Essays in Applied New Institutional Economics & Public Choice

This dissertation comprises three chapters that apply theoretical works from new institutional economics and public choice to explain various institutions of human behavior. 

 

The first chapter explores the law and economics of Puritan organization. Puritan congregations in 17th century New England instituted many rules and regulations surrounding daily life. These norms are well explained by Iannaccone’s (1992) model of religious clubs. This model is extended by recognizing norms are costly to enforce, and groups will act to minimize these costs. This chapter argues Puritans organized in compact settlements to lower the monitoring costs associated with enforcing their prohibitions and stigmatizing norms. Using an originally constructed data set of 327 New England towns, this study finds more religious towns were more compactly settled and vice versa. This theory explains why centralized land demarcating institutions were often found in New England but not in other American colonies. 

 

The second chapter argues that the effects of monetary policy on income inequality will depend on both the prevailing economic and political equilibria. Monetary policy and institutions are far from exempt from political influences. This study analyzes monetary institutions not as being run by either benevolent technocrats or a wealth-maximizing Leviathan, but as the outcome of competition between interest groups trying to capture wealth transfers. While interest groups gaining from specific monetary policies and institutions can easily identify themselves, losers often cannot. As a result, losers have a more difficult time fighting back, and both the organization of money production and monetary policy are shaped by political competition between rent-seekers. This framework is used to analyze modern developments in monetary policies and institutions, namely (1) the Fed’s reaction to the 2007 financial crisis, (2) the Fed’s reaction to the COVID crisis, and (3) the establishment and development of the euro. 

 

The final chapter develops a theory of bureaucratic rent creation. Under political competition, bureaucrats who wish to maintain their jobs and salaries must continue to stimulate demand for their agency’s services in order to secure funding. This paper suggests that one way a bureau can do so is by creating avenues for private entities to collect rents through entrepreneurial action. The Federal Student Aid office in the U.S. Department of Education and their Free Application for Federal Student Aid (FAFSA) can serve as an example. By getting students to fill out a FAFSA application, colleges obtain the detailed financial information of students and families. Colleges can then use this information to price discriminate. The bureau’s derived benefits from this behavior are two-fold: (1) Private interests groups can lobby political sponsors to continue funding the agency. Using data obtained from lobbying reports filed with the federal government, this study finds that there is a positive relationship between lobbying expenditures and the implementation of regulations that enhance the value of the rents associated with the FAFSA. (2) The source of the rents can be used as a performance indicator to meet the demands of political sponsors. Drawing from the 5-year strategic plans from the Department of Education and the Federal Student Aid office, this study finds that these bureaus can benefit from engaging in such behavior.