On the Efficacy of Reforms: Policy Tinkering, Institutional Change, and Entrepreneurship

We analyze the interplay of policy reform and entrepreneurship in a model where investment decisions and policy outcomes are both subject to uncertainty. The production costs of non-traditional activities are unknown and can only be discovered by entrepreneurs who make sunk investments. The policy maker has access to two strategies: policy tinkering,' which corresponds to a new draw from a pre-existing policy regime, and institutional reform,' which corresponds to a draw from a different regime and imposes an adjustment cost on incumbent firms. Tinkering and institutional reform both have their respective advantages. Institutional reforms work best in settings where entrepreneurial activity is weak, while it is likely to produce disappointing outcomes where the cost discovery process is vibrant. We present cross-country evidence that strongly supports such a conditional relationship.

Cultures, Clashes and Peace

Ethnic and religious fractionalization have important effects on economic growth and development, but their role in internal violent conflicts has been found to be negligible and statistically insignificant. These findings have been invoked in refutation of the Huntington hypothesis, according to which differences of ethnic, religious and cultural identities are the ultimate determinants of conflict. However, fractionalization in all its demographic forms is endogenous in the long run. In this paper, we empirically investigate the impact of violent conflicts on ethno-religious fractionalization. The data involve 953 conflicts that took place in 52 countries in Europe, Africa and the Middle East between 1400 CE and 1900 CE. Besides a variety of violent confrontations ranging from riots, revolts and power wars between secular sovereigns, the data cover religiously motivated confrontations. We document that countries in which Muslim on Christian wars unfolded more frequently are significantly more religiously homogenous today. In contrast, those places where Protestant versus Catholic confrontations occurred or Jewish pogroms took place are more fractionalized, both ethnically and religiously. And the longer were the duration of all such conflicts and violence, the less fractionalized countries are today. These results reveal that the demographic structure of countries in Europe, the Middle East and North Africa still bear the traces of a multitude of ecclesiastical and cultural clashes that occurred throughout the course of history. They also suggest that endogeneity could render the relationship between fractionalization and the propensity of internal conflict statistically insignificant. Finally, instrumenting for conflicts with some geographic attributes and accounting for the endogeneity of fractionalization with respect to ecclesiastical conflicts shows that religous fractionalization likely has negative effects on economic growth.conflict, religion, institutions, economic development

Lessons from the Ottoman Harem (On Ethnicity, Religion and War)

The Ottoman Empire had a profound impact in Europe, the Middle East and North Africa at the apogee of its power, covering the era between 1453 C. E. and 1699 C. E. In this paper, I exploit the empire’s unique culture and institutions to examine the roles of ethnicity and religion in conflict and war. Based on one theory, the Ottoman conquests were driven by the Gaza ideology according to which the empire’s central motivation was provided by a spirit of Holy War in the name of Islam. This is generally emphasized as the reason why the Ottomans initiated more conflicts in the West, and why on the eastern fronts, more conflicts were started by its rivals. Another not necessarily mutually exclusive theory claims that the Imperial Harem wielded considerable political power in Ottoman affairs. Accordingly, the members of the Harem with different ethnic or religious backgrounds often lobbied the Sultan to influence the geography of Ottoman conquests. Using comprehensive data on Ottoman wars and conflicts between 1401 C. E. and 1700 C. E., I document that Ottoman conquests were concentrated in the West throughout the mid-16th century. Then, I show that the ethnic background of Valide Sultan (the queen mother) was an important and independent determinant of whether the empire engaged in military conquests in Europe, North Africa or the Middle East. Depending on the empirical specification, the reign of a sultan with a European maternal genealogy was enough to offset more than 70 percent of the empire’s western orientation in imperial conquests. Still, these findings do not rule out the possibility that the sultans’ ethnic and cultural heritages – but not the politics of the queen mothers or their Harems – influenced Ottoman conquests.conflict, religion, production and appropriation, family economics

Population Increase, Extralegal Appropriation, and the End of Colonialism

Between 1946 and 1976, the European powers granted independence to all of their large colonies in Africa and Southeast Asia. This paper attempts to provide an economic explanation for this remarkable ending to the era of colonialism. The main theoretical innovation is to consider the effect of population increase on the allocation of time by the indigenous population between productive and subversive activities. The analysis suggests that the increase in population during the colonial period increased the potential return to extralegal appropriation of the profits of colonial companies until the colonies became a net burden on the metropolitan governments. The analysis also suggests that there was less subversive activity in colonies in which the market for indigenous labor was monopsonized because monopsonistic employers internalized the potential negative effect of extralegal appropriation on net profits.

The Profitabality of Colonialism

This paper develops an analytical framework for studying colonial investment from the perspective of neoclassical political economy. The distinguishing feature of colonial investment in this model is that the metropolitan government restricts the amount of investment in the colony in order to maximize the net profits earned in the colony. The model explicitly includes the threat of extralegal appropriative activities by the indigenous population in the colony. The analysis of this model identifies the conditions, where these conditions include both the technology of production and the technology of extralegal appropriation, that determine the profitability of colonialism. The analysis suggests why historically some countries but not others became colonies and why many colonies that were initially profitable subsequently become unprofitable and were abandoned. The model also has implications for the amount of investment. the allocation of resources between productive and appropriative activities, and the distribution of income in colonies.

Marriage, Cohabitation and Commitment

This paper combines partner matching with an intra-household allocation model where couples decide if they want to marry or cohabitate. Marriage encourages but does not ensure a higher level of spousal commitment, which in turn can generate a larger marital surplus. Individuals’ marital preferences and commitment costs vary, and sorting equilibria are based on individuals’ marital preferences and propensity to commit. In all equilibria, some married couples are able to cooperate and operate efficiently, but some married and all cohabiting couples act with limited commitment and non-cooperatively. When spousal marital commitment costs are gender symmetric, there is a pure-sorting equilibrium in which all partners who prefer to act with commitment in marriage are matched with someone who has the same preference. In such an equilibrium, the benefits of marital commitment accrue to both partners. When commitment costs are not gender neutral, there can also be mixed-matching equilibria in which a partner who is willing to act with commitment in marriage is matched with someone who is not. In all such equilibria, the benefits of marital commitment accrue only to those men or women who are in short supply. Consequently, a shortage of men (women) who can maritally commit makes all women (men) worse off and materially indifferent between marriage or cohabitation. An excess supply of men who prefer marriage not only reduces the marriage incentives of men and raises those of women, but also the marital commitment incentives of men. As a corollary, if the gains from marriage fall, not only will more individuals choose to cohabitate but more married couples will act non-cooperatively.collective model, intra-household bargaining, modes of partnership choice

Risk, Institutions and Growth: Why England and Not China?

We analyze the role of risk-sharing institutions in transitions to modern economies. Transitions requires individual-level risk-taking in pursuing productivity-enhancing activities including using and developing new knowledge. Individual-level, idiosyncratic risk implies that distinct risk-sharing institutions – even those providing the same level of insurance – can lead to different growth trajectories if they differently motivate risk-taking. Historically, risk sharing institutions were selected based on their cultural and institutional compatibility and not their unforeseen growth implications. We simulate our growth model incorporating England’s and China’s distinct pre-modern risk-sharing institutions. The model predicts a transition in England and not China even with equal levels of risk sharing. Under the clan-based Chinese institution, the relatively risk-averse elders had more control over technological choices implying lower risk-taking. Focusing on non-market institutions expands on previous growth-theoretic models to highlight that transitions can transpire even in the absence of exogenous productivity shocks or time-dependent state variables. Recognizing the role of non-market institutions in the growth process bridges the view that transitions are due to luck and the view that transitions are inevitable. Transitions transpire when ‘luck’ creates the conditions under which economic agents find it beneficial to make the choices leading to positive rates of technological change. Luck came in the form of historical processes leading to risk-sharing institutions whose unintended consequences encouraged productivity-enhancing risk-taking.institutions, risk, growth, development

The launch of the euro

The introduction on January 1, 1999, of the euro--the single currency adopted by eleven of the fifteen countries of the European Union--marked the beginning of the final stage of Economic and Monetary Union and the start of a new era in Europe. The creation of a single currency and a single monetary policy has provided both extraordinary challenges and exceptional opportunities within Europe. This article reviews the organization, objectives, and targets of the euro area's new central bank and discusses some of the early challenges it has faced in setting and implementing monetary policy with the new common currency. It discusses the initial functioning of the payment system and the interbank market and reviews the effects to date of the single currency on European bond and equity markets, on the banking system, and in euro-area transactions.Euro ; European Monetary System (Organization) ; European currency unit

An Assignment Model with Divorce and Remarriage

We develop a two-sided matching model with positive sorting, divorce and remarriage. Match quality for each couple is revealed ex post and those with poor draws divorce. Competition determines lifetime expected utilities but per-period utilities depend on the laws that govern the distribution of assets upon divorce. We discuss separately cases in which remarriage is or is not feasible and cases in which commitments are or are not made. In all cases, lifetime utilities are exactly pinned down by equilibrium (stability) requirements. Moreover, ex-post Nash bargaining and ex-ante commitment yield the same non-contingent intertemporal allocations. We then analyze the impact of changes in the property division upon divorce, considering for instance a reform that favors women. The short-term impact of the reform on the allocations of already married wives is positive. However, its long-term impact on yet unmarried women is not because such a reform generates lower utility for women within marriage which exactly offsets their higher prospective divorce settlement. When remarriage is possible, more complex effects could occur: the reform typically alters divorce probabilities and it may affect the total surplus generated by marriage, thus either increasing both spouses' welfare or decreasing both.matching, intra-household allocations, Becker-Coase theorem

Geography, Demography, and Early Development

This paper explores the role of geography in economic development and demographic transition. It presents a growth model where survival is endogenously determined and where the odds of survival and the returns to labor are higher in geographically favorable regions. Higher life expectancy prompts parents to devote more of their resources to old-age consumption and enjoyment. Consequently, the invest relatively more in the quantity and quality of their offspring. Investment in education, together with population growth eventually triggers technological progress. As the level of technology improves and life expectancy rises along with it, a geographically advantageous economy first enters a post-Malthusian regime during which both fertility and educational attainment increase. Then, as further improvements in technology lead to a higher education premium, such an economy undergoes a demographic transition during which life expectancy continues to rise and parents have fewer but more educated children. In regions where geography is more adverse, this transition does not take place and economies remain trapped in the Malthusian regime. Thus, accounting for the role of geography in development helps to link demographic transition to geography and shows that the latter affects the economy mostly indirectly through the impact of geography on households' demographic choices. In the early stages of development, those choices in turn determine whether economies attain the scale and scope necessary for sustained economic progress. The paper also provides a framework with which to asses why geography may matter less today.