2006
Central bank cooperation depends on a few crucial parameters: the extent to which central bankers
agree on theory (end means relationships); the extent to which they can agree on goals (social
purpose); the capacity (technical and institutional) to achieve their collective goals; and whether the
broader political environment facilitates or impedes cooperation. This article explores these questions
by first providing an overview of central banks and bankers. Among the G-10 countries, central
bankers are likely to share political independence, relatively long term horizons, and (increasingly)
academic backgrounds. These conditions may be conducive to high levels of cooperation in the future.
Second, I explore the “easiest” form of cooperation – information sharing – and conclude that this is an
area in which central bank cooperation will become increasingly routinised. Cooperation to address
global financial stability is a more difficult cooperative dilemma, with tensions between the need for
efficient regulatory management and the inclusion of a broader range of cooperating institutions. In the
area of exchange rate and monetary policy coordination, consensus among the major exchange rate
authorities regarding the effectiveness of coordinated exchange market interventions has withered,
though this does not preclude a new consensus from emerging in the future. One of the most
significant challenges to central bank cooperation in the future will be how to include rising monetary
and financial powers, particularly China, into the cooperative management of international monetary
conditions.
Also Bank for International Settlements Working Paper #200.
Download PDFWe construct a model of simultaneous change and persistence in institutions. The model
consists of landowning elites and workers, and the key economic decision concerns the form
of economic institutions regulating the transaction of labor (e.g., competitive markets versus
labor repression). The main idea is that equilibrium economic institutions are a result of the
exercise of de jure and de facto political power. A change in political institutions, for example
a move from nondemocracy to democracy, alters the distribution of de jure political power,
but the elite can intensify their investments in de facto political power, such as lobbying or
the use of paramilitary forces, to partially or fully offset their loss of de jure power. In the
baseline model, equilibrium changes in political institutions have no effect on the (stochastic)
equilibrium distribution of economic institutions, leading to a particular form of persistence in
equilibrium institutions, which we refer to as invariance. When the model is enriched to allow
for limits on the exercise of de facto power by the elite in democracy or for costs of changing
economic institutions, the equilibrium takes the form of a Markov regime-switching process
with state dependence. Finally, when we allow for the possibility that changing political institutions
is more difficult than altering economic institutions, the model leads to a pattern ofcaptured democracy, whereby a democratic regime may survive, but choose economic institutions
favoring the elite. The main ideas featuring in the model are illustrated using historical
examples from the U.S. South, Latin America and Liberia.
Using micro-level data (from tax records) on attorney incomes in
2004, we reconstruct the industrial organization of the Japanese legal services industry.
These data suggest a bifurcated bar. The most talented would-be lawyers (those with the
highest opportunity costs) pass the bar-exam equivalent on one of their first tries or
abandon the effort. If they pass, they then opt for careers in Tokyo that involve complex
litigation and business transactions. The work places a premium on their talent, and
from it they earn appropriately high incomes. The less talented face lower opportunity
costs, and willingly spend many years studying for the exam. If they eventually pass,
they tend to forego the many amenities available to professional families in Tokyo and
disproportionately opt for careers in the under-lawyered provinces. There, they earn
monopoly rents not available in the far more competitive Tokyo market.
Also John M. Olin Center for Law, Economics, and Business, Working Paper no. 559.
Download PDFBy juxtaposing at-will employment with corporate
fiduciary duties, Jordan v. Duff & Phelps creates something of a
classroom brain-twister. Yet the exchange between Frank Easterbrook
(writing for the majority) and Richard Posner (dissenting) also illustrates
two fundamental but seldom recognized principles of real-world courts.
First, the bench is properly a place for honest jurists of moderate talent
(ideally, monitored for their work). It is not a place for men and women
with the independence and sophistication of Posner and Easterbrook.
Such judges can muddy the law by trying to fix bad precedent, and worsen
the law by setting interventionist examples for their far less talented peers.
Second, by basic second-best principles, the right legal rule for a
substantial fraction of contractual disputes is not a rule designed to
facilitate efficient deals. It is a rule that dismisses a plaintiff’s claim
forthright. We live in a world with imperfect judges, costly and dishonest
attorneys, and only moderately intelligent juries. As Posner implicitly
recognizes in Jordan (but other judges rarely do), many cases are simply
beyond the capacity of such real-world courts to handle cost-effectively.
Also John M. Olin Center for Law, Economics, and Business, Working Paper no. 557.
Download PDFThe conventional wisdom in political science is that for a democracy to be consolidated, all groups must have a chance to attain power. If they do not then they will subvert democracy and choose to
fight for power. In this paper we show that this wisdom is, if not totally incorrect, seriously incomplete. This is so because although the probability of winning an election increases with the size of a group, so does the probability of winning a
fight. Thus in a situation where all groups have a high chance of winning an election, they may also have a high chance of winning a
fight. Indeed, in a natural model, we show that democracy may never be consolidated in such a situation. Rather, democracy may only be stable when one group is dominant. We provide a test of a key aspect of our model using data from La Violencia, a political conflict in Colombia during the years 1946-1950 between the Liberal and Conservative parties. Consistent with our results, and contrary to the conventional wisdom, we show that
fighting between the parties was more intense in municipalities where the support of the parties was more evenly balanced.
We present a model of coarse thinking, in which individuals group situations into
categories, and transfer the informational content of a given message from situations in a
category where it is useful to those where it is not. The model explains how
uninformative messages can be persuasive, particularly in low involvement situations,
and how objectively informative messages can be dropped by the persuader without the
audience assuming the worst. The model sheds light on product branding, the structure
of product attributes, and several puzzling aspects of mutual fund advertising.
Supporters of the anti-globalization movement argue that "globalization has dramatically increased inequality between and within nations" (Mazur, 2000), and in particular that it has marginalized the poor in developing countries and left behind the poorest countries. Meanwhile, more moderate mainstream politicians argue that the poor must invest in education to take advantage of globalization (Clinton, 2000).
Such views are difficult to reconcile with a standard Heckscher-Ohlin trade model with two countries, two goods, and two factors (skilled and unskilled labor, or alternatively capital and labor). Under a simple model, globalization should benefit the poor in poor countries and reduce inequality in poor countries, and within the developing world the poorest countries and least educated workers should have the greatest opportunity to benefit from globalization.
Restrictions on migration of low-skilled workers to richer countries are arguably the
largest distortion in the world economy and the most costly to the world’s poor. Yet rich
countries seem unlikely to eliminate these restrictions due to concerns about the impact
of migration on inequality among natives, public finances, and native culture. A rapidly
growing new type of migration may not be subject to these concerns. Many "new rich"
countries issue special visas for foreigners, women in particular, to work as private
household workers. "Old rich" countries often choose low levels of enforcement against
illegal immigrants working in this sector. We argue that by allowing high-skilled native
women to increase market labor supply, this type of immigration increases the wages of
low-skilled natives and provides a fiscal benefit by correcting tax distortions toward
home production. Calibration suggests welfare gains to natives from a program, such as
Hong Kong’s or Singapore’s, under which roughly 7% of the labor force are foreign
private household workers, may increase the ratio of native low-skilled workers by 3.9%
and increase native welfare by 1.2% of income, roughly 100 times the level estimated by
Borjas and increases the relative wages of native low-skilled to high-skilled by 3.9%.
Paradoxically, however, even if these programs are pareto improving, they may conflict
with ethical norms requiring stronger social obligations to long-term residents than to
other foreigners. Short-term programs may be more acceptable.
We conduct two experiments to understand the process of obtaining a driver’s license in India. In the first
experiment, we randomly assign license candidates to one of three groups: bonus (offered a financial reward
if they could obtain their license fast), lesson (offered free driving lessons upfront), and control. The control
group alone illustrates bureaucratic failures: 71% of the license getters in that group avoided the mandated
driving test and 62% failed a surprise driving test. The system responds to private needs—there are more
license getters in the bonus group—but at a social cost: there are more license getters who cannot drive in the
bonus group. The system however also appears to respond to social considerations, as there are more license
getters in the lesson group. Large extra-legal payments are made by license getters: those in the control group
pay 2.5 times the official fee. More of these extra-legal payments take place in the bonus group. Surprisingly,
these extra-legal payments are not direct bribes to bureaucrats but instead payments to agents. In the second
experiment, we perform an audit study to better understand the role of agents. The audit shows that agents
can provide licenses to individuals even if they cannot drive; but the audit also shows that agents cannot as
easily circumvent all other rules. We argue that our findings are most consistent with agents being the
channel for corruption in this system. We also report some suggestive evidence that bureaucrats create red
tape, possibly to induce more license candidates to use agents.
Water-related diseases, particularly diarrhea in young children, kill two million people
annually. To address this problem, donors and governments often provide infrastructure such as
communal standpipes, wells, and protected springs in rural areas, where piping water into homes
is infeasible. We study the impact of source water quality improvements achieved via spring
protection in rural Kenya using a randomized evaluation. Spring protection leads to large
improvements in source water quality as measured by the fecal indicator bacteria E. coli. Water
quality gains at the home are smaller on average, but this finding depends critically on
households’ water source choices. At households that only used the sample spring at baseline,
71% of the spring water quality benefits are translated into home water gains, suggesting that recontamination
in transport and storage may be less of a concern than is sometimes claimed.
Consistent with this view, the home water quality gains from spring protection are no larger for
households with better baseline sanitation or hygiene knowledge. Changes in household water
source choices after spring protection are used to derive revealed preference estimates of the
willingness to pay for improved water quality using a travel cost approach. The average
willingness to pay for the moderate gains in home water quality due to spring protection is at
least US$3.27 per household per year. We find no significant child health effects of spring
protection.
This article addresses the question of why religion becomes a central issue in some civil wars whereas in others—even many of those whose primary combatants identify strongly with a particular religion—it has not. This question is important because religious civil wars are costly to the contending actors (both in the short term and the long term) and are more likely to affect regional and perhaps even international stability.
This document also appears as Discussion Paper 2006-03 of the Belfer Center for Science and International Affairs, John F. Kennedy School of Government. Comments are welcome and may be directed to the author via email at
monica_toft@harvard.edu.
Download PDFInternational treaties in pursuit of common endeavors can be classified into two categories: those that set mutually agreed national objectives and leave each signatory to pursue them in their own way; and those that define mutually agreed actions. The proposed treaty on global climate change falls into the first category with respect to greenhouse gas emissions by the rich countries. Stabilization of atmospheric concentration of greenhouse gases requires eventual engagement of developing countries. The proposed treaty, based on historical emission levels, does not provide a foundation acceptable to them. Indeed, there is unlikely to be any generally acceptable principle for allocating emission rights, potentially worth trillions of dollars, among rich and poor countries. This probable impossibility suggests a successful attack on greenhouse gas emissions, necessarily international in scope, must be through mutually agreed actions, such as a nationally-collected emissions tax, rather than through national emission targets.
Cooper, Richard N. "A Treaty on Global Climate Change: Problems and Prospects." Working Paper 97–09, Weatherhead Center for International Affairs, Harvard University, December 1997
Download PDFAxel Michaelowa’s paper addresses how the world should proceed in a post Kyoto Protocol period, which begins in 2013 but must be agreed before then. It is informative, ingenious, and constructive. But its proposal for extending emissions targets and enlarging the number of countries to which they apply is deeply flawed, partly by carrying forward the flaws inherent in the Kyoto Protocol (KP hereafter). This comment will address the intellectual framework of the proposal, identify three fatal flaws (all inherent in the Kyoto Protocol), and suggest an alternative approach.
Michaelowa explicitly rejects a cost-benefit approach to public policy in dealing with global climate change in favor of an absolute (indicative) ceiling to atmospheric concentrations of greenhouse gases, mainly but not exclusively carbon dioxide. This approach implies an extreme degree of risk aversion with respect to climate change – any cost to avoiding it is worth the price—about which every economist should be skeptical.
Download PDFArtificial states are those in which political borders do not coincide with a division of nationalities desired by the people on the ground. We propose and compute for all countries in the world two new measures of borders and divisions of people. One is based on measuring how borders split ethnic groups into two separate adjacent countries. The other one measures how straight land borders are, under the assumption the straight land borders are more likely to be artificial. We then show that these two measures seem to be highly correlated with several measures of political and economic success.
The relations between the People’s Republic of China (PRC) and nearly all Latin American countries blossomed during the first half of the first decade of the twenty-first century. “China fever” gripped the region. Latin American presidents, ministers, business executives and journalists “discovered” China and its rapidly growing impact on the world’s economy and on Latin America itself.
The principal explanation for this boom in “China fever” was China’s own economic boom and its widening and deepening worldwide spread. In the current decade, Sino-Latin American trade, and economic relations more generally, have grown at a spectacular pace. Improved political relations were a necessary part of the expansion in economic relations because intergovernmental agreements facilitate economic relations, but the exuberance of the economic boom outpaced the improvement in political relations. Military or militarily-sensitive relations changed little, notwithstanding the fears of some in the United States and elsewhere over this question.
Also Inter-American Dialogue Working Paper. Washington, DC: 2006.
In the absence of owners, how effective are the constraints imposed by the state in promoting effective firm governance? This paper develops state-level indices of governance environment facing not-for-profits and examines the effects of these rules on not-for-profit behavior. Stronger provisions aimed at detecting managerial misbehavior are associated with significantly greater charitable expenditures, increased foundation payouts and lower insider compensation. Instrumental variables analysis confirms the relationship between the governance environment and not-for-profit performance. The paper also examines how governance influences an alternative metric of not-for-profit performance—the provision of social insurance. Stronger governance measures are associated with intertemporal smoothing of resources and greater activity in response to negative economic shocks.
Also NBER Working Paper No. 11140.
We generalize the Antràs and Helpman (2004) model of the international organization of production in order to accommodate varying degrees of contractual frictions. In particular, we allow the degree of contractibility to vary across inputs and countries. A continuum of firms with heterogeneous productivities decide whether to integrate or outsource the production of intermediate inputs, and from which country to source them. Final-good producers and their suppliers make relationship-specific investments which are only partially contractible, both in an integrated firm and in an arm’s-length relationship. We describe equilibria in which firms with different productivity levels choose different ownership structures and supplier locations, and then study the effects of changes in the quality of contractual institutions on the relative prevalence of these organizational forms. Better contracting institutions in the South raise the prevalence of offshoring, but may reduce the relative prevalence of FDI or foreign outsourcing. The impact on the composition of offshoring depends on whether the institutional improvement affects disproportionately the contractibility of a particular input. A key message of the paper is that improvements in the contractibility of inputs controlled by final-good producers have different effects than improvements in the contractibility of inputs controlled by suppliers.
We model and calibrate the arguments in favor and against short-term and long-term debt. These arguments broadly include: maturity premium, sustainability, and service smoothing. We use a dynamic equilibrium model with tax distortions and government outlays uncertainty, and model maturity as the fraction of debt that needs to be rolled over every period. In the model, the benefits of defaulting are tempered by higher future interest rates. We then calibrate our artificial economy and solve for the optimal debt maturity for Brazil as an example of a developing country and the U.S. as an example of a mature economy. We obtain that the calibrated costs from defaulting on long-term debt more than offset costs associated with short-term debt. Therefore, short-term debt implies higher welfare levels.
Harvard Business School Working Paper 06-005; NBER Working Paper 13119, August 2006
This paper provides empirical evidence of the influence of adolescent marriage opportunities on female schooling attainment and gives predictions of the impact of imposing universal age-of-consent laws. Using data from rural Bangladesh, we explore the commonly cited hypotheses that women attain less schooling as a result of marrying young. We isolate the causal effect of marriage timing by exploiting variation in the timing of menarche as an instrumental variable for age of first marriage. Our results indicate that marriage age matters: Each additional year that marriage is delayed is associated with 0.30 additional years of schooling and 6.5% higher probability of literacy. Delayed marriage is also associated with a significant increase in use of preventive health care services, some of which appears to be independent of the change in schooling, indicating separate “age effects” of delaying marriage. In the context of competitive marriage markets we show that the above results can be used to obtain estimates of the change in equilibrium female education that would arise from introducing a minimum legal age of marriage. The resulting analysis implies that, under reasonable assumptions, enforcing universal age of consent laws would have a strong positive impact on female schooling.
We study a small open economy characterized by two empirically important frictions—incomplete financial markets and an inability of the government to commit to policy. We characterize the best sustainable fiscal policy and show that it can amplify and prolong shocks to output. In particular, even when the government is completely benevolent, the government’s credibility not to expropriate capital endogenously varies with the state of the economy and may be "scarcest" during recessions. This increased threat of expropriation depresses investment, prolonging downturns. It is the incompleteness of financial markets and lack of commitment that generate investment cycles even in an environment where first best capital stock is constant.
