Discipline Through Disagreement ∗

Abstract. This paper studies politicians who have a present-bias for spending: they want to increase current spending and procrastinate spending cuts. We argue that legislators ’ bias is more severe in economies with low institutional quality. We show that disagreement in legislatures leads to policy persistence and that this attenuates the temptation to overspend. Depending on the environment, legislators ’ decisions to be fiscally responsible may either complement or substitute other legislator’s decisions. In economies with weak institutions, politicians ’ actions are strategic complements. Thus, institutional changes that induce fiscal responsibility are desirable, they generate a positive responsibility multiplier and reduce inefficient spending. However, in economies with better institutions, the same institutional change would induce some legislators to free ride on others ’ responsibility and may lead to more inefficient spending. JEL Classification: D72, H00

Labor Market Distortions, Employment and Growth: The Recent Chilean Experience

The per capita growth rate of Chile from 1984 to 1997 was among the highest in the world. During recent years, however, per capita growth dropped significantly. This paper discusses the role of factor accumulation and the efficiency with which factors are used, measured as total factor productivity (TFP), to explain the evolution of output in Chile during the past 20 years. In contrast with the experience of the 1980s and early 1990s, in recent years the primary determinant of the drop in output growth has not been a decline in TFP, but a severe fall in employment. Using a calibrated dynamic general equilibrium model based on the neoclassical growth model, with fluctuations in factor inputs induced by changes in TFP and relative input prices, we conclude that a 6.17% increase in the cost of labor hiring replicates the observed fall in employment. This fall, in turn, could be attributed to a perceived higher cost of labor services associated to both the significant increase in the minimum wage observed between 1998 and 2000, and a labor code reform, intensively debated during the 1999- 2002 period.

Intermediated quantities and returns

The difference between average borrowing and lending rates in the United States is over 2 percent. In spite of this large difference, there is over 1.7 times GNP in 2007 of intermediated borrowing and lending between households. In this paper a model is developed consistent with these facts. The only difference within an age cohort is preferences for bequests. Individuals with little or no bequest motive are lenders, while individuals with strong bequest motive are borrowers and owners of productive capital. Given no aggregate uncertainty, the return on equity is the same as the household borrowing rate. The government can borrow at the household lending rate, so there is a 2 percent equity premium in our world with no aggregate uncertainty. We examine the distribution and life cycle patterns of asset holding and consumption and find there is large dispersion in asset holdings and little in consumption. ; Updated by Working Paper 685.Equilibrium (Economics) ; Financial markets

Why aredeveloping countries so slow in adopting new technologies ? the aggregate and complementary impact of micro distortions

This paper explores how developmental and regulatory impediments to resource reallocation limit the ability of developing countries to adopt new technologies. An efficient economy innovates quickly; but when the economy is unable to redeploy resources away from inefficient uses, technological adoption becomes sluggish and growth is reduced. The authors build a model of heterogeneous firms and idiosyncratic shocks, where aggregate long-run growth occurs through the adoption of new technologies, which in turn requires firm destruction and rebirth. After calibrating the model to leading and developing economies, the authors analyze its dynamics in order to clarify the mechanism based on firm renewal. The analysis uses the steady-state characteristics of the model to provide an explanation for long-run output gaps between the United States and a large sample of developing countries. For the median less-developed country in the sample, the model accounts for more than 50 percent of the income gap with respect to the United States, with 60 percent of the simulated gap being explained by developmental and regulatory barriers taken individually, and 40 percent by their interaction. Thus, the benefits from market reforms are largely diminished if developmental and regulatory distortions to firm dynamics are not jointly addressed.Economic Theory&Research,Emerging Markets,E-Business,Technology Industry,Political Economy

Costly financial intermediation in neoclassical growth theory

The neoclassical growth model is extended to include costly intermediated borrowing and lending between households. This is an important extension as substantial resources are used in intermediating the large amount of borrowing and lending between households. In 2007, in the United States, the amount intermediated was 1.7 times GNP, and the resources used in this intermediation amounted to at least 3.4 percent of GNP. The theory implies that financial intermediation services are an intermediate good and that the spread between borrowing and lending rates measures the efficiency of the financial sector. ; This paper was previously published as Working Paper 655 and Staff Report 405 under the title "Intermediated Quantities and Returns."

Intermediated quantities and returns

There is a large amount of intermediated borrowing and lending between households. Some of it is intergenerational, but most is between older households. The average difference in borrowing and lending rates is over 2 percent. In this paper, we develop a model economy that displays these facts and matches not only the returns on assets but also their quantities. The heterogeneity giving rise to borrowing and lending and differences in equity holdings depends on differences in the strength of the bequest motive. In equilibrium, the lenders are annuity holders and the borrowers are those who have equity holdings, who live off its income when retired, and who leave a bequest. The borrowing rate and return on equity are the same in the absence of aggregate uncertainty. The divergence between borrowing and lending rates can thus give rise to an equity premium, even in a world without aggregate uncertainty. ; Updated by Working Paper 685.Households - Economic aspects

Las cooperativas frente a los bancos tradicionales: el impacto de su exclusión del mercado interbancario

Analizamos la conveniencia de permitir que los bancos cooperativos participen en el mercado interbancario en Chile. Consideramos que es aconsejable permitirlo si la calidad de su gobernanza no es demasiado deficiente en relación con la de los bancos comerciales tradicionales. Cuando los bancos cooperativos participan en el mercado interbancario, aumentan tanto la probabilidad de crisis financieras como la volatilidad del producto interior bruto (PIB). Sin embargo, puesto que incluir a las cooperativas genera grandes ganancias de eficiencia en el sector financiero, tanto el PIB como el bienestar global aumentan sustancialmente. Concluimos que no hay ninguna razón de política para excluir unilateralmente a las cooperativas del mercado interbancario chileno

Cooperatives versus traditional banks: the impact of interbank market exclusion

We analyse the desirability of allowing cooperative banks to participate in the interbank market in Chile. We find that it is advisable to allow this if the quality of their governance is not too deficient relative to that of traditional commercial banks. When cooperative banks do participate in the interbank market, both the probability of financial crises and the volatility of gross domestic product (GDP) rise. However, because the inclusion of cooperatives generates large efficiency gains in the financial sector, both GDP and aggregate welfare substantially increase. We conclude that there is no policy reason to unilaterally exclude cooperatives from the Chilean interbank market

Costly Financial Intermediation in Neoclassical Growth Theory

The neoclassical growth model is extended to include costly intermediated borrowing and lending between households. This is an important extension as substantial resources are used in intermediating the large amount of borrowing and lending between households. In 2007, in the United States, the amount intermediated was 1.7 times GNP, and the resources used in this intermediation amounted to at least 3.4 percent of GNP. The theory implies that financial intermediation services are an intermediate good and that the spread between borrowing and lending rates measures the efficiency of the financial sector.