Essays in Political Economy and Crisis

My research has two main themes --- the link between political economy and economic development, and the causes and effects of economic crises and long recessions. This dissertation samples from some of this ongoing research. The relationship between economic development and democracy is key in political economy. Many commentators have suggested that economic growth increases support for democracy. One proposed mechanism is that modernization, by reducing the demand for low-skilled labor, increases the willingness of elites, particularly in agriculture, to extend the franchise. In Chapter 1 I use subnational variation in South Africa to test this mechanism. I employ national shocks to the mining sector's demand for native black workers and cross-sectional variation in labor market competition induced by apartheid to estimate the effect of black labor scarcity on wages, capital intensity, and changes in partisan voting preferences. I find that reductions in the supply of foreign mine labor following the sudden withdrawal of workers from Malawi and Mozambique (and the increased demand for native black workers) increased mechanization on the mines and on farms competing with mines for labor. I then show that these induced structural changes resulted in differential increases in pro-political reform vote shares in the open districts relative to closed districts, even as mining districts became more conservative and voted more to maintain the non-democratic regime. Chapter 2 also explores issues related to the close relationships between economic and political institutions. In this chapter, together with my coauthor Sebastien Turban, we show how sovereign debt spreads are impacted by news about executive term limits. Political institutions matter for countries' cost of borrowing. We use an event-study to analyze the markets' response to new information about executive term limits over 101 events in seven emerging markets. Investors respond significantly to news about restrictions on those limits, lowering risk spreads. The one day abnormal returns following news about a restriction is 2 percentage points. Over ten days, the cumulative abnormal return is 5 percentage points. News about term limits extensions are not significant in the medium run. The results are robust to a non-parametric test and are confirmed when looking at the behavior of sovereign CDS prices. Chapter 3 starts the second part of this dissertation which is an investigation into the housing-related aspects of the recent crisis which began as a "subprime crisis" before it became the "Great Recession". In particular, this chapter focuses on the institutional details underpinning these markets. It also serves to set up the analysis in the following chapter which looks at one of the potentially important mechanisms which amplified the severity of the housing crisis. One important feature emerging from this analysis is that it appears that protections for home mortgage creditors were strengthened in the period preceding the subprime crisis. This may have both increased lending, but also the difficulty of modifying home loans ex post. This is more problematic to the extent that there are negative externalities from foreclosures. Chapter 4, co-authored work with David Munroe, shows that completed foreclosures cause neighboring foreclosure lings. We estimate this relationship using administrative data on home foreclosures and sales in Cook County, IL, instrumenting completed foreclosures with randomly assigned chancery-court judges. A completed foreclosure causes 0.5 to 0.7 additional foreclosure lings within 0.1 miles, an effect that persists for several years. Contagion is driven by borrowers on the margins of default, not those severely at risk. We find evidence that borrowers learn about lender behavior from neighboring foreclosures. Finally, a foreclosure causes an increase in housing sales among relatively low-quality properties.