I study how GDP shocks affect corruption and political turnover, both from a theoretical and an empirical perspective. The theoretical setting presumes politicians are heterogeneous and privately informed about their degree of corruptibility. They face exogenous shocks to GDP, which affect appropriable government revenues. The political incentives to appropriate these rents systematically vary with such shocks, which affects the endogenous re-election/replacement decisions of voters. I predict that transitory output shocks that lie above trend represent a good opportunity to grab rents today - current gains increase relative to expected continuation values. Therefore, corruption is predicted to be pro-cyclical, as is subsequent political turnover. This has the further implication that booms in current mandates decrease corruption in future mandates, because voters eliminate the more corrupt incumbents. I test these three predictions using an annual panel of countries over 1985-2011. I find evidence in support of the theory. Moreover, these cyclical properties are stronger for more democratic countries, suggesting electoral accountability is indeed the bridge that links corruption to business cycles.
Too good to be true? Retention rules for noisy agents, with Debraj Ray (Online Appendix) [NEW VERSION!]
An agent who privately knows his type (good or bad) seeks to be retained by a principal. The principal seeks to retain good agents. Agents signal their type with some ambient noise, but can alter this noise, perhaps at some cost. Our main finding, that we examine in several extensions, is that in equilibrium, the principal treats extreme signals in either direction with suspicion, and retains the agent if and only if the signal falls in some intermediate bounded set. In short, she follows the maxim: "if it seems too good to be true, it probably is." We consider various extensions, including non-normal signal structures, non-binary types, interacting agents, costly mean-shifting, dynamics with term limits, and principal commitment. We discuss applications to risky portfolio management and political risk-taking, and mention several others.
Computation of Antidumping Duties for Differentiated Goods
Current methodologies for computing antidumping duties implicitly assume that the domestically produced and the imported products are perfect substitutes. This paper advances a new methodology that relaxes this assumption by means of a partial equilibrium Armington (1969) model with monopolistically competitive domestic firms. The theory indicates that antidumping duties should not depend on quality differentials but on elasticities of substitution. I empirically evaluate the proposed methodology by applying it in two real-world antidumping cases. With the first case I show how to calibrate the parameters of the theoretical model in order to compute the proposed antidumping duties, and I illustrate how big the difference between current and proposed duties can be in practice: antidumping duties decrease from 97% to 37%. The second example is considered to show that antidumping duties might be insufficient to eliminate the injury to the domestic industry, even if they are infinitely large.