The wealth of a young nation: On voting rights, financing plights, and long-run wealth inequality in Norway

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Edda Torsdatter Solbakken

The Wealth of a Young Nation

On voting rights, ﬁnancing plights, and long-run wealth inequality in Norway

April 30, 2018

Dissertation for the Ph.D. degree Department of Economics

University of Oslo

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© Edda Torsdatter Solbakken, 2018

Series of dissertations submitted to the Faculty of Social Sciences, University of Oslo No. 709

ISSN 1564-3991

reproduced or transmitted, in any form or by any means, without permission.

Cover: Hanne Baadsgaard Utigard.

Print production: Reprosentralen, University of Oslo.

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Acknowledgements

This thesis was written while I was employed at the Research Department at Statistics Norway. I am grateful to Statistics Norway for employing me to work on their project People and their incomes in Norway, 1859-2013, which was ﬁnanced by the Research Council of Norway.

Many people have contributed to this thesis. My supervisors Rolf Aaberge and Kalle Moene deserve special thanks: Rolf for always showing interests in and being willing to discuss my work, continuous encouragements and valuable comments; and Kalle for his unique ability to simplify and inspire which has been essential for the progress and completion of this thesis. I would also like to thank Jørgen Modalsli for valuable input, guidance and introducing me to economic history.

I thank my colleagues at SSB for welcoming me into an inspiring work environment. I especially thank Ingrid Huitfeldt and Hege Gjefsen for valuable comments, proof-reading, and for more support and encouragement than one can expect from colleagues, or even friends. I am also grateful to my fellow PhD students at the University of Oslo for a great collaboration during the course work as well as interesting discussions and nice lunches.

I am thankful to my family and friends for showing interest in my work, great support and getting me out of the oﬃce. Finally, I am grateful to Kristen for endless support and patience, and for his improving cooking skills.

Oslo, April 2018 Edda Solbakken

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The list of questions within economic history is as varied as in most other dis- ciplines. It includes discussions on how and why the world has become increasingly unequal. The ﬁeld also contains extensive studies on how some countries escaped the so called Malthusian trap before others. It also embodies broad topics focusing on why some countries industrialize before others. Why, for instance, did the industrial revolution take place in Europe and not in Asia? And, why did it ﬁrst occur in Eng- land and not in France? These types of questions are studied in new light in economic history by using insights and methods from the social sciences.

Within these broader questions, the discipline explores the role of income distribution, endowments and political institutions for economic progress and change more generally. What role did high wages play to induce change and why were wages high in some places and not in all? Modern economic history is also occupied with questions related to power and dominance. Why, for instance, was it Europeans who conquered the world? How was the Americas incorporated into the global economy? Why has Africa remained the poorest region in the world?

The modern discipline of economic history is also occupied by more speciﬁc changes, maybe special to one country, or a small group of countries, following reforms or new laws. The aim of such narrower studies may be to shed light on the broader context of the process of historical change. The special events may also be of lasting interest in themselves.

My thesis addresses questions related to i) how we should understand and assess the long-term development of wealth and inequality in Norway, a study that can be classiﬁed as belonging to the study of historical change, and to ii) the functioning of democratic rule by exploring the eﬀects of extending the right to vote on public policy, and by exploring the extent of favoritism during the introduction of democracy and

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establishment of the modern Norwegian state.

Parts of my work address questions that ﬁt under the headline of speciﬁc changes.

In the first chapter, I study specific policy changes related to the extension of the suffrage at the beginning of the 20th century. In the second chapter, I use the financing of the central bank to study the extent of favoritism during the establishment of the modern Norwegian state. Yet, the problems studied in all three chapters of my dissertation, I suggest, can clearly be considered either a direct contribution to understand a broad picture, or as building blocks that fit into a broad picture. They address some specific questions that I hope are of importance for how we should understand historical change in Norway from 1800 until today, including the long-run wealth dynamics, the long-term development of democratic rule, and institutions.

The role of institutions and rights for development

Institutions have been given a lot of attention as one of the confounding factors to the large variation in economic development between countries Acemoglu et al. (2001).

When looking at the world today it is a clear correlation between the quality of institutions and the economic development of countries. However, the causal relationship between institutions and economic development may go both ways; good institutions may cause higher development, but the direction could also be reversed. It may be that the good institutions create good investment condition and good conditions for economic growth, or it may be that richer countries aﬀord better institutions.

The search for good instruments to decipher the causal relationship is compre- hensive and the level of inventiveness can be high. In their seminal paper Acemoglu et al. (2001), for instance, the authors use the mortality rate of colonial settlers as an instrument for the quality of institutions that Europeans brought with them to the colonies.

A way to shed light on the relationship between economic development and the quality of institutions is to examine the quality of institutions under the establishment of countries that today are characterized by high GDP and good institutions. If it is the case that the institutions were well functioning at the time of establishment, this supports the argument for how good institutions contributed to the positive development. The chapter ”Honest Elites?” studies the quality of institutions by investigating the extent of favoritism and rule bending in the establishment of institutions and state administration in Norway, a country that today is characterized by good governance and high GDP per capita.

The presence of favoritism suggests that a country’s institutions are unable to constrain the politicians to act on self-interests. When looking at the world today, there is

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a clear association between the favoritism and the quality of institutions (Hodler and Raschky, 2014). However, the association does not answer whether the ineﬃcient allocation of resources through favoritism hinders economic development, or if economic development strengthens institutions.

There is a growing literature documenting the presence of favoritism in developing countries. When looking at a sample of 47 African countries, Dreher et al. (2016) find that the birth regions of leaders receive substantially more foreign aid from China than other subnational regions. Similarly, Burgess et al. (2015) find that more public funds are invested in the Kenyan regions that share the ethnicity of the president. This bias disappears in periods with democracy. The phenomenon is not unique for the African continent. In Vietnam, Do et al. (2016) find that government officials favor their hometowns in allocation of infrastructure improvements. However, the evidence for favoritism is ambiguous. Looking at the tax rate on different crops, Kasara (2007) finds that crops grown in the ethnical regions of the leaders of the country are taxed higher relative to crops grown in regions inhabited by other ethnical groups. The author argues that it is easier for the political elite to find trusted intermediaries to hinder opposition in their home regions and that this makes it easier to extract more resources. Regional favoritism is not unique for developing countries. Ansolabehere et al. (2002) find that increased representation leads to more state funds per capita in the U.S. Similarly, Fiva and Halse (2016) find that the incumbent regional government invests more intensely in the hometowns of the members of the ruling party in Norway.

However, favoritism seems to be more prevalent in less developed countries Hodler and Raschky (2014).

By examining the institutions ability to constrain the politicians we gain insight in the development of institutions in Norway. The external validity may be limited by the speciﬁc context. In much of the evidence of favoritism from the developing world there is both ethnical and regional dimensions of favoritism. In contrast, Norway had a quite homogenous population. In ethnically divided societies the incidences of favoritism may be much higher. In addition, as Franck and Rainer (2012) has emphasized, favoritism is less prevalent in countries with one religion, which was the case in Norway.

The role played by institutions closely relate to the use of power by diﬀerent groups in society. The many inﬂuential papers by Daron Acemoglu and Jim Robinson reintro- duced the old distinction between de jure and de facto political power in this context.

Here de jure political power refers to laws and institutions in society, including how institutions constrain the ruling elite and how they provide incentives for how politicians act. De facto political power of the elite, in contrast, refers to what leading politicians and strong men in society can do beyond the power that is allocated to

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them by the laws and institutions. Their de facto power includes the ability to bend rules, be corrupt, favor own group-interests, and other forms of misuse of discretionary power and information. In my discussion of to what extent Norway had honest elites, both aspects of power are important.

In addition to the institutions’ ability to constrain the leaders, the degree of co- determination and participation in government can affect the development path. Who has the right to voice their opinion and who has co-determination in a society might impact the polices implemented. Typically, only men with a certain income or wealth had the right to vote in the early Western democracies. Over time universal suffrage has been introduced. As the suffrage has been extended, new groups have been able to participate in the decision making and in shaping the society. New voters may differ from the existing voters in income or preferences. The new voters may also have information about needs in the society that the existing voters do not have. These differences might lead the new voters to vote for different politicians and policies than the existing voters. The change in politicians and policies may again change the development path of the country.

There is a growing literature demonstrating the effect the expansions of the suffrage had on a variety of policy outcomes. The literature covers both the extension of the suffrage to poorer voters and to women.

Theoretically, the Meltzer and Richard (1981) model can be used to see how introducing poorer individuals to the suffrage may lead to more redistribution because the gap between the mean income and the income of the median voter increases. However, the empirical evidence is not so clear. Acemoglu et al. (2015) summarize the literature on democracy and social and economic policies as voluminous and full of contradictions. Several studies find positive correlation between extension of the suffrage and governmental spending, social spending and tax revenues when analyzing the effects of the abolishment of the economic restriction for suffrage in Europe and North America during the 18th and 19th hundreds ((Aidt et al., 2006), (Aidt and Jensen, 2009), (Ace- moglu and Robinson, 2000) and Lindert (1994)). However, one must be careful with causal interpretations as there are problems with the identification strategy for much of this literature (Acemoglu et al., 2015). Yet, using more rigorous identification methods on modern day elections in Brazil, Fujiwara (2015) finds that facilitating voting for less educated voters shifts government spending toward health care that benefits the poor. This is in line with the evidence from suffrage expansions in Europe and North America. Contrary to this, Mulligan et al. (2004) find no significant difference in social and economic policies between democracies and non-democracies in a cross section of countries.

Suﬀrage extensions have also been used to study the consequence of women’s rights

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on development (see e.g. Doepke et al. (2012) for an overview). The findings are in line with the evidence from extending the suffrage to the poor. For the United States, Lott and Kenny (1999) find that the enfranchisement of women coincided with an immediate increase in state government expenditures and revenue, and that the effect continued growing over time as more women took advantage of the franchise.

Looking at the same reforms, Miller (2008) finds that female suffrage increased the health spending and reduced the infant mortality. Similarly, Aidt and Dallal (2008) and Aidt et al. (2006) find that extending the suffrage to women in Western Europe increased social spending. The late introduction of female suffrage in Switzerland in 1971, allows Abrams and Settle (1999) to analyze the effects of female suffrage in more modern times. Their findings confirm that enfranchisement of women increased the social welfare spending.

The chapter ”Gender or Class - What Determines Voting?” adds to both the literature on abolishing the social constraint on the right to vote and the extensions of the right to vote to women. A key contribution of the chapter is that it estimates separate eﬀects for poor and rich women.

The role of wealth inequality for development

The interplay between the distribution of wealth and development is central to many theories attempting to explain the cross-country differences in long-term development (Roine and Waldenström, 2015). The direction of the causal relationship between economic development and inequality is ambiguous; economic development may affect inequality, but inequality may also affect economic development. On the one hand, the concentration of wealth may affect the development. Inequality may stimulate investment and thereby economic development, or inequality may hinder positive social and economic development because of the unequal opportunities it creates. On the other hand, development may impact the inequality of wealth. A common view based on the Kuznets curve hypothesis has been that the inequality in income and possibly inequality in wealth first rises and then declines with economic development, as the proportion of the population that joins high-productivity sectors, and therefore benefits from the economic development, grows (Piketty and Zucman, 2015). A first step to examine the relationship between inequality and development is to assemble empirical evidence for the long-run development in inequality.

The interest in, and the empirical evidence on, the long-run development of inequality have increased dramatically over the last decades. At the start of the millennium Piketty resumed the work of Kuznets and provided empirical evidence for top income shares for France for the twentieth century (Roine and Waldenstr¨om, 2015). Atkinson

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and Piketty (2007) and Atkinson and Piketty (2010) expand this work and use the same methods and types of data for several other countries. The data from these studies, as well as later work, has been made available through the database World inequality database¹. The publication of Thomas Piketty’s Capital in the 21st (2014) century further spurred an interest in the development in inequality in the general public and broadened the debate.

Much of the available research on long-run inequality studies income. This is partly due to the availability of data. The scarcity of data on wealth is both due to lack of estimates of household wealth and the problem of valuating wealth. For income, data has more frequently been collected for income tax purposes. Even though much of the knowledge of the long-run development in inequality is based on income, the discussion on long-run inequality does not necessarily separate between income and wealth. New research is steadily providing more empirical evidence on the development in wealth inequality (see e.g. Roine and Waldenstr¨om (2015), Saez and Zucman (2016) and Alvaredo et al. (2017)).

Based on joint work with Rolf Aaberge and Jørgen Modalsli, I provide fresh evidence for how the distribution of wealth in Norway has evolved. The chapter ”Measur- ing long-run wealth inequality” aims to provide methods to use data sources already available in many countries to construct a time-series for wealth inequality. In contrast to much of the existing literature, the chapter aims at describing the development in the whole wealth distribution, not just the development in top wealth shares.

Empirical Methods

Economic history has traditionally focused on describing large-scale development.

Technical progress has facilitated digitalization of old data sources. The increased availability of data has made it possible to supplement and test existing hypotheses empirically, as well as to create consistent long-run time series describing the development of, for instance, inequality. In other ﬁelds of economics there is a large interest in revealing causal relationships. The new historical data sources have made it possible to also employ these methods on historical events (Diamond and Robinson, 2010).

Causality and Correlation

When trying to disclose causal relationships, randomized controlled trials (RCTs) are considered the hallmark of the scientiﬁc method. However, there are many reasons why performing RCTs is not always possible. In the case of economic history, it is not possible to go back in time to perform a RCT. In other ﬁelds of economics, costs

1http://wid.world/

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and ethical concerns may be some of the hindrances to performing RCTs. In addition, large social phenomena are not necessarily suited for RCTs.

A way of approximating RCTs commonly used in all fields of economics are quasi- experimental methods. On the one hand, such methods are often data consuming, which can be challenging in a historical setting. To perform such methods, it is often required to follow observations over time. The need to link observations over time can be particularly difficult when using historical data. On the other hand, when including the past in the scope of study, the number of potential natural experiments to study increases. The increase in potential natural experiments increases both the probability of finding a natural experiment that can be used to answer the question of interest, and creates opportunities for other questions.

In the chapter ”Gender or Class - What Determines Voting?” the suffrage expansions for municipality elections at the beginning of the 19th hundreds in Norway is used to find the causal effect of including new groups into the suffrage on public health provisioning. The national rules for suffrage create exogenous variation between the municipalities in the share of voters that are new voters after each extension of the suffrage. This exogenous variation makes it possible to identify the causal effect of the new voting groups on public health care provision, using a difference in difference approach. In addition to being able to examine the role of the suffrage extensions on the expansion of the public health care services, the analysis allows for examining the potential gender difference in preferences for public health care services.

Comparability over time

The increased availability of data enables construction of time-series that describes the long-run development in wealth inequality. However, the use of data from diﬀerent time periods requires great attention to the comparability of the data.

The potential differences over time in definitions and scope of the variables is true for all types of economic variables. In the specific case of wealth, there can be great variation in definition of wealth in different sources. Both what is included in the wealth concept, and how different assets are valued, may differ between sources. The recorded wealth can both be gross and net wealth. In the case of wealth estimates taken from tax sources, it can also vary whether the tax under the threshold for taxation is recorded. If such differences between sources are not considered, the resulting series can be misleading.

In the chapter ”Measuring long - run wealth inequality” we use several measures to make the estimates for wealth inequality consistent over time.

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Historical context

The modern Norwegian state was born out of war and turmoil. The country was ruled by the Danish King for more than 400 hundred years and was a poor state. Denmark was allied with France during the Napoleonic Wars. Afterwards, Norway was ceded to Sweden by the winning parties in the Kiel treaty.

After the independence from Denmark, a limited form of democracy was introduced. However, the introduction was not driven by liberal principles and benevolent leaders. On the contrary, the old ruler, the Danish Crown Prince, opened for democracy as a last resort to hinder the transaction of Norway to Sweden. The Danish Crown Prince called for a national assembly, with the agenda to be elected as the King of Norway and hence keep Norway from being ceded to Sweden. To gain legitimacy for the decisions made at the assembly, representatives to the assembly were elected by the people. The assembly resulted in a constitution for the new state. Nevertheless, the Danish Crown Prince failed to keep Norway, and Norway became a separate state under the Swedish King.

The elite had a lot of power in the establishment of the new state. Only a small elite had education and had privileges under the Danish Rule, while most people had little experience with governing. The representatives in the constitutional assembly were largely members of the elite. In addition, the election process for the assembly was constructed so that the government oﬃcials that had held oﬃce under the Danish rule, would have majority in the assembly. Hence, it was not obvious that the laws and regulations established at the assembly would take the preferences of the general public into account. For instance, the right to gather in larger groups was restricted.

This can be interpreted as a way for the elite to keep their power and position in the society (Dyrvik, 2011).

The chapter ”Honest Elites?” exploits this transition to explore the new institutions’ ability to constrain the politicians to act on their self-interests in this context.

In the decades after the independence the new state struggled with low growth and poverty. The main reasons were an unstable monetary situation and decreased exports due to increased protectionism from, among others, the United Kingdom. However, from the middle of the century to the 1870s the country experienced a period of signiﬁcant growth. The growth was mainly driven by high productivity growth in agriculture and increased exports. The ﬁrst wave of industrialization in terms of large-scale manufacturing industry also took place at this time.

After decades with high growth, the Norwegian economy stagnated and experienced low growth from the 1870s until the First World War. The period was characterized by high emigration to North America (Grytten, 2008). It is in this context that the suﬀrage expansions studied in the chapter ”Gender or Class - What Determines

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Voting?” took place.

The chapter ”Measuring long-run wealth inequality” looks at the development of inequality of wealth over the 20th century. Three events have marked the 20th century after Norway gained independence from Sweden in 1905; the First and Second World War; and the discovery of oil in Norwegian territorial waters. The two world wars had very different effects on the Norwegian Economy. During the First World War Norway was officially neutral. The merchant fleet profited greatly in the beginning of the war, and the economy boomed. However, at the end of the war the Norwegian fleet was not able to obtain the neutrality and suffered severe losses.

The losses at the end of First World War marked the start of a severe depression that lasted until the 1930s. During the Second World War Norway was occupied. On the one hand the domestic economy suﬀered from a fall in production and rationing of important goods. On the other hand, the merchant ﬂeet was still operating. In the period after the Second World War, the country experienced high and steady growth. In 1969 oil was discovered in Norwegian territorial waters (Grytten, 2008).

The rents from the oil industry have in large parts gone to the state. It may still be that the introduction of a new proﬁtable sector such as the oil sector have impacted the inequality in wealth.

Ethical concerns

Scholars might view the modern discipline of economic history as misplaced accuracy, where too little information is available to make precise evaluations and solid estimates.

The early work of Engerman and Fogel (1974) on slavery is a good example of some of the methodological disagreements and ethical issues that the discipline has raised.

The book was highly debated from the start. It was questioned whether the slaves covered in the available data were representative enough to make general inferences from the estimates and draw lessons on how slavery worked as an institution. In the more popular debate, the two authors were even accused of defending slavery.

It is of course important to avoid overgeneralizing empirical evidence independently of whether it is in a historical context or not. But being clear, and providing precise numbers if possible, creates space for criticism, reinterpretations and possibly new investigations. That said, stating that the ﬁnancing of the Bank of Norway was not characterized by favoritism and open dishonesty by politicians, is not a demonstration that there was no fraud at all in establishing the institutions of modern Norway.

As in much empirical research, one can ask questions about the potential stigmati- zation following the grouping of people (NOU 2018: 7, 2018). In the chapter ”Gender or Class - What Determines Voting?” I look at the eﬀect of introducing new groups

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into the suffrage. The effect I find is the mean effect of that group. I find that rich men vote for less public provision of health services than women and poor men. This is of course an average effect and can hide large variation in preferences within the group.

In addition, to evaluate the generality of this result, we also must take into account that the ﬁnding is from another time. Therefore, translating this to the present can be both stigmatizing and potentially cause misinterpretation of the results.

Thesis ﬁndings

The chapter ”Gender or Class - What Determines Voting?” adds to the literature in political economy and history on how policies change when the suﬀrage is extended.

One speciﬁc contribution of the chapter is the separate eﬀects of rich and poor women.

Earlier investigations in the literature have only been able to look at the aggregate effect of extending the suffrage to women, and hence not been able to separate whether the effect is driven by women being poorer than men or women having other preferences than men. I find that even rich women prefer more public provision of health services than rich men. This suggest that women prefer a higher provision of health services regardless of income.

The chapter ”Honest Elites?” sheds new light on the quality of institutions and presence of favoritism under the establishment of the modern Norwegian state. I do not ﬁnd any indications of favoritism. The ﬁndings suggest that the new institutions were able to constrain the politicians from acting on their self-interest.

The chapter ”Measuring long-run wealth inequality” provides methods to make use of available tax data to construct long-run series for the development in inequality for the whole wealth distribution, as well as a completely new time-series for the long-run development of wealth inequality in Norway.

Chapter summaries

Chapter 1: Gender or Class - What Determine Voting?

Lessons from expanding the suﬀrage in early 1900s Norway

How people vote may depend on a combination of their preferences and their income.

Previous literature has found that extending the suffrage, both to women and poorer voters, increase the provision of public goods (Aidt et al. (2006), Aidt and Jensen (2009), Fujiwara (2015), Lott and Kenny (1999), Miller (2008), Aidt and Dallal (2008), and Abrams and Settle (1999)). Extending on this literature, the paper investigates whether the voting difference between men and women can be explained by income differences alone.

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To shed light on what causes the difference in voting between men and women, this chapter uses the extension of suffrage in Norway during the early 1900s. The suffrage was extended in steps to poor men, rich women and poor women, which make is possible to estimate separate effects for rich and poor, and men and women.

The motivation for the chapter is twofold. First, a growing literature documents that women care more for the wellbeing of children and social welfare in general. This have led many to suggest that female empowerment is not just a goal of equal treatment, but a way to promote development in poor countries (Miller, 2008). Focusing on women instead of on the poor in general may be misleading if the differences in revealed preferences between men and women are due to differences in income. Secondly, in an historical perspective, the extensions of the suffrage coincided in time with large changes in the society. Among them was a dramatic decrease in infant mortality and an increase in health personnel. The paper investigates whether there is an association between the extension of the suffrage and the increase in public health services and reduced mortality rates.

The fact that when people got the right to vote in municipality elections depended both on their gender and their household incomes, makes it possible to estimate separate eﬀects on the supply of public goods for poor men, rich women and poor women.

Rich men had had the right to vote in municipality elections since the early 18th hundreds. The suffrage was then extended to all men and women from rich households in 1901, and in 1910 to all women. The income threshold for gaining the right to vote was set by the central government and was equal across all municipalities. The threshold was set just above the national median household income, so what is referred to as rich and poor can be read as above and below the median. The share of new voters with each extension of the suffrage differs between municipalities due to different income levels in different municipalities. This variation makes it possible to identify the causal effect of the new voters by comparing the change in outcomes in municipalities with a high share of new voters with the change in outcomes in municipalities with a low share of new voters, controlling for between municipality variation and between year variation with municipality and year fixed effects.

At the time of the suffrage extensions there were also private health care services available for those who could pay. In the paper a simple theoretical model is constructed to pin down the main hypotheses. In the model the voters can choose between private and public provision of health care and may differ both in income and preferences. Further, the probabilistic voting approach is used to see how the supply change in health services following the suffrage extensions will differ depending on the difference in preferences between men and women. The model leaves the following three assertions: If the gender difference in voting is caused by women being poorer

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than men, enfranchisement of both poor men and poor women increases public provision of health care. If the gender diﬀerence in voting is caused by women caring more for health provision to own family than men, the enfranchisement of poor women increases the public provision of health care more than the enfranchisement of poor men.

If the gender diﬀerence in voting is caused by women caring more for health provision to the community, the enfranchisement of both rich and poor women increases the public provision of health care.

The empirical results are in line with both the hypotheses of women caring more for health provision to the community, as well as with women caring more for health service to their own family. The results suggest that rich women demand a higher supply of doctors than what rich men do. If we believe that both rich women and rich men have access to private doctors, the increase in supply driven by the enfranchisement of rich women indicates that the rich women care more about others access to health services than what rich men do. Yet, the rise in supply may also be caused by women having less access to the household resources than their husbands. Alternatively, some rich households may have high incomes, but not so high that private provision is cheaper for them than public provision of health care and that women prefer more supply of health care to their own family than their husbands.

When poor women are enfranchised, poor men have already had the right to vote in three elections. Still, the results suggest that the supply of vaccinators increased following the enfranchisement of poor women. This indicates that there are gender diﬀerences in the preferences for what types of public good one prefers also among the users of the public goods. Yet, the rise in supply of vaccinators may also be interpreted as more force to similar demands from poor men or rich women who had not yet succeeded in getting the demand implemented.

Chapter 2: Honest Elites?

The allocation of the tax burden to ﬁnance the central bank of Norway

Poor countries are often poorly governed. Young nations without strong democratic institutions and traditions seem to be particularly hard hit by bad governance. The weak institutions make it possible for the leaders to distribute policies and favors in exchange for political support. Favoritism of some sort seems to be typical for nations with weak democratic institutions and a new state apparatus. Accordingly, diﬀerences in economic development across countries are often explained by diﬀerences in the institutions’ ability to constrain the rulers (Baland et al. (2010), Meredith (2005)).

The causal relationship between institutions and economic development, however, can be ambiguous; strong institutions may spur economic development, or rich countries

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may aﬀord better institutions. One way to explore the relationship between economic performance and favoritism is to explore establishment of institutions in countries that today are characterized as developed countries.

This is the topic of ”Honest Elites?”. The chapter sheds light on the extent of favoritism and rule bending in the establishment of institutions and state administration in Norway, a country that today is characterized by good governance and high GDP per-capita. I use the allocation of a speciﬁc tax to detect the extent of favoritism and rule bending empirically.

After the Napoleonic Wars, Norway went from being ruled by the Danish King to an independent state under the Swedish King. With this transition a limited democracy was introduced. Building own institutions became important for the Norwegian state in order to gain as much independence as possible in the new union. One of these institutions was the central bank. A requirement to establishment a central bank was to obtain suﬃciently large reserves. The chapter explores the degree of favoritism in the process of obtaining these funds. Favoritism can take place in both the construction of the law and the implementation of the law concerning the establishment of the bank. To investigate the presence of favoritism in both stages, the analysis is twofold;

ﬁrst, I explore the process and proposals leading up to the law; second, I investigate empirically the presence of favoritism in the implementation of the law.

In the ﬁrst part of the analysis, the law is interpreted as favoring certain groups if they are exempted from paying their share of, or gain disproportionate control over, the bank. Several of the proposals for the law favored certain groups. However, none of these proposals passed through the Parliament. The ﬁnal law did not favor certain groups on paper. The bank ended up being funded by forced deposits. Since the deposits were involuntary and risky, they are referred to as a tax. The allocation mechanism of the tax burden opened for favoritism.

The law stated that the tax was to be assessed according to the magnitude of individuals’ wealth. However, individuals’ wealth was not formally valued before the tax was issued. Instead, the tax burden was distributed in three steps. First, the parliament representatives allocated the tax burden onto the diﬀerent constituencies.

Second, an elected commission in each county allocated the tax burden to the municipalities within the county. Last, an elected commission in each municipality allocated the tax burden across individuals within the municipality. The lack of formal evaluation of peoples’ wealth, and the involvement of politicians in the allocation process of the tax burden, open for favoritism. The involvement and potential favoritism per- formed by the parliament representatives is the focus of the chapter. It is a sign of favoritism if the constituencies and municipalities with higher representation receive a lower tax burden. Measures of political representation and wealth estimates from

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other sources are used to analyze the presence of favoritism empirically.

The empirical analysis provides no evidence of favoritism. If the parliament representatives favored their constituencies, municipalities, or themselves, there should be a systematic association between the representation of an area and the tax burden allocated to the area. First, it is a sign of favoritism if constituencies with higher representation in parliament received less of the tax burden. The results suggest that this is not the case, if anything; constituencies with higher representation received a higher tax burden. Second, it is a sign favoritism if municipalities where the parliament representatives resided received less of the tax burden or taxed more people without the right to vote. The parliament representatives were not supposed to be formally involved in the county commissions’ allocations of the tax burden to municipalities, or the municipality commissions’ allocation of the tax burden onto individuals. However, the parliament representatives may have interfered to beneﬁt themselves. The results give no suggestion of such involvement. If anything; the municipalities where parliament representatives resided, received a higher tax burden relative to their wealth, and fewer people without the right to vote were taxed. In addition to the parliament representatives, the economic elite can have interfered in the allocation of the tax burden to beneﬁt themselves. The results indicate that the economic elite did not interfere, at least not successfully, in the allocation of the tax.

The absence of favoritism in the allocation of the tax burden may be caused by the elites being honest, or by the country’s new institutions being able to constrain the elites from acting in their self-interest. In the discussion leading up to the ﬁnal law, the politicians seem not to be constrained by the institutions. Several of the proposals presented in the discussion regarding the law suggest that the parliament representatives attempted to favor certain groups. These proposals indicate that the politicians wanted to favor certain groups and that the lack of favoritism in the allocation of the tax burden is due to the institutions’ ability to constrain the politicians. However, it may also be that the parliament representatives had respect for the laws once they were passed and did not attempt to favor themselves, or others, in the implementation of the law.

Chapter 3: Measuring Long-Run Wealth Inequality Co-authored with Rolf Aaberge and Jørgen Modalsli

The topic of inequality and its evolution over time has been the center of heated debates over the last years. While the evidence on the evolution of income inequality is increasing, evidence on wealth inequality is still available only for a few countries, and often with sparse data (Roine and Waldenstr¨om, 2015). As for the development in

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inequality of income, knowledge about the evolution of distribution of private wealth is important to understand economic growth and inequality.

Using Norway as an example, this chapter (co-authored with Rolf Aaberge and Jørgen Modalsli) explores the potential for estimating overall wealth inequality based on a variety of diﬀerent data sources, which are available in many countries. In contrast to many previous studies, we aim to go beyond top wealth shares, and estimate the Gini coeﬃcient for the distribution of wealth for the 20th century.

The analysis proceeds in three steps. Our point of departure is wealth data from tax records. For the early parts of the analysis, data on the wealth distribution are available for selected years in tabulations. From 1967 onwards, wealth at the household level is available from administrative tax registers. The wealth tabulations, as well as administrative tax registers until 1995, list only wealth holdings that are taxed.

This restriction creates problems for the comparability over time as the threshold for taxation increase signiﬁcantly several times. As the threshold increases, the number of recorded wealth holders decline. Restricting the analysis to tax reported wealth data may therefore result in an incorrect description of the evolution of wealth inequality over time. In the most extreme case, the change in the threshold for taxation leads to a 16 per cent increase in the Gini coeﬃcient from one year to another. To produce a consistent long-run series, we show how estimates from previous years can be used to correct the estimates after an increase in the tax threshold.

A shortcoming of using tax records as a source of wealth estimates, is the undervaluation of certain assets. To alleviate this shortcoming, we start out by accounting for the undervaluation of housing. While housing is a major component of personal wealth, it has been undervalued in tax-assessed wealth in Norway, as in many other countries. From the mid-1990’s onwards, we rely on imputed market values for housing from Stubhaug (2017), based on market transactions and detailed household data.

Further, we present a novel imputation method to extend these results back to 1969.

Accounting for market values of housing decreases the estimated Gini coeﬃcient with about 25 per cent in 1970 but does not alter the development in inequality over time.

To further explore the potential shortcomings of the wealth estimates from tax records, we construct a series for the total wealth. The series for total wealth is constructed with a combination of estimates of total private wealth from balance sheets, private capital accumulation from National Accounts and data on market prices for different assets. The estimates for total wealth exceeds the total tax-assessed wealth greatly. By distributing the wealth that is not assessed on the distributions of tax- assessed wealth in different manners, we sketch out some possible harmonized series of the evolution of inequality. The level of inequality differs greatly depending on how we distribute the excess wealth, however, all the series show the same development

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over time.

The resulting series for the wealth inequality differs in level depending on which of the three methods above that are used to measure the inequality. However, the evolution in inequality over time is robust to the choice of methodology. All three methods show that wealth inequality in Norway was high and increasing in the early twentieth century, fell substantially from 1938 until the mid-1970’s, and has increased significantly since the mid-1980s. The difference in levels of inequality depending on the method and data used emphasizes the importance of harmonizing the methods and data when comparing inequality over time and between countries.

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CHAPTER I

Gender or Class - What Determines Voting?

Lessons from expanding the suﬀrage in early 1900s Norway

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Gender or Class - What Determines Voting?

Lessons from expanding the suﬀrage in early 1900s Norway

^∗

Edda Solbakken

^†

April 30, 2018

Abstract

Previous literature has found that extending the suffrage to females and abolishing the economic constraint for suffrage seems to increase the supply of public goods. This paper sheds light on whether the difference in voting between men and women can be explained by differences in income alone, or if there exist gender specific differences in preferences. The timing of introduction to suffrage in municipality elections in the early 1900s in Norway depended both on gender and income.

That the income threshold for suffrage was set nationally and that the income level varied between municipalities, creates variation across municipalities in the share of new voters following each extension of the suffrage. This variation allows me to estimate separate effects for the change in supply of public health personnel following the extension of suffrage to poor men, rich women and poor women. I find that the enfranchisement of both poor men and rich women increases the supply of doctors relative to when only rich men had the right to vote, and that the enfranchisement of poor women increases the supply of vaccinators relative to when only rich men and women and poor men had the right to vote. This indicates that the gender differences in voting is caused by differences in preferences as well as income.

∗This paper is a part of the research project ”People and their incomes in Norway, 1859-2013” (231625) ﬁnanced by the Norwegian Research Council. I thank Rolf Aaberge and Kalle Moene for help and advice, and Ingrid Huitfeldt, Hege Marie Gjefsen, Matteo Alpino, Andreas Kotsadam and Sturla Løkken for helpful discussions, suggestions and comments at various stages at this project. Comments from seminar participants at UIO, SSB and the The 41th Annual Meeting of the Norwegian Association of Economists are gratefully acknowledged.

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1 Introduction

How individuals vote may depend both on their preferences and their income. Both extending the suffrage to females and abolishing the economic constraint for suffrage seems to increase the supply of public goods (Aidt et al.(2006), Aidt and Jensen(2009), Fujiwara (2015), Lott and Kenny (1999), Miller (2008), Aidt and Dallal (2008), and Abrams and Settle (1999)). Is this because women are less well-off than men or because they care more about others?

By using the extensions of the suffrage in the early 1900s, this paper sheds light on whether the difference in voting between men and women can be explained by differences in income alone, or if there exist gender specific differences in preferences.

Understanding whether women have other preferences for policies than men is important both today an historically. The growing literature documenting that women have stronger preferences for children’s wellbeing and social welfare in general, have led many to think that female empowerment is not just a goal of equal treatment but a way to promote development in poor countries (Miller,2008). If the differences in revealed preferences between men and women are due to differences in income, the focus on women instead of the poor can be misleading. From an historical perspective, it is interesting to see whether the change in policies coinciding with the extension of the suffrage to women is associated by the introduction of the female suffrage.

Separating social preferences by gender and economic status is difficult empirically, because demographic and socioeconomic characteristics may be overlapping. Preferences, gender and economic status can be studied in surveys. However, participation in surveys is voluntary, and participation may be correlated with preferences. People might also answer dishonestly or differently if they were forced to make real trade-offs (Brunner et al., 2011).

This paper separates gender and economic status by exploiting the extension of suffrage in Norway from 1901 and onwards. New groups got the right to vote depending both on their gender and their income. Rich men got the right to vote in the early 18th hundreds, the suffrage was then extended to all men and women from rich households in 1901, and in 1910, to all women in municipality elections. The income threshold for gaining the right to vote was set by the central government and was equal across all municipalities. The threshold was set just above the national median household income, so what is referred to as rich and poor can be read as above and below the median. Due to different income levels in different municipalities, the share of new voters with each extension of the suffrage differs between municipalities. This makes it possible to identify the causal effect of the new voters by comparing the change in outcomes in municipalities with a high share of new voters with the change in outcomes in municipalities with a low share of new voters. Since the suffrage is extended to poor men, rich women and poor

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females in separate years, it is possible to ﬁnd separate eﬀects for the three groups.

The Meltzer and Richard (1981) model can be used to see how introducing poorer individuals to the suffrage may lead to more redistribution because the gap between the mean income and the income of the median voter increases. However, the empirical evidence is not so clear. Acemoglu et al. (2015) summarize the literature on democracy and redistribution as voluminous and full of contradictions. Looking at the abolishment of the economic restriction for suffrage in Europe and North America during the 18th and 19th hundreds, several studies find positive correlation between extension of the suffrage and governmental spending, social spending and tax revenues ((Aidt et al., 2006), (Aidt and Jensen,2009), (Acemoglu and Robinson, 2000) andLindert (1994)). However, there are problems with the identification strategy for much of this literature, so one must be careful with causal interpretations (Acemoglu et al., 2015). Comparing Brazilian states that introduce new election technology at different points in time, Fujiwara(2015) finds that facilitating voting for less educated voters shifts government spending toward health care that benefits the poor. Contrary to this, Mulligan et al. (2004) find no significant difference in social and economic policies between democracies and non-democracies in a cross section of countries.

Using the variation in the timing of the introduction of female suffrage across the United States, Lott and Kenny (1999) find that the enfranchisement of women coincided with an immediate increase in state government expenditures and revenue, and that the effect continued growing over time as more women took advantage of the franchise.

Looking at the same reforms, Miller(2008) finds that female suffrage increased the health spending and reduces the infant mortality. Similarly, Aidt and Dallal (2008) and Aidt et al. (2006) find that female suffrage increased social spending in Western Europe, but had no effect on the total budget. The late introduction of female suffrage in Switzer- land in 1971, allows Abrams and Settle (1999) to compare the changes in governmental spending in Switzerland to changes in neighboring countries where females already had the right to vote. Their findings confirm that enfranchisement of women increased the social welfare spending also in more modern times. ¹

The gender diﬀerences in voting have been explained by women having less economic resources than men. Abrams and Settle (1999) claim that the increase in social spending coinciding with the enfranchisement of women is at least partly due to the decisive voter shifting down the the income distribution. Edlund and Pande (2002) link the increasing gender gap in political preference in the United States to the decrease in marriage rate.

They argue that men transfer resources to women in marriage and thus men become richer and females poorer when the marriage rate goes down. Edlund et al. (2005) conﬁrm that these results hold also when looking at Western Europe. In contrast, Funk and Gathmann (2015) ﬁnd that the gender gap holds even when controlling for characteristics such as

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age, education and income.² They conclude that the gender gap is a result of gender speciﬁc preferences.

In comparison to the studies above, this paper has a clearer identification strategy to separate rich from poor within genders and does not depend on survey data. The timing of enfranchisement did not only depend on the gender, but a combination of gender and economic status. Thus we can infer how different groups’ demand for public goods vary by looking at the changes in policy after their enfranchisement. A concern when using the timing of enfranchisement to infer causal interpretations, is that other factors may cause both changes in the rules for suffrage and changes in the outcome of interest. This is not a concern since I am comparing changes across municipalities with the same rules for suffrage. The variation in the representation of different groups between municipalities stems from the income thresholds for suffrage. Since the income level varies between municipalities we get variation in the share of voters that are new voters after each extension of the suffrage and can compare the changes in municipalities with a high share of new voters to municipalities with a low share of new voters, controlling for between municipality variation and between year variation with municipality and year fixed effects.

This paper focuses on the provision of public goods in terms of health services. Health services is chosen for more than one reason. Prior to the extension of the suﬀrage there was very low supply of public health personnel. During the extension there was massive expansion that was unevenly distributed across municipalities. The timing of the extension of the suﬀrage also coincides with a dramatic fall in the infant mortality rate from a very high initial level. The combination of high mortality rates and low provision of health services makes it likely that the demand for public services was a salient feature of the elections at the time.

It is not possible to identify the different groups’ demand for health services directly, but I infer their demand for health provision by looking at the change in supply of health personnel following the enfranchisement of the different groups. I look at three types of health personnel; midwives, vaccinators and doctors. We expect the enfranchisement of different voting groups to alter the supply of health personnel, depending largely on who benefited from the public provision of health personnel. The publicly provided health personnel did not have monopoly. There were several private practitioners and for the well-of it was possible to pay for one’s own health services without having to contribute to other’s access to health services by demanding it publicly provided and paid for by taxes.

The expected changes in the public provision of health services following the franchise

2Funk and Gathmann (2015) use surveys containing both whether and what individuals voted under federal ballots and a broad range of socio-economic characteristics. The surveys are held shortly after the elections thus Funk and Gathmann(2015) argue they can measure the survey accuracy perfectly by comparing the approval of policies in the survey to the actual approval from oﬃcial ballot statistics.

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extensions differ depending on what we believe causes the gender differences in voting. By looking at how different voting groups affect the supply of health personnel it is possible to pin down whether class or gender determines voting.

We have the following three assertions:

i. If the gender diﬀerence in voting is caused by women being poorer than men, enfranchisement of both poor men and poor women increases public provision of health care.

ii. If the gender diﬀerence in voting is caused by women caring more for health provision to own family than men, the enfranchisement of poor women increases the public provision of health care more than the enfranchisement of poor men.

iii. If the gender diﬀerence in voting is caused by women caring more for health provision to the community, both the enfranchisement of rich and poor women increase the public provision of health care.

Below I make these assertions clear in a small model of the demand for public goods.

The empirical results show to be consistent with the hypotheses about gender speciﬁc preferences for health provision both to one’s own family and to the community. The results suggest that rich women demand a higher public supply of doctors than rich men do. Since both rich women and rich men have access to private doctors, the increase in public supply driven by the enfranchisement of rich women indicates that the rich women care more about others access to health services than rich men do. The enfranchisement of poor men alters the supply of doctors relative to when only rich men had the right to vote. This suggests that income, and thereby the accessibility to private alternatives, do impact the demand for public provision of health personnel. When poor women are enfranchised in Norway, poor men have already had the right to vote in three elections.

Still, we see an increase in the supply of vaccinators following the enfranchisement of poor women. The increase indicates that there are also gender specific differences in the preferences for health provision to one’s own family. The results are robust to including municipality specific trends, and when shown graphically in an event-study it is clear that they are not driven by secular trends.

The remainder of the paper is structured as follows. Section 2 provides a theoretical framework for how the expected changes in the supply of health personnel may depend on gender diﬀerences in voting. Section 3 presents the institutional setting. Section 4 discusses the empirical strategy. Section 5 introduces the data. Section 6 presents the empirical results. Section 7concludes.

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2 Suﬀrage Reforms

Throughout, I follow the order of suffrage extensions in Norway and build on the fact that rich men for a long time had had the right to vote. The suffrage was extended in steps to poor men, rich women and poor women. To pin down my main arguments, and hypothesis for the empirical part of the paper, I construct a simple model of how the public provision of health care can be thought of in a situation where there is also a private alternative that can serve those who can pay. As stated, this was the situation when the suffrage was extended in the beginning of the 1900s.

Political competition and new voters

The basic idea of the arguments that follow is how extending the suﬀrage changes the composition of voters. The voters’ income cannot be directly identiﬁed in the data. Yet, it is possible to infer something about the voters’ income by observing when they got the right to vote, since it depended on their income.

When the suﬀrage is extended, the new voters may have diﬀerent political demands than the existing voters. The new voters can thus change the political balance and may induce a change in the public provision of health services, as political parties adjust their programs and promises to capture some of the votes of the new voters. Theoretically, a simple way to represent this political competition in the municipalities is to use the probabilistic voting approach (see Persson and Tabellini (2000)).

In probabilistic voting, each voter is considered to have preferences over policies that may be based on their own interests, possibly including social care for others. ln addition, voters have personal sympathies that from the perspective of the politicians are like random variables. Hence, depending on which political promises and programs that are made, each political candidate (or party) can in principle calculate the expected vote share they will obtain, and what the probability of winning is.

In theory at least, political competition among parties, that are basically interested in winning the election, leads to convergence of policies across the competing candidates.

The policies that politicians promise to implement, are obtained by taking account of a weighted average of the interests or preferences of the voters. For simplicity, we can think of this as a weighted average of the ideal policy of the different groups. The entrance of new groups typically changes the policies in the direction of the ideal policy of the new voting group or groups. Hence, the focus of the following model is to find the ideal policy for groups of voters by constructing a generic set of preferences for health care and take in to account the difference in income between the groups.

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Preferences and incomes

The new voters can differ from the existing voters in three ways: income, the evaluation of health services for their own family, and the evaluation of health services for the community. To set the stage, let the health service that is provided by the municipality, k_m, and by the private market, k_p, be close substitutes. The voters can choose between demanding the k_m through elections or buy k_p in the market. Publicly provided health services are available to everyone in the municipality and is assumed to be financed by a flat marginal tax rate, t on household income, y. Privately provided health services, k_p, are only available to those who buy them. The market price is p. The only differences between the public and private health services are the providers and the price.

One way to represent the electorate’s demands is to assume that all voters have some basic preferences in common, but that they may diﬀer in the weight they put on the diﬀerent components in their overall utility and in their economic opportunities to satisfy their preferences. When k_m and k_p are close substitutes, it is natural to represent a typical voter’s utility of health services provided to the family members by an increasing and concave utility function H(k_p+k_m). For any level of public provision, k_m, the voter can top up the provision by demanding k_p in addition. Or, the voter may rely completely on private provision. The voter’s social utility of health services provided to everybody in the community can be represented by the increasing and concave function A(k_m). Finally, let U be an increasing and concave utility function of private non-health consumption C =y(1−t)−pk_p, and ¯y the mean income in the municipality. A balanced municipality budget implies k_m= ¯yt.

Now, the overall utility of a generic voter can be represented by

V =U(C) +βH(k_m+k_p) +γA(k_m) (1) The voters have three characteristics; their household income; their evaluation of health services for their own family; and their evaluation of health service for the community. As mentioned, the potential diﬀerences between voters in their evaluation of health services for their own family and/or the community are represented by the weights, β andγ, that they put on the diﬀerent utilities H and A.

Private or public provision

The real price of the public provision, k_m, isy/y¯for a household with income y. Hence, rich households pay more for public provision than poor households. Regardless of the voters’ utility of community’s access to health services, a voter always prefers public provision over private provision of health services to their own family if the household

The wealth of a young nation: On voting rights, financing plights, and long-run wealth inequality in Norway

Edda Torsdatter Solbakken