Essays in political economy and mechanism design

2013-06-25This dissertation is a two-part investigation on political economy and mechanism design. In the first essay we estimate the economic effects of a counterinsurgency policy using the Naxalite insurgency in India as a case study. While there exists a substantial literature looking at the relationship between insurgency and economic growth, the economic effects of counterinsurgency policies remain underexplored. Using the synthetic control method of analysis (a recently developed generalization of the difference-in-difference methodology), we provide the first measurements of the direct economic benefits of a unique robust security response to an insurgency. Of all the states affected by Naxalite violence in India, only one state i.e. Andhra Pradesh raised a specially trained and equipped police force in 1989 known as the Greyhounds, dedicated to combating the Naxalite insurgency. Compared to a synthetic control region constructed from states affected by Naxalite violence that did not raise a specially trained anti-Naxalite police force, we find that Andhra Pradesh gained on average 16.11% of its per capita NSDP over the period 1989 to 2000. Interestingly, we find that these effects come through the various sub-sectors of the non-agricultural sector. The effects on the manufacturing sector and its sub-components (registered and unregistered manufacturing) are particularly strong and range from 20%-26%. Placebo tests indicate that all results are significant. Conventional difference-in-difference specifications using state and industry level panel data further corroborate these findings. ❧ In the second essay we study in the laboratory a variant of the house allocation with existing tenants problem where (i) subjects are partitioned into tiers with hierarchical privileges, (ii) they play multiple matches, and (iii) they know their position in the priority queue before making their decision. We evaluate the performance of the modified versions of three well-known mechanisms: Top Trading Cycle, Gale-Shapley and Random Serial Dictatorship with Squatting Rights. For all three mechanisms, we find low rates of participation (around 40%), high rates of truth-telling conditional on participation (around 90%), high proportions of fair allocations (above 90%) and significant efficiency losses. We also observe differences across mechanisms: Random Serial Dictatorship is ranked highest in efficiency and Top Trading Cycle is ranked lowest in fairness. We then show that position in the queue has a positive and significant impact on participation whereas experience and tier has little effect on behavior. Finally, the individual analysis reveals that the majority of subjects who do not play according to the theory still follow discernible patterns of participation and preference revelation