National security.

The NBER's Working Group on National Security, directed by NBER President Martin Feldstein of Harvard University, met in Cambridge on February 25. These papers were discussed:

Ilyana Kuziemko and Eric Werker, Harvard University, "How Much is a Seat on the Security Council Worth? Foreign Aid and Bribery at the United Nations"

Chris Rohlfs, University of Chicago, "How Much Did the U.S. Government Value its Troops' Lives in World War II? Evidence from Dollar-Fatality Tradeoffs in Land Battles"

Daniel L. Chen, University of Chicago, "Islamic Resurgence during the Indonesian Financial Crisis"

Claude Berrebi, RAND Corporation, and Esteban F. Klor, Hebrew University, "On Terrorism and Electoral Outcomes: Theory and Evidence from the Israeli-Palestinian Conflict"

Hugh Rockoff, NBER and Rutgers University, "Until It's Over, Over There: The U.S. Economy in World War I" (NBER Working Paper No. 10580)

Change-Tai Hsieh, University of California, Berkeley, and Enrico Moretti, NBER and University of California, Berkeley, "Did Iraq Cheat the United Nations? Underpricing, Bribes, and the Oil for Food Program"

Matthew Gentzkow, University of Chicago, and Jesse M. Shapiro, Harvard University, "Media Bias and Reputation"

Ten of the 15 seats on the UN Security Council are held by rotating members serving two-year terms. Using country-level panel data, Kuziemko and Werker find that foreign aid receipts can rise substantially during a rotating member's tenure on the Security Council: U.S. economic aid increases by 77 percent and UN development aid rises by 42 percent to countries that serve during a typical important year for the council. The authors find that the positive effect of the Security Council on aid is much greater during years when key diplomatic events take place. Further, the increase in aid disappears immediately after a rotating member's tenure ends. The aid increases are larger for small countries and non-democratic countries. These results are consistent with U.S. and UN aid being used to influence the votes of rotating members. While German foreign aid displays remarkably similar patterns to that of the United States and the UN, the aid outlays of other major donor nations seem unaffected by the Security Council status of recipients.

Rohlfs uses battle-level data to estimate the rate at which the U.S. Army traded dollars for fatalities in World War II. Using data from 164 engagements, he estimates the effects of American and German troops and tanks on mission accomplishment and U.S. battle fatalities. He supplements these data with cost estimates compiled from archived U.S. Army records. Rohlfs finds that the Army could have reduced fatalities by increasing its use of tanks and decreasing its use of ground troops. In 2003 dollars, his preferred estimates suggest that this policy would have cost $1 million to $2 million per life saved. This figure appears roughly similar to citizens' willingness-to-pay to avoid fatality risk

In one paper, Chen exploits relative price shocks induced by the Indonesian financial crisis to demonstrate a causal relationship between economic distress and religious intensity and to ask why it exists. Using precrisis wetland hectares and government occupation as instruments, and dryland hectares and service occupation as "placebo instruments," Chert estimates the impact of economic distress on religious intensity. Economic distress stimulates Koran study and Islamic school attendance but does not stimulate other social activities or secular school attendance. The results seem attributable to the role of religion as ex-post social insurance: credit availability reduces the effect of economic distress on religious intensity by roughly 80 percent; religious intensity alleviates the need for alms or credit to meet basic needs at the peak of the crisis; and religious institutions facilitate consumption smoothing among villagers. Chen explains these findings in a model where religious intensity represents the degree of social insurance in which people participate, and social sanctions facilitate the function of religion as ex-post insurance. Together, these results show that religious intensity responds to economic forces: alleviating risk may mitigate fundamentalist tendencies. In a second paper, Chert exploits differences in religious intensity across Indonesia before and during the Indonesian financial crisis, and relative price shocks induced by the crisis, to identify the effect of economic distress on the relationship between religious intensity and social violence. He finds that religious intensity before the crisis and social violence after the crisis are strongly associated. Social violence is negatively associated with other social activities. Religious intensity is more strongly linked with social violence in regions that are more economically distressed. In other words, economic distress appears to have a causal impact on the link between religious intensity and social violence. Credit availability mitigates this effect. Chen explains these findings in a model where high marginal utilities during economic distress increase incentives for group conflict which in turn increases the budget of insurance groups. With volatility, religions with stronger sanctions or violence are more stable and successful. As volatility declines, benign groups and religions become relatively successful.

Berrebi and Klor investigate the interaction between terror attacks and electoral outcomes in Israel. They analyze a dynamic model of reputation that captures the salient characteristics of this conflict. The theoretical model generates two precise empirical predictions about the interaction between terrorism and electoral outcomes: the relative support for the right-wing party should increase after periods with high levels of terrorism and decrease after periods of relative calm; and, the expected level of terrorism is higher when the left-wing party is in office than during the term of the right-wing party. The authors test these hypotheses with a newly created dataset on terrorist attacks in Israel between 1990 and 2003. The first hypothesis is strongly supported by data culled from public opinion polls about the Israeli electorate's political preferences. As to the second hypothesis, the results support the theoretical prediction for three of the four Israeli governments that served during the time period studied. That is, terror attacks escalated when left-wing governments served and decreased during the terms in office of tight-wing governments.

The process by which the U.S. economy was mobilized during World War I was the subject of considerable criticism both at the time and since. Nevertheless, when viewed in the aggregate, the degree of mobilization achieved during the short period of active U.S. involvement was remarkable. The United States entered the war in 1917 having made only limited preparations. In 1918, the armed forces were expanded to include 2.9 million sailors, soldiers, and marines; 6 percent of the labor force in the 15-to 44 age bracket. Overall in 1918, one fifth or more of the nation's resources was devoted to the war effort. By the time the Armistice was signed in 1919, a profusion of new weapons was flowing from American factories. Rockoff describes how mobilization was achieved so quickly, including how it was financed, and some of its longterm consequences.

From 1997 through early 2003, the UN Oil for Food Program allowed Iraq to export oil in exchange for humanitarian supplies. Hsieh and Moretti measure the extent to which this program was corrupted by Iraq's attempts to deliberately set the price of its oil below market prices in an effort to solicit bribes, both in the form of direct cash bribes and in the form of political favors, from the buyers of the underpriced oil. The authors infer the magnitude of the potential bribe by comparing the gap between the official selling price of Iraq's two crude oils (Basrah Light and Kirkuk) and the market price of several comparison crude oils during the Program to the gap observed prior to the Program. They find consistent evidence that underpricing of Basrah Light averaged $1 per barrel from 1997 through 1999 and reached a peak (almost $3 per barrel) from May 2000 through September 2001. The estimated underpricing declined quickly after the UN introduced a retroactive pricing scheme that reduced Iraq's ability to set the price of its oil. The evidence on whether Kirkuk was underpriced is less clear. Notably, episodes of underpricing of Basrah Light are associated with a decline in the share of major oil multinationals among the oil buyers, and an increase in the share of obscure individual traders. The observed underpricing of Iraqi oil suggests that Iraq generated $5 billion in rents through its strategic underpricing. Of this amount, the authors estimate that Iraq collected $0.7 to $2 billion in bribes (depending on Iraq's share of the rents implied by the price gap), or roughly 1 to 3 percent of the total value of oil sales under the Program. Finny, they find little evidence that underpricing was associated with increases in the relative supply or declines in the relative demand of Iraqi oil.

A Bayesian consumer who is uncertain about the quality of an information source will infer that the source is of higher quality when its reports conform to the consumer's prior expectations. Gentzkow and Shapiro use this fact to build a model of media bias in which firms slant their reports toward the prior beliefs of their customers in order to build a reputation for quality. Bias emerges in this model even though it can make all market participants worse off. The model predicts that bias will be less severe when consumers receive independent evidence on the true state, and that competition between independently owned news outlets will reduce bias. The authors present a variety of empirical evidence consistent with these predictions.