Abstract
This thesis consists of four self-contained empirical essays. In the first essays "Markets for Risk and Openness to Trade: How are They Related?" (with Helena Svaleryd), we ask if there is an empirical relationship between financial development and openness to trade. Numerous theoretical papers have noted that trade policies can be used as an insurance against shocks from international markets. It follows that the development of markets for risk should reduce the incentives to rely on trade policy for insurance purposes. Feeney and Hillman (2001) explicitly demonstrate how asset-market incompleteness can affect trade policy in a model where trade policy is determined by the lobbying of interest groups. If risk can be fully diversified, special-interest groups have no incentive to lobby for protection, and free trade will prevail. Likewise, trade liberalization might increase the demand for financial services, thereby spurring the development of financial markets. Using several indicators of both openness to trade and financial development, we find an economically significant relation between the two. In particular, the relation holds when using the well known, although criticized (Rodriguez and Rodrik 1999), Sachs-Warner index, and structurally adjusted trade, as indicators of openness. For tariff levels and non-tariff barriers, the results hold only for relatively rich countries. Causality seems to be running both from openness to financial development and the other way around, depending on which indicator and methodology are used. Due to underlying technological differences, industries differ in their need for external financing (Rajan and Zingales, 1998). Since services provided by the financial sector are largely immobile across countries (Pagano et al., 2001), the pattern of specialization should be influenced by the degree of financial development. In the second essay, "Financial Markets, the Pattern of Specialization, and Comparative Advantage: Evidence from OECD Countries" (with Helena Svaleryd), we find this effect to be strong. In fact, the financial sector has an even greater impact on the pattern of specialization among OECD countries than differences in human- and physical capital. Further, the financial sector gives rise to comparative advantage in a way consistent with the Hecksher-Ohlin-Vanek model. Large and active stock markets, as well as the degree of concentration in the banking sector, produce the strongest and most consistent effects. The results also support the view that the quality accounting standards and the legal protection of creditors affect the pattern of industry specialization, while the depth of the financial system (measured by the amount of liquidity in an economy) is a source of comparative advantage. The third essay, "Who Wants Political Integration? Evidence from the Swedish EU-Membership Referendum" looks directly at the determinants of political attitudes towards regional integration and separation. More precisely, the regional voting pattern of the 1994 Swedish EU-membership referendum is analyzed. To explain this variation, an empirical investigation based on the extensive theoretical literature analyzing the determinants of regional economic and political integration is undertaken. Since enhanced possibilities of inter-regional risk sharing is one of the main gains from integration discussed in the literature (e.g Persson and Tabellini, 1996), special attention is given to this issue. The empirical results show that individuals living in labor markets exposed to a high degree of risk were more negative towards EU-membership than those living in safe ones. It is also shown that inhabitants of high-income labor markets, with a high level of schooling and small receipts of central government transfers were relatively positive towards the EU-membership. Given the restrictive regulations limiting discretionary policies within the EU, these results suggest that inhabitants of safe and rich regions voted in favor of secession from the Swedish transfer system, rather than in favor of European integration. In the final essay, "Does Labor Market Risk Increase the Size of the Public Sector? Evidence From Swedish Municipalities", I study if a high degree of private labor-market risk is related to a larger public sector in Swedish municipalities. The theoretical hypothesis is based on Rodrik (1998), who argues (and shows empirically) that countries exposed to a high degree of external risk also tend to have larger governments. The safe public sector is expanded at the expense of risky sectors and hence provides insurance against income volatility. Several problems related to data availability and comparability that apply to cross-country studies are circumvented by using data on Swedish municipalities. Further, there is no need to aggregate the public sector across different levels of governance: local risk is directly related to the size of the local public sector. The paper is not a complete parallel to Rodrik’s study, however. Several alternative insurance mechanisms that do not exist between countries are available between municipalities. For example, the central government provides insurance against individual-specific risk such as unemployment and illness, private capital markets are better integrated within than between countries, and the central government can hand out grants to municipalities. Despite these mitigating factors, local labor-market risk is found to have a substantial impact on municipal public employment. It is also found that shocks increasing the size of the public sector across all municipalities tend to generate a larger increase in risky locations. For municipal public spending and taxation the results are, however, much weaker. Hence, labor-market risk affects the labor intensity of the municipal public sector, rather than its size.