Resistance to reform: Reconsidering the role of individual-specific uncertainty

Individual-specific uncertainty may increase the chances of reform being enacted and sustained. Reform may be more likely to be enacted because a majority of agents might end up losing little from reform and a minority gaining a lot. Under certainty, reform would therefore be rejected, but it may be enacted with uncertainty because those who end up losing believe that they might be among the winners. Reform may be more likely to be sustained because, in a realistic setting, reform will increase the incentives of agents to move into those economic activities that benefit. Agents who respond to these incentives will vote to sustain reform in future elections, even if they would have rejected reform under certainty. These points are made using the trade-model of Fernandez and Rodrik (AER, 1991).Status-quo bias, bias against reform, individual-specific uncertainty

Technology diffusion and the spatial distribution of wages in the US

What explains the spatial distribution of wages across US counties? I find that two of the most important factors are spatial technology diffusion and externalities due to the aggregate scale of production. One empirical finding supporting the importance of spatial technology diffusion is that average wages in a county decrease with the average level of schooling in neighboring counties when employment in the county and average wages in neighboring counties are held constant. All empirical results are obtained using a novel instrument for (endogenous) employment at the county-level and take into account other factors (e.g. productivity-differences across states, climate) that may determine wages.US spatial wage distribution, spatial technology diffusion, dynamic spatial externalities, spatial fixed effects

Estimating the effect of transitory economic shocks on civil conflict

This note tries to clarify some remaining issues in the debate on the effect of income shocks on civil conflict. Section 1 discusses the discrepant findings on the effect of rainfall shocks on civil conflict in Miguel and Satyanath (2010, 2011) and Ciccone (2011). Section 2 develops an instrumental variables approach to estimate the effect of transitory (rainfall-driven) income shocks on civil conflict and contrasts the conclusions with those of Miguel, Satyanath, and Sergenti (2004) and Miguel and Satyanath (2010, 2011). Throughout, the note uses the data of Miguel, Satyanath, and Sergenti to focus on the methodological issues at the core of the debate (for results using the latest data see Ciccone, 2011).transitory economic shocks, conflict, weather,

The contribution of schooling in development accounting: Results from a nonparametric upper bound

How much would output increase if underdeveloped economies were to increase their levels of schooling? We contribute to the development accounting literature by describing a non-parametric upper bound on the increase in output that can be generated by more schooling. The advantage of our approach is that the upper bound is valid for any number of schooling levels with arbitrary patterns of substitution/complementarity. Another advantage is that the upper bound is robust to certain forms of endogenous technology response to changes in schooling. We also quantify the upper bound for all economies with the necessary data, compare our results with the standard development accounting approach, and provide an update on the results using the standard approach for a large sample of countries.development accounting, imperfect substitution

Adjustment to target capital, finance and growth

Does financial development result in capital being reallocated more rapidly to industries where it is most productive? We argue that if this was the case, financially developed countries should see faster growth in industries with investment opportunities due to global demand and productivity shifts. Testing this cross-industry cross-country growth implication requires proxies for (latent) global industry investment opportunities. We show that tests relying only on data from specific (benchmark) countries may yield spurious evidence for or against the hypothesis. We therefore develop an alternative approach that combines benchmark-country proxies with a proxy that does not reflect opportunities specific to a country or level of financial development. Our empirical results yield clear support for the capital reallocation hypothesis.Financial development, sector analysis, growth, measurement error, investment opportunities

Trade, extent of the market and economic growth 1960-1996

We find that trade and domestic market size are robust determinants of economic growth over the 1960-1996 period when trade openness is measured as the US dollar value of imports and exports relative to GDP in PPP US$('real openness'). When trade openness is measured as the US dollar value of imports and exports relative to GDP in exchange rate US$ ('nominal openness') however, trade and the size of domestic markets are often non-robust determinants of growth. We argue that real openness is the more appropriate measure of trade and that our empirical results should be seen as evidence in favor of the extent-of-the-market hypothesis.Extent of the market, institutions, growth

Trade and productivity

We estimate the effect of international trade on average labor productivity at the country level. Our empirical approach relies on summary measures of trade that, we argue, are preferable on both theoretical and empirical grounds to the one conventionally used. In contrast to the marginally significant and non-robust effects of trade on productivity found previously, our estimates are highly significant and robust even when we include institutional quality and geographic factors in the empirical analysis. We also examine the channels through which trade and institutional quality affect average labor productivity. Our finding is that trade works through labor efficiency, while institutional quality works through physical and human capital accumulation. We conclude with an exploratory analysis of the role of trade policies for average labor productivity.Trade, productivity, institutions trade policy

Human capital, the structure of production, and growth

Do high levels of human capital foster economic growth by facilitating technology adoption? If so, countries with more human capital should have adopted more rapidly the skilled-labor augmenting technologies becoming available since the 1970’s. High human capital levels should therefore have translated into fast growth in more compared to less human-capital-intensive industries in the 1980’s. Theories of international specialization point to human capital accumulation as another important determinant of growth in human-capital-intensive industries. Using data for a large sample of countries, we find significant positive effects of human capital levels and human capital accumulation on output and employment growth in human-capitalintensive industries. JEL Classification: E13, F11, O11Growth, Human capital, structure of production

Rain and the democratic window of opportunity

According to the economic approach to political transitions, transitory negative economic shocks can open a window of opportunity for democratic improvement. Testing the theory requires a source of transitory shocks to the aggregate economy. We use rainfall shocks in Sub-Saharan African countries and find that negative rainfall shocks are followed by significant improvement in democratic institutions. Instrumental variables estimates indicate that following a transitory negative income shock of 1 percent, democracy scores improve by 0.9 percentage points and the probability of a democratic transition increases by 1.3 percentage points.Democratization, transitory economic shocks

Schooling Supply and the Structure of Production: Evidence from US States 1950-1990

We find that over the period 1950-1990, US states absorbed increases in the supply of schooling due to tighter compulsory schooling and child labor laws mostly through within-industry increases in the schooling intensity of production. Shifts in the industry composition towards more schooling-intensive industries played a less important role. To try and understand this finding theoretically, we consider a free trade model with two goods/industries, two skill types, and many regions that produce a fixed range of differentiated varieties of the same goods. We find that a calibrated version of the model can account for shifts in schooling supply being mostly absorbed through within-industry increases in the schooling intensity of production even if the elasticity of substitution between varieties is substantially higher than estimates in the literature.