How Nations Evolve: Political Accountability and Developmental Trajectories
ABSTRACT: We study how the developmental trajectory of a nation is determined by the endogenous evolution of political accountability. We analyze a dynamic game between citizens and a government with privately known type (benevolent or opportunistic) and hidden action. To diversify sector-specific economic risks, citizens invest in private sectors and expect the government to invest tax revenue into public sectors. Political risk arises as an opportunistic government may confiscate tax revenue with positive probability. The government is however constrained by political accountability enforced through the adjustment of public trust from Bayesian citizens, who may gradually learn about the government’s type as informational efficiency gets improved in the development process. We derive the unique Markov perfect equilibrium of the game, and show how the joint evolution of political accountability and the equilibrium strategy of an opportunistic government determines the developmental trajectory of a nation. Our results offer an explanation for the rise of "vicious" or "virtuous" economic and political circles. As an extension, we also discuss selffulfilling political transition.
Housing and Wealth Accumulation in Urban China, Before and After the 1994 Housing Reform (working paper) -with Christoph Winter and Fabrizio Zilibotti
ABSTRACT: We empirically document large increases in financial wealth and housing wealth/income ratios of urban Chinese households between 1995 and 2002. We analyze the drivers behind these trends with the help of a quantitative model with endogenous housing choice and housing sector choice. Our focus is on the supply change, the preference shock and the institutional changes that the urban housing market experienced following the 1994 housing reform, in particular the introduction of mortgage markets and the introduction of a large private housing market replacing the allocation of housing through state-owned enterprises. We find that the supply change, the preference shock as well as the introductionn of private housing markets are important, the latter by resolving misallocation that is present in the pre-reform allocation of dwellings, which distorts households’ optimal choices. The introduction of the mortgage markets has a limited impact. We conclude that housing related factors including institutional changes affect Chinese households’ saving behavior and can explain a significant part of the data trends.
A Tale of Two Civilizations (Work in Progress)
ABSTRACT: We micro-found the payoff matrix of the prisoners' dilemma game that allows for economic growth. Collectivists are matched to play the game and can be (non-)trustworthy. Individualists don't participate in the game and can produce intermediate goods used by collectivists in their production of the final good. Parents rationally choose to transmit (non-)trustworthiness values to or cultivate individualism in their children, and this choice is influenced by spatial patterns of cooperation, productivity and enforcement institutions. The European and Chinese civilizations evolve on distinct economic, cultural and institutional trajectories due to a mere difference in initial social distance. Individualism and contracting institutions develop in Europe while proximity matching is popular in China. As a result, the European development path features a high level of initial conflicts, early emergence of individualism and contracting institutions, both of which lead to innovations and faster economic development. Moreover, the development of contracting institutions expands the scope of cooperation and induces generalized morality. The Chinese development path features a low level of initial conflicts, a large initial scope of cooperation but late emergence of individualism. Proximity matching increases cooperation within a narrow group, facilitates collectivist culture and postpones emergence of innovative spirits.