Seminar 5 (Nov 1, 2013): Bad institutions

I. Sugar and inequality

Consider Engerman and Sokoloff's (1997) paper:

1. Try to describe generally how differences in resource endowments affect distribution hence hence institutional development
2. In the paper "Inequality does cause underdevelopment: Insights from a new instrument" (2007), Bill Easterly use the abundance of land suitable for growing wheat relative to the abundance of land suitable for growing sugar cane as an instrument for inequality across countries
   1. Explain the rationale for such an instrument in light of Engerman and Sokoloff's work. The figure shows a version of his first stage regression: Does it correspond to what you would expect?
   2. In the first panel of his Table 4, he attempt to study the causal effect of inequality on development (measured by log per capita income). Discuss his findings.
3. In 19th century Norway, the coast of the northern part of the country was politically and economically dominated by an elite of fish buyers (væreier) facing a nummer of poor fishermen. Further south along the coast, fisheries were less abundant and buyers were less powerful.
   1. What would be the expected outcomes regarding instituional end poilitical development in the two regions according to Engerman and Sokoloff's theory?
   2. It turns out that the first parliamentary representatives from the Labor party (then a revolutionary socialist party) came from the North. How does this fit in Engerman and Sokoloff's framework? How about the model of Acemoglu and Robinson (2001)?

II. Probabilistic voting and rents from politics

1. Consider the model in Besley et al. (2010). Say that there are no partisans so σ=1. Find the share of votes going to party D as a function of the promised utlities V_D and V_R.
2. Assume now a simplified version of political rents: The total government budget is Y. This is to be divided into public goods g and rents to the politicians r, so Y=g+r. The voters' utility is V_D=g_D. Politicians get an ego rent R for being in office and can keep the rents r. Hence they maximize (R+r)*Pr(win election). Otherwise the model is as in the paper. Solve the problem and find g_D and g_R.
3. What would happen to rents if there is no aggregate uncertainty, i.e. ξ=0?
4. Finally explore what happens to rents if there are partisan voters and they are distributed as in the paper.