David Stasavage

The Limits of Delegation: Veto Players, Central Bank Independence, and the Credibility of Monetary Policy

Governments unable to make credible promises hinder economic development and effective policymaking. Scholars have focused considerable attention on checks and balances and the delegation of authority to independent agencies as institutional solutions to this problem. The political conditions under which these institutions enhance credibility, rather than policy stability, are still unclear, however. We show that checks—multiple veto players—enhance credibility, depending on the extent of uncertainty about the location of the status quo, on how agenda control is allocated among the veto players, and on whether veto players have delegated policymaking authority to independent agencies. In the context of monetary policy and independent central banks, we find evidence supporting the following predictions: Delegation is more likely to enhance credibility and political replacements of central bank governors are less likely in the presence of multiple political veto players; this effect increases with the polarization of veto players.We have benefited from the generous advice of many people, including Alberto Alesina, Tim Besley, Georgios Chortareas, Roberta Gatti, Simon Hug, Stephan Haggard, Witold Henisz, Aart Kraay, Francesca Recanatini, and Mary Shirley, and from comments of seminar participants at DELTA (Paris), George Mason, and Oxford. Three anonymous referees and the editor were especially helpful. This papers findings, interpretations, and conclusions are entirely those of the authors and do not necessarily represent the views of The World Bank, its executive directors, or the countries they represent.

Religion and Preferences for Social Insurance

In this paper we argue that religion and welfare state spending are substitute mechanisms that insure individuals against adverse life events. As a result, individuals who are religious are predicted to prefer lower levels of social insurance than will individuals who are secular. To the extent policy outcomes reflect individual preferences, then countries with higher levels of religiosity should have lower levels of welfare state spending. In formalizing our argument we also suggest that if benefits from religion are subject to a network externality (I derive greater pleasure from religion when others are also religious), it is possible for countries that are similar in terms of underlying conditions to exhibit multiple equilibria with respect to religion and social insurance. We empirically test our predictions using individual-level data on religiosity, individual-level data on social insurance preferences, and cross-country data on social spending outcomes. The findings are strongly supportive of our hypotheses.

Checks and Balances, Private Information, and the Credibility of Monetary Commitments

In this article, we argue that the effectiveness of central bank independence and exchange-rate pegs in solving credibility problems is contingent on two factors: political institutions and information asymmetries. However, the impact of these two factors differs. We argue that the presence of one institution--multiple political veto players--should be crucial for the effectiveness of central bank independence, but should have no impact on the efficacy of exchange-rate pegs. In contrast, exchange-rate pegs should have a greater anti-inflationary impact when it is difficult for the public to distinguish between inflation generated by policy choice and inflation resulting from exogenous shocks to the economy. Such information asymmetries between the public and the government, however, do not increase the efficacy of central bank independence. Empirical tests using newly developed data on political institutions provide strong support for our hypotheses.

Private Investment and Political Institutions

Recent research has demonstrated a negative link between macroeconomic and political uncertainty and levels of private investment across countries. This raises the question whether certain types of government institutions might help reduce this uncertainty. North and Weingast (1989) propose that political institutions characterized by checks and balances can have beneficial effects on investment by allowing governments to credibly commit not to engage in ex post opportunism with respect to investors. In this paper I develop and test a modified version of their hypothesis, suggesting that checks and balances, on average, improve possibilities for commitment, but that they are not a necessary condition for doing so. Results of heteroskedastic regression and quantile regression estimates strongly support this proposition.

Publicity of Debate and the Incentive to Dissent: Evidence from the US Federal Reserve

When central banks are transparent about their decision making, there may be clear benefits in terms of credibility, policy effectiveness, and improved democratic accountability. While recent literature has focused on all of these advantages of transparency, in this paper we consider one potential cost: the possibility that publishing detailed records of deliberations will make members of a monetary policy committee more reluctant to offer dissenting opinions. Drawing on the recent literature on expert advisors with ?career concerns?, we construct a model that compares incentives for members of a monetary policy committee to voice dissent when deliberations occur in public, and when they occur in private. We then test the implications of the model using an original dataset based on deliberations of the Federal Reserve?s Federal Open Market Committee, asking whether the FOMC?s decision in 1993 to begin releasing full transcripts of its meetings has altered incentives for participants to voice dissenting opinions. We find this to be the case with regard to both opinions on shortterm interest rates and on the ?bias? for future policy.

Institutions, Partisanship, and Inequality in the Long Run

It has been widely suggested by political scientists and economists, based on empirical evidence for the period since 1970, that the institution of centralized wage bargaining and the presence of a government of the left are associated with lower levels of income inequality. The authors make use of new data on top income shares as well as long-run series on wage inequality to examine the effects of partisanship and wage bargaining over a much longer time period, nearly the entire twentieth century. Their empirical results provide little support for the idea that either of these two factors is correlated with income inequality over this period. They then show that a closer look at the introduction of centralized wage bargaining in individual countries during the middle part of the twentieth century reveals that in countries that moved to centralize wage bargaining, income inequality had already been trending downward well before the institutional change, that the move to centralized bargaining did not alter this trend, and that these changes in income inequality were also observed in countries that did not adopt centralized wage bargaining at this time. The results suggest that there were alternative institutional paths to reduced income inequality during most of the twentieth century. This raises the possibility that either structural economic changes or commonly shared economic and political events, such as world wars and economic crises, may ultimately be more important for understanding the evolution of income inequality than are the institutional or partisan characteristics commonly considered to be decisive by political scientists.

Polarization and Publicity: Rethinking the Benefits of Deliberative Democracy

Though openness in government has obvious benefits, recent scholarship has devoted less attention to the possibility that it might also have costs. I use a formal framework to investigate the effect of public versus private decision making on opinion polarization. Existing work emphasizes that public debate helps to reduce polarization and promote consensus, but I argue that when debate takes place between representatives the opposite may be true. When representatives make decisions in public, they face incentives to use their actions as a signal of loyalty to their constituents, potentially ignoring private information about the true desirability of different policies. Anticipating this, constituents will not alter their prior policy beliefs following a debate of this type. When representatives instead make policy decisions in private, they are more likely to allow private information to influence their actions. An important consequence is that even if constituents do not observe actions or statements of individual representatives, they can still use the final policy choice to revise their initial beliefs. I suggest that these conclusions have significant implications for both the literature on deliberative democracy and for discussions of polarization in American politics.

Democracy, War, and Wealth: Lessons from Two Centuries of Inheritance Taxation

In this article we use an original data set to provide the first empirical analysis of the political economy of inherited wealth taxation that covers a significant number of countries and a long time frame (1816–2000). Our goal is to understand why, if inheritance taxes are often very old taxes, the implementation of inheritance tax rates significant enough to affect wealth inequality is a much more recent phenomenon. We hypothesize alternatively that significant taxation of inherited wealth depended on (1) the extension of the suffrage and (2) political conditions created by mass mobilization for war. Using a difference-in-differences framework for identification, we find little evidence for the suffrage hypothesis but very strong evidence for the mass mobilization hypothesis. Our study has implications for understanding the evolution of wealth inequality and the political conditions under which countries are likely to implement policies that significantly redistribute wealth and income.

The role of democracy in Uganda's move to universal primary education

Ugandas establishment of free universal primary education has been a particularly dramatic, and widely acclaimed example of a government devoting increased resources to basic service provision. The announcement and successful implementation of the Universal Primary Education (UPE) program has resulted in a sizeable increase in primary school enrolment rates, and in particular in rural areas of the country. Ugandas recent experience with UPE raises a fundamental question: why has Uganda been successful in devoting increased resources to primary education when other governments have so often failed to achieve the same goal? In seeking an answer to this question, it is difficult to ignore the fact that the Ugandan governments decision to abolish primary school fees was first announced as a manifesto commitment made during a presidential election campaign. Within a few months of his election in May 1996, President Museveni made good on this commitment by announcing that primary school fees would be abolished for four children in each Ugandan family. This apparent link between an election and a new education initiative suggests that electoral competition may be a powerful force in prompting governments to deliver public services. There is a problem with drawing a swift conclusion about the link between democracy and education spending, because candidates in African election campaigns have often promised greater spending on primary education and then failed to deliver once elected. The goal of this paper is to focus on Ugandas recent move to free universal primary education in order to ask whether the success of the UPE program can be attributed to democratic politics. The authors primary objective is to explore the Ugandan case in order to ask when and where a move to competitive elections will result in increased government spending on education, that is, he focuses on exploring the link between democratic politics and UPE. After the introduction, Section 2 first considers general propositions about democratic politics and government policy choices. Section 3 turns to the Ugandan case, presenting the events leading to the announcement of the UPE initiative in 1996, while also discussing subsequent implementation. Section 4 then considers in depth whether existing evidence shows that democratic politics can explain why UPE was announced and why it has been successfully implemented. Section 5 briefly considers complementary explanations for UPEs success, and in particular the role of macroeconomic stability and reforms to budgetary institutions. Finally, Section 6 concludes and considers the broader implications of the Ugandan case.

A framework for the analysis of corruption

The article sets out a framework within which the problem of corruption may be analysed in any specific country. It does not seek to establish the importance of such activity in a general sense, or seek to propose particular economic policy or institutional programmes that should be pursued in order to reduce the impact on the development process. Rather, the objective is to provide a structure for two distinct areas of analysis. Firstly, it considers the investigation of the determinants of corruption, emphasising the environment in which corruption evolves — whether shaped by international, national or specific institutional factors — and the manner in which the different parties to corruption interact and organise themselves in conducting these activities. Secondly, the article focusses on the importance of corruption for economic development by considering the different forms of corruption and the characteristics of these forms that are most critical for economic activity. Here, the distortions that are introduced into on-going economic activity are identified, together with the manner in which these distortions redirect activity in sub-optimal directions. In addition, the nature of the uncertainty attaching to these differing forms of corruption is considered, and especially the degree to which a form may be considered anarchic or structured in character: the former reflecting a system of intense uncertainty, and the latter one of less uncertainty — perhaps, only minimal uncertainty — as a predictable and stable set of relationships between parties is established. Finally, the article reviews the empirical work that has been undertaken in this field. This article, therefore, seeks to identify how detailed case study analysis, focussed on individual countries — and, indeed, on specific institutions or sectors within those countries — could valuably complement these existing studies, and provide a framework for those seeking to design policy that is appropriate to any individual circumstance.