New Releases by Daron Acemoglu

This book develops a framework for analyzing the creation and consolidation of democracy. Different social groups prefer different political institutions because of the way they allocate political power and resources. Thus democracy is preferred by the majority of citizens, but opposed by elites. Dictatorship nevertheless is not stable when citizens can threaten social disorder and revolution. In response, when the costs of repression are sufficiently high and promises of concessions are not credible, elites may be forced to create democracy. By democratizing, elites credibly transfer political power to the citizens, ensuring social stability. Democracy consolidates when elites do not have strong incentive to overthrow it. These processes depend on (1) the strength of civil society, (2) the structure of political institutions, (3) the nature of political and economic crises, (4) the level of economic inequality, (5) the structure of the economy, and (6) the form and extent of globalization.

We develop a tractable framework for the analysis of the relationship between contractual incompleteness, technological complementarities, and technology adoption. In our model a firm chooses its technology and investment levels in contractible activities by suppliers of intermediate inputs. Suppliers then choose investments in noncontractible activities, anticipating payoffs from an ex post bargaining game. We show that greater contractual incompleteness leads to the adoption of less advanced technologies and that the impact of contractual incompleteness is more pronounced when there is greater complementary among the intermediate inputs. We study a number of applications of the main framework and show that the mechanism proposed in the paper can generate sizable productivity differences across countries with different contracting institutions and that differences in contracting institutions lead to endogenous comparative advantage differences.

"This paper investigates the determinants of vertical integration using data from the UK manufacturing sector. We find that the relationship between a downstream (producer) industry and an upstream (supplier) industry is more likely to be vertically integrated when the producing industry is more technology intensive and the supplying industry is less technology intensive. Moreover, both of these effects are stronger when the supplying industry accounts for a large fraction of the producer''s costs. These results are generally robust and hold with alternative measures of technology intensity, with alternative estimation strategies, and with or without controlling for a number of firm and industry-level characteristics. They are consistent with the incomplete contract theories of the firm that emphasize both the potential costs and benefits of vertical integration in terms of investment incentives"--National Bureau of Economic Research web site.

"We revisit one of the central empirical findings of the political economy literature that higher income per capita causes democracy. Existing studies establish a strong cross-country correlation between income and democracy, but do not typically control for factors that simultaneously affect both variables. We show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and various measures of democracy. We also present instrumental-variables using two different strategies. These estimates also show no causal effect of income on democracy. Furthermore, we reconcile the positive cross-country correlation between income and democracy with the absence of a causal effect of income on democracy by showing that the long-run evolution of income and democracy is related to historical factors. Consistent with this, the positive correlation between income and democracy disappears, even without fixed effects, when we control for the historical determinants of economic and political development in a sample of former European colonies"--National Bureau of Economic Research web site.

"Develops the empirical and theoretical case that differences in economic institutions are the fundamental cause of differences in economic development." - abstract.

Many developing countries have suffered under the personal rule of "kleptocrats", who implement highly inefficient economic policies, expropriate the wealth of their citizens, and use the proceeds for their own glorification or consumption. We argue that the success of kleptocrats rests, in part, on their ability to use a "divide-and-rule" strategy, made possible by weakness of the institutions in these societies. Members of society need to cooperate in order to depose a kleptocrat, yet such cooperation may be defused by imposing punitive rates of taxation on any citizen who proposes such a move, and redistributing the benefits to those who need to agree to it. Thus the collective action problem can be intensified by threats which remain off the equilibrium path. In equilibrium, all are exploited and no one challenges the kleptocrat. Kleptocratic policies are more likely when foreign aid and rents from natural resources provide rulers with substantial resources to buy off opponents; when opposition groups are shortsighted; when the average productivity in the economy is low; and when there is greater inequality between producer groups (because more productive groups are more difficult to buy off). Keywords: dictatorship, divide-and-rule, economic development, institutions, kleptocracy, personal rule, political economy. JEL Classifications: O12, H00

This paper documents that the Rise of (Western) Europe between 1500 and 1850 is largely accounted for by the growth of European nations with access to the Atlantic, and especially by those nations that engaged in colonialism and long distance oceanic trade. Moreover, Atlantic ports grew much faster than other West European cities, including Mediterranean ports. Atlantic trade and colonialism affected Europe both directly, and indirectly by inducing institutional changes. In particular, the growth of New World, African, and Asian trade after 1500 strengthened new segments of the commercial bourgeoisie, and enabled these groups to demand, obtain, and sustain changes in institutions to protect their property rights. Furthermore, the most significant institutional changes and consequently the most substantial economic gains occurred in nations where existing institutions placed some checks on the monarchy and particularly limited its control of overseas trading activities, thus enabling new merchants in these countries to benefit from Atlantic trade. Therefore, the Rise of Europe was largely the result of capitalist development driven by the interaction of late medieval institutions and the economic opportunities offered by "Atlantic trade." Keywords: Capitalism, Economic Growth, Institutions, Political Economy, Social Conflict, Trade. JEL Classifications: O10, F10, P10, N13.

Countries that have pursued distortionary macroeconomic policies, including high inflation, large budget deficits and misaligned exchange rates, appear to have suffered more macroeconomic volatility and also grown more slowly during the postwar period. Does this reflect the causal effect of these macroeconomic policies on economic outcomes? One reason to suspect that the answer may be no is that countries pursuing poor macroeconomic policies also have weak ''institutions, '' including political institutions that do not constrain politicians and political elites, ineffective enforcement of property rights for investors, widespread corruption, and a high degree of political instability. This paper documents that countries that inherited more ''extractive'' instit utions from their colonial past were more likely to experience high volatility a nd economic crises during the postwar period. More specifically, societies where European colonists faced high mortality rates more than 100 years ago are much more volatile and prone to crises. Based on our previous work, we interpret this relationship as due to the causal effect of institutions on economic outcomes: Europeans did not settle and were more likely to set up extractive institutions in areas where they faced high mortality. Once we control for the effect of institutions, macroeconomic policies appear to have only a minor impact on volatility and crises. This suggests that distortionary macroeconomic policies are more likely to be symptoms of underlying institutional problems rather than the main causes of economic volatility, and also that the effects of institutional differences on volatility do not appear to be primarily mediated by any of the standard macroeconomic variables. Instead, it appears that weak institutions cause volatility through a number of microeconomic, as well as macroeconomic, channels.

We construct a simple model where political elites may block technological and institutional development, because of a "political replacement effect." Innovations often erode elites'' incumbency advantage, increasing the likelihood that they will be replaced. Fearing replacement, political elites are unwilling to initiate change, and may even block economic development. We show that elites are unlikely to block development when there is a high degree of political competition, or when they are highly entrenched. It is only when political competition is limited and also their power is threatened that elites will block development. We also show that such blocking is more likely to arise when political stakes are higher, and that external threats may reduce the incentives to block. We argue that this model provides an interpretation for why Britain, Germany and the U.S. industrialized during the nineteenth century, while the landed aristocracy in Russia and Austria-Hungary blocked development. Keywords: Political Economy, Institutions, Development, Industrialization. JEL Classification: H2, N10, N40, O1, O3, O4

Study comparing wage inequality trends in the U.S. and UK (and other Anglo-Saxon countries) with trends in continental Europe. Data from Australia, Belgium, Canada, Denmark, Finland, Germany, Israel, Netherlands, Norway, Sweden, UK and US are used.

We analyze an economy where managers engage both in the adoption of technologies from the world frontier and in innovation activities. The selection of high-skill managers is more important for innovation activities. As the economy approaches the technology frontier, selection becomes more important. As a result, countries at early stages of development pursue an investment-based strategy, with long-term relationships, high average size and age of firms, large average investments, but little selection. Closer to the world technology frontier, there is a switch to an innovation-based strategy with short-term relationships, younger firms, less investment and better selection of managers. We show that relatively backward economies may switch out of the investment-based strategy too soon, so certain economic institutions and policies, such as limits on product market competition or investment subsidies, that encourage the investment-based strategy may be beneficial. However, societies that cannot switch out of the investment based strategy fail to converge to the world technology frontier. Non-convergence traps are more likely when policies and institutions are endogenized, enabling beneficiaries of existing policies to bribe politicians to maintain these policies. Keywords: appropriate institutions, convergence, economic growth, innovation, imitation, political economy of growth, selection, technical change, traps. JEL Classifications: O31, O33, O38, O40, L16.

We show that even in the absence of diminishing returns in production and techno-logical spillovers, international trade leads to a stable world income distribution. This is because specialization and trade introduce de facto diminishing returns: countries that accumulate capital faster than average experience declining export prices, depressing the rate of return to capital and discouraging further accumulation. Because of constant re-turns to capital accumulation from a global perspective time-series behavior of the world economy is similar to that of existing endogenous growth models, with the world growth rate determined by policies, savings and technologies. Because of diminishing returns to capital accumulation at the country level, the cross-sectional behavior of the world economy is similar to that of existing exogenous growth models: cross-country variation in economic policies, savings and technology translate into cross-country variation in incomes, and country dynamics exhibit conditional convergence as in the Solow-Ramsey model. The dispersion of the world income distribution is determined by the forces that shape the strength of the terms of trade effects the degree of openness to international trade and the extent of specialization. Finally, we provide evidence that countries accumulating faster experience a worsening in their terms of trade. Our estimates imply that, all else equal, a 1 percentage point faster growth is associated with approximately a 0.7 percentage point decline in the terms of trade.

Becker''s theory of human capital predicts that minimum wages should reduce training investments for affected workers, because they prevent these workers from taking wage cuts necessary to finance training. We show that when the assumption of perfectly competitive labor markets underlying this theory is relaxed, minimum wages can increase training of affected workers, by inducing firms to train their unskilled employees. More generally, a minimum wage increases training for constrained workers, while reducing it for those taking wage cuts to finance their training. We provide new estimates on the impact of the state and federal increases in the minimum wage between 1987 and 1992 of the training of low wage workers. We find no evidence that minimum wages reduce training. These results are consistent with our model, but difficult to reconcile with the standard theory of human capital.

In this paper, we survey non-competitive theories of training. With competitive labor markets, firms never pay for investments in general training, whereas when labor markets are imperfect, firm-sponsored training arises as an equilibrium phenomenon. We discuss a variety of evidence which support the predictions of non-competitive theories, and we draw some tentative policy conclusions from these models.

In the standard model of human capital with perfect labor markets, workers pay for general training. When labor market frictions compress the structure of wages, firms may invest in the general skills of their employees. The reason is that the distortion in the wage structure turns "technologically" general skills into "specific" skills. Labor market frictions and institutions, such as minimum wages and union wage setting, are crucial in shaping the wage structure, and thus have an important impact on training. Our results suggest that the more frictional and regulated labor markets in Europe and Japan may generate more firm-sponsored general training than the U.S.

Presents an alternative theory to explain the increase in both the unemployment of skilled and unskilled workers, and in wage differentials between skilled and unskilled workers.

In contrast to the standard Beckerian theory which predicts that firms should never pay for training in skills which are equally valuable to others firms, develops a theory which explains why, in a non-competitive labour market, firms will find it profitable to invest in such general training. Investigates some of the implications of the theory using microdata from German firms with apprenticeship programmes.