UC Santa Barbara

Institutions, as mechanisms of social order, often constrain the behavior of individuals within a society. Political institutions constrain the behavior of politicians, financial institutions constrain the behavior of businesses and payment processors and social institutions often constrain the behavior of individuals. These institutions often play an important role in constraining activities that may be seen as illicit or unwanted and careful analysis of these constraints can allow researchers to learn more about activities that are often hidden or go unreported.

This dissertation explores the role of institutional constraints on unwanted behavior by studying deforestation in Brazil and Malawi as well as underground activity in fraudulent software sales. These cases share the commonality that they are influenced by institutional constraints. Politicians in Brazil are constrained by reelection incentives, perpetrators of fraudulent antivirus software are constrained by payment processors and the cultural practice of ethnic favoritism in public good provision leads to particular ethnic groups in Malawi receiving much more fertilizer subsidies than others.

The first chapter examines deforestation in Brazil. Local political authority (formal or informal) over natural resources may create rents for politicians. The political decision to use or allocate resources involves balancing private rents with reelection prospects. I examine the case of deforestation in Brazil and a presidential decree granting the federal government the authority to punish counties that failed to limit total deforestation within their borders. This collective punishment aimed to generate pressure on local politicians to slow deforestation. Using binding term limits as a source of variation in reelection eligibility, I find eligibility has no effect on deforestation prior to the decree. After the decree, reelection eligible mayors reduced annual deforestation 10% more than mayors ineligible for reelection. These findings are consistent with the equilibrium outcome of a lobbying model. Policies such as sanctions, which target the electorate in order to influence political behavior, may be less effective when politicians are not accountable to voters.

The second chapter examines Fake antivirus (AV) programs which have been utilized to defraud millions of computer users into paying as much as one hundred dollars for a phony software license. As a result, fake AV software has evolved into one of the most lucrative criminal operations on the Internet. In this chapter, we examine the operations of three large scale fake AV businesses, lasting from three months to more than two years. More precisely, we present the results of our analysis on a trove of data obtained from several backend servers that the cybercriminals used to drive their scam operations. Our investigations reveal that these three fake AV businesses had earned a combined revenue of more than $130 million dollars. A particular focus of our analysis is on the financial and economic aspects of the scam, which involves legitimate credit card networks as well as more dubious payment processors. In particular, we present an economic model that demonstrates that fake AV companies are actively monitoring the refunds (chargebacks) that customers demand from their credit card providers. When the number of chargebacks increases in a short interval, the fake AV companies react to customer complaints by granting more refunds. This lowers the rate of chargebacks and ensures that a fake AV company can stay in business for a longer period of time. However, this behavior also leads to unusual patterns in chargebacks, which can potentially be leveraged by vigilant payment processors and credit card companies to identify and ban fraudulent firms. This chapter is joint work with Brett Stone-Gross, Richard Kremmerer, Christopher Kruegel, Douglas Steigerwald, and Giovanni Vigna and was published as Stone-Gross et al. (2013).

The final chapter returns to deforestation and studies it in the context of agriculture in Malawi. The effect of development policies on the environment is often ambiguous ex ante. Programs designed to improve agricultural productivity may increase deforestation by raising the marginal productivity of agricultural land, thus increasing the demand for land clearing. However, in a setting of subsistence farming on unproductive land, increasing agricultural productivity may reduce the need to shift cultivation to maintain the desired yields. This chapter examines the impact of agricultural subsidies on deforestation in Malawi by leveraging ethnic favoritism in government resource allocation. By exploiting a change in the ethnicity of the Malawi president following the 2004 election, we show that coethnic districts received more fertilizer subsidies and experienced significant declines in deforestation compared to districts with other predominant ethnicities. This paper studies a case in which poverty alleviation programs have beneficial environ- mental impacts demonstrating that, in certain contexts, input subsidies may provide a ‘win-win’ scenario. This chapter is joint work with Conor Carney.