If democracy is to have any of the good effects said to justify it, it must be self-enforcing. Those who control the government must choose to hold regular, competitive elections for the highest offices, and all parties must be willing to comply with the results. I consider simple models of electoral accountability along the lines of Barro (1973) and Ferejohn (1986), but allowing rulers to chose whether to hold elections and citizens whether to rebel or protest. When individuals privately observe a signal of government’s performance (e.g., their own welfare), they face a difficult problem of how to coordinate to pose a credible threat of rebellion necessary to induce the ruler to provide public goods. The convention of holding elections according to a known schedule and rules can provide a public signal for coordinating rebellion in the event that elections are suspended or blatantly rigged, while the elections themselves aggregate private observations of performance. Two threats to this solution to political moral hazard are also considered. First, when the ruling faction controls the army, it may prefer to fight rather step down after losing an election, and ex post transfers may be incredible. A party system where parties can return to office in the future is shown to be able to restore self-enforcing democracy, though at the expense of weaker electoral control. Second, subtle or piecemeal electoral fraud may undermine the ability of the citizens to credibly threaten the opposition that maintains elections. I show that when there are organizations in society that can privately (though noisily) observe and announce fraud or the state of popular discontent (such as an opposition party), under some conditions the incumbent prefers to commit to fair elections over an “accountable autocratic ” equilibrium in which public goods are provided but costly rebellions periodically occur. 1

This article analyzes the effect of competition on a supermarket firm's incentive to provide product quality. In the supermarket industry, product availability is an important measure of quality. Using U.S. Consumer Price Index microdata to track inventory shortfalls, I find that stores facing more intense competition have fewer shortfalls. Competition from Walmart—the most significant shock to industry market structure in half a century—decreased shortfalls among large chains by about a third. The risk that customers will switch stores appears to provide competitors with a strong incentive to invest in product quality.

The higher legislative success of parliamentary governments relative to presidential governments has been used to argue that legislative success is driven by parliamentary governments' superior agenda power or their control of legislative majorities. We show that this approach is at odds with some of the empirical regularities across and within political systems. We then propose a legislative bargaining model to elucidate this puzzle. In the model, the policies of a confidence-dependent parliamentary government enjoy more predictable support from governing coalition members because their short-term policy goals are less important than the government's survival. Coalition support is stronger when the government has more agenda power and is weaker with a larger ruling coalition. We explore the empirical implications of these findings and their consequences for the comparative study of legislative institutions.

Katharine Coman's “Some Unsettled Problems of Irrigation,” published in March 1911 in the first issue of the American Economic Review, addressed issues of water supply, rights, and organization. These same issues have relevance today, in the face of growing concern about the availability of fresh water worldwide. The central point of this article is that appropriative water rights and irrigation districts that emerged in the American West in the late nineteenth and early twentieth centuries in response to aridity to facilitate agricultural water delivery, use, and trade raise the transaction costs today of water markets. These markets are vital for smooth reallocation of water to higher-valued uses elsewhere in the economy and for flexible response to greater hydrological uncertainty. This institutional path dependence illustrates how past arrangements to meet conditions of the time constrain contemporary economic opportunities. They cannot be easily significantly modified or replaced ex post.

This paper investigates the role of banking supervision in controlling bank risk. Banking supervision is measured in terms of enforcement outputs (i.e., on-site audits and sanctions). Our results show an inverted U-shaped relationship between on-site audits and bank risk, while the relationship between sanctions and risk appears to be linear and negative. We also consider the combined effect of effective supervision and banking regulation (in the form of capital and market discipline requirements) on bank risk. We find that effective supervision and market discipline requirements are important and complementary mechanisms in reducing bank fragility. This is in contrast to capital requirements, which prove to be rather futile in controlling bank risk, even when supplemented with a higher volume of on-site audits and sanctions.

A striking feature of many financial crises is the collapse of exports relative to output. In the 2008 financial crisis, real world exports plunged 17 percent while GDP fell 5 percent. This paper examines whether the drying up of trade finance can help explain the large drops in exports relative to output. This paper is the first to establish a causal link between the health of banks providing trade finance and growth in a firm's exports relative to its domestic sales. We overcome measurement and endogeneity issues by using a unique data set, covering the Japanese financial crises of the 1990s, which enables us to match exporters with the main bank that provides them with trade finance. Our point estimates are economically and statistically significant, suggesting that trade finance accounts for about one-third of the decline in Japanese exports in the financial crises of the 1990s.

This paper proposes a model that allows for nonlinear risk exposures of hedge funds to various risk factors. We introduce a flexible threshold regression model and develop a Bayesian approach for model selection and estimation of the thresholds and their unknown number. In particular, we present a computationally flexible Markov chain Monte Carlo stochastic search algorithm which identifies relevant risk factors and/or threshold values. Our analysis of several hedge fund returns reveals that different strategies exhibit nonlinear relations to different risk factors, and that the proposed threshold regression model improves our ability to evaluate hedge fund performance.

We build a game-theoretic model where aggression can be triggered by domestic political concerns as well as the fear of being attacked. In the model, leaders of full and limited democracies risk losing power if they do not stand up to threats from abroad. In addition, the leader of a fully democratic country loses the support of the median voter if he attacks a non-hostile country. The result is a non-monotonic relationship between democracy and peace. Using Polity data, we classify countries as full democracies, limited democracies, and dictatorships. For the period 1816–2000, Correlates of War data suggest that limited democracies are more aggressive than other regime types, including dictatorships, and not only during periods when the political regime is changing. In particular, a dyad of limited democracies is more likely to be involved in a militarized dispute than any other dyad (including “mixed” dyads, where the two countries have different regime types). Thus, while full democratization might advance the cause of peace, limited democratization might advance the cause of war. We also find that as the environment becomes more hostile, fully democratic countries become more aggressive faster than other regime types.

The paper studies procurement contracts with pre-project investigations in the presence of adverse selection and moral hazard. To model the procurer's problem, we extend a standard sequential screening model to endogenous information acquisition with moral hazard. The optimal contract displays systematic distortions in information acquisition. Due to a rent effect, adverse selection induces too much information acquisition to prevent cost overruns and too little information acquisition to prevent false project cancellations. Moral hazard mitigates the distortions related to cost overruns yet exacerbates those related to false negatives. The optimal mechanism is a menu of option contracts that achieves the dual goal of providing incentives for information acquisition and truthful information revelation.