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We find evidence consistent with the hypothesis that governments in poor countries have a more left wing rhetoric than those in OECD countries. A possible explanation is that corruption, which is more widespread in poor countries, reduces the electoral appeal of capitalism more than that of socialism. The empirical pattern of beliefs within countries is consistent with this explanation: people who perceive corruption to be high in the country are also more likely to lean left ideologically and to declare to support a more intrusive government in economic matters. Finally, we show that the corruption-left connection can be explained if corruption is seen as unfair behavior on the part of capitalists. Voters then react by moving left, even if this is materially costly to them. There is a negative ideological externality since the existence of corrupt entrepreneurs hurts good entrepreneurs by reducing the general appeal of capitalism.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jpubeco.2006.05.013 Byline: Rafael Di Tella (a), Robert MacCulloch (b) Keywords: Optimal unemployment benefits; Labor market institutions; Hysteresis Abstract: We show how the differences in US and European institutions can arise in a normative model. The paper focuses on the labor market and the government's decision to set unemployment benefits in response to an unemployment shock. The government balances insurance considerations with the tax burden of benefits and the possibility that they introduce adverse 'incentive effects' whereby benefits increase unemployment. It is found that when an adverse shock occurs, benefits should be increased most when the adverse incentive effects of benefits are largest. Adjustment costs of changing benefits introduce hysteresis and can help explain why post-oil shock benefits remained high in Europe but not in the US. Desirable features of the model are that we obtain an asymmetry out of a symmetric environment and that the mechanism yielding hysteresis is both simple (requires the third derivative of the utility function to be non-negative) and self-correcting. Empirical evidence concerning the role of corporatism is discussed. Author Affiliation: (a) Harvard Business School, Morgan Hall, Soldier Field Road, Boston, MA 02163, USA (b) Imperial College London, South Kensington Campus, London SW7 2AZ, England Article History: Received 21 March 2006; Revised 30 March 2006; Accepted 2 May 2006 Article Note: (footnote) [star] We thank Fernando Alvarez for generous ideas and suggestions as well as Tim Besley, Alan Manning, Juan Pablo Nicolini, Jorn-Steffen Pischke, Julio Rotemberg and Justin Wolfers as well as seminar participants at London School of Economics, MIT (macro), Harvard (labor), UTDT, Stanford (political economy), University of Pennsylvania (economics), the Milan (2000) conference of the European/American Association of Labor Economists.

We introduce a new data set on hiring and firing restrictions for 21 OECD countries for the period 1984-1990. The data are based on surveys of business people in the countries covered, so the indices we use are subjective in nature. Controlling for country and time fixed effects, and using dynamic panel data techniques, we find evidence that increasing the flexibility of the labor market increases both the employment rate and the rate of participation in the labor force. A conservative estimate suggests that if France were to make its labor markets as flexible as those in the US, its employment rate would increase 1.6 percentage points, or 14% of the employment gap between the two countries. The estimated effects are larger in the female than in the male labor market, although both groups seem to have similar long-run coefficients. There is also some evidence that more flexibility leads to lower unemployment rates and to lower rates of long-term unemployment. We also find evidence consistent with the hypothesis that inflexible labor markets produce 'jobless recoveries' and introduce more unemployment persistence. JEL classification: J65 Keywords: Job security provisions; Subjective data; Employment; Unemployment