Download Political institutions

Political institutions
I. Unbundling institutions,
Acemoglu and Johnson (2005)
• Two theories of the state
• 1. Contract theory: the state provides the
legal framework that enables private
contracts to facilitate economic
transactions
• 2. Predatory theory: the state is an
instrument for transferring resources from
one group to the other
Unbundling institutions
• OBJECTIVE: Opening the black box of institutions,
considering more specific types of institutions
• Contracting institutions VS property rights institutions
• Contracting institutions:
– Legal formalism measure of DLLS03 as a proxy for the costs of
enforcing private contracts.
– This variable measures the number of formal legal procedures
necessaray to resolve a simple case of collecting on an unpaid
check or evicting a non-paying tenant
• Property rights institutions:
– Index of protection against government expropriation
– Constraints on the executive
Endogeneity issues
Contracting institutions
Economic outcomes
Property rights institutions
Instruments
Contracting institutions
Legal origins
Property rights institutions
Mortality rates of settlers
Economic outcomes
• UNIVARIATE
regressions
• Strong effect of property
rights institutions on
GDP, investment, credit,
and stockmarkets
• Strong effect of
contracting institutions
on credit and stock
markets, not so strong
effect for GDP and
investment
• MULTIVARIATE
regressions
• Strong effect of property
rights institutions on
GDP, investment, credit,
and stockmarkets
• Strong effect of
contracting institutions
on stock markets, not so
strong effect for GDP
and investment
Conclusion
• Property rights appear to be more important
than contracting institutions for financial and
economic development
• Contracting institutions only matter for the form
of financial intermediation
• This suggests that private agents find alternative
institutions to support private contracting (e.g.
trust, repeated relationships, simpler contract
like debt vs equity), while no such solutions exist
to protect agents against government
expropriation
II. The role of democracy
Facts about democracy and growth
• Richer countries are more likely to be
democracies, Barro (1999)
• This correlation disappears in panel data if
controlling for country fixed effects,
Acemoglu, Johnson, Robinson, and Yared
(2005)
• Overall, there is mixed evidence on a
positive linkage between growth and
democracy
Democracy, Entry and Growth: A
simple model
• More democracy -> Less corruption -> More
entry -> More innovation
• Model solved in class
• Main results:
– A firm close to the frontier responds to increased
entry threat by innovating more in order to escape the
entry threat
– A firm that starts far behind the frontier is discouraged
from innovating ba an increased entry threat because
he is unable to prevent the entrant from destroying
the value of his innovation.
– The higher the level of democracy, the less profitable
it is for incumbent firms to bribe politicians
Aghion, Alesina and Trebbi (2004)
• Find supportive empirical evidence for the
previous model:
– democracy and political rights enhance
growth of more advanced sectors, less so for
less advanced sectors
– Democracies do indeed have lower entry
barriers
Democracy, Inequality and Growth
• Main result
– More inequality leads to more redistribution,
which in turn affects negatively economic
growth
– More democracy reinforces this channel
because of its impact on redistribution
• Model solved in class
Persson and Tabellini (1994)
• Empirical evidence suggests that
inequality is negatively correlated with
economic growth in democracies
• However, other papers have shown that
this correlation is not super robust -> more
work needs to be done