I am a Professor in the Vancouver School of Economics and a Senior Fellow of the Institutions, Organizations and Growth program of the Canadian Institute for Advanced Research.

Today my work focuses on problems in development economics, with a particular interest in Political Economy. I also work hard on squash (playing) and cricket (watching).

Please click on paper titles for abstracts and full text downloads.

CULTURE AND DEVELOPMENT

This paper shows that increases in (firm-level) competition positively impact (individuallevel) trust. Using US states’ banking de-regulation from the mid 1970s, we first show that an increase in competition had a causal impact on trust, measured in the General Social Survey (GSS). We develop a model which explains why increased competition within a state increases trust. The model also predicts a positive correlation between trust and sectoral competitiveness in the cross-section. We explore this implication using the 2004 wave of the GSS which we can match with US census of firms competition measures. The model’s predictions are strongly borne out.

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We study the co-evolution of norms and institutions in order to better understand the conditions under which potential gains from new trading opportunities are realized. New trading opportunities are particularly vulnerable to opportunistic behavior and therefore tend to provide fertile ground for cheating. Cheating discourages production, raising equilibrium prices and therefore the return to cheating, thereby encouraging further cheating. However, such conditions also provide institutional designers with relatively high incentives to improve institutions. We show how an escape from the shadow of opportunism requires that institutional improvements out-pace the deterioration of norms. A key prediction from the model emerges: larger economies are more likely to evolve to steady states with strong honesty norms, even though larger economies need not have better institutions. This prediction is tested using a cross section of countries; population size is found to have a significant positive relationship with a measure of trust, even when controlling for standard determinants of trust and institutional quality.

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POLITICAL ECONOMY

This paper presents new evidence on the power sharing layout of national political elites in a panel of African countries, most of them autocracies. We present a model of coalition formation across ethnic groups and structurally estimate it employing data on the ethnicity of cabinet ministers since independence. As opposed to the view of a single ethnic elite monolithically controlling power, we show that African ruling coalitions are large and that political power is allocated proportionally to population shares across ethnic groups. This holds true even restricting the analysis to the subsample of the most powerful ministerial posts. We argue that the likelihood of revolutions from outsiders and the threat of coups from insiders are major forces explaining such allocations.

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When and how do democratic institutions deliver accountable government? In addressing this broad question, we focus on the role played by political norms – specifically, the extent to which leaders abuse office for personal gain, and the extent to which citizens punish such transgressions. We show how qualitatively distinct political norms can coexist because of a dynamic complementarity, in which citizens’ willingness to punish transgressions is raised when they expect such punishments to be used in the future. We seek to understand the emergence of accountability by analysing transitions between norms. To do so, we extend the analysis to include the possibility that, at certain times, a segment of voters are (behaviourally) intolerant of transgressions. Our mechanism highlights the role of leaders, offering an account of how their actions can instigate enduring change, within a fixed set of formal institutions, by disrupting prevailing political norms. We show how such changes do not depend on ‘sun spots’ to trigger coordination, and are asymmetric in effect – a series of good leaders can (and eventually will) improve norms, whereas bad leaders cannot damage them.

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This paper explores the performance of rural governance institutions (Gram Panchayats) in Maharashtra, India. The results of a detailed set of household and village surveys we conducted point to a stunningly robust and participatory democratic process: Elections are freely contested, fairly tallied, highly participatory, non-coerced and lead to political representation believed by voters to strongly reflect their will. However, poverty alleviation schemes (one of the main tasks of rural Gram Panchayats) are patchy and poorly implemented. Beneath this veneer of representative democracy we find evidence of deeply ingrained clientilist structures. These allow land-owning elites of a leading caste (Marathas) to maintain political power which they use to undermine poverty alleviating policies that would redistribute income away from them. We explore theoretically the means by which this caste is able to use its dominance of land-ownership and its traditional position of caste ascendency to achieve political control. The data also allows us to test, both directly and indirectly, differing hypotheses regarding the means by which cultural power (caste) and land ownership yield political power for the elite even in a highly representative, fair and participatory democratic setting.

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CYCLE AND GROWTH

We use a Schumpeterian model in which both the economyís growth rate and its volatility are endogenously determined to assess some welfare and policy implications associated with business cycle fluctuations. Because it features a higher average growth rate than its acyclical counterpart, steady state welfare is higher along the cyclical equilibrium growth path of the model. We assess the impact of alternative stabilization policies designed to smooth cyclical fluctuations. Although, it is possible to significantly reduce the variance of output growth via simple policy measures, the welfare benefits are at best negligible and at worst completely offset by the resulting reduction longóterm productivity growth.

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Recent empirical work finds that R&D expenditures are quite procyclical, even for firms that are not credit-constrained during downturns. This has been taken as strong evidence against Schumpeterian-style theories of business cycles that emphasize the idea that downturns in production may be good times to allocate labor towards innovative activities. Here we argue that the procyclicality of R&D investment is, in fact, quite consistent with at least one of these theories. In our analysis, we emphasize three key features of R&D investment relative to other types of innovative activity: (1) it uses knowledge intensively, (2) it is a long-term investment with uncertain applications and (3) it suffers from diminishing returns over time.

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We develop a theory of growth and cycles that endogenously relates job flows, worker flows and wages over the cycle to the processes of restructuring, innovation and implementation that drive long—run growth. Expansions are the result of clustered implementation of new ideas and recessions are the negative consequence of the restructuring that anticipates them. Due to incentive problems, production workers are employed via relational contracts and experience involuntary unemployment. Separation rates and firm turnover are counter-cyclical, but labour productivity growth and hiring rates are procyclical. Our framework also highlights the counter-cyclical forces on wages due to restructuring, and illustrates the relationship between the cyclicality of wages and long—run productivity growth.

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ON THE JOB LEARNING

Why don’t all countries converge rapidly to the use of most efficient or best practice technologies? AQ1 Micro level studies suggest managerial skills play a key role in the adoption of modern technologies. In this paper we model the interactive process between on-the-job managerial skill acquisition and the adoption of modern technology. We use the model to illustrate why some countries develop managerial skills quickly and adopt best practice technologies, while others stay backwards. The model also explains why managers will not migrate from rich countries to poor countries, as would be needed to generate convergence. Finally we show why standard growth accounting exercises will incorrectly attribute a large proportion of managerial skills’ contribution to TFP and we quantify the importance of this bias.

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The adoption and diffusion of technological knowledge is generally regarded as a key element in a country’s economic success. However, as is the case with most types of information, the transfer of technological knowledge is likely to be sub ject to adverse selection problems. In this paper we examine whether asymmetric information regarding who knows how to run a new technology efficiently can explain a set of observations regarding within and cross-country patterns of technology diffusion. In particular, we show how the dynamics of adverse selection in the market for technological knowhow can explain (1) why inefficient technology use may take over a market even when better practice is available, (2) why widespread inefficient use may persist unless a critical mass of firms switch to best practice, (3) why efficient adoption of new technologies is more likely to occur where the existing technology is already productive, where wages are already relatively high, and where the new technology is not too great an advance over the old one, and (4) why the international mobility of knowledgeable individuals does not guarantee the diffusion of best practice technology across countries.

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LINKS TO SOME OTHER PUBLICATIONS

We develop a model of "intrinsic" cycles, driven by the decentralized behaviour of entrepreneurs and firms making continuous, divisible improvements in their productivity. We show that when the introduction of productivity impovements is endogenous, implementation cycles arise even in the presence of reversible investment and consumptionósmoothing. The implied cyclical equilibrium is unique within its class and shares several features in common with actual business cycles. In particular its predictions are qualitatively consistent with the joint behaviour of the investment rate and Tobinís Q during US recessions.

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This paper provides a selective overview highlighting some major themes of the recent literature on the role of pro-social motivation in the provision of social services. We focus on the insights obtained from two alternative ways of modelling pro-social motivation; action-oriented and output-oriented altruism. This literature has implications regarding the design of optimal incentives, the selection of motivated agents and its interaction with monetary rewards, and the optimal organizational form required to exploit such motivations. We also discuss the implications for government provision of social services from the perspective of a parallel literature that emphasizes the noncontractible nature of output, and contrast it with the implications derived from work emphasizing the role of pro-social motivation.

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Despite the potential for free-riding, workers motivated by ‘making a difference’ to the mission or output of an establishment may donate labor to it. When the establishment uses performance related compensation (PRC), these labor donations closely resemble a standard private provision of public goods problem, and are not rational in large labor pools. Without PRC, however, the problem differs significantly from a standard private provision of public goods situation. Specifically, in equilibrium: there need not be free-riding, decisions are non-monotonic in valuations, and contribution incentives are significant even in large populations. When PRC is not used, the establishment tends to favor setting low wages which help to select a labor force driven by concern for the firm’s output. Expected output can actually fall with the wage in this situation. When wages are optimally set, the introduction of PRC, even if perfect and costless, may lower expected output and firm profits in comparison to the non-PRC outcome.

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Many argue that elements of a society’s norms, culture or social capital are central to understanding its development. However, these notions have been difficult to capture in economic models. Here we explore a possible role for ‘trustworthiness’ as corresponding to social capital. Individuals are trustworthy when they perform in accordance with promises, even if this does not maximize their payoffs. The usual focus on incentive structures in motivating behaviour plays no role here. Instead, we emphasize more deep-seated modes of behaviour and consider trustworthy agents being socialized to act as they do. To model this socialization, we borrow from a process of preference evolution pioneered by Bisin and Verdier (2001). The model developed endogenously accounts for social capital and explores its role in the process of economic development. It captures in a simple, formal way the interaction between social capital and the economy’s productive processes. The results obtained caution against rapid reform and provide an explanation for why late developing countries may not easily be able to transplant the modes of production that have proved useful in the West.

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It is shown here that, despite the efficiency gains from privatization, when markets are incomplete, all individuals may be made worse off by privatization, even when the resource is equitably privatized. Such market incompleteness is common in the developing world and can explain the often encountered resistance to efficiency enhancing privatizing reforms, especially in the case of village level landholdings and forests. The advantage of common held property arises because of its superior insurance properties (which tend to provide income maintenance in low states). Sufficient conditions are established under which any feasible insurance scheme under private property cannot ex ante Pareto dominate allocations under the commons.

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We show how a Schumpeterian process of creative destruction can induce rational, herd behavior by entrepreneurs across diverse sectors as if fueled by "animal spirits." Consequently, a multisector economy, in which productivity improvements are made by independent, profit-seeking entrepreneurs, exhibits regular booms, slowdowns, and downturns as part of the long-run growth process. Our cyclical equilibrium has higher average growth, but lower welfare than the corresponding acyclical one. We show how a negative relationship can emerge between volatility and growth across cycling economies, and assess the extent to which our model matches several features of actual business cycles.

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In this paper, we analyze the interactions between growth and the contracting environment in the production sector. Allowing incompleteness in contracting implies that viable production relationships for firms and workers, and therefore the profitability of industries, depend on the rates of innovation and growth. The speed at which new innovations arrive in turn depends on the profitability of production, for the usual reasons examined in the endogenous growth literature. We show that these interactions can have important implications which are consistent with observed phenomena in both the micro and macro environment. In particular, we demonstrate how this interaction can lead to a productivity slowdown and a shift in labour market contracts toward more short term arrangements. We show the consistency of an increase in the proportion of the labour force under short term employment, unchanged turnover, increased relative returns of workers in high productivity sectors, and increased income inequality, with a productivity slowdown of finite duration.

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Winter 2016

ECON441 The Process of Economic Development Sections

Industrialization of an agrarian economy; how the West grew rich; history of Japanese development; technical progress and growth; evolution of the patterns of income distribution; role of international trade in development; environment and development.