Objectives

This course provides a graduate-level introduction to Political and Institutional Economics. The focus lies on explaining how democratic politics and electoral competition crucially matter for economic incentives, and how institutions and governance are key factors for development and for curbing the risk of conflict.

After providing a solid theoretical background to the students, we shall study cutting-edge empirical articles on these topics. Part of these recent influential articles will be discussed in student presentations.

The primary goal of the course is to familiarize the students with this increasingly important subfield of economics and to provide an overview on what cutting-edge research is currently carried out on these topics. A secondary goal of the course is also to foster the applied econometrics and oral presentation skills of the students.

Contents

This course covers the following topics:

SECTION 1: THE BIG PICTURE: ORIGINS OF THE STATE

• Market Failures and the efficiency arguments for the state
• Redistribution arguments for the state
• State Failure and bad politicians

SECTION 2A: DEMOCRATIC POLITICS AND THE ECONOMY: THEORY

• Downsian electoral competition and Median Voter Theorem
• Probabilistic voting
• Lobbying, rent-seeking and Special interest policy
• Bureaucracy
• Partisan politics: "citizen candidate" and "legislative bargaining"

SECTION 2B: DEMOCRATIC POLITICS AND THE ECONOMY: EMPIRICS

• Incumbency advantage
• Direct democracy
• Political dynasties
• Identity of leaders
• Information, voting and public policies

SECTION 3A: INSTITUTIONAL ECONOMICS AND GOVERNANCE: THEORY

• Inequality and Institution Building
• Determinants of State Capacity
• Institutions and Development

SECTION 3B: INSTITUTIONAL ECONOMICS AND GOVERNANCE: EMPIRICS

• Historical origin of institutions and path dependency
• Ethnic diversity and institutions
• Inequality and institutions
• Institutions and development

SECTION 4A: ECONOMICS OF CONFLICT: THEORY

• War inefficiency puzzle
• Contest success functions and paradox of power
• Political bias and war
• Ethnic conflict
• State capacity and conflict

SECTION 4B: ECONOMICS OF CONFLICT: EMPIRICS

• Ethnic diversity, discrimination and conflict
• Natural resources, climate change and conflict
• Political institutions and conflict
• Policies for Peace
• Economic and political consequences of conflict

References

Important references of this course are listed below. The syllabus (including a more detailed list of references) is available on the moodle page of this course.

Section 1:

Mueller, Dennis, 2003, Public Choice III, Cambridge: Cambridge University Press.

Section 2A & 2B:

Mueller, Dennis, 2003, Public Choice III, Cambridge: Cambridge University Press.

Persson, Torsten, and Guido Tabellini, 2002, Political Economics: Explaining Economic Policy, Cambridge MA: MIT Press.

Funk, Patricia and Christina Gathmann, 2011, "Does Direct Democracy Reduce the Size of Government? New Evidence from Historical Data, 1890-2000", Economic Journal, 121, 1252-1280.

Lee, David, 2008, "Randomized experiments from non-random selection in U.S. House elections", Journal of Econometrics, 142, 675-697.

Section 3A & 3B:

North, Douglass, 1994, "Economic Performance Through Time", American Economic Review, 84, 359-368.

North, Douglass, 1991, "Institutions", Journal of Economic Perspectives, 5, 97-112.

Coase, Ronald, 1960, "The Problem of Social Cost", Journal of Law and Economics, 3, 1-44.

Acemoglu, Daron and James A. Robinson, 2006, Economic Origins of Dictatorship and Democracy, Cambridge MA: Cambridge University Press.

Besley, Timothy, and Torsten Persson, 2011, Pillars of Prosperity, Princeton NJ: Princeton University Press.

Acemoglu, Daron, Simon Johnson, and James A. Robinson, 2001, "The Colonial Origins of Comparative Development: An Empirical Investigation", American Economic Review, 91, 1369-1401.

Abeberese, Ama Baafra, Prabhat Barnwal, Ritam Chaurey, and Priya Mukherjee, 2023, "Democracy and Firm Productivity: Evidence from Indonesia", Review of Economics and Statistics, forthcoming.

Belloc, Marianna, Francesco Drago, and Roberto Galbiati, 2016, "Earthquakes, religion, and transition to self-government in Italian cities", Quarterly Journal of Economics, 131, 1875-1926.

Aidt, Toke S., and Raphaël Franck, 2015, "Democratization under the threat of revolution: Evidence from the Great Reform Act of 1832." Econometrica, 83, 505-547.

Section 4A & 4B:

Fearon, James, 1995, "Rationalist Explanations for War", International Organization, 49, 379-414.

Jackson, Matthew and Massimo Morelli, 2007, "Political Bias and War", American Economic Review, 97, 1353-73.

Esteban, Joan and Debraj Ray, 2008, "On the Salience of Ethnic Conflict," American Economic Review, 98, 2185-202.

Dal Bó, Ernesto and Pedro Dal Bó, 2011, "Workers, Warriors, and Criminals: Social Conflict in General Equilibrium", Journal of the European Economic Association, 9, 646-677.

Rohner, Dominic, Mathias Thoenig, and Fabrizio Zilibotti, 2013, "War Signals: A Theory of Trade, Trust and Conflict", Review of Economic Studies, 80, 1114-1147.

Rohner, Dominic, 2023, "Mediation, military and money: The promises and pitfalls of outside interventions to end armed conflicts." Journal of Economic Literature, forthcoming.

Blattman, Christopher, and Jeannie Annan, 2016, "Can employment reduce lawlessness and rebellion? A field experiment with high-risk men in a fragile state", American Political Science Review, 110, 1-17.

Pre-requisites

The course is open to all students of the Master in Economics, and to other interested students who have basic mathematical knowledge (e.g. doing maximization under constraint).

Evaluation

First attempt

Exam:

Written 2h00 hours

Documentation:

Not allowed

Calculator:

Not allowed

Evaluation:

There is a written exam (counts as two-thirds of the final grade) and an oral presentation on a recent cutting-edge article (counts as one-third of the final grade). The exam contains both multiple-choice questions and longer questions.

Retake

Exam:

Written 2h00 hours

Documentation:

Not allowed

Calculator:

Not allowed

Evaluation:

There is a written, integrative exam that accounts for the final grade.