Standardized enforcement: Access to justice vs contractual innovation

We model the different ways in which precedents and contract standardization shapethe development of markets and the law. In a setup where more resourceful parties candistort contract enforcement to their advantage, we find that the introduction of astandard contract reduces enforcement distortions relative to precedents, exerting twoeffects: i) it statically expands the volume of trade, but ii) it crowds out the use ofinnovative contracts, hindering contractual innovation. We shed light on the largescale commercial codification occurred in the 19th century in many countries (evenCommon Law ones) during a period of booming commerce and long distance trade.

Social capital, government expenditures, and growth

Countries with greater social capital have higher economic growth. We show that socialcapital is also highly positively correlated across countries with government expenditureon education. We develop an infinite-horizon model of public spending and endogenousstochastic growth that explains both facts through frictions in political agency whenvoters have imperfect information. In our model, the government provides servicesthat yield immediate utility, and investment that raises future productivity. Voters aremore likely to observe public services, so politicians have electoral incentives to underprovidepublic investment. Social capital increases voters' awareness of all governmentactivity. As a consequence, both politicians' incentives and their selection improve.In the dynamic equilibrium, both the amount and the efficiency of public investmentincrease, permanently raising the growth rate.

(Re-) Shaping hatred: Anti-Semitic attitudes in Germany, 1890-2006

In this paper, we assess the determinants of long-run persistence of localculture, and examine the success of policy interventions designed to change attitudes.We analyze anti-Semitic attitudes drawing on individual-level survey results fromGermany s social value survey in 1996 and 2006. On average, we find that historicalvoting patterns for anti-Semitic parties between 1890 and 1933 are powerfulpredictors of anti-Jewish attitudes today. There is evidence that transmission takesplace both vertically (parent to child) and horizontally (among peers). Policy modifiedGerman views on Jews in important ways: The cohort that grew up under the Naziregime shows significantly higher levels of anti-Semitism. After 1945, the victoriousAllies implemented denazification programs in their zones of occupation. We usedifferences in these policies between the occupying powers as a source of identifyingvariation. The US and French zones today still show high anti-Semitism, reflecting anambitious botched attempt at denazification. In contrast, the British and Soviet zones,register much lower levels of Jew-hatred.

Schooling supply and the structure of production: Evidence from US States 1950-1990

We find that over the period 1950-1990, US states absorbed increases in the supplyof schooling due to tighter compulsory schooling and child labor laws mostly throughwithin-industry increases in the schooling intensity of production. Shifts in the industrycomposition towards more schooling-intensive industries played a less important role.To try and understand this finding theoretically, we consider a free trade model withtwo goods/industries, two skill types, and many regions that produce a fixed rangeof differentiated varieties of the same goods. We find that a calibrated version ofthe model can account for shifts in schooling supply being mostly absorbed throughwithin-industry increases in the schooling intensity of production even if the elasticityof substitution between varieties is substantially higher than estimates in the literature.

Structural unemployment

Structural unemployment is due to mismatch between available jobs and workers.We formalize this concept in a simple model of a segmented labor market with searchfrictions within segments. Worker mobility, job mobility and wage bargaining costsacross segments generate structural unemployment. We estimate the contribution ofthese costs to fluctuations in US unemployment, operationalizing segments as statesor industries. Most structural unemployment is due to wage bargaining costs, whichare large but nevertheless contribute little to unemployment fluctuations. Structuralunemployment is as cyclical as overall unemployment and no more persistent, bothin the current and in previous recessions.

Speculation, risk premia and expectations in the yield curve

An affine asset pricing model in which traders have rational but heterogeneous expectations aboutfuture asset prices is developed. We use the framework to analyze the term structure of interestrates and to perform a novel three-way decomposition of bond yields into (i) average expectationsabout short rates (ii) common risk premia and (iii) a speculative component due to heterogeneousexpectations about the resale value of a bond. The speculative term is orthogonal to public informationin real time and therefore statistically distinct from common risk premia. Empirically wefind that the speculative component is quantitatively important accounting for up to a percentagepoint of yields, even in the low yield environment of the last decade. Furthermore, allowing for aspeculative component in bond yields results in estimates of historical risk premia that are morevolatile than suggested by standard Affine Gaussian term structure models which our frameworknests.

The contribution of schooling in development accounting: Results from a nonparametric upper bound

How much would output increase if underdeveloped economies were toincrease their levels of schooling? We contribute to the development accounting literature by describing a non-parametric upper bound on theincrease in output that can be generated by more schooling. The advantage of our approach is that the upper bound is valid for any number ofschooling levels with arbitrary patterns of substitution/complementarity.Another advantage is that the upper bound is robust to certain forms ofendogenous technology response to changes in schooling. We also quantify the upper bound for all economies with the necessary data, compareour results with the standard development accounting approach, andprovide an update on the results using the standard approach for a largesample of countries.

A model of shadow banking

We present a model of shadow banking in which financial intermediaries originate and trade loans, assemble these loans into diversified portfolios, and then finance these portfolios externally with riskless debt. In this model: i) outside investor wealth drives the demand for riskless debt and indirectly for securitization, ii) intermediary assets and leverage move together as in Adrian and Shin (2010), and iii) intermediaries increase their exposure to systematic risk as they reduce their idiosyncratic risk through diversification, as in Acharya, Schnabl, and Suarez (2010). Under rational expectations, the shadow banking system is stable and improves welfare. When investors and intermediaries neglect tail risks, however, the expansion of risky lending and the concentration of risks in the intermediaries create financial fragility and fluctuations in liquidity over time.

The political cost of reforms

This paper formalizes in a fully-rational model the popular idea that politiciansperceive an electoral cost in adopting costly reforms with future benefits and reconciles it with the evidence that reformist governments are not punished by voters.To do so, it proposes a model of elections where political ability is ex-ante unknownand investment in reforms is unobservable. On the one hand, elections improve accountability and allow to keep well-performing incumbents. On the other, politiciansmake too little reforms in an attempt to signal high ability and increase their reappointment probability. Although in a rational expectation equilibrium voters cannotbe fooled and hence reelection does not depend on reforms, the strategy of underinvesting in reforms is nonetheless sustained by out-of-equilibrium beliefs. Contrary tothe conventional wisdom, uncertainty makes reforms more politically viable and may,under some conditions, increase social welfare. The model is then used to study howpolitical rewards can be set so as to maximize social welfare and the desirability of imposing a one-term limit to governments. The predictions of this theory are consistentwith a number of empirical regularities on the determinants of reforms and reelection.They are also consistent with a new stylized fact documented in this paper: economicuncertainty is associated to more reforms in a panel of 20 OECD countries.

Slow recoveries: A structural interpretation

An analysis of the performance of GDP, employment and otherlabor market variables following the troughs in postwar U.S. businesscycles points to much slower recoveries in the three most recentepisodes, but does not reveal any significant change over time in therelation between GDP and employment. This leads us to characterizethe last three episodes as slow recoveries, as opposed to jobless recoveries.We use the estimated New Keynesian model in Galí-Smets-Wouters (2011) to provide a structural interpretation for the slowerrecoveries since the early nineties.

Fiscal policy, pricing frictions and monetary accommodation

We investigate the theoretical conditions for effectiveness of government consumptionexpenditure expansions using US, Euro area and UK data. Fiscal expansions taking placewhen monetary policy is accommodative lead to large output multipliers in normal times.The 2009-2010 packages need not produce significant output multipliers, may havemoderate debt effects, and only generate temporary inflation. Expenditure expansionsaccompanied by deficit/debt consolidations schemes may lead to short run output gains buttheir success depends on how monetary policy and expectations behave. Trade opennessand the cyclicality of the labor wedge explain cross-country differences in the magnitude ofthe multipliers.

Estimating the effect of transitory economic shocks on civil conflict

This note tries to clarify some remaining issues in the debate on the effect of income shocks oncivil conflict. Section 1 discusses the discrepant findings on the effect of rainfall shocks oncivil conflict in Miguel and Satyanath (2010, 2011) and Ciccone (2011). Section 2 develops aninstrumental variables approach to estimate the effect of transitory (rainfall-driven) incomeshocks on civil conflict and contrasts the conclusions with those of Miguel, Satyanath, andSergenti (2004) and Miguel and Satyanath (2010, 2011). Throughout, the note uses the data ofMiguel, Satyanath, and Sergenti to focus on the methodological issues at the core of the debate(for results using the latest data see Ciccone, 2011).

Contractual resolutions of financial distress

In a financial contracting model, we study the optimal debt structure to resolve financial distress. Weshow that a debt structure where two distinct debt classes co-exist - one class fully concentrated andwith control rights upon default, the other dispersed and without control rights - removes the controllingcreditor's liquidation bias when investor protection is strong. These results rationalize the use and theperformance of floating charge financing, debt financing where the controlling creditor takes the entirebusiness as collateral, in countries with strong investor protection. Our theory predicts that the efficiency ofcontractual resolutions of financial distress should increase with investor protection.

Austerity and anarchy: Budget cuts and social unrest in Europe, 1919-2008

Does fiscal consolidation lead to social unrest? Using cross-country evidencefor the period 1919 to 2008, we examine the extent to which societies becomeunstable after budget cuts. The results show a clear correlation between fiscalretrenchment and instability. Expenditure cuts are particularly potent infueling protests; tax rises have only small and insignificant effects. We test ifthe relationship simply reflects economic downturns, using a recently-developedIMF dataset on exogenous expenditure shocks, and conclude that this is not thecase. While autocracies and democracies show broadly similar responses to budgetcuts, countries with more constraints on the executive are less likely to seeunrest after austerity measures. Growing media penetration does not strengthenthe effect of cut-backs on the level of unrest. We also find that austerity episodesthat result in unrest lead to quick reversals of fiscal policy.