Because government intervention transfers resources from one party to another, it creates room for corruption. As corruption often undermines the purpose of the intervention, governments will try to prevent it. They may create rents for bureaucrats, induce a misallocation of resources, and increase the size of the bureaucracy. Since preventing all corruption is excessively costly, second-best intervention may involve a certain fraction of bureaucrats accepting bribes. When corruption is harder to prevent, there may be both more bureaucrats and higher public-sector wages. Also, the optimal degree of government intervention may be nonmonotonic in the level of income.

We develop a tractable model of endogenous production networks. Each one of a number of products can be produced by combining labor and an endogenous subset of the other products as inputs. Different combinations of inputs generate (prespecified) levels of productivity and various distortions may affect costs and prices. We establish the existence and uniqueness of an equilibrium and provide comparative static results on how prices and endogenous technology/input choices (and thus the production network) respond to changes in parameters. These results show that improvements in technology (or reductions in distortions) spread throughout the economy via input–output linkages and reduce all prices, and under reasonable restrictions on the menu of production technologies, also lead to a denser production network. Using a dynamic version of the model, we establish that the endogenous evolution of the production network could be a powerful force towards sustained economic growth. At the root of this result is the fact that the arrival of a few new products expands the set of technological possibilities of all existing industries by a large amount—that is, if there are n products, the arrival of one more new product increases the combinations of inputs that each existing product can use from 2 n −1 to 2 n , thus enabling significantly more pronounced cost reductions from choice of input combinations. These cost reductions then spread to other industries via lower input prices and incentivize them to also adopt additional inputs.

This paper examines the implications of regulatory change for input mix and technology choices of regulated industries. We study the increase in the relative price of labor faced by U.S. hospitals that resulted from the move from full cost to partial cost reimbursement under the Medicare Prospective Payment System (PPS) reform. Using the interaction of hospitals' pre-PPS Medicare share of patient days with the introduction of PPS, we document substantial increases in capital-labor ratios and declines in labor inputs following PPS. Most interestingly, we find that PPS seems to have encouraged the adoption of a range of new medical technologies.

We exploit the major international health improvements from the 1940s to estimate the effect of life expectancy on economic performance. We construct predicted mortality using preintervention mortality rates from various diseases and dates of global interventions. Predicted mortality has a large impact on changes in life expectancy starting in 1940 but no effect before 1940. Using predicted mortality as an instrument, we find that a 1 percent increase in life expectancy leads to a 1.7-2 percent increase in population. Life expectancy has a much smaller effect on total GDP, however. Consequently, there is no evidence that the large increase in life expectancy raised income per capita.

This paper evaluates the importance of "property rights institutions," which protect citizens against expropriation by the government and powerful elites, and "contracting institutions," which enable private contracts between citizens. We exploit exogenous variation in both types of institutions driven by colonial history and document strong first‐stage relationships between property rights institutions and the determinants of European colonization strategy (settler mortality and population density before colonization) and between contracting institutions and the identity of the colonizing power. Using this instrumental variables approach, we find that property rights institutions have a first‐order effect on long‐run economic growth, investment, and financial development. Contracting institutions appear to matter only for the form of financial intermediation. A possible explanation for this pattern is that individuals often find ways of altering the terms of their formal and informal contracts to avoid the adverse effects of weak contracting institutions but find it harder to mitigate the risk of expropriation in this way.

This paper offers a theory of development that links the degree of market incompleteness to capital accumulation and growth. At early stages of development, the presence projects limits the degree of risk spreading (diversification) that the economy can achieve. The desire to avoid highly risky investments slows down capital accumulation, and the inability to diversify idiosyncratic risk introduces a large amount of uncertainty in the growth process. The typical development pattern will consist of a lengthy period of “primitive accumulation” with highly variable output, followed by takeoff and financial deepening and, finally, steady growth. “Lucky” countries will spend relatively less time in the primitive accumulation stage and develop faster. Although all agents are price takers and there are no technological spillovers, the decentralized equilibrium is inefficient because individuals do not take into account their impact on others' diversification opportunities. We also show that our results generalize to economies with international capital flows.

The recent ascent of right-wing populist movements in several countries has rekindled interest in understanding the causes of the rise of fascism in the interwar years. In this article, we argue that there was a strong link between the surge of support for the Socialist Party after World War I and the subsequent emergence of fascism in Italy. We first develop a source of variation in socialist support across Italian municipalities in the 1919 election based on war casualties from the area. We show that these casualties are unrelated to a battery of political, economic, and social variables before the war and had a major effect on socialist support (partly because the socialists were the main antiwar political movement). Our main result is that this boost to socialist support (that is “exogenous” to the prior political leaning of the municipality) led to greater local fascist activity as measured by local party branches and fascist political violence, and to significantly larger vote share of the Fascist Party in the 1921 and 1924 elections. We provide evidence that landowner associations and greater presence of local elites played an important role in the rise of fascism. Finally, we find greater likelihood of Jewish deportations in 1943–45 and lower vote share for Christian Democrats after World War II in areas with greater early fascist activity.

We construct a model to study the implications of changes in political institutions for economic institutions. A change in political institutions alters the distribution of de jure political power, but creates incentives for investments in de facto political power to partially or even fully offset change in de jure power. The model can imply a pattern of captured democracy, whereby a democratic regime may survive but choose economic institutions favoring an elite. The model provides conditions under which economic or policy outcomes will be invariant to changes in political institutions, and economic institutions themselves will persist over time. (JEL D02, D72) The domination of an organized minority … over the unorganized majority is inevitable. The power of any minority is irresistible as against each single individual in the majority, who stands alone before the totality of the organized minority. At the same time, the minority is organized for the very reason that it is a minority. —Gaetano Mosca (1939, 53).

Much of the empirical work and the conceptual discussion of the impact of institutions on economic development either implicitly or explicitly assumes that institutions persist. Although Acemoglu et al. (2001) provide evidence that constraints on the executive persist, many aspects of institutions change frequently. Less-developed countries cycle between democracy and dictatorship and often change their constitutions. Relatedly, while the current economic problems in Latin America are often traced back to colonial times (Stanley L. Engerman and Kenneth L. Sokoloff, 1997; Acemoglu et al., 2002), the specific institutions that once underpinned the colonial economy, such as the encomienda, the mita, or slavery, vanished long ago. These observations suggest that we need to develop a framework in which changes in certain dimensions of institutions are consistent with overall institutional persistence. In this paper, we make an attempt to highlight some important mechanisms for understanding simultaneous change and persistence in institutions. Institutional persistence, in this context, refers to the persistence of a cluster of economic institutions, such as the extent of enforcement of property rights for a broad cross section of society (Acemoglu et al., 2001). Such lack of property rights enforcement may be driven by quite different specific institutions, e.g., risk of expropriation, entry barriers, or economic systems such as serfdom or slavery. In turn, these different specific economic institutions may exist under different political institutions, including dictatorships, absolutist monarchies, oligarchies, and corrupt or even populist democracies. Given this rich array of possibilities, a useful framework must specify which aspects of institutions can change, which others have a tendency to persist in equilibrium, and how the persistence of certain types of institutions could have lasting effects on economic outcomes. In this paper, we provide a simple model of the coexistence of change and persistence in institutions. First we describe some existing approaches to the persistence of social arrangements, as well as the essence of the mechanism we propose. Next, we illustrate the key issues using the experience of the southern United States, and last we provide a simple model that formalizes the main mechanism in the paper. We conclude by discussing a complementary mechanism to the one presented in this paper.