The Voracity Effect

American Economic Review, 1999

We analyze an economy that lacks a strong legal-political institutional infrastructure and is populated by multiple powerful groups. Powerful groups dynamically interact via a fiscal process that effectively allows open access to the aggregate capital stock. In equilibrium, this leads to slow economic growth and a ‘‘voracity effect,’’ by which a shock, such as a terms of trade windfall, perversely generates a more-than-proportionate increase in fiscal redistribution and reduces growth. We also show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks. 


Voracity and Growth in Discrete Time

Economic Letters, 1998

Several developing countries have frequently responded to favorable shocks by increasing government spending more than proportionally and by investing in inefficient capital projects. As a result, transitory windfalls have frequently lead to a contemporaneous deterioration of the current account, an increase of the fiscal deficit-to-GDP ratio, and a decline in the quality of investment. Representative agent models cannot rationalize these facts. Tornell and Lane (1998) [Tornell, A., Lane, P., 1998. Voracity and growth. American Economic Review, 1998, forthcoming] rationalize them considering a differential game among several powerful groups. We present the discrete time analog of that model and show that the results are not specific to the continuous time specification.


Why Aren't Savings Rates in Latin America Procyclical?

Journal of Development Economics, 1998

We document a striking empirical regularity: Latin American savings rates are, as a rule, substantially less procyclical than for OECD countries and in some cases are actually countercyclical. We build a non-representative agent intertemporal macroeconomic model that rationalizes this phenomenon as the equilibrium outcome of interaction between multiple groups that have common access to aggregate income. We conclude by suggesting that institutional reform may hold the key to improving the cyclical behavior of savings in Latin America.


Are Windfalls a Curse? A Non-Representative Agent Model of the Current Account

Journal of International Economics, 1998

A puzzling feature of temporary terms of trade booms is that some countries have responded to such windfalls by running current account deficits. Furthermore, those countries that ran current account deficits failed to attain greater post-boom growth rates, indicating the deficits were consumed or invested in low quality projects. The point we make is that the structure of the fiscal process is critical in determining outcomes. If fiscal control is unitary, then the consumption-smoothing effect is operative, and representativeagent models of the current account have predictive power. However, if control is divided among several fiscal claimants, a voracity effect appears which counteracts the consumption smoothing effect, leading to a deterioration of the current account in response to a positive temporary shock. We model the interaction among fiscal claimants as a dynamic game and show that in equilibrium aggregate appropriation increases more than the windfall itself. This results in a deterioration of the current account. We also show that all the windfall is dissipated, with the country experiencing no increase in welfare.


The Political Economy of Mexico’s Entry into NAFTA

The Annual East Asian NBER Conference, 1998



Economic Growth and Decline with Endogenous Property Rights

Journal of Economic Growth, 1997

This article introduces endogenous institutional change into a neoclassical growth model. For some parameter values, all Markov perfect equilibria involve a shift from common property to private property followed by a shift back to common property. Even in the presence of a linear production technology, this sequence of switches generates growth rates that are increasing at low levels of capital and decreasing at high levels of capital. This result rationalizes the hump-shaped growth path followed by some countries through history, as well as the conditional convergence observed in postwar data. For other parameter values, there are also equilibria in which common property prevails forever. This result rationalizes the low-growth traps in which many poor countries find themselves.


Power, Growth and the Voracity Effect

Journal of Economic Growth, 1996

Why is it that resource-rich countries tend to have lower growth rates than resource-poor countries? And why is it that many countries that enjoy terms-of-trade windfalls end up with lower growth rates? To explain these puzzles, we extend the neoclassical growth model by replacing the representative agent with multiple powerful groups and by introducing a new concept, the voracity effect--a more than proportional increase in redistribution in response to an increase in the raw rate of return. We show that, in an economy with powerful groups and weak institutions, the voracity effect operates if the elasticity of intertemporal substitution is high enough. That is, there exists a negative relationship between the growth rate and the raw rate of return, which is positively related to the terms of trade. We provide some empirical evidence in support of the mechanism we propose.  


The Tragedy of the Commons and Economic Growth: Why Does Capital Flow from Poor to Rich Countries?

Journal of Political Economy, 1992

We analyze a differential game in which all interest groups have access to a common capital stock. We show that the introduction of a technology that has inferior productivity but enjoys private access may ameliorate the tragedy of the commons. We use this model to analyze capital flight: in many poor countries, property rights are not well defined; since "safe" bank accounts in rich countries (the inferior technology) are available to citizens of these countries, they engage in capital flight. We show that the occurrence of capital flight does not imply that opening the capital account reduces growth and welfare.