We provide quasi-experimental evidence of the effects of municipal budget rules on the level of local economic activity exploiting the fact that, in 1999, the Italian government imposed a balanced-budget fiscal rule on all municipal governments but in 2001 exempted municipalities below 5,000 inhabitants. Municipalities which remained subject to budget rules increased taxes but also experienced a significant increase in the number of firms and workers. The increase in taxes was largely financed through issuing more building permits, which led to higher urban revenues. To support the claim that building permits is a plausible mechanism which attracts more firms, in the face of higher taxes, we show that the positive impact of budget rules on employment growth and firms' entry is concentrated in municipalities with no physical constraints to urban planning and development. (JEL D73, H72, R52, R31, R33)
Several studies have underscored the significance of familiarity and collegiality in shaping judicial behavior in US federal courts. However, the distinct features of the US judicial system limit the ability to formulate a general theory. This research draws on 84,335 appellate decisions from Taiwanese courts to examine the role of familiarity in a career judge system. In Taiwan, lower court judges are transitorily promoted to appellate courts for 3 years, after which they typically return to their district courts before some of them are permanently promoted. By comparing their reversal patterns during temporary and subsequent permanent promotions to those of permanent appellate judges, we find that transitorily promoted judges reverse less frequently, and judges generally favor district courts where they have previously served. Social identity is likely a key explanatory factor. The size, diversity, and random allocation of cases in our dataset strengthens the generality of judicial behavior theories.
This article investigates whether early career exposure of inexperienced employees to employers affects their later career outcomes. The extent to which entry-level workers get to demonstrate their abilities is an important determinant of how precisely the employer can estimate their talent. I implement a novel instrumental variable strategy, exploiting co-worker injuries as a source of random variation in junior employee working time. Co-worker injuries create vacant slots in team rosters, which are filled by junior workers, increasing their exposure. The results show that additional exposure increases junior workers' rehiring probability as well as their post-entry-level salary and contract length (JEL M51, J63, J24, Z22).
We use data from the American offshore whaling industry to examine the relationship between racial diversity and team performance. Teams consist of the crew operating onboard whaling vessels, and performance is measured by the value of the output captured during the voyage. The results show robust estimates of racial diversity's association with team performance at the firm level, which is U-shaped. Whereas increasing levels of racial diversity initially reduced revenue, higher levels yielded substantial gains. The nonlinear pattern is consistent with conflicts and hunting success working in opposite directions.
Online reviews affect consumer choices and are therefore frequently faked. Not all consumers are aware of this. In a model with fake reviews and naive consumers, the unique equilibrium is characterized by partial pooling, where fake reviews are persuasive and blend in with real ones. Raising consumer awareness has opposing effects on the naive and aware consumer groups. If real reviews are written strategically, they are not always truthful. Under favorable market conditions, the equilibrium with all strategic reviewers is outcome equivalent to one with all aware consumers. Thus, awareness campaigns can yield similar outcomes, regardless of their target audience (JEL C72, D82, D83, L15)
Scholars recognize the variety of tools that Congress and presidents deploy to influence public policy. Less understood are the consequences of principals' disagreement over policy implementation. Presidents direct agencies on how to interpret the law, often in conflict with the desires of Congress. Such disputes can serve as a cue for the U.S. Supreme Court to intervene by reviewing statutory interpretation. Accordingly, our theory predicts that presidents' instructions to the executive branch will increase the probability that a law's implementation is reviewed by the Court, especially when agencies are under presidential control. Further, review and invalidation are more likely when the Court disagrees with the president's implementation agenda. We find support for this theory by examining all laws passed, issued with an objecting presidential signing statement, and reviewed by the Court between 1981 and 2020. This study demonstrates the judiciary's role in adjudicating interbranch disputes over the law while highlighting the limits of presidential policymaking.
By examining an international trade regulation of China in 1757, we study how economic shocks influence the selection of bureaucrats in the context of the world's earliest political meritocracy. Using a unique county-level dataset, we show that areas with greater exposure to the trade-induced economic shock experienced a larger decline in the number of selected bureaucrats. Suggestive evidence suggests that the economic decline related to the regulation made it harder for potential candidates to afford the costs of taking civil service exams. Our results highlight the role of economic conditions in a meritocracy that aims to select talented bureaucrats.
We provide the first worldwide overview of the patterns of hierarchical differentiation across Business Groups (BGs), highlighting the coexistence of different hierarchical shapes. We show how the different shapes can arise as optimal hierarchical structures in a knowledge-based model of BGs when subsidiaries' operations involve problem-solving under parents' supervision. The optimal choice of hierarchical structure is driven by production efficiency and two dimensions of problem-solving: efficiency related to supervising knowledge creation and handling associated communication across subsidiaries. We check the consistency of the model's predictions with the empirical patterns. The model successfully passes the consistency test (JEL D23, L23, F23, L25, G34)
Do governments treat firms they own more generously than comparable firms they do not own? The allocation of stimulus funds to hospitals in Germany during the financial crisis provides a unique opportunity to address this question. Using an instrumental variable approach leveraging the historical persistence of hospital ownership, we find evidence that publicly owned hospitals received substantial preferential treatment from the government. These findings have important implications for industrial policy, providing an explanation for the existence of soft budget constraints often associated with publicly owned enterprises (JEL I18, L33, L53)
We study an investment setting involving time-inconsistent elites and non-elites. The latter embrace norms that provide an intrinsic return on cooperation and may switch to a risk-sharing activity yielding a higher marginal intrinsic return. A more severe consumption risk and/or a smaller investment return increase the profitability of risk-sharing and, in turn, foster cultural accumulation. A limited investment payoff, instead, pushes the elites to enact an inclusive political process to incentivize the non-elites and the latter to reciprocate with strong norms signaling cooperation despite its limited return. These predictions are consistent with data on 44 Mesopotamian polities observed between 3050 and 1750 BCE. While the diffusion of interest-free loans of agricultural products and major irrigation infrastructures was negatively related to the harvest value, the spread of formal merchant institutions was linked to the distance to the trade circuits. Moreover, major irrigation projects were implemented where the climate was more erratic (JEL H10, O13, P00, Z10).
Exploiting an individual-level administrative dataset in a large Italian municipality, we investigate the impact of income shocks and exposure to ethnic diversity on electoral turnout. A large positive income shock increases turnout only among the poor, while both adverse income and diversity shocks tend to dampen turnout. Estimates are larger at the lower tail of the income distribution, where a large negative income shock reduces turnout by 7.9%, and among poor elderly people, whose turnout drops by 13.5%. The entry of a populist party possibly induces a relative increase (decrease) in turnout among the poor (rich) who suffered an income loss. (JEL D72, D31)
What is the long-term effect of organized crime presence on civic capital? By leveraging novel tax compliance and organized crime data, this study investigates this question within the Italian landscape from the 1950s to the 2000s. We exploit the forced resettlement law that compelled organized crime members living in the South of Italy to resettle in the Centre-North area of the country. Employing a difference-in-differences estimation strategy, estimates reveal that sustained exposure to mafia presence reduces TV tax compliance. Exploring possible mechanisms, we find that municipalities exposed to the forced resettlement law show more firms in strategic sectors for organized crime infiltration, and more episodes of extortion and labor racketeering
Does a legal formalist stay a formalist? Using a new measure of jurisprudential commitments based on an original dataset of annotated Supreme Court opinions leveraged through a fine-tuned large language model, we study whether, how, and why justices change their jurisprudence over the course of their careers, from 1870 to 2024. We find that most justices do not change significantly over their careers: they start how they end. However, roughly 15%-20% of justices exhibit change during their careers. Though we observe heterogeneity in the direction of jurisprudential movement over the series, locally it tends to be homogeneous: for example, we see anti-formal shifts after the judicial revolution of 1937. We investigate two mechanisms for shifting jurisprudence: we find little evidence that it is related to changes in ideology; we find suggestive evidence that it is related to peer effects and changes of the jurisprudence of other members on the Court.
While special interest politics has been shown to undermine political trust, less is known about how political trust influences special interest politics. We construct a static electoral competition model in which candidates propose policy platforms and an interest group determines the level of campaign contributions. We show that a high level of trust in politicians allows the interest group to capture politicians during elections, creating a dynamic dilemma of political trust. Extending the model to a dynamic framework with short-lived players, we find that this dilemma can lead to cycles of political trust and special interest politics: political trust is accumulated, consumed, and then restored, following cycles of special interest politics. (JEL D72, D73, D83).
This article investigates whether merger remedies, such as divestitures, can cause more harm than good using a model of firm conduct. The model is estimated leveraging the variation generated by a large divestiture in the US beer market. First, I find that price coordination, materialized through conduct parameters, acts as a countervailing force that limits the pro-competitive effects of a divestiture. Price coordination eliminates about 80% to 133% of the welfare gains from a divestiture. Second, based on counterfactual simulations, I show that a merger cleared with divestiture is likely to reduce consumer surplus more than a merger approved without divestiture (JEL K21, L4, L13).
We show experimentally that a very brief face-to-face conversation, or small talk, with a potential trading partner can serve a contracting function by enhancing trust and strengthening cooperative norms. Specifically, participants engaged in 3-min video calls with no agenda before playing Hold Up and Stag Hunt games. Despite having no prior knowledge of the games, the calls positively impacted trust, cooperation, and efficiency: there was more investment and less stealing in the Hold Up games, and participants more frequently reached the efficient equilibrium in a second, surprise Stag Hunt game when they talked after the first game. Our findings suggest that some players who had the opportunity to hold up others changed their preferences, and some who risked being held up changed their beliefs. Beyond alleviating contractual incompleteness, these results help explain why small talk pervades human interaction-from high-stakes business deals to casual professional encounters and beyond(JEL D02, D86, D91).
Considerable evidence suggests that people are internally motivated to keep their promises. But it is unclear whether such internal motivations create a meaningful level of commitment in economically relevant situations where promisors have strong self-interested reasons to break their promises. Self-interested incentives to break promises compete with-and so may overcome-the moral motivations of those who are internally motivated to keep them. We experimentally investigate the willingness of third parties to altruistically punish promise breaking. Participants observe a transaction between a potential promisor and promisee and can incur personal costs to punish the promisor for uncooperative actions. Our results suggest that the same moral reasons that motivate promisors to keep their promises make third-party observers more likely to punish promise breaking. This suggests that the same underlying promissory norms drive both (i) promise-keeping behavior in the absence of second- and third-party enforcement mechanisms and (ii) non-legal enforcement mechanisms that arise when third parties can punish potential promisors in a decentralized fashion. This makes it more likely that promissory norms support cooperative behavior
Two opposed parties seek to influence the court. They invest in gathering evidence and select what to disclose. The court then adjudicates. We compare this setting with one allowing cross-examination. A cross-examiner tests the opponent to persuade the court that relevant information was withheld. Cross-examination without appropriate safeguards is shown to be detrimental to the quality of adjudication. It shifts the risk of adjudication error from erroneously finding for the cross-examined to erroneously finding for the cross-examining party. That party therefore has less incentives to acquire evidence because the opponent can now also be countered through cross-examination. A potential cross-examined also has less incentives to gather evidence because there is now a smaller chance of prevailing. Adjudication is therefore less informed. We show that redirect examination (or substitutes such as court-led examination) plays an essential role in correcting undesirable effects. Together, cross and redirect efficiently extract information from a testifying party (JEL C7, D8, K4).
Should product harms be investigated by firms via "Responsible Innovation" (RI) or by regulators? Firms can investigate potential harms early on, but only by diverting resources from innovation. Regulators, by contrast, often investigate harms after products are on the market. We characterize the efficient solution, which hinges on the firm's opportunity cost of RI-how sensitive innovation success is to resource diversion-and the regulator's cost of investigating harms. Our main insights are threefold. First, efficiency assigns primary responsibility to the lowest-cost party: firms when innovation success is insensitive to resource diversion, regulators when innovation success is highly sensitive. Second, efficient regulatory actions can be implemented with standard tools-fines, bans, and investigations-but this hinders firms' RI incentives. Third, competition reduces RI investments for each firm but can raise aggregate RI. Our results highlight the trade-off between efficient oversight and incentives for responsible innovation while cautioning against one-size-fits-all regulation (JEL L51, M14, O32, D82).
We examine how anti-money laundering (AML) policies affect banks and credit provision. Exploiting a Colombian regulation aimed at controlling the flow of drug trafficking proceeds into the financial system, we find that bank deposits decline in high drug-trafficking municipalities. This liquidity shock affects credit availability in other municipalities: banks sourcing deposits from high drug-trafficking areas reduce lending compared to other banks. Leveraging a proprietary database on bank-firm relationships, we also show that small firms relying on credit from these affected banks experience reduced sales, investment, and profitability. Finally, using night lights data, we find that these results do not reflect a shift in activity across firms or between the formal and informal sectors. Our findings reveal a hidden cost to be considered when implementing AML policies. (JEL K42, G18, G21)
