Political Economy of Mechanisms

We study the provision of dynamic incentives to self‐interested politicians who control the allocation of resources in the context of the standard neoclassical growth model. Citizens discipline politicians using elections. We show that the need to provide incentives to the politician in power creates political economy distortions in the structure of production, which resemble aggregate tax distortions. We provide conditions under which the political economy distortions persist or disappear in the long run. If the politicians are as patient as the citizens, the best subgame perfect equilibrium leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear. In contrast, when politicians are less patient than the citizens, political economy distortions remain asymptotically and lead to positive aggregate labor and capital taxes.     

The Network Origins of Aggregate Fluctuations

This paper argues that, in the presence of intersectoral input–output linkages, microeconomic idiosyncratic shocks may lead to aggregate fluctuations. We show that, as the economy becomes more disaggregated, the rate at which aggregate volatility decays is determined by the structure of the network capturing such linkages. Our main results provide a characterization of this relationship in terms of the importance of different sectors as suppliers to their immediate customers, as well as their role as indirect suppliers to chains of downstream sectors. Such higher‐order interconnections capture the possibility of “cascade effects” whereby productivity shocks to a sector propagate not only to its immediate downstream customers, but also to the rest of the economy. Our results highlight that sizable aggregate volatility is obtained from sectoral idiosyncratic shocks only if there exists significant asymmetry in the roles that sectors play as suppliers to others, and that the “sparseness” of the input–output matrix is unrelated to the nature of aggregate fluctuations.     

VERTICAL INTEGRATION AND TECHNOLOGY: THEORY AND EVIDENCE

We study the determinants of vertical integration. We first derive a number of predictions regarding the relationship between technology intensity and vertical integration from a simple incomplete contracts model. Then, we investigate these predictions using plant‐level data for the UK manufacturing sector. Most importantly, and consistent with the theoretical predictions, we find that the technology intensity of downstream (producer) industries is positively correlated with the likelihood of integration whereas the intensity of upstream (supplier) industries is negatively correlated with it. Also consistent with theory, both correlations are stronger when the supplying industry accounts for a large fraction of the producer's costs. These results are generally robust and hold with alternative measures of technology intensity, with alternative estimation strategies, and with or without controlling for a number of firm‐ and industry‐level characteristics. (JEL: L22, L23, L24, L60)     

THE MONOPOLY OF VIOLENCE: EVIDENCE FROM COLOMBIA

Many states in Latin America, Africa, and Asia lack the monopoly of violence, even though this was identified by Max Weber as the foundation of the state, and thus the capacity to govern effectively. In this paper we develop a new perspective on the establishment of the monopoly of violence. We build a model to explain the incentive of central states to eliminate nonstate armed actors (paramilitaries) in a democracy. The model is premised on the idea that paramilitaries may choose to and can influence elections. Since paramilitaries have preferences over policies, this reduces the incentives of the politicians they favor to eliminate them. We then investigate these ideas using data from Colombia between 1991 and 2006. We first present regression and case study evidence supporting our postulate that paramilitary groups can have significant effects on elections for the legislature and the executive. Next, we show that the evidence is also broadly consistent with the implication of the model that paramilitaries tend to persist to the extent that they deliver votes to candidates for the executive whose preferences are close to theirs and that this effect is larger in areas where the presidential candidate would have otherwise not done as well. Finally, we use roll‐call votes to illustrate a possible “quid pro quo” between the executive and paramilitaries in Colombia.     

Examining power through social relations in teachers’ discourse about intercultural education

This study examined power through social relations between entities in the implementation of intercultural communicative competence (ICC) in an environment where English is spoken as a foreign language. The examination involved analysing the discourse of two foreign English teachers. Specifically, subject positioning of entities, made apparent through pronominal markers and shifts, as well as discourse meaning, were analysed to establish attributes and relations pertinent to the teaching and learning entities and context. The findings showed how teachers’ epistemologies can be made visible through the examination of discourse. Steven, a participant of this study, indicated that while he seemingly practised an inclusive approach, he was restricted by his teaching context, which appeared to be stricter, and his students’ language proficiency. The second teacher, Tamara, was more democratic in her pedagogical approach, seen through her students’ involvement. This signified a more open work environment as both teacher and student could make necessary adjustments to support the learning objectives. From this study, we could see how intercultural education is still perceived differently. This difference may be due to the parameters of the teachers. This study also showed how teachers’ discourse is a feasible site for the examination of power.     

INTELLECTUAL PROPERTY RIGHTS POLICY,COMPETITION AND INNOVATION

To what extent and in what form should the intellectual property rights (IPR) of innovators be protected? Should a company with a large technology lead over its rivals receive the same IPR protection as a company with a more limited advantage? In this paper, we develop a dynamic framework for the study of the interactions between IPR and competition, in particular to understand the impact of such policies on future incentives. The economy consists of many industries and firms engaged in cumulative (step‐by‐step) innovation. IPR policy regulates whether followers in an industry can copy the technology of the leader. We prove the existence of a steady‐state equilibrium and characterize some of its properties. We then quantitatively investigate the implications of different types of IPR policy on the equilibrium growth rate and welfare. The most important result from this exercise is that full patent protection is not optimal; instead, optimal policy involves state‐dependent IPR protection, providing greater protection to technology leaders that are further ahead than those that are close to their followers. This is because of a trickle‐down effect: providing greater protection to firms that are further ahead of their followers than a certain threshold increases the R&D incentives also for all technology leaders that are less advanced than this threshold.     

The Economics of Labor Coercion

The majority of labor transactions throughout much of history and a significant fraction of such transactions in many developing countries today are “coercive,” in the sense that force or the threat of force plays a central role in convincing workers to accept employment or its terms. We propose a tractable principal–agent model of coercion, based on the idea that coercive activities by employers, or “guns,” affect the participation constraint of workers. We show that coercion and effort are complements, so that coercion increases effort, but coercion always reduces utilitarian social welfare. Better outside options for workers reduce coercion because of the complementarity between coercion and effort: workers with a better outside option exert lower effort in equilibrium and thus are coerced less. Greater demand for labor increases coercion because it increases equilibrium effort. We investigate the interaction between outside options, market prices, and other economic variables by embedding the (coercive) principal–agent relationship in a general equilibrium setup, and studying when and how labor scarcity encourages coercion. General (market) equilibrium interactions working through the price of output lead to a positive relationship between labor scarcity and coercion along the lines of ideas suggested by Domar, while interactions those working through the outside option lead to a negative relationship similar to ideas advanced in neo‐Malthusian historical analyses of the decline of feudalism. In net, a decline in available labor increases coercion in general equilibrium if and only if its direct (partial equilibrium) effect is to increase the price of output by more than it increases outside options. Our model also suggests that markets in slaves make slaves worse off, conditional on enslavement, and that coercion is more viable in industries that do not require relationship‐specific investment by workers.     

EMERGENCE AND PERSISTENCE OF INEFFICIENT STATES

We present a theory of the emergence and persistence of inefficient states based on patronage politics. The society consists of rich and poor. The rich are initially in power, but expect to transition to democracy, which will choose redistributive policies. Taxation requires the employment of bureaucrats. By choosing an inefficient state structure, the rich may be able to use patronage and capture democratic politics, so reducing the amount of redistribution in democracy. Moreover, the inefficient state creates its own constituency and tends to persist over time. Intuitively, an inefficient state structure creates more rents for bureaucrats than would an efficient one. When the poor come to power in democracy, they will reform the structure of the state to make it more efficient so that higher taxes can be collected at lower cost and with lower rents for bureaucrats. Anticipating this, when the society starts out with an inefficient organization of the state, bureaucrats support the rich, who set lower taxes but also provide rents to bureaucrats. We obtain that the rich–bureaucrats coalition may also expand the size of bureaucracy excessively so as to generate enough political support. The model shows that an equilibrium with an inefficient state is more likely to arise when there is greater income inequality, when bureaucratic rents take intermediate values, and when individuals are sufficiently forward‐looking.