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Citizens, Institutions and Globalization

Periodic Reporting for period 4 - CITIZINGLOBAL (Citizens, Institutions and Globalization)

Reporting period: 2021-07-01 to 2022-06-30

Globalization has brought the world economy unprecedented prosperity. Yet it has also created governance challenges, engendered popular discontent, and placed a strain on political systems. Reaping the full gains from global economic integration requires the appropriate infrastructure, institutions and policies. Their distributional consequences, however, can be controversial. Moreover, they may be incompletely or imperfectly understood by voters, calling into question their democratic legitimacy.

This project aims to improve our understanding of the interplay between citizens’ information, political institutions and economic globalization. It studies how political structure reacts to globalization; how trade- and productivity-enhancing policies can enjoy democratic support; but also why voters may support instead inefficient surplus-reducing policies.

Its first main theme is the crucial role of voter knowledge in a well-functioning democracy. The project shows that powerful special interests can capture government decisions when citizens are poorly informed. Harmful consequences include inefficient protectionism, misallocation of public investment, unchecked pollution and insecurity of property rights. These distortions are mitigated when rules are simple and transparent, and when policies and their consequences are subject to robust media scrutiny.

Systematic mistakes in interpreting information present another threat. The project finds that voter support for populism is partly caused by the poor performance of incumbents. But voters risk drawing the wrong conclusions from politicians’ track record, seeking and elevating individual political saviors, at the expense of the institutions that truly underpin political accountability.

The second main theme is the interplay of economic geography and political structure. The project shows how geography shapes politics. Globalization drove first the growth of countries and bellicose empires, but then the rise of international unions in which peaceful smaller countries thrive. On the other hand, politics shape geography through levers such as trade policy, transport infrastructure, or the adoption of uniform rules that are appropriate in some places but not in others.
The results achieved by the project include four published academic articles and three completed working papers.

“The Political Economy of Transportation Investment” (Economics of Transportation 2018) explains infrastructure development in wealthy democracies through a tug-of-war between city residents suffering nuisance costs, suburbanites enjoying the benefits of shorter commutes, and taxpayers nationwide funding infrastructure subsidies. As city incomes rise and community organization improves, this theory accounts for the shift from overbuilding and neglect of neighborhood disruption to underbuilding and overexpenditure on mitigation.

“A Theory of Economic Unions” (Journal of Monetary Economics 2020) studies international unions as a way to remove regulatory barriers to trade. The theory traces their distributional consequences across member states and across sectors within each country. Empirical evidence confirms the theoretical predictions: euroskepticism is strongest in EU countries with a large domestic market and more sectors experiencing a trade deficit with the rest of the Union.

“Securing Property Rights” (Journal of Political Economy 2021) studies the enforcement mechanisms that protect property rights. When officials can be suborned, compensation for damages is liable to fail and less fact-intensive remedies are efficient: simple injunction, or regulation when relationships are multilateral and complex. Evidence on US water pollution confirms that federal regulation addressed the failures of litigation identified by the theory. It improved water quality the most in states with the worst government corruption, reducing spatial disparities.

“Globalization and Political Structure” (Journal of the European Economic Association 2022) explains the historical relationship between economic globalization and the geographic structure of government. As technology expands opportunities for trade, trade-hindering borders become costlier. The optimal response was first to eliminate borders by expanding country size. In a second wave of globalization, it is best instead to eliminate the cost of borders through international institutions, and shrink country size. This theory also accounts for the rise and fall of imperialism. Evidence confirms the key theoretical prediction: growth in trade predicts country expansion in the 19th century, but not after 1945.

“Fundamental Errors in the Voting Booth” (presented in Germany, Italy, the Netherlands, Norway, the UK and the US) studies how voters’ demand for policies, politicians and institutions is distorted by the Fundamental Attribution Error, a key psychological bias. When voters observe successful leaders, they misattribute success to personal characteristics like skill and rectitude, rather than environmental factors like favorable macroeconomic conditions or democratic checks and balances. This theory can explain popular support for a slide into authoritarianism.

“The Dracula Effect: Voter Information and Trade Policy” (presented in Germany, Italy, Spain, Switzerland and the UK) explains protectionism as a result of endogenous information asymmetries across voters. Trade barriers reap electoral rewards because they are disproportionately noticed by their beneficiaries. This theory predicts that exposure of a sector to media scrutiny reduces its trade barriers. Evidence on US manufacturing industries confirms this prediction, exploiting variation in news coverage driven by the timing of industrial accidents relative to major newsworthy events.

“Do Incompetent Politicians Breed Populist Voters? Evidence from Italian Mayors” (presented in Italy, the UK and the US) presents evidence that support for anti-establishment parties decreases when elected officials are more capable and effective. It identifies a causal relationship by focusing on variation in the ability of local politicians driven by discontinuous changes in their compensation at sharp population thresholds.
continuous changes in their compensation at sharp population thresholds.
The project develops novel perspectives on key open questions in economics. It formulates a novel theory of optimal enforcement institutions when systematic subversion is a concern, and provides novel evidence that the effects of US environmental policy reflect such concerns. It develops a novel theory of international economic unions as a tool to reduce regulatory barriers to trade, studying both their role in the long-run evolution of political structure and their distributive implications today. It introduces the Fundamental Attribution Error in models of political agency. It provides novel evidence that support for populism is partly caused by incumbents- poor performance.

While the main goal of the project is to help understand observed economic phenomena, its conclusions also offer lessons for improving policy outcomes. They highlight the importance of transparency; of simple rules that can be more easily monitored; and of the need to ensure that the aggregate gains from globalization are broadly shared.
A video providing a non-technical overview is posted at: https://www.youtube.com/watch?v=UtFfqv2Hvw0