The Banquet


The role of the state in economic development

Major accounts of the role of the state in economic development have held that the state is essential for ensuring private property rights—that democratic checks and balances encourage investment and therefore economic growth. Other schools of development stress the importance of promoting economies of scale and export oriented production. In these, the state takes on a far more active role in planning and coordinating investment.

In a remarkably comprehensive 2016 paper, PRANAB BARDHAN brings together disparate literatures to develop a more nuanced understanding of the state’s role in economic development:

“Beyond being a ‘nightwatchman’ of property rights and markets, the state often needs to be a guide, coordinator, stimulator, and a catalytic agent for economic activities in situations where, for various historical and structural reasons, the development process has been atrophied and the path forward is darkened by all kinds of missing information and incomplete markets.

In general, different types of governance mechanisms are appropriate for different tasks. The state can provide leadership to stimulate individuals to interact cooperatively in situations where noncooperative interactions are inefficient. But the state officials may have neither the information nor the motivation to carry out this role. They may be inept or corrupt or simply truant, and the political accountability mechanisms are often much too weak to discipline them. We thus need a whole variety and intermixture of institutional arrangements to cope with the strengths and weaknesses of different coordination mechanisms, and the nature of optimal intermixture changes in the development process.”

Link to the essay.

  • Acemoglu, Johnson, and Robinson’s 2001 paper “The Colonial Origins of Comparative Development.” Link. And Acemoglu, García-Jimeno, and Robinson’s 2015 “State Capacity and Economic Development: A Network Approach.” Link.
  • James Scott’s 1999 Seeing Like a State examines failures of large-scale state development projects. Link.
  • In a paper from 1983, Bardhan draws on econometric evidence from cross-sectional data in rural India to challenge researchers in development economics to rethink the relationship between active labor markets and economic growth: “Contrary to its common characterization as a feudal relic and a symptom of economic stagnation tied-labor may actually be strengthened by capitalist agricultural development.” Link.

New Researchers

The balance sheet effect

University of Oxford PhD candidate GENEVIEVE NELSON’s job market paper looks at the relationship between securitization and house price growth. Expanding on the standard story of securitization and the Great Recession, Nelson explicitly models the the private securitization of mortgage credit, producing a new “balance sheet effect.” From the abstract:

“Innovation in the private mortgage securitization market drove at least two-thirds of house price appreciation and about one-third of the increase in non-conforming mortgage credit in the US between 2000 and 2006. This is the only driver of house price growth that is consistent with the simultaneous increase in mortgage credit and decrease in mortgage spreads in the data. A key feature in my model is the financial constraint placed on the balance sheet of mortgage securitizers. It is the ultimate limit on the quantity of mortgage credit the aggregate financial sector can absorb given the mortgage spread. This balance sheet effect is missed by standard DSGE models with housing.”

Link to the full paper, link to Nelson’s website.

Each week we highlight great work from a graduate student, postdoc, or early-career professor. Have you read any excellent research recently that you’d like to see shared here? Send it our way:

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  • In the second iteration of our new blog series, Phenomenal Works, sociologist Beth Popp Berman discusses Alice O’Connor’s book, Poverty Knowledge: “O’Connor shows both the promise and the limits of social science to usefully inform our understanding of the persistent problem of poverty.” Link.
  • Next Friday in the office in New York: a research session with Doug Webber titled “When Do Students and Taxpayers See a Return?” Sign up here.
  • In a new working paper, Robert Kelchen and Zhuoyao Liu present the first ever evidence on whether gainful employment regulations induce colleges to close low-performing programs. The results: “Although the regulations were repealed before any program lost federal funding, we found that passing GE was associated with a lower likelihood of a program or college closing.” Link.
  • “Prices have risen more quickly for people at the bottom of the income distribution than for those at the top.” Christopher Wimer, Sophie Collyer, and Xavier Jaravel find that accounting for “inflation inequality” adds 3.2 million people to poverty estimates in 2018. Link to the study and link to coverage by Annie Lowrey.
  • At VoxEU, Adam Brzezinski, Yao Chen, Nuno Palma, and Felix Ward “investigate the effects of money supply shocks on the economy using the case of maritime disasters in the Spanish Empire.” Link.
  • “I use the individual-level records from my own family in rural Mississippi to estimate the agricultural productivity of African Americans in manual cotton picking nearly a century after Emancipation, 1952–1965.” From 2015, Trevon Logan on economic roles and racial identity. Link.
  • Forthcoming at Demography, David Brady and Zachary Parolin analyze trends in deep and extreme poverty in the United States from 1993-2016: “We find significant increases from lows in 1995 to peaks in 2016 in both deep and extreme poverty. Adding homelessness, deep poverty would be 7-8% higher and extreme poverty would be 19-23% higher in 2016, which suggests our estimates are lower-bounds.” Link.
  • “Work restructuring arising from fissuring alters wage determination inside and outside firms and provides an alternative explanation for a growing empirical literature on earnings inequality.” David Weil discusses labor policy for fissured workplaces. Link.
  • In the America Journal of Public Health: an issue dedicated to the history, politics, and public health implications of SNAP. Link.
  • “Buying time promotes happiness.” New evidence on wealth and well-being. Link.
  • Boško Mijatović and Branko Milanović “provide the first calculation of the welfare ratio for Serbia in the second part of the 19th century and the first decade of the 20th.” Link. On his blog, Milanović considers geographical and demographic challenges faced by late industrializers. Link.
  • “I never thought that the single best predictor of getting a paper accepted would be clear and accessible writing.” David Slusky interviews Amitabh Chandra, editor of the Review of Economics and Statistics. Link.
  • From 2017, an INET report in which William Lazonick et. al estimate price gouging in the US pharmaceutical industry, concluding that “US drug prices are by far the highest in the world.” Link.
  • “Can limits to arbitrage explain historical asset price reversals? During the ‘British Bicycle Mania’ of 1896-1898, cycle share prices rose by 200 per cent before falling 76 per cent from their peak value. This paper argues that arbitrage during this episode was limited by the risk of being cornered after short selling shares. Three corners in cycle company shares occurred during the ‘mania’, two of which resulted in substantial losses for short-sellers. The first corner corresponded with a structural break in cycle share prices, and cross-sectional analysis reveals that companies for which cornering risk was greater experienced more pronounced mispricing.” Link.

Each week we highlight research from a graduate student, postdoc, or early-career professor. Send us recommendations:

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