Essays on Illegal Activities, Institutions and Economic Growth

In public economics, two extremist views on the functions of a government compete: one emphasizes government working for the public interest to provide value for the citizens, while another regards government mainly as a workhorse for private interests. Moreover, as the sole legitimate authority, the government has the right to define the rules and laws as well as to enforce them. With respect to regulation, two extremes arise: from too little regulation to too much of it. If the government does not function or ceases to exist, the state falls into anarchy or chaos (Somalia). If it regulates too much, it will completely suffocate private activities, which might be considered extralegal (the former Soviet Union). In this thesis I scrutinize the government s interventionist policies and evaluate the question of how to best promote economic well-being. The first two essays assume that the government s policies promote illegal activity. The first paper evaluates the interaction between the government and the mafia, and pays attention to the law enforcement of underground production. We show that the revenue-maximizing government will always monitor the shadow economy, as monitoring contributes to the government s revenue. In general, both legal and illegal firms are hurt by the entry of the mafia. It is, however, plausible that legal firms might benefit by the entry of the mafia if it competes with the government. The second paper tackles the issue of the measurement of the size of the shadow economy. To formulate policies it is essential to know what drives illegal economic activity; is it the tax burden, excess regulation, corruption or a weak legal environment? In this paper we propose an additional explanation for tax evasion and shadow production, namely cultural factors as manifested by religion as determinants of tax morality. According to our findings, Catholic and Protestant countries do not differ in their tax morale. The third paper contributes to the literature discussing the role of the government in promoting economic and productivity growth. Our main result is that, given the complex relationship between economic growth and economic freedom, marketization has not necessarily been beneficial in terms of growth. The last paper builds on traditional growth literature and revisits the debate on convergence clubs arising from demographic transition. We provide new evidence against the idea that countries within a club would converge over time. Instead, we propose that since the demographic transition is a dynamic process, one can expect countries to enter the last regime of stable, modern growth in stages.

Spectral states and accretion geometries in Galactic black hole binaries

Black hole X-ray binaries, binary systems where matter from a companion star is accreted by a stellar mass black hole, thereby releasing enormous amounts of gravitational energy converted into radiation, are seen as strong X-ray sources in the sky. As a black hole can only be detected via its interaction with its surroundings, these binary systems provide important evidence for the existence of black holes. There are now at least twenty cases where the measured mass of the X-ray emitting compact object in a binary exceeds the upper limit for a neutron star, thus inferring the presence of a black hole. These binary systems serve as excellent laboratories not only to study the physics of accretion but also to test predictions of general relativity in strongly curved space time. An understanding of the accretion flow onto these, the most compact objects in our Universe, is therefore of great importance to physics. We are only now slowly beginning to understand the spectra and variability observed in these X-ray sources. During the last decade, a framework has developed that provides an interpretation of the spectral evolution as a function of changes in the physics and geometry of the accretion flow driven by a variable accretion rate. This doctoral thesis presents studies of two black hole binary systems, Cygnus~X-1 and GRS~1915+105, plus the possible black hole candidate Cygnus~X-3, and the results from an attempt to interpret their observed properties within this emerging framework. The main result presented in this thesis is an interpretation of the spectral variability in the enigmatic source Cygnus~X-3, including the nature and accretion geometry of its so-called hard spectral state. The results suggest that the compact object in this source, which has not been uniquely identified as a black hole on the basis of standard mass measurements, is most probably a massive, ~30 Msun, black hole, and thus the most massive black hole observed in a binary in our Galaxy so far. In addition, results concerning a possible observation of limit-cycle variability in the microquasar GRS~1915+105 are presented as well as evidence of `mini-hysteresis' in the extreme hard state of Cygnus X-1.