Thierry Verdier

This paper elucidates the willingness of an autocrat to push through institutional reforms in a context where traditional authorities represented by religious clerics are averse to them and where the military control the means of repression and can potentially stage a coup. We show that although the autocrat always wants to co-opt the military, this is not necessarily true of the clerics. Exclusive co-option of the military obtains where the loyalty of the autocrat’s army is strong while the organizational strength of religious movements is rather low. Radical institutional reforms can then be implemented. Empirically, the dominant regime in contemporary Muslim countries is the regime of double co-option where the autocrat resorts to a double-edged tactic: pleasing the official clerics by slowing the pace of reforms and ensuring the loyalty of the military so as to put down clerics-led rebellions.

In this paper we survey recent advances in the economic theory of cultural transmission. We highlight three main themes on which the literature has made great progress in the last ten years:the domain of traits subject to cultural transmission, the micro-foundations for the technology of transmission, and feedback effects between culture, institutions, and various socio-economic environments. We conclude suggesting interesting areas for future research.

This paper provides a simple model of identity salience that is applied to the phenomenon of the recent rise in right-wing populism in the Western world. Trade and capital flows, skill-biased technological change, and migration have led to declining employment and wages in these economies and a parallel rise in economic and cultural populism, tapping into nativist sentiments. We argue that when long-term income stagnation for most of the population and decline for some go together with high rates of income growth at the very top, one has zero-sum economics and that naturally raises the possibility of using various kinds of social identities to claim a bigger share of a fixed sized pie. We show that in ethnically or racially polarized societies this naturally leads to the salience of social identities that enable majority ethnic groups to vote for policies that exclude minority groups so that they get a greater share of a dwindling surplus. In contrast, in more ethnically and racially homogeneous societies, this would instead lead to the demand for more pro-redistribution policies that involve greater provision of public goods.

We propose a model of intergenerational transmission of education wherein children belong to either highly educated or low-educated families. Children choose the intensity of their social activities, while parents decide how much educational effort to exert. Using Add Health data, we find that, on average, children’s homophily acts as a complement to the educational effort of highly educated parents but as a substitute for the educational effort of low-educated parents. We also find that policies that subsidize kids’ socialization efforts can backfire for low-educated students because they tend to increase their interactions with other low-educated students.

This paper presents a new theory of crime where leaders transmit a crime technology and act as a role model for other criminals. We show that, in equilibrium, an individual’s crime effort and criminal decisions depend on the geodesic distance to the leader in his or her network of social contacts. By using data on friendship networks among U.S. high-school students, we structurally estimate the model and find evidence supporting its predictions. In particular, by using a definition of a criminal leader that is exogenous to the network formation of friendship links, we find that the longer is the distance to the leader, the lower is the criminal activity of the delinquents and the less likely they are to become criminals. We finally perform a counterfactual experiment that reveals that a policy that removes all criminal leaders from a school can, on average, reduce criminal activity by about 20% and the individual probability of becoming a criminal by 10%.

What determines whether or not multinational firms transplant the mode of organisation to other countries? We embed the theory of knowledge hierarchies in an industry equilibrium model of monopolistic competition to examine how the economic environment may affect the decision of multinational firms about transplanting the mode of organisation to other countries. We test the theory with original and matched parent and affiliate data on the level of decentralisation of 660 Austrian and German multinational firms and 2,200 of their affiliate firms in Eastern Europe. We find that market competition in both home and host markets is an important driver of organisational transfer to host countries: an increase in competition in the home (host) market by ten percentage points lowers (increases) the probability of transplanting by nine (seven) percentage points.

In this paper we discuss the role of explicit formal dynamic models in our understanding of socio-economic history. Specifically, to illustrate the methodological issue, we center our analysis on studies of institutional and cultural change. Finally, we study in detail a dynamic model of institutions for property rights protection and culture of conflict as an example.

The essential role that institutions play in understanding economic development has long been recognized across the social sciences, including in economics. Academic and policy interest in this subject has never been higher. The Handbook of Economic Development and Institutions is the first to bring together in one single volume the most cutting-edge work in this area by the best-known international economists. The volume’s editors, themselves leading scholars in the discipline, provide a comprehensive introduction, and the stellar contributors offer up-to-date analysis into institutional change and its interactions with the dynamics of economic development. This book focuses on three critical issues: the definitions of institutions in order to argue for a causal link to development, the complex interplay between formal and informal institutions, and the evolution and coevolution of institutions and their interactions with the political economy of development. Topics examined include the relationship between institutions and growth, educational systems, the role of the media, and the intersection between traditional systems of patronage and political institutions. Each chapter—covering the frontier research in its area and pointing to new areas of research—is the product of extensive workshopping on the part of the contributors. The definitive reference work on this topic, The Handbook of Economic Development and Institutions will be essential for academics, researchers, and professionals working in the field.

Using a choice experiment in the lab, we assess the relative importance of different attitudes to income inequality. We elicit subjects’ preferences regarding pairs of payoff distributions within small groups, in a firm-like setting. We find that distributions that satisfy the Pareto-dominance criterion attract unanimous suffrage: all subjects prefer larger inequality provided it makes everyone weakly better off. This is true no matter whether payoffs are based on merit or luck. Unanimity only breaks once subjects’ positions within the income distribution are fixed and known ex-ante. Even then, 75% of subjects prefer Pareto-dominant distributions, but 25% of subjects engage in money burning at the top in order to reduce inequality, even when it does not make anyone better off. A majority of subjects embrace a more equal distribution if their own income or overall efficiency is not at stake. When their own income is at stake and the sum of payoffs remains unaffected, 20% of subjects are willing to pay for a lower degree of inequality.