WT Week 8 Flashcards
Motivation
Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition (Greif, 1993)
To understand how coalition can eliminate the principal-agent problem in overseas trading.
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Special settings
Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition (Greif, 1993)
Maghribi Traders were 11th century Jewish traders who mainly operated in the western basin of the Mediterranean. Traded in the presence of a large commitment problem, such that without institutions, traders would not trade on overseas markets. Required either an agent or for traders to go themselves, but face principal-agent problem. Widely varying prices and localised competitive trading.
Theory
Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition (Greif, 1993)
Introduing a coalition will alow for the passage of information on agents and in lieu of contract enforceabiility, will reduce the incentive for cheating.
Empirical design
Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition (Greif, 1993)
“Bilateral punishment strategy (BPS): if you think someone cheated you, then you punsih them. This threat is not a strong deterrent. Creates scenarios where no hiring occurs, causing low output equilibria.
Multilateral punishment strategy (MPS): offers wage to an agent and rehires if honest, fires if cheat, and no agent who cheats will be hired by any other merchant. Merchants will trust merchants from the same coalition.”
Data
Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition (Greif, 1993)
Information on the Maghribi Traders were found in a genizah (where the worn-out texts with G-d’s name on are stored before burial) in a Shul.
Key findings
Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition (Greif, 1993)
“Coalitions can improve efficiency by reducing agency costs and other transaction costs. However, striving for sustainability can also prevent the future expansion of the coalition
Agents are also now more concerned about how their actions are perceived rather than the impact of their action, maximising their expected utility but forfitting the maximisation of profit
Paper largely in favour of coalitions
MPS allows cooperation (hiring) in situations where BPS doesn’t –> increaes efficiency”
Interpretation / policy implications
Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition (Greif, 1993)
“MPS explains why coalition members didn’t trade with non-Maghrebis, whereas BPS can’t
Coalitions are necessary in imperfect markets (information frictions, imperfect legal institutions, imperfect monitoring)”
Motivation
Jensen 2022:
”* To document how the modern tax with high collection redistribution capacities arises over the course of economic development - Income tax exemption threshold decreases in the income distribution as a country develops, tracking growth in the employee share of employment that occurs gradually further down the income distribution
* To provide evidence that the expansion of the income tax base over development is driven by the rise in the share of employees (who have third-party reported income) that occurs gradually further down countries’ income distributions over successive development stages.
“
Special settings
Jensen 2022:
The paper constructs a new microdatabase covering 100 countries at all income levels, as well as long-run time series data for the United States (1870-2010) and Mexico (1960-2010). This allows the authors to study tax system changes both across a broad set of countries and within countries over time as they develop.
Theory
Jensen 2022:
“1. Info trails and tax enforcement - The paper builds on the theoretical idea that the presence of third-party reporting and information trails, which are more prevalent for employees compared to the self-employed, improves tax compliance and reduces enforcement costs
* As share of employees in an economy increase -> it becomes easier for govts to enforce and expand the income tax
2. Development and structural transformation - theories of structural change, economies transition from self-rmployment to employee-based employment as development increases
3. Optimal tax and redistribution - Redistribution should be achieved solely through progressive taxation. The authors argue that this theoretical result may not apply to developing countries, where the income tax base is constrained by the high prevalence of self-employment and the associated enforcement costs.
“
Data
Jensen 2022:
”* Primarily descriptive empirical strategy - using novel microlevel data to document new stylised facts about the evolution of employment structure and income tax systems over the development process
1. Data construction - build new microdatabase from surveys from 100 countries at various income, as well as historical data from US (1870-2010) and Mexico (1960-2010)
2. Measuring employment structure - for each country, in each time period, calculate the share of employees within each decile of the income distribution.
3. Measuring income tax structure - locate the income tax exemption thresholdwithin each country’s income distribution and calculate the share of the population above this thresholds (the size of income tax base).
4. Cross-country and time-series analhysis - document evolution of the employment structure and income tax structure across countries at different stages of development. LIC to HIC transition analysed.
Sub-national analysis - examined relationship b/w employment structure and income tax structure across US states over time, leveraging panel data to estimate the association b/w change sin employee share and change in the size of the state income tax base. “
Empirical design
Jensen 2022:
“1. Cross-country micro data -
* new microdatabase of HH surveys from 100 countries.
* Survey contain info on - individuals’ employment type, income, etc.
* Countries are chosen to reprensent different parts of the income distribution - with 20% from LICs, 28% from LMICs, 21% form UMICs, and 31% from HICs
2. Historical micro data:
* Historical data from the United States (1870-2010) and Mexico (1960-2010).
* For the United States, the author combines census data from 1950-2010 with earlier surveys and local tax assessments to construct a long-run time series.
* For Mexico, the author uses nationally representative surveys available from 1960-2010.
“
Key findings
Jensen 2022:
“1. Stylised fact 1 (figure 2) - within each country, the employee share increases with income.
* Countries develop -> increase in employee share gradually extends further down the income distribution
2. Stylised fact 2 (figure 1) - as countries develop, the income tax exemption threshold moves down the income distribution, closely tracking the increases in employees share. Observed across countries, within the US over time and within Mexico
3. Stylised fact 3 (figure 4) -> despite the chagnes in size of the income tax base, the share of employees within the base remain consistently high (85-95%) across all levels of development - hold for US and Mexico
Authors provide suggestive evidence that the expansion of income tax base is associated with increased tax collection as a share of GDP (figure 6), both across countries and within US states over time”
Interpretation / policy implications
Jensen 2022:
”* Important implications for public finance and development
* Results emphasise that this common tax policy (income taxation) has very different implications for collection and redistributive capacities across development due to underlying differences in economic structure
* Redistribution should be achieved solely through the direct income tax - but this papers’ findings suggest that this theoretical result may be based on assumptions which aren’t suited to developing countires
Assumes unconstrained governments and broad and flexible income tax schedules along the full income distribution - but this is at odds with the paper’s findings “
Motivation
Mendez (2022)
”* What are the effects of large foreign investment projects on development?
* What is the role of private sector companies in the development of local amenities?
To what extent did the United Fruit Company impact the development of local amenities and living standards? “
Special settings
Mendez (2022)
”* Evidence used is from the United Fruit Company (UFC)
* It was one the largest MNCs in the 20th century
* Exploiting the natural experiment created by the UFC -
* In Costa Rica, the firm has a large concession, where it was the only employer from 1899 to 1984. “
Theory
Mendez (2022)
- In a developing country setting with high worker mobility, even a monopsonist corporation may find it optimal to invest substantially in local amenities in order to attract and retain workers - this can have positive long-run impacts on economic development
- Company documents indicate that UFCo heavily invested in local amenities, such as education and health infrastructure, to attract and retain workers. The paper explores the relationship between worker mobility and the firm’s investment efforts, theorizing that increased competition for labor incentivized greater investment in amenities.
Empirical design
Mendez (2022)
The geographic regression discontinuity design allows for a rigorous evaluation of UFCo’s impact, revealing a causal relationship between the company’s presence and improved economic outcomes. Historical data and company reports provide further insight into UFCo’s investment strategies and their implications for local development.
Data
Mendez (2022)
The study utilizes detailed census data geo-referenced at the census-block level from 1973 to 2011, allowing for a comprehensive analysis of UFCo’s long-term impact on living standards in the region.
Key findings
Mendez (2022)
Households within former UFCo regions exhibited better economic outcomes and were less likely to be poor compared to those outside the company’s influence. The positive effects persisted over time, indicating a lasting impact on local development.
Interpretation / policy implications
Mendez (2022)
Investments in local amenities by private companies like UFCo can significantly improve living standards in regions where they operate. The paper highlights the importance of considering private sector involvement in local development initiatives and suggests that incentivizing such investments could yield substantial benefits.
