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The Amplification Effect: Foreign Aid's Impact on Political Institutions

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How does foreign aid affect recipient countries’ political institutions? Two competing hypotheses offer contradictory predictions. The first sees aid, when delivered correctly, as an important means of making dictatorial recipient countries more democratic. The second sees aid as a corrosive force on recipient countries’ political institutions that makes them more dictatorial. This paper offers a third hypothesis about how aid affects recipients’ political institutions that we call the “amplification effect.” We argue that foreign aid has neither the power to make dictatorships more democratic nor to make democracies more dictatorial. It only amplifies recipients’ existing political institutions. We investigate this hypothesis using panel data for 124 countries between 1960 and 2009. Our findings support the amplification effect. Aid strengthens democracy in already democratic countries and dictatorship in already dictatorial regimes. It doesn’t alter the trajectory of recipients’ political institutions.
Nabamita Dutta, Peter T. Leeson and Claudia R. Williamson

The Role of Growth Slowdowns and Forecast Errors in Public Debt Crises

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According to the well‐known arithmetic of debt dynamics, a growth slowdown results in rising debt ratios if fiscal policy does not adjust. This mechanical effect plays a role in a surprisingly wide variety of public debt crises, from the Latin American debt crisis of the 80s and 90s to the low income HIPC crisis of the same period to the current Eurozone debt crisis and US debt crisis. Growth slowdowns often result in growth projections by fiscal authorities that are too optimistic, one of the possible reasons for which fiscal policy fails to adjust. Sound forecasting practices of projecting mean reversion and being more conservative the worse the debt situation are ignored in some major debt crises.
William Easterly

Dignity and Development

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This paper explores how expanding the notion of informal institutions in the broader institutional framework provides a more complete explanation for development. Specifically, I incorporate McCloskey’s notion of ‘dignity and liberty’ as part of the institutional nexus. By doing so, a richer explanation and understanding of the importance of institutions in explaining different economic outcomes is offered. Focusing on bourgeois dignity offers a precise mechanism to explain how institutions matter to support economic growth. In addition, analyzing the changing attitudes towards the bourgeoisie provides a specific example of mechanisms that can lead to institutional change.
Claudia R. Williamson

Reconstructing Empire in British and French Africa. Past and Present

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It was indeed empire that European leaders at the end of World War II needed to reconstruct. They had come very close to losing a struggle with another form of empire, the Nazi Reich, and in South East Asia they had lost valued territories to a country that had dared to play the empire-game with them— Japan. At the same time, both British and French leaders felt, with some reason, that they had been saved by their empires: by the resources in men and material contributed by the dominions and colonies of Great Britain and by the symbolic importance of French Equatorial Africa’s refusal to follow Vichy, followed by the contributions of North African territories and diverse African people to the reconquest of European France from the Mediterranean . . . 
Frederick Cooper

Does Regulatory Supervision Curtail Microfinance Profitability and Outreach?

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Regulation allows microfinance institutions to take deposits and expand their banking functions, but complying with regulation can be costly. We examine implications for institutions’ profitability and their outreach to small-scale borrowers and women, using a newly-constructed dataset on 245 leading institutions. Controlling for the non-random assignment of supervision via treatment effects and instrumental variables regressions, we find evidence consistent with the hypothesis that profit-oriented microfinance institutions respond to supervision by maintaining profit rates but curtailing outreach to women and customers that are costly to reach. Institutions with a weaker commercial focus instead tend to reduce profitability but maintain outreach.
Jonathan Morduch, Robert Cull, and Asli Demirgüç-Kunt

Reestablishing the Income-Democracy Nexus

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Reestablishing the Income-Democracy Nexus
A number of recent empirical studies have cast doubt on the “modernization theory” of democratization, which posits that increases in income are conducive to increases in democracy levels. This doubt stems mainly from the fact that while a strong positive correlation exists between income and democracy levels, the relationship disappears when one controls for country fixed effects. This raises the possibility that the correlation in the data reflects a third causal characteristic, such as institutional quality. In this paper, we reexamine the robustness of the income-democracy relationship . . . 
Jess Benhabib, Alejandro Corvalan and Mark M. Spiegel

Climate and Civil War: Is the Relationship Robust?

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A recent paper by Burke et al. (henceforth “we”) finds a strong historical relationship between warmer than-average temperatures and the incidence of civil war in Africa (Burke et al. 2009). These findings have recently been challenged by Buhaug (2010) who finds fault with how we controlled for other potential explanatory variables, how we coded civil wars, and with our choice of historical time period and climate dataset. We demonstrate that Buhaug’s proposed method of controlling for confounding variables has serious econometric shortcomings . . . 
Marshall Burke, John Dykema, David Lobell, Edward Miguel and Shanker Satyanath

Re-examining Economics Shocks and Civil Conflict.

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Miguel, Satyanath, and Ernest Sergenti (2004), henceforth MSS, show that economic growth is negatively related to civil conflict in Africa, using annual rainfall variation as an IV for growth. Antonio Ciccone (2011) argues that thanks to rainfall’s mean-reverting nature, rainfall levels are preferable to annual changes. We make three points. First, MSS’s  findings hold using rainfall levels as instruments. Second, Ciccone (2011) does not provide theoretical justification for preferring rainfall levels. Third, the first-stage relationship between rainfall and growth is weaker after 2000, suggesting that alternative instruments are needed when studying recent conflicts. We highlight the accumulating microeconomic evidence that adverse economic shocks lead to political violence.
Shanker Satyanath and Edward Miguel

Rhetoric versus Reality: The Best and Worst of Aid Agency Practices

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Foreign aid critics, supporters, recipients and donors have produced eloquent rhetoric on
the need for better aid practices – has this translated into reality? This paper attempts to monitor the best and worst of aid practices among bilateral, multilateral, and UN agencies. We create aid practice measures based on aid transparency, specialization, selectivity, ineffective aid channels and overhead costs. We rate donor agencies from best to worst on aid practices. We find that the UK does well among bilateral agencies, the US is below average, and Scandinavian donors do surprisingly poorly . . . 

Democratic Transitions and Implicit Power: An Econometric Approach

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Recent works of political economy have emphasized the importance of distinguishing between transfers of explicit and implicit power over economic decision making in democratic transitions. Scholars have so far provided interesting anecdotal evidence supporting their claims of potential divergence between transfers of explicit and implicit power. In this paper we apply econometric techniques to examine if a transfer of explicit power has not also been accompanied by a transfer of implicit power. We do so in the context of a major country where considerable uncertainty remains over the military’s implicit role in economic decision making . . . 
Shanker Satyanath and Gokce Goktepe

Marriage Networks, Nepotism and Labor Market Outcomes in China

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This paper considers the potential role of marriage in improving labor market outcomes through the expansion of an individuals' networks. I focus on the impact of a father-in-law on a young man's career using panel data from China. Particular features of the Chinese context allows for an identification strategy that isolates the network effects related to a man's father-in-law by comparing the post-marriage death of a father-in-law with the death of a mother-in-law. The estimates suggest that the loss of the father-in-law translates into a decrease in a man's earnings by 20%. Furthermore, the evidence indicates that the decline in wages can be attributed to nepotism rather than a decline in job information.
Shing-Yi Wang

Efficiency Considerations of Donor Fatigue, Universal Access to ARTs and Health Systems.

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There is great need to consider how the limited resources available can be used most efficiently to increase the number of lives saved and to ensure that these resources also benefit health systems. Improving efficiency is much more than just improving the productive efficiency and also about ensuring that resources are going to where they will be the most beneficial and making investments that are the most efficient over time. These choices may be essential to achieving the goal of universal access to treatment as well as the sustainability of these programmes.
Karen Grépin

State Misallocation and Housing Prices: Theory and Evidence from China.

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This paper examines the equilibrium price effects of the privatization of housing assets that were previously owned and allocated by the state. I develop a theoretical framework that shows that privatization can have ambiguous effects on prices in the private market, and that the degree of misallocation of the assets prior to privatization determines the subsequent price effects. I test the predictions of the model using a large-scale housing reform in China. The results suggest that the removal of price distortions allowed households to increase their consumption of housing and led to an increase in equilibrium housing prices.
Shing-yi Wang

Leveraging HIV Programs to Deliver an Integrated Package of Health Services: Some Words of Caution

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Over the past decade, HIV programs have been successfully scaled up in many developing countries, leading some to wonder how the investments made into HIV infrastructure could be leveraged to deliver additional health services. Although the concept is appealing from many perspectives, integrating additional health services into existing vertical HIV infrastructure may not mitigate some of the challenges these programs have introduced in implementing countries . . . 
Karen Grepin

Ethnicity and Conflict: An Empirical Study

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This paper examines the impact of ethnic divisions on conflict. The empirical specification is informed by a theoretical model of conflict (Esteban and Ray, 2011) in which equilibrium conflict is related to just three distributional indices of diversity: ethnic polarization, ethnic fractionalization, and a Greenberg-Gini index constructed across ethnic groups. Our empirical findings verify that these distributional measures are significant correlates of conflict . . . 
Joan Esteban, Laura Mayoral and Debraj Ray

Linking Conflict to Inequality and Polarization.

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In this paper we study a behavioral model of conflict that provides a basis for choosing certain indices of dispersion as indicators for conflict. We show that a suitable monotone transform of the equilibrium level of conflict can be proxied by a linear function of the Gini coefficient, the Herfindahl-Hirschman fractionalization index, and a specific measure of polarization due to Esteban and Ray.
Debraj Ray and Joan Esteban

A Model of Ethnic Conflict

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We present a model of conflict in which discriminatory government policy or social intolerance is responsive to various forms of ethnic activism, including violence. It is this perceived responsiveness—captured by the probability that the government gives in and accepts a proposed change in ethnic policy—that induces individuals to mobilize, often violently, to support their cause. Yet, mobilization is costly and militants have to be compensated accordingly. The model allows for both financial and human contributions to conflict and allows for a variety of individual attitudes (“radicalism”) towards the cause. The main results concern the effects of within-group heterogeneity in radicalism and income, as well as the correlation between radicalism and income, in precipitating conflict.
Debraj Ray and Joan Esteban

Civilizing Society

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This paper attempts to answer two important questions in economics. First, what virtues are important for promoting economic progress? Second, what is the source of these virtues? To answer these questions, I rely on recent studies suggesting that the virtues of trustworthiness, tolerance and respect, and individual determination are important for understanding how civil society supports economic prosperity. Specifically, trust, respect, and individual motivation encourage and support economic freedom. I also explore competing explanations for the determinants of virtues including religion, the role of government, and the act of economic exchange for civilizing society. My analysis finds support for the latter source. . . 
Claudia R. Williamson

Civil War Exposure and Violence

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In recent years scholars have begun to focus on the consequences of individuals’ exposure to civil war, including its severe health and psychological consequences. Our innovation is to move beyond the survey methodology that is widespread in this literature to analyze the actual behavior of individuals with varying degrees of exposure to civil war in a common institutional setting. We exploit the presence of thousands of international soccer (football) players with different exposures to civil conflict in the European professional leagues, and find a strong relationship between the extent of civil conflict in a player’s home country and his propensity to behave violently on the soccer field, as measured by yellow and red cards . . . 
Shanker Satyanath, Sebastian Saiegh, and Edward Miguel

The Distribution of Wealth and Fiscal Policy in Economies with Finitely Lived Agents

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We study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and intergenerational transmission of wealth. Financial markets are incomplete, exposing agents to both labor and capital income risk. We show that the stationary wealth distribution is a Pareto distribution in the right tail and that it is capital income risk, rather than labor income, that drives the properties of the right tail of the wealth distribution. We also study analytically the dependence of the distribution of wealth—of wealth inequality in particular—on various fiscal policy instruments like capital income taxes and estate taxes, and on different degrees of social mobility. We show that capital income and estate taxes can significantly reduce wealth inequality, as do institutions favoring social mobility. Finally, we calibrate the economy to match the Lorenz curve of the wealth distribution of the U.S. economy.
Alberto Bisin, Jess Benhabib and Shenghao Zhu

Ethnic Identity and Labor Market Outcomes of Immigrants in Europe

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We study the relationship between ethnic identity and labour market outcomes of non-EU immigrants in Europe. Using the European Social Survey, we find that there is a penalty to be paid for immigrants with a strong identity. Being a first generation immigrant leads to a penalty of about 17% while second- generation immigrants have a probability of being employed that is not statistically different from that of natives. However, when they have a strong identity, second-generation immigrants have a lower chance of finding a job than natives. Our analysis also reveals that the relationship between ethnic identity and employment prospects may depend on the type of integration and labour market policies implemented in the country where the immigrant lives. More flexible labour markets help immigrants to access the labour market but do not protect those who have a strong ethnic identity.
Alberto Bisin, Eleonora Patacchini, Thierry Verdier, and Yves Zenou.