Making it great
The Emergence of the Corporate Form
Giuseppe Dari-Mattiacci et al.
Journal of Law, Economics, and Organization, May 2017, Pages 193-236
We describe how, during the 17th century, the business corporation gradually emerged in response to the need to lock in long-term capital to profit from trade opportunities with Asia. Since contractual commitments to lock in capital were not fully enforceable in partnerships, this evolution required a legal innovation, essentially granting the corporation a property right over capital. Locked-in capital exposed investors to a significant loss of control, and could only emerge where and when political institutions limited the risk of expropriation. The Dutch East India Company (VOC, chartered in 1602) benefited from the restrained executive power of the Dutch Republic and was the first business corporation with permanent capital. The English East India Company (EIC, chartered in 1600) kept the traditional cycle of liquidation and refinancing until, in 1657, the English Civil War put the crown under strong parliamentary control. We show how the time advantage in the organizational form had a profound effect on the ability of the two companies to make long-term investments and consequently on their relative performance, ensuring a Dutch head start in Asian trade that persisted for two centuries. We also show how other features of the corporate form emerged progressively once the capital became permanent.
Population and Civil War
Daron Acemoglu, Leopoldo Fergusson & Simon Johnson
NBER Working Paper, April 2017
Medical and public health innovations in the 1940s quickly resulted in significant health improvements around the world. Countries with initially higher mortality from infectious diseases experienced greater increases in life expectancy, population, and -- over the following 40 years -- social conflict. This result is robust across alternative measures of conflict and is not driven by differential trends between countries with varying baseline characteristics. At least during this time period, a faster increase in population made social conflict more likely, probably because it increased competition for scarce resources in low income countries.
Does social media reduce corruption?
Chandan Kumar Jha & Sudipta Sarangi
Information Economics and Policy, June 2017, Pages 60–71
In this paper we study the relationship between multi-way means of communication and corruption by exploring the link between social media and corruption. Using a cross-country analysis of over 150 countries, we document a robust and statistically significant negative relationship between Facebook penetration (a proxy for social media) and corruption. A falsification test for the relationship between Facebook penetration and corruption is also reported. We find that the relationship between Facebook penetration and corruption is strongest for the set of countries with low press freedom. Moreover, we find that social media is complementary to press freedom in regards to its association with corruption. Finally, our findings also confirm the negative correlation between internet penetration and corruption.
Ethnic Diversity and Poverty
Sefa Awaworyi Churchill & Russell Smyth
World Development, July 2017, Pages 285–302
We examine the relationship between ethnic diversity and poverty for a cross-sectional sample of developing countries. We measure diversity using indices of ethnic and linguistic fractionalization, and measure poverty using the multidimensional poverty index (MPI), multidimensional poverty headcount (MPH), intensity of deprivation, poverty gap, and poverty headcount ratio. We find that ethnic and linguistic fractionalization contributes to poverty levels. Specifically, after controlling for endogeneity, we find that a standard deviation increase in ethnic fractionalization is associated with a 0.32-, 0.44- and 0.53-standard deviation increase in the MPI, MPH and the intensity of deprivation, respectively. Moreover, a standard deviation increase in ethnic fractionalization is associated with between a 0.34- and 0.63-standard deviation increase in the population living below $1.90 and $3.10, the poverty gap at $1.90 and $3.10 a day and the headcount ratio at $1.90 and $3.10 a day. Similar results are also observed for linguistic fractionalization with standardized coefficients between 0.53 and 0.93. We find that our results are robust to alternative ways to measure poverty and ethnic diversity including ethnic polarization as well as alternative approaches to address endogeneity.
Growing, Shrinking, and Long Run Economic Performance: Historical Perspectives on Economic Development
Stephen Broadberry & John Joseph Wallis
NBER Working Paper, April 2017
Using annual data from the thirteenth century to the present, we show that improved long run economic performance has occurred primarily through a decline in the rate and frequency of shrinking, rather than through an increase in the rate of growing. Indeed, as economic performance has improved over time, the short run rate of growing has typically declined rather than increased. Most analysis of the process of economic development has hitherto focused on increasing the rate of growing. Here, we focus on understanding the forces making for a reduction in the rate of shrinking, drawing a distinction between proximate and ultimate factors. The main proximate factors considered are (1) structural change (2) technological change (3) demographic change and (4) the changing incidence of warfare. We conclude with a consideration of institutional change as the key ultimate factor behind the reduction in shrinking.
Threshold effects of human capital: Schooling and economic growth
Humna Ahsan & Emranul Haque
Economics Letters, July 2017, Pages 48–52
Empirical growth studies have often found average years of schooling to be unrelated with economic growth. This note shows that the significant positive effect of schooling can only be realised after an economy crosses a threshold level of development.
Paying for War and Building States: The Coalitional Politics of Debt Servicing and Tax Institutions
Ryan Saylor & Nicholas Wheeler
World Politics, April 2017, Pages 366-408
Many scholars believe that intense warfare propelled state formation in early modern Europe because rulers built tax institutions to pay for wars. Scholars likewise cite milder geopolitical pressures to explain the lackluster state building in the developing world. The authors analyze episodes of ferocious warfare in and beyond Europe and find that despite similar fiscal strains, not all governments built strong tax institutions to service wartime debt. When net creditors in a country’s credit market were part of the ruling political coalition, they pressed governments to diversify taxes and strengthen fiscal institutions to ensure debt service. But when net debtors held political sway, governments were indifferent to debt servicing and fiscal invigoration. Coalitional politics can help to explain why mounting debt-service obligations led to fiscal institution building in some cases, but not others. The analysis highlights how the private economic interests of ruling coalition members can affect state building.
Unified China and Divided Europe
Chiu Yu Ko, Mark Koyama & Tuan-Hwee Sng
International Economic Review, forthcoming
This paper studies the causes and consequences of political centralization and fragmentation in China and Europe. We argue that a severe and unidirectional threat of external invasion fostered centralization in China while Europe faced a wider variety of smaller external threats and remained fragmented. Political centralization in China led to lower taxation and hence faster population growth during peacetime compared to Europe. But it also meant that China was more vulnerable to occasional negative population shocks. Our results are consistent with historical evidence of warfare, capital city location, tax levels, and population growth in both China and Europe.
China's GDP Growth May be Understated
Hunter Clark, Maxim Pinkovskiy & Xavier Sala-i-Martin
NBER Working Paper, April 2017
Concerns about the quality of China’s official GDP statistics have been a perennial question in understanding its economic dynamics. We use data on satellite-recorded nighttime lights as an independent benchmark for comparing various published indicators of the state of the Chinese economy. Using the methodology of Pinkovskiy and Sala-i-Martin (2016a and b), we exploit nighttime lights to compute the optimal weights for various Chinese economic indicators in a best unbiased predictor of Chinese growth rates. Our computations of Chinese growth based on optimal weightings of various combinations of economic indicators provide evidence against the hypothesis that the Chinese economy contracted precipitously in late 2015, and are consistent with the rate of Chinese growth being higher than is reported in the official statistics.
Macroeconomic Effects of Aggregate Corporate Tax Avoidance: A Cross-Country Analysis
Terry Shevlin, Lakshmanan Shivakumar & Oktay Urcan
University of California Working Paper, April 2017
We re-examine the relation between corporate taxes and future macroeconomic growth. Prior studies in the economics literature present contradictory evidence on this relation. We argue that the mixed evidence in the prior literature is at least partly due to the use of statutory corporate tax rates which ignore the complexity of tax credits, tax exemptions, tax deductions, tax enforcement and firms’ tax planning. Consistent with these concerns, we document that the relation between future economic growth and statutory corporate tax rates are sensitive to choice of economic growth proxies, model specification and control variables. We propose an alternative tax burden measure that aggregate cash effective tax rates of listed firms, a common measure of firm-level tax avoidance, and find a strong and robust positive relation between country-level tax avoidance and future macroeconomic growth. This finding is further supported by a positive relationship between firm-level corporate tax avoidance and future firm-level investment. In cross-sectional tests, the positive relationship between aggregate corporate tax avoidance and future economic growth appears to be driven by countries with higher levels of government corruption and with higher levels of corporate tax planning as opposed to government granted tax incentives.
Impact of International Monetary Fund programs on child health
Adel Daoud et al.
Proceedings of the National Academy of Sciences, forthcoming
Parental education is located at the center of global efforts to improve child health. In a developing-country context, the International Monetary Fund (IMF) plays a crucial role in determining how governments allocate scarce resources to education and public health interventions. Under reforms mandated by IMF structural adjustment programs, it may become harder for parents to reap the benefits of their education due to wage contraction, welfare retrenchment, and generalized social insecurity. This study assesses how the protective effect of education changes under IMF programs, and thus how parents’ ability to guard their children’s health is affected by structural adjustment. We combine cross-sectional stratified data (countries, 67; children, 1,941,734) from the Demographic and Health Surveys and the Multiple Indicator Cluster Surveys. The sample represents ∼2.8 billion (about 50%) of the world’s population in year 2000. Based on multilevel models, our findings reveal that programs reduce the protective effect of parental education on child health, especially in rural areas. For instance, in the absence of IMF programs, living in an household with educated parents reduces the odds of child malnourishment by 38% [odds ratio (OR), 0.62; 95% CI, 0.66–0.58]; in the presence of programs, this drops to 21% (OR, 0.79; 95% CI, 0.86–0.74). In other words, the presence of IMF conditionality decreases the protective effect of parents’ education on child malnourishment by no less than 17%. We observe similar adverse effects in sanitation, shelter, and health care access (including immunization), but a beneficial effect in countering water deprivation.
Resource Shocks and Human Capital Stocks - Brain Drain or Brain Gain?
Journal of Development Economics, July 2017, Pages 250–268
Based on the paradox of plenty, resource abundant countries tend to be vulnerable for lower economic prosperity along with instable political institutions as well as corruption. This paper sheds light on the relationship between resource abundance and the selectivity of migration. First, I combine a Dutch-Disease-model with a Roy-Borjas-model in order to elaborate on the relationship between resource shocks and migrant selectivity theoretically. Thereby, I predict that resource booms give rise to brain drain effects which are mediated through distributional effects under certain conditions. Second, I provide empirical evidence for the effect of resource shocks on migrant selectivity based on a structural equation model in order to disentangle effects on income inequality and migrant selectivity. The results show that resource shocks, especially oil booms, strengthen brain drain effects in a sample with 116 source and 23 destination countries between 1910 and 2009.
On the Joint Evolution of Culture and Institutions
Alberto Bisin & Thierry Verdier
NBER Working Paper, April 2017
Explanations of economic growth and prosperity commonly identify a unique causal effect, e.g., institutions, culture, human capital, geography. In this paper we provide instead a theoretical modeling of the interaction between culture and institutions and their effects on economic activity. We characterize conditions on the socio-economic environment such that culture and institutions complement (resp. substitute) each other, giving rise to a multiplier effect which amplifies (resp. dampens) their combined ability to spur economic activity. We show how the joint dynamics of culture and institutions may display interesting non-ergodic behavior, hysteresis, oscillations, and comparative dynamics. Finally, in specific example societies, we study how culture and institutions interact to determine the sustainability of extractive societies as well as the formation of civic capital and of legal systems protecting property rights.
Economic Institutions and Comparative Economic Development: A Post-Colonial Perspective
Daniel Bennett et al.
World Development, August 2017, Pages 503–519
Existing literature suggests that either colonial settlement conditions or the identity of colonizer were influential in shaping the post-colonial institutional environment, which in turn has impacted long-run economic development. These two potential identification strategies have been treated as substitutes. We argue that the two factors should instead be treated as complementary and develop an alternative and unified IV approach that simultaneously accounts for both settlement conditions and colonizer identity to estimate the potential causal impact of a broad cluster of economic institutions on log real GDP per capita for a sample of former colonies. Using population density in 1500 as a proxy for settlement conditions, we find that the impact of settlement conditions on institutional development is much stronger among former British colonies than colonies of the other major European colonizers. Conditioning on several geographic factors and ethno-linguistic fractionalization, our baseline 2SLS estimates suggest that a standard deviation increase in economic institutions is associated with a three-fourth standard deviation increase in economic development. Our results are robust to a number of additional control variables, country subsample exclusions, and alternative measures of institutions, GDP, and colonizer classifications. We also find evidence that geography exerts both an indirect and direct effect on economic development.
The Millennium Peak in Club Convergence: A New Look at Distributional Changes in The Wealth of Nations
Journal of Applied Econometrics, April/May 2017, Pages 621–642
This paper proposes an easy-to-use nonparametric indicator for club convergence, or convergence within clusters of countries: it measures whether the modes of the gross domestic product (GDP) per capita distribution become more pronounced over time. Relying on changes in the critical bandwidth for unimodality, the indicator is a dynamic extension of concepts from often-used multimodality tests. Its evolution suggests the new empirical result of a ‘millennium peak’ in club convergence in the worldwide GDP per capita distribution. The club convergence movements of the 1980s and 1990s, when groups of poor and rich countries converged to two separate points, was followed by a de-clubbing movement after the turn of the millennium.
Even Constrained Governments Take: The Domestic Politics of Transfer and Expropriation Risks
Benjamin Graham, Noel Johnston & Allison Kingsley
Journal of Conflict Resolution, forthcoming
This article analyzes an understudied and contested form of government taking, transfer restriction, which has supplanted expropriation as the most ubiquitous and costly type of international property rights violation. Veto-player-type constraints curtail governments’ ability to engage in outright and (nontransfer related) creeping expropriation but have little impact on their ability to generate wealth via transfer restrictions. We use a formal model to derive testable implications regarding the effect of political institutions and domestic politics on governments’ ability to collect these two types of rent. Empirically, we use novel time-series cross-sectional data to show that while veto-player-type political constraints diminish expropriation risk, transfer risk is much less affected: even constrained governments impose transfer restrictions.
Policy Distortions and Aggregate Productivity with Endogenous Establishment-Level Productivity
José-María Da-Rocha, Marina Mendes Tavares & Diego Restuccia
NBER Working Paper, April 2017
What accounts for differences in output per capita and total factor productivity (TFP) across countries? Empirical evidence points to resource misallocation across heterogeneous production units as an important factor. We study resource misallocation in a model where establishment-level productivity is endogenous and responds to the same policy distortions that create misallocation. In this framework, policy distortions not only misallocate resources across a given set of productive units (static effect), but also create disincentives for productivity improvement (dynamic effect) thereby affecting the productivity distribution and further contributing to lower aggregate output and productivity. The dynamic effect is substantial quantitatively. Reducing the dispersion in revenue productivity in the model by 25 percentage points to the level of the U.S. benchmark implies an increase in aggregate output and TFP by a factor of 2.9-fold. Improved resource allocation accounts for 42 percent of the gain, whereas the change in the productivity distribution accounts for the remaining 58 percent.