"Nothing has such power to broaden the mind as the ability to investigate systematically and truly all that comes under thy observation in life."
Geopolitics, Aid and Growth (With Axel Dreher and Vera Eichenauer), World Bank Economic Review 31(2), pp.268–28 (). Journal | SSRN
We investigate the effects of short-term political motivations on the effectiveness of foreign aid. Specifically, we test whether the effect of aid on economic growth is reduced by the share of years a country served on the United Nations Security Council (UNSC) in the period the aid is committed, which provides quasi-random variation in aid. Our results show that the effect of aid on growth is significantly lower when aid was committed during a country’s tenure on the UNSC. This holds when we restrict the sample to Africa, which follows the strictest norm of rotation on the UNSC and thus where UNSC membership can most reliably be regarded as exogenous. We derive two conclusions from this. First, short-term political favoritism reduces the effectiveness of aid. Second, results of studies using political interest variables as instruments for overall aid arguably estimate the effect of politically motivated aid and thus a lower bound for the effect of all aid.
Towards the Greater Good? EU Commissioners’ Nationality and Budget Allocation in the European Union (With Stephan Schneider), American Economic Journal: Economic Policy 10(1),p.214-39 (February). Journal | PDF | SSRN | Online Appendix
We demonstrate that the nationalities of EU Commissioners influence budget allocation decisions in favor of their country of origin. Our focus is on the Commissioners for Agriculture, who are exclusively responsible for a specific fund that accounts for the largest share of the overall EU budget. On average, providing the Commissioner causes a one percentage point increase in a country's share of the overall EU budget, which corresponds to 500 million Euros per year. There are no different pretreatment trends and the magnitude of the bias from selection-on-unobservables would have to be implausibly high to account for the estimated coefficient.
The Home Bias in Sovereign Ratings (With Andreas Fuchs), Journal of the European Economic Association 15(6), pp.1386–1423 (December). Journal | PDF | SSRN | Online Appendix
Credit rating agencies are frequently criticized for producing biased sovereign ratings. This article discusses how the home country of rating agencies could affect rating decisions as a result of political economy influences and cultural distance. Using data from nine agencies based in six countries, we test whether agencies assign better ratings to their home countries, as well as to countries economically, geopolitically and culturally aligned with them. Our results show biases in favor of the respective home country, culturally more similar countries, and countries in which home‐country banks have a larger risk exposure. Linguistic similarity seems to be the main transmission channel that explains the advantage of the home country.
Aid fragmentation and effectiveness:
What do we really know? (With Katja Michaelowa, Axel Dreher, and Franziska Spörri), World Development 99, pp.320-334 (November). Journal | PDF | SSRN
Aid fragmentation is widely recognized as being detrimental to development outcomes. We re-investigate the impact of fragmentation in the context of growth, bureaucratic policy, and education, focusing on a number of conceptually different indicators of fragmentation, and paying attention to potentially heterogeneous effects across countries, sectors, and channels of influence. Our systematic and detailed reexamination of existing empirical studies shows that this differentiation is crucial. In some sectors—such as primary education—donor concentration or limiting donor numbers appears to be detrimental rather than beneficial for development outcomes. In other areas, we find the expected negative effect, but only when we conceptualize fragmentation as a lack of lead donors (too limited concentration), rather than in terms of donor numbers. In all cases, sufficient initial administrative capacity in recipient countries prevents the negative and reinforces the positive effects of fragmentation. This stresses the importance of questioning the sweeping conclusions drawn by much of the previous literature. Based on what we currently know, generalizing judgements about the effect of aid fragmentation may be misleading.
Information Transmission within Federal Fiscal Architectures: Theory and Evidence (With Axel Dreher, Christos Kotsogiannis and Silvia Marchesi), Oxford Economic Papers (forthcoming) (published online). Journal | PDF | SSRN
This paper explores the role of information transmission and misaligned interests across levels of governments in explaining variation in the degree of decentralization across countries. We analyse two alternative policy-decision schemes—‘decentralization’ and ‘centralization’— within a two-sided incomplete information principal–agent framework. The quality of communication depends on the conflict of interests between the government levels and on which government level controls the degree of decentralization. We show that the extent of misaligned interests and the relative importance of local and central government knowledge affect the optimal choice of policy-decision schemes. Our empirical analysis confirms that countries’ choices depend on the relative importance of private information. In line with our theory the results differ significantly between unitary and federal countries.
Gesture politics or real commitment? Gender inequality and the allocation of aid (With Axel Dreher and Stephan Klasen), World Development 70, pp.464–480 (July 2015). Journal | SSRN
We investigate whether donors give more aid to countries with larger gender gaps in education, health, or women’s rights, and whether they reward improvements in those indicators. We find some evidence that high gender gaps in education and health are associated with higher allocation of aid in those sectors and aid overall. Greater female political representation also appears to come along with higher aid flows. While we find no systematic evidence that donors allocate funds with regard to merit, our results show that donors are more responsive to inequalities in countries that provide good legal rights for women.
Inequality and happiness: When perceived social mobility and economic reality do not match. (With Christian Bjørnskov, Axel Dreher, Justina A.V. Fischer, Jan Schnellenbach), Journal of Economic Behavior & Organization 91, p.75 - 92 (March 2013). Journal | SSRN
We argue that perceived fairness of the income generation process affects the association between income inequality and subjective well-being, and that there are systematic differences in this regard between countries that are characterized by a high or , respectively, low level of actual fairness. Using a simple model of individual labor market particip ation under uncertainty, we predict that high levels of perceived fairness cause higher levels of i ndividual welfare, and lower support for income redistribution. Income inequality is predicted to have a more favorable impact on subjective well- being for individuals with high fa irness perceptions. This relationship is predicted to be stronger in societies that are characterized by low actual fairness. Using data on subjective well-being and a broad set of fairness measures from a pseudo micro-panel from the WVS over the 1990-2008 period, we find strong support for the negative (positive) association between fairness perceptions and the demand for more equal incomes (subjective well-being). We also find strong empirical support for the predicted differences in individual tolerance for income inequality, and the predicted influence of actual fairness.
Who Benefits from Economic Freedom? Unraveling the Effect of Economic Freedom on Subjective Well-Being, World Development 50, pp.74 - 90 (). Journal | SSRN
Who benefits from economic freedom? Results from a panel of 86 countries over the 1990–2005 period suggest that overall economic freedom has a significant positive effect on subjective well-being. Its dimensions legal security and property rights, sound money, and regulation are in particular strong predictors of higher well-being. The overall positive effect is not affected by socio-demographics; the effects of individual dimensions vary, however. Developing countries profit more from higher economic freedom, in particular from reducing the regulatory burden. Culture moderates the effect: societies that are more tolerant and have a positive attitude toward the market economy profit the most.
Does Aid Buy (Economic) Freedom? (With Axel Dreher ), Economic Freedom of the World: 2012 Annual Report pp.219-246 (2012). Journal