Notesale: Turn your study into money

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Putting aside the questions of inequality, poverty traps and economic growth we turn to deep rooted factors
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Different regions of the world have different
productivity of farming
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Douglas North/ Acemoglu: Economic Institutions
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Emphases on property rights:
Rule of Law: the way the state intervenes to protect peoples’ property rights
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Without property rights, the incentives to exert effort and invest are absent
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Acemoglu: Colonialised countries can have institutions enforced on them
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If population is scarcer, more egalitarian institutions may develop - because there is no wealth to extract, colonisers
want to help the economy to grow in a successful way
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How Geography has an effect on institutions/ property rights/ state capacity (the ability of the state to obtain revenue
(tax) and provide public goods)/ state concentration
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Technology is also related to the geography
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We are focussing on how differences in technology and geography have an effect on the tax technology - which is the
ability of the elite to tax the subjects
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Hunter-gatherers are not in one place
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Storability: Some food produce is storable, others are not
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Most of the main staple food following the transition to farming in the temperate regions were cereals: rice, wheat,
barley
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This makes it
easy for the elites to tax the farmers heavily
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Differences in geographical conditions - land suitability for different crops has an effect on the tax technology
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State capacity: the easier it is to tax, the easier it is to build state capacity
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Emergence of the State

Pascale paper
About the emergence of hierarchy and differences across countries in state capacity
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Finally: application of the model to understand difference between ancient Egypt and Mesopotamia

Hunter-gathering tended to be small groups of people, very egalitarian
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Following the transition to hunter-gathering, there is the emergence of hierarchy, and eventually states
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Farmers are more productive than hunter-gatherers
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This surplus is taxable by the elite
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Moav and Neeman (2014) claim that these explanations are flawed:
According to Malthusian theory, there is no surplus - because it translates to population growth rather than income per
capita
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They claim that the change (from hunter-gatherer to farmer) is not the increase in income, but the change in the tax
technology (the ability of the elite to tax)
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In a Malthusian economy, where individuals have an income of subsistence
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So with a smaller population and same other factors of production,
surplus is created
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Farming facilitated expropriation
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Formation of hierarchy depends on demand potential:
Farmer would prefer to be taxed by stationary bandits (an elite) rather than roving bandits, because roving
bandits have no incentive to cultivate production of farmers for the future, and a state would provide defence
(public goods) to protect them
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Even if, as a
group these public goods are desirable, everyone individually would like to avoid paying taxes (free-rider problem)
The same things which makes farmers vulnerable to expropriation by bandits also allows the state to tax farmers
Improved tax technology
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An early state is just bandits turning stationary
The difference between roving and stationary bandits:
Roving bandits, given the opportunity, will take everything
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They want to keep
incentives in place, and therefore not impose a 100% tax rate
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Y may grow, but (G/Y) increases
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Luigi Pascale: empirical work
Cereals vs tubors predictions:
A: Farmers would raise tubors instead of cereals
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Looking at land suitability (0-8) for cereals and tubors (separately)
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If farmers have to opportunity to raise tubors, they will do it
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How does this explain why the temperate zones are more successful economically than tropical areas?
In the tropics, the opportunity to raise tubors is what kills state capacity
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This is an explanation of why some regions are more successful than others that goes through state capacity and
institutions
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(30:00)

3
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Principle Agent Model:
In cases of asymmetry of information, when the principle needs to incentivise the agent towards some behaviour, but
there are problems of information
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The principle is the state, and the agents are the farmers
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TO SIMPLIFY:
The economy only exists for two periods
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Here is the model:
Suppose each agent has a block of land, and output can be high or low
State of nature (theta) can be good or bad
b = prob that the state of nature is good
Output is only high if the effort of the agent is high (H), and the state of nature is good (G)
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The agent knows what the state of nature is, but the principle doesn’t observe the
state of nature or the effort level (information asymmetry)
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(1-q) is prob that signal is misleading
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Suppose the state knows land is flat/ uniform and
homogenous: if output is high in all plots except one, state may infer that the state of nature was good, but agent was
shirking
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If land is flat and uniform, there is no differences in micro-climates/ less variance in same region - so information is
more accurate (higher q)
But if land in a certain part of the world is hilly and rigid, then you would see more variance within the same region,
so information is less accurate
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Main point is that there are large differences within a small area, because of the
irrigation system - meaning large differences in land productivity within a small area
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There is a shortage of water further away from the river
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Information is a key factor in obtaining revenue
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Could control farmers, extracting revenue which was diverted into large pyramids and other
public goods
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The river floods in august,
which is then diverted into basins
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It is very uniform within a given year
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There are difference across years - as the level of the river
differs across years
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Based on the Nilometer, the govt knew in advance what revenue to anticipate
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Crucial: the survival of the agent depends on effort, and there is a cost of exerting effort
(gamma > 0) (calorie exertion)
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Effort is efficient: the gap between high and low output is more than the cost of effort
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Utility, U = I - gamma
In equilibrium, the contract is such that the agent will exert effort when the state of nature is good
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Important because, by shirking, the agent makes the extra income of gamma
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So the agent works hard not just to
obtain higher revenue now, but also to keep his job
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0 = Agent’s alternative (being dismissed) is zero
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In addition, the principle allows the agent to keep atleast a basic wage (w)
which is at least as large as gamma to cover the cost of survival of the agent
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Two possible strategies - to use the stick, or to not use the stick:
d=0 means the probability that the agent is dismissed, is 0
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d=1 means the probability that the agent is dismissed, is 1 in the following case:
Output is low, but the signal on the state of nature is good
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But the interesting case, whether to punish the agent, or not is in the case of low output
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But the
principal could condition punishment on the signal on the state of nature
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However, this costs the principal, as they have to find a different agent, who may be less efficient
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Stick and carrot - a combination of the stick and the carrot
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Optimisation: we want to find the optimal contract
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An employment contract is fully described by the bonus (b) and the probability of dismissal (d)
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Threatening the agent to dismiss them
at the end of the second period is meaningless
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The principal would like to minimise the cost of incentivising the agent (+ gamma is just min wage)
pb is the expected cost of the bonus
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Cost = prob
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If agent exerts high effort, output will be high (when state of nature is good)
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Agent knows state of nature, so
if state of nature is bad, agent doesn’t work and nothing is relevant
if state of nature is good, agent can exert high effort or shirk
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The agent’s income would be b + w
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The agent makes an income which is more than subsistence, which gives them utility
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