Seminar 5 (Nov. 9)

I. State capacity

1. Besley and Persson (2009) consider two facets of state capacity, legal capacity and fiscal capacity. Explain:
   1. What each of these really mean
   2. What it means to invest in each of these and how it can be done
2. In their model, there are two groups, A and B. What would change in the model if there was only one group? How would you interpret this change to the model?
3. Explain why high political stability may enhance a state's ability to expand its capacity.
4. What empirically testable pedictions does the model give?
5. Sánchez de la Sierra (2017) argues that the settling of stationary bandits, a primitive form of state creation, is more likely where efficient taxation is possible. Explain briefly how he tests this hypothesis and what he finds [Exam question 2015]
6. To what extent can Sánchez de la Sierra's (2017) paper be seen as a test of Besley and Persson's model?

II. Favoritism

1. Table 3 in Fisman (2001, AER) is reproduced below. How can Fisman, on the basis of the findings in this table, conclude that a substantial fraction of the market value of the politically connected firms is due to their connections? Recall that NR(JCI) is the return on the Jakarta Stock Exchange Composite Index net of broader Southeast Asian effects, and that POL is an index of the firm’s political connections. Discuss briefly potential weaknesses in Fisman’s identification strategy.

   

2. Explain how Hodler and Raschky (2014) study the extent of favoritism, and discuss critically to what extent they can really identify favoritism.
   1. Are there types of favoritism that would escape their strategy?
   2. Consider the case where a country discovers deposits of a natural resource (e.g. oil), making one city important (e.g. Stavanger). As the resource is important for the country, a president from this region is elected. Moreover, as the resource is valuable, the extraction city grows. Discuss to what extent Hodler and Raschky would measure this as favoritism.