Reserving political office for members of a particular, usually disadvantaged, group is a common form of political quota in many parts of the world. This has been shown to improve distributional access in favour of reserved groups, but often conjectured (and shown) to come at the cost of governance quality. We develop the first theoretical model to demonstrate the opposite possibility; a reduction in political competition - due to office being restricted to members of a pre-designated group - can improve governance. The model establishes a tight set of predictions regarding when improvements should be expected to occur, and when not. Such predictions are not yielded by alternative theories of political competition, are a priori unlikely to occur by chance, and have never been investigated in the large empirical literature on the effects of political reservations. We first show, in a Maharashtrian sample of rural villages, that governance outcomes dramatically increase under reservations. This is the first such effect documented in the literature. We then demonstrate a non-uniform pattern of improvement that lines up precisely with the predictions of the theory developed here.
[go to paper]

[go to paper]

This paper investigates, theoretically and empirically, factional arrangements within the Chinese Communist Party (CCP), the governing political party of the People’s Republic of China. Our empirical analysis ranges from the end of the Deng Xiaoping era to the current Xi Jinping presidency and it covers the appointments of both national and provincial officials using detailed biographical information. We present a set of new empirical regularities within the CCP, including substantial leadership premia in the Politburo and Central Committee, intra-faction competition for promotions, and systematic patterns of cross-factional mixing at different levels of the political hierarchy. An organizational economic model suited to characterizing factional politics within single-party nondemocratic regimes rationalizes the data in-sample and displays excellent out-of-sample performance.

[go to paper]

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.

[go to paper]

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.

[go to paper]

In many developing countries, institutional set-ups often feature a key group of players, the elite, seeking to manipulate extant institutions to their advantage. Their means of doing this vary across contexts and greatly affect the prospects of institutional reform. We explore this process for village level governing institutions in India, using a survey that we designed for this end. The region we chose, rural Maharashtra, is known to exhibit functional local democracies, but also shows tremendous government inaction on poverty alleviation; perhaps due to elite control. We find a stunningly robust and participatory democratic process: elections are freely contested, fairly tallied, highly participatory, non-coerced and lead to appointment of representative politicians. However, beneath this veneer of ideal democracy we find evidence of deeply ingrained clientelist vote-trading structures maintained through extra-political means. Elite minorities seek power to undermine policies that would redistribute income towards the majority poor. We explore theoretically the means by which the elite are able to use their dominance of landownership and traditional positions of social superiority to achieve political control. Our theory predicts a large set of observables that should covary with the presence of a socially ascendant group (the Maratha caste). Our estimates suggest how the dominant elite have been able to maintain power in light of successful majoritarian institutional reforms.

[go to paper]

Democracies in which political elites hold and respect elections, yet do not extend related freedoms that empower the non-elite (civil liberties, free press, rule of law, etc.), are empirically pervasive, but imperfectly understood. What motivates the elite to respect the electoral wishes of a weak non-elite in such systems? We lay out a formal model that sheds light on this, and related questions raised by such minimalist democracies. The key, we show, is the crucial role of competitive elections in allowing credible power sharing among the elite. The theory simultaneously rationalizes competitive autocracies, non-redistributive democratizations, and the political resource curse.

[go to paper]

We posit the problem of an autocrat who has to allocate access to executive positions within his inner circle and define the career profile of his insiders. The leader monitors the capacity of staging a coup by his subordinates and the incentives of trading a subordinate’s own post for a potential shot at the leadership. These theoretical elements map into structurally estimable hazard functions for ministerial terminations in African governments. The evidence points at leader’s survival concerns playing a crucial role in shaping the incentives of insiders within African national governments and can ultimately help explain insiders’ widespread lack of competence and nearsighted policymaking in autocracies. Several counterfactual policy experiments are performed.

[go to paper]

Understanding how humans sustain cooperation in large, anonymous societies remains a central question of both theoretical and practical importance. In the laboratory, experimental behavioural research using tools like public goods games suggests that cooperation can be sustained by institutional punishment—analogous to governments, police forces and other institutions that sanction free-riders on behalf of individuals in large societies. In the real world, however, corruption can undermine the effectiveness of these institutions. Levels of corruption correlate with institutional, economic and cultural factors, but the causal directions of these relationships are difficult to determine. Here, we experimentally model corruption by introducing the possibility of bribery. We investigate the effect of structural factors (a leader’s punitive power and economic potential), anti-corruption strategies (transparency and leader investment in the public good) and cultural background. The results reveal that (1) corruption possibilities cause a large (25%) decrease in public good provisioning, (2) empowering leaders decreases cooperative contributions (in direct opposition to typical institutional punishment results), (3) growing up in a more corrupt society predicts more acceptance of bribes and (4) anti-corruption strategies are effective under some conditions, but can further decrease public good provisioning when leaders are weak and the economic potential is poor. These results suggest that a more nuanced approach to corruption is needed and that proposed panaceas, such as transparency, may actually be harmful in some contexts.

[go to paper]

Human pro-sociality towards non-kin is ubiquitous and almost unique in the animal kingdom. It remains poorly understood, though a proliferation of theories has arisen to explain it. We present evidence consistent with a set of theories based on group level selection of cultural norms favoring pro-sociality. The evidence is drawn from survey data and from laboratory treatment of experimental subjects. The findings provide support for cultural group selection as a contributor to human pro-sociality.

[go to paper] [Read a lay summary of this paper in Vox]

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.

[go to paper]

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.

[go to paper]

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.

[go to paper]

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.

[go to paper]

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.

[go to paper]

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.

[go to paper]

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.

[go to paper]

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.

[go to paper]

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.

[go to paper]

[go to paper]

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.

[go to paper]

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.

[go to paper]

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.

[go to paper]

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.

[go to paper]