Mark Gradstein

What causes firms to hide output? The determinants of informality

Abstract In many developing countries, a significant part of economic activity takes place in the informal sector. Earlier work has examined the determinants of the size of the informal sector, focusing separately on factors such as tax and regulation burden, financial market development, and the quality of the legal system. We revisit this issue by using an integrated data set which contains information on all these aspects. Building on a simple analytical framework, we test the channels affecting the degree of informality. We find that the quality of the legal framework is crucially important in determining the size of the informal sector, whereas the significance of taxes, regulations, and financial constraints is reduced in the context of a well functioning legal system, consistent with the presented model. Additionally, firm size is negatively correlated with the propensity to go informal; finance constraints tend to induce informality among smaller firms but not among large firms, whereas legal obstacles induce informality among larger firms.

Orchestrating Rent Seeking Contests

Contests have different, sometimes quite complex, organisational structures. In particular, while most of the existing literature focusses on simultaneous contests, multistage contests are also quite frequently encountered. This paper seeks to provide a rationale for the latter by endogenising the choice of a contest structure, which is made by an organiser of a contest interested in maximising the efforts expended by the contenders.

Inequality and Institutions

This paper presents theory and evidence on the relationship between inequality and institutional quality. We propose a model in which the two dynamically reinforce each other and set out to test this relationship with a broad array of institutional measures. We establish double causality between better institutional quality and a more equal distribution of income, but also demonstrate that the link from the latter dominates the former. These results are shown to be robust to various specifications and different data sources that cover various time-spans.

Education, Social Cohesion, and Economic Growth

Analysis of the contribution of education to growth through its role in promoting a common culture indicates that when different cultural groups separately determine the social content of their school curricula excessive polarization can result, with less than optimal growth. The optimal trajectory involves a gradual, reciprocal convergence of school curricula towards the middle ground. This may be difficult to implement in a political context in which all agents are identified with one group or another. When curricula are determined by legislative bargaining, centralization of schooling may result in overly rapid homogenization in some cases, and - perhaps surprisingly - excessive polarization in others.

Inequality, democracy and the protection of property rights

Motivated by the observed relevance of institutional quality, such as strong property rights, for economic performance, this research considers the emergence of property rights protection as a political outcome. It argues that the support for such protection is greater the more equal income distribution and the smaller political bias. When these conditions initially hold, the politically influential rich elite may prefer to relinquish its power through democratisation in order to commit future policy makers to the enforcement of property rights, thus ensuring larger investment and faster growth along the transition path. In a very unequal economy, however, such democratisation will not take place.

Aging population and education finance

Conventional wisdom suggests that aging of population will increase political pressure to tilt the composition of social spending in favour of the elderly, while potentially sacrificing other publicly provided goods such as education. This view seems to be supported by recent empirical findings that per child public education spending tends to be lower in US jurisdictions with higher fraction of elderly residents. Do these cross-sectional findings also carry the dynamic implication that longevity will lead over time to waning political support for funding of public education? This Paper challenges such implication. We present a model that is consistent with the aforementioned cross-sectional regressions yet predicts an overall positive impact of increasing longevity on public education funding and economic growth.

Human capital, social capital, and public schooling

Abstract Public education contributes to growth not only by building human capital but also by instilling common norms that increase social cohesion. This is modeled in the context of a political economy framework in which social cohesion reduces wasteful rent seeking, and thus strengthens incentives for investment in human captial. The political decisions that determine whether different social groups retain separate schooling systems, or adopt an integrated system, weigh these material advantages against the psychic cost to parents of alienating their children from traditional values. This aspect of public education helps explain why, commonly, education is publicly administered as well as publicly financed.

Democratic Choice of an Education System: Implications for Growth and Income Distribution

We use an OLG model to examine democratic choice betweentwo modes of government support for education: subsidies forprivately purchased education and free uniform public provision.We find little conflict between democracy and growth: the samefactors that generate popular support for subsidization overfree uniform provision—large external benefits, a largeexcess burden, and little inequality—also favor its relativegrowth performance. Furthermore, restricting the franchise toan upper-income elite may also reduce growth. Two extensionsexamine the effect of intergenerational mobility and indicatethe theoretical possibility of periodic swings in the balancebetween public and private spending.

Time Dynamics and Incomplete Information in the Private Provision of Public Goods

In this paper a dynamic model of the provision of a public good with incomplete information is developed. For a finite population, in addition to the standard underprovision type of results, inefficiency occurs because of a delay in contributions. For an infinite population, although delay may disappear, underprovision remains so that equilibrium is still inefficient. Policy implications of these results are described, emphasis being put on possible government intervention with incomplete information.

Rent Seeking and the Provision of Public Goods

In this short paper I adopt the public choice school paradigm of modeling a government in order to compare its performance with that of the market in the standard model of the provision of public goods. Private provision is represented by the Cournot-Nash equilibrium in individual contributions. Public provision incorporates rent seeking, whereby some of the aspects of the allocation are determined indirectly by influence activities of the interested parties. Thus, both allocation procedures yield inefficiency, and the question is which procedure results in a greater amount of inefficiency: private provision with its free riding incentives, or public provision with its rent seeking incentives. The results indicate that public provision may well be preferred to private provision of public goods. Thus, superiority of private provision is not guaranteed even in the case of a non-benevolent government. Copyright 1993 by Royal Economic Society.