April 2019 newsletter: Microeconomic Insights — distilling research for public debate

Readers will know that in the past few years, the Society and the economics profession at large has become increasingly concerned about the perception of economics by policymakers and the general public. In this article Siobhán Miller describes a new website aiming to make academic research, particularly in microeconomics, available to a wide audience.

Why is pollution from US manufacturing declining, even as US manufacturers continue to produce more? How much does consuming news with a strong political stance influence Americans’ voting behaviour? How can marital choices contribute to widening economic inequality?

Despite the output of valuable and high quality microeconomic research answering questions such as these, it sometimes struggles to find to find readership and interest beyond the pages of academic journals. Microeconomic Insights is a website that seeks to bridge this gap, making high-quality innovative academic research available to wider audience. We aim to share leading new ideas by soliciting articles published in top journals and producing clearer, more accessible summaries. We select articles, which improve the foundations of economic policymaking and further our understanding of how economics interacts with the environment in which we live. Our content is curated by an editorial committee of leading academics, each an expert in their own field. All editors are full professors at top institutions such as Yale, Harvard, LSE, University College, London. (A full list appears at the end of this article).

A wide breadth of research

Since starting in 2015, our goal has always been to publicise the insights from high quality research in general, with particular emphasis placed on showcasing young and less well connected researchers working at the research frontier. We consider articles that address relevant issues worldwide, irrespective of geographical location. Papers are selected for inclusion based on a number of criteria, including policy relevance, robustness and generality of findings, topicality and in order to achieve coverage of a broad range of issues.

Since launching three years ago, Microeconomic Insights has built up a library of articles covering development, environment, health, international trade, labour markets, organisation of markets, and public finance. All new articles are disseminated through our mailing list which you can sign up to via our website, and we also regularly communicate over Twitter and Facebook. We have grown a solid following mainly in the US and Europe but also with significant readership in countries such as India, Australia and Kenya. Other the past years, as well as expanding our reach more broadly, we have also been able to reach younger, and more female audiences.

Going into 2019, we hope to remain a home for cutting-edge research which informs public knowledge and shapes the conversation around microeconomic issues.

Below, are summaries of two of our more recent articles, written in collaboration between the authors and our specialist journalists.

The impact of China's hidden shipbuilding subsidies

Myrto Kalouptsidi (Original article published in the Review of Economic Studies).

Over the past two decades, Chinese firms have rapidly come to dominate a number of capital-intensive industries, such as steel, auto parts, solar panels, and shipbuilding. In 2006, for example, China identified shipbuilding as a ‘strategic industry’ and introduced a plan for its development. In a short time, China's market share had doubled from 25 per cent to 50 per cent, leaving Japan, South Korea and Europe trailing behind.

Industrial policy, notably in the form of government subsidies, is often invoked as a possible contributing factor to this expansion. Some observers have asserted that China's rapid rise was driven by hidden subsidies that reduced shipyard production costs, as well as by a number of new shipyards constructed as part of the plan.

This research is designed to assess the relative contribution of these interventions. The author first develops a methodology for detecting the presence of subsidies and gauging their magnitude. This strategy is then applied to the world shipbuilding industry, a long-time target of industrial policy.

The analysis reveals strong evidence that government subsidies decreased the cost of production in Chinese shipyards by 13-20 per cent, corresponding to a total of US$1.5-4.5 billion between 2006 and 2012. There is also evidence that Chinese shipyards are less efficient than their Japanese and South Korean counterparts.

The policy interventions led to substantial misallocation of production across countries -— with Japan, in particular, losing significant market share — and no significant gains for consumers. In the absence of the subsidies, China's market share would be cut to less than half, while Japan's share would increase by 70 per cent. If only new shipyards are removed, China’s share would fall from 50 per cent to 40 per cent, suggesting that new shipyards played an important role though not the predominant part in China’s expansion.

The prices of ships and the cost of freight are moderately lower as a consequence of the subsidies, according to the analysis. But in general, the benefits of subsidies to shipping are minimal, which implies that a frequent assertion that China developed shipbuilding to benefit from low freight rates for its trade is unsubstantiated.

Overall, the results of this study suggest that Chinese subsidies dramatically altered the geography of production and countries' market shares. Although price (and thus consumer) gains are small in the short run, they may grow in the long run as the operating fleet becomes larger. But it is doubtful that such gains will justify the extent of the estimated subsidies.

Patronage in the British Empire: the high costs of discretionary public appointments

Guo Xu (original article in American Economic Review)

Civil servants constitute a key element of state capacity, with the responsibility for raising government revenues, providing public services and implementing reforms. But what happens to the performance of bureaucrats when they are appointed to office less on the basis of their talents than on their social connections to powerful patrons?

A new study reports evidence on the costs of patronage through the lens of a historical bureaucracy that spanned the globe: the administration that ran the British Empire. The research combines newly digitized personnel and public finance data into a single dataset covering the entire period of the Colonial Office (1854-1966), the universe of all colonial governors and the 70 colonial territories under the control of the ministry.

To measure governor’s social connections, the study uses information on shared ancestry and membership in the British aristocracy, and attendance at the same elite schools and universities. Governors’ performance is measured by revenue generation, which was a key performance dimension of the Colonial Office.

Analysis of these data reveals that governors with social connections to the Secretary of State at the Colonial Office received 10 per cent higher salaries during the period of patronage (up to 1930). This increase was driven by allocation to better paid and more desirable positions in colonies that were larger and closer to London and which had lower rates of settler mortality.

What about the performance of governors whose appointments were the result of patronage? Once allocated to a colony for a fixed six-year term, they provided more tax exemptions, raised less revenue and invested less. These promotion and performance gaps disappeared after the abolition of patronage appointments in a 1930 civil service reform. Patronage therefore distorts the allocation of public sector positions and reduces the incentives of favored bureaucrats to perform.

The large negative effects of patronage raise the intriguing question of whether it has had ‘scarring’ effects beyond the days of the British Empire. In a follow-up study, the researcher finds that countries exposed for longer to connected governors during the period of patronage have lower fiscal capacity today. Consistent with policy persistence and the tax exemptions granted in the colonial period, these countries have lower quality tax systems.

Taken together, these results provide evidence that there were large costs of patronage, both for the British Empire but also for the independent countries that emerged from the Empire following decolonization. What’s more, while the research provides evidence from a historical ministry, the organization of the Colonial Office — with its hierarchy and multi-divisional form — offers a striking resemblance to modern-day bureaucracies.

The key implication for organizations now is that incremental reforms aimed at curtailing discretion in the appointment of civil servants may improve government effectiveness and economic performance. This could be particularly important in the cases of senior appointments with strong influence over decisions that have potentially wide and long-term consequences. It is precisely these senior positions that are still under patronage today.

Our supporters

Microeconomic Insights’ website is hosted and run by the Institute for Fiscal Studies, while our work is funded by the Economic and Social Research Council, the Alfred P Sloan Foundation, the Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD), USC Dornsife Center for Economic and Social Research, the Woodrow Wilson School of Public and International Affairs and the Cowles Foundation.

To read our articles or for more information about our work and our editorial board, please visit our website: https://microeconomicinsights.org/

The current editorial committee consists of Joseph Altonji (Thomas DeWitt Cuyler Professor of Economics at Yale University), Alan Auerbach (director of the Robert D. Burch Center for Tax Policy and Public Finance at the University of California at Berkeley), Oriana Bandiera (Professor of Economics at the London School of Economics), Richard Blundell (David Ricardo Professor of Political Economy at University College London and the Director of the ESRC Centre for the Microeconomic Analysis of Public Policy at the Institute for Fiscal Studies), Rachel Griffith (professor of economics at the University of Manchester and a research director at the Institute for Fiscal Studies), Marc Melitz (David A. Wells Professor of Political Economy at Harvard University), Ariel Pakes (Thomas Professor of Economics at Harvard University), Robert Porter (William R. Kenan Professor of Economics at Northwestern), and John Van Reenen (Gordon Y Billard Professor of Management and Economics at the Massachusetts Institute for Technology). Former editors include Orazio Attanasio, Roger Gordon, Stephen Redding and Penny Goldberg.