1 / 14

North and Thomas -V-

North and Thomas -V-. Credibility. Formal Definition:. A strategy is credible if it is optimal to follow it under all conceivable circumstances A strategy must be optimal even under circumstances that should never arise, given the strategy. Game theory: Subgame perfection. Example.

adair
Download Presentation

North and Thomas -V-

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. North and Thomas -V- Credibility

  2. Formal Definition: • A strategy is credible if it is optimal to follow it under all conceivable circumstances • A strategy must be optimal even under circumstances that should never arise, given the strategy Game theory: Subgame perfection

  3. Example Protect 1, 2 G Invest -1, x Confiscate Payoff to: I, G I Protect 0, 0 G Don’t Invest 0, 1 Confiscate x<2. Is always protect a credible strategy? x>2. What is the outcome?

  4. Commitment Problems • Investment • Slow growth • Capital flight • Interest rates • Crowding out investors • Drain on government revenues • Inflation • Disincentives to save • Disincentives to invest

  5. Excessive taxation in Russia Revenues per ton $115 Costs - production 30 - transport, export costs, currency conversion 20 - export taxes 26 - excise tax 4.50 - royalties 9.20 - mineral resources tax 11.50 - other taxes 7 Total costs -------------------------------------108.20 Profit ------------------------------------------- $6.80 Profit tax --------------------------------------- 2.58 NET Profit ------------------------------------- $4.22 Source: Watson, 1994

  6. Inflation - why do we have it? P Keynes Sa Pb Pa Db Da Y Ya Yb

  7. Inflation - why do we have it? • Problems: • Open economies • fiscal stimulus - decrease the exchange rate • monetary stimulus - capital flight • Rational expectations • But, still a short-term temptation - inflation • Costs? • Quantitative evidence • Growth, investment, quality of life, corruption, income inequalities

  8. North and Thomas:Constraints → credibility Implications: • Institutions explain development • Globalization and convergence • England & Netherlands vs. Spain & France

  9. Spain • 1560-1581: Spain vs. Turkey • 1560’s: Netherland’s revolt • 1580: Annex Portugal • 1588: Spanish Armada sinks • 1618-1648: 30 years’ war • 1635-1659: France vs. Spain • 1640’s: Portugal revolts

  10. Spain • External threat Absolutism (tax autonomy) • No rivals • Transaction costs → tax Mesta (sheep), not land • Overextension → war → high discount rate • Defaults → high interest rates • Forced loans, confiscation → • low investment • destruction of capital markets • merchants bankrupted • Silver from New world → inflation, trade deficit

  11. France • Elimination of rivals Absolutism (tax autonomy) • Crisis of 100 years’ war • Transaction costs → • distortionary taxation • guilds • monopolies

  12. Netherlands • Good administration (Dukes of Burgundy) → stable property rights (land, labor, capital) • Commerce • Lending at interest, negotiable notes (3% interest rates) • Rapid adjustment to comparative advantage (English cloth)

  13. England • Low external threat • Enforcement problems (why not in France?) • Common law overturned some royal monopolies • Puritan revolution, Restoration 1688 • Constraints → lower interest rates → increase in royal power Constraints on Tudors and Stuarts • Independent nobility and merchants

  14. How do you critique N&T? • Assumptions • Hypotheses • Research design • Evidence • Conclusions

More Related