Trade, law and order, and political liberties: theory and application to English medieval boroughs

Earleir version issued as discussion paperWe develop a framework that puts the administration at the core of the relationship between trade and political liberties. A ruler chooses the size of an administration that (i) collects taxes and (ii) provides law and order for a representative merchant to use. To be exploited, large gains from trade require a relatively large administration. However, keeping a large administration in check is difficult. When the resulting inefficiencies are significant, the ruler grants control of the administration to the better-informed merchant, even though this facilitates tax evasion. We analyze the case of post-Norman Conquest England (1066-1307) by using evidence on taxation, commerce, and political liberties across boroughs. We use boroughs’ ownership as a proxy for the cost of controlling the administration, and find that rulers with a high cost are more willing to grant boroughs the control of their administration. Also, provided it belongs to a high-cost ruler, a borough’s propensity to receive a grant increases with its commercial importance. Finally, we find that boroughs are willing to pay higher taxes in exchange for liberties

Potential Output and Fiscal Rules in a Monetary Union under Asymmetric Information - 2nd ed

We analyze fiscal rules within a Monetary Union in the presence of (i) asymmetric information on member states’ potential output and (ii) bail-out among member states. The first-best deficit is contingent on the cycle, that is, on member states’ output gap. In the presence of asymmetric information and bailout, the first-best deficit is not implementable. Bail-out lowers the scope for signalling (discrimination) by member states (lenders) and induces overborrowing by member states characterized by a low output gap. The Monetary Union can design a mechanism such that a member state with a smaller negative output gap runs an optimal budget deficit upon receiving a transfer form the Union. We show that, this ‘cyclically-contingent’ fiscal framework Pareto dominates the ‘cyclically-adjusted’ fiscal rule currently enforced by the European Monetary Union. Our model can then account for a situation where both asymmetric information over cyclical positions and the presence of bail-out among member states does not induce borrowing distortions

Potential Output and Fiscal Rules in a Monetary Union under Asymmetric Information

We analyze fiscal rules within a Monetary Union in the presence of (i) asymmetric information about member states’ potential output and, therefore, output gap and (ii) bail-out among member states. In our framework, bail-out lowers the scope for signalling (discrimination) by member states (lenders). In the presence of asymmetric information, bail-out and national governments’ shortsightedness make the first-best fiscal rule non-implementable as member states are tempted to run excessively high deficits. The Monetary Union designs a mechanism such that member states with high output gap (i.e., in a recession) run higher budget deficits by making an ex-post transfer to the Union. We find that the first-best deficit is contingent on the cycle – i.e., on the member state’s output gap – and, all else equal, can be implemented provided the member states’ ability to repay its own debt upon the realization of a bad shock is sufficiently high. A downward distortion in the deficit run by a member state during an expansion is otherwise introduced. Finally, the Monetary Union cannot discriminate among types of borrowers when national governments are excessively shortsighted

Trade, Self-Governance,and the Provision of Law and Order, with an Application To Medieval English Chartered Towns

We build a model to investigate the interaction between trade, the supply of law and order, and the nature of governing political institutions. To supply law and order necessary for a representative merchant to create wealth, a ruler (i) appoints officials capable of coercion and (ii) introduces a system of taxation. When potential gains from trade are important, the demand for law and order is high but appointing numerous officials capable of coercion may pave the way to arbitrary and distortive expropriation. Delegating the task of appointing offi- cials to the better-informed merchant lowers the cost of sustaining good market institutions, but exacerbates the latter's temptation to escape taxation. When gains from trade are instead low delegation never occurs. Our theory provides a rationale for the case of post-Norman Conquest England (1066-1307) where, in parallel with the rise of trade, kings increasingly give in to the citizens' desire of self-governance by granting Charters of Liberties

Capture, Politics and Antitrust Effectiveness

We study the ex-ante budget devoted by a Political Principal to a Competition Authority in charge of collecting evidence on the Industry's behavior. The Industry can capture both the Principal (lobbying) for a reduced budget, and the Authority (side-contracting) so as to avoid fines. Authority's capture is costly to the Principal when side-contracting is sufficiently efficient. Collusion proofness induces high-powered incentives for the Authority, hence fostering the Authority's willingness to spend the allocated budget. For intermediate values of side-contracting's efficiency, in this moral hazard setting we find that the optimal budget increases as side-contracting gets more efficient. Only when side-contracting's efficiency reaches high enough values the budget decreases, thus generating a discrepancy between the Authority's and the Principal's desired level of information gathering. Finally, a complementarity between lobbying of the Principal and capture of the Authority arises.Budget, Law Enforcement, Three-tier Hierarchy, Moral Hazard, Collusion-Proofness, Lobbying.