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

Property rights institutions

Economic outcomes

Instruments

Contracting institutions

Property rights institutions

Economic outcomesLegal origins

Mortality rates of settlers

• 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