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AbstractThe choice of whether to regulate firms or to allow them to compete is key. If demand is sufficiently inelastic, competition entails narrower allocative inefficiencies, but also smaller expected profits, and thus weaker incentives to invest in cost reduction. Hence, deregulation should be found where cost reduction is less socially relevant and consumers are more politically powerful, and it should produce lower expected costs only when investment is not sufficiently effective. These predictions hold true under several alternative assumptions and are consistent with data on the deregulation initiatives implemented in 43 US state electricity markets between 1981 and 1999 and on the operating costs of the plants that served these markets. Crucially, these empirical results help rationalize the slowdown of the deregulation wave and are robust to considering the other determinants of deregulation emphasized by the extant literature, i.e. costly long-term wholesale contracts and excessive capacity accumulation.

To evaluate the relative importance of a culture of cooperation and inclusive political institutions, I divide Europe into 120 km×120 km grid cells, and exploit the exogenous variation in both institutions created by medieval history. I document strong first‐stage relationships between present‐day norms of respect and trust and the severity of consumption risk—i.e. climate volatility—over the period 1000–1600 and between the inclusiveness of present‐day regional political institutions and the factors that raised the returns on elite‐citizenry investments—i.e. terrain ruggedness and direct access to the coast. Building on these first stages, I show that only culture has a first‐order effect on income, even after controlling for country fixed effects, proxies for the alternative roles of the excluded instruments, factors modulating the roles of institutions, and intermediate outcomes. Two possible explanations for these results are that more inclusive regional political institutions might have impeded, in the early modern era, state‐building and market integration, and that in modern representative democracies, they are irrelevant in easing the monitoring of politicians by voters when the latter are not morally compelled to punish political malfeasance or the former have weak civic virtues. Macro and micro evidence supports these ideas.

Although the relevance of property rights and transaction costs for trade and innovation are well-known, we still lack a formal framework to think about their origins and interplay. Within trade interactions, fully protecting the original owners' property implies that some high-valuation potential buyers inefficiently refuse to buy it because of transaction costs. When instead property rights are weak, low-valuation potential buyers inefficiently expropriate the original owners' property. The trade-off between these two misallocations entails that property rights will be weaker the larger transaction costs are regardless of whether they are driven by frictions outside the control of traders or determined by the mix of the dispersion in their valuation and either the original owners' market power or their privileged information. A similar conclusion holds true for an upstream firm's property rights on an input necessary to a downstream firm to introduce a new technology and whose cost is random and ex ante non contractible. This time, transaction costs rise with the likelihood of a more productive technology. All these implications survive when a group of traders/innovators has a larger political influence on institutional design and when the disincentive to effort effect of weak property rights is taken into account. Crucially, the model predictions are consistent with the negative effects of proxies for market frictions and failures on measures of the protection of personal, intellectual, and financial property for a panel of 135 countries spanning the 2006-2015 period. Evidence from several identification strategies suggests that these relationships are indeed causal.

Although the relevance of property rights and transaction costs for trade and innovation are well-known, we still lack a formal framework to think about their origins and interplay. Within trade interactions, fully protecting the original owners' property implies that some high-valuation potential buyers inefficiently refuse to buy it because of transaction costs. When instead property rights are weak, low-valuation potential buyers inefficiently expropriate the original owners' property. The trade-off between these two misallocations entails that property rights will be weaker the larger transaction costs are regardless of whether they are driven by frictions outside the control of traders or determined by the mix of the dispersion in their valuation and either the original owners' market power or their privileged information. A similar conclusion holds true for an upstream firm's property rights on an input necessary to a downstream firm to introduce a new technology and whose cost is random and ex ante non contractible. This time, transaction costs rise with the likelihood of a more productive technology. All these implications survive when a group of traders/innovators has a larger political influence on institutional design and when the disincentive to effort effect of weak property rights is taken into account. Crucially, the model predictions are consistent with the negative effects of proxies for market frictions and failures on measures of the protection of personal, intellectual, and financial property for a panel of 135 countries spanning the 2006-2015 period. Evidence from several identification strategies suggests that these relationships are indeed causal.