Strategic Ignorance and Social Institutions

Strategic Ignorance and Social Institutions

Strategic Ignorance and Social Institutions

Eleonora Freddi

Dissertation for the Degree of Doctor of Philosophy, Ph.D., in Economics

Stockholm School of Economics, 2017

Strategic Ignorance and Social Institutions

© SSE and Eleonora Freddi, 2017 ISBN 978-91-7731-042-6(printed) ISBN 978-91-7731-043-3(pdf)

This book was typeset by the author using L^ATEX.

Front cover picture:

© Radachynskyi Serhii/Shutterstock, 2017 Back cover picture:

Juliana Wiklund, 2015 Printed by:

Ineko, G¨oteborg, 2017 Keywords:

Information avoidance, refugee crisis, motivated beliefs, click data, bequest, intergenerational exchange, Chinese savings, public expenditures, poor reliefs, state capacity.

To you

Foreword

This volume is the result of a research project carried out at the Department of Economics at the Stockholm School of Economics(SSE).

This volume is submitted as a doctoral thesis at SSE. In keeping with the policies of SSE, the author has been entirely free to conduct and present her research in the manner of her choosing as an expression of her own ideas.

SSE is grateful for the financial support provided by the Jan Wallander and Tom Hedelius Foundation, which has made it possible to carry out the project.

G¨oran Lindqvist Tore Ellingsen

Director of Research Professor and Head of the Stockholm School of Economics Department of Economics

Stockholm School of Economics

Acknowledgments

My Ph.D. journey can be compared to a chess game. I started without know- ing where I would end up. The first moves set up a path, but I had to revise my strategy a million times. Some moves were easy and predictable. Oth- ers needed a more careful examination. For some other moves it was simply a gamble. I sought out opportunities, made mistakes and learnt from them. I got small rewards by capturing the opponent’s pieces, but my mind was always focused on finishing the game. This thesis is the outcome of such a game. And I consider it a successful win.

I am indebted to my supervisor Tore Ellingsen for invaluable guidance, en- couragement and support. He has always been very open to listen to my ideas and, most importantly, to structure them. He shared his incredible intuition during our meetings and put me on the right track when necessary. I have ad- mired his enthusiasm when discussing economic and social issues. To continue the metaphor of the chess game, he has been a great chess teacher who explores with you all possible moves but then highlights the best strategy. All chapters in this thesis have benefited a lot from his feedback and comments, from which I definitely learnt a lot. Thank you Tore!

I would also like to thank Erik Lindqvist for helping me during my Ph.D.

studies. From being teaching assistant for his course in econometrics, I devel- oped my interest in applied econometrics. His attention to details and his deep knowledge in the field were a great inspiration for me. I very much appreci- ated his prompt availability in giving me feedback and enjoyed our talks over coffees and department lunches.

This thesis would have not been feasible without the tremendous collab- oration of my co-authors. I would like to thank Ingvild Almas and Øystein Thøgersen for introducing me to the fantastic world of economic research so early in my Ph.D. career. They have been important guides throughout my doctorate. I owe a lot to them. In particular, I very much admired Ingvild’s

viii STRATEGIC IGNORANCE AND SOCIAL INSTITUTIONS spontaneity and endurance at work. I further wish to thank Avner Greif. His invitation to the Department of Economics at Stanford University gave me the opportunity to spend a full academic year in one of the most prestigious and productive economics environments. I gained a lot from this experience.

Avner has a bottomless knowledge in history, which he has always been happy to share during our meetings. I very much enjoyed the time I spent at Stanford.

Other professors have also been of great importance. Richard Friberg has always had an open door in helping through the first steps in my Ph.D. and in solving any bureaucratic issue. I appreciated the valuable advice on the job market from Martina Bj¨orkman Nyqvist and Johanna Wallenius. I thank J¨orgen Weibull, Mark Voorneveld and Camilla Elwing-Johansson for organiz- ing very inspiring researchers’ lunches. I enjoyed the enthusiasm in research and in life of Federica Romei and Anna Dreber Almenberg. I have been deeply inspired by David Str¨omberg for his innate interest and expertise in applied work and for being an incredibly talented teacher. I further wish to thank Jon De Quidt, David Domeij, Eva Meyersson Milgrom, Paul Milgrom, Robert Ostling, Torsten Persson and Karl W¨arneryd.¨

Differently from a chess game, I did not have to play alone all the time.

I was lucky to share this experience with fantastic people. I would like to thank my officemates and, most of all friends, Marta Giagheddu and Nadiia Lazhevska. It has been great going through my Ph.D. with you. From the course work during the first years to the uncountable lunches and coffees to- gether. From the support during difficult times to the laughs and long talks during breaks. I enjoyed every minute of it. I would like to thank Anna Aevarsdottir, Ana Maria Ceh, Saman Darougheh, Sirus Dehdari and Math- ias Iwanowsky for offering a sincere friendship which I hope will continue in the future. I further wish to thank Paola Di Casola and Spyridon Sichlimiris.

Working with them has been an incredible experience, not only professionally, but also personally. They have been my role models for most choices during my Ph.D. Daniel Alm´en, Richard Foltyn, Karl Harmenberg, Gustaf Lund- gren, Wei Si and Tamara Sobolevskaia have also been an important milestone during my stay in Stockholm. Thank you Evelina Bonnier and Arieda Muc¸o for sharing advice, support and understanding throughout the years. Thank you Max Groneck and Jun Chen for your great help in the preparation to the job market. I further wish to thank all the administrative staff at the Stockholm School of Economics for their constant work and support to Ph.D. students.

ix Special thanks to Ritva Kiviharju for her warmth and kindness.

Through my Ph.D. I met a lot of interesting people who in a way or an- other contributed to this thesis. So a big thank you goes to Adam Altmejd, Mark Bernard, Andreas Born, Albin Erlanson, Karin Hederos, Erik Mohlin, Anna Sandberg, Thomas Seiler and Markus Sigonius. Thank you Selene, Ser- ena, Domenico, Andrea P., Andrea C., Julian, Benjamin, Svante, Christofer, Elle, Romans, Clara, Elin, Siri, Emma, Joakim, Paul, Mark S., Max V., Sreyashi and Atahan for the great company during lunches, dinners and night outs.

My stay in Stockholm would have not been the same without the amazing friends I met. Thank you Audinga Baltrunaite and Andrea Guariso for having been fantastic flatmates. Your advice and suggestions during the last phases of the Ph.D. have been invaluable. Thank you Benedetta Lerva for bringing the joy and the sparkle that only you can give. Thank you Elisa for being a great companion in the Swedish course and in my doctoral life in Stockholm. Thank you Mara for making my time at Stanford even more memorable.

The support and encouragement from my family and friends have been crucial to overcome difficult times during my stay in Stockholm. From my university friends (Albi, Ari, Costi, Davidino, Edo, Fede, Franci, Gio, Isa, Lara, Ugo) to my international friends (Alex, Ana, Bram, Sandra, Ste, Tesse).

Thank you for having been a reference point throughout the years. Thank you Anna for being close to me since the very first day of my university studies.

Thank you Sisi for sharing your most important life moments with me and for being a constant presence. Thank you Cate for all the adventures, laughs, talks and for joyfully visiting me across the world. Thank you Ale for always being next to me, no matter the distance. Your friendship and love have been and will always be an important part of my life. Grazie per tutto! Special thanks to my family. Thank you for accepting and supporting all my decisions. Grazie ad ognuno di voi per tutto quello che avete fatto per me. Grazie Nonne! Grazie Papy! Grazie Fabio! Grazie Mamma per aver sempre creduto in me!

The last acknowledgment goes to my teammate in life Chris. Introducing me to chess is only one of the infinite things I would like to thank you for. Your support, encouragement, patience, intelligence, stubbornness, knowledge, cu- riosity and love have all been important ingredients for this thesis. Together we won this game and now I’m looking forward to the next one.

Stockholm, May 2, 2017 Eleonora Freddi

Contents

Introduction 1

1 Do People Avoid Morally Relevant Information? Evidence from

the Refugee Crisis 5

1.1 Introduction . . . 6

1.2 Institutional setup . . . 12

1.3 Data and empirical design . . . 14

1.3.1 Data and descriptives . . . 15

1.3.2 Identification strategy . . . 19

1.3.3 Assessing the identification strategy . . . 21

1.4 Empirical analysis . . . 23

1.4.1 Additional results . . . 26

1.5 Robustness checks . . . 28

1.5.1 Remaining threats to identification . . . 28

1.5.2 Validation checks . . . 31

1.5.3 Placebo test . . . 34

1.6 Alternative mechanisms . . . 35

1.7 Theoretical framework . . . 41

1.8 Concluding remarks . . . 44

Figures and Tables . . . 47

Appendix . . . 84

1.A Text Analysis . . . 84

1.B Municipalities without online traffic on DN.se . . . 86

1.C Exogenous allocation of refugees across Sweden . . . 86

1.D Extra figures and tables . . . 89

Bibliography 106

2 Saving and Bequest in China: An Analysis of Intergenerational

Exchange 115

2.1 Introduction . . . 116

2.2 Saving patterns in China . . . 120

2.3 Theoretical framework . . . 121

2.3.1 Altruism . . . 123

2.3.2 Exchange . . . 124

2.4 Data collection and descriptives . . . 125

2.5 Empirical results . . . 129

2.5.1 Robustness checks . . . 132

2.6 Concluding remarks . . . 134

Tables . . . 136

Appendix . . . 147

2.A Sampling details . . . 147

Bibliography 148 3 What Did States Do? An Analysis of Historical Public Expendi- tures 153 3.1 Introduction . . . 154

3.2 Public expenditures . . . 158

3.2.1 Central government expenses . . . 159

3.2.2 Civil and military expenses . . . 161

3.2.3 Local government expenses . . . 163

3.3 Poor reliefs . . . 164

3.4 Public expenditures and poor reliefs . . . 167

3.5 Political and economic outcomes . . . 170

3.6 Concluding remarks . . . 173

Tables and Figures . . . 175

Appendix . . . 209

Bibliography 214

Introduction

This doctoral thesis in Economics consists of three self-contained chapters.

The first two chapters investigate strategic behavior of individuals. In particu- lar, the first chapter examines whether people avoid information in an attempt to reduce the moral pressure to engage in prosocial behavior. Exploiting the sudden inflow of refugees to Sweden during Fall 2015, the analysis provides evidence of such strategic ignorance in areas that welcomed a larger number of asylum seekers. The second chapter theoretically and empirically studies an exchange-based bequest motive in China. Using unique survey data, larger as- sistance in daily care from the child to the parent is found to correlate positively with the amount of bequest intended for the child. The third and last chapter continues the investigation of strategic behavior in light of social institutions.

It analyzes the structure and purpose of public spending in the European coun- tries during the 19th century. Redistribution of resources towards the paupers is found to play a key role in building state capacity. Abstracts of each chapter follow.

Do People Avoid Morally Relevant Information?

Evidence from the Refugee Crisis

Combining unique click data from a Swedish newspaper and administrative data on asylum seekers in Sweden, I examine whether a larger presence of refugees in a municipality induces people to avoid news that may encourage welcoming the newcomers. Given the unexpected inflow of refugees who ar- rived to Sweden during 2015 and their exogenous allocation across Swedish municipalities, I can estimate the causal impact of refugee-presence on infor- mation avoidance exploiting variation across time and space. People living in municipalities where the relative number of refugees has been larger are shown to read fewer articles about asylum seekers. To isolate the mechanism of avoid-

2 STRATEGIC IGNORANCE AND SOCIAL INSTITUTIONS ing morally relevant information, I identify articles that may raise feelings of compassion towards the refugees. The decrease in information acquisition is 36 percent larger for articles that take the refugees’ perspective. The findings are interpreted in light of a modified version of the motivated beliefs model due to Rabin(1995).

Saving and Bequest in China:

An Analysis of Intergenerational Exchange (with Ingvild Almas and Øystein Thøgersen)

Particularly high saving rates among the elderly in both rural and urban China call for an investigation of the involved bequest motive. Utilizing unique sur- vey data from a diverse group of Chinese households, we document that the magnitude of the bequest from parent to child is associated with the level of personal assistance from child to parent. Moreover, we find indicative evi- dence that both bequest and assistance are increasing in the parent’s income and decreasing in the child’s income. Comparing with the prediction from a stylized overlapping generations model, these findings are consistent with an exchange-based bequest motive. This conclusion has implications for how pub- lic policies and transfer schemes may be designed in order to contribute to the government objective of increased private consumption. Our results are con- ditional on the inclusion of the housing wealth as part of the bequest, which indicates that transfer of housing is key to understanding the intergenerational assistance and bequests motives, and subsequently the high savings among the elderly in China.

What Did States Do?

An Analysis of Historical Public Expenditures (with Avner Greif)

By exploring historical fiscal systems, this paper provides new evidence on the productive side of state capacity. Using a novel dataset, we descriptively an- alyze the structure of public spending in the main European countries dur- ing the 19th century. Data show that the share of civil expenditures increased over time relative to military spending. To explain cross-country differences

INTRODUCTION 3 in civil expenditures, we explore the relation between central government ex- penses and local public spending, as well as poor reliefs. The latter constituted the preliminary form of public assistance. We find that countries with a small relative share of civil expenditures also recorded low local expenses, but spent more on paupers. Using our dataset, we confirm the positive impact of political transformations on public expenditures found by Dincecco and Katz(2016).

Controlling for the amount spent on the poor, we also find a positive effect of the productive capacity of the state on economic growth.