Inmate Governance in Brazilian Prisons

Prisons in São Paulo and Rio de Janeiro are run not so much by prison guards as inmates. In circumstances of severe overcrowding and acute staff shortage, prisoners are recruited or organise themselves not only to perform clerical and janitorial work, but also to provide for welfare, discipline and security. Such inmate governance is as much a defining feature of Brazilian prison life as inhumane living conditions. In recent years the roles played by inmates in managing the day to day of Brazilian prisons have been largely subsumed by prison gangs. However, staff-inmates relations remain characterised less by conflict and power as accommodation and reciprocity.

The paper, by Sacha Darke, is here. 

A disjointed post on complexity, institutions and the future of the commons research-agenda

Is diversity good or bad? That is a pretty ambiguous question since it does not define "diversity," "good," or "bad." If we ask the question in the context of a complex system, the economy, for example, we could define diversity as a "large enough" number of different industries, different firms, etc. In the same context "good" can be defined as high "functionality," "stability," "fitness," "robustness," or "innovativeness," etc. To be sure in some context diversity increases different measurements of "goodness." For example a more "diverse" population can be more resilient against an external shock, such as a viral disease. On the other hand, high diversity can be negative. High ethnic fragmentation for example might lead to conflict. So, diversity in the context of complex systems is more complex than I initially thought. That is the main idea I got from reading this excellent book. I might go back and read it again to understand better the models used to explore diversity, which seem pretty simple but are actually deep and fascinating.

From the author' parting thoughts:

The system itself is more robust, more efficient, or more innovative if it contains the appropriate amount and kinds of diversity.

That takes me to a book I just started: Understanding Institutional Diversity by Lin Ostrom. If understandig diversity is a complex challenge, understanding the diversity of institutions is equally challenging. I have read only the first chapter, and this is one bit:

Institutions are only one of a large number of elements that affect behavior in any particular situation at a particular time and place. No single cause exists for human behavior.

Lin Ostrom legacy is massive, and one wonders what directions the commons research agenda will take. Eduardo Araral offers an interesting answer:

I propose that the third generation research agenda on the commons move away from research that are basically variations of the same theme (which variables are important) and arrives at fundamentally the same and settled conclusion (i.e. the drama of local commons). I argue instead that scholars of the commons need to pay attention to the following fundamental questions raised in this paper.  

First, is Ostrom’s critique of Hardin really a special case applicable to small locally governed commons? Second, is Hardin really justified in the case of large scale, national, regional and international commons? Are there examples to the contrary? Third, how can the flaws in studies supporting the external validity of Ostrom’s institutional design principles be remedied, for instance confirmatory bias, endogeneity, multi-collinearity and specification problems? Fourth, are the “commons” that scholars purport to study qualify as CPRs (i.e. exclusion to the resource system is difficult) or are they private property owned by limited partnerships? Fifth, are scholars who argue for the privatization of CPRs (organically evolved rather than imposed) justified in their claims that it can avert the tragedy of the commons? Or as a counterfactual, are there examples of privatized CPRs - overtime - that can be considered as unsuccessful contrary to the standard model? Until scholars of the commons unambiguously settle these questions, the conclusions from this paper should be considered tentative and merely points to unanswered questions and avenues for future research.  

Finally, and most importantly, whatever limitations the first and second generation commons literature may have, future scholars of the commons certainly owe a debt of gratitude to Ostrom and her colleagues for having laid down the foundations for a third generation research agenda on the commons and inspiring a new generation of scholars. pp 19-20. 

Financial Inclusion in Latin America

That is from a paper by Liliana Rojas-Suarez and Maria Alejandra Amado. From the abstract:

A key finding of this paper is that although the four types of obstacles explain the absolute level of financial inclusion, institutional deficiencies and income inequality are the most important obstacles behind the Latin America’s financial inclusion gap. From our analysis at the individual level, we find that there is a Latin America-specific effect of education and income. The results suggest that the effect of attaining secondary education on the probability of being financially included is significantly higher in Latin America than in its comparators. Furthermore, the difference in the probability of being financially included between the richest and the poorest individuals is significantly higher in Latin America than in comparator countries.

Prosperity in the Falkland Islands

Of course, many companies sell their products and services abroad. Why don't we see governments selling their best products or services to other countries? One of those products can be the justice system. That is the idea behind the free-cities/charter-cities movement - or at least of some versions of it. If individuals in a society want to buy law enforcement from another, would that create Pareto improvements? 

I thought more about that while writing this paper on the Falkland Islands. To be sure, the U.K. provides the justice system in the Islands because they are a British Overseas Territory. So, the circumstances are different from charter cities, but the case made me think that actually buying justice from another government might work. 

An excerpt from the case:

It is likely that by per-capita standards the Falkland Islands will become one of the richest societies in the world. According to some assumptions of oil prices and population growth in the peak years of oil production the GDP of the islands could reach between 675 and 1,000 million, that is between US$189,000 and 280,000 per person per year. 

Culture and Agriculture

Wikimedia Commons

From an paper via MR: 

This study shows that China’s wheat and rice regions have different cultures. China’s rice regions have several markers of East Asian culture: more holistic thought, more interdependent self-construals, and lower divorce rates. The wheat-growing north looked more culturally similar to the West, with more analytic thought, individualism, and divorce. Furthermore, Table 4 presents an instrumental variable regression instrumental variable regression showing that climatic suitability for rice significantly predicts all of the cultural variables in this study, which suggests that reverse causality is unlikely.

Unresolved questions: 

There are still unresolved questions with the rice theory. For example, studies can test whether irrigation is central to the effect of rice by comparing paddy rice with dryland rice cultures, which grow rice without irrigation. Studies can also explore how rice differences persist in the modern world, whether through values, institutions, or other mechanisms.

An obvious follow up can be to explore violence (homicies) within those cultures.  

Germany: From Sick Man of Europe to Economic Superstar

Germany lost on average 11 days of work each year per 1,000 employees by strikes and lock-outs between 1991 and 1999, but only five days per 1,000 employees between 2000 and 2007. These figures for the earlier and later time period compare to 40 and 32 days per 1,000 employees in the United States, 30 and 30 days in the United Kingdom, 73 and 103 days in France, 158 and 93 days in Italy, and 220 and 164 days in Canada (Lesch 2009). (p. 177).

That is from this very interesting article that I should use in an institutional economics class. The title is "From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy."

Institutions, Productivity, and the Shadow Economy

This is an interesting paper by Axel Dreher, Pierre-Guillaume Méon, & Friedrich Schneider: 

This paper assesses the relationship between institutions output, and productivity when official output is corrected for the size of the shadow economy. Our results confirm the usual positive impact of institutional quality on official output and total factor productivity, and its negative impact on the size of the underground economy. However, once output is corrected for the shadow economy, the relationship between institutions and output becomes weaker. The impact of institutions on total (“corrected”) factor productivity becomes insignificant. Differences in corrected output must then be attributed to differences in factor endowments. These results survive several tests for robustness. 

They explain:

The main rationale behind our results is that weak institutions not lead only to less factor accumulation, but also encourage participation in the shadow economy. The observed negative correlation between weak institutions and official output is therefore driven both by a reduction in production and a switch from the formal to the informal sector. Using official output to estimate the relationship between institutions and output implies that the production of countries with weaker institutions will be underestimated, thereby inflating the observed relationship. As a result, when shadow output is added to official output the correlation weakens. Using official output figures to compute TFP leads to the same bias. Thus, correcting official figures for the shadow economy also weakens the relationship between institutions and TFP, or even goes as far as removing it altogether. The essence of our results suggests that part of the observed relationships reported in the previous literature is not due to a reduction of output, but instead due to a switch from the formal to the informal sector. (p. 138). 

And the paper comes at a time when there seems to be a revival of discussions about GDP as an important statistic of the economy. 

How institutions facilitate entrepreneurship and intergenerational mobility

This article has provided evidence to suggest improvements in institutional quality can increase income mobility. Economic theory supports these findings because improvements in regulations and a less burdensome economy facilitate income mobility. However, the empirical estimates suggest that lack of corruption and secure property rights are associated with reductions in intergenerational earnings persistence. In short, the dream of income mobility can be supported with high quality institutions, independent of the Great Gatsby Effect. 

The other hypothesis, that social transfer programs such as government spending on education and healthcare will increase income mobility for a society finds no support. This finding in conjunction with the first suggests that institutions matter (North, 1991) for income mobility by facilitating the entrepreneurial process. In order to allow everyone the opportunity to realize the dream of income mobility, countries must allow sound institutions to foster entrepreneurship. Only then will income mobility persist as a reality and not merely a dream. (p. 13).

From the concluding remarks of this paper by Christopher J. Boudreaux (Journal of Institutional Economics, Feb. 2014). A draft is here. 

Adam Smith's and Douglass North's Multidisciplinary Approach to Economic Development

From an excellent paper by Kwangsu Kim in the The American Journal of Economics and Sociology (Jan. 2014):

Finally, it requires notice that with regard to the same stories just observed North recently proceeded to add an integral linkage between cultural artifacts and economic development (North 2005: 44, 135–145). North claimed that the success of Western Europe and the United States is based on a “competitive decentralized environment” with a flexible institutional structure and “modern perceptions of freedom,” which were created by the combined forces of “Christian dogma” and English “individualistic behavioral beliefs.” In contrast, why Spain and Latin America were slow to growth lay in an “absolutist,” “centralized monarchy and resultant bureaucracy” and “the evolution of the belief structure in ways that reinforced the existing institutional structure and stifled both economic growth and political/civil freedoms” (North 2005: 137, 144–145).

The abstract:

This article aims to point out Adam Smith's and Douglass North's multidisciplinary approach to economic development and history. Based on a philosophical link of methodological issues, Smith and North shared a conceptual framework and explanatory principles in common as well as similar historical illustrations. In terms of the use of comprehensive and integrated models of society, politics, and economy, they presented that economic development relies on how far congenial both institutional environments and sociocultural values of justice, liberty, security, and equality are to economic agents, allowing the interplay between economic performance and polity/culture. Meanwhile, these suggest a bridging role between old and new institutionalism, and, more importantly, a revival of Smithian moral philosophical tradition in the history of economics. 

It is amazing how much ground Adam Smith covered. Many of his arguments are the basis for large traditions in modern economics.  

The Transplant Effect

An organ transplant is a serious procedure. There are specific steps to take before, during, and after surgery. Several tests for compatibility are done, and the operation itself involves a careful separation and connection of nerves, veins, and whatnot. Doctors need to prevent infections and to be alert to rejection. In spite of that, a lot of transplants have been successful and people whose chances of living were minimal can continue with their lives. 

If transplants of organs are tough, transplanting institutions from one society to another might be eve tougher, and the check-list is not clear. Are compatibility checks needed? Is the equivalent of a doctor necessary to perform the procedure? Does the recovery need monitoring? What kind of complications can happen? If societies are like human organisms it make sense to see transplants of institutions as transplants of human organs. A substantial difference, however, is that organs connect tissue, blood cells, etc., but institutions connect people. There are many reasons why organs are rejected, in the same way that institutions can be. 

This article by Valentin Seidler is called When do institutional transfers work? (Journal of Institutional Economics, January 2014). He describes the "transplant effect:" when taking institutions from one place to another fails, and he compares two societies: The Bornu Empire of northern Nigeria, with the Tswana society from Botswana. He looks at the colonial and independence periods. The first is a case where the "new" institutions "did not stick," the second is considered a successful "transplant." 

The Kanuri of Bornu Empire have been chosen, because they are a larger, homogenous, landlocked, and pastoralist ethnic group and may be representative for other societies with similar ethnic characteristics. 

He highlights the role of cultural entrepreneurs, institutional entrepreneurs, and political entrepreneurs  

Political actors and cultural entrepreneurs can support the process of institutional transfer. . .

Yet, for the investigation of why the transplant effect occurs to varying degrees across countries, the key elements remain vague: What makes political and cultural entrepreneurs act (rent seeking?). How do they obtain the necessary information of the prevalent cultural norms in the receiving country and of the imported institutions? Which contextual parameters promote or obstruct institutional change? 

One society can transplant formal institutions but, of course, the hardest is to successfully transplant informal institutions. 

In brief, institutional change is possible by a gradual process of renegotiation between agents or facilitated by exogenous shocks (crises, wars, revolution etc) which break some institutions out of path dependence and allow the establishment of new institutions from scratch. . . Either way, the newly established institutions may or may not present the most efficient solution depending – among others - on interdependencies with other existing institutions (e.g. cultural beliefs) and the information of establishing agents.

Transplant of organs can be successful for many reasons. Success depends for example on the way in which the immune system responds to the new organ or tissue. The immune system may reject it, and that is why immunosuppressant drugs are used to reduce the strength of the immune system (Wikipedia). That extrapolated to the sphere of social institutions means that the institutions to be replaced have their defense system which reacts against the new ones. In fact, if we might learn something from this analogy is that developing ingenious ways to deal with the immune system of the status-quo is one of the main determinants of success of "institutional transplants."  

Medical transplants are expensive, and either the patient, an insurance company, a social insurance program, or a combination of the three covers the costs. For institutional transplants who pays the costs? 

First, most scholars would agree that institutional change benefits from a sharp break from established practices (Williamson 2000, p. 598, Roland 2004, p. 115, De Jong and Stoter 2009, p. 321).

[In the case of the Kanuri people from Bornu] indirect rule was chosen to effectively establish control and British administration over 15 million people with limited financial and human resources (Crowder 1978a, p. 179).

There is indeed a period of time necessary for the new organ to adapt to its new environment, and also for the environment to adapt to the new organ. That period of time is critical for the patient recovery, and the same happens in institutional transplants.  

Truth-telling by Third-party Auditors and the Response of Polluting Firms

Interesting paper by Esther Duflo, Michael Greenstone, Rohini Pande and Nicholas Ryan

In many regulated markets, private, third-party auditors are chosen and paid by the firms that they audit, potentially creating a conflict of interest. This article reports on a two-year field experiment in the Indian state of Gujarat that sought to curb such a conflict by altering the market structure for environmental audits of industrial plants to incentivize accurate reporting. There are three main results. First, the status quo system was largely corrupted, with auditors systematically reporting plant emissions just below the standard, although true emissions were typically higher. Second, the treatment caused auditors to report more truthfully and very significantly lowered the fraction of plants that were falsely reported as compliant with pollution standards. Third, treatment plants, in turn, reduced their pollution emissions. The results suggest reformed incentives for third-party auditors can improve their reporting and make regulation more effective.

The authors explain

Our experiment altered the market structure in several complementary ways to incentivize accurate reporting. All 473 audit-eligible plants in two populous and heavily polluted industrial regions of Gujarat entered the experimental sample. In each region, half the plants were randomized into a treatment with four parts. First, treatment plants were randomly assigned an auditor they were required to use. Second, auditors were paid from a central pool, rather than by the plant, and their fee was set in advance at a flat rate, high enough to cover pollution measurement and leave the auditor a modest profit margin.

In practice the critical issue is to get the central pool to work effectively (honestly).

Institution market, and more

--1--

As markets expand and people become richer and more educated better institutions are demanded. A reverse causality is also possible: better institutions improve market performance and education quality. From an NYT article on the growth of the middle class in Mexico:

While cooking dinner, Mrs. Martínez said that her husband’s job had given them the credit and stability they needed to start her own business — a gourmet salad shop in a colonial village nearby. And as is common in other countries with an expanding middle class, such as Brazil, their economic rise has led to demands for better government. 

When someone recently stole Mrs. Martínez’s cellphone, she said she went straight to the police over the objections of her father, who warned her nothing would be done. “He was right,” she said. “But next time it happens, I want my complaint to be there. I’m trying to make a living here, and I want a legal life.

In other words, there is a demand (and hopefully a supply) of better institutions.  

--2--

In the article The Economics of Slums in the Developing World there is an interesting puzzle at the end, when it talks about the "land title paradigm." It says: 

The major limitation of the [de Soto's] land titling argument is that it assumes that a lack of formal titles implies weak or nonexistent property rights. However, systematic evidence that land rights are always weakly enforced in slums. As one counterexample, Lanjouw and Levy (2002) have argued that informal rights can effectively substitute for formal titles in slum settlements in Ecuador. In Kibera, where all vacant land was formally reclaimed by the Kenyan government in 1969, here all the members of one ethnic group still claim land rights based on tenancy allocated by the British colonial authorities in the early twentieth century. The fact that most individuals recognized as landlords live outside the slum (Syagga, Mitullah, and Karirah-Gitau 2002) also implies that their informal rights over renters are strongly enforced. 

How Do Migrants Choose Their Destination Country? An Analysis of Institutional Determinants

Good education and health systems tend to attract migrants, while generous pension systems deter them.

That is from the abstract of this paper (draft) by Wido Geis, Silke Uebelmesser, & Martin Werding.

Identity and Performance

An interesting paper on how culture shapes behavior using caste categories in India

It is typically assumed that being hard-working or clever is a trait of the person, in the sense that it is always there, in a fixed manner. However, in an experiment with 288 high-caste and 294 low-caste students in India, cues to one's place in the caste system turned out to starkly influence the expression of these traits. The experiment allows us to discriminate between two classes of models that give different answers to the question of how someone's identity affects his behavior. Models of the fixed self assume that identity is a set of preferences. Models of the frame-dependent self assume that identity entails a set of mental models that are situationally evoked and that mediate information processing. Our findings suggest that the effect of identity on intellectual performance depends sensitively on the social setting. This perspective opens up new policy options for enhancing human capital formation and development.

That is from a paper by Karla Hoff & Priyanka Pandey. A draft is here. 

A useful explanation

Under the Revealed Mixed and Revealed Segregated conditions, the experimenter began a session by making public the identity of the participants, as described above (p. 13).

Policy volatility, institutions, and economic growth

 That is from this paper by Antonio Fatás and Ilian Mihov. The abstract

In this paper we present evidence that policy volatility exerts a strong and direct negative impact on growth. Using data for 93 countries, we construct measures of policy volatility based on the standard deviation of the residuals from country-specific regressions of government consumption on output. Undisciplined governments that implement frequent and large changes in government spending unrelated to the state of the business cycle generate lower economic growth. We employ both instrumental variables and panel estimation to address concerns of omitted variables and endogeneity. A one-standard-deviation increase in policy volatility reduces long-term economic growth by about 0.74% in the panel regressions, and by more than one percentage point in the cross-section.

Bribing: Worldwide Evidence from Firms

We utilize survey data from over 11,000 firms operating in 125 countries and a profit-maximizing cost-benefit framework to study the determinants of procurement bribery. About one-third of firms bribe to secure public contracts, with an average bribe of 7.9% of the contract value. Econometric estimations suggest that the demand-side of good governance (voice and democratic accountability, press freedom, transparency) and the supply-side (rule of law, government effectiveness), along with competition, significantly reduce the incidence and magnitude of bribery by firms. Multinational firms appear sensitive to reputational risks in their home countries, but also partially adapt to their host country environment, with 20% bribing in middle- and low-income countries, but only 11% bribing in OECD countries; in contrast, 36% of domestic firms bribe. Larger and foreign-owned firms are less likely to bribe than smaller domestic ones, yet among bribers, foreign and domestic firms pay similar amounts. This suggests that reputational risks – affecting the decision to bribe, not the amount – are important. The results point to potential policy measures that raise the costs and lower the benefits of bribing, e.g., publicdisclosure of firms that bribe, and cast doubt on conventional initiatives that may not affect profits, e.g., voluntary codes of conduct.

From a paper by Anna E. D'Souza & Daniel Kaufmann, published in an interesting journal. A draft is here.

Morality, Institutions, and Economic Growth

The figure is from this paper by Harvey S. James Jr. , and this is the abstract

Generalized morality reflects ethical norms in society about the inappropriateness of behaviors that can cause harm to others. Generalized morality may be an important factor affecting the economic performance of countries. A measure of generalized morality is constructed from data from the World Values Survey. One question examined is whether generalized morality is correlated with economic growth rates in per capita GDP across a sample of countries, controlling for institutions and other factors expected to affect economic performance. A second question examined is whether the path by which generalized morality affects growth is direct or indirect through generalized trust. The findings reveal that generalized morality is correlated with economic growth, but its effect is manifested primarily through generalized trust when economic institutions are weak.

I am glad to see papers like this one, and the topic remains under-researched. Great insights can be found in David Hume.

The Long-Run Effects of the Scramble for Africa

From a paper by Stelios Michalopoulos & Elias Papaioannou 

. . . civil conflict is concentrated in the historical homeland of partitioned ethnicities. We also document that violence against civilians (child soldiering, village burning, abductions, rapes) and territorial changes between rebel groups, militias, and government forces are more prevalent in the homelands of split groups [from the abstract].

The authors . . .

[E]xploit a new rich geocoded dataset that reports information on more than 43, 000 conflict events over the period 1997−2010 [p. 31].

More specifically . . .

Our most conservative estimates suggest that civil conflict intensity is approximately 30% higher in areas where partitioned ethnicities reside as compared to the homelands of ethnic groups that have not been separated by the national borders. We further find that homelands of partitioned groups experience a 5% to 10% higher likelihood of a territorial control change between the government and rebel groups. It is not only army fighting that is concentrated in the homelands of partitioned groups. Violence against civilians is roughly 40% higher in regions where split groups reside. The evidence thus uncovers the on-going violent repercussions of the colonial border design [p. 2].

HT: Jacob A. Jordaan 

Self-government and Long Term Persistence of Institutions (Italy)

From a paper by Luigi Guiso, Paola Sapienza, & Luigi Zingales. 

We show that cities that experienced self-government in the Middle Ages have more civic capital today [from the abstract]. 

Our reading of medieval history (among others, Reynolds, 1997; Milani, 2005; Jones, 1997; Tabacco, 1987; Pirenne, 1956) suggests that bishops played a key role in coordinating local citizens in their struggle against the Emperor for independence. Therefore, we use the presence of a bishop before the year 1000 as one predictor of eventual free city-state status [p. 4]. 

Another natural factor is strategic military position. Cities on hilltops or surrounded by waters were easier to defend militarily and hence more likely to succeed in rebelling against the Emperor and becoming independent. As a proxy for strategic position we use foundation by the Etruscans. The Etruscans (ninth century BCE), who populated an area stretching from Mantua in the North to Salerno in the South, were the first Italian civilization to be organized in the form of city-states. Since they had “first mover” advantage, they tended to locate their cities in positions that were easy to defend, so that Etruscan origin is a good proxy for strategic location, as the picture of their capital Orvieto (Figure 1 in the Appendix) suggests [p. 4].

HT: Fabio Sabatini

Institutional Reforms: Expanding Export Variety

The graph is for China. "Encouragement Policy" refers to less restrictions for foreign ownership, which is positively related to the number of industries and diversification in production. The paper is by Liugang Sheng & Dennis Tao Yang.

The abstract

This paper presents theory and evidence showing that institutional reforms in developing countries can effectively expand their product varieties in export. Our model demonstrates that relaxing foreign ownership controls and improving contract enforcement can induce multinational companies to produce new products in host developing countries, and that a combination of the two reforms has an amplifying effect on the introduction of product varieties. Consistent with these theoretical predictions, we find empirically that ownership liberalization and judicial quality played an important role in raising the extensive margin of processing exports in China for the period of 1997-2007.