The Early State: Hebrew University of Jerusalem. Royal Holloway University of London
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1 The Early State: Malthusian Dynamics and Asymmetric Information Joram Mayshar Hebrew University of Jerusalem Omer Moav Hebrew University of Jerusalem Royal Holloway University of London Zvika Neeman Tel-Aviv University
2 Contribution We incorporate two elements: a. Malthusian Dynamics b. Asymmetric Information
3 Contribution We incorporate two elements: a. Malthusian Dynamics b. Asymmetric Information to explain two facts concerning the early state:
4 Contribution We incorporate two elements: a. Malthusian Dynamics b. Asymmetric Information to explain two facts concerning the early state: 1. The emergence of the state following the Neolithic Revolution
5 Contribution We incorporate two elements: a. Malthusian Dynamics b. Asymmetric Information to explain two facts concerning the early state: 1. The emergence of the state following the Neolithic Revolution 2. Regional differences across early states in scale and institutions
6 Plan of the presentation 1 The emergence of the state: criticism of 1. The emergence of the state: criticism of the literature and an informal model
7 Plan of the presentation 1. The emergence of the state: criticism of the literature and an informal model 2. Regional differences: a principle-agent model
8 Plan of the presentation 1. The emergence of the state: criticism of the literature and an informal model 2. Regional differences: a principle-agent model 3. Application of the model to ancient Egypt and Mesopotamia: differences in institutions
9 1. The emergence of the state
10 1. The emergence of the state Existing literature offers explanations based on the premise that:
11 1. The emergence of the state Existing literature offers explanations based on the premise that: The transition from foraging to agriculture
12 1. The emergence of the state Existing literature offers explanations based on the premise that: The transition from foraging to agriculture Food surplus (Marxian surplus income above subsistence)
13 1. The emergence of the state Existing literature offers explanations based on the premise that: The transition from foraging to agriculture Food surplus (Marxian surplus income above subsistence) An elite that did not produce food (ranked society)
14 1. The emergence of the state Existing literature offers explanations based on the premise that: The transition from foraging to agriculture Food surplus (Marxian surplus income above subsistence) An elite that did not produce food (ranked society) The emergence of the state
15 Contribution We argue that this explanation is flawed
16 Contribution We argue that this explanation is flawed: The gradual rise in productivity by itself could not have generated any surplus since population size adjusts endogenously to prevent its creation.
17 Contribution We argue that: It is the state that generated surplus through expropriation, curtailing the increase in population.
18 Contribution We argue that: It is the state that generated surplus through expropriation, curtailing the increase in population. It was a change in the ability to expropriate that explains the emergence of the state, not a change in productivity. it
19 A Malthusian Equilibrium MPL APL L
20 A Malthusian Equilibrium Replacement income MPL APL L
21 A Malthusian Equilibrium Population size Replacement income MPL APL L * L
22 A Malthusian Equilibrium No surplus regardless of economic growth Population size Replacement income MPL APL L * L
23 A Malthusian Equilibrium Population size with a government and no tax distortions Replacement income Population size with no government MPL APL L ** L * L
24 A Malthusian Equilibrium With a Government G Y MPL Replacement income APL L ** L
25 Economic Growth G APL Y MPL L ** L
26 Economic Growth Economic growth has no effect on state s scale G APL Y MPL L ** L
27 Malthusian Dynamics: Evidence Technological improvements before the industrial revolution have a positive effect on the size of the population and no effect on income per capita. (Ashraf and Galor 2011). Income has a positive effect on population p growth before the industrial revolution (Crafts and Mills 2009; Kelly and O Grada 2010; Lagerlof 2009).
28 The ability to expropriate: the role of storage The seasonality of grain production made substantial storage necessary, once cereals became the primary source of calories.
29 The ability to expropriate: the role of storage The seasonality of grain production made substantial storage necessary, once cereals became the primary source of calories. Such storage is consistent with the lack of any Marxian surplus. (but some Archeologists employ the term surplus as a synonym for stored food).
30 The ability to expropriate: the role of storage We argue that stored food-stuff facilitated confiscation it created a change in the tax technology
31 The ability to expropriate: the role of storage We argue that stored food-stuff facilitated confiscation it created a change in the tax technology This change enabled the formation of the state.
32 The ability to expropriate: The role transparency Grain storage is an important example of greater transparency of production that induced a change in tax capacity.
33 The ability to expropriate: The role transparency Grain storage is an important example of greater transparency of production that induced a change in tax capacity. Asymmetric information induces control problems that limit tax capacity and the scale of the state thi i th f f th d t f th this is the focus of the second part of the presentation
34 Transparency vs. Productivity Existing theory: increased productivity it generated surplus and the state. Our approach: increased transparency enabled expropriation and the state Consistent with the lack of growth of the state during long periods with significant technological progress.
35 Taxation Constraints G Replacement income Y MPL APL L ** L 0 L
36 Improvements in the Tax Technology G Replacement income Y MPL APL L ** L 0 L
37 Existing Literature: The Emergence of the State There are two approaches that explain the emergence of the state, both based on Marxian surplus: integration ti theories conflict theories
38 Existing Literature: The Emergence of the State Integration theories (starting ti with Plato and Hobbes, Childe 1936, Wittfogel 1957) The state was formed to promote the welfare of its subjects by: providing security; facilitating i trade; constructing and managing irrigation projects.
39 Existing Literature: The Emergence of the State Conflict theories (t (starting ti with ithrousseau, Marx and dengels) l) The state is formed in order to resolve class conflict and protect the elite Stationary bandits (the elite) took advantage of the niche of expropriating others (Olson 1993)
40 Existing Literature: The Early State and Population Some theories take population as constant Others ascribe a crucial role to population growth and to population pressure (Carneiro 1970; Johnson and Earle 2000) technological improvements in agriculture led to technological improvements in agriculture led to population growth and competition over resources necessitated the reorganization of society leading to the formation of the nation-states.
41 Summary of Part 1
42 Summary of Part 1 The precondition of surplus is inconsistent with endogenous population in Malthusian dynamics.
43 Summary of Part 1 The precondition of surplus is inconsistent with endogenous population in Malthusian dynamics. The importance of storage and transparency is overlooked.
44 Summary of Part 1 The precondition of surplus is inconsistent with endogenous population in Malthusian dynamics. The importance of storage and transparency is overlooked. The role of technological change isn t through increased productivity but through increased transparency.
45 2. Explaining regional differences: the role of transparency
46 2. Explaining regional differences: the role of transparency Environmental differences:
47 2. Explaining regional differences: the role of transparency Environmental differences: Differences in the transparency of the production process
48 2. Explaining regional differences: the role of transparency Environmental differences: Differences in the transparency of the production process Differences in the tax technology
49 2. Explaining regional differences: the role of transparency Environmental differences: Differences in the transparency of the production process Differences in the tax technology Differences in the scale of the state and in institutional arrangements
50 2. Explaining regional differences: a principle-agent i model We develop a principal-agent agent model, representing the government as an absentee landlord and its subjects.
51 2. Explaining regional differences: a principle-agent i model We develop a principal-agent agent model, representing the government as an absentee landlord and its subjects. The model illustrates the importance of asymmetric information and endogenous population.
52 2. Explaining regional differences: a principle-agent i model We study the effect of transparency on the type of contract: Stick threat of dismissal Carrot share of output
53 2. Explaining regional differences: a principle-agent i model We study the effect of transparency on the type of contract: Stick threat of dismissal Carrot share of output And the implied: Tenancy institutions Government size Population density
54 Model The principal-agent problem The State (the principal) allocates land to its subjects (the agents) and designs the contract to maximize its expected income. Agents are risk neutral and choose their effort level to maximize their expected welfare (current income and the value of employment) net of effort cost.
55 Population size is determined by the state: - total land N / - plot size allocated to each agent
56 Output in each plot of land: Y H L if e h and G otherwise e h, l - effort G, B - state of nature 0, 1 - the probability that G Thecostofeffort: c if e h; zero if e l
57 Information Ĝ, B - a public signal about the state of nature Signal accuracy q 1/2 q Pr Ĝ G Pr B B 1 q Pr Ĝ B Pr B G is observed after effort decision
58 Interpretation of the signal Observation of output in other plots provides information about the state of nature at a specific plot depending on the correlation across plots. An observable signal such as the Nilometer that measures the amount of water in the Nile and provides a public signal about the state of nature.
59 Incentive scheme - the carrot: The principal pays the agent: a bonus b If output is high: Y H a basic wage c regardless of output
60 Incentive scheme - the stick: s 0, 1 - the probability the agent is fired if Y L and Ĝ (otherwise the agent is retained) x - the cost of replacing the agent - the agent s discount factor V - the value of the agent s employment in the next period the agent s value of unemployment is zero
61 An employment contract is fully described by two variables: b and s (a carrot and a stick) We assume that: x c 1 c This assumption implies that the incentive scheme is optimal for the principal. It assures that dismissing the agent when Y L and B is a dominated contract.
62 The objective function of the principal is to maximize aggregate income: N by choosing plot size and the optimal contract, b and s subject to the long-run subsistence constraint: I Ĩ - State s expected income from each plot I b - Agent s expected income net of effort cost
63 We first set 1 and abstract from the subsistence constraint Output: Y H L if e h and G otherwise Thecostofeffortisc 1 c 0 if e h and zero if e l
64 The principal s objective function - OF: max b,s where: H b 1 L 1 q sx subject to the agent s incentive compatibility constraint - IC: b V 1 q 1 q 1 s V c q 1 s 1 q 1 q 1 q 1 s V
65 Participation (individual rationality) constraint holds: the alternative utility is zero We assume that effort is efficient: H L c and that output is sufficient to compensate for effort: L c There exist a contract such that the OF 0 and the IC holds
66 Rewrite the agent s IC: b c qs V Or: b qs V c Intuition: The return to effort: the expected rise in income, b, and the increase in the probability to maintain the job qs, multiplied by its value, V, is larger than the cost of effort.
67 Solution The IC is binding (the contract is designed by the principal and we now abstract from the subsistence constraint): b c qs V The marginal cost to the principal of b and s are constant Corner solution
68 Pure Carrot or s 0, b c Maximum Stick s 1, b c q V Since c, a solution s 1, b 0 does not exist.
69 By replacing b from the IC in the OF and taking the derivative wrt s, if q q Pure Carrot 1 x 1 x V 1 Otherwise Maximum Stick
70 Intuition: a principal relaying on a stick to incentivise the agent has to incur the cost of dismissal x with probability: 1 1 q The expected cost of using the stick : 1 1 q x is decreasing with the quality of information q
71 The Bellman equation V b Pr retained V V b 1 Pr retained
72 Maximum Stick: V c 1 q 2 q 0 Pure Carrot: V c 1
73 The threshold q is given by: 1 q 1 c 1 x 1 q 2q For a sufficiently large x or for a sufficiently small δ, the critical value q 1/2 (x implies q 1, and δ 0 implies q 1). there exist a set of parameters for which there exists a pure carrot equilibrium. Since q 1 there always exists a range of q such that the contract is max stick.
74 Expected Income - Pure Carrot The net expected income of the agent I b c c The expected income of the principal H L L 2c Efficient outcome: I H L L c
75 Expected Income - Maximum Stick The net expected income of the Agent I b c q V c 1 q q 1 q 2 q decreasing with q; strictly positive for q 1
76 The intuition for the decline of I with q above q : Holding constant the bonus, b, a higher q implies a lower probability of dismissal, increasing the value of employment. Therefore, as q increases b has to decline to hold the incentive constraint binding.
77 Expected Income - Maximum Stick The expected income of the principal H L 1 1 q x L 2c q c 1 q 2 q increasing with q
78 Expected Income - Maximum Stick inefficient outcome: I H L L c 1 1 q x inefficiency declines with q
79 Income and Information H ( 1 ) L c Total Income Principal s income 1/2 qˆ 1 Agent s income q Pure carrot Max stick
80 The State and Population Population size: Output: Y N / 1/ H if e h and G L otherwise
81 The cost of effort is increasing and convex with plot size: where, c 0 0 c 0;c 0 The elasticity of effort wrt plot size is restricted: e c, c c 2
82 The objective function of the principal is to maximize aggregate income: N by choosing plot size and the optimal contract s and b, subject to the subsistence constraint: I Ĩ
83 First stage of the optimization: as a function of under a binding IC, regardless of Ĩ: Pure Carrot: Max Stick: c H L L 2c / s H L L q c 1 q 2 q 1 1 q x 2c /
84 Under both contracts payoff is strictly decreasing with plot size Subsistence constraint is always binding I Ĩ b Ĩ/
85 Second stage: Optimal under the subsistence constraint (I Ĩ, regardless of the IC: min N Ĩ min c Ĩ / where, c c Ĩ since e c, 2, under pure carrot, the IC does not hold for. c is determined such that both constraints are binding.
86 Plot Size: Pure Carrot I c c Ĩ Max Stick If the IC holds at, then s, otherwise, s is determined by: I c s q 1 1 q 2 q Ĩ s c
87 Under endogenous plot size the threshold q is given implicitly by c s for a sufficiently large x or for a sufficiently small δ, the critical value q 1/2. (x implies q 1, and δ 0 implies q 1) There exist a set of parameters for which there exists a pure carrot equilibrium. Since q 1 there always exists a range of q such that the contract is max stick.
88 Plot size allocated to each agent is larger in the more transparent economy under the max stick contract
89 In the more transparent economy there are less agents - population size is smaller - and the government collects a larger share of income
90 Within the max stick contract, as long as s, the larger is q -themore transparent is economic activity - the larger is plot size, the smaller is population size, and the larger is the share of government.
91 State scale and population p Total Income State s income Population 1/2 qˆ 1 q Pure carrot Max stick
92 Comment One of the key aspects of state government is the multi-tiered tiered hierarchy of control. We would like to interpret it as though a similar principal-agent agent interaction like the one that we depicted exits at the different levels of the hierarchy.
93 3. Application: Ancient Egypt and Mesopotamia The Old Testament refers to Egypt as a house of bondage This expressed disapproval of land tenure institutions in Pharaonic Egypt, where all farmers were serfs who tilled land that they did not own. In ancient Israel and Mesopotamia, owneroperated farming was the norm.
94 Mesopotamia typical irrigation system
95 Egypt typical irrigation system
96 Nilometer A nilometer: indications to the water level of the Nile. Allowed easier calculations for taxes on farmers.
97
98
99
100 Application: Ancient Egypt and Mesopotamia Private land
101 Application: Ancient Egypt and Mesopotamia Private land Leasing contracts and loans; real estate transactions documentation
102 Application: Ancient Egypt and Mesopotamia Private land Leasing contracts and loans; real estate transactions documentation Law codes
103 Application: Ancient Egypt and Mesopotamia Private land Leasing contracts and loans; real estate transactions documentation Law codes Strong independent cities
104 Application: Ancient Egypt and Mesopotamia Private land Leasing contracts and loans; real estate transactions documentation Law codes Strong independent cities King is God
105 Conclusion Information and freedom: The prevailing view is that asymmetry of information is a hindrance for efficiency. We argue that lack of transparency could protect the freedom and well-being of agents. The degree of transparency has an effect on the size of the state, population density, and institutions.
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