Carmine Guerriero

Endogenous (In)Formal Institutions

Despite the huge evidence documenting the relevance of inclusive political institutions and a culture of cooperation, we still lack a framework that identifies their origins and interaction. In a model in which an elite and a citizenry try to cooperate in consumption risk-sharing and investment, we show that a rise in the investment value encourages the elite to introduce more inclusive political institutions to convince the citizenry that a sufficient part of the returns on joint investments will be shared. In addition, accumulation of culture rises with the severity of consumption risk if this is not too large and thus cheating is not too appealing. Finally, the citizenry may over-accumulate culture to credibly commit to cooperate in investment when its value falls and so inclusive political institutions are at risk. These predictions are consistent with the evolution of activity-specific geographic factors, monasticism, and political institutions in a panel of 90 European regions spanning the 1000-1600 period. Evidence from several identification strategies suggests that the relationships we uncover are causal.

Endogenous Legal Traditions

A key feature of a legal system is the set of institutions used to aggregate the citizens’ preferences over the harshness of punishment, i.e., the legal tradition. While under common law appellate judges’ biases offset one another at the cost of volatility of the law, under civil law the legislator chooses a certain legal rule that is biased only when he favors special interests, i.e., when preferences are sufficiently heterogeneous and/or the political process is sufficiently inefficient. Hence, common law can be selected only under this last scenario. This prediction is consistent with a novel dataset on the lawmaking and adjudication institutions in place at independence and in 2000 in 155 transplants, many of which reformed the transplanted legal tradition.

The Political Economy of (De)Regulation: Theory and Evidence from the U.S. Electricity Market

The choice of whether to let firms compete or regulate them is key issue in economics. If the demand is sufficiently inelastic, competition entails narrower allocative distortions but also smaller expected profits and, thus, weaker incentives to invest in cost-reduction than regulation does. Thus, societys preferences for competition are stronger the less socially relevant cost-reduction is and the greater the political power of consumers is. This prediction is consistent with U.S. power market data. During the 1990s, deregulation was implemented where marginal fuel costs and the inefficiency of fuel input usage had been the lowest and where politicians were the most pro-consumer. In addition, GMM estimates imply that deregulation significantly reduced labor and fuel expenses by pushing the most efficient firms to serve the market, but did not improve technical --- and in particular fuel input usage --- efficiency. My results shed new light on the slowdown of the deregulation wave and survive to the consideration of the other drivers of deregulation identified by the extant literature, i.e., costly long-term wholesale contracts and excessive capacity accumulation.

Law, Economics and History: Endogenous Institutional Change and Legal Innovation

Understanding the origins of formal and informal institutions of cooperation and regulation and their long-lasting impact on market exchange and technological investment is one of the most pressing questions in law, economics and history. Accordingly, despite the different angles considered by different disciplines, the notion that institutions emerge endogenously in the face of both welfare-enhancing and rent-seeking motives has recently come to be an accepted paradigm. Yet, despite this convergence, an even more vigorous effort in inquiring the determinants and the effects of institutional change is needed in order to guide legal and institutional reforms. The aim of this chapter is to substantiate this desideratum and, at the same time, to provide a new interdisciplinary research agenda.

A novel dataset on legal traditions, their determinants, and their economic role in 155 transplants

The law and the economy are deeply influenced by the legal tradition or origin, which is the bundle of institutions shaping lawmaking and dispute adjudication. The two principal legal traditions, common law and civil law, have been transplanted through colonization and occupation to the vast majority of the jurisdictions in the world by a group of European countries. Here, I illustrate a novel dataset recording the lawmaking institution employed by 155 of these jurisdictions at independence and in 2000 and four discretion-curbing adjudication institutions adopted by 99 of these “transplants” at the same two points in time. Contrary to the “legal origins” scholars׳ assumption, 25 transplants changed the transplanted lawmaking institution and 95 modified at least one of the transplanted lawmaking and adjudication rules. In “Endogenous Legal Traditions” (Guerriero, 2016a) [12], I document that these reforms are consistent with a model of the design of legal institutions by societies heterogeneous in their endowment of both the extent of cultural heterogeneity and the quality of the political process. In “Endogenous Legal Traditions and Economic Outcomes” (Guerriero, 2016b) [13] moreover, I show the relevance of considering legal evolution and the endogeneity between legal traditions and economics outcomes. The data illustrated here also include the proxies for the determinants of legal evolution I use in “Endogenous Legal Traditions” (Guerriero, 2016a) [12] and the novel measure of economic outcomes I employ in “Endogenous Legal Traditions and Economic Outcomes” (Guerriero, 2016b) [13].

The Political Economy of (De)Regulation: Evidence from the US Electricity Industry

The choice of whether to regulate firms or to allow them to compete is key. If the demand is sufficiently inelastic, competition entails narrower allocative inefficiencies but, also, smaller expected profits and, thus, weaker incentives to invest in cost reduction. Hence, deregulation should be found where cost reduction is less socially relevant and consumers are more politically powerful, and it should produce lower expected costs only when investment is not sufficiently effective. These predictions hold true under several alternative assumptions and are consistent with data on the deregulation initiatives implemented in 43 US state electricity markets between 1981 and 1999 and on the operating costs of the plants that served these markets. To illustrate, deregulation prevailed where the marginal fossil fuel cost and the inefficiency of fuel usage had been the lowest and politicians were the most pro-consumer. Moreover, GMM estimates imply that deregulation lowered labor and fossil fuel expenses by pushing the most efficient firms to serve the market, but it did not reduce the inefficiency of fuel usage. These results help rationalize the slowdown of the deregulation wave and are robust to considering the other key drivers of deregulation, i.e., costly long-term wholesale contracts and excessive capacity accumulation.

Extractive States: The Case of the Italian Unification

Despite the huge evidence on the adverse impact of extractive policies, we still lack a formal framework to identify their origins and role. Here, we lay out a two-region, two-social class model for thinking about this issue, and we exploit its implications to propose a novel account of the present-day divide between North and South of Italy. To illustrate, we document that it also arose because of the region-specific policies selected between 1861 and 1911 by the elite of the Kingdom of Sardinia, which unified Italy in 1861. While pre-unitary revenues from land property taxes and railway diffusion were shaped by each regions farming productivity but not by its political relevance for the Piedmontese elite, the opposite was true for the post-unitary ones. Moreover, tax distortions and the severity of all the other extractive policies are related to the growing post-unitary divide in culture and literacy, but not to the gap in the manufacturing industry value added. These two sets of results imply that extraction has neither eased the formation of a unitary market nor favored industrialization. Reassuringly, we reach similar conclusions when we consider region fixed effects and time dummies whether interacted or not with the structural conditions differentiating the two blocks of regions in 1861, i.e., inclusiveness of political institutions, land ownership fragmentation, and inputs. Crucially, our framework sheds light on the incentives of other groups dominating political and economic unions, e.g., Germany within the post-crisis EU.

A novel dataset on horizontal property rights in 126 jurisdictions

The law and the economy are deeply influenced by horizontal property rights, which are the rules regulating legal direct and indirect takings between private parties. To foster research on the determinants and impact of these institutions, we illustrate here a novel data set partially employed in (Dari-Mattiacci, Giuseppe, Carmine Guerriero, 2015; Dari-Mattiacci, Giuseppe, Carmine Guerriero, Zhenxing Huang, 2016) [3], [4], and (Guerriero Carmine, 2016) [6] and describing the acquisition of ownership through adverse possession of personal and real property and the use of government takings to transfer real property from a private party to another private party in 126 jurisdictions. These data are based on the laws and judicial decisions prevailing in each jurisdiction between 1981 and 2011.