Political Parties as Drivers of U.S. Polarization: 1927-2018
(with Nathan Canen and Chad Kendall)
Journal of Political Economy, Revise & Resubmit.
The current polarization of elites in the U.S., particularly in Congress, is frequently ascribed to the emergence of cohorts of ideologically extreme legislators replacing moderate ones. Politicians, however, do not operate as isolated agents, driven solely by their preferences. They act within organized parties, whose leaders exert control over the rank-and-file, directing support for and against policies. This paper shows that the omission of party discipline as a driver of political polarization is consequential for our understanding of this phenomenon. We present a multi-dimensional voting model and identification strategy designed to decouple the ideological preferences of lawmakers from the control exerted by their party leadership. Applying this structural framework to the U.S. Congress between 1927-2018, we find that the influence of leaders over their rank-and-file has been a growing driver of polarization in voting, particularly since the 1970s. In 2018, party discipline accounts for around 65% of the polarization in roll call voting. Our findings qualify the interpretation of – and in some cases subvert – a number of empirical claims in the literature that measures polarization with models that lack a formal role for parties.
Making Policies Matter: Voter Responses to Campaign Promises
(with Cesi Cruz, Phil Keefer, and Julien Labonne)
Economic Journal, Revise & Resubmit.
Do campaign promises matter? We combine a structural model and a large-scale field experiment disseminating candidate policy platforms in Philippine mayoral elections to show how voters respond to campaign promises. Voters who randomly received information about current campaign promises are more likely to vote for candidates closer to their own preferences and those also informed about past promises reward incumbents who fulfilled them. The structural model shows that campaigns operate through both learning and psychological mechanisms, and that vote buying, while important, is not the sole driver of voter behavior.
The Cost of Regulatory Compliance in the United States (with Miao Ben Zhang)
We quantify firms’ compliance costs of regulation from 2002 to 2014 in terms of their labor input expenditure to comply with government rules, a primary component of regulatory compliance spending for large portions of the U.S. economy. Detailed establishment-level occupation data, in combination with occupation-specific task information, allow us to recover the share of an establishment’s wage bill owing to employees engaged in regulatory compliance. Regulatory costs account on average for 1.34 percent of the total wage bill of a firm, but vary substantially across and within industries, and have increased over time. We investigate the returns to scale in regulatory compliance and find an inverted-U shape, with the percentage regulatory spending peaking for an establishment size of around 500 employees. Finally, we develop an instrumental variable methodology for decoupling the role of regulatory requirements from enforcement in driving firms’ compliance costs.
Minority Underrepresentation in U.S. Cities (with Federico Ricca)
This paper investigates the patterns of minority representation in U.S. municipal governments and of minority voter registration for the period 1981-2020. We report substantial levels of strategic underrepresentation of African American, Asian, and Latino voters in U.S. local politics. Disproportionality in the representation and in voter registration rates of minority groups are widespread, but stronger where racial or ethnic minorities are electorally pivotal. Underrepresentation is determined by the combination of several endogenous institutional features, starting from systematic disparity in voter registration, strategic selection of electoral rules, city's form of government, council size, and pay of elected members of the council. We provide causal evidence of the strategic use of local political institutions in reducing electoral representation of minorities based on the U.S. Supreme Court narrow decision of Shelby County v. Holder (2013), which removed Voting Rights Act (VRA) Section 4 coverage requirements for a specific subset of U.S. localities. In VRA-covered municipalities, changes to voting procedures required preclearance by the Department of Justice, a process designed to prevent racially discriminatory actions. Post 2013, previously VRA-covered municipalities quickly revert to levels of minority underrepresentation and underregistration identical to those of non-covered municipalities, reducing overall proportionality in minority representation and registration.
Investing in Influence: Investors, Portfolio Firms, and Political Giving (with Marianne Bertrand, Matilde Bombardini, Raymond Fisman, and Eyub Yegen)
Campaign finance laws aim to limit an individual’s influence over the political process. We show that corporate ownership may be an important mechanism by which institutional investors circumvent such constraints and increase their influence. Using data on the political giving and ownership of all 13-F investors during 1980-2018, we show the probability that a firm’s Political Action Committee (PAC) donates to a politician supported by an investor’s PAC nearly doubles after the investor acquires a large stake, and when an investor obtains a board seat, there is a five-fold increase in the probability that a firm donates to a politician supported by the investor. This increase in similarity of political giving coincides precisely with the acquisition election cycle, and is not driven by selection into specific politically strategic acquisitions, as convergence in political behavior is observed even for exogenously determined acquisitions caused by stock index inclusions. Further, we show that portfolio firms’ PAC expenditure experiences a relatively large shift at the acquisition date relative to past giving, whereas no such pattern is observed for institutional investors. We argue that these findings are best explained by investors influencing portfolio firm giving, suggesting that PAC giving may be another means by which influential shareholders impact corporate decision-making, in a manner that amplifies investors’ political voice.
A Theory of Minimalist Democracy (with Chris Bidner and Patrick Francois)
Democracies in which political elites hold and respect elections, yet do not extend related freedoms that empower the non-elite (civil liberties, free press, rule of law, etc.), are empirically pervasive, but imperfectly understood. What motivates the elite to respect the electoral wishes of a weak non-elite in such systems? We lay out a formal model that sheds light on this, and related questions raised by such minimalist democracies. The key, we show, is the crucial role of competitive elections in allowing credible power sharing among the elite. The theory simultaneously rationalizes competitive autocracies, non-redistributive democratizations, and the political resource curse.
The Dictator's Inner Circle (with Patrick Francois and Ilia Rainer)
We posit the problem of an autocrat who has to allocate access to executive positions within his inner circle and define the career profile of his insiders. The leader monitors the capacity of staging a coup by his subordinates and the incentives of trading a subordinate’s own post for a potential shot at the leadership. These theoretical elements map into structurally estimable hazard functions for ministerial terminations in African governments. The evidence points at leader’s survival concerns playing a crucial role in shaping the incentives of insiders within African national governments and can ultimately help explain insiders’ widespread lack of competence and nearsighted policymaking in autocracies. Several counterfactual policy experiments are performed.
Gains from Distortions in Congested City Networks (with Matilde Bombardini)
This paper presents a model and an automated methodology for assessing gains from network distortions in cities. Distortions arise from excluding traffic along certain routes. Distortions degrade network connectivity, but can be paradoxically useful for congestion amelioration. We show that such distortions are quantitatively large, increasingly pervasive in larger cities, and potentially very valuable. The results ultimately support the view that Braessí(1968) paradox is not just a theoretically interesting possibility, but a widespread feature of city road networks.
Measuring Central Bank Communication: An Automated Approach with Application to FOMC Statements (with David Lucca) [online appendix]
We present a new method to measure central bank communication and apply it to statements by the Federal Open Market Committee. The measures are intuitive and capture significant information about future rate decisions by the Federal Reserve. We find that longer-dated Treasury yields mainly react to changes in communication around announcements. In lower frequency data, changes in the statements lead policy rate decisions by more than a year, and are a significant determinant of longer-dated Treasury yields. The statements contain information regarding both the predicted and the residual component of a Taylor rule model, and lead the residual component.
 Social Interactions and Legislative Activity
(with Nathan Canen and Matt Jackson)
Journal of the European Economic Association, Forthcoming.
We develop a model of endogenous network formation as well as strategic interactions that take place on the resulting network, and use it to measure social complementarities in the legislative process. Our model allows for partisan bias and homophily in the formation of relationships, which then impact legislative output. We identify and structurally estimate our model using data on social and legislative efforts of members for each of the 105th-110th U.S. Congresses (1997-2009). We find large network effects in the form of complementarities between the efforts of politicians, both within and across parties. Although partisanship and preference differences between parties are significant drivers of socializing in Congress, our empirical evidence paints a less polarized picture of the informal connections of members of Congress than typically emerges from congressional votes alone. Finally, we show that our formulation is useful for developing relevant counterfactuals, including the effect of political polarization on legislative activity (and how this effect can be reversed), and the impacts of networks in the congressional emergency response to the 2008-09 financial crisis.
 Lobbying Behind the Frontier
(with Matilde Bombardini and Olimpia Cutinelli-Rendina)
in U. Akcigit and J. Van Reenen, (eds.) The Economics of Creative Destruction, Harvard University Press, August 2023.
This chapter investigates the non-market response of firms to international trade shocks increasing the level of competition in U.S. industries. Lobbying expenditures increase as a consequence of import changes related to the China shock. The effect on lobbying is not homogeneous across firms and it concentrates particularly in those producers which are further away from the technological frontier. We discuss theo- retical mechanisms driving lobbying behind the technological frontier: not only the cost-benefit trade-off between innovation and lobbying is relatively less appealing for lower productivity firms, but the collective action ability of low productivity firms improves after a competitive shock.
 Factions in Nondemocracies: Theory and Evidence from the Chinese Communist Party
(with Patrick Francois and Kairong Xiao)
Econometrica, March 2023, 91(2): pp.565-603.
This paper investigates, theoretically and empirically, factional arrangements within the Chinese Communist Party (CCP), the governing political party of the People’s Republic of China. Our empirical analysis ranges from the end of the Deng Xiaoping era to the current Xi Jinping presidency and it covers the appointments of both national and provincial officials using detailed biographical information. We present a set of new empirical regularities within the CCP, including substantial leadership premia in the Politburo and Central Committee, intra-faction competition for promotions, and systematic patterns of cross-factional mixing at different levels of the political hierarchy. An organizational economic model suited to characterizing factional politics within single-party nondemocratic regimes rationalizes the data in-sample and displays excellent out-of-sample performance.
 Did U.S. Politicians Expect the China Shock?
(with Matilde Bombardini and Bingjing Li)
American Economic Review, January 2023, 113(1): pp.174-209.
In the two decades straddling China's WTO accession, the China Shock, i.e. the rapid trade integration of China in the early 2000's, has had a profound economic impact across U.S. regions. It is now both an internationally litigated issue and the casus belli for a global trade war. Were its consequences unexpected? Did U.S. politicians have imperfect informa- tion about the extent of China Shock's repercussions in their district at the time when they voted on China's Normal Trade Relations status? Or did they have accurate expectations, yet placed a relatively low weight on the subconstituencies that ended up being adversely affected? Information sets, expectations, and preferences of politicians are fundamental, but unobserved determinants of their policy choices. We apply a moment inequality approach designed to deliver unbiased estimates under weak informational assumptions on the informa- tion sets of members of Congress. This methodology offers a robust way to test hypotheses about the expectations of politicians at the time of their vote. Employing repeated roll call votes in the U.S. House of Representatives on China's Normal Trade Relations status, we formally test what information politicians had at the time of their decision and consistently estimate the weights that constituent interests, ideology, and other factors had in congressio- nal votes. We show how assuming perfect foresight of the shocks biases the role of constituent interests and how standard proxies to modeling politician's expectations bias the estimation. We cannot reject that politicians could predict the initial China Shock in the early 1990's, but not around 2000, when China started entering new sectors, and find a moderate role of constituent interests, compared to ideology. Overall, U.S. legislators appear to have had accurate information on the China Shock, but did not place substantial weight on its adverse consequences.
 Hall of Mirrors: Corporate Philanthropy and Strategic Advocacy
(with Marianne Bertrand, Matilde Bombardini, Ray Fisman, and Brad Hackinen)
Quarterly Journal of Economics, November 2021, 136(4): pp.2413-2465.
Information is central to designing effective policy and policymakers often rely on competing interests to separate useful from biased information. In this paper we show how this logic of virtuous competition can break down, using a new and comprehensive dataset on U.S. federal regulatory rulemaking for 2003-2016. For-profit corporations and non-profit entities are active in the rule-making process and are arguably expected to provide independent viewpoints. Policymakers, however, may be less than fully aware of the financial ties between some firms and non-profits – grants that are legal and tax-exempt, but hard to trace. We document three patterns which suggest that these grants may distort policy. First, we show that, shortly after a firm donates to a non-profit, that non-profit is more likely to comment on rules on which the firm has also commented. Second, when a firm comments on a rule, the comments by non-profits that recently received grants from the firm’s foundation are systematically closer in content to the firm’s own comments, relative to comments submitted by other non-profits. Third, the final rule’s discussion by a regulator is more similar to the firm’s comments on that rule when the firm’s recent grantees also commented on it. We discuss two interpretations of the evidence. While the negative welfare consequences of a “comments-for-sale” scenario are immediate, we show that, even if corporate grants’ only effect is to relax the grantee’s budget constraint, this can also lead to distorted policy making.
 Improving Context Modeling in Neural Topic Segmentation
(with Linzi Xing, Brad Hackinen, and Giuseppe Carenini)
Proceedings of the 1st Conference of the Asia-Pacific Chapter of the Association for Computational Linguistics and the 10th International Joint Conference on Natural Language Processing, December 2020, pp.626-636.
Topic segmentation is critical in key NLP tasks and recent works favor highly effective neural supervised approaches. However, current neural solutions are arguably limited in how they model context. In this paper, we enhance a segmenter based on a hierarchical attention BiLSTM network to better model context, by adding a coherence-related auxiliary task and restricted self-attention. Our optimized segmenter outperforms SOTA approaches when trained and tested on three datasets. We also demonstrate our proposal’s robustness in domain transfer setting by training a model on a large-scale dataset and testing it on four challenging real-world benchmarks. Furthermore, we apply our proposed strategy to two other languages (German and Chinese) and show its effectiveness in multiligual scenario.
 Insurgent Learning
(with Drew Shaver, Eric Weese, and Austin Wright)
Journal of Political Institutions and Political Economy, September 2020, 1(3): pp.417-448.
Over the past decade the United States has invested substantial economic resources in protecting its troops against improvised explosive devices (IEDs). Yet we know little about the impact of these investments on combat tactics and soldier safety. Using newly declassified military records on individual IED explosions in Afghanistan from 2006-2014, we show that detonation and casualty rates did not decline during this period. Consistent with historical evidence from other substate conflicts, evidence from the Afghan conflict suggests that insurgents learned quickly how to neutralize military investments in improved technologies of war.
 Empirical Models of Lobbying
(with Matilde Bombardini)
Annual Review of Economics, August 2020, 12: pp.391-413.
This paper offers a review of the recent empirical literature on lobbying within Political Economy. In surveying extant evidence, we emphasize quid-pro-quo and informational issues in special interest politics and we highlight crucial open research questions in both. The main unresolved methodological issues remain how to properly account for the impact of lobbying on which equilibrium policies are chosen and advanced, and on how distorted those equilibrium policies might be relative to the interests of the general public. Of the principal open questions within political economy, a comprehensive quantitative assessment of the welfare distortions of lobbying remains one of the most elusive.
 Tax-Exempt Lobbying: Corporate Philanthropy as a Tool for Political Influence
(with Marianne Bertrand, Matilde Bombardini, and Ray Fisman) [data and materials]
American Economic Review, July 2020, 110(7): pp.2065-2102.
We analyze the role of charitable giving as a means of political influence, a channel that has been heretofore unexplored in the political economy literature. For philanthropic foundations associated with Fortune 500 and S&P500 corporations, we show that grants given to charitable organizations located in a congressional district increase when its representative obtains seats on committees that are of policy relevance to the firm associated with the foundation. This pattern parallels that of publicly disclosed Political Action Committee (PAC) spending. As further evidence on firms’ political motivations for charitable giving, we show that a member of Congress’s departure is associated with a short-term decline in charitable giving to his district, and we again observe similar patterns in PAC spending. Charities directly linked to politicians through personal financial disclosure forms filed in accordance with Ethics in Government Act requirements similarly exhibit patterns that are consistent with political dependence. Our analysis suggests that firms may deploy their charitable foundations as a form of tax-exempt influence seeking. Based on a stylized model of political influence, our most conservative estimates imply that around 7 percent of total U.S. corporate charitable giving can be interpreted as politically motivated, an amount that is economically significant: it is 2.5 times larger than annual PAC contributions and about 36 percent of total federal lobbying expenditures. Given the lack of formal electoral or regulatory disclosure requirements, charitable giving may be a form of political influence that goes mostly undetected by voters and shareholders, and which is subsidized by taxpayers.
 Unbundling Polarization
(with Nathan Canen and Chad Kendall) [data and materials]
Econometrica, May 2020, 88(3): pp.1197-1233.
This paper investigates the determinants of political polarization, a phenomenon of increasing relevance in Western democracies. How much of polarization is driven by divergence in the ideologies of politicians? How much is instead the result of changes in the capacity of parties to control their members? We use detailed internal information on party discipline in the context of the U.S. Congress – whip count data for 1977-1986 – to identify and structurally estimate an economic model of legislative activity in which agenda selection, party discipline, and member votes are endogenous. The model delivers estimates of the ideological preferences of politicians, the extent of party control, and allows us to assess the effects of polarization through agenda setting (i.e. which alternatives to a status quo are strategically pursued). We find that parties account for approximately 40 percent of the political polarization in legislative voting over this time period, a critical inflection point in U.S. polarization. We also show that, absent party control, historically significant economic policies would have not passed or lost substantial support. Counterfactual exercises establish that party control is highly relevant for the probability of success of a given bill and that polarization in ideological preferences is more consequential for policy selection, resulting in different bills being pursued.
 Regulation and Market Liquidity
(with Kairong Xiao) [online appendix]
Management Science, May 2019, 65(5): pp.1949-1968.
We examine the effects of post-crisis financial regulation, encompassing the Dodd-Frank Act and Basel III, on market liquidity of the U.S. fixed income market. We estimate structural breaks in a large panel of liquidity measures of corporate and Treasury bonds. Our methodology does not require a priori knowledge of the timing of breaks, can capture not only sudden jumps but also breaks in slow-moving trends, and displays excellent power properties. Against the popular claim that post-crisis regulation hurts liquidity, we find no evidence of liquidity deterioration during periods of regulatory intervention. Instead, breaks towards higher liquidity are often detected.
 Insurgency and Small Wars: Estimation of Unobserved Coalition Structures
(with Eric Weese) [data and materials]
Econometrica, March 2019, 87(2): pp.463-496.
Insurgency and guerrilla warfare impose enormous socio-economic costs and often persist for decades. The opacity of such forms of conflict is an obstacle to effective international humanitarian intervention and development programs. To shed light on the internal organization of otherwise unknown insurgent groups, this paper proposes two methodologies for the detection of unobserved coalitions of militant factions in conflict areas. These approaches are based on daily geocoded incident-level data on insurgent attacks. We provide applications to the Afghan conflict during the 2004-2009 period and to Pakistan during the 2008-2011 period, identifying systematically different coalition structures. Applications to global terrorism data and identification of new groups or shifting coalitions are discussed.
 Authoritarian Elites
(with Adlai Newson) [data and materials]
Canadian Journal of Economics, [2018 Innis Lecture] November 2018, 51(4): pp.1088-1117.
We explore the role of ruling elites in autocratic regimes and provide an assessment of tools useful to clarify the structure of opaque political environments. We first showcase the importance of analyzing autocratic regimes as non-unitary actors by discussing extant work on nondemocracies in Sub-Saharan Africa and China, where the prevailing view of winner-take-all contests can be clearly rejected. We show how specific biographical information about powerful cadres helps shed light upon the composition of the inner circles that empower autocrats. We further provide an application of these methods to the Democratic People’s Republic of Korea (DPRK), one of the most personalistic, opaque, and data-poor political regimes in the world today. Employing information from DPRK state media on participants at official state events, we are able to trace the evolution and consolidation of Supreme Leader Kim Jong Un around the transition period following the death of his father, Kim Jong Il. The internal factional divisions of the DPRK are explored during and after this transition. Final general considerations for the future study of the political economy of development are presented.
 Is Europe an Optimal Political Area?
(with Alberto Alesina and Guido Tabellini)
Brookings Papers on Economic Activity, Spring 2017, pp.169-213.
Employing a wide range of individual-level surveys, we study the extent of cultural and institutional heterogeneity within the EU and how this changed between 1980 and 2008. We present several novel empirical regularities that paint a complex picture. While Europe has experienced both systematic economic convergence and an increased coordination across national and subnational business cycles since 1980, this was not accompanied by cultural convergence among European citizens. Such persistent heterogeneity does not necessarily spell doom for further political integration, however. Compared to observed heterogeneity within member states themselves, or in well functioning federations such as the US, cultural diversity across EU members is a similar order of magnitude. The main stumbling block on the road to further political integration is not heterogeneity of tastes or of cultural traits, but other cleavages, such as parochial national identities.
 New Tools for the Analysis of Political Power in Africa
(with Ilia Rainer)
in S. Edwards, S. Johnson, D. Weil (eds.) African Successes: Government and Institutions, University of Chicago Press, December 2015.
The study of autocracies and weakly institutionalized countries is plagued by scarcity of information about the relative strength of different players within the political system. This paper presents novel data on the composition of government coalitions in a sample of fifteen post-colonial African countries suited to this task. We emphasize the role of the executive branch as the central fulcrum of all national political systems in our sample, especially relative to other institutional bodies such as the legislative assembly. Leveraging on the impressive body of work documenting the crucial role of ethnic fragmentation as a main driver of political and social friction in Africa, the paper further details the construction of ethnic composition measures for executive cabinets. We discuss how this novel source of information may help shed light on the inner workings of typically opaque African political elites.
 Foreclosures, House Prices, and the Real Economy
(with Atif Mian and Amir Sufi) [online appendix]
Journal of Finance, December 2015, 70(6): pp.2587-2634.
From 2007 to 2009, states without a judicial requirement for foreclosures were more than twice as likely to foreclose on delinquent homeowners. Comparing zip codes close to state borders with differing foreclosure laws, we show that foreclosure propensity and housing inventory jumped discretely as one entered non-judicial states. There is no jump in other homeowner attributes such as credit scores, income, or education levels. Using state judicial requirement as an instrument for foreclosures, we show that foreclosures led to a large decline in house prices, residential investment, and consumer demand from 2007 to 2009. As foreclosures subsided from 2011 to 2013, the difference between foreclosure rates in non-judicial and judicial requirement states shrank and we find evidence of a stronger recovery in non-judicial states.
 How Is Power Shared in Africa?
(with Patrick Francois and Ilia Rainer) [online appendix]
Econometrica, March 2015, 83(2): pp.465-503.
Is African politics characterized by concentrated power in the hands of a narrow group (ethnically determined) that then fluctuates from one extreme to another via frequent coups? Employing data on the ethnicity of cabinet ministers since independence, we show that African ruling coalitions are surprisingly large and that political power is allocated proportionally to population shares across ethnic groups. This holds true even restricting the analysis to the subsample of the most powerful ministerial posts. We argue that the likelihood of revolutions from outsiders and coup threats from insiders are major forces explaining allocations within these regimes. Alternative allocation mechanisms are explored. Counterfactual experiments that shed light on the role of Western policies in affecting African national coalitions and leadership group premia are performed.
 How Do Voters Respond to Information? Evidence from a Randomized Campaign
(with Chad Kendall and Tommaso Nannicini) [data and materials]
American Economic Review, January 2015, 105(1): pp.322-53.
In a large-scale controlled trial in collaboration with the reelection campaign of an Italian incumbent mayor, we administered (randomized) messages about the candidate’s valence or ideology. Informational treatments affected both actual votes in the precincts and individual vote declarations. Campaigning on valence brought more votes to the incumbent, but both messages affected voters’ beliefs. Cross-learning occurred, as voters who received information about the incumbent also updated their beliefs about his opponent. With a novel protocol of beliefs elicitation and structural estimation, we assess the weights voters place upon politicians’ valence and ideology and employ the model to simulate counterfactual campaigns.
 Is It Whom You Know or What You Know? An Empirical Assessment of the Lobbying Process
(with Marianne Bertrand and Matilde Bombardini) [online appendix]
American Economic Review, December 2014, 104(12): pp.3885-3920.
Do lobbyists provide issue-specific information to members of Congress? Or do they provide special interests access to politicians? We present evidence to assess the role of issue expertise versus connections in the US Federal lobbying process and illustrate how both are at work. In support of the connections view, we show that lobbyists follow politicians they were initially connected to when those politicians switch to new committee assignments. In support of the expertise view, we show that there is a group of experts that even politicians of opposite political affiliation listen to. However, we find a more consistent monetary premium for connections than expertise.
 The Revolving Door and Worker Flows in Banking Regulation
(with David Lucca and Amit Seru)
Journal of Monetary Economics, July 2014, 65: pp.17-32.
This paper traces career transitions of federal and state U.S. banking regulators from a large sample of publicly available curricula vitae, and provides basic facts on worker flows between the regulatory and private sector resulting from the revolving door. We find strong countercyclical net worker flows into regulatory jobs, driven largely by higher gross outflows into the private sector during booms. These worker flows are also driven by state-specific banking conditions as measured by local banks’ profitability, asset quality and failure rates. The regulatory sector seems to experience a retention challenge over time, with shorter regulatory spells for workers, and especially those with higher education. Evidence from cross-state enforcement actions of regulators shows gross inflows into regulation and gross outflows from regulation are both higher during periods of intense enforcement, though gross outflows are significantly smaller in magnitude. These results appear inconsistent with a "quid-pro-quo" explanation of the revolving door, but consistent with a "regulatory schooling" hypothesis.
 Inconsistent Regulators: Evidence from Banking
(with Sumit Agarwal, David Lucca, and Amit Seru)
Quarterly Journal of Economics, May 2014, 129(2): pp.889-938.
We find that regulators can implement identical rules inconsistently due to differences in their institutional design and incentives and this behavior adversely impacts the effectiveness with which regulation is implemented. We study supervisory decisions of U.S. banking regulators and exploit a legally determined rotation policy that assigns federal and state supervisors to the same bank at exogenously fixed time intervals. Comparing federal and state regulator supervisory ratings within the same bank, we find that federal regulators are systematically tougher, downgrading supervisory ratings almost twice as frequently as state supervisors. State regulators counteract these downgrades to some degree by upgrading more frequently. Under federal regulators, banks report higher fraction of nonperforming loans, more delinquent loans, higher regulatory capital ratios, and lower returns on assets. Leniency of state regulators relative to their federal counterparts is related to costly consequences and likely proxies for delayed corrective actions—more lenient states have higher bank-failure rates, lower repayment rates of government assistance funds, and more costly bank resolutions. Moreover, relative leniency of state regulators at the bank level predicts the bank's subsequent likelihood of severe distress. The discrepancy in regulator behavior arises because of differences in how much regulators care about the local economy as well as differences in human and financial resources involved in implementing the regulation. There is no support for the corruption hypothesis, which includes “revolving doors” as a reason for leniency of state regulators. We conclude by discussing broader applicability of our findings as well as implications of our work for the design of banking regulators in the U.S. and Europe.
 Resolving Debt Overhang: Political Constraints in the Aftermath of Financial Crises
(with Atif Mian and Amir Sufi) [data and materials]
American Economic Journal: Macroeconomics, April 2014, 6(2): pp.1-28.
This paper advances the idea that countries become more politically polarized and fractionalized following financial crises, reducing the likelihood of major financial reforms precisely when they might have especially large benefits. The evidence from a large sample of countries provides strong support for the hypotheses that following a financial crisis, voters become more ideologically extreme and that, independently of whether they were initially in power, ruling coalitions become weaker. The evidence that increased polarization and weaker governments reduce the chances of financial reform and that financial crises lead to legislative gridlock and anemic reform is less clear-cut. The US debt overhang resolution is discussed as an illustration.
 The Political Economy of the US Mortgage Expansion
(with Atif Mian and Amir Sufi)
Quarterly Journal of Political Science, October 2013, 8(4): pp.373-408.
We examine how special interests, measured by campaign contributions from the mortgage industry, and constituent interests, measured by the share of subprime borrowers in a congressional district, may have influenced U.S. government policy toward subprime mortgage credit expansion from 2002 to 2007. Beginning in 2002, mortgage industry campaign contributions increasingly targeted U.S. representatives from districts with a large fraction of subprime borrowers. During the expansion years, mortgage industry campaign contributions and the share of subprime borrowers in a congressional district increasingly predicted congressional voting behavior on housing related legislation. Such patterns do not hold for non-mortgage financial industry. The evidence suggests that both subprime mortgage lenders and subprime mortgage borrowers influenced government policy toward subprime mortgage credit expansion.
 Risk Aversion and Expected Utility Theory: An Experiment with Large and Small Stakes
(with Matilde Bombardini)
Journal of the European Economic Association, December 2012, 10(6): pp.1348-99.
We employ a novel data set to estimate a structural econometric model of the decisions under risk of players in a game show where lotteries present payoffs in excess of half a million dollars. Differently from previous studies in the literature, the decisions under risk of the players in presence of large payoffs allow to estimate the parameters of the curvature of the vN-M utility function not only locally but also globally. Our estimates of relative risk aversion indicate that a constant relative risk aversion parameter of about one captures the average of the sample population. In addition we find that individuals are practically risk neutral at small stakes and risk averse at large stakes, a necessary condition, according to Rabin (2000) calibration theorem, for expected utility to provide a unified account of individuals’ attitude towards risk. Finally, we show that for lotteries characterized by substantial stakes non-expected utility theories fit the data equally well as expected utility theory.
 Competition and Political Organization: Together or Alone in Lobbying for Trade Policy?
(with Matilde Bombardini)
Journal of International Economics, May 2012, 87(1): pp.18-26.
This paper employs a novel data set on lobbying expenditures to measure the degree of within-sector political organization and to explore the determinants of the mode of lobbying and political organization across U.S. industries. The data show that sectors characterized by a higher degree of competition tend to lobby more together (through a sector-wide trade association), while sectors with higher concentration and more differentiated products lobby more individually. The paper proposes a theoretical model to interpret the empirical evidence. In an oligopolistic market, firms can benefit from an increase in their product-specific protection measure, if they can raise prices and profits. They find it less profitable to do so in a competitive market where attempts to raise prices are more likely to reduce profits. In competitive markets firms are therefore more likely to lobby together, thereby simultaneously raising tariffs on all products in the sector.
 Votes or Money? Theory and Evidence from the US Congress
(with Matilde Bombardini)
Journal of Public Economics, August 2011, 95(7-8): pp.587-611.
This paper investigates the relationship between the size of interest groups in terms of voter representation and the interest group’s campaign contributions to politicians. We uncover a robust hump-shaped relationship between the voting share of an interest group and its contributions to a legislator. This pattern is rationalized in a simultaneous bilateral bargaining model where the larger size of an interest group affects the amount of surplus to be split with the politician (thereby increasing contributions), but is also correlated with the strength of direct voter support the group can offer instead of monetary funds (thereby decreasing contributions). The model yields simple structural equations that we estimate at the district level employing data on individual and PAC donations and local employment by sector. This procedure yields estimates of electoral uncertainty and politicians effectiveness as perceived by the interest groups. Our approach also implicitly delivers a novel method for estimating the impact of campaign spending on election outcomes: we find that an additional vote costs a politician on average 145 dollars.
 The Political Economy of the US Mortgage Default Crisis
(with Atif Mian and Amir Sufi) [online appendix]
American Economic Review, December 2010, 100(5): pp.1967-98.
We examine the effects of constituent interests, special interests, and politician ideology on congressional voting behavior on two of the most significant pieces of legislation in U.S. economic history: the American Housing Rescue and Foreclosure Prevention Act of 2008 and the Emergency Economic Stabilization Act of 2008. Representatives from districts experiencing an increase in mortgage default rates are more likely to vote in favor of the AHRFPA, and the response is stronger in more competitive districts. Representatives only respond to mortgage related defaults (not non-mortgage defaults), and are more sensitive to defaults of their own-party constituents. Higher campaign contributions from the financial services industry are associated with an increased likelihood of voting in favor of the EESA, a bill which transfers wealth from tax payers to the financial services industry. Examining the trade-off between ideology and economic incentives, we find that conservative politicians are less responsive to both constituent and special interests. This latter finding suggests that politicians, through ideology, can commit against intervention even during severe crises.
 Democracy, Technology, and Growth
(with Philippe Aghion and Alberto Alesina)
in Elhanan Helpman (ed.) Institutions and Economic Performance, Harvard University Press, December 2008.
We explore the question of how political institutions and particularly democracy affect economic growth. Although empirical evidence of a positive effect of democracy on economic performance in the aggregate is weak, we provide evidence that democracy influences productivity growth in different sectors differently and that this differential effect may be one of the reasons of the ambiguity of the aggregate results. We provide evidence that political rights are conducive to growth in more advanced sectors of an economy, while they do not matter or have a negative effect on growth in sectors far away from the technological frontier. One channel of explanation goes through the beneficial effects of democracy and political rights on the freedom of entry in markets. Overall, democracies tend to have much lower entry barriers than autocracies, because political accountability reduces the protection of vested interests, and entry in turn is known to be generally more growth-enhancing in sectors that are closer to the technological frontier. We present empirical evidence that supports this entry explanation.
 Electoral Rules and Minority Representation in US Cities
(with Philippe Aghion and Alberto Alesina) [online appendix]
Quarterly Journal of Economics, February 2008, 123(1): pp.325-357.
This paper studies the choice of electoral rules, in particular the question of minority representation. Majorities tend to disenfranchise minorities through strategic manipulation of electoral rules. With the aim of explaining changes in electoral rules adopted by US cities, particularly in the South, we show why majorities tend to adopt “winner-take-all” city-wide rules (at-large elections) in response to an increase in the size of the minority when the minority they are facing is relatively small. In this case, for the majority it is more effective to leverage on its sheer size instead of risking to concede representation to voters from minority-elected districts. However, as the minority becomes larger (closer to a fifty-fifty split), the possibility of losing the whole city induces the majority to prefer minority votes to be confined in minority-packed districts. Single-member district rules serve this purpose. We show empirical results consistent with these implications of the model in a novel data set covering US cities and towns from 1930 to 2000.
 Who Adjusts and When? On the Political Economy of Reforms
(with Alberto Alesina and Silvia Ardagna)
IMF Staff Papers, [2005 Mundell-Fleming Lecture] September 2006, Special Issue, 53: pp.1-29.
Why do countries delay stabilizations of large and increasing budget deficits and inflation? And what explains the timing of reforms? We use the war of attrition model as a guidance for our empirical study on a vast sample of countries. We find that stabilizations are more likely to occur when time of crisis occur, at the beginning of term of office of a new government, in countries with "strong" governments, (i.e. presidential systems and unified governments with a large majority of the party in office), and when the executive faces less constraints. The role of external inducements like IMF programs has at best a weak effect, but problem of reverse causality are possible.
 Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development
(with Dani Rodrik and Arvind Subramanian) [data and materials]
Journal of Economic Growth, June 2004, 9(2): pp.131-165.
We estimate the respective contributions of institutions, geography, and trade in determining income levels around the world, using recently developed instruments for institutions and trade. Our results indicate that the quality of institutions “trumps” everything else. Once institutions are controlled for, measures of geography have at best weak direct effects on incomes, although they have a strong indirect effect by influencing the quality of institutions. Similarly, once institutions are controlled for, trade is almost always insignificant, and often enters the income equation with the “wrong” (i.e., negative) sign, although trade too has a positive effect on institutional quality. We relate our results to recent literature, and where differences exist, trace their origins to choices on samples, specification, and instrumentation.
 Endogenous Political Institutions
(with Philippe Aghion and Alberto Alesina)
Quarterly Journal of Economics, May 2004, 119(2): pp.565-613.
A fundamental aspect of institutional design is how much society chooses to delegate unchecked power to its leaders. If, once elected, a leader cannot be restrained, society runs the risk of a tyranny of the majority, if not the tyranny of a dictator. If a leader faces too many ex post checks and balances, legislative action is too often blocked. As our critical constitutional choice, we focus upon the size of the minority needed to block legislation, or conversely the size of the (super)majority needed to govern. We analyze both “optimal” constitutional design and “positive” aspects of this process. We derive several empirical implications which we then discuss.
 Who Invented Instrumental Variable Regression?
(with James Stock)
Journal of Economic Perspectives, Summer 2003, 17(3): pp.177-194.
Using Natural Language Processing methods, this paper probes the authorship of the first ever econometric derivation of instrumental variable regression in Appendix B of the 1928 volume The Tariff on Animal and Vegetable Oils. The work, authored by economist Philip G. Wright, was by many ascribed to Philip's son, famed genetic statistician Sewall Wright. We establish that Philip G. Wright was the author of the analysis and the inventor of instrumental variable regression, one of the most popular and influential method for causal inference used in econometrics almost a century later.
 Electoral Rules and Corruption
(with Torsten Persson and Guido Tabellini)
Journal of the European Economic Association, June 2003, 1(4): pp.958-989.
Is corruption systematically related to electoral rules? Recent theoretical work suggests a positive answer. But little is known about the data. We try to address this lacuna by relating corruption to different features of the electoral system in a sample of about eighty democracies in the 1990s. We exploit the cross-country variation in the data, as well as the time variation arising from recent episodes of electoral reform. The evidence is consistent with the theoretical priors. Larger voting districts-and thus lower barriers to entry-are associated with less corruption, whereas larger shares of candidates elected from party lists-and thus less individual accountability-are associated with more corruption. Individual accountability appears to be most strongly tied to personal ballots in plurality-rule elections, even though open party lists also seem to have some effect. Because different aspects roughly offset each other, a switch from strictly proportional to strictly majoritarian elections only has a small negative effect on corruption.