Working papers results

by Nicola Fontana, Tommaso Nannicini, Guido Tabellini

The Italian civil war and the Nazi occupation of Italy occurred at a critical juncture, just before the birth of a new democracy. We study the impact of these traumatic events by exploiting geographic heterogeneity in the duration and intensity of civil war, and the persistence of the battlefront along the "Gothic line" cutting through Northern-Central Italy. We find that the Communist Party gained votes in postwar elections where the Nazi occupation lasted longer, mainly at the expense of centrist parties. This effect persists until the late 1980s and appears to be driven by equally persistent changes in political attitudes.

In this work we propose a definition of comonotonicity for elements of B (H)sa, i.e., bounded self-adjoint operators defined over a complex Hilbert space H. We show that this notion of comonotonicity coincides with a form of commutativity. Intuitively, comonotonicity is to commutativity as monotonicity is to bounded variation. We also define a notion of Choquet expectation for elements of B (H)sa that generalizes quantum expectations. We characterize Choquet expectations as the real-valued functionals over B (H)sa which are comonotonic additive, c- monotone, and normalized.

We review recent models of choices under uncertainty that have been proposed in the economic literature. The framework that we propose is general and may be applied in many different fields of environmental economics. To illustrate, we provide a simple application in the context of an optimal mitigation policy. Our objective is to offer guidance to policy makers who face uncertainty when designing climate policy.

We provide both an axiomatic and a neuropsychological characterization of the dependence of choice probabilities on time in the softmax (or Multinomial Logit Process) form (see below picture) MLP is the most widely used model of preference discovery in all fields of decision making, from Quantal Response Equilibrium to Discrete Choice Analysis, from Psychophysics and Neuroscience to Combinatorial Optimization. Our axiomatic characterization of softmax permits to empirically test its descriptive validity and to better understand its conceptual underpinnings as a theory of agents'rationality. Our neuropsychological foundation provides a computational model that may explain softmax emergence in human behavior and that naturally extends to multialternative choice the classical Diffusion Model paradigm of binary choice. These complementary approaches provide a complete perspective on softmaximization as a model of preference discovery, both in terms of internal (neuropsychological) causes and external (behavioral) effects.

We develop new likelihood-based methods to estimate factor-based Stochastic Discount Factors (SDF) that may accommodate Hidden Markov dynamics in the factor loadings. We use these methods to investigate whether it is possible to find a SDF that jointly prices the cross-section of eight U.S. portfolios of stocks, Treasuries, corporate bonds, and commodities. In particular, we test a range of possible different specification of the SDF, including single-state and Hidden Markov models and compare their statistical and pricing performances. In addition, we assess whether and to which extent a selection of these models replicates the observed moments of the return series, and especially correlations. We report that regime-switching models clearly outperform single-state ones both in term of statistical and pricing accuracy. However, while a four-state model is selected by the information criteria, a two-state three-factor full Vector Autoregression model outperforms the others as far as the pricing accuracy is concerned.

Deposit volatility and costly bank liquidity increase the long-term lending rates offered by banks, which reduce loan maturities, long-term investment and output. We formalise this mechanism in a banking model and analyse exogenous variation in deposit volatility induced by a Sharia levy in Pakistan. Data from the credit registry and a firm-level survey show that deposit volatility and liquidity cost: 1) reduce loan maturities and lending rates; 2) leave loan amounts and total investment unchanged; 3) redirect investment from fixed assets towards working capital. A targeted liquidity program is quantified to generate yearly output gains between 0.042% and 0.205%.

The regulation of bank liquidity can create a commitment device on repaying depositors in bad states, if deposit insurance is absent. A theoretical model shows that liquidity regulation can: 1) stimulate a deposit inflow, moderating the limited liability inefficiency; 2) promote lending and branching, if deposit growth exceeds the intermediation margin decline. Our empirical test exploits an unexpected policy change, which fostered the liquid assets of Ethiopian banks by 25% in 2011. Exploiting the cross-sectional heterogeneity in bank size and bank-level databases, we find an increase in deposits, loans and branches, with no decline in profits.

A well functioning bureaucracy can promote prosperity, as Max Weber maintained. But when bureaucracy gets jammed-a Kafkian situation-it causes stagnation. We propose a dynamic theory of the interaction between legislation and the efficiency of bureaucracy. When bureaucracy is inefficient, the effects of politicians' legislative acts are hard to assess. Incompetent politicians thus have strong incentives of passing laws to acquire the reputation of skillful reformers. But a plethora of often contradictory laws can itself lead to a collapse in bureaucratic efficiency. This interaction can spawn both Weberian and Kafkian steady states. A temporary surge in political instability, which increases the likelihood of a premature end of the legislature, exerts pressure for reforms, or results in the appointment of short-lived technocratic governments can determine a permanent shift towards the nightmare Kafkian steady state. The aggregate experience of Italy in its transition from the so-called First to the Second Republic fits the narrative of the model quite well. Using micro-data for Italian MPs, we also provide evidence consistent with the claim that when political instability is high, politicians signal their competence through legislative activism, which leads to the overproduction of laws and norms.

We define as populist a party that champions short-term protection policies while hiding their long-term costs by using anti-elite rhetoric to manipulate beliefs. We provide a framework that rationalizes this definition and generates sharp implications for people support to populist platforms (the demand side), for the timing of appear ance of populist parties and their chosen orientation (the supply side) as well as for non-populist parties response to populist success (an equilibrium market reaction). Using individual data on voting in European countries we document that key fea tures of the demand for populism as well as the supply heavily depend on turnout incentives, previously neglected in the populism literature. Once turnout effects are properly taken into account, economic insecurity drives consensus to populist policies directly as well as through indirect negative effects on trust and attitudes towards migrants. On the supply side, populist parties are more likely to emerge and prosper when countries deal with systemic economic insecurity crisis that both left-oriented incumbent parties (relying on government-based policies) and right-oriented (relying on markets) find hard to address, disappointing voters who lose faith in them and abstain. Relative entry space determines the orientation choice of populist parties, i.e., whether they enter on left or right of the political spectrum. The typical non-populist party policy response is to reduce the distance of their platform from that of new populist entrants, thereby magnifying the aggregate supply of populist policies.

This paper proposes an integrated simple theory of bargaining and conflict between ethnic groups, delivering novel predictions on secessionist versus centrist conflict, and confronting them to the data. We find that greater size of the opposition ethnic groups reduces the likelihood of peaceful union with respect to secessionist and centrist conflict, and that cultural preference similarity decreases the risk of secessionist conflict with respect to centrist conflict and with respect to union. Finally, we show that greater patience increases the likelihood of secessionist conflict with respect to centrist conflict.