nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2011‒11‒21
four papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Disasters and Development: Natural Disasters, Credit Constraints and Economic Growth By McDermott, Thomas K. J.; Barry, Frank; Tol, Richard S. J.
  2. Corruption, growth and ethnic fractionalization: a theoretical model By Roy Cerqueti; Raffaella Coppier; Gustavo Piga
  3. Optimal timing of regime switching in optimal growth models: A Sobolev space approach By Cuong Le Van; Erol Dogan; Cagri Saglam
  4. Happy for How Long? How Social Capital and GDP relate to Happiness over Time By Stefano Bartolini; Francesco Sarracino

  1. By: McDermott, Thomas K. J.; Barry, Frank; Tol, Richard S. J.
    Abstract: We demonstrate, using a simple two-period equilibrium model of the economy, the potential effects of extreme event occurrences - such as natural or humanitarian disasters - on economic growth over the medium- to long-term. In particular, we focus on the effect of such shocks on investment. We examine two polar cases; an economy in which agents have unconstrained access to capital markets, versus a credit-constrained version, where the economy is assumed to operate in financial autarky. Considering these extreme cases allows us to highlight the interaction of disasters and economic underdevelopment, manifested through poorly developed financial markets. The theoretical analysis shows that the shock of a disaster occurrence could have lasting effects on economic growth only if agents face borrowing constraints. The predictions of our theoretical model are then tested using a panel of data on natural disaster events at the country-year level, covering the period 1979-2007. We find that for countries with low levels of financial sector development, natural disaster events exert a significant negative impact on economic growth. In particular, where access to credit is problematic, the negative effects of disasters on growth are persistent over the medium-term. These results are robust to various checks. Our findings suggest that natural disasters do represent significant threats to economic development in poor countries.
    Keywords: natural disasters,financial development,credit constraints,economic growth/growth/investment/US/data
    Date: 2011–10
  2. By: Roy Cerqueti (University of Macerata); Raffaella Coppier (University of Macerata); Gustavo Piga (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper analyzes the existing relationship between ethnic fractionalization, corruption and the growth rate of a country. We provide a simple theoretical model. We show that a nonlinear relationship between fractionalization and corruption exists: corruption is high in homogeneous or very fragmented countries, but low where fractionalization is intermediate. In fact, when ethnic diversity is intermediate, constituencies act as a check and balance device to limit ethnically-based corruption. Consequently, the relationship between fractionalization and growth rate is also non-linear: growth is high in the middle range of ethnic diversity, low in homogeneous or very fragmented countries.
    Keywords: corruption, ethnic fractionalization, monitoring cost, economic growth.
    JEL: D73 K42 O43
    Date: 2011–11–08
  3. By: Cuong Le Van (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, University of Exeter Business School - University of Exeter Business School, VCREME - VanXuan Center of Research in Economics, Management and Environment - VanXuan Center of Research in Economics, Management and Environment); Erol Dogan (Bilkent University - Bilkent University); Cagri Saglam (Bilkent University - Bilkent University)
    Abstract: This paper analyses the optimal timing of switching between alternative and consecutive regimes in optimal growth models. We derive the appropriate necessary conditions for such problems by means of the standard techniques from calculus of variations and some basic properties of Sobolev spaces.
    Keywords: Multi-stage optimal control, Sobolev spaces, Optimal growth models
    Date: 2011–03
  4. By: Stefano Bartolini; Francesco Sarracino
    Abstract: What does predict the evolution over time of subjective well-being? We answer this question correlating cross country time series of subjective well-being with the time series of social capital and/or GDP. First, we adopt a bivariate methodology similar to the one used used by Stevenson and Wolfers (2008), Sacks et al. (2010), Easterlin and Angelescu (2009), Easterlin et al. (2010). We find that in the long (at least 15 years) and medium run (6 years) social capital is a powerful predictor of the evolution of subjective well-being. In the short-term (2 years) this relationship weakens. Indeed, short run changes in social capital predict a much smaller portion of the changes in subjective well-being, compared to longer periods. GDP follows a reverse path: in the short run it is more positively correlated to the changes in well-being than in the medium-term, while in the long run the correlation vanishes. Secondly, we run trivariate regressions of time series of subjective well-being on time series of both social capital and GDP, which confirm the results from bivariate analysis.
    Keywords: Easterlin paradox; GDP; economic growth; subjective well-being; happiness; life satisfaction; social capital; time-series; short run; medium run; long run; WVS; EVS; ESS; time-series.
    JEL: D60 I31 O10
    Date: 2011–10

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