Law and economic behaviour
Ranoua Bouchouicha, Olivier L'Haridon & Ferdinand Vieider
Journal of Comparative Economics, forthcoming
Preferences play a key role in economic models as drivers of behaviour. Recent contributions have started to model preferences as endogenously determined. This creates two fundamental issues for empirical research. The first concerns the determinants of preferences. The second concerns the effect of preferences on economic outcomes, which become difficult to quantify once preferences are endogenous. We explore the extent to which the prevalence of risk tolerance across countries is endogenously determined by the legal and institutional environment of a country, and whether this behavioural trait in turn contributes to shaping the aggregate entrepreneurship rate. To do so, we rely on structural equation modelling, where the direction of causality arises from the underlying model assumed to construct the equations. Data fit to the model serve to determine whether the underlying causal model presents a plausible representation of the empirical facts. We find that legal origins exert a strong effect on risk tolerance. We further document an indirect effect of legal origins on entrepreneurship rates passing through risk preferences. These findings illustrate the pervasiveness of the effect of legal origins on economic behaviour.
The long-term welfare effects of colonial institutions: Evidence from Central India
Journal of Development Economics, January 2024
In Central India, the Narmada River separates two regions that have been ruled by different types of government only during the colonial period, and for reasons independent of their initial economic development. I implement a spatial RDD on village population in the Nineteenth Century as well as in 1901, and I run the same model on proxies of welfare in 2015. My results highlight that divergence has realised where the river overlapped with the colonial border, but not in a neighbouring area where the same Narmada River separates two shores with the same type of former colonial institution. I discuss the following transmission mechanism. The treated group was directly administered by the British with more modern state tools -- such as the enforcement of property rights and a transparent taxation system -- that made it easier to develop private investment. The most prominent example is the mixed-capital enterprise in charge of the construction of the first trans-continental railway. Infrastructure endowment seems to be crucial for the long-term transmission of the colonial institutional characteristics to the outcomes measured in 2015, which show better average welfare outcomes, as well as higher wealth inequality in the treated group. My work provides an explanation of how the improvement in the quality of the institutions of an embryonic state may sustain the growth of the local markets it deems relevant.
Long-term mental health cost of the Great Chinese Famine
Mingwang Cheng, Zhouxiang Wang & Ning Neil Yu
Health Economics, forthcoming
The Great Chinese Famine (1959-1961) claimed tens of millions of lives. This study aims to causally examine the long-term mental health cost it imposed on those who survived. To estimate the nationwide total mental health cost, we use a novel dataset to measure the famine intensity of every prefecture-level region, match it to a nationally representative survey, and then identify the long-term effects of the famine on the depression of rural residents then in the early years of their lives. Difference-in-differences estimates reveal that a one-standard-deviation rise in the experienced famine intensity increased a standard measure of depression by about 0.039 and 0.064 if the individual experienced the famine at ages 0-2 and 3-5, respectively. This translates into roughly 7.99 million cases of severe depressive symptoms caused by the famine, which is likely an undercount. Examining the mechanisms behind the large effects, we find that important roles were played by starvation experience and childhood maltreatment, as well as the primary mediators including other health outcomes, economic status, and social relationship. Our findings shed light on how large-scale food security failures impact the mental well-being of the survivors.
Social Networks and the Origins of State Capacity: Evidence from Early Modern Venice
Caterina Chiopris & Yuhua Wang
Harvard Working Paper, August 2023
We explore how social networks allow central elites to make a credible commitment to local elites whose financial resources are urgently needed to finance war and lengthen the state's survival. We argue that marriage networks, by which elites exchange "mutual hostages," promise future gains of state survival to both central and local elites, aligning their disparate interests. Embedded in marriage networks with the local elites, central elites can credibly commit to fulfilling their obligations to protect the periphery because reneging on such obligations will harm the central elites' own offspring. Anticipating state protection, local elites will invest in the state by lending money and paying taxes. We evaluate our arguments using the case of early modern Venice. Exploiting an difference-in-differences design to compare families that were integrated into the nobility marriage networks earlier with those that were integrated later, we show that social integration is positively associated with investment in public debt. We also observe increased tax revenues from the provinces that had families integrated and more military spending and state institutions established in the integrated provinces. Our findings highlight the role of social network in aligning the incentives of central and local elites in favor of a strong central state.
Caselaw and England's economic performance during the Industrial Revolution: Data and evidence
Peter Grajzl & Peter Murrell
Journal of Comparative Economics, forthcoming
We generate and analyze data pertinent to examining whether developments in caselaw were consequential for England's economic performance during the Industrial Revolution. Applying topic modeling to a corpus of 67,455 reports on English court cases, we construct annual time series of caselaw developments between 1765 and 1865. We then add a real per-capita GDP series to our caselaw series and estimate a structural VAR featuring a linear time trend. Our evidence shows that caselaw developments were an important determinant of economic fluctuations. Caselaw shocks jointly account for more of the variability in per-capita GDP around its long-term trend than do shocks directly to per-capita GDP. The response of per-capita GDP to caselaw innovations critically depends on the legal domain. Developments in caselaw on intellectual property, organizations, debt and finance, and inheritance boosted economic performance while developments in property and ecclesiastical caselaw had negative effects on per-capita GDP. Our analysis uncovers a 'bleak-law era' when the legal system misallocated attention between output-promoting and output-hindering areas of law.
Meritocracy and Asset Prices
Suleyman Basak, Valeria Fedyk & Darcy Pu
London Business School Working Paper, October 2023
Meritocracy characterizes a political system wherein economic goods are allocated based on an individual's ability and effort, rather than social class. This paper constructs a measure of meritocracy, uncovers meritocracy's impact on asset prices, income inequality, and effort empirically, and proposes a theoretical model that is consistent with empirical findings. Our empirical analysis demonstrates that higher levels of meritocracy are associated with a higher interest rate, lower stock price-dividend ratio, and lower stock risk premium and volatility. We also find that meritocracy plays a significant role in the real economy, with higher meritocracy related to higher levels of individual and aggregate effort and greater income inequality over the past 50 years. To shed light on these findings, we develop a dynamic model of financial markets that incorporates meritocracy in the economy. Our model provides insights that support our empirical results, uncovers the underlying mechanisms at play, and makes novel predictions regarding how heterogeneity in individual ability and social class modulates the relationship between meritocracy and inequality.
Spatial Networks and the Diffusion of Ideas
Harvard Working Paper, November 2023
The rise of knowledge and the flow of innovation have long been recognized as an important factor for economic development. How do increased spatial connections affect the generation and diffusion of ideas? Intuitively, a denser network should increase the number of novel ideas and augment their diffusion. I study knowledge production in Germany in the 19th century, relying on the universe of bibliographic records and novel railway statistics, among other original data, as well as cutting-edge machine learning and topology to measure ideas. I show that the railroad network increased the creation of new ideas, contributing to 11% of the increase in knowledge production. Scholars' mobility led to the formation of specialized clusters, and thus to cities' specialization. New ideas are formed by combining ideas coming from cities connected by the railroad. However, with a denser network, new ideas diffused less on average. This was a by-product of specialization: with the railroad, groups of scholars could focus on narrower topics and co-locate with similar professionals; they learnt more from similar groups, but became disconnected from dissimilar ones. The findings shed light on the causes for specialization in knowledge production, on the organization of modern science, and on the diffusion of information in dense networks.
Railways, Development, and Literacy in India
Latika Chaudhary & James Fenske
Journal of Economic History, forthcoming
We study the effect of railroads, the single largest public investment in colonial India, on human capital. Using district-level data on literacy and two different identification strategies, we find railroads had positive effects on literacy, in particular on male and English literacy. We show that railroads increased literacy by raising secondary and elite primary schooling, rather than vernacular primary schooling. Our mediation analysis suggests that non-agricultural income, urbanization, and opportunities for skilled employment are important mechanisms, while agricultural income is not.
College Expansion, Trade, and Innovation: Evidence from China
International Economic Review, forthcoming
China has expanded the yearly quota on newly admitted college students by more than 7 times since 1999. How did this massive education expansion affect firms' export and innovation choices? I document that after this expansion impacted the labor market, manufacturing firms' innovation increased considerably, especially among exporting firms, accompanied by sizable skill upgrading of exports. I then develop a multi-industry spatial equilibrium model, featuring skill intensity differences across industries and heterogeneous firms' innovation and export choices. Quantitatively, the college expansion explained 72% of increases in China's manufacturing R&D intensity between 2003-2018 and also triggered export skill upgrading.
Barker's Hypothesis Among the Global Poor: Positive Long-Term Cardiovascular Effects of in Utero Famine Exposure
Alberto Ciancio et al.
An influential literature on the Developmental Origins of Health and Disease (DOHaD) has documented that poor conditions in utero lead to higher risk of cardiovascular disease at older ages. Evidence from low-income countries (LICs) has hitherto been missing, despite the fact that adverse in utero conditions are far more common in LICs. We find that Malawians exposed in utero to the 1949 Nyasaland famine have better cardiovascular health 70 years later. These findings highlight the potential context specificity of the DOHaD hypothesis, with in utero adversity having different health implications among aging LIC individuals who were exposed to persistent poverty.