Publications

The Brazilian oil company Petrobras is a leader in the technically challenging offshore oil exploration and an innovation pioneer in this segment. In the last ten years it has discovered enough reserves to put Brazil in the group of oil exporters while serving as an anchor of an industrial policy focused on increasing domestic procurement of capital goods. These achievements made the company a poster child of developmentalists, an example of a state company that innovates and invests in long-term projects. However, recent corruption investigations revealed that former employees, suppliers and politicians were involved in a billionaire kickback scheme that used the company for illegal campaign financing and coalitionbuilding. This paper explains the puzzle of Petrobras’ as a technological leader at the same time that it was the center of party-clientelistic practices. It argues that given Brazil’s geological endowments, Petrobras could better serve open political purposes if the company continued to create rents through Schumpeterian innovation in deep offshore. Innovation supported Petrobras’ other activities, which later included politically-driven investments, bribe extraction, and gasoline price subsidies. Using a variety of data sources, including plea bargain statements and a spreadsheet of bribe rates of large projects, this paper shows how bribes and economic losses differed across industry segments, with the downstream concentrating more losses than the more innovative and subject to cost pressures upstream. Petrobras’ operational capabilities and a trackrecord of innovation in oil extraction led to successful discoveries of new reserves that paradoxically facilitated political interference by easing historical constraints that had spared the company from political exchanges.

How much does it matter which party controls the government? There are a
number of reasons to believe that the partisan composition of state government
should affect policy. But the existing evidence that electing Democrats instead
of Republicans into office leads to more liberal policies is surprisingly weak, in-
consistent, and contingent. We bring clarity to this debate with the aid of a new
measure of the policy liberalism of each state from 1936-2014, using regression-
discontinuity and dynamic panel analyses to estimate the policy effects of the
partisan composition of state legislatures and governorships. We find that until
the 1980s, partisan control of state government had negligible effects on policy
liberalism, but that since then partisan effects have grown markedly. Even to-
day, however, the policy effects of partisan composition pale in comparison to
the policy differences across states. They are also small relative to the partisan
divergence in legislative voting records.

This paper analyzes the determinants of underfunding of local government's pension funds using a politico-economic overlapping generations model. We show that a binding downpayment constraint in the housing market dampens capitalization of future taxes into current land prices. Thus, a local government's pension funding policy matters for land prices and the utility of young households. Underfunding arises in equilibrium if the pension funding policy is set by the old generation. Young households instead favor a policy of full funding. Empirical results based on cross-city comparisons in the magnitude of unfunded liabilities are consistent with the predictions of the model.

This paper offers a historical perspective on the evolution of central banks as lenders of last resort (LOLR). Countries differ in the statutory powers of the LOLR, which is the outcome of a political bargain. Collateralized LOLR lending as envisioned by Bagehot (1873) requires five key legal and institutional preconditions, all of which required political agreement. LOLR mechanisms evolved to include more than collateralized lending. LOLRs established prior to World War II, with few exceptions, followed policies that can be broadly characterized as implementing “Bagehot’s Principles”: seeking to preserve systemic financial stability rather than preventing the failure of particular banks, and limiting the amount of risk absorbed by the LOLR as much as possible when providing financial assistance. After World War II, and especially after the 1970s, generous deposit insurance and ad hoc bank bailouts became the norm. The focus of bank safety net policy changed from targeting systemic stability to preventing depositor loss and the failure of banks. Statutory powers of central banks do not change much over time, or correlate with country characteristics, instead reflecting idiosyncratic political histories.

Does political ideology influence economic research? We rely upon purely inductive methods in natural language processing and machine learning to examine patterns of implicit political ideology in economic articles. Using observed political behavior of economists and the phrases from their academic articles, we construct a high-dimensional predictor of political ideology by article,
economist, school, and journal. In addition to field, journal, and editor ideology, we look at the correlation of author ideology with magnitudes of reported policy relevant elasticities. Overall our results suggest that there is substantial sorting by ideology into fields, departments, and methodologies, and that political ideology influences the results of economic research.

I examine the role of political instability as a potential explanation for the lack of capital flows from rich countries to poor countries (i.e. the `Lucas Paradox'). Using panel data from 1984 to 2014, I document the following: (i) developed countries exhibit larger inflows of foreign direct investment (FDI), (ii) countries subject to high investment risk are those that typically receive low FDI inflows, and (iii) investment risk is generally higher in fractionalized and politically unstable economies. These findings suggest a negative relationship between political instability and FDI through the investment risk channel. I then inspect the theoretical mechanism using a dynamic political-economy model of redistribution, wherein policymakers have access to an expropriation technology that can be used to extract resources from foreign investors. The proceeds are used to finance group-specific transfers to domestic workers, but hinder economic growth by discouraging FDI. Different social groups compete to gain control of this instrument, but face a probability of losing power at each point in time. The greater the degree of political turnover is, the stronger the incentives to expropriate when in power. A key force driving this result is redistributive uncertainty, since there is a possibility that no transfers will be received in the future. The mechanism is supported by the finding that investment risk (a measure that captures the degree to which the extraction technology is used) is negatively related to FDI and government stability. Finally, I show that the political equilibrium exhibits over-expropriation and under-investment even when there is no political uncertainty because fractionalized societies suffer from static inefficiencies due to the presence of a common pool problem.

For decades, America’s state and local governments have promised their workers increasingly generous pensions but failed to fully fund them, producing a fiscal problem of staggering proportions. In this paper, we examine the politics of public pensions. While it might seem obvious that the pension problem is due to Democrats and unions pushing for generous pensions over Republican resistance, we develop a theory—rooted in voters, interest groups, and myopic politicians—to argue that, during normal times, we should expect both parties to support generous (and underfunded) pensions, and thus to be responsible for the larger problem. It is only after the onset of the Great Recession, which disrupted normalcy by expanding the scope of conflict, that we should expect partisan conflict. Using a new dataset of state legislators’ votes on hundreds
of pension bills passed between 1999 and 2011, we carry out an empirical analysis that supports these expectations.

During the financial crisis of 2007-10, the Federal Reserve (Fed) served as a global lender of last resort by establishing currency swap agreements with 14 central banks, including several in East Asia, to provide dollar liquidity to banks in foreign jurisdictions. These agreements were controversial internationally because the Fed selectively established swaps with some central banks and not others, raising concerns about access to the Fed’s dollar-creating facilities. Within the U.S. Congress, the swaps were controversial because they appeared to be a new and unauthorized form of foreign aid. I analyze both the Fed’s decision to establish swap lines with certain central banks and the congressional response to these arrangements. I find that the Fed was more likely to establish swaps with central banks whose jurisdictions were important to U.S. commercial banks, suggesting that the Fed discriminated in ways that served U.S. interests. I also analyze subsequent congressional voting on legislation that would enhance the Fed’s transparency with respect to its transactions with foreign central banks. I find that campaign contributions from commercial banks significantly reduce the likelihood that a representative voted “yes” on the bill. I also find that right-wing representatives were far more likely than their left-wing peers to support this bill, which suggests that new coalitions are forming on the role of the Fed in the (global) economy.