How the IMF lives with its conditionality

In spite of the intense controversy associated with the conditionality of its lending, IMF decisions are not voted upon but are the sense of the meeting of the Executive Directors as declared by the Managing Director. This unusual decisionmaking process is a substitute for secrecy of voting, which is not feasible within the IMF. It permits the wealthier countries to impose adjustment conditions without the appearance of the continual exercise of their majority power in the IMF. It permits the poorer, developing countries to agree or to disagree without taking an explicit position or to disagree with less danger to the favorable consideration of any future request which might be made.     

Insuring legislative wealth transfers: theory and evidence

Authorities rely on reports from private citizens to detect and enforce more than a trivial portion of effective law-breaking. The present article is the first to study the cultural aspect of peer reporting experimentally. By collecting data in a post-Soviet country (Moldova), we focus in particular on how the Soviet legacy of using citizens as private informants may have a long-lasting effect on their willingness to cooperate with state authorities. We then contrast those effects with peer reporting behavior in France, a Western society. Our results suggest that participants in Moldova view cooperation with authorities as less socially acceptable than their counterparts in France. Our results also suggest that participants in Moldova engage less frequently in peer reporting than individuals in France. However, we also find that less peer reporting does not necessarily imply less tax compliance. Participants in both countries exhibit very similar tax compliance rates. We explain the effect of peer reporting on tax compliance in Moldova using the country's past experience during the Soviet era, when being reported to authorities was common and carried grave consequences.

     

Social security and private saving: theory and historical evidence

This article is a nontechnical presentation of the debate that has gone on during the past decade over whether the U.S. social security system has depressed private saving in the economy. The heart of the article is an assessment of economist Martin Feldstein's original evidence, presentation of the alternative evidence that concluded that currently available historical data do not support the proposition that social security reduces private saving, and an evaluation of the contradictory evidence presented by Feldstein in response to the alternative evidence. The article concludes that, although the total body of evidence is inconclusive, the historical evidence fails to support the hypothesis that social security has reduced private saving. The Office of Research, Statistics, and International Policy, as part of its ongoing research mission, investigates the interrelationship between social security and the economy. This article presents an examination of one of several aspects of this relationship relevant to public policy considerations and is intended to make previously published technical papers available to a broader audience.     

Logrolling under fragmented authoritarianism: theory and evidence from China

This paper provides a rigorous theoretical and empirical analysis of the effect of logrolling between interest groups on social welfare in a non-democratic political system. In particular, we focus on China, where bureaucratic interest groups are separate vertical organizations reaching down from Beijing to the provinces and cities. The key question in this paper is: what are the effects of the logrolling of parochial interest groups on state policies and social welfare in autocracies? We address this question both theoretically and empirically. The theory predicts a specific distortion in resource allocation because of logrolling, while the empirical results confirm the theoretical prediction. We find policy outcomes under logrolling are characterized by excessive spending on all the interest groups’ preferred goods and insufficient spending on public goods. We test the existence of logrolling between the Ministry of Civil Affairs and Ministry of Health in China. Our result shows logrolling between the two ministries lead to inefficiencies in social security and health care policies.     

Democracy and the quality of economic institutions: theory and evidence

Public Choice - We present a simple model, illustrating how democracy may improve the quality of the economic institutions. The model further suggests that institutional quality varies more across...     

The rise and demise of theocracy: theory and some evidence

This paper models theocracy as a regime where the clergy in power retains knowledge of the cost of political production but which is potentially incompetent, quarrelsome, or corrupt. This is contrasted with a secular regime where government is contracted out to a secular ruler, and hence the church loses the possibility of observing costs and creates for itself a hidden-information agency problem. The church is free to choose between regimes—a make-or-buy choice—and we look for the range of environmental parameters that are most conducive to the superiority of theocracy and therefore to its occurrence and persistence, despite its disabilities. Numerical solution of the model indicates that the optimal environment for a theocracy is one in which the “bad” (high-cost) state is disastrously bad but the probability of its occurrence is not very high. Quantitative evidence on the rise of ancient Israelite theocracy and the current surge of Islamic theocratic fundamentalism provides surprisingly strong support for this prediction. Lastly, supportive evidence is suggested by two rare instances of a theocracy’s peaceful demise.     

Flexible specialization versus post-Fordism: theory,evidence and policy implications

There is widespread agreement that something dramatic has been happening to the international economy over the past two decades: rapid and radical changes in production technology and industrial organization, a major restructuring of world markets, and consequent large-scale changes in the policies of economic management at the internahonal, national and regional levels. At the same time there is a great deal of confusion about how to characterize these changes, the mechanisms at work, and the policy implications for different groups of economic and political actors. One way of accomplishing these tasks is to postulate a change of basic manufacturing organization from a ‘Fordist’ pattern that prevailed in the years of the long post-1945 boom to a ‘post-Fordist’ successor in the later 1970s and 1980s. Many people habitually conflate three approaches to industrial change under this heading: flexible specialization, regulation theory, and a more diverse body of explicitly ‘post-Fordiit’ analyses. The resulting problem is that significant differences of approach are concealed bv a suerficial similaritv between the proponents of flezble specialization and a sit of adparently similar bbt underlyingly divergent ideas. The purpose of this paper is to examine systematically the differences between flexible specialization, regulation theory, and other variants of ‘post-Fordism’ with respect to their fundamental assumptions and theoretical architecture, their methodological approach and use of evidence, and their policy implications.     

Can process conditionality enhance aid effectiveness?

Can process conditionality enhance poverty reduction in developing countries? We address this question in a political-economic framework with political distortions on the recipient and the donor side. Process conditionality is a useful tool only if the international financial institutions hold all necessary information to assess the political situation in recipient countries and to select the true representatives of the poor into a participatory process. If they do not hold this information or if bureaucratic interests reduce their incentive to acquire this information, process conditionality loses its effectiveness.     

Ranking state fiscal structures using theory and evidence

This paper offers unique rankings of the extent to which fiscal structures of U.S. states contribute to economic growth. The rankings are novel in two key respects: They are well grounded in established growth theory, in which the effect of taxes depends both on the level of taxes and on the composition of expenditures; and they are derived from actual estimates of the link between fiscal structures and economic growth. Estimates for the latter yield a growth hill, in which the incremental effect of taxes spent on productive services and infrastructure initially rises, reaches a peak, and then declines. Rankings derived from these estimates differ sharply from typical rankings based on levels of taxation alone. Two hypothetical policy experiments highlight both the growth‐hill effects of tax investments in productive services and infrastructure and the short‐ and long‐term tradeoffs in attempting to fund strong social services. © 2008 by the Association for Public Policy Analysis and Management.     

The scope of political jurisdictions and violence: theory and evidence from Africa

Public Choice - Is there more violence in areas with many small countries or only a single large one? I build on Bernholz (The international game of power: past, present and future 1985) to create...     

A public choice theory of the Great Contraction: Further evidence

We benefitted from comments by John Johnson and Lloyd Blenman. M. Bala Subrahmanyam, Steven Moore, and Thomas Lewis provided valuable research assistance. Any remaining errors are our own.     

Banking on Seniority: The IMF and the Sovereign's Creditors

The programs designed by the International Monetary Fund (IMF) during the Global Financial Crisis have shown more awareness of the importance of domestic demand for the prospects of economic recovery. Yet the IMF has continued to do little about the late payments made by governments to domestic creditors and suppliers. In contrast, the greater protection historically awarded by the IMF to foreign creditors has endured throughout the recent crisis. The article suggests that, in order to adequately balance foreign creditor seniority and growth objectives, the IMF may sometimes need to emphasize equitable burden‐sharing across categories of creditors rather than privilege the interests of international bond markets.     

Interaction between federal taxation and horizontal tax competition: theory and evidence from Canada

The aim of this paper is to determine to what extent and how federal taxes affect local tax decisions. Testing the impact of an increase in the federal tax on horizontal tax competition with Canada-US data for 1984–1994, it finds evidence that an increase in federal tax makes horizontal tax reactions weaker. This is because an increase in federal tax raises the cost, in terms of utility of income, of a unit increase in the province’s tax rate. On the methodological side, it is possible to estimate the impact of the federal tax on the fiscal policy of the province without neglecting control for year effects, which cannot be used in the empirical literature because they are perfectly collinear with the federal tax.     

(De)Centralization and voter turnout: theory and evidence from German municipalities

A vast academic literature illustrates that voter turnout is affected by the institutional design of elections (e.g., compulsory voting, electoral system, postal or Sunday voting). In this article, we exploit a simple Downsian theoretical framework to argue that the institutional framework of public good provision—and, in particular, the distribution of political and administrative competences across government levels—likewise affects voters’ turnout decisions by influencing the expected net benefit of voting. Empirically, we exploit the institutional variation across German municipalities to test this proposition, and find supportive evidence.     

Letting the good times roll: A theory of voter inference and experimental evidence

This paper examines inference and attribution in a simple and ubiquitous strategic situation: a voter is faced with discerning whether a leader worked on his or her behalf after observing an informative, but noisy signal about the leader's performance. We characterize perfect Bayesian equilibria, quantal response equilibria (QRE), and provide a simple model of a heuristic-based approach, referred to as strategic naivete, within a wide class of such environments. We also discuss experiments conducted to examine human behavior within such an environment. While it is clear that the observed behavior is inconsistent with perfect Bayesian equilibrium, distinguishing between QRE and strategic naivete will require further work. We conclude with a discussion of the broader implications of probabilistic and/or heuristic-based attribution processes for electoral politics and political economy.     

The institutional structuring of innovation policy coordination: theory and evidence from East Asia

This article suggests that variations in the dominant pattern of innovation policy coordination can be analysed and understood effectively by dividing innovation and other complementary socio-economic policies into low-complexity and high-complexity tasks.The effective implementation of these two sets of policy tasks that differ in the extent, nature and intractability of collective action problems confronting the coordination process hinges on the strength of two sociopolitical institutions: bureaucratic organizational structures and interactive governing arrangements. While bureaucratic organizational structures are better suited to delivering low-complexity tasks, interactive governing arrangements are more effective in resolving high-complexity policy problems. They interact differently across political economies to structure the management of coordination challenges and thus give rise to divergent patterns of innovation policy-making. The comparative analysis of innovation policy coordination between Hong Kong and Singapore over the past two decades lends strong support to the central theoretical propositions of the article.