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VHV Ch 1 reading

Tons of regulations everywhere about a very wide range of things
Perfect competition - little need for antitrust policies and other regulatory efforts. But this doesn’t exist
Government has 2 types of mechanisms to address departures from perfectly competitive:
1. Price incentives. Impose tax on activities to make them less attractive
2. Control behavior directly. (I.e antitrust where take explicit action to block mergers to prevent such high market share)
Point of antitrust regulation is that economy efficiency losses result from monopolies.
Economic regulation to help promote efficiency. And may be to control price.
Deregulation of airlines - competition helps consumers and create better market structure
Health, safety, and environmental regulations to fix externalities from economic behavior
Regulation thru litigation
Regulation to try to fix these market failures


Economic Gangsters: Corruption, Violence, and Poverty of Nations

President Suharto of Indonesia - whenever he gets sick, shares of a company called Bimantara Citra, which he helps out, get hurt badly. Clear market connection between his health and the company.
Insiders trade before announced and have stock fall a few days before announce he’s going to the doctor
Suharto, while he had corruption, he was consistent and was honorable in that if say a deal, do it. No chaos

Looking at Dick Cheney and his ties to Halliburton. Even though has ties to them, stock market not changing based on Cheney’s health. Limits to favor giving in Washington. Too much scrutiny

Look at smuggling and measure it as difference as what country A reports leaving vs what country B reports entering
Higher tariffs, higher smuggling gap


BEPP 203 at wharton

Wharton: market transactions (customers, suppliers, financial services) and market competition
Bepp 203: government is a big player; regulation (political process, response to market failures)
They interact thru firm owners and managers


Market equilibrium - is it good? 2 powerful ideas

EQ is the rest point of a system
Market EQ is the prices and quantities we will see traded when firms and consumers act without interference.
Is it good?
Adam smith says it is - market efficiency without regulations allows for best output
Drug prices - could argue EQ results in high price, but conversely it is government patents that result in that. How it compares to different EQ is important.

Powerful idea 1: resources are allocated optimally when a. Firms and consumers act in their own interest. B. Nobody could come in and re-organize who gets what or increase total welfare (market is efficiency). Point is they traded only happen if both better off, so best thing to do is let all trades happen. Assume market efficiency, but not always the case.
However, reality is sometimes different from smiths story
Powerful idea 2: identifying situations where markets fail to lead to optimal allocations.


Market failures covered in class

1. Weak institutions (I.e. lack of property rights)
2. Externalities
3. Asymmetric info
4. Inequality
5. Labor markets


Overview of US regulation and how to measure it

A state imposed limitation on the discretion that may be exercised by individuals or organizations, which is supported by the threat of sanction.
Alan stone - “regulation and its alternatives”
Measure regulation thru federal register of the US government (daily publication, new rules and regulations, final rules, changes to existing rules, notices of meetings and adjudicatory proceedings)


Regulation over time

Regulations are everywhere in the
Federal register pages - annual page count (number of pages published annually) increase massively in the 60s and mid 70s. Then falls and has risen since the 80s
And the cumulative pages has been on a big rise for a while

1800s - forging markets (expansion)
1900s - developing markets (regulation to promote equity and universality. Allow access to goods and services - looking at prices too. Force At&T to serve rural areas - regulate their prices)
1970s - mature markets (deregulation to promote efficiency)
2010s - back to developing markets with finance and healthcare under Obama. Under trump, less regulations

Looking at most industries in the US, regulations in the 30s and 40s and then deregulation in the late 70s


Indonesia example of corruption

Looking at importance of business/politics relationship and the corruption in Indonesia
Suppose you’re a money manager and considering investments in Indonesia in 1990s - choose which ones to look at based on fundamental analysis (future profitability, etc), and what roles regulations and political connections play in future profitability
Hypothesis: President Suharto is important for future profitability

Suharto was president of Indonesia from 1967 to 98. Pro market and anti communism and autocratic ruler (persecute communists and Chinese Indonesians). Rumored to direct resources to favored companies' such as Bimantara Citra
Looking at stocks correlated with his health - companies that depend more on Suharto should be hurt more when he gets sick.
Suharto dependency index scored 0-4.
High scores - managed by his children and long term allied.
See that well connected firms lose most value when he gets sick.


Wrap up lecture 1

Markets don’t always give efficient outcome
Regulation should attempt to fix market failures (overview of us regulatory history)
Motivating examples of market failures, regulation, corruption


Thanks to Finely Tuned Focus Groups... reading by Sullivan

2000 presidential election - extremely close. Insane amount of polls, hard to pull ahead in a state or even a country, end up in stalemate. Ton of data and dominating life. Marketing research
Stigma attached to losing
Parties are cautious bc evenly matched, or evenly matched bc they’re both cautious. Country split down the middle, frozen like this since 1994
Fight about matters of procedure bc parties sensitive that no mandate for anything.
To get rid of this split, new candidate could try to shake up political system. Appeal fo new voters.


Fifty-fifty forever by Kaus

2002 article.
Nation is split right down the middle
Over time, each party crafts its message to maximize its appeal and adjust after each election to regain any lost share of the votes
Shift/drift toward what current people think. Ideological drift won’t translate into political dominance by one party or the other, but rather both parties move toward new center of gravity.
Changes that resulted in current deadlock
A. Convergence of both parties’ ideologies. Parties not that far apart - both are democratic capitalism, differences at the margins.
B. Withering away of interest groups that inhibit party flexibility
C. Dimming of historic memories


Median voter theorem

Think about a problem where the government needs to decide whether to provide a public good (I.e. build a school) and of the level of a public good to provide (I.e. where to build a school, how much to spend)
- government needs to aggregate indiviudal preferences into a single decision
- how can the government decide
- voting, particularly majority voting, is a common method
- mvt: under some conditions, the policy that is adopted will reflect the ideal point of the person whose ideal point is at the median of all the ideal points

Looking at a number line, say 100 is most conservative and 0 is most liberal. Say we have a candidate D1 at 10 and R1 at 90. If R1 shifts to 80, then will gain more of the vote. Dem candidate shifts too. Both wind up in the middle at 50
Parties shift policies toward what the median ideology is.
Party ideology less important as shift toward the middle.


Kaus argument

Fifty fifty forever - us presidential election about 50-50 split for a long time
Central claim:
-parties compete for votes
- so even if parties have ideologies, they will adapt to changing whims of the electorate, in order to remain electorally competitive
- how will they do this?
- by adapting the platform that the median voter would most desire
- median votes preferences are in the middle with an equal number on each side


More formal discussion of MVT

We can think of MVT in context of genera, electorate, Congress, or any other group that votes
Kaus is talking about US public
MVT was originally stated in terms of a representative body with rules of procedure
Look at past presidential election popular votes - no landslide votes. Median voter theorem provided explanation as no one dominant party.
In that kind of environment, three key assumptions (see next slide)


3 main assumptions of MVT plus 2 assumptions of voters

2 voter assumptions:
1. Uniform distribution of voters across political spectrum - equal number of voters at each value
2. Voters choose candidate closest to them on the line.

3 key assumptions:
1. Unidimensionality
2. Single peaked preferences
3. Open rule, so all proposals can be considered



Preferences can be considered on a single dimension from right to left
For example, consider candidates based on a single score of how liberal or conservative they are. Certain indexes exist to do so

Despite huge variety of issues in national politics, unidimensionality isn’t such a bad assumption



Preferences with a single local peak and utility falls as you move away in any direction from that peak. The ideal point = bliss point. Utility falls as move away from the peak in any direction

Looking at utility graphs, must be just one peak. Each of the lines are different voters and their preferences, but they require single peak for each person

Ex: if you don’t care about policy but just that other person loses, then this doesn’t hold.


Open rule

- Permits all relevant amendments to be offered to a bill, without any resitrictions. This is close to what actually occurs in the us House of Representatives
- representatives decide on the policy by simple majority vote
- continue until policy is enacted (or legislative session ends)
- in general elections, open rule obviously doesn’t apply. Voters generally have to choose between candidates presented by parties.
Any choice within the range.


MVT summary

Assume 2 candidates (A and B), single peaked preferences, and a single dimensional policy, and voting by majority rule. Assume candidates want to win

Then the prediction is the EQ policy outcome of A and B will be the same (the median policy). Convergence toward the median voter’s bliss point. They need more than 50% of votes to win so they must gravitate toward the median. If they don’t, the other candidate will win.


Business analogy to the MVT

Houses ha equal distance between them. 2 Ice cream trucks that sell same amount of ice cream for same price. Customer decision based on distance. Ice cream trucks can move and want to maximize profits
Key implication is the convergence of businesses, the sameness you might observe
We see the trucks going to the middle and locate next to each other so neither has advantage. This is the Eq.
1929 Hoteling law - observation that businesses make products as similar as possible


Extending women the right to vote

Between 1869 and 1929, diff states extend voting rights to women
Congress fear of being punished at the polls by women, not conviction of the bills necessity, result in them voting for a certain bill, such as prohibition and hygiene which women are in favor of.

Hygiene public campaign by women - campaign by nurses btwn end of May and September - visiting new members, examining children, encouraging breastfeeding, hygiene info.
Where 0-50 is men preferences (0 is least in favor of public health spending and 100 is most in favor) and 50-100 are women, before the median voter is at 25. Then give women the right to vote it shifts to 50. So get a lot more in favor of public health spending.

See that state level public health spending increased by 35% after women get voting rights. Childhood mortality declined by 8-15%. Mainly thru better hygienic conditions. Translates to 20k deaths saved.
Politicians actually respond to median voter.


MVT evidence: us house elections.

Take 2 very similar us house districts (like C and D which go from 25 to 75). One randomly assigned Democrat district (A, goes from 0 to 50) and one randomly assigned republican (B, goes from 50 to 100)
Voters will respond to the median voter.
What we see is the 50% threshold is very important bc above 50 is republican and below 50 is Democrat. If median voter theory holds, then we wouldn’t expect a jump at 50, would expect a sloping upward line as approach mid point with policies only slightly diff above 50
Evidence actually shows big jump at 50 with a gap, gamma, suggesting that the MVT doesn’t hold here, as would expect similar towns to support similar policies but the jump doesn’t support that.


Strategic extremism

Not everyone votes
You can use negative advertising to defer your opponents moderate supporters from voting (I.e. Republican Party can smear dem candidate to get moderate dems to not show up)
Parties might strategically target their extreme allies who won’t be deterred by the opponents negative ads

Ex: consider 0 to 100 scale where 40 to 60 don’t vote.
Eq is now are 40 and 60. No voters btwn 40 and 60 fundamentally alters this thinking.


Primary elections

Primaries affect whether MVT will hold in general elections
Politicians might have to commit, at least partially, to wishes of the median primary voter.
In Democrat primary, looking between 0 and 50. Median is 25. Republican at 75. Then shift to 50 for general election.
Problem is that primary voters hold you accountable, call them flip-flippers. So not fully to 50, but definitely more moderate.


MVT - pivotal voter

MVT is necessarily about the median voter - it depends how many votes you need to succeed. MVT says preferences of the pivotal voter will be implemented. For action in the senate that is subject to filibuster, senator at 60th percentile has the pivotal, decisive vote to end the filibuster (which is when vote is delayed and need 60% of vote to prevent the delay)

MVT is a positive theory but is also a practical tool for negotiation. Target your persuasion toward pivotal voter


MVT 3 types of evidence

1. Do general elections tend to be close to 50-50 over time? Yes - supports MVT (kaus article)

2. Do policies change when franchise is extended? Yes - supports MVT (women voting and hold health)

3. Do places w very similar median voters elect politicians to support very similar policies? No, doesn’t support MVT. (Us house member votes)


Women as policy makers reading

Hard to separate out effects of being women and policy in general. So, look at India.
Certain reserved seats for women in India villages. Unreserved spots mostly all men. Find that women invest more in infrastructure relevant to development priorities of women. West Bengal - women complain more about water and roads, invest more there. Rajastan, women complain more about water but less roads, invest more water but less roads.
Contrast to idea that women would just listen to husbands ideas.
Women in reserve seats are less experienced, less ambitious, and lower prospects in politics, and are of lower socioeconomic status. no evidence though that these differences drive the results. Gender is what explains the different investments
Males don’t respond to needs of electorate as well and even when women do better job, the perception is that they’ve done worse job. Bias perception, which is why the reservations are needed.


Political selection reading by Timothy Besley

James madison in federalist paper 57 - aim of every political constitution is, or should be, to Obtain for rulers men who possess most wisdom to discern and most virtue to pursue common good of society
1. Need to form political class that is competent and honest enough to discharge its duties - study here and 2. To get institutional incentives right so politicians act in public interest - has been discussed a lot

Dynamic leaders are important, need to understand how they get in power.
Political selection important bc:
1. If limits of the degree to which individuals can credibly adopt policy positions, then who is picked for public office is instrumental to adopting a credible policy stance.
2. If the control of politicians through elections is limited, then improving quality of government requires an increase in honesty, integrity, or competence of those who are elected. Remove bad politicians from office.
Political selection doesn’t matter in MVT bc just median voter. But, they don’t carry out platform. Reputation formation and selection play role in achieving policy credibility.
Majority-minority district controversy where minorities grouped into few districts, so represented there but marginalized in system as a whole.
Gender representation selection matters
Selection matters in affecting quality of politicians in office. Honesty and competency are important
Fiduciary model - Comes from word “to trust” part of the common law. Rulers to uphold public trust. Public service motivation
Intrinsic motivation - virtue hard wired into preferences
Making policy - better to have broad based social objectives pursued than narrow interests.
Different types of elections - see lecture notes
Attractiveness ratio - rewards come in formal compensation, public service motivation, and other rents.
A = (rents + wages) / (public service motivation + wages)
When A is large, more bad politicians will run. When A is small, more good politicians run. Strong public service ethic results in lower A. Civic virtue and not depending on wages for office running helps democracy
With low public service motivation, payment matters. With high, it doesn’t matter.

Success ratio - probability of election of bad politicians / probability of election of good politicians. Multiply this by A
If S = 0, then ideal, and never any bad politicians.
Primary election helps focus on candidates rather than policy generally. Information also important and free media is key to stopping corruption.

Opportunity cost ratio - O = outside option of bad politicians / outside option of good political. Economy with strong private philanthropic sector will tend to reduce pool of good politicians available

Accountability ratio, R, the prob that bad and good politicians get re selected = prob of re election of bad politicians / prob of re election of good politicians
Trade off as bad politicians may change behavior in office to stay elected, but then not filtered out.


Methods of choosing leaders - does politician matter in these systems?

1. Randomly chosen representative body (Athens, jury duty) - no, it doesn’t matter, as random selection should control for this, as long as the pool of people includes everyone

2. Heredity. No, it doesn’t matter

3. Force. Unclear, likely not, need to keep military happy

4. Elections. Under MVT, politician identity shouldn’t matter. Only distribution of voter preferences. MVT says all come to same voting Patten. What really only matters is the voters.


MVT politician identity

MVT predicts politician identity shouldn’t matter, only the distribution of voter preferences should matter
Politicians will aim to:
1. Maximize election probability by appealing to median voter
2. Politician identity factors won’t matter
(Female, education, race, ethnic group, political party)
3. Major appeal of elections is precisely that politician identity shouldn’t matter, votes should matter


MVT and commitment problem

Candidates have their own preferences for policies. For example, preference for transferring resources to their own ethnic group.

How can they convince voters they won’t switch after getting elected?
- identity is a commitment mechanism.
- Identity can signal to voters about the politicians policy preferences
- identity is something hard to “fake”

Policy that reserves office for certain identities can lead to different policy decisions. Example with female reservations for office.


Reservation for female office

Say we have a number lime with 0 being male favored policy and 100 female favored policy. Should be at 50 per the MVT. So forcing candidates to be female shouldn’t matter per the MVT, as need fo appeal to men and women. But, could be a commitment problem, as you don’t believe them.
Say just females running, should still try to be in median as men are voting too. But commitment problem, as May not actually do those policies
Rwanda has the most women in office


India example set up

In India, they have a 3 tiered rural council system. Villagers to councilors for the council president (Pradhan). Grand Panchayats (GP) are village councils who oversee the councilors and council President.
Problem - could be increased corruption. If identity matters, policy outcomes should move toward what women what. We see it does
In India, 1/3 of the seats are reserved for women. Scheduled caste/tribe reserved in proportion to local population
And 1/3 of the GP must have female Pradhan (Pres). Which gps have female Pradhan chosen at random

Thing is that the MVT says this shouldn’t matter, as will adapt median policy. Or women could be puppets for their husbands. But it could matter, women inspire others to grow into these and become politicians.


India example design

Women as policy makers study design:
1. Check that places w reservation for female Pradhan are similar to places without reservation for female Pradhan on village infrastructure before female Pradhan starts (apples to apple comparison)
2. Measure policy preferences of men and women using data on formal requests and complaints brought to the Pradhan in 6 months prior to the survey, sorted by gender of petitioner and type of good petitioned for (reason is need to know if the policies actual represent female policy preferences - are men and women complaining about diff things?)
3. Data on infrastructure investments in 2 years following most recent election


India example results

Men and women had different policy preferences. Looking at complaints by men and women
In West Bengal, women have lot more issues w drinking water and road improvements than men, but less problem with education and irrigation and ponds.
In rajasthan, women have issue with drinking water but not with road improvement.
Possibly could be women use roads in WB but not Raj

Results show that women invest more in public goods that women prefer
So, there is a real impact on men vs women here.
2 years after coming into office, village reflects the preferences. It does matter


Other female effects

1. Lower political experience
2. Lower re-election prospects
3. Lower socio economic status


Daughter and congressional voting example

Looking at how male politicians can change based on their daughters. Do they vote more in favor of women’s issues?
Experiment looks at 4 US house cohorts (97-04) who had kids before entering congress. Looking at scores by the national organization of sumen (NOW)
In the full sample, republicans have more children, are more white, and are more Protestant. Also republicans lot lower NOW score. But, to control for this, we look within party.

We find that for people with 2 children, more female children increase their NOW score. Comparing everyone with 2 children, so 0 girls vs 1 vs 2. More daughters you have when have 2 kids, more pro-female you come. True for dems and republicans

Then look at reps with 3 children. For Democrats, same thing, more daughters, higher NOW score.
For republicans, less of an effect. 3 is higher than 0, but 2 is basically same as 0 and not much of an effect.


Female reservations in business. Norway example

Norway reform in 2006. All corporate boards of public companies must have 40% women by feb 2008.
Doing this to possibly solve sexism, that boards w all men don’t know how good or bad women will be, or to get the women on the board outside intervention is needed.
See a massive increase in females on Norway listed (public) firms in that period compared to Norway private and listed scandavia companies
Research shows that in general, women take less risk in stock market and perform better in non competitive situations. Does this matter on corporate boards?
See that after the rule, Norway listed firms have smaller operating profits/assets while Norway unlisted firms go up. Other country listed an unlisted go down slightly
And then look at rates of employment downsizing in Norway before and after the quota. See that listed countries doing worse but unlisted better


Summary of politician identity mattering

Economic concepts: if politicians can’t commit to policies, then scope for politician identity mattering. Politicians will pursue policies closer to their own identity
1. Female village leaders in India - females voting for what they want
2. Us congress members w and without daughters - slight policy changes
3. Norweigthen corporate boards - companies doing worse


Why is there so little money in US politics reading (by Ansolabehere, de Figueiredo, and Snyder Jr)

Extremes about money in US political campaign - one extreme that contributions have massive influence and other one that contributions don’t matter.
Looking at whether it is political investment or more consumption.
Most money, especially for PACs, comes from individuals. Cap of $10k investment, most don’t reach that
Majority in money in politics is from individuals in small amounts
Tullock’s puzzle - why so little money in politics considering how big industry is. Reason, perhaps, Is that contributions don’t influence legislators well enough. In fact, opposite relation is seen sometimes.
Simultaneity between votes and contributions as not sure which one effects the other. And lack control variables so unclear what the cause is.
Evidence that contributions leads to substantial influence on votes is small. Money is small per of political calculation that re-election oriented official makes
See that contributions are more consumption thats investment. Ideologically motivated rather than investment. Like giving to charity. Top CEOs give small amount and firms give small, giving to charity is more important
Real spending for politics has gone up, but as fraction of GDP it has stayed relatively similar Since collapse in 1900 Gone down slightly.
Small donors affect both marginal and average dollar.
Why do interest groups give at all? 5 possibilities
1. Give a little and get a little.
2. Money buys access rather than policy directly. Lobbying > camps in contributions
3. Interest groups want to affect elections rather than change views of existing legislators.
4. PACs coordinate individual donations and help overcome collective action problems that could hurt indiviudal contributors
5. Interest groups give for consumption
Indiviudal’s are main source of money in US campaigns and hurts leverage of interest groups.


Revolving door lobbyists: value of political connections in Washington reading
By blanes, draca, and Fons-Rosen

Lobbying in UK is smaller than US bc less voting along party lines in US so more open to lobbyist influence
UK cabinet ministers are focus of lobbying bc direct decision making
Revolving door where political differs to government to lobbyists
Think they’re buying influence
Political connection value is high for lobbyists. Lose revenue when former employer leaves congress and hard to offset this loss, but rather it continued
Proximity to power matters for lobbyists



1. Single regression - Y = a + bx + e where Y is dependent variable and X independent
2. Multi variable w multiple X variables
3. Regression tell us how precise estimates of relationship are. T statistic = coefficient / standard error


Session 4: political contributions, lobbying, and political behavior

Economic concepts:
- we can think of political contributions like any other investment firms might make. Invest until MB=MC of investment
-eq contribution rates are low, about $3B per election cycle, and unconstrained by legal limits
- estimating impact of contributions on votes is complicated bc of selection and simultaneity
Ex: revolving door lobbyists

Looking at if money matters - break into 1. Political contributions - individuals give money directly to politician and 2. Lobbying - money goes to lobbyists who then talk to politicians and draft bills


Why do individuals and firms give to campaigns

-influences who wins - return the favor
-influence their policy to line up with yours (get their votes), change existing policy.

-right thing to do
-believe that a candidate will bring about good changes


Donation amounts

1. Key question: are these donation amounts big or small?
-legislators make choices about trillions of dollars of government money (Tullocks puzzle:
-plus costs of regulations that affect business

2. Campaign donations are dominated by:
-indiviudals: spenc $2.4B in 1999-2000 cycle. 10% of indiviudal’s gave for an average of $115. This amount pre-dates changes to how firms can give. Easy to track where money came from back then.
- Corporations gave only $380M: small fraction
Political action committee (PAC): funded by a corporation/organization but can only take donations from individuals within organization. Pay for people in firm to work as pac and indiviudal’s donate thru the firm. Can’t just give profits to politicians.
Only 4% of contributing pacs reach the $10K contribution limit. Average PAC donation around 2k


2016 election spending

For presidential candidates, individuals give way, way more than pacs. $1.1B for indiv vs $4M PAC’s

For house and senate, indiviudal’s also give way more bf closer
House: PAC give 35%, indiv 53%
Senate: PAC 17% and indiv 72%
Takeaway: indiv continue most important source of donations


Niche sectors and tullocks puzzle

In the defense, oil and gas, dairy, and sugar industries, firms give tiny subsidy to what govt spends in the industry.
Tullock argues that if contributions really mattered, we should see lot more contributions than we do.
Other possible takeaway: votes are cheap - can influence policy with small number
Also could be collusion among firms - agree to not pay more than certain amount for votes.


Effect of contributions on voting

General finding: additional 60k in corporate pac receipts changes chamber of commerce voting score by 3%
Vote more pro-business but not huge amount.
Correlation not causation in corporate pacs leading to pro business.


Why it is hard to figure out what contributions do?

Indiviudal’s and firms tend to give to politicians they agreed with. But correlation not causation.

1. Simultaneity problem: reverse causality. Contributions Could come before a vote to influence the vote
Or, contributions could come after a vote to show agreement with the vote
Ex: hired as data intern for Philly police over summer. Find that more police with more crime, but don’t reduce police and expect crime. Rather, it is you have more police in areas with more crime. So contributions may not be causing policy but could be reversed. They make good policy and you’re rewarded.

2. Selection problem - confounding/omitted variable
Or contributions could arrive bc of omitted variable common btwn contributor and the legislator (selection)
Ex: district A has a gun factory and give money to politician A who then gets pro gun votes. And district B could be politician B who is just anti gun. But we can’t say A came bc of the money. Can be counfoudning variable politician A operates in place where votes like guns which is why the gun factory is there. Not the money causing pro gun vs anti gun. Selection problem driven by omitted variable that gun lovers live in district A and not B


Why is there so little money in US politics?

Goal is to distinguish between two theories of political contributions
Consumption vs investment theory of political contributions:
-evidence against investment theory:
1. Contributions are low relative to benefits (tullocks puzzle)
2. No strong correlation between who contributes and votes
3. CEOs don’t give higher fraction than others
4. Marginal dollar


Ceo contribution evidence on consumption theory

Ceo contributions are low relative to their income
Data on 94 top executives from 12 large corporations. On average, they gave $7,500 to their own corporations’ Pacs in the 1997-98 election cycle. Much lower than max of $25 per indiviudal as stated in federal election campaign at the time
Consistent with consumption theory.


The marginal dollar

See that for safe house seats (30% margin or more), 48% of campaign funds come from indiviudal’s and 46% from pacs (corporations)
In close races (5% Marg or less), 60% campaign funds from indiviudal’s and 31% from pacs
Investment theory: we would expect pacs to be larger in close races than safe races but we see the opposite. But, safe house seats are lower risk, so could be a better investment. Low risk for higher return, so could be consistent with investment theory.


Citizens united Supreme Court

New rules for corporate, union, and trade group spending on federal elections:
1. Corporations, unions, and trade groups can now spend freely on advertising for and against presidential/congressional candidates
2. Cannot give money directly to candidates or national party committees
3. Within 30 days of primary/60 days of election, advertisement must disclose source of who is responsible for the ad
4. Corporations, unions can funnel ads thru other groups

Super pac is this, which allows money to funneled thru and not say who the money comes from.


MN forward example

MN forward is a super pac. Don’t know where the money came from and ads advertisements for Tom Emmer, republican governor candidate
Leaks that target and Best Buy gave money to them.
First well known example of corporate contribution thru independent group (dark money)
Dark money are nonprofit organizations that do not disclose their donors


Dark money amounts (prior to November 2012 elections)

See a lot of dark money entering the race and rise of it overall. More for republicans than democrats. And split btwn Pres, house, and senate. Senate gets the most by a bit.


Dark money and candidate outcomes

Looking at races and dark money. See that despite republicans having dark money advantage in some races, they’re not winning. And vice versa. X axis is the republican dark money spending advantage and Y axis is how likely the district is republican or Democrat. And then dot colored based on if win or lose. When Y axis = 0, neutral between dem and rep.
Even w republican dark money, lot of Democrat wins. Not driving election outcomes, but rather the district demographic is more important.


Spending by outside groups besides the candidate

Outside spending includes money from party committees, dark money groups, and super pacs.
Not very direct causal. No strong evidence that dark money or outside spending matters for election outcomes.
May not have changed outcome, but could have been even more blue dots, may be they did influence the election. We don’t know bc can’t observe the counterfactual. And could be game theory that if dems gave and we don’t, then it’ll be worse
So can’t say for sure what’s happening, but it is clear that spending advantage for republicans isn’t winning them races.


Candidate spending and candidate outcomes

Here, it seems the money is more effective. Could just be better at spending their own money. When have the advantage in spending, typically winning here.
Same axes with X as republican advantage, Y district demographic, and dot color who wins.



Strategic communication of politically relevant information to government officeholders (Baron)
Spending of resources by individuals or groups to influence a political outcome

Positive: politicians have limited research and time - can drive their attention to issues they may have glanced over
Negative: richer people get voice heard.
See that total lobbying spending has gone up considerably since 1998. Number of lobbyists up and then back down during recession and fallen since.
Lobbying leaders are US chamber of commerce, realtors association, pharma
Tech companies massively growing lobbyists recently


Positive view of lobbying

Helps politician better serve his constitutions and lobbying organization
- have information or expertise and offers politically relevant information
- political relevant and welfare maximizing information about:
- consequences: will this law work - consequences of the bill. Wasted votes - consequences of my vote (is supporting bill just a waste of time?)
- preferences: re-election imperative: home district median voter. Career ambitions: future career constituency median voter
- targeting and timing of truthful and welfare maximizing information.

Also good in that may glance over your issue, so can help them and give them this information.


Negative view of lobbying

Influence that hurts constituents but helps lobbying firm
- lobbying firm uses political connections for societally harmful regulation
- certain groups are privileged at a cost to others


Revolving door lobbyists study

Revolving door: movement of people from government positions to the private sector
To what extent do former government officials cash in on the personal connections made during public service?
Lobbyists claim: what you know matters.
Critics claim: who you know matters
Difficult to distinguish these with data.

Look at how lobbyist earnings change when connected politicians retire. Lobbyist knowledge is the same, but discrete drop in “who you know”
Find that lobbyist income drops 20% when former political employer leaves congress. Drop $177K in income to lobbyist firm and effect is persistent for three years.
Retired affects most politicians and defeated in reelection is number 2
Do worse once retired and then the effect persists for three years. Then gets better.


Summary of political contributions and lobbying

MVT, political identity, and lobbying are different ways to examine how governments form policy
MVT suggests outcome of regulation will tend toward the preferences of the median voter
- But, lobbying could distort that (for better or worse)
- MVT doesn’t take into consideration intensity of preferences but lobbying does
Concern that lobbying can create inefficiencies
- rent seeking behavior
-lobby to retain subsidies which are socially inefficient.


Media slant: a question of cause and effect reading by Mankiw

Root cause of the spin in newspapers - looking at certain phrases that are used in news article.
Ideology of the owner doesn’t matter. Instead, it is the customers.
If liberal community, paper leans left. If conservative, lean right.
Religiosity matters too - if more religious, more conservatives, more conservative newspaper.
Don’t mold to their own brand of politics but rather do so to their customers politics.


Does the mass media have political influence reading by Dufflo

French Pres hopeful wants to guarantee media independence. Thinks media manipulated elections.
Study looking at this, sees that Fox News caused increase in republican vote of about half a percent or 200k votes, enough to change 2000 Pres election.
Printed press experiment increased odds of voting, but readers weren’t influenced by ideological stance of newspaper, and newspaper does increase chance they’ve active in politics. 2005 experiment
Possible the difference is the different periods, and could be that newspaper readers are smarter.


Why is the media special

1. Citizens need information in order to participate in politics
-information about the state of the world, about political view of various political actors, about government policy, and about the competence/honesty of political actors and government
2. Information acquisition and transmission is a high fixed cost, low marginal cost activity. So, it doesn’t make sense for each citizen to collect info directly (I.e. everyone can’t be a reporter)
3. The media are for the organizations - either public, private non profit, or private for profit - that collect the info and distribute it to citizens


Overview of media in democracies lecture

Evidence that politicians may seek to influence the media
How the media may or may not filter info in various ways
How this info and its distortions affect voting and policy

Does media matter for politics (politicians think so)
Media bias (private and public)
Media’s impact on policy


How much is media support worth? Study from McMillan and Zoido

Peru’s President Fujimori bribed a wide variety of people for support during May 2000 election. Cabinet members, politicians, judges, media, etc
His chief security officer actually paid the bribes. He kept detailed records' with receipts, and videotaped all bribes
Authors analyze videotapes and receipts to determine the price of support from various types of people
Key finding: payments to media owners are orders of magnitude larger than bribes to anyone else. Larger bribes than to anyone else
Bribes to television people way bigger than to other politicians. Clear the media matters.
Take aways: at least as measured by bribe payments, media is quite Important part of political process. Related aside: note that a top priority for coup holders is seizing control of the media.


Political influence over media

It is systematic
Djankov does a Study of 97 countries. Finds that press ownership is 59% owned by families, 29% by the state. Tv ownership 64% state owned and 29% by families

Negatives: incumbents use media to maintain power
Positive: public interest (state may be less biased), not for profit, info = public goods


More subtle forms of influence

Government influence can come even without ownership or censorship
Advertising dollars
Di Tella and Franceschelli (2011)
- governments need to advertise in newspapers (procurement tenders, legal notices, etc)
- look at relationship between government advertising and coverage of corruption in Argentina
- one standard deviation increase in monthly govt advertising correlated with reduction of .18 standard deviation in coverage of corruption


Media bias

The media plays an important role in political process
But private media also has its own agenda, maximizing profits
So, how does profit motive interact with their role as purveyor of information? How does media filter info?
Media bias is when different sources cover the same news completely differently


Gentzkov and Shapiro theory

Model of reputation: some firms are high quality and receive perfect signal about true state of the world and report truthfully. Most are normal and receive noisy signal about true state of the world and can choose to report truthfully or not.

Key observation: individuals are more likely to believe a firm is high quality if the firms report matches the indiviudal’s priors (I.e. confirms what they already thought). So, normal firms slant their reports so they look more like priors of their audience.

The study measures slant as different phrases that Democrats or Republicans say. Helps analyze if network is biased in an objective fashion
Measure works pretty well w a good relation between what we think of as a conservative paper and the conservative slants.

Results: higher republican media slant in areas with more republicans. Media slant is profit maximizing response. I.e. have bias bc the customers in the area like that bias, or identify w that party.


Does media affect voting

1. Fox News 2000 presidential election, see that more turnout and more republican turn out. Increase republican vote share.
2. Non government tv in Russia exploits distance to television transmitter which determines if households can receive independent tv. Independent tv strongly reduced vote for government party and increased vote for opposition parties.

1. Gentzkov, Shapiro, and Sinkinson do a study looking at newspapers and see that while it impacts turnout, it doesn’t have any partisan bias.
2. Gerber and Bergan do a study. See that giving people who used to get no newspaper a right or left leaning one doesn’t have an impact on knowledge, opinions, or turnout in gubernatorial elections and no impact of getting either paper on voting for democrat in congress in 2006


Do people adjust media consumption in response to bias?

Study by Durante and Knight in 2012 in Italy. 3 state owned channels (RAI1, RAI2, RAI3) and 3 private owned stations.
RAI2 is always center right, RAI3 is always left, but RAi1 (most popular) searches depending on who is in power. Question is that when RAI1 switches, do viewers adjust their news consumption accordingly?
Yes! We do see a switch for both right winged and left winged

Media bias responds to consumers preferences
Given that bias seems to matter at least sometimes, politicians may seek to introduce bias in the media to further political ends
Consumers are again partially sophisticated: they partially offset exogenous changes in bias by switching their news consumption, but not completely (I.e. channel switching; demographic trends where area turns more republican over time and news reflects that is not exogenous)


Efficiency vs freedom: Rwanda and other aid darlings reading

Rwanda is cleaner, good roads, enforced laws rather than most other African countries. Fast improving and honest country. But, President becoming more ruthless and authoritarian
Development and freedom balance.
See this in other places too, West wants leaders like this who spend aid money well.
Western guilt from Rwanda genoside still, get aid, and spend it well
Withdrawing aid to prevent bad leadership within the country could work.

Rwanda leader - spends iad well and doing good job economically but is otherwise intolerent and bad.


Autocracies overview

So far, focusing on democratic decision making. But, while Democrat countries increasing and passed numbers of autocrat countries in the late 90s, still is very close
Some countries ha elections, but not all consistent processes.
Worth looking at autocracies to see what else is going on around the world.

Looking at:
Economic growth rates in different types of political regimes
Theory: how and why autocracies and democracies promote economic growth
Evidence on how political regimes affect economic performance
Firm strategy: assessing the leaders


Evidence: are poorer countries more autocratic

Looking at per capital GDP on x axis vs average level of democracy on the Y axis
See that higher per capita GDP does correlate with higher level of democracy
Don’t know if causal, just see correlates
Don’t know which way causality would be, and could be third variable


Autocracy vs democracy: average growth

Simple approach:
Look at average economic growth rates since 1950 - autocracies are 1.4% and democracies 2.2%
Problem: difference could be due to all sorts of other factors

More sophisticated approaches:
- controlling for other factors (income, education, investment rate, life expectancy, etc). Barro finds no relationship between democracy and better growth
- look within country at changes in democracy and whether that causes growth (removes country specific differences). Acemogulu finds no relationship between changes in democracy and better growth
Looking at graph, see basically no relation with more democracy and gdp. X axis is change in log gdp per capita and y axis is change in measure of democracy. Basically horizontal line. Very very slight upward


Autocracy v democracy: variability in growth

Looking beyond average at the distribution
Prob that the growth rate is worse than -10 and -5 percent and better than 5 and 10 percent
In democracies, we have way less variability than autocracies. Autocracies much more likely to be worse than -10 and -5 as well as greater than 5 and 10 than democracies
So, more likely to reach extremes in autocracies.


Autocracies vs democracy in the media and academia too

In media - one party autocracy has drawbacks but when smart people lead it, can have advantages. One party can impose politically difficult but important policies that are needed. Gives China as an example - NYT column

In academia - visionary leaders can do more in autocratic than democratic bc dont have constraints, but can be misguided and cause major damage. In democracies, more constrained. So less variable in democracies. Not as many great successes and less prolonged disasters - Becker 2019


Evidence: take aways on democracies vs autocracies

Democracies have grown little faster than autocracies on average
Control for other factors, no evidence that democracy has positive, causal effect on growth
Which result you care about depends on what question you’re asking
Growth is much more volatile in autocracies than democracies (better upsides and worse downsides)
Trade off - political representation for better growth rates or lower growth and more representation


Why autocracy may be good for growth

The profitability of an investment may depend on complementary investments
Consider a model where you can either build or not build a coal mine and a railroad. Both cost $1B and give you no value unless both are built in which case they each give you $2B in value
2x2 matrix. If build, build get 1,1. If build, not build get -1, 0. If not build, build get 0,-1. If don’t build either get 0,0
So, two Nash eq. Either them both building or both not building
Most economic beneficial outcome is for them both to build. But quite possible we are in the (0,0) state and neither deviates. In an autocracy, they can force both companies to build. In democracy, can’t do that

So, autocracy leads to coordination. Coordination failures solved by giving decision rights to a single party
Types of national scale coordination problems: infrastructure investments, savings to keep investment needs, long term education investments, recessions. Leadership examples: China, Singapore, USSR, etc.


Industrialization and the big push

Rosenstein-rodan: if various sectors of the economy invested simultaneously, they could each create income that becomes the source of demand for goods in other sectors, and so enlarge their markets and make industrialization profitable
Formalized this idea by associating a big push towards industrialization with multiple equilibria
If industrialization was the only eq, the market would arrive at it by itself without any policy intervention


Theory: democracy and economic growth

Ways in which democracies support economic growth:
-choosing good leaders
-constraining bad leaders
-creating stability of institutions
-efficient allocation of resources

Ways in which democracies may harm economic growth:
-constraining good leaders
-short term policy bias driven by re-election motives
-special interest politics
-redistribution motive - taxation of capital


Evidence on how political regimes affect economic performance - evidence on possible reason for more volatile growth rates in autocracies: leaders

Democratic institutions meant to produce consistently good (or at least not terrible) leaders. Fewer mechanisms to ensure good leadership in autocracies - luck of the draw
A possible explanation for more volatile growth rates in autocracies - if political leaders significantly affect growth rates
Looking at political identity within autocracies.
Looking at China, see massive different growth rates with Deng vs Mao. Massively different with more market economy and outside investment and end of collective nature of agriculture
Look at other autocrats, see similar things where autocratic leaders matter a lot. When specific person changes, can have a big shift. In democracies, don’t see as big a shift bc of median voter theory


More volatile growth rates in autocracies - leaders, evidence

Jones and Oiken (2005): do leaders matter?
Use leaders to investigate effects of leaders on growth rates
Deaths of leaders affect growth rates in autocratic regimes but not democratic
Jones and oiken (2009): hit or miss?
Use the inherent randomness in success or failure of assassination attempts to investigate effects of leaders on institutional change
Deaths of autocrats, but not of Democrats, yields changes in institutions (persistent moves towards increased democracy)


Possible reasons for higher growth rates in democracies

Democracies may promote more efficient allocation of resources
Burgess et al investigated where roads are built in Kenya under different presidents and under varying levels of democracy
Find strong evidence of ethnic favoritism, districts that share the ethnicity of the president get four times the length of paved roads built
Ethnic favoritism disappears during periods of democracy
Mass political participation, a free press and a vocal civil society constrains the choices of the leaders

- democracies may have the advantage in ways other than economic performance. Less sensitivity to the identity of specific leaders and less ethnic favoritism.


Evaluating leaders incentives

Goals of leader/party in power?
- preserve power - almost universal motive, in democracies it is re-election and autocracies is to avoid coups and control succession
- ideology - socialist, religious, developmental?


Assessing stability of leadership

Fact 1: longer an autocrat is in power, less likely the leader is to exit in the following year
Look at numbers in diff places, see once in power longer than 2 years' very unlikely to leave

Bienen and van de Walle investigate observable features that change likelihood of leader exit
Fact #2: age. Being 1 year older scales up baseline probability of exit very modestly (I.e, you can wait a long time for leaders to die)

Fact 3: non-constitional entry. Doubles chance of exit in first year but by year 4, such leaders are less likely to exit than other kinds of leaders
Fact 4: extreme autocrats significantly less likely to leave in given years. Baseline prob less than 30%
Fact 5: growth rate. No obvious effect on tenure


Summary of autocracy

Autocracies are very different from democracies. Lower average growth and more volatility in growth
Potential benefits of autocracies: solve coordination problems
Leaders matter under autocracies but not democracies
Given that autocratic leaders matter a lot, firms should assess risk of turnover in autocracies


Corruption reading by Shleifer and Vishny

1. Structure of government institions and of political process are very important determinants of the level of corruption. Weak governments that don’t control agencies experience very high corruption levels
2. Illegality of corruption and need for secrecy make it much more distortion any and costly than taxation

Corruption is sale by government officials of government propert for personal gain. Without theft - official actually turns over official price of good to government. So MC=p. With theft, official doesn’t turn over anything to government. Hides the sale. Price = bribe, May be lower than official price.
Without theft, downward sloping MR line and where it hits P=MC horizontal is the quantity. If no corruption, would produce more - when P=MC hits demand
With theft, do it when MR hits MC=0. And go up to the bribe amount - where that quantity vertically up hits the demand curve is the price.
Corruption spreads bc of competition between officials and between consumers. Jobs could be done thru auction, pay more to get the job, but that assumes you bribe. And competition between buyers spreads corruption with theft. But doesn’t work without theft as compete to go down toward zero.
Efficiency: 1. Competition - compete for who can charge toll. 2. Joint monopoly - 1 toll. 3. Independent monopolies - many tolls.
Corruption bad for investment and development.
Corruption driven down by competition. Only happens w weak central government and secrecy


What is corruption

Sale by government officials of government property for private gain
Context of the government official in this class.
Ex: drivers license in US - drivers Ed and use same teacher and tester - corruption in paying person who is testing you
Ex: drivers license in India - pay someone else to be you and take road test - or can bribe DMV person.
Does your money go to government or to individuals?
Measure corruption thru surveys, difference between inputs and outputs, audits, and market valuation


Surveys to measure corruption

Questions about actual behavior - asked to pay a bribe (I.e. international crime victim survey)
Questions about perceptions (not their own behavior)
Asked to do it vs actually doing it
Professors says real estate developers are corrupt and pay off government officials to get permits


Audits: one example

Budgeted project - misappropriated funds = actual project



Study of smuggling in Hong Kong (Fishman and Wei, 2004)
Hong Kong reported exports to China. Consist of goods that fell of the truck and those that China reported as being imported
Essentially, Hk paying customs fee at the border to enter. rather than paying fee, give officials a cut of the good, and then don’t register.
See that higher tariff goods have higher leakage rates, suggesting there is bribery

Another example - Indonesia with Suharto, as discussed, stocks of companies he’s close w go down right before announced he has bad health and needs to go to foreign doctor. Index overall not effected.


Are poor countries more corrupt?

Look at graph of log of per capita income on x axis and corruption index on y axis (prob need to pay bribe to receive government contract)
See that very poor countries are very corrupt. Very rich countries are very not corrupt.
And in the middle, it could be either very corrupt or very not corrupt but not in the middle.
Essentially two streams - very corrupt for poor to medium countries. And very not corrupt for medium to rich countries. Medium countries either very corrupt or not.


Objectives with corruption theory

Move beyond the idea that corruption is bad, but rather looking at when it is good and when it is worst. What type of countries have worse corruption? Very poor counties have high corruption and very wealthy countries have low corruption. Large variance in corruption in middle income countries.
Does high corruption necessarily cause low income?
What makes corruption persist over time?


Shleifer and Vishny Article and corruption with vs without theft

Article looking at corruption with theft vs without theft
Structure of corrupt bureaucracy: monopolistically organized, disorganized (so corrupt bureaucrats impose externalities on each other), and competitive
Corruption worse than taxation bc of the role of secrecy harming corruption and making it more inefficient

Corruption is the sale by government official of government property or right to do business for personal gain

Corruption without theft: firm pays bribe to win bid (e.g. privatization), government gets official price and the bureaucrat gets the bribe.

Corruption with theft: pay for basic government service (I.e, let good thru border for less than customs duty). Beurcrat gets the bribe, government gets nothing.


Corruption without theft

firm pays bribe to win bid (e.g. privatization), government gets official price and the bureaucrat gets the bribe.

Graph with price on Y axis and quantity on x axis
Downward sloping MR (bc need fo sell at lower price when produce more) downward sloping D curve (not as steep as MR). Horizontal MC = official price line.
Where MR = MC is the quantity being used. Draw line vertically up to the demand curve to get the price for that quantity.
If no corruption, quantity would be where D=MC, which would be smaller price and higher quantity.
Instead, producing less for higher price.
Less permits are issued when corruption without theft as smaller quantity.
Not persistent, as buyer may rat out bc paying more


Corruption with theft

Price on Y axis, quantity on X
Downward sloping MR, downward sloping D (not as steep), and horizontal MC=0 as government gets nothing. So, price at MC=MR, bribe here is full price paid. Draw line up to D to get price paid. May be below the official price horizontal line
This is persistent - buyers won’t rat out. May pay less bc just paying bribe nothing to government.


Takeaways from corruption with and without theft

Persistence: corruption without theft less persistent bc buyer has incentive to report. Corruption with theft is persistent bc in some cases both buyer and beuocrat don’t benefit from reporting

Effect of competition amongst applicants for bureaucratic jobs:
-suppose applicants pay bribe for job and only one person gets the job. Whoever pays more for the job will get it. And more applicants drive the price up. Most corrupt person will get it, as they can pay more bc will earn more from the job.
Example with corruption in procuring building permits where you pay less than official fee and they give you the permit. What happens if competition among real estate developer firms?
If corruption with theft, then honest firms pay more and don’t pay bribes. If corruption without theft, corrupt firms pay more


Centralized vs decentralized corruption

Strong central authority controls all bribes. Bribe payment assures right (no subsequent bribe). Ex: possibly only as bad as a high, predictable tax
Ex: ussr and post-soviet Russia. Transition from corrupt central government to corrupt provincial governments can greatly increase economic costs of corruption. Partial explanation for why countries can have high corruption but also high growth rates (China)

Bribes are decentralized and unpredictable. Need multiple, complementary permissions. Bribe local legislature, central ministry, local fire authorities, water authorities. Corruption of this sort drives out commerce
Extreme version: free entry into bribe collection
Ex: tons of river tolls

Ex overall: going from city A to city B. Centralized has one toll booth. Clear how much you need to pay.
Decentralized has many different toll booths. Pay bribe but Uncertain about what comes next. And likely higher amount of times need to pay bribe. Bribes can have negative impact. Less total traveling if too high price or uncertainty. Can have deterrence after too much


Competitive corruption

Need a single permission
And multiple bureaucrats could supply it
The bureaucrats compete so the bribe is driven down to zero

Can drive down price of bribe. Unless they collude and charge bribe, but incentive to deviate. Eq is at 0


Can bribe have social benefits?
Efficient allocation argument and problems with that

Argument 1: bribes allocate resources efficiently. Like sealed-bid auction. Bureaucrat solicits bid from many firms for contract and highest bidder (briber) is firm that will be most productive. Bribes ensure efficient allocation of projects across firms

Problem with this is what will bureaucrats do with the bribe? In public auction, most efficient firms still wins. Income to bureaucrat’s pocket instead of government programs

Will most efficient firms really win contracts?
Bureaucrat May restrict entry in the bribe process (preference for family/friends, fear of punishment). Some firms may be legally or morally (culturally) constrained from offering bribes. Bureaucrat May choose firm most likely to pay future bribes as opposed to most productive firm


Bribes generally grease the wheels and problems w that argument

Bribes grease the wheels - states impose excessive regulations on firms, bribery allows firms to sidestep these costly regulations, society gains from bribes. Regulation is crazy, just pay the bribe and get it done. Works with certain governments, could hurt when new government comes.

Problem is that many regulations are good. For example, good that you need to know how to drive to pass road test or safety regulations in factories
And short sighted solution to bad regulations. Sidestep a bad regulation today, willingness to pay bribe observed, and more bad regulations imposed and then regulatory swap

And may create sand in the gears. This is when government programs impose onerous and inefficient regulations which leads to bribery supplementing bureaucrats income which then leads to incentive to add new regulations. This goes back to the beginning and impose new onerous and inefficient regulations. Stuck in cycle of bad regulations and bribery



Measuring corruption isn’t easy bc people don’t have incentive to be honest about it
Corruption isn’t linearly related with economic growth
Corruption with theft worse than corruption without theft
Centralized corruption better than decrenatlized
Some ways competition can help reduce corruption but many ways in which it cannot
Some arguments for and against idea that corruption can actually be good.


Routes to reduced corruption reading

Corruption reduction - either encouraging community participation or increasing probability of centrality administered audits. Find that community participation doesn’t work but auditing does to reduce corruption
Measure corruption as missing expenditures (how much it should cost based on examination - official recorded cost)
Audits reduce missing expenditures by 8%
Community monotiting doesn’t work
Perceptions of corruption subject to biased and don’t work
Missing material costs when fewer supplies used in road than reported in budget or prices inflated. Missing labor costs when local officials did not pay village laborers as much as was stated on project budget.
Community participation helps reduce missing labor expenses, as community members work on roads and making sure they get paid. But shifting missing expenditures toward materials. Only slight decrease
Audits had no effect in wages but massively decrease material missing.
Audits most effective when elections soon. Worth it to do the audits.


Economic gangsters, corruption, violence and the poverty of nations by Fishman and Miguel

Chapter 6: death by a thousand small cuts. witches, instititions, hunger and killing. Kill witches and old people/young children in some societies bc not producing income. Rapid conflict prevention support (RCPS) to have foreign aid play an insurance role for poor countries. Kick in for countries w temporary income drops, at the start of the drop not once already dropped fully. Use warning side and then give it to them. It is basically just insurance. Giving money may not help, but starting point at least

Chapter 7: road back from war. Vietnam recovering post early bc Lot of opportunities for profitable investments from rebuilding. Japan after WWII too. Technological innovation from the war. National identity from suffering together during war. Shared struggles and sacrifice. Common purpose helps in the future. Common enemy rallies the troops. Civil war has opposite effect, hurting unity and leaving behind deep social divisions. More civil wars today and take a long time to heal.
Africa making some comebacks economically despite social traumas of civil war. Sierra Leone good example, get rid of the guns and UN helps the government and become democracy, does better.


Overview: remedying corruption

Economic concepts: secrecy costs of corruption, culture as a cause of corruption, and audits cost-effectively help reduce corruption


Secrecy costs of corruption

Hiding corruption generated inefficiencies that are much larger than the bribes itself
Ex: bottling firm in Mozambique uses old technology to put labels on drink bottles but the error rate is high (30%) and then the workers scrape off the label to start the labeling process again
Two options for a modern labeling machine
1. $10k generic machine (gets job that’s needed done) vs $100k machine that can work on all types of bottle shapes. Lot of different colors
The firm gets the machine through foreign aid charity. instead of buying the 10k machine, keeps waiting for approval for the 100k one. Corruption as only one company makes the 100k one, so say it costs more than 100k and give the rest as a bribe. Aid organization ripped off. Bribe manager gets money, call it 10k and aid organization pays 110k. Cost of corruption is higher than 10k though, it includes more as the 100k machine isn’t needed. Cost of corruption is 100k (110-10k alternative)


Culture of corruption as a bad equilibrium?

In many developing countries, we observe high rates of bribery among traffic policemen
Model: official traffic fine costs $10, bribe costs $5. Disagreement over whether bribe should be paid results in significant risks for both parties. Driver fears angry policeman and policeman fears driven will report him to police chief.
2x2 matrix with driver being able to offer bribe or pay fine and policeman being able to solicit bribe or collect fine
Policeman payoff is first.
If driver offers bribe and policeman solicits bribe: (5, -5)
If driver pays fine and policeman solicits bribe: (-50,-50), as driver will report policeman but driver bad off too bc threatening policeman so could get screwed over.
If driver offers bribe and policeman collects fine: (0, -50) as driver is screwed. Like if you bribe in the US. Go to jail rather than just a small ticket
If driver pays fine and policeman collects fine: (0,-10). This is honest situation here. Money to government.
Two eqs here. Either both bribe or both pay/collect fine. Depends on the social norm in the place as to which eq you’re at. Culture of high or low corruption.
To change eq, need a signal. Change the payoffs. May be whistleblower reporting corruption and getting share of what government gets from act, for example. See a few slides from now
And remember graph from before where looking at per capita income and corruption. Poorest countries are corrupt and richest aren’t. But in the middle can be either very corrupt or not.


Culture as equilibrium behavior

Otherwise similar societies may still arrive at different corruption eq. Beliefs about others behaviors define which eq prevails. We can think of different beliefs and resulting outcome as different “culture”

Private and social preferences may diverge. Driver/policeman prefer corrupt outcome but society prefer other eq
Solution is whistleblower to call out corruption


Eliminating corruption

Changing eq can be difficult - mistakes may be very costly to the parties. Social norms or culture may be very persistent
Methods to change eq: alter payoffs (at least temporarily), try to alter beliefs
Ex: introduce monitoring of traffic policemen. Policemen caught with probability P and fined $100 if caught.
Payoff to policemen if solicits bribe and drivers offer bribes is 5 - 100P where P is prob get caught. So, if P>5%, then payoff is worse than zero, making it more preferable to not offer the bribe as the eq shifts down to just one outcome, both sides going with the fine.


Causes of corruption

Explore the idea of culture (I.e. weak social sanctions) as a possible cause
Weak constraints: weak institions (weak enforcement) and gift giving (reciprocity)
Temptations: economic hardship (low wages in public sector), monopoly, red tape (onerous regulations)


UN diplomat study

Corruption as culture
Prior to Nov 2002, foreign diplomats in NY didn’t have to pay parking tickets. Can if they want, but not enforced. Over previous 5 year period, over 150k parking tickets and $18M in fines.
Correlating parking violations and country’s corruption level
Enforcement of law is the same in NY, but cultural norms are different for each country’s diplomat, so can isolate effect of culture
See big differences. Kuwait is worst by far. Then a bunch of other African countries while most European are lower corrupt. For the ones with tickets, normal to violate government rules for benefit. While for the ones with less tickets, not the case. About social norms
We graph standardized index for corruption of the home country on x axis and the log of parking violations measure. See a positive relation. This suggests that more corrupt countries have their diplomats not pay as many tickets, suggesting that there is a culture and social norm effect


NY parking change in November 2002

Change it now where punishment if unpaid parking violations and confiscate license plate if more than 3 unpaid. Threat of deducing parking violations fees from US foreign aid to country
See a massive decrease in number of parking tickets after increase in enforcement. Also see dip on 9/11 and back up after possibly bc feel bad or bc police isn’t enforcing parking as much.


Summary of that study

Culture plays an important role in determining corrupt behavior (separate from institutions and enforcement). Culture can help determine which of the multiple eq a country lands in (I.e. both police and person paying fine or being corrupt)
However, enforcement is effective at reducing corruption


Indonesian roads project corruption

Indonesian road project which is called the Kecatman development program (KDP) and isworld bank sponsored and 15k villages receiving $8800 each
608 villages in study, each about to start building road. Village implementation team (elites) receive money and build the road
Testing corruption remedies (randomized evolution of corruption reducing interventions)
1. Community oversight - invitations to village accountability meetings. Anonymous comment cards
Good in that can change norms and be sustainable and less costly. But could be free rider problem where expect other people to go and nobody doe
2. Audits - notification after funding before construction. Possibility of criminal action and public announcement of results
Good in that could work, but what if audit team is corrupt and what happens if audit and catch and then what?
Research team does auditing to prevent this


Indonesia road results

Looking at misreporting based on wages and materials.
Community participation results: wage misreporting falls as people want their money and recognize this since more involved. Material missing increases. Overall slight decrease in missing, but not much. So not really working. And could be funneling work to friends and fam.

Auditing works. Material missing way down. Wages roughly same. What’s interesting is even with 100 percent certainty of being audited, still 20% of funds are missing. Can’t rid corruption, just reduce it


Overall summary

Increasing enforcement and cost of corruption is effective - see the NY diplomat parking - once enforced, less
Increased monitoring is - see auditing (and cost benefit analysis is good - cost $500 and reduce missing expenditures by $1,165)
Community participation not effective
Anti corruption campaign policies are being pursued in some countries (China death penalty for corruption and conferences w policy makers can’t be at 5 star hotels)


Root causes: a historical approach to assessing the role of institions in economic development by Acemoglu

Proximate causes of poverty: lack functioning markets, populations poorly educated, outdated/nonexistent machinery and technology
Fundamental caused: geography and institutions (human influence)
Good institions have 3 characteristics: 1. Property rights, 2. Constraints on actions of elites and powerful, and 3. Some degree of equal opportunity
Geography - poorest places near equator. Correlation. But institutions important to protect property rights of investors in rich countries.
Look at colonization by Europeans as an experiment to see if it is geography or institutions. If geography, then places that were rich before should remain rich, as key factor of prosperity staying the same.
Europeans typically had extractive institutions if worried about getting sick and bad institutions there. But colonies with settler societies with European institions. In Australia, Canada, New Zealand, US
See that geography hypothesis disproven as richer countries in 1500 are less well today and vice versa. More urbanization in 1500 associated with less gdp per capita today
Reversal of fortune here. Helps prove institutions hypothesis, as European colonialism makes Europeans most politically powerful. geography isn’t relevant to economic successor failure.
Institutions are very important. Institutional change will happen either when groups that favor change become powerful enough to impose it on potential losers or when societies can strike a bargain with potential losers so as to credibly compensate them after the change takes place or to shield them from the most adverse consequences of these changes.


Charter cities

Poor guy has an iPhone but not electricity bc rules for electric Corp are in place such that the company is better off with less people w power but phone comp better off w more people w phones
Want to make city rules like phone rules, change rules. More choices to both people and leaders can help
North Korea vs South Korea were same. But so different now bc of different rules. Look at night and see diff activity. Same with Haiti and DR where Haiti is so dark - government weak can be just as bad as rules too strong like NK
China - leader thousand years ago but then stop doing it. Now going way up. Special zones in China work w different economic rules and firms come in and make things. 4 special zones and 14 cities

Idea to have these charter cities where specific rules to attract people to come. Cities are right scale. Villages too small and nations too big. New places w new rules that can work.
Charter city - specific rules, attract people to come. Need: 1. Good rules in charter, 2. Choices for people - uninhibited land is best, 3. Choices for leaders - partnership between nations
Britain thru Hong Kong did this and very effective
Different from colonialism bc no cohesion but rather choices
Could do in Cuba Guantanamo bay or Africa
Cities are only 3% of world. Have 1 billion more people there, 1 percent more
Land becomes valuable - incentives
Ideas - technology and rules


Big picture goals for market failures and outline of institutions

Explore specific examples of the causes and consequences of market failures. How government policy and regulation (or other market and non market players) might solve these problems. Applications from around the world with a focus on emerging markets.
Develop a toolkit, including empirical analysis, to answer these questions

Importance of institutions for market outcomes. Case studies and causal link using colonial origins



Markets fail without good institutions.
Enormous variation in GDP per capita across countries. Brazil to USA is 1/5. India is 1/13 USA. Sub suharian Africa to us is 1/20 or 1/30
Argument today - institutions are most important explanation

Market transactions of taking taxis in different countries depend on institutions. India taxi - “meter broken”
China - generally works but sometimes “broken” - scared to be reported her husband wrote down license plate of a driver like this and driver was terrified


Proximate vs fundamental causes of prosperity

Proximate causes:
1. Physical capital
2. Human capital (education, health)
3. Technology

Fundamental causes are the ones behind the proximate ones
1. Institutions (humanly devised rules shaping incentives)
2. Geography (differences in environment) - role of malaria, tropical agriculture, and being landlocked
3. Culture (differences in beliefs, attitudes, and preferences)



Rules of the game in economic, political, and social interactions
Usual definition - rules of the game in a society or, more formally, the humanly devised constraints that shape human interaction
Key point is that institutions are humanly devised, set constraints, shape incentives, good institutions encourage investment in physical and human capital.

Formal institutions:
Government policy (regulation), financial, education, religion, legal
Informal: social norms, family, ethnics


Measuring quality of institutions

Most commonly used measures are subjective
Risk of expropriation in a scale of 1 to 10. Survey of international investors
Constraints on the executive in a scale of 1 to 7. Group of political scientists
Control of corruption

Not surprisingly, these correlate with GDP per capita. But do better - institutions actually cause countries to be richer?

We see that countries with higher protection against expropriation risk have higher gdp per capita and those w lower protection have lower gdp per capita.

Can’t imply causality from this - improving institutions doesn’t lead to better outcomes. Could be reverse causality (richer countries can afford good institutions). Can’t randomly assign different institutions to different countries to study this. Look for events in history to create natural experiment (where 2 countries are alike in almost all other ways, except for their institutions). Examples of NK and SK and Haiti and DR follow


North and South Korea

Prior to WWII, ruled as united and homogenous country. Entire pensinula had similar ethnic, linguistic, cultural, geographic, and economic
In 1910, Japanese conquer and rule until 1945 when peninsula divided. US got leader of the south side, ussr of the north side
Advantages of studying this:
Location and timing or the split was arbitrary (rather than driven by economic outcomes, it was driven by geography); Korea didn’t choose split themselves; and very different subsequent institutions imposed after (this is the key)
In 1945, about same level of gdp per capita. Differences are very small, slightly favor the north in terms of investment, industry, large hydroelectric plant, chemical plants, largest port. But very similar
Then, North Korea becomes repressive dictatorship while South Korea is democracy. North Korea has war w US and SK in 1950-53. Chinese enter. By 1960s, South Korea started steady growth
By 1980s, North Korea system clearly failed, only helped by ussr subsidies which ended in 1990s, leading to famine
Looking at gdp per capita over time in Sk and NK. Start off basically same, South Korea soaring since then starting in the 70s. Now it’s not even close
Look at lights at night - a measure of economic activity. NK is basically dark. Sk has a lot more activity


Haiti and the Dominican republic

Haiti and DR share Caribbean island of Hispaniola
Geographically, similar. Dr more rain and Haiti more mountains. Similar otherwise. For example, native population entirely wiped out soon after arrival of Spanish. All immigrants came, or brought, for economic reasons
Spanish island but French took over the west. Very big slave sugar economy. Slave rebellion from 1791 to 1804 that kicks out the French
French get there west - Haiti. Initially richer, stronger, more populous. Former slaves. Subsistence farming. Distrust of outside. Limit investment and immigration. Unstable government
DR is eastern side. Initially poorer, mostly European, cattle economy. Like investment and immigration. Unstable government
From 1950 to today, Haiti is very poor and brutal dictators. Bad for enviro w Forrest protection
Dr has better gdp per capita. Lower population and less pressure on forests
Looking at night lights. See big difference. DR much more active. Point here is institutions have effect rather than geography


Institutions and Economic Conditions

Are institutions the cause of current economic conditions? What explains the variation we see in quality of institutions?

Challenges to isolating effect of institutions - reverse causality (I.e. is high gdp per capita causing good institutions or good institutions causing high gdp per capita)
and confounds (a third variable that affects both institutions and gdp per capita, such as foreign aid, social norms, culture, geography)
Graph showing clear relation where higher protection from expropriation and gdp per capita have clear positive relation
And another graph showing how if closer to equator, correlated with lower gdp per capita


Two approaches fo identifying impact of institutions

Ingredients for identifying the causal impact of institutions (called instrumental variables approach): something that determines quality of institutions, something that doesn’t predict current economic outcomes directly (thru only qualify of institutions)
Want something that shocked institutions like we did w Haiti and DR and Korea. Same variable that hits institutions directly rather than gdp per capita
Two possibilities:
1. Settler mortality during period of colonization
2. Reversal of fortune


Approach 1: settler mortality as a determinant of European settlement (Acemogolu, Robinson, and Johnson - AJR 2001)

In colonies, institutions were better quality when European settlers decided to stay in the country and establish themselves there, instead of just using country to make money
Example of where Europeans settled: Australia
Example of where they didn’t settle but just set up extractive sites: Congo
Mortality rate was driven in European decision go settle or not. Malaria and yellow fever major sources of European mortality in some colonies. Locals have immunity, condition on getting to age 5
Disease environment in colonial institutions —> current institutions —> current Econ outcomes
Persistence of initial colonial institutions:
In former colonies, current institutions better in places where early institutions were better. Why? Need persistence for colonial institutions to match current.
Bad extractive institutions —> those in power will maintain it for own gain, elite in power has incentive to maintain/exploit institutions
Good institutions —> widespread investment in physical and human - society has incentive to prevent systems that could take investments

Different types of approaches to colonization which created different sets of institutions.
Colonization strategy influenced by disease environment
Colonial state and institutions persisted even after independence


Settler mortality vs expropriation risk and settler mortality vs current gdp

Higher settler mortality with lower protection from expropriation risk
Lower settler mortality with higher protection expropriation risk (like USA)
Critique here is that some deaths aren’t from disease but rather war vs peace

Higher settler mortality with lower gdp per capita. Lower settler mortality with higher gdp per capita
Even if control for geography, same negative relation.


Limitations of AJR 2001 approach

Albouy said: bad data as only 28 of 64 countries in their analysis have mortality rates that originate from within own borders. Others are assigned by AJR from countries with similar disease environments
Mortality data not from European settlers but from soldiers. Sometimes soldiers living in peace in barracks and other times on a campaign

Another critique by Glaeser:
Constraints on executive measure with 1 for worst institutions and 7 for best. Haiti score going up and down so much, that institutions can’t change so quickly, so really this is an outcome not a deep and fundamental institution
Development and institutions both caused by human capital
Higher initial education leads to more political stability and better institutions as well as better technology and productivity (and higher levels of development)



Different types of approaches to colonization which created diff sets of institutions
Colonization strategy was influenced by disease environment
Institutions are important to determine success and failure of markets
Colonial institutions persist today


Approach 2: reversal of fortune (AJR 2002)

Societies that were rich In 1500 could be exploited via extractive institutions (African slavery in Caribbean, forced labor in South America)
Europeans introduced institutions to foster investment in societies that were poor in 1500
Quality of institutions persisted from colonial times and allowed industrialization/prosperity later
Looking at urbanization in 1500 vs gdp per capita today and see major inverse relation. Least urbanized countries in 1500 are the richest today and vice versa. We use urbanization for the 1500 measure Bc no measure of gdp per capita back then

Policy implications:
Long run effect of institutions vs institutional reform today
Research tells us having good institutions long ago predicts better institutions and economic outcomes today
However, the research doesn’t directly tell us how would happen if we instituted institutional reform today
Urbanization in 1500 —> colonial institutions —> current institutions


Charter cities

A way to change institutions. Paul Romer came up with this idea. Establish a charter between a city (in a developing country) and another country
Key idea: important rules and institutions from developed country via a “charter”
No one forced to live there or invest there
Set up rules and allow people to choose to live there
Hope that one success will have spillover effects in the region
Has to had on city scale bc country is too variable/large and bc opt in is needed and can’t do that on a country scale. Village is too small


Charter city rules

Enforcement of property rights
Legal system
The charter explicitly states these rules
Combination of good institutions with low cost labor force will attract foreign private investment


Hong Kong charter city inspiration

English system of rules in a Chinese city with low taxes and enforcement of property rights and contracts
Freedom of movement of goods and people
Copy car cities in China sprang up
Schenzhen city was one of the first (1980)
Special economic zones
This results in massive growth of China gdp per capita
Charter cities are different from Hk in that HK is a colony without choice to enter, this will have choice to enter.


Critisms of charter cities

Simplistic to think this is an easy process
Assuming they will be benevolent nut may not be
Concern that people will want to extract/expropriate the value
Politically impossible to implement! Honduras wanted to do this with bunch of developing countries but their Supreme Court said no


Can we focus on one institution and if so which one

Rather than so many charter cities, consider just on institution as easier for resources
The Mystery of capital by Hernando de Soto
Key difference: problem of “dead” capital in some countries. Affects ability to invest and incentives to invest. Lot of vote but can’t access the capital bc bad institutions

Land without property titles as example of dead capital. I,e, get can’t mortgage against house bc can’t prove you own it.
See this in Mumbai. Hard to say you own these shacks and would be better off if could get loan against the land
Land only estimates - $9.34 trillion in 1997. $4100 per person in developing world. 85% of urban land in developing countries is informally or illegal held and 53% of rural land. Extrapolation from 4 or 5 countries
Research evidence is mixed. Limited evidence that property titling programs have led to increased in collateralized loans and growth of small businesses. More evidence of changes in labor market choices and residential investment
In Mongolia you can get the loans. Large country relative to people. Fenced between properties and easier to develop.


Institutions wrap up

Two stories of colonial roots of modern institutions:
1. High mortality areas prevented Europeans from settling and establishing good institutions
2. Colonial powers set up extractive institutions in areas that were rich in 1500 and set up good institutions in areas that were poor in 1500
Major critiques: data issues, not causal relationship between institutions and economic outcomes
How to change institutions - charter cities as one idea, focus on property rights and tilting is another idea.


Cultural biases in economic exchange

Looking at how cultural biases affect economic exchange
Use data on bilateral trust between European countries
Trust is affected by characteristics of the country being trusted
Also by cultural aspects of the match between trusted country and trusted country, such as their history of conflicts and their religious,genetic, and somatic similarities
Lower bilateral trust leads to less trade between two countries, less portfolio investment, and less direct investment, even after controlling for the characteristics of the two countries.
Effect is stronger for goods that are more trust intensive
Perceptions rooted in culture are important and generally omitted determinants of economic exchange
Systematic differences in trust among European countries, correlated to their different cultural heritages. Paper looking at quantities rather than quality of the trade.


Culture agenda

Topic: how does culture play a role in economic outcomes, in solving or creating market failures?
Overview, testing impact of Protestant work ethic, cultural biases and economic exchange
Toolkit: regressions


Culture definition

Empirical economic research defines culture as “those customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation”
Dictionary defined if as a. The integrated pattern of human knowledge, belief, and behavior that depends upon humans capacity for learning and transmitting knowledge to succeeding generations and b. The customer y beliefs, social forms, and material traits of a racial,religious, or social group


Culture overview

One view: economic performance and incentives are largely (or partly) shaped by culture, including religious or national cultural characteristics determining beliefs, preferences, and customs. For example, countries w Protestant work ethic was conducive to capitalism and economic growth (Weber hypothesis)
Cultural values are important - work vs leisure
Protestant work ethic - value hard work over leisure.
Additionally, value on education/analysis (openness to new ideas), family (nuclear), collective vs indiviudal, honor/violence, openness to outsiders, fairness, attitudes toward women working, question authority, and savings are all part of culture


Challenge to Weber and alternative

Challenge is that if culture is so important and very slow-changing, how can we explain situations where economic growth takes off suddenly (like China or in comparing north and South Korea)

Alt view: culture interacts w institutions. In particular, culture defines social norms
In this view, social norms can change more quickly than national cultural characteristics. China shifted from norms that respected authority under Mao to a more individualistic set of norms. And north and South Korea now have very different social norms
Under this view, important to study the determinants of social norms to identify potential for interventions to improve outcomes


Measurement of culture

Survey questions on attitudes and beliefs. Trust - collected in a variety of different surveys, including world values survey
Data on tangible outcomes - female labor force participation and fertility
Characteristics: religion


Culture and gdp per capita (Tabellini, 2008)

Relationship between trust and respect in subnational units (within country) and gdp per capita in Europe
“Generally speaking, would you say that most people can be trusted or that you can’t be too careful in dealing with people” was question asked to measure trust
Respect (tolerance and respect for others) - ranking 5 things children should learn at home where other options are good manners, independence, obedience, hard work, feeling of responsibility, imagination, thrift, saving money and things, determination and perserverence, religious faith, unselfishness
Voting on different factors
Looking within Italy, see that higher trust associated with higher regional output.
Effects of gdp per capita may work thru institutions. Then looking at other countries, see that more trust/respect for others in children is associated with more GADP+bureaucratic quality.
Finally, we look at relationship between value of work and gdp/n and see that best gdp per capita is in the middle of the value of work relative to leisure. No strong relationship here. US with highest gdp per capita but in the middle of the value of work relative to leisure area.


Causal estimates of impact of Protestant work ethic

Remember that Weber hypothesis said that the Protestant work effort led to economic success. Hard to measure this since can choose religion
Cantoni decides to test it by looking at natural experiment in Germany in 1555 where they granted local princes the right to impose their denomination on their subjects. Essentially princes can choose if everyone is Protestant or catholic. Pretty evenly dispersed and geography not a factor here, independent on geography.
Since on average, more populous cities have higher gdp per capita, lookin at city size for the catholic vs Protestant cities that were in the 1555 reformation. See not a difference between catholic or Protestant. Suggests no evidence for theory of Protestant work ethic bc areas where the residents were forced to be Protestant were not different in terms of city size than areas that were forced to be catholic


Regression analysis

Best fit line thru the data
Most basic form: y = a + bX + e
a is the y-intercept, b is the slope (for one unit change in X, how much does Y change), e is the error (how far dots are from line)
Each coefficient estimate has corresponding standard error that tells us how confident we are the coefficient is statistically different from zero. T score = coefficient / standard error. If >1.96, then significant at 95%


Cultural biases in economic exchange (2009 by guiso, sapienza, and zingales)

Answering the questions: what determines bilateral trust btwn countries and how does bilateral trust affect economic exchanges between countries (trade and investment)
Looking at how business managers measure trust in other European countries. See that they generally view themselves as more trustworthy and Germany is trustworthy, Italy is not, and rivalries matter - England and France don’t trust bc of history


Effect of trust on trade, foreign direct investment, and portfolio investment

X variables are trust, common language, distance, border, press coverage, transportation costs. Multiple regression

1. Y variable is trade. See significant relation of trust to trade, as the coefficient of b is significant and has the **
2. Y variable is FDI. Again, significant relation
3. Now it is portfolio investment (institutional investors). And it is significant

Concerns regarding interpretation is if culture/trust or just history and possible reverse causality


Synthesis on culture

Evidence doesn’t support Weber’s protest work ethic idea leading to better long run economic outcomes
But culture matters for economic transactions today


Different theoretical models

1. Median voter theorem - candidates shift toward the median voter
A. Three assumptions - unidimensionality, single peaked preferences, open rule
B. Figure - number line and shift toward the middle. politics not about ideology but about winning.

2. Game theory: payoff matrix
A. Investment and coordination under autocracy - see that can build and build and in best case but both may not build
B. Petty corruption - whether policeman accepts bribe and the guy offers it

3. Corruption with and without theft. Where MR = MC is the quantity


Empirical methods

1. Looking at data
2. Regression - impact of culture/trust on economic exchanges
3. Comparison of treatment group with a “control group” - randomized experiments: random giving out newspapers - find no evidence it changes political attitude; natural experiment - 40% board seats to women
4. Event studies - ex: death of a leader
5. Other discontinuities - ex: cutoff of getting more than 50% of the votes - showing MVT not applicable as should be smooth



1. Overview - market eq, market efficiency, and market failures

2. How the political process affects policy
B. Political identity
C. Political contributions and lobbying
D. Media
E. Autocracies
F. Theories of corruption
G. Remedying corruptions (solutions and evidence)

3. Big picture determinants of market failures - institutions and culture


Session 1: market efficiency and market failures

Powerful idea 1: resources are allocated optimally when firms/consumers act in their own interest. No one could come in and re organize who gets what or increase total welfare (market is efficient)
However, realty sometimes different from smiths free market story
Powerful idea 2: identifying situations where markets fail leads to optimal allocations. Market failures and rationale for regulation


Session 2: MVT

Important insight into how elections affect policy:
- political parties compete for votes
- so even if parties have ideologies, they will adapt to changing whims of the electorate in order to remain electorally competitive
Do this by adopting the platform the media voter would most desire

3 pieces of evidence:
1. Two party elections should naturally be very close (in favor of MVT)
2. Extending the franchise (I.e. Changing the median voter) - when women vote in the us, big shifts. This is in favor of MVT
3. Do politicians representing areas with similar median voters support different policies? Look at US house elections and see evidence that MVT is not complete description as there is a big gap here right at the 50% margin rather than it being continuous

Need policy outcomes to change or policy platforms of politicians to change


Session 3: evidence on political identity

Reservations for women in village governments in India
- panchayats randomly chosen to have female leader invest in public goods preferred by women

Congressmen and daughters in US
- congressmen with more daughters have higher voting scores from women advocacy groups

Norweigen corporate bonds


Session 4: contributions, lobbying, and political behavior

Little money in politics, most comes from individuals. Contributions - investment or consumption
Tullocks puzzle - should be more contributions given size of industry - suggests contributions don’t affect policy as if they did, we should see more contributions
Hard to see effect of contributions bc of simulateniety problem (reverse causality) and selection problem (confounding/omitted variable)
Hard to see effects of dark money and winning bc can’t observe counterfactual and causation unclear

Lobbying - strategic communication of politically relevant info to government officeholders. Good in giving politicians attention to issues but bad in that richer people get voice heard. Can distort away from the MVT preferences.
Revolving door - when your congressman retires or leaves, you do worse


Session 5: media

Media is important in giving information
Media support very important - Fujimori bribes higher to media than elsewhere.
Media bias - agenda to maximize profits, match what their audience wants to hear.
Fox News and Russia TV impact voting for certain sides, but newspaper studies see they impact turnout but not who they vote for
People shift news coverage in relation to their bias.
People are partially sophisticated as they partially offset exogenous changes in bias by switching their news consumption but not fully


Session 6: autocracies

Democracies grown a little faster than autocracies on average, but on trolling for other factors, no evidence that there is a positive causal effect for democracies in growth
Which result depends on question asked - growth is much more volatile in autocracies than democracies. Better upsides, worse downsides.
Autocracies good for coordination - EQ where they both build rather them not both building, as autocracy forces the firms to do so
Democracy good for Econ growth in: choosing good leaders, constraining bad leaders, creating stability of institutions and property rights, efficient allocation of resources. Bad for Econ growth in constraining good leaders, short term policy bias driven by re-election motives, special interest politics, redistribution motive - taxation of capital

Leaders part of why volatile in autocracies - huge changes in output when new leader.
Democracies don’t have ethnic favoritism like autocracies which harms growth. Democratices have less sensitivity to identity of specific leaders and less ethnic favoritism.


Session 7: corruption

Corruption: sale by government officials of government property for private gain. Leakage, audits to see misappropriated funds
Corruption with theft -government gets nothing, bureaucrat gets it all
Corruption without theft - government gets it, and bureaucrat gets cut on top of this
Corruption without theft less persistent, as buyer has incentive to report and more competition between firms
Competition for jobs - those who pay more for it, corrupt get it.
Centralized corruption has central authority control bribes while decentralized has bribes decentralized and not coordinated, resulting in possible negative impact
Bribes can help allocate resources efficiently, but money to bureaucrat so not efficient there
Bribes can help grease the wheels to get around stupid regulations, but some regulations and good and create sand in the gears where now more regulations being added.


Session 8: remedying corruption

Secrecy costs of corruption - company requests more expensive bottling machine, inefficiency creates larger than bribe itself
Culture is important for corruption - see the matrix with the cop and the driver collecting the fine vs not. Two EQ, in countries where they have corruption they pay the bribe vs in countries without corruption they collect the fine. Social norm and culture decides if pay the bribe or not. Can have a whistleblower to help eliminate this
UN study - in NY so all else is equal, see more corrupt counties have more unpaid parking tickets, but stricter enforcement works across the board.
Indonesia road project - audits are effective in reducing corruption, community programs are not.


Session 9: Institutions 1

Proximate causes: physical capital, human capital, technology
Fundamental caused: institutions, geography, and culture
Institutions are rules of the game in economic, political, and social interactions.
NK and SK - had been together, separate, see massive differences. Point being that institutions rather than geography are important
Same thing with Haiti and the DR
Hard to isolate effect of institutions, as institutions and GDP per capita could be reversely related and confounding variable (like foreign aid, social norms, culture, geography) possible
Possibility 1 for impact of institutions: settler mortality during period of colonization - Europeans settle if healthy disease environment. See that these countries get European institutions rather than extractive only. And these countries doing way better now. Colonial state and institutions persist even after independence. Critique is that mortality rates are not perfect data and that culture changes so not institutions


Session 10: institutions 2

Approach 2: reversal of fortune. The idea that rich societies in 1500 could be exploited via extractive institutions. European introduced institutions to foster investment in societies that were poor in 1500. More urban in 1500, lower gdp per capita today
Good institutions lead to prosperity today
Charter cities - new rules in special zones that promote development. Kind of unrealistic
If one institution to focus on, look at capita and property titles. Property titles important so you can loan against your home. Focus on property rights institutions and titling to help cities


Session 11: culture

Culture - customary beliefs and values that ethnic, religious, and social groups transmit daily unchanged from generation to generation
Weber - Protestant work ethic leads to better economy.
Idea that culture is important and fixed. Challenge to this idea that culture is so important and slow changing is that economic growth can take off suddenly. So, alternative view is that culture interacts with institutions to form social norms. Social norms change a lot.
Study to look at Protestant work ethic and don’t see evidence for it. 1555 study where can be Protestant or catholic and see no difference in result.
Trust has positive relationships on trade, foreign direct investment, and portfolio investment.