Good Predictions and Bad Policies

Relatively little has been said on economic policy by participants in the debate on the realisticness of assumptions in economic models. What has been said is that a `Friedmanian´ methodology which accepts unrealistic assumptions and is only concerned with correct predictions is appropriate from the perspective of a practical economist who is in charge of designing policy. This paper tries to show that this is not true. Even if a model provides very accurate predictions of an event, its ability to provide valid explanations is determined by the realisticness of its underlying assumptions. Different assumptions yield different explanations and unrealistic assumptions tend to provide no explanation at all. There is a strong relation between the way a phenomenon is explained and understood and the actions that are consequently recommended. Therefore, a model based on unrealistic assumptions is not a reliable source of advice on policy.Milton Friedman, unrealistic assumptions, economic policy, economic models, instrumentalism.

Resources for Sale: Corruption, Democracy and the Natural Resource Curse

A puzzling piece of empirical evidence suggests that resource-abundant countries tend to grow slower than their resource-poor counterparts. We attempt to explain this phenomenon by developing a lobbying game in which rent seeking firms interact with corrupt governments. The presence or absence of political competition, as well as the potential costs of political transitions, turn out to be key elements in generating the `resource curse.¿ These variables define the degree of freedom that incumbent governments have in pursuing development policies that maximize surplus in the lobbying game, but put the economy off its optimal path. We test our predictions by adding measures of democracy and authoritarianism to existing regression models of the resource curse, and obtain support for our hypothese

Democracy and the curse of natural resources

We propose a theoretical model to explain empirical regularities related to the curse of natural resources. This is an explicitly political model which emphasizes the behavior and incentives of politicians. We extend the standard voting model to give voters political control beyond the elections. This gives rise to a new restriction into our political economy model: policies should not give rise to a revolution. Our model clarifies when resource discoveries might lead to revolutions, namely, in countries with weak institutions. Natural resources may be bad for democracy by harming political turnover. Our model also suggests a non-linear dependence of human capital on natural resources. For low levels of democracy human capital depends negatively on natural resources, while for high levels of democracy the dependence is reversed. This theoretical finding is corroborated in both cross section and panel data regressions

Fiscal Transparency and Procyclical Fiscal Policy

This paper examines why fiscal policy is procyclical in developing as well as developed countries. We introduce the concept of fiscal transparency into a model of retrospective voting, in which a political agency problem between voters and politicians generates a procyclical bias in government spending. The introduction of fiscal transparency generates two new predictions: 1) the procyclical bias in fiscal policy arises only in good times; and 2) a higher degree of fiscal transparency reduces the bias in good times. We find solid empirical support for both predictions using data on both OECD countries and a broader set of countries.fiscal transparency; fiscal policy; procyclicality; business cycle; political economy

Evolutionary Algorithms for Reinforcement Learning

There are two distinct approaches to solving reinforcement learning problems, namely, searching in value function space and searching in policy space. Temporal difference methods and evolutionary algorithms are well-known examples of these approaches. Kaelbling, Littman and Moore recently provided an informative survey of temporal difference methods. This article focuses on the application of evolutionary algorithms to the reinforcement learning problem, emphasizing alternative policy representations, credit assignment methods, and problem-specific genetic operators. Strengths and weaknesses of the evolutionary approach to reinforcement learning are presented, along with a survey of representative applications

Board structures around the world: An experimental investigation

We model and experimentally examine the board structure-performance relationship. We examine single-tiered boards, two-tiered boards, insider-controlled boards, and outsider-controlled boards. We find that even insider-controlled boards frequently adopt institutionally preferred rather than self-interested policies. Two-tiered boards adopt institutionally preferred policies more frequently, but tend to destroy value by being too conservative, frequently rejecting good projects. Outsidercontrolled single-tiered boards, both when they have multiple insiders and only a single insider, adopt institutionally preferred policies most frequently. In those board designs where the efficient Nash equilibrium produces strictly higher payoffs to all agents than the coalition-proof equilibria, agents tend to select the efficient Nash equilibria.

Evaluating the provision of school performance information for school choice

We develop and implement a framework for determining the optimal performance metrics to help parents choose a school. This approach combines the three major critiques of the usefulness of performance tables into a natural metric. We implement this for 500,000 students in England for a range of performance measures. Using performance tables is strongly better than choosing at random: a child who attends the highest ex ante performing school within their choice set will ex post do better than the average outcome in their choice set twice as often as they will do worse

On"good"politicians and"bad"policies - social cohesion, institutions, and growth

Social cohesion - that is, the inclusiveness of a country's communities - is essential for generating the trust needed to implement reforms. Citizens have to trust that the short-term losses that inevitably arise from reform, will be more than offset by long-term gains. However, in countries divided along class and ethnic lines, and with weak institutions, even the boldest, most civic-minded and well-informed politician (or interest group) will face severe constraints in bringing about policy reform. The authors hypothesize that key development outcomes (particularly economic growth) are most likely to be associated with countries that are both socially cohesive and governed by effective public institutions. They test this hypothesis for the sample of countries with available data. The authors develop a conceptual framework based on the idea of social cohesion, then review the evidence on which it is based. While several earlier studies have shown that differences in growth rates among developing countries are a result of weak rule of law, lack of democracy, and other institutional deficiencies, the authors focus on the social conditions that give rise to these deficiencies. They also seek to establish empirically a causal sequence from social divisions to weak institutions to slow growth. The essence of their argument, supported by new econometric evidence, is that pro-development policies are comparatively rare in the developing world less because of the moral fiber of politicians (though that surely matters) than because good politicians typically lack the room for maneuver needed to make desired reforms. This lack of maneuverability is a product of insufficient social cohesion and weak institutions. The authors also explore the determinants of social cohesion, focusing on historical accidents, initial conditions, and natural resource endowments. Social cohesion should not be seen as a concern primarily of developing and transition economies. Indeed, it is important in the United Kingdom as in Ukraine, in Canada as in Colombia, in the Netherlands as in Australia.Social Capital,Decentralization,Labor Policies,Public Health Promotion,Community Development and Empowerment,Inequality,Poverty Assessment,Economic Development,Governance Indicators,Social Capital