historical past.

Democratic Transitions and Implicit Power: An Econometric Approach
DRI Working Paper No. 73
By Shanker Satyanath and Gokce Goktepe
Abstract: Recent works of political economy have emphasized the importance of distinguishing between transfers of explicit and implicit power over economic decision making in democratic transitions. Scholars have so far provided interesting anecdotal evidence supporting their claims of potential divergence between transfers of explicit and implicit power. In this paper we apply econometric techniques to examine if a transfer of explicit power has not also been accompanied by a transfer of implicit power. We do so in the context of a major country where considerable uncertainty remains over the military’s implicit role in economic decision making long after an explicit transfer of power to elected leaders, namely Turkey. Our findings indicate a significant gap between the explicit and implicit aspects of Turkey’s democratic transition, adding support to scholars’ claims about the importance of distinguishing between these aspects of transitions.

Statistical Discrimination, Productivity and the Height of Immigrants
DRI Working Paper No. 72

By Shing-Yi Wang
Abstract: Building on the economic research that demonstrates a positive relationship between height and worker ability, this paper considers whether employers use height as a tool for statistical discrimination. The analysis focuses on immigrants and native-born individuals because employers are likely to have less reliable signals of productivity for an immigrant than a native-born individual. Using multiple data sets, the paper presents a robust empirical finding that the wage gains associated with height are almost twice as large for immigrants than for native-born individuals. This result is consistent with two hypotheses. First, in the relative absence of other sources of information about immigrants, employers place more weight on height for immigrants than for native-born individuals. Second, height is more correlated with productivity for immigrants than for native-born individuals. The empirical results provide strong support for the hypothesis that the productivity gap between tall and short immigrants is greater than the productivity gap between tall and short native-born workers. The hypothesis of statistical discrimination based on height is rejected.

Uneven Growth: A Framework for Research in Development Economics
DRI Working Paper No. 71
By Debraj Ray
Abstract: The textbook paradigm of economy-wide development rests on the premise of “balanced growth”: that is, on the presumption that all sectors will grow in unison over time as a country gets richer. This view has served us reasonably well in several circumstances, particularly those pertaining to macroeconomic models of long-term growth. An implicit view that growth is balanced across sectors, or something close to it, also underlies the notion of “trickle-down,” a stance that has strongly influenced development policy. Of course, we would all agree that balanced growth is an abstraction. In many developing countries, economic growth has been fundamentally uneven. First one sector, then another, then a third have grown rapidly but not all together. A list of some instances of this phenomenon would include software development; the outsourcing of services; quick compositional shifts between agriculture and other sectors; the rise of export processing zones; and others. The question really is not whether growth is balanced – it isn’t – but whether the abstraction is a useful one. For many important development questions, I believe the answer is no. This is why I’d like to take the reality of “uneven growth” seriously and use it as an organizing device for a research program.

Immigration and Labour Market Performance
DRI Working Paper No.70
By Alberto Bisin, Eleaonora Patacchini, Thierry Verdier and Yves Zenou
Abstract: We study the relationship between ethnic identity and labour market outcomes of non-EU immigrants in Europe. Using the European Social Survey, we find that there is a penalty to be paid for immigrants with a strong identity. Being a first generation immigrant leads to a penalty of about 17% while second-generation immigrants have a probability of being employed that is not statistically different from that of natives. However, when they have a strong identity, second-generation immigrants have a lower chance of finding a job than natives. Our analysis also reveals that the relationship between ethnic identity and employment prospects may depend on the type of integration and labour market policies implemented in the country where the immigrant lives. More flexible labour markets help immigrants to access the labour market but do not protect those who have a strong ethnic identity.

The Economics of Cultural Transmission and Socialization
DRI Working Paper No. 69
By Alberto Bisin and Thierry Verdier
Abstract: This paper presents a survey of the theoretical and empirical literature on cultural transmission and socialization. It has been prepared for the Handbook of Social Economics, edited by Jess Benhabib, Alberto Bisin, and Matt Jackson, to be published by Elsevier Science in 2010.

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2010

Women’s Rights and Development
DRI Working Paper No. 68
By Raquel Fernández
Abstract: Why has the expansion of women’s economic and political rights coincided with economic development? This paper investigates this question, focusing on a key economic right for women: property rights. The basic hypothesis is that the process of development (i.e., capital accumulation and declining fertility) exacerbated the tension in men’s conflicting interests as husbands versus fathers, ultimately resolving them in favor of the latter. As husbands, men stood to gain from their privileged position in a patriarchal world whereas, as fathers, they were hurt by a system that afforded few rights to their daughters. The model predicts that declining fertility would hasten reform of women’s property rights whereas legal systems that were initially more favorable to women would delay them. The theoretical relationship between capital and the relative attractiveness of reform is non-monotonic but growth inevitably leads to reform. I explore the empirical validity of the theoretical predictions by using cross-state variation in the US in the timing of married women obtaining property and earning rights between 1850 and 1920.

Does Culture Matter?
DRI Working Paper No. 67
By Raquel Fernández
Abstract: This paper reviews the literature on culture and economics, focusing primarily on the epidemiological approach. The epidemiological approach studies the variation in outcomes across different immigrant groups residing in the same country. Immigrants presumably differ in their cultures but share a common institutional and economic environment. This allows one to separate the effect of culture from the original economic and institutional environment. This approach has been used to study a variety of issues, including female labor force participation, fertility, labor market regulation, redistribution, growth, and …financial development among others.

Implications of an Economic Theory of Conflict
DRI Working Paper No. 66
By Anirban Mitra and Debraj Ray
Abstract: We study inter-group conflict driven by economic changes within groups. We show that if group incomes are “low”, increasing group incomes raises violence against that group,and lowers violence generated by it. These correlations are tests for group aggression or victimization, which we apply to Hindu-Muslim violence in India. Our main result is that an increase in per-capita Muslim expenditures generates a large and significant increase in future religious conflict, an increase in Hindu well-being has no significant effect. This robust empirical finding, combined with the theory, suggests that Hindu groups have been primarily responsible for Hindu-Muslim violence in post-Independence India.

Ethnicity and Conflict: An Empirical Study
DRI Working Paper No. 65
By Joan Esteban, Laura Mayoral and Debraj Ray
Abstract: This paper examines the impact of ethnic divisions on conflict. The analysis relies on a theoretical model of conflict (Esteban and Ray, 2010) in which equilibrium conflict is shown to be accurately described by a linear function of just three distributional indices of ethnic diversity: the Gini coefficient, the Hirschman-Her ndahl fractionalization index, and a measure of polarization. Based on a dataset constructed by James Fearon and data from Ethnologue on ethno-linguistic groups and the “linguistic distances” between them, we compute the three distribution indices. Our results show that ethnic polarization is a highly signifi cant correlate of conflict. Fractionalization is also signi ficant in some of the statistical exercises, but the Gini coefficient never is. In particular, inter-group distances computed from language and embodied in polarization measures turn out to be extremely important correlates of ethnic conflict.

The Distribution of Wealth and Fiscal Policy in Economies with Finitely Lived Agents
DRI Working Paper No. 64
By Jes Benhabib, Alberto Bisin and Shenghao Zhu
Abstract: We study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and inter-generational transmission of wealth. Financial markets are incomplete, exposing agents to both labor and capital income risk. We show that the stationary wealth distribution is a Pareto distribution in the right tail and that it is capital income risk, rather than labor income, that drives the properties of the right tail of the wealth distribution. We also study analytically the dependence of the distribution of wealth, of wealth inequality in particular, on various fiscal policy instruments like capital income taxes and estate taxes, and on different degrees of social mobility. We show that capital income and estate taxes can significantly reduce wealth inequality, as do institutions favoring social mobility. Finally, we calibrate the economy to match the Lorenz curve of the wealth distribution of the U.S economy.

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2009

Exploring the Failure of Foreign Aid: The Role of Incentives and Information
DRI Working Paper No.63
By Claudia R. Williamson
Abstract: The stated purpose of foreign aid is to promote economic and human development. Recently, the ability of foreign aid to achieve its goals is called into question. Widespread conceptual and empirical literature suggests that foreign aid is ineffective. This paper explores the failure of foreign aid relying on the role of both incentives and information. The success of aid depends on incentives faced by all parties in donor and recipient countries. In addition, both donors and recipients must obtain the necessary information to actually target and achieve desired goals. This analysis provides a double-edged sword to explain why foreign aid fails to achieve development goals.

Institutions and Economic Performance: An Introduction to the Literature
DRI Working Paper No. 62
By Kevin E. Davis
Abstract: This essay serves as the introduction to a collection of critical writings on the relationship between institutions and economic performance. The essay not only provides an overview of the field but also explores some of the thorny questions surrounding the definition and measurement of institutions.

Does the Globalization of Anti-corruption Law Help Developing Countries?
DRI Working Paper No. 61
By Kevin E. Davis
Abstract: What role do foreign countries play in combating political corruption in developing countries? This chapter begins by describing the recently developed transnational anti-corruption regime, which encompasses legal instruments ranging from the dedicated multilateral agreements sponsored by the OECD and the United Nations, to the anti-corruption policies of the international financial institutions, to components of the international anti-money laundering regime, international norms governing government procurement, and private law norms concerning enforcement of corruptly procured contracts. It also surveys the evidence concerning a variety of claims about the potential advantages and disadvantages of having foreign institutions play a role in preventing, sanctioning, or providing redress for corruption on the part of local public officials. One of the main conclusions is that more attention ought to be paid to whether foreign institutions displace and undermine, or alternatively complement and enhance, local anti-corruption institutions. The analysis not only sheds light on the transnational anti-corruption regime, but also has implications for other efforts to rely on foreign legal institutions to address the problems of developing countries.

Information, Social Networks and the Demand for Public Goods: Experimental Evidence from Benin
DRI Working Paper No. 60
By Leonard Wantchekon and Christel Vermeersch
Abstract: This paper empirically investigates the effects of memberships in information and social networks on the demand for public goods. The data originate from a unique …field experiment that took place during the …first round of the 2001 presidential elections in Benin. Randomly selected villages were exposed to “purely” redistributive or “purely” national public goods electoral platforms, while the remaining villages were exposed to standard mixed platforms. We …find that individuals who are exposed to media or who are members of local associations have higher demand for public goods, while voters who are more involved in political discussions demand less. Ceteris paribus, demand for public goods is higher among voters who have ethnic ties with a candidate, are more educated or female, but we fi…nd no modifying effect of religion or socio-economic status.

Noncompliance Bias Correction Based on Covariates in Randomized Experiments
DRI Working Paper No. 59
By Yves Atchade and Leonard Wantchekon
Abstract: We propose some practical solutions for causal effects estimation when compliance to assignments is only partial and some of the standard assumptions do not hold. We follow the potential outcome approach but in contrast to Imbens and Rubin (1997), we require no prior classification of the compliance behaviour. When noncompliance is not ignorable, it is known that adjusting for arbitrary covariates can actually increase the estimation bias. We propose an approach where a covariate is adjusted for only when the estimate of the selection bias of the experiment as provided by that covariate is consistent with the data and prior information on the study. Next, we investigate cases when the overlap assumption does not hold and, on the basis of their covariates, some units are excluded from the experiment or equivalently, never comply with their assignments. In that context, we show that a consistent estimation of the causal effect of the treatment is possible based on a regression model estimation of the conditional expectation of the outcome given the covariates. We illustrate the methodology with several examples such as the access to infuenza vaccine experiment (McDonald et al (1992) and the PROGRESA experiment (Shultz (2004)).

Does Ethnic Solidarity Facilitate Electoral Support for Nation-Building Policies?: Evidence from a Political Experiment
DRI Working Paper No. 58
By Yves Atchade and Leonard Wantchekon
Abstract: Would voters support or reject a co-ethnic candidate if she were to adopt a platform that appeals equally to all ethnic groups? We address this counterfactual question using experimental data collected in the context of the 2001 elections in Benin. A hierarchical probit model with a structural equation is used to analyze the data. We adopt a Bayesian approach together with Markov Chain Monte Carlo to handle the computations. We ad that ethnic ties strengthen electoral support for national public goods platforms. The effect is stronger among those who are culturally less distant from most other voters; that is, those who speak several languages, watch television regularly, and travel frequently. We argue that the positive effect of ethnic ties would have remained, even if the experiment had taken place in more urban and ethnically diverse districts. We conclude that ethnic solidarity can help secure electoral support for nation-building policies as long as such policies are adopted by political leaders.

Underground Insurgency and Democratic Revolution
DRI Working Paper No. 57
By Antonio Cabrales, Antonio Calvo-Armengol and Leonard Wantchekon
Abstract: We propose a model of the transition from an autocratic regime to either a liberal democracy or a new autocratic regime (e.g. a communist government). An underground organization votes on whether or not to hold a mass protest. If a protest is held, the organization members decide whether to put effort into the uprising. Higher effort makes regime change more likely, but it is individually risky. This creates the possibility, in principle, of high and low effort equilibria. But we show, using weak dominance arguments, that only the high effort equilibrium is “credible.” Thus, internal party democracy is shown to enhance the efficiency of political transitions. Finally, we show when the transition is likely to lead to the emergence of a democracy, and we derive conditions regarding the ”quality” of that democracy. When a revolution succeeds, it leads to a constitutional design phase wherein revolutionaries and reformists of the old regime negotiate the constitutional rules of the democratic game. This then leads to a democratic consolidation phase wherein the two sides choose to abide or not to abide by the result of elections. Conditions for a successful transition to (and consolidation of) democracy incorporate both ex-ante and ex-post assessments of electoral prospects by the parties who participate in the process.

Can Informed Public Deliberation Overcome Clientelism? Experimental Evidence From Benin
DRI Working Paper No. 56
By Leonard Wantchekon
Abstract: This paper provides experimental evidence on the effect of “informed” town hall meetings on electoral support for programmatic, non-clientelist platforms. The experiment takes place in Benin and involves real candidates running in the fi…rst round of the 2006 presidential elections. The treatment is a campaign strategy based exclusively on town hall meetings during which policy proposals made by candidates are “speci…c” and informed by empirical research. The control is the “standard” strategy based on campaign rallies followed by targeted or clientelist electoral promises. We …nd that the treatment has a positive effect on self-perceived knowledge about policies and candidates. The data also suggests a positive effect of the treatment on turnout and electoral support for the candidates participating in the experiment. The results suggest that new democracies may contain electoral clientelism by institutionalizing the use of both town hall meetings in electoral campaigns and policy expertise in the design of electoral platforms.

The Slave Trade and the Origins of Mistrust in Africa
DRI Working Paper No. 55
By Nathan Nunn and Leonard Wantchekon
Abstract: We investigate the historical origins of mistrust within Africa. Combining contemporary household survey data with historic data on slave shipments by ethnic group, we show that individuals whose ancestors were heavily threatened by the slave trade today exhibit less trust in neighbors, family co-ethnics, and their local government. We confirm that the relationship is causal by instrumenting the historic intensity of the slave trade by the historic distance from the coast of the respondent’s ancestors, controlling for the respondent’s current distance from the coast. We undertake a number of falsification exercises, all of which suggest that the necessary exclusion restrictions are likely satisfied. We then show that much of the relationship between the slave trade and an individual’s level of trust today cannot be explained by the slave trade’s effect on factors external to the individual, such as domestic institutions or the legal environment. Instead, the evidence shows that a significant portion of the effects of the slave trade work through vertically transmitted factors that are internal to the individual, such as cultural norms of behavior, beliefs and values.

Randomized Evaluation of Institutions: Theory with Applications to Voting and Deliberation Experiments
DRI Working Paper No. 54
By Yves Atchade and Leonard Wantchekon
Abstract: We study causal inference in randomized experiments where the treatment is a decision making process or an institution such as voting, deliberation or decentralized governance. We provide a statistical framework for the estimation of the intrinsic e¤ect of the institution. The proposed framework builds on a standard set-up for estimating causal e¤ects in randomized experiments with noncompliance (Hirano-Imbens-Rubin-Zhou [2000]). We use the model to re-analyze the effect of deliberation on voting for programmatic platforms in Benin (Wantchekon [2008]), and provide practical suggestions for the implementation and analysis of experiments involving institutions.

Cultural Context: The Productivity of Capitalism
DRI Working Paper No. 53
By Claudia Williamson and Rachel Mathers
Abstract: Does capitalism perform better when embedded in certain cultures? Given the wide range of economic success and failure, we address potential causes for the effectiveness or ineffectiveness of institutional constraints. This paper argues that culture matters for the success of capitalist institutions, specifically economic freedom. We claim that different cultures may raise or lower the productivity of economic institutions by either constraining or supporting these rules. We analyze this relationship empirically by examining how the interaction between economic freedom
and culture affects economic growth. Our results suggest that culture does, indeed, enhance the effectiveness of capitalism and its subsequent impact on growth.

Democratic Transitions and Implicit Power: An Econometric Approach
DRI Working Paper No. 52
By Gokce Goktepe and Shanker Satyanath
Abstract: Recent works of political economy have emphasized the importance of distinguishing between transfers of explicit and implicit power over economic decision making in democratic transition. Scholars have so far provided interesting anecdotal evidence supporting their claims of potential divergence between transfers of explicit and implicit power. This raises the question of whether it is possible to econometrically identify when a transfer of explicit power has not also been accompanied by a transfer of implicit power. This paper offers a straightforward and easily replicable approach to addressing this question using the tools of financial econometrics. We apply this approach here to a major country where considerable uncertainty remains over the military’s implicit role in economic decision making long after an explicit transfer of power to elected leaders, namely Turkey. Our findings indicate a significant gap between the explicit and implicit aspects of Turkey’s democratic transition, adding support to scholars’ claims about the importance of distinguishing between these aspects of transitions.

Civil War Exposure and Violence
DRI Working Paper No. 51
By Edward Miguel, University of California Berkeley; Sebastian Saiegh, University of California San Diego and Shanker Satyanath, NYU
Abstract: In recent years scholars have begun to focus on the consequences of individuals’ exposure to civil war, including its severe health and psychological consequences. Our innovation is to move beyond the survey methodology that is widespread in this literature to analyze the actually behavior of individuals with varying degrees of exposure to civil war in a common institutional setting. We exploit the presence of thousands of international soccer (football) players with different exposures to civil conflict in the European professional leagues, and find a strong relationship between the extent of civil conflict in a player’s home country and his propensity to behave violently on the soccer field, as measured by yellow and red cards. This link is robust to region fixed effects, country characteristics (e.g., rule of law, per capita income), player characteristics (e.g., age, field position, quality), outliers, and team fixed effects. Reinforcing our claim that we isolate the effect of civil war exposure rather than simple rule-breaking or something else entirely, there is no meaningful correlation between our measure of exposure to civil war and soccer performance measures not closely related to violent conduct. The result is also robust to controlling for civil wars before a player’s birth, suggesting that it is not driven by factors from the distant historical past.

Securing Private Property: Formal versus Informal Institutions
DRI Working Paper No. 50
By Claudia Williamson, NYU and Carrie Kerekes, Florida Gulf Coast University
Abstract: Property rights is one of the most fundamental and highly robust institutions supporting economic performance. However, the channels through which property rights are achieved are not adequately identified. This paper is a first step towards unbundling the black box of property rights into a formal and informal component. We empirically determine the significance of both informal and formal rules in securing property rights. We find that when both components are included in the analysis, the impact of formal constraints are greatly diminished, while informal constraints are highly significant in explaining the security of property. These results are robust to a variety of model specifications, multiple instrumental variable and a range of control variables.

Getting Climate-Related Conditionality Right
DRI Working Paper No. 49
By Kevin Davis, NYU and Sarah Dadush, NYU
Abstract: not available

Leader Survival, Revolutions and the Nature of Government Finance
DRI Working Paper No. 48
By Alastair Smith, NYU and Bruce Bueno de Mesquita, NYU
Abstract: Leaders face multiple threats to their political survival. In additional to surviving the threats to tenure from within the existing political systems, which is modeled using Bueno de Mesquita et al’s (2003) selectorate theory, leaders risk being deposed through revolutions and coups. To ameliorate the threat of revolution, leaders can either increase public goods provisions to buy off potential revolutionaries or contract the provision of those public goods, such as freedom of assembly, transparency and free press, which enable revolutionaries to coordinate. Which response a leader chooses depends upon existing institutions and the structure of government finances. These factors also affect the likelihood and direction of institutional change. Tests of leader survival indicate that revolutionary threats increase the likelihood of deposition for nondemocratic leaders. Leaders with access to resources such as foreign aid, or natural resource rents are best equipped to survive these threats and avoid the occurrence of these threats in the first place.

Missing Women: Age and Disease
DRI Working Paper No. 47
By Siwan Anderson, University of British Columbia and Debraj Ray, NYU
Abstract: Relative to developed countries and some parts of the developing world, most notably sub- Saharan Africa, there are far less women than men in India and China. It has been argued that as many as a hundred million women could be missing. The possibility of gender bias at birth and the mistreatment of young girls are widely regarded as key explanations. We provide a decomposition of these missing women by age and cause of death. While we do not dispute the existence of severe gender bias at young ages, our computations yield some striking new findings: (1) The vast majority of missing women in India and a significant proportion of those in China are of adult age; (2) As a proportion of the total female population, the number of missing women is largest in sub-Saharan Africa, and the absolute numbers are comparable to those for India and China; and (3) Almost all the missing women stem from disease-by-disease comparisons and not from the changing composition of disease, as described by the epidemiological transition. Finally, using historical data, we argue that a comparable proportion of women was missing at the start of the 20th century in the United States, just as they are in India, China, and sub-Saharan Africa today.

The Phelps-Koopmans Theorem and Potential Optimality
DRI Working Paper No. 46
By Debraj Ray, NYU
Abstract: not available

Inequality and Markets: Some Implications of Occupational Diversity
DRI Working Paper No. 45
By Dilip Mookherjee, Boston University and Debraj Ray, NYU
Abstract: This paper characterizes long run income distribution in a competitive economy with borrowing constraints. Parents decide both on financial bequests and investments in their children’s education. The occupational structure is “rich”: there is a continuum of occupations with varying entry costs that are imperfect substitutes in the production process. Occupational returns are endogenously determined by market conditions. If the span of occupational investments is wide enough, the wealth distribution is non- degenerate and long-run inequality arises. In this case, the average return to education must rise with the level of educational investment – the return to human capital is endogenously nonconcave. This finding, which contrasts with the usual presumption that the private return to human capital is decreasing, constitutes the central empirically testable proposition of this paper.

A Model of Ethnic Conflict
DRI Working Paper No. 44
By Joan Esteban, Instituto de Analisis Economico and Debraj Ray, NYU
Abstract: This paper studies costly conflict in a world of complete information, in which society can commit to divisible transfers among all potentially warring groups. The difficulty in preventing conflict arises from the possibility that there may be several conflictual divisions of society, each based on a different marker, such as class, geography, religion, or ethnicity. It is shown that this diversity of societal markers is particularly conducive to social instability when potential conflict is over private, divisible resources. In contrast, when conflict is over public goods, such diversity promotes social stability.

Remarks on the Initiation of Costly Conflict
DRI Working Paper No. 43
By Debraj Ray, NYU
Abstract: This paper studies costly conflict in a world of complete information, in which society can commit to divisible transfers among all potentially warring groups. The difficulty in preventing conflict arises from the possibility that there may be several conflictual divisions of society, each based on a different marker, such as class, geography, religion, or ethnicity. It is shown that this diversity of societal markers is particularly conducive to social instability when potential conflict is over private, divisible resources. In contrast, when conflict is over public goods, such diversity promotes social stability.

A Remark on Color-Blind Affirmative Action
DRI Working Paper No. 41
By Debraj Ray, NYU and Rajiv Seth, Barnard College, Columbia University
Abstract: not available

Tanzania’s Economic and Political Performance: A District-Level Test of Selectorate Theory
DRI Working Paper No. 40
By Alastair Smith, NYU and Bruce Bueno de Mesquita, NYU
Abstract: Hypotheses derived from the selectorate theory of political survival are tested against Tanzanian district-level data. We assess the extent to which resource allocations within Tanzania depend on the size of the district-level presidential winning coalition and the presidential support coalition. Using indicators that precisely measure coalition size given Tanzania’s electoral rules, we find that smaller winning coalition districts emphasize private goods allocations such as maize vouchers and road construction. Larger coalition districts emphasize public goods provision such as better health care access, residential electrification, greater income equality, and a lower infant mortality rate. These findings hold with controls for poverty, productivity, and population. Support coalition size – that is, total vote share for the winning party – generally has an insignificant effect on public and private goods allocations. Likewise, the control variables generally have little effect.

Selling Out on the UN Security Council
DRI Working Paper No. 39
By Alastair Smith, NYU and Bruce Bueno de Mesquita, NYU
Abstract: Election to the United Nations Security Council (UNSC) provides nations with an opportunity to trade policy support in exchange for aid and other forms of financial assistance. Nations elected to one of the ten temporary two year seats on the United Nations Security Council experience substantially lower economic growth during their time on the council than comparable nations not on the UNSC. Over the two year period of UNSC membership and the following two years, during which a nation is ineligible for reelection, UNSC nations experience a 3.5% contraction in their economy relative to nations not elected to the UNSC. Further, on average nations in the UNSC become less democratic and experience an increase in the level of restrictions on press freedom. The effects of UNSC membership on political and economic development are particularly strong in non-democratic states.

Pivotal Patronage
DRI Working Paper No. 38
By Alastair Smith, NYU and Bruce Bueno de Mesquita, NYU
Abstract: In contrast to traditional approaches to patronage politics, in which politician directly buy electoral support from individuals, we examine how patronage based parties can elicit wide spread electoral support by offering to allocate benefits to the precinct giving it the most support. Provided that the party can observe precinct level voting, this mechanism, which eliminates the need to observe individual votes or to reward a large number of individual voters, incentivizes voters to support a party even when the party enacts policies which are against their interests. When a party allocates rewards contingent upon precinct-level voting results, voters can be pivotal both in terms of affecting who wins the election and in influencing which precinct gets the benefits. The latter (prize pivotalness) dominates the former (outcome pivotalness), particular when a patronage party is anticipated to win. Competition between the precincts for prize pivotalness encourages rational voting even when the odds of outcome pivotalness approach 0.

Where Does the Money Go? Best and Worst Practices in Foreign Aid
DRI Working Paper No. 37
By William Easterly, NYU and Tobias Pfutze, NYU
Abstract: The Schelling model of a “tipping point” in racial segregation, in which whites flee a neighborhood once a threshold of nonwhites is reached, is a canonical model of strategic interdependence. The idea of “tipping” explaining segregation is widely accepted in the academic literature and popular media. I use census tract data for metropolitan areas of the US from 1970 to 2000 to test the predictions of the Schelling model and find that this particular model of strategic interaction largely fails the tests. There is more “white flight” out of neighborhoods with a high initial share of whites than out of more racially mixed neighborhoods.

Empirics of Strategic Interdependence: The Case of the Racial Tipping Point
DRI Working Paper No. 36
By William Easterly, NYU
Abstract: The Schelling model of a “tipping point” in racial segregation, in which whites flee a neighborhood once a threshold of nonwhites is reached, is a canonical model of strategic interdependence. The idea of “tipping” explaining segregation is widely accepted in the academic literature and popular media. I use census tract data for metropolitan areas of the US from 1970 to 2000 to test the predictions of the Schelling model and find that this particular model of strategic interaction largely fails the tests. There is more “white flight” out of neighborhoods with a high initial share of whites than out of more racially mixed neighborhoods.

The Indomitable in Pursuit of the Inexplicable: The World Development Reports’ Failture to Comprehend Economic Growth Despite Determined Attempts, 1978-2008
DRI Working Paper No. 35
By William Easterly, NYU
Abstract: not available

Women’s Rights and Development
DRI Working Paper No. 34
By Raquel Fernandez, NYU
Abstract: Why has the expansion of women’s economic and political rights coincided with economic development? This paper investigates this question, focusing on a key economic right for women: property rights. The basic hypothesis is that the process of development (i.e., capital accumulation and declining fertility) exacerbated the tension in men’s conflicting interests as husbands versus fathers, ultimately resolving them in favor of the latter. As husbands, men stood to gain from their privileged position in a patriarchal world whereas, as fathers, they were hurt by a system that afforded few rights to their daughters. The model predicts that declining fertility would hasten reform of women’s property rights whereas legal systems that were initially more favorable to women would delay them. The theoretical relationship between capital and the relative attractiveness of reform is non-monotonic but growth inevitably leads to reform. I explore the empirical validity of the theoretical predictions by using cross-state variation in the US in the timing of married women obtaining property and earning rights between 1850 and 1920.

Economic Freedom, Culture and Growth
DRI Working Paper No. 33
By Claudia Williamson, NYU and Rachel Mathers, West Virginia University
Abstract: How does economic freedom and culture impact economic growth? This paper argues that culture and economic institutions, specifically economic freedom, both play a role in economic development independently, but the strength of their impact can only be better understood when both are included in the growth regression. We find that, when both are included in the growth regression, the impact of culture is greatly diminished, while economic freedom continues to have a significant impact on economic growth. Our results suggest that economic freedom is more important than culture for growth outcomes, though the mechanisms through which culture affects growth warrant further investigation. We posit that culture may be more important for initial growth, diminishing in significance once the institutions of economic freedom have been established.

Political Survival and Endogenous Institutional Change
DRI Working Paper No. 32
By Bruce Bueno de Mesquita, NYU and Alastair Smith, NYU
Abstract: Incumbent political leaders risk deposition by challengers within the existing political rules and by revolutionary threats. Building on Bueno de Mesquita, Smith, Siverson, and Morrow’s selectorate theory, the model here examines the policy responses of office-seeking leaders to revolutionary threats. Whether leaders suppress public goods such as freedom of assembly and freedom of information to hinder the organizational ability of potential revolutionaries or appease potential revolutionaries by increasing the provision of public goods depends, in part, on the sources of government revenues. Empirical tests show that governments with access to revenue sources that require few labor inputs by the citizens, such as natural resource rents or foreign aid, reduce the provision of public goods and increase the odds of increased authoritarianism in the face of revolutionary pressures. In contrast without these sources of unearned revenues, governments respond to revolutionary pressures by increasing the provision of public goods and democratizing.

Is the Brain Drain Good for Africa?
DRI Working Paper No. 31
By William Easterly, New York University and Yaw Nyarko, New York University
Abstract: We build upon recent literature to do several exercises to assess benefits and costs of the brain drain to Africa. Contrary to a lot of the worries expressed in the media and in aid agencies, the brain drain is probably a net benefit to the source countries. We make several arguments: (1) the African brain drain is not large enough to have much effect on Africa’s skill gap relative to the rest of the world. Since other regions had a larger brain drain, the skill gap between Africa and the rest would actually be larger in a counterfactual world of NO brain drain with the same amount of skill creation. (2) The gains to the migrants themselves and their families who receive indirect utility and remittances more than offset the losses of the brain drain. According to one of our calculations, the present value of remittances more than covers the cost of educating a brain drainer in the source country. (3) Brain drain has a positive effect on skill accumulation that appears to offset one for one the loss of skills to the brain drain. Hence it is not surprising that we fail to identify any negative growth effect of the brain drain. Although some of our exercises are reliant on special assumptions and shaky data that require further investigation, we conclude based on what we can know in this paper that the brain drain is on balance good for Africa.

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2008

Credit Constraints, Job Mobility and Entrepreneurship: Evidence from a Property Reform in China
DRI Working Paper No. 30
By Shing-Yi Wang, New York University
Abstract: This paper provides new evidence on the impact of private property rights on entrepreneurship. I explore this issue in the context of a housing reform in urban China that allowed state employees renting state-owned housing the opportunity to buy their homes at subsidized prices. Using the reform as an exogenous change in the capital constraints and mobility costs that influence individuals’ entry into entrepreneurship, my estimates suggest that the property reform increased self-employment. I develop a model of job choice to test two mechanisms that might explain how the reform increased entrepreneurship. I find that the reform increased the ability of individuals to finance entrepreneurial ventures by allowing them to capitalize on the value of the real estate. The unbundling of housing benefits from state employment also contributed to the increase in entrepreneurship by facilitating labor mobility out of the state sector.

Can the West save Africa?
DRI Working Paper No. 29
By William Easterly, New York University
Abstract: In the new millennium, the Western aid effort towards Africa has surged due to writings by well-known economists, a celebrity mass advocacy campaign, and decisions by Western leaders to make Africa a major foreign policy priority. This survey contrasts the predominant “transformational” approach (West saves Africa) to occasional swings to a “marginal” approach (West takes one small step at a time to help individual Africans). Evaluation of “one step at a time” initiatives is generally easier than that of transformational ones either through controlled experiments (although these have been much oversold) or simple case studies where it is easier to attribute outcomes to actions. We see two themes emerge from the literature survey: (1) escalation. As each successive Western transformational effort has yielded disappointing results, the response has been to try an even more ambitious effort. (2) the cycle of ideas. Rather than a progressive testing and discarding of failed ideas, we see a cycle in aid ideas in many areas in Africa, with ideas going out of fashion only to come back again later after some lapse long enough to forget the previous disappointing experience. Both escalation and cyclicality of ideas are symptomatic of the lack of learning that seems to be characteristic of the “transformational” approach. In contrast, the “marginal” approach has had some successes in improving the well-being of individual Africans, such as the dramatic fall in mortality.

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2007

Do Remittances Promote Democratization?
DRI Working Paper No. 28
By Tobias Pfutze, New York University
Abstract: This paper presents evidence for international migration to have played a significant role in the Mexican democratization process. It argues that the non-taxability of remittances reduces an incumbent government’s ability to maintain political patronage systems and, as a result, elections will become more competitive. The empirical results, using data from municipal elections in Mexico, support this theory. Estimating an instrumental variable probit model, I find that remittances significantly increase the probability of a party in opposition to the former state party PRI to win in a municipal election. Moving from the first to the third quartile of the remittances measure increases that probability in previously state party ruled towns by more than 15% when party preferences are controlled for.

How the Millennium Development Goals are Unfair to Africa
DRI Working Paper No. 27
By William Easterly, New York University and Brookings Institute
Abstract: Those involved in the Millennium Development Goal (MDG) campaign routinely state “ Africa will miss all the MDGs.” This paper argues that a series of arbitrary choices made in defining “success” or “failure” as achieving numerical targets for the Millennium Development Goals made attainment of the MDGs less likely in Africa than in other regions even when its progress was in line with historical or contemporary experience of other regions. The statement that “Africa will miss all the MDGs” thus paints an unfairly bleak portrait of Africa.

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2006

Was the Wealth of Nations Determined in 1000 B.C.?
DRI Working Paper No. 26
By Diego Comin, New York University; William Easterly, New York University; Erick Gong, UC Berkeley
Abstract: We assemble a dataset on technology adoption in 1000 BC, 0 AD, and 1500 AD for the predecessors to today’s nation states. We find that this very old history of technology adoption is surprisingly significant for today’s national development outcomes. Although our strongest results are for 1500 AD, we find that even technology as old as 1000BC matters in some plausible specifications.

Are Aid Agencies Improving?
DRI Working Paper No. 25
By William Easterly, New York University
Abstract: The record of the aid agencies over time seems to indicate weak evidence of progress over time in response to learning from experience, new knowledge, or changes in political climate. The few positive results are an increased sensitivity to per capita income of the recipient (although it happened long ago) a decline in the share of food aid, and a decline in aid tying. Most of the other evidence — increasing donor fragmentation, unchanged emphasis on technical assistance, little or no sign of increased selectivity with respect to policies and institutions, the adjustment lending-debt relief imbroglio — suggests an unchanged status quo, lack of response to new knowledge, and repetition of past mistakes.

Artificial States
DRI Working Paper No. 24
By Alberto Alesina, Harvard University; William Easterly, New York University; Janina Matuszeski, Harvard University
Abstract: Artificial states are those in which political borders do not coincide with a division of nationalities desired by the people on the ground. We propose and compute for all countries in the world two new measures of the degree to which states are artificial. One is based on measuring how borders split ethnic groups into two separate adjacent countries. The other measures how straight land borders are, under the assumption the straight land borders are more likely to be artificial. We then show that these two measures seem to be highly correlated with several measures of political and economic success.

U.S. Environmental Regulation and FDI: Evidence from a Panel of U.S. Based Multinational Firms
DRI Working Paper No. 23
By Rema Hanna, Graduate School of Public Service, New York University
Abstract: This paper measures the response of U.S. based multinational firm to the Clean Air Act Amendments (CAAA), which dramatically strengthened U.S. environmental regulation. Using a panel of firm-level data over the period 1966-1999, I estimate the effect of regulation on a multinational’s foreign production decisions. The CAAA induced substantial variation in the degree of regulation faced by firm, allowing for the estimation of econometric models that control for firm-specific characteristics and industrial trends. I find that the CAAA caused regulated multinational firm to increase their foreign assets by 5.3% and their foreign output by 9%. In aggregate, this increase represents approximately 0.6% of the stock of multinationals’ domestic assets in polluting industries. Contrary to common beliefs, I find that heavily regulated firms did not disproportionately increase foreign investment in developing countries. Finally, this paper presents limited evidence that U.S. based multinationals increased imports of highly polluting goods when faced with tougher U.S. environmental regulation. Overall, these results are consistent with the view that U.S. environmental regulations cause U.S. firm to move capital and jobs abroad.

Does Corruption Produce Unsafe Drivers?
DRI Working Paper No. 22
By Marianne Bertrand, University of Chicago Graduate School of Business, NBER, CEPR and IZA; Simeon Djankov, International Finance Corporation and CEPR; Rema Hanna, Graduate School of Public Service, New York University; Sendhil Mullainathan, Harvard University and NBER
Abstract: We follow 822 applicants through the process of obtaining a driver’s license in New Delhi, India. To understand how the bureaucracy responds to individual and social needs, participants were randomly assigned to three groups: “bonus,” “lesson” and comparison groups. In the bonus group, participants were offered a financial reward if they could obtain their license fast; in the lesson group, participants were offered free driving lessons. To gauge driving skills, we performed a surprise driving test after participants had obtained their licenses. Several findings about corruption emerge. First, the bureaucracy is responsive to individual needs. Those who want their license faster (e.g. the bonus group), get it 40% faster and at a 20% higher rate. However, the bureaucracy is insensitive to social needs. Learning to drive safely is not how those in the bonus group obtain their license: in fact, 69% of them were rated as “failures” on our independent driving test. Second, those in the lesson group, despite superior driving skills, are only slightly more likely (by 8 percentage points) to get a license than the comparison group and far less likely (by 29 percentage points) than the bonus group. Third, bureaucrats create red tape by arbitrarily failing drivers, independent of their actual driving skills. These findings reject the view that corruption is used primarily to circumvent socially unimportant parts of regulation.

Capital Controls, Political Institutions, and Economic Growth: A Cross Country and Panel Analysis
DRI Working Paper No. 21
By Shanker Satyanath, New York University; Daniel Berger, New York University
Abstract: Disastrous events like the East Asian financial crisis of 1997-98 highlight the potential humanitarian consequences of governments’ decisions to liberalize international capital flows. Despite these consequences little systematic attention has been paid to whether and how politics affects the relationship between capital controls and long term growth. Statistical analyses conducted by economists largely show no correlation between capital controls and long term growth. We show that this is not the case when political institutions are taken into account. We demonstrate that countries that are simultaneously authoritarian and have a large number of societal divisions are negatively affected by capital controls, while democratic countries do not suffer adverse growth effects from capital controls. In doing so we systematically address the concerns of measurement error, reverse causation, and omitted variables bias that make it difficult to precisely assess the causal effects of capital controls. Our results are robust to numerous changes of specifications and samples and have significant policy implications.

The Political Economy of Nominal Macroeconomic Pathologies
DRI Working Paper No. 20
By Shanker Satyanath, New York University; Arvind Subramanian, IMF
Abstract: Recognizing that inflation and the macroeconomic policies that affect it can emanate from distributional conflicts in society, we examine the deep determinants of several nominal pathologies and related policy variables from a distributional perspective. We develop new instruments and use well-established existing instruments for these deep determinants and find that two deep determinants– societal divisions and democratic institutions –have a powerful and robust causal impact on nominal macroeconomic outcomes. Surprisingly, given the widespread attention accorded to the effects of populist democracy on inflation, democracy robustly serves to reduce inflation over the long term. A one standard deviation increase in democracy reduces inflation nearly four-fold. A similar increase in societal divisions increases inflation more than two-fold. Our results are robust to alternative measures of democracy, samples, covariates, and definitions of societal division. It is particularly noteworthy that a variety of nominal pathologies and/or their proximate policy causes discussed in the recent macroeconomic literature, such as procyclical policy, absence of central bank independence, original sin, and debt intolerance, have common origins in societal divisions and/or undemocratic political institutions.

Politically Generated Uncertainty and Currency Crises: Theory, Tests, and Forecasts
DRI Working Paper No. 19
By David Leblang, University of Colorado; Shanker Satyanath, New York University
Abstract: While it is widely acknowledged that political factors contribute to currency crises there have been few efforts at using political variables to improve crisis forecasts. We discuss ways in which political factors can be incorporated into theoretical models of crises, and develop testable hypotheses relating variations in political variables to variations in the probability of a currency crisis. We show that the incorporation of political variables into diverse crisis models substantially improves their out-of-sample predictive performance.

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2005

How to assess the needs for aid? The answer: Don’t ask.
DRI Working Paper No. 18
By William Easterly, New York University

Social Cohesion, Institutions and Growth
DRI Working Paper No. 17
By William Easterly, New York University; Jozef Ritzen, Office of the President, Maastricht University; Michael Woolcock, Development Research Group, The World Bank, and Kennedy School of Government, Harvard University
Abstract: We present evidence that measures of ‘social cohesion’, such as income inequality and ethnic fractionalization, endogenously determine institutional quality, which in turn causally determines growth.

Monitoring Works: Getting Teachers to Come to School
DRI Working Paper No. 16
By Rema Hanna, Wagner School of Public Service, New York University; Esther Duflo, Department of Economics, MIT
Abstract: In the rural areas of developing countries, teacher absence is a widespread problem. This paper tests whether a simple incentive program based on teacher presence can reduce teacher absence, and whether it has the potential to lead to more teaching activities and better learning. In 60 informal one-teacher schools in rural India, randomly chosen out of 120 (the treatment schools), a financial incentive program was initiated to reduce absenteeism. Teachers were given a camera with a tamper-proof date and time function, along with instructions to have one of the children photograph the teacher and other students at the beginning and end of the school day. The time and date stamps on the photographs were used to track teacher attendance. A teacher’s salary was a direct function of his attendance. The remaining 60 schools served as comparison schools. The introduction of the program resulted in an immediate decline in teacher absence. The absence rate (measured using unannounced visits both in treatment and comparison schools) changed from an average of 42 percent in the comparison schools to 22 percent in the treatment schools. When the schools were open, teachers were as likely to be teaching in both types of schools, and the number of students present was roughly the same. The program positively affected child achievement levels: a year after the start of the program, test scores in program schools were 0.17 standard deviations higher than in the comparison schools and children were 40 percent more likely to be admitted into regular schools.

Reliving the 50s: the Big Push, Poverty Traps, and Takeoffs in Economic Development
DRI Working Paper No. 15
By William Easterly, Department of Economics, New York University
Abstract: The classic narrative of economic development — poor countries are caught in poverty traps, out of which they need a Big Push involving increased aid and investment, leading to a takeoff in per capita income — has been very influential in development economics since the 1950s. This was the original justification for foreign aid. The narrative lost credibility for a while but has made a big comeback in the new millennium. Once again it is invoked as a rationale for large foreign aid programs. This paper applies very simple tests to the various elements of the narrative. Evidence to support the narrative is scarce. Poverty traps in the sense of zero growth for low income countries are rejected by the data in most time periods. There is evidence of divergence between rich and poor nations in the long run, but this does not imply zero growth for the poor countries. Moreover, this divergence is more associated with institutions rather than the disadvantages of initial income. The idea of the takeoff does not garner much support in the data. Takeoffs are rare in the data, most plausibly limited to the Asian success stories. Even then, the takeoffs are not associated with aid as the standard narrative would imply.

What Can the Rule of Law Variable Tell Us About Rule of Law Reforms?
DRI Working Paper No. 14
By Kevin Davis, School of Law, New York University
Abstract: The recent resurgence of optimism regarding the role of legal reforms in promoting development seems to be based in part upon cross country statistical analyses that purport to show causal relationships between variables measuring characteristics of legal institutions and variables measuring levels of various kinds of development. However, the persuasiveness of these analyses is limited by the quality of the legal data upon which they rely. As it turns out, many of the variables that are commonly used to measure respect for the rule of law, enforcement of property rights and contracts do not capture information capable of shedding light upon the potential impact of purely legal reforms. In some cases the variables capture the interaction between legal and non- legal features of society. In other cases they aggregate the effects of a large number of legal institutions. In still other cases they capture information about features of legal systems that are not amenable to reform.

The Product Cycle and Inequality
DRI Working Paper No. 13
By Boyan Jovanovic, Department of Economics, New York University
Abstract: This paper models the product cycle and explains how it relates to world inequality. In the model, both phenomena arise because skilled people have a comparative advantage in making high-tech products. The model can explain up to a 10:1 income differential between people and up to a 7:1 differential between countries. Tariff policies and intellectual-property protection have a much larger effect here than in some other models.

Micro-insurance: the next revolution?
DRI Working Paper No. 12
By Jonathan Morduch, Public Policy and Economics, New York University

The Last Instance: Are Institutions the Primary Cause of Economic Development?
DRI Working Paper No. 11
By Adam Przeworski, Department of Politics, New York University
Abstract: Following North, neo-institutionalists claim that institutions are the ”primary” cause of economic development, ”deeper” than the supply of factors and methods for their use, what Marxists would call “forces of production.” Yet while the conclusion is different, the historical narratives differ little across these perspectives. How, then, are such conclusions derived? Can anything be said to be ”primary”? I conclude that “causal primacy” is an answer to an incorrectly posed question. Institutions and development are mutually endogenous and the most we can hope for is to identify their reciprocal impacts.

Development, Democracy, and Mass Killings
DRI Working Paper No. 10
By William Easterly, New York University and Center for Global Development; Roberta Gatti, Development Research Group and The World Bank; Sergio Kurlat, Development Research Group, The World Bank
Abstract: Using a newly assembled dataset spanning from 1820 to 1998, we study the relationship between the occurrence and cruelty of episodes of mass killing and the levels of development and democracy across countries and over time. We find that massacres are more likely at intermediate levels of income and less likely at very high levels of democracy. Surprisingly, discrete improvements in the democracy index do not translate into a lower chance of massacres unless the countries move to the highest level of democracy, and even that finding is not completely robust.

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