Introduction Model Case Study Conclusion Why Nations Succeed The Institutional and Political Influence in Prosperity Yiqian Lu Jincheng Zhang November 2, 2016 1/38
Introduction Model Case Study Conclusion What Induces Cross-country Long Term Economic Growth? Geographical influence (Gunnar Myrdal 1968, Sachs 2001) tropical underdevelopment Leaders – (Jones and Olen, 2005): Leaders are important Intellectual difference – Lynn and Vanhanen (2006) shows IQ could explain most of income discrepancies, which is controversial. Culture Institution (Acemoglu, Robinson 2001, 2006, 2012 etc.) 2/38
Introduction Model Case Study Conclusion How to Explain within-country Economic Growth Human capital accumulation - Gary Becker, Kevin Murphy 1994, Barro 1989, Romer 1989 Political capital - corruption’s negative influence (Pellegrini and Gerlagh 2004) -government’s influence non-negligible (Stigler 1975, Posner 1974, Becker 1983) Both human capital and political capital - Ehrlich and Lui 1999 3/38
Introduction Model Case Study Conclusion Our Question Acemoglu and Robinson argue intrinsic political and economic institution is the only condition for economic success. The theory could be challenging in explaining Singapore, Mideast countries’ economic prosperity Our question: how to conglomerate Becker, Murphy and Ehrlich’s approach with Acemoglu and Robinson’s? 4/38
Introduction Model Case Study Conclusion Some Related Literature Przeworski and Limongi (1993) summarize literatures (about 20 papers) have different views on democracy’s influence on economic progress. Ansolabehere, Figueiredo, Snyder (2003): Political capital should not be viewed as investment but consumption. Cooper, Gulen, Ovtchinnikov (2009) Political contribution and future positive abnormal returns – one kind of anomalies. Gary Becker (1994) More efficient laws takes effect on coordination cost and reduce redundant human capital investment. 5/38
Introduction Model Case Study Conclusion Setup – Discounted profit maximization assumption Agent wants to maximize ∞ 1 � (1 + r t ) t P i max t , ∀ i (1) t =0 where r t is the t-year yield rate and P i t represents profit level for agent i in period t. 6/38
Introduction Model Case Study Conclusion Setup – Human capital and Political Capital Investment Following Becker, Ehrlich’s approach, in each period agent needs to invest in human capital h t and political capital p t to reach the state H t and P t H i + H i t +1 = A ( ¯ H i t ) h i (2) t and H i + Q i t +1 = B ( λ ¯ Q i t ) q i (3) t 7/38
Introduction Model Case Study Conclusion Setup - Agent level Production contribution e i t = 1 − h i t − q i (4) t and the raw profit is set by H i + H i Y i t = C ( ¯ t ) e t (5) t The realized profit is as follows. t [1 + θ ln( Q i t P i t = Y i )] (6) Q ∗ t Agents with stronger political power Q i t > Q t are accompanied by positive subsidies or transferring income. On the contrary, Q i t < Q t denotes a net loss. 8/38
Introduction Model Case Study Conclusion Setup - Redistribution equation t [1 + θ ln Q i � Y i � P i � Y i t t = t = ] , ∀ t (7) Q ∗ t i i i And the median political capital level Q ∗ t is also determined by the above equation. For instance, if all agents have the same raw profit level Y i t and the distribution of political capital follows t will be exactly e µ since log-normal distribution ln N ( µ, σ 2 ), Q ∗ ln Q i t remains symmetric. t Q ∗ 9/38
Introduction Model Case Study Conclusion Pros Using consumption in the utility function could result in negative consumption level in the utility function, which is less convincing than including a negative profit. Linear tax-consumption relationship is not consistent with permanent income hypothesis while in our approach the linear tax-profit relationship is more appropriate. 10/38
Introduction Model Case Study Conclusion Equilibrium – Euler Equation (1 + r t +1 )(1 + θ ln Q i t ) t Q ∗ e i t +1 = (8) Q i t +1 A (1 + θ ln t +1 ) Q ∗ and H i + Q i H i + H i t +1 B ( λ ¯ ¯ = θ Q ∗ t ) t (9) H i + H i ¯ Q i A (1 + θ ln t +1 t +1 ) t +1 Q ∗ 11/38
Introduction Model Case Study Conclusion Equilibrium I – No human capital accumulation without political capital Condition: A < 1 + r . (1 + r ) t = C ¯ C ¯ ∞ H i H i (1 + r ) V ( ¯ H i ) = � (10) r t =0 quite similar to the traditional discount cash flow pricing model 12/38
Introduction Model Case Study Conclusion Equilibrium II – Decreasing human capital growth without political capital Condition: 1 + r < A < 2 r . Human capital in period t : H i ((2 A − 2 r − 3)( A − r − 1) t − A + r + 1) ¯ H i t = , ∀ t (11) A − r − 2 Value of the agent: ∞ 1 V ( ¯ � H ) = (1 + r ) t P t t =0 C ( r + 1) 1 − t � ¯ H ((2 A − 2 r − 3)( A − r − 1) t − A + r +1) � + ¯ H ∞ A − r − 2 � = A t =0 = C ¯ H ( r + 1) 2 (2 r + 1) Ar (2( r + 1) − A ) (12) 13/38
Introduction Model Case Study Conclusion Equilibrium III – Increasing human capital growth with finite share value without political capital Condition: 2 + r < A < 2(1 + r ). Most of the properties in Equilibrium III is the same as Equilibrium II The human capital accumulation growth rate is positive for each period, which is still lower than the growth of interest discount rate (1 + r ) t , resulting in a finite company share price. 14/38
Introduction Model Case Study Conclusion Equilibrium IV – Increasing human capital growth with unbounded share price without political capital Condition: A ≥ 2(1 + r ) This is equivalent to the case g > r in the discounted cash flow (with growth) model. In this case, the approximate growth rate for human capital and profit level is A − 1 − r , which even exceeds the interest rate (1 + r ) t , yielding an infinite share price. 15/38
Introduction Model Case Study Conclusion Equilibrium I to IV 16/38
Introduction Model Case Study Conclusion Equilibrium I to IV 17/38
Introduction Model Case Study Conclusion Equilibrium with political intervention e = A − (1 + r ) h i e + q i (13) A and H i + Q ∗ H i + H i t +1 B ( λ ¯ ¯ t S i = θ Q ∗ e ) t (14) H i + A ( ¯ ¯ H i + H i t ) h i A (1 + θ ln S i e ) e where h i e , q i e , e i e , S i e are the steady states of h i t , q i t , e i t , S i t , respectively 18/38
Introduction Model Case Study Conclusion Equilibrium with political intervention τ + A ¯ e ) t − τ − A ¯ H i h i H i h i H i t = ( H i e − 1)( Ah i e e (15) Ah i Ah i e − 1 and τ + B λ ¯ e ) t − τ − B λ ¯ H i q i H i q i Q i t = ( Q i e − 1)( Bq i e e (16) Bq i Bq i e − 1 with the natural constraint: A ≥ 1 + r 19/38
Introduction Model Case Study Conclusion Equilibrium I – Stagnant human capital accumulation where H t cannot grow e B ( λ ¯ H + Q ∗ e ) θ Q ∗ = 1 (17) A e = − θ B λ ¯ ( θ B λ ¯ H ) 2 + 4 A θ B � H + Q ∗ (18) 2 θ B where Q ∗ e q ∗ e = (19) B λ ¯ H + BQ ∗ e under the condition 1 ≤ A − 1 − r (20) q ∗ A e i.e. A > 1 + r (21) 1 − q i e 20/38
Introduction Model Case Study Conclusion Equilibrium I – Stagnant human capital accumulation where H t cannot grow ¯ H i S i 0 = S i 1 = ... = S i e = ... = (22) ¯ H H i and 0 = λ ¯ with Q i e = − B λ ¯ H i q i H i + Q i H i + Q i t +1 = B ( λ ¯ e = B ( λ ¯ Q i t ) q i t ) q i e − 1 for ∀ t ≥ τ . e Bq i Result: dq ∗ d θ < 0 e The after-redistribution profit is ¯ H i P i t = C ¯ H i (1 − q i e )(1 + θ ln H ) (23) ¯ 21/38
Introduction Model Case Study Conclusion Equilibrium I – Stagnant human capital accumulation where H t cannot grow the share value for the median company under stagnant equilibrium is e )(1 + θ ln ¯ C ¯ H i H i (1 − q i H )(1 + r ) ¯ V θ = (24) r The share value of the firm with relative class level S i is C ¯ = C ¯ ∞ H i (1 − q i e )(1 + θ ln S i ) H i (1 − q i e )(1 + θ ln S i )(1 + r ) V S i � = θ (1 + r ) t r t =0 (25) Result: V Si dS i > 0 if and only if B > 1 θ 22/38
Introduction Model Case Study Conclusion Equilibrium II – Increasing human capital accumulation e ) B λ ¯ H i + B λ ¯ H i q i H i q i ) = S i ( A − r − 1 B ( λ ¯ − q i e e θ + S i e e ln S i e (26) 1 − Bq i 1 − Bq i A e e with < 1 B ≤ A − r − 1 1 B , if A 0 ≤ q i (27) e A B > A − r − 1 1 ≤ if A − r − 1 , A 23/38
Introduction Model Case Study Conclusion Equilibrium II – Democratic equilibrium Equilibrium II (Democratic Equilibrium) : When 1 B ≤ A − r − 1 , A A − r − 1 , for higher class agents with S i A i.e. B ≥ dem ≥ 1, no matter what θ is, there exists one unique equilibrium state { q i dem , h i dem , e i dem } . For lower class agents S i dem < 1 is true, if and 1 only if θ ≤ − dem , there exists one unique equilibrium state ln S i { q i dem , h i dem , e i dem } . 24/38
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