Limiting Court Behavior: A Case for High Minimum Sentences and Low Maximum Ones

We model a simple justice system in which a court is mandated by society to assess the guilt and the punishment of an accused. The court takes prison facilities as given and neglects its impact on the cost to society of implementing the sentence. Clearly, the court, in this world, will condemn more often than society and assign higher penalties. Under these circumstances, society at large would necessarily benefit from having maximum sentences. We show, however, as a series of perverse results, that (1) maximum penalties need to be lower than the highest socially desirable penalty; (2) society would benefit from imposing high minimum sentences even though it is precisely the harshness of courts, which it wants to curb.Maximum and minimum penalties, sentencing guidelines, social optimum

Fertility, Education, and Market Failures

We show that coordination failures may be part of an explanation for the demographic differences between rich and poor countries and their differing attitudes towards the use of child labor. Our analysis is carried out within a two-period, general equilibrium model with endogenous fertility, parental investment in children's education and firms' tradeoff between traditional technologies and the adoption of skill-intensive, modern ones. The model exhibits multiple equilibria due to the lack of a coordination mechanism between parental decisions on the quantity and the quality of children and entrepreneurs' technology choices.Endogenous fertility, education, child labor, skill-biased technology, welfare, multiple equilibria, coordination

Child Labor and Coordination Failures

In this paper, we show how coordination failures may explain the prevalence of child labor in developing countries. We do so within a simple game-theoretic setup. Child labor arises in our environment because of the lack of a coordination mechanism between parental decisions to invest in the human capital of their children and firm's decisions to invest in skill-intensive technology. Governmental policies that help coordinate expectations lead to the disappearance of child labor.Child labor, welfare, equilibrium selection, coordination

FOREIGN AID AND THE BUSINESS CYCLE

In this paper, we document some key business cycle properties of foreign aid flows to developing countries. We identify two striking empirical regularities. First, aid flows are highly volatile over time -- on average, two to three times as volatile as the recipient's output. Second, for most African countries, net aid inflows are strongly positively correlated with their domestic output. Outside of Africa, we find a similar, if somewhat less pronounced, pattern of aid procyclicality.To see why these empirical regularities are important, recall that output fluctuations in developing countries are much stronger than in industrialized economies. Indeed, we document that the gross domestic product of an aid recipient is on average six times as volatile as that of a donor. For developing countries, though, customary ways to smooth out the impact of output fluctuations on domestic consumption are likely to be very onerous. For instance, moral hazard and repudiation risk imply that heavily indebted nations are often denied new loans (or are asked to repay old ones) precisely when their economies suffer adverse shocks -- see, e.g., Atkeson-1991). At the same time, foreign aid is a sizeable source of income to recipients, especially in Africa, where it averages 12.5% of gross domestic product and constitutes the main source of foreign capital. In such an environment, foreign aid flows have the potential to play a key role in smoothing out developing countries' output fluctuations. Our results imply that, all in all, aid does not play that role.Admittedly, it might be argued that, except for emergency relief, the chief purpose of foreign aid is not to act as an insurance device but, instead, to fuel economic development, in which case it is not clear a priori whether one should expect aid flows to be procyclical or countercyclical. It is well known, however, that output fluctuations affect growth negatively -- see, e.g., Hamilton (1989) and Ramey&Ramey (1995). Hence, even if aid were meant solely to help foster growth, serious concerns should nonetheless arise from the fact that aid disbursement patterns contribute to the volatility of developing countries' disposable income.Our findings are robust. Our data set comprises various yearly aid and output series for sixty-three recipient and eighteen donor countries between 1969 and 1995. We find few differences between the cyclical behavior of multilateral as opposed to bilateral aid disbursements, even though multilateral aid flows are relatively more volatile than their bilateral counterparts. Likewise, aid commitments fluctuate more than actual net disbursements, but both commitments and disbursements are procyclical. We also pay special attention to Africa, because it is the region where aid is largest relative to recipient GDP and aid procyclicality is most striking. We show that, regardless of the domestic output measure used, net aid receipts are procyclical for at least two-thirds of the thirty-eight countries in our African subsample and are countercyclical for, at most, two of them. Key components of African aid, such as grants or technical assistance, are as strongly procyclical as total aid flows. Finally, we can find no evidence that, among African countries, the procyclicality of aid might be a function of the recipient's former colonial power, choice of exchange rate regime or some other criterion.We complete the paper by analyzing the cyclical properties of aid flows from the donors' perspective. For almost all donor countries, we find that total aid disbursements are strongly positively correlated with the donor's output. In a clear majority of cases, however, those same donors' bilateral aid flows to the sample countries are not positively correlated with the donor's output. A corollary is that the procyclicality of aid inflows experienced by aid recipients is not the mere result of the conjunction of (i) positive comovements between North-South business cycles [Kouparitsas (1998); Agenor&Prasad (1999)] and (ii) a positive correlation between donors' aid policies and their business cycles.

Why Don't Poor Countries Adopt Better Technologies?

In this paper we develop a simple heterogeneous-agent model with incomplete markets to explain the prevalence of a large low-productivity, informal sector in developing countries. In our model, the provision of public infrastructure creates a productivity premium for formalization, which increases with infrastructure quality. Our model breaks the symmetry of equilibria and offers endogenous differentiation of rich and poor countries' behavior. While the model supports multiple stable equilibria in `rich' countries with varying degrees of formalization, including full formalization, it indicates an absence of equilibrium with full formalization in `poorer' countries. If legislative intolerance alone suffices to jolt a rich country into the equilibrium with complete formalization, accompanying policies may be required in poor countries to first provide the conditions for existence of such equilibrium.Technology adoption, informal sector, industrialization, inequality, infrastructure

Aide internationale et développement en Haïti: bilan et perspective

Au cours des cinquante dernières années, l’aide internationale a été massive et soutenue. Pour certains pays, dont Haïti, on parle de l’équivalent de plusieurs plans Marshall par année pendant plusieurs décennies. Pourtant de nombreux pays récipiendaires de cette aide internationale, dont Haïti, affichaient en 2007 un niveau de vie moyen plus faible qu’en 1960. L’aide internationale peut être un formidable moteur de développement. Elle peut aussi en être le plus grand frein. Dans ce texte, nous mettons en évidence quelques travers importants de l’aide internationale et montrons dans quelles conditions celle-ci pourra contribuer au développement d’Haïti

Measuring Unemployment Insurance Generosity

In this paper, we develop a methodology to summarize the various policy parameters of an unemployment insurance scheme into a single generosity parameter. Unemployment insurance policies are multdimensional objects. They are typically defined by waiting periods, eligibility duration, benefit levels and asset tests when eligible, which makes intertemporal or international comparisons difficult. To make things worse, labor market conditions, such as the likelihood and duration of unemployment matter when assessing the generosity of different policies. We build a first model with such complex characteristics. Our model features heterogeneous agents that are liquidity constrained but can self-insure. We then build a second model that is similar, except that the unemployment insurance is simpler: it is deprived of waiting periods and agents are eligible forever with constant benefits. We then determine which level of benefits in this second model makes agents indifferent between both unemployment insurance policies. We apply this strategy to the unemployment insurance program of the United Kingdom and study how its generosity evolved over time

Market Incompleteness and the Equity Premium Puzzle: Evidence from State-Level Data

This paper investigates the importance of market incompleteness by comparing the rates of risk aversion estimated from complete and incomplete markets environments. For the incomplete-markets case, we use consumption data for 50 U.S. states. While the use of state-level data is conceptually inferior to the use of data on individual consumption, it may be preferable because state-level data are less susceptible to measurement errors. We find that the rate of risk aversion under the incomplete-markets setup is much lower. Furthermore, including the second and third moments of the cross-sectional distribution of consumption growth in the pricing kernel lowers the estimate of risk aversion. These findings suggest that market incompleteness ought to be seen as an important component of solutions to the equity premium puzzle. Ce papier étudie l'importance de la complétude du marché en comparant le taux d'aversion au risque estimé dans le cas de marchés complets et incomplets. Dans le cas de marchés incomplets, nous utilisons des données de consommation de 50 états américains. Bien que l'utilisation de données agrégées au niveau des états est conceptuellement moins justifiée que l'utilisation de données individuelles, ce choix est préférable du fait que les données agrégées sont moins sujettes aux erreurs de mesures. Nous trouvons que le taux d'aversion au risque sous l'hypothèse de marchés incomplets est plus petit. De plus, la prise en compte du deuxième et du troisième moment de la distribution transversale de la croissance de la consommation dans le pricing kernel réduit le taux d'aversion au risque estimé. Ces résultats suggèrent que l’incomplétude du marché devrait être regardé comme une composante importante de la solution du puzzle de la prime d’équité.heterogeneity, idiosyncratic consumption risk; incomplete markets; consumption-based asset pricing model; risk aversion; equity premium puzzle, hétérogénéité, risque inhérent à la consommation, marchés incomplets, modèle d’évaluation d’actif basé sur la consommation, aversion au risque, puzzle de la prime d’équité