We use newly assembled data on regulation in several sectors of many OECD countries to provide evidence that regulatory reform of product markets is associated with an increase in investment. A component of reform that plays a very important role is entry liberalization, but privatization also has a substantial effect on investment. Sensitivity analysis suggests that our results are robust.

The goal of this paper is to evaluate the attribution of policy prerogatives to European Union level institutions and compare them to the implications of normative policy models and to the preferences of European citizens. For this purpose we construct a set of indicators to measure the policy-making intensity of the European Union (European Council, Parliament, Commission, Court of Justice, etc.). We confirm that the extent and the intensity of policymaking by the EU have increased sharply over the last 30 years, but at different speeds, and in different degrees, across policy domains. In recent years the areas that have expanded most are quite remote from the EEC’s original mission of establishing a free market zone with common external trade policy. On the contrary some policy domains that would normally be attributed to the highest level of government remain at national level.We argue that the resulting allocation of prerogatives between the EU and member countries is partly inconsistent with normative criteria concerning the assignment of policies at different government levels, as laid out in the theoretical literature.

This paper studies the relationship between international conflict and the size distribution of countries in a model in which both peaceful bargaining and nonpeaceful confrontations are possible. We show how the size distribution of countries depends on the likelihood, benefits, and costs of conflict and war. We also study the role of international law and show how better defined international "property rights" may lead to country breakup and more numerous local conflicts.

Different beliefs about the fairness of social competition and what determines income inequality influence the redistributive policy chosen in a society. But the composition of income in equilibrium depends on tax policies. We show how the interaction between social beliefs and welfare policies may lead to multiple equilibria or multiple steady states. If a society believes that individual effort determines income, and that all have a right to enjoy the fruits of their effort, it will choose low redistribution and low taxes. In equilibrium, effort will be high and the role of luck will be limited, in which case market outcomes will be relatively fair and social beliefs will be self-fulfilled. If instead, a society believes that luck, birth, connections, and/or corruption determine wealth, it will levy high taxes, thus distorting allocations and making these beliefs self-sustained as well. These insights may help explain the cross-country variation in perceptions about income inequality and choices of redistributive policies.

We survey and assess the literature on the positive and negative effects of ethnic diversity on economic policies and outcomes. Our focus is on communities of different size and organizational structure, such as countries, cities in developed countries, and villages and groups in developing countries. We also consider the endogenous formation of political jurisdictions and highlight several open issues in need of further research, in particular the endogenous formation of ethnic identity and the measurement of ethnic diversity.

Bigger governments raise the possibilities for corruption; more corruption may in turn raise the support for redistributive policies that intend to correct the inequality and injustice generated by corruption. We formalize these insights in a simple dynamic model. Apositive feedback from past to current levels of taxation and corruption arises either when wealth originating in corruption and rent seeking is considered unfair, or when the ability to engage in corruption is unevenly distributed in the population. This feedback introduces persistence in the size of the government and the levels of corruption and inequality. Multiple steady states exist in some cases.

Americans average 25.1 working hours per person in working age per week, but the Germans average 18.6 hours. The average American works 46.2 weeks per year, while the French average 40 weeks per year. Why do western Europeans work so much less than Americans? Recent work argues that these differences result from higher European tax rates, but the vast empirical labor supply literature suggests that tax rates can explain only a small amount of the differences in hours between the U.S. and Europe. Another popular view is that these differences are explained by long-standing European “culture,” but Europeans worked more than Americans as late as the 1960s. In this paper, we argue that European labor market regulations, advocated by unions in declining European industries who argued “work less, work all” explain the bulk of the difference between the U.S. and Europe. These policies do not seem to have increased employment, but they may have had a more society-wide influence on leisure patterns because of a social multiplier where the returns to leisure increase as more people are taking longer vacations.

We study the effect of the level of inequality in society on individual well-being using a total of 123,668 answers to a survey question about ‘‘happiness’’. We find that individuals have a lower tendency to report themselves happy when inequality is high, even after controlling for individual income, a large set of personal characteristics, and year and country (or, in the case of the US, state) dummies. The effect, however, is more precisely defined statistically in Europe than in the US. In addition, we find striking differences across groups. In Europe, the poor and those on the left of the political spectrum are unhappy about inequality; whereas in the US the happiness of the poor and of those on the left is uncorrelated with inequality. Interestingly, in the US, the rich are bothered by inequality. Comparing across continents, we find that left-wingers in Europe are more hurt by inequality than left-wingers in the US. And the poor in Europe are more concerned with inequality than the poor in America, an effect that is large in terms of size but is only significant at the 10% level. We argue that these findings are consistent with the perception (not necessarily the reality) that Americans have been living in a mobile society, where individual effort can move people up and down the income ladder, while Europeans believe that they live in less mobile societies.

A fundamental aspect of institutional design is how much society chooses to delegate unchecked power to its leaders. If, once elected, a leader cannot be restrained, society runs the risk of a tyranny of the majority, if not the tyranny of a dictator. If a leader faces too many ex post checks and balances, legislative action is too often blocked. As our critical constitutional choice, we focus upon the size of the minority needed to block legislation, or conversely the size of the (super)majority needed to govern. We analyze both “optimal” constitutional design and “positive” aspects of this process. We derive several empirical implications which we then discuss.

We investigate whether political jurisdictions form in response to the trade-off between economies of scale and the costs of a heterogeneous population. We consider heterogeneity in income, race, ethnicity, and religion, and we test the model using American school districts, school attendance areas, municipalities, and special districts. We find strong evidence of a trade-off between economies of scale and racial heterogeneity; we also find evidence of a trade-off between economies of scale and income heterogeneity. Conversely, we find little evidence that ethnic or religious heterogeneity shapes jurisdictions. To clarify the direction of causality between heterogeneity and jurisdictions, we exploit shocks to racial heterogeneity generated by the two world wars.

In this paper, we present our view of the recent evolution of European integration. We first briefly describe the main features of the institution and decision making process in the European Union, with particular attention to the debate between federalists and super nationalists. We then identify two key issues in the process of European integration: 1) an emphasis on “institutional balance” based on a complex web of institutions with overlapping jurisdiction; 2) A conflict between a dirigiste versus a more laissez faire approach to government. We argue that the first problem leads to a lack of clarity in the allocation of powers between European institutions, confusion in the allocation of prerogatives between national governments and EU institutions, and lack of transparency and accountability. The dirigiste culture also manifests itself in an abundant production of verbose rhetoric, which in our view is far from innocuous and direct set the European policy debate in the wrong direction.We then study how these problems play out in 4 important areas: employment policies, culture and scientific research, foreign and defense policies, and fiscal policy. Finally, we study the implications of the recently proposed European Constitution a potential solution of these two problems.

What is the optimal number of currencies in the world? Common currencies affect trading costs and, thereby, the amounts of trade, output, and consumption. From the perspective of monetary policy, the adoption of another country's currency trades off the benefits of commitment to price stability against the loss of an independent stabilization policy. The nature of the tradeoff depends on co-movements of disturbances, on distance, trading costs, and on institutional arrangements such as the willingness of anchor countries to accommodate to the interests of clients.

This paper evaluates the effects of fiscal policy on investment using a panel of OECD countries. We find a sizeable negative effect of public spending—and in particular of its wage component—on profits and on business investment. This result is consistent with different theoretical models in which government employment creates wage pressure for the private sector. Various types of taxes also have negative effects on profits, but, interestingly, the effects of government spending on investment are larger than those of taxes. Our results can explain the so-called “non-Keynesian” (i.e., expansionary) effects of fiscal adjustments.

Both individual experiences and community characteristics influence how much people trust each other. Using individual level data drawn from US localities we find that the strongest factors associated with low trust are: (i) a recent history of traumatic experiences; (ii) belonging to a group that historically felt discriminated against, such as minorities (blacks in particular) and, to a lesser extent, women; (iii) being economically unsuccessful in terms of income and education; (iv) living in a racially mixed community and/or in one with a high degree of income disparity. Religious beliefs and ethnic origins do not significantly affect trust. The role of racial cleavages leading to low trust is confirmed when we explicitly account for individual preferences on inter racial relationships: within the same community, individuals who express stronger feelings against racial integration trust relatively less the more racially heterogeneous the community is.