Society for Institutional & Organizational Economics
Conference papers from 2008 (sessions were not tracked for this year)
We study the effects of procedural satisfaction on responders’ willingness to accept various proposed allocations by investigating the role of proposer’s appointment procedures. We do so in an experimental setting in which we distinguish between responders having their procedural preferences satisfied and not satisfied. One proposer faces four responders who can invest in resistance against the split of a pie. Resistance is modeled as a threshold public good: resistance is successful and nothing has to be paid iff responders’ total contributions exceed a certain threshold. Experimental evidence from Bulgaria suggests that costly resistance depends on whether responders’ individual and group preferences regarding the proposer’s entitlement procedure are satisfied: responders whose procedural preferences are satisfied offer significantly less resistance towards unfavorable allocations.
Previous studies have found a strong impact of property rights on land use, land values and land-specific investment; though there is a simultaneity problem. It is often the case, for example, that land claimants will invest on the land as a means to signal ownership (investment affects property rights). Another example of reverse causality is when rented land attracts invasion by landless peasants exploiting pro-squatter legislation, (contract choice affects property rights). We propose the use of the number of Catholic priests in the county as an instrument. Importantly, the Brazilian Catholic Church has historically been one of the most progressive branches. Priests provided notions of human and political rights, and organizational skills that formed the seeds for the success of the Landless Peasant Movement during the 1990s. We use a panel for the 5500 counties in Brazil in 1985 and 1996 which includes conflict, priests and land use data as well as other controlling variables, and show that the presence of priests effectively instruments for conflict (property rights). In addition our IV approach indicates that land conflicts affect land tenure.
We develop a formal model of bargaining and exchange in multiparty presidential regimes that simultaneously considers political transfers, monetary transfers, and policy concessions. The two-party case of the United States serves as a benchmark in discussing exchange in presidential regimes, while the Brazilian regime serves as an exemplar of the multiparty case. The results of the modeling suggest that the executive is better off using political transfers in exchange for support from factions that are ideologically similar to the executive and better off using monetary transfers when obtaining support from more ideologically distant factions. The model also suggests that the optimal strategy for building a governing coalition depends on expectations about future bargaining conditions. We examine empirical evidence from a period of “normal” politics in Brazil under President Lula and from the more difficult first year of Lula’s presidency.
Service adaptations constitute a major issue in Public Private Partnerships (PPPs). So far, studies have explained the ex post adaptation problems by the distorted incentives for the private public-service provider to invest in adaptation efforts. However, as any PPP is between a public authority and a private provider, public authorities have also an important role to play in the adaptation of the private provision over time. This paper studies how the contractual design of PPPs affects political accountability and incentives for contractually unanticipated service adaptations. More specifically, we observe worldwide two main different contracting out procedures: the concession contract and the availability contract. The main difference between these two contractual practices concerns the demand risk, which is borne by private providers in the first case and by public authorities in the second case. This paper shows that there are two main effects of the contractual design on accountability. (1) Concession contracts, compared to availability contracts, motivate more public authorities from investigating and responding to public demands. (2) Concession contracts can give greater adaptation effort incentives to private providers than availability contracts. The striking policy implication of this paper is then that the trend towards a greater resort to contracts where private providers bear little or no demand risk may not be optimal in terms of allocative efficiency.
The “paper trail” of receipts and vouchers that is subsequently recorded in the journal entry provides the foundation for modern accounting. In this paper, we trace the impact of the recordkeeping function of accounting on small societies. Our tests, which use the ethnographic data in the Standard Cross-Cultural Sample (SCCS), indicate that recordkeeping is a foundational institution that originates very early in an economy’s development. Recordkeeping promotes the emergence of economic institutions such as markets, hierarchies and specialized division of labor. These economic institutions in turn foster favorable societal outcomes such as agricultural success, political stability, and investment in tangible and human capital.
Business formalization has been argued to be a mere rent-seeking process, what has encouraged simplification policies that aim to abate the initial costs of formalization without paying attention to its value. This paper presents an alternative theory, which contemplates business formalization as a necessary ex ante intervention, by which some of the voluntary contracts creating the firm are made public. This allows judges to apply liability rules instead of property rules when adjudicating disputes. As liability rules protect innocent third parties, these are consequently unaffected by the information disadvantage they suffer when contracting with the firm. This enhances impersonal trade, but dilutes property rights. Therefore, legal systems can apply the liability rule only when the owner has consented to it in a judicially verifiable manner. For company transactions, judicial verification requires formal mechanisms that provide independent control, such as company registers. These mainly prevent owners who contract with third parties under a liability rule to opportunistically deny later that such rule should be applied. The theory is tested in a sample of 160,291 corporate transactions by showing that the extent of control in formalization is related to the complexity of the transaction.
Computerized databases and the Internet have recently made publication of company accounts potentially less costly and more useful, thanks to electronic filing and universal online access to credit information systems. These developments advise against simplification policies that would reduce the scope of mandatory publication. Instead, they encourage policies pursuing a broader efficiency goal, achievable by reducing costs and enhancing value through administrative reforms of filing, archive and retrieval systems. Survey and registry evidence on how the information in the accounts is valued and used by firms fully supports these claims.<br /> Paper available at SSRN: <a href="http://ssrn.com/abstract=1141905">http://ssrn.com/abstract=1141905</a>.
Widespread skepticism prevails among economists over a possible connection between civil liberties and the level of economic activity. Previous empirical research on economic growth has found mixed evidence on the influence of civil liberties. Arguments about which institutions matter for growth, however, continue to suggest mechanisms that highlight the importance of the human rights captured by civil liberties. In particular we will emphasize that they can work as indicators of the prevalence of the rule of law or more narrowly of the existence of property rights institutions. Disaggregation of the Freedom House Civil Liberties index allows a fresh empirical look at the effect of human rights on growth. Our results show that one of the four subcategories of the index outperforms all available indicators of property rights institutions in explaining long-term economic growth and the level of operations in investment goods markets. This subcategory, Personal Autonomy and Individual Rights, captures the level of second generation human rights that affect the mobility of individuals with respect to housing, employment and university education, as well as the level of protection of property rights. Our findings are based on cross-country data, which is subject to a variety of well known limitations. Nonetheless, one should ask why this civil liberties subcategory performs so much better than other variables using standard criteria and in the same setting.
: In this paper, using a large database concerning more than 3 450 strategic relationships in force between French firms in 2003, we study the way they govern their relationships. More precisely, we show that depending on the characteristics of their relationships observed governance structures features combined relational as well as formal elements. Those two dimensions might be complement or substitute depending on characteristics and expected results of the relationships as well as reputation of contracting partners. Our results thus suggest that competing theoretical frameworks focusing on informal agreements or on formal agreements might miss a part of the story. We suggest how those dimensions might complete or substitute each other shedding new light on previous empirical results on this issue.
Bankruptcy procedures are one of the mechanisms that were designed during the medieval age to support contractual exchange. Those types of procedure are mainly thought in the literature either as an instrument for settling defaults and bargaining ex post on residual rights or as a way to foster market discipline by giving agents the ex ante signals and appropriate incentives not to cheat their creditors. In this paper, we use new time series data on the bankruptcy figures in 19th century France that provide the evolution of the number of cases, the accumulated backlog, the outcomes, the value of assets and liabilities, the dividend earned by creditors. This allow us to characterize the main evolution of this legal institution in a developing economy. We find clear evidences of a sustained, long-term process of legalization, whereby the settlement of private defaults became increasingly ruled by courts. Also the increase in the number of procedures was driven partly by the expanding reach of the institution towards the lower strata of economic activity, i.e. small and very small businesses. This was done through the introduction of a kind of fresh start process through which some entrepreneurs were discharged de facto of their obligations towards creditors. Finally and consistently with traditional view the bankruptcy procedure did also manage the reallocation of property right following (sufficiently big) firms’ insolvencies.
This paper applies and attempts to extend a "full" theory of property rights to the development of titling in Lima, Peru between the 1910s and the 1990s. In doing so, it reinterprets the demand-side analysis used in de Soto's The Other Path by analyzing the role different political regimes played in the titling process. Contrary to follow up studies of de Soto's work which examine the effects of property rights formation on economic performance, this research tackles a different problem. It takes the perspective of institutional history to ask why property rights developed as they did in Lima, Peru. As such, it views the titling programs de Soto's institute oversaw in Peru in the late 1980s and early 1990s not as the application of objective research but as endogenous to institutional evolution in Peru. Such an analysis has both theoretical and policy implications. It contributes to a full theory of property rights through an empirical study which further specifies political supply-side components such as the definition, interpretation, and enforcement of property rights. The study also contributes to a framework for understanding when titling programs may or may not work given the political conditions of supply.
In much of the American West water shortages are becoming an increasingly important issue. With increasing demands for water for municipal, industrial, and environmental uses, it is clear that transfers of water from agricultural to other uses will produce economic gain. But water transfers out of agriculture are not occurring very rapidly. Most commodity markets respond rapidly to price differentials and market arbitrage reduces those differentials overtime. What is different about water markets in the American West and why have those differentials grown rather than decreased? In this paper we argue that it is the existence of multiple rights of exclusion, or the tragedy of the anticommons, that has impeded water transactions. We explain the tragedy of the anticommons and also describe the various rights of exclusion that exist. The paper concludes with a case study that illustrates the difficulty of water transfers.
Trustworthiness is the basis for maximizing output in economic exchange and in explaining differences in standards of living around the world. A society's willingness to trust and the quality of its institutions have their origins in the trustworthiness of its citizens. We propose a theoretical structure where trustworthiness and trust are important for production, but trustworthiness is primary. We estimate the relationship using a sample of 51 countries. We find that trustworthiness is important for output per capita and that the effect of trust is likely to come from trustworthiness via institutions. Our results are robust to alternative specifications.
To manage their coordination needs, individuals may find beneficial to delegate the right to establish and enforce rules to ad hoc entities. We differentiate between weak (or private) and strong (or public) delegation. We then oppose rule-makers, or insiders, or dominant players, who can impose their rules, to peripheral actors who have insufficient incentives to settle on an alternate order. This opposition then helps formalizing the emergence of a constitutionalized liberal order, where equality of rights balances asymmetries between citizens. We then show how political orders and market integration have interacted over the course of history. We identify three constitutional phases within the modern Westphalian era. This allows us first, to analyze the present day, international “non-order”; characterized by the confusion between private and public actors, failing to implement a binding hierarchy of norms. We then derive four evolutionary scenarii of constitutionalization corresponding to contrasted degree of institutional integration and of equality of rights between individuals. We then formalize the political dynamic leading to a possible, future global constitution as a conflict between “progressive” actors and conservative ones who derive substantial private benefits from national state machineries.
In this paper, we claim that private provision of public services by means of a "hybrid" mode - in which state-appointed supervisors are responsible for monitoring the operations of a private agent - not necessarily present the trade-off between cost reduction at the expense of service quality as foreseen by the received theories. For that, we develop a model to describe the underlying mechanisms supporting such hybrid governance and conditions in which private operation with public supervision will be able to achieve satisfactory quality levels while still preserving incentives for cost reduction. Our model is supported by quantitative and qualitative evidence from prisons in Brazil. Results demonstrate that the hybrid governance exhibits lower costs and superior service quality as compared to traditional public mode of provision. Finally, we address some implications for the design and the organization of public services.
This paper investigates the choice of the two profit-sharing vertical restraints within franchising networks: the royalty rate and the up-front fee. It is based on the theoretical and empirical literature concerning share contracts in the framework of a double-sided moral hazard. We use a three countries European dataset, regarding a wide range of sectors, in order to test several assumptions concerning the choice of the profit-sharing provisions within franchise contracts. The estimations are partly consistent with the analytical context.
This study sets off to test Akerlof’s lemon principle which advocates that the prices of lemons and non-lemons are identical under information asymmetry and hence adverse selection problems may arise. Empirical evidence in Hong Kong’s housing presale market, however, shows that lemons are priced 3% less than non-lemons. A game-theoretical model suggests that the sellers attempt to offer a “discount” so as to induce the buyers to flip the lemons in the secondary housing market, and hence their legal liabilities could be discharged. A constrained maximization model further proposes that the optimal level of “discount” is a function of the underlying common law principle. Under a legal institution in which the caveat venditor (or let the seller beware) principle prevails, the seller will perceive a lower probability of winning the hypothetical lawsuit hence a higher “discount” will be given away, and vice versa when the caveat emptor (or let the buyer beware) principle is applied. Nevertheless, a panel data hedonic price model reveals that the “discounts” are ostensible only and the lemons are in fact overpriced by 7% and 10% in the caveat venditor and caveat emptor institutions respectively. Although lemons tend to be overpriced more under a caveat emptor than a caveat venditor legal institution, this study finds no evidence that it is more efficient to switch from the former to the latter institution. (Funded by PolyU: G-U364)
During much of history, the primary form of insurance against negative health shocks and the related income shocks has been the extended family. This paper presents an economic institution that enabled miners in the California gold rush to pool the risk of a negative health shock in the absence of kin, despite the commitment problem inherent in such risk sharing. Risk sharing was governed by coalitions – economic institutions in which common expectations, risk sharing, and information-transmission supported the operation of reputation mechanisms in the midst of the gold rush. Historical records, census data on household structure, earnings, and real estate holdings, and a game-theoretic model are used to examine these institutions. By highlighting the conditions under which such institutions emerge, this work sheds light on the ability to mitigate risk of negative health shocks in other settings.
Due to the increasing complexity and pace of technological development, and the higher uncertainty and costs imposed by R&D projects, organizations have strong motives to collaborate through various modes of strategic alliances. When technology alliances simultaneously involve academy and industry organizations, the collaboration can be significantly complicated by the specific rules prevailing either in the academic environment or in the industrial environment. Academy-industry collaboration difficulties may arise for reasons of divergences in terms of motives, incentives, constraints, and organizational culture. Hence they need to be managed with specific organizational schemes. In the present paper, we propose to shed light on the role that intermediary institutions may play in academy-industry technology alliances. Indeed, when allying, academy and industry organizations can have recourse to intermediary institutions, which may help them deal with their stringent and specific collaboration difficulties. We propose in this paper to focus on a specific type of intermediary institution; namely the industry federation. On the basis of an exploratory case study on the Belgian Technology Industry Federation, AGORIA, we expose the regulatory mechanisms implemented by this intermediary institution. This paper shows how intermediary institutions such as AGORIA may mitigate the collaboration difficulties and, therefore, ease the management of academy-industry technology alliances.
Climate change presents the greatest collective action problem the international community has yet confronted. The unequal distribution of expected costs and benefits from climate change (based on mean damage estimates from probability distribution functions) creates different incentives for different countries, which can be expected to bargain in their own perceived interests. Unresolved collective action problems explain the notorious flaws in the Kyoto Protocol, and continue to impede efforts to replace or improve on Kyoto. Policy recommendations and negotiating strategies that ignore those collective action problems are likely to prove ineffective. This paper explains why collective action problems are far more serious in the case of the Kyoto Protocol than they were in the case of the Montreal Protocol on protecting the stratospheric ozone layer, and offers recommendations for reducing those problems. In particular, due consideration of (1) low-probability, high magnitude climate changes (beyond the mean estimates of damages) and (2) the secondary effects of climate change (implicating, for example, national security interests) should better align the interests of the parties. At the very least, it should raise the lowest common denominator of the parties, resulting in a substantially stronger and more effective international climate change regime.
This paper deals with share contracts in small-scale export pineapple production in Ivory Coast. It relies on intensive fieldwork conducted in 2002-2003 in the village of Djimini-Koffikro, combining surveys and in-depth case studies. All landowners and tenants were interviewed. A techno-economic survey was conducted in parallel on 147 plots cultivated under owner-occupancy, fixed rent or share contracts. The case highlights the role share contracts play for small producers regarding a production characterized by high price volatility on the European market, high production costs, and strong labor and know-how requirements. The study reveals the diversity of contractual configurations regarding the same crop, at the same place and under the same local term (abougnon). From the actors' perspective, the analysis of contractual choices sheds light on (i) the role of disequilibria/imperfection in tenancy, labor and credit markets; (ii) the role of intra-family land rights; and (iii) the minor role of monitoring and enforcement. We show that the abougnon contract allows actors facing a variety of constraints to engage efficiently in the intensive pineapple production. However, in terms of equity, the abougnon contract appears to be quite ambivalent: on the one hand, it contributes to the tenants' accumulation and autonomization process; on the other hand, the disequilibria on the tenancy market allows landowners to take advantage of the tenants' investments and know-how.
In this article the conditions for the rise and fall of representative regimes are explored. High citizen mobility and unexploited opportunities for investment create the need of reassuring factor owners against the tax hunger of the State. This may lead to the emergence of representative institutions of government, a process that reverts when those conditions disappear. Factors that facilitate or restrain the mobility of citizenry are identified, mainly in the domain of military technology. Thus, a number of interrelations between production and war technologies, political development and economic performance are revealed, giving rise to an interpretation of historical evolution.
We extend the industry evolution literature by explicitly considering connections between vertically related industries. Specifically, we explore whether a downstream firm’s exit rate is affected by prevalence of upstream suppliers. We further explore whether different governance forms in the upstream industry–vertically integrated suppliers vs. those that sell on the market–affect a downstream firm’s exit rate differently. Finally, we revisit the traditional population density-exit rate relationship while explicitly controlling for upstream industry characteristics to explore whether the conventional interpretation of density survives our expansion of the theoretical lens. We test our predictions in a study of the laser printer and laser engine industries. These industries are characterized by a variety of governance forms: fully-integrated, partially-integrated, and non-integrated firms. We find that the exit rate of printer firms declines as the number of non-integrated or partially-integrated engine firms increases; the number of fully-integrated firms has no effect on printer firm exit rates. Further, in models that include data on upstream suppliers, the traditional U-shaped effect of printer firm density on printer firm exit rates is replaced by a purely competitive effect. We speculate how the pervasive U-shaped effect of population density–and its widely held “legitimation and competition” interpretation–might be an artifact of industry scope in prior studies.
Legal frameworks, especially in Europe, encourage private participation and competition in the management of public services. However, many local public authorities concentrate the various services they have in charge in the hands of a single operator, leading to horizontal integration which a priori minimizes the positive effects of competition. The following article tries to understand why vertical disintegration is regularly combined with horizontal integration. Results of our model show that under some conditions, this may lead to better performance at lower cost for the public authority. Such a proposition is tested and corroborated using an original database concerning the contractual choices made by 5000 French local public authorities in 1998 and 2001.
In a country with weak institutional constraints on the executive, the real power might belong to the government bureaucracy rather than to an autocratic leader. We combine the Aghion-Tirole definition of formal and real authority and Barro-Ferejohn model of political agency to study the relationship between accountability of elected officials and the extent to which their subordinate bureaucrats have real decision-making power. Normatively, we show that the lower is the level of political accountability; the lower should be the level of real authority at the bottom of the government hierarchy. Positively, we distinguish between different accountability - bureaucratization political regimes.
Economic growth depends not only on formal legal institutions but also on a foundation of cooperative social norms. Results from experimental economics demonstrate that cooperation is influenced by a belief that other players will cooperate and also by the support of cooperative behavior by respected authorities. Courts play an important part in both factors. Through enforcement of the law, courts not only mandate compliance with formal law by the parties to the lawsuit, but also create incentives for others to comply with the law. Less appreciated but just as important, courts serve as respected authority whose support of cooperative norms influence productive social and economic behavior. To achieve a position of respected authority, courts must be viewed as a legitimate government body. This paper will use legal theory to examine the factors that sustain the legitimacy of courts, focusing on independence, impartiality, and competence. The paper will also apply legitimacy theory to show the social values that make it more likely that a court will be respected within a country, as well as relying on recent empirical studies that evaluate the court’s legitimacy in various countries. Finally, the paper will access the depth of the legitimacy of the United States Supreme Court and consider the effects of political attacks on the Court since the New Deal.
We propose and investigate a new channel through which the resource curse - a stylized fact that countries rich in natural resources grow slower - operates. Predatory governments are more likely to expropriate corporate profits in natural resource industries when the price of resources is higher. Corporations whose profits are more dependent on the price of resources can mitigate the risk of expropriation by reducing corporate transparency. Lower transparency, in turn, leads to inefficient capital allocation and slower economic growth. Using a panel of 72 industries from 51 countries over 16 years, we demonstrate that the negative effect of expropriation risk on corporate transparency is stronger for industries that are especially vulnerable to expropriation, in particular, for industries whose profits are highly correlated with oil prices. Controlling for country, year, and industry fixed effects, we find that corporate transparency is lower in more oil price-dependent industries when the price of oil is high and property rights are poorly protected. Furthermore, corporate growth is hampered in oil price-sensitive industries because of less efficient capital allocation driven by adverse effects of lower transparency.
This paper examines the quota assignment rules established in the legislation that government sugar controls in the United States under the Agricultural Adjustment Administration beginning in 1934. It presents data on the assignment and fulfillment of quotas on domestic production and import quotas, which permits an examination of the role that Cuba played in making the program function as a price stabilization program. It finds that that Cuba served as a “shock absorber” or a “producer of last resort,” as it stood prepared to absorb a demand shock of considerable size. Data on excess production capacity in Cuba and domestic suppliers show that Cuba was in a unique position because of great excess capacity caused by its own political and institutional response to the world crisis. The argument that Cuba was ready to step up to a sudden change in the demand for sugar is confirmed as war emerged in Europe in 1939. The long-run consequences are, as in Krueger’s analysis, unintended. One can surmise that, if the United States had any part in the rise of Fidel Castro to power in 1959, the persistence of the U.S. sugar controls in the form they took on cannot be dismissed as a principal cause.
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) has continued to fiercely debated between North and South, particularly with respect to its provisions for the agricultural sector. Article 27.3(b) of the TRIPS Agreement requires WTO member countries to offer some form of intellectual property protection for new plant varieties, either in the form of patents (common in the U.S.) or plant breeder’s rights (PBR). This paper analyses the effects of the introduction of PBRs in more than 100 importing countries on the value of exports of agricultural seeds and planting material from 11 exporting EU countries, including all principal traditional exporters of seeds. A gravity model, adapted for application to a specific sector, is estimated using panel data covering 15 years (1988-2002) of export flows in order to assess the effect of UPOV membership on seed imports. The results indicate that the introduction of a ‘minimal’ form of IPR protection for plant varieties, the 1978 UPOV Treaty, is not correlated with a significant increase in seed imports. Adoption of the broader scope of protection contained in the 1991 UPOV Treaty is actually correlated with a significant, though relatively small, decline in seed imports from European countries. Together this suggests that IPRs do little to ‘kick-start’ the inflow of technology, while a dynamic formulation of the model provides more support for state (path) dependence in this sector.
This paper analyses institutional arrangements for marketing of fresh fruits and vegetables in Tanzania: spot market transactions, marketing by producers’ organisations, contract farming with individual farmers and with producers’ organisations. Marketing of vegetables in Tanzania is undertaken primarily in spot market-type transactions. There is some limited movement towards farmers’ engaging collectively in contract farming through producers’ organisations for higher value products. Contracting with individual farmers would entail excessive transaction costs, reflecting structural difficulties in achieving economies of scale at the level of primary production. Transaction costs associated with establishing a producers’ organisation for marketing purposes appear to be too high, suggesting an important agenda for research and capacity strengthening. On the other hand, spot market transactions are quite diverse in terms of their market context and there appear to be opportunities for reducing transaction costs. With respect to the institutional environment in the region, government policies in East Africa have more often than not restricted the emergence of successful institutional arrangements through extensive interventions that left little room for market actors to shape suitable institutional arrangements. Combined with rent-seeking behaviour of government officials, this has also restricted the emergence of a successful fresh fruit and vegetable sector.
In analysing institutional change over time the concepts of path dependence and institutional lock-ins play an important role. Following North (1990), a number of factors and mechanisms causing institutional path dependence are discussed in the literature. Large set-up costs, increasing returns to scale, coordination effects, learning effects, adaptive expectations, but also legal paradigms and trajectories are the most important ones. Such institutional lock-ins may result in the prevalence of suboptimal institutions despite the existence of more efficient ones. In contrast to their importance the factors and mechanisms which may lead to a break-out from such institutional lock-ins have received only minor attention. In our paper we discuss the impact of better information, a decrease in set-up costs (including switching costs), learning effects and external shocks. We examine the effect of the often competitive relationship between the various agents who are engaged in activities to bring about institutional change (legislators, public administration, the courts). We assess our hypotheses with regard to the various factors that bring about break-outs from institutional lock-ins, using a case study on the German Bismarckian social security law. Introduced under a monarchy in the late 19th century, its main pillars are still in use in Germany today, despite several changes in the political system, a profound change in the economic environment and also in social relationships.
Empirical analysis of vertical integration has mostly been restricted to developed countries. But since the institutional context in developing countries is very different, so may be the factors that influence vertical integration. Estimates made using a new data set of Egyptian garment firms show that distinctive features of the business environment are indeed the most significant determinant of vertical integration. Limited access to finance restricts the possibilities for many firms to undertake the investment required to integrate, whilst volatile and uncertain market conditions make firms more likely to rely on the market for their inputs. This does not mean that transaction cost theories of vertical integration are irrelevant; for example, high monitoring costs discourage integration while disputes over quality and temporal specificities encourage it. But there are nuances related to market segment. Producers of higher quality garments rely on imported textiles. Contrary to theoretical predictions, these producers do not integrate even if search and switch costs are high, but the opposite is true of producers relying on domestic suppliers.
Does auditor independence improve earnings quality and, if so, is regulation necessary to realize such improvements? Popular characterizations of recent governance scandals answer “yes!” but lack support from scholarly investigations. This disagreement motivates our investigation of whether auditor independence affects earnings quality in ways that prior research would have missed, and what any such effect means for the efficiency-consequences of related governance regulations. 1. We relax a priori data-restrictions that ignore the potential for auditors’ dependence on consulting fees to enhance earnings quality. 2. We measure unexpected accounting fees in a more defensible manner, and develop a matching estimator to examine whether fee disclosures improve asset-pricing efficiency; and 3. We empirically evaluate the potential for governance externalities to rationalize proscriptive regulations. Our results offer some support for auditor independence improving earnings quality. Importantly, however, they also suggest that mandated fee disclosures exhausted any regulatory opportunities to improve this dimension of corporate governance, and thus speak more directly than does the literature against Sarbanes-Oxley’s proscription on jointly producing audit and non-audit services.
This paper relates organizational form and performance in hotel sector, particularly the guest perceived quality. We argue that the organizational choice affects the perceived quality because each organizational form alters the trade off between motivation and coordination costs and consequently their performance in terms of quality. Using a two-step regression model, we test this main hypothesis and other determining factors of the organizational choice in sample of 264 hotels which belong to the six main hotel chains operating in Spain. First-step results show that insourced hotels overcome lease and management contract hotels when monitoring cost are low and when the coordination cost are high. Once the endogeneity of the modal choice is controlled for, our second-step results suggests that coordination cost affecting quality are better solved through insourced and leased hotels than in establishments run under management contracts (four and five-star category insourced and leased hotels perform better in terms of perceived quality than equivalent management contract hotels). Moreover, recently restored buildings positively affect the perceived quality only in leasing hotels, which reflects the disputes over the maintenance of the assets arising in lease contracts.
We study the richness of organizational forms in rural conflict-ridden zones of Colombia, one of the countries of the world with the highest homicide rates in the past two decades. Specifically, we focus on the impact of subjective and objective insecurity measures on the choice of organizational mode among market, hybrid and hierarchical forms. Based on a survey of 675 rural production units in five regions, we find that the perception of community insecurity correlates positively with hybridization in the organization of production (internal governance and contracting) and of fixed assets ownership. Perception of personal insecurity leads to hybridization of trade. Objective insecurity measures, such as homicide rates, have a less robust positive effect on certain types of hybridization. These results offer important insights for shaping government policies for regional development and conflict resolution.
The decline of authority is widely recognized as a hallmark of the knowledge. Chandler’s visible hand of management, coordinating economic activities through closed R&D processes, vertically integrated manufacturing and distribution systems, and dedicated sales forces, is said to be giving way to Adam Smith’s invisible hand of the market and, even more so, to the less visible handshake of networks and other new organizational forms. These newer forms feature flatter hierarchies with delegated decision authority, employee ownership of assets (most importantly, specialized knowledge), and high-powered incentives. Such tendencies have been taken by many authors as reason to dismiss theories of organizations that focus on authority and firm boundaries. We argue, in contrast, that accounts of the death of authority are greatly exaggerated. First, authority relations can serve as effective coordination mechanisms under conditions of dispersed and rapidly changing knowledge. Moreover, ownership of alienable assets is still important, and firm boundaries can be meaningfully defined in terms of these ownership patterns. Finally, complementarities between incentives, authority, and ownership suggest that transactions will tend to cluster in discrete structural forms, such that authority relations do not disappear. Authority and centralized decision-making continue to play a key role in a knowledge economy.
It is a well-established fact that the government bureaucracy in many developing countries is large, difficult to understand, little transparent and slow-moving. However, "de jure" bureaucratic procedures sometimes have little to do with how firms or individuals actually go about when dealing with the government bureaucracy. One institution that has emerged in many countries is a specialized intermediary, henceforth called dispatcher, that helps individuals and firms in bureaucratic contacts. It is often the workings of this "de facto" institution, rather than the de jure procedure, that determines outcomes such as how many firms or individuals that go through a certain bureaucratic procedure, processing times, waiting times and financial costs. In this paper, a model in which firms demand a license from the government bureaucracy is developed in order to address two key questions related to the use of dispatchers. First, how does the existence of dispatchers change the number of licenses awarded and prices that firms pay for licenses? How do these results depend on the organization of bureaucrats and dispatchers, on the regulatory framework and on the extent of corruption in the bureaucracy? Second, what are the incentives of corrupt bureaucrats and dispatchers to try to make regulation more/less complicated? When are the incentives of bureaucrats and dispatchers to create "red tape" aligned? Ultimately and ideally, the answers to these questions can help in explaining why bureaucracies have proven so hard to reform.
We study the incentives to expropriate foreign capital under democracy and oligarchy. We model a two-sector small open economy where foreign investment triggers Stolper-Samuelson effects through reducing exporting costs. We show how incentives to expropriate depend on the distributional effects of the investment and on how these affect the interests of the group in power. How investment affects the incomes of the different groups in society depends on the sectors where these investments are undertaken and the structural features of the economy such as factor intensity. We characterize expropriation equilibria and show that if investment is undertaken in the sector that uses labor less intensively, democracies are generally more prone to expropriate. This result provides one possible rationalization for the wave of expropriations in Latin America under governments with a broad popular base during the 20th Century.
In the presence of specific investment, sophisticated contracts or vertical integration have been proposed as solutions to a holdup problem that arises when parties cannot commit not to renegotiate an agreement ex-post. In a repeat transaction framework, I argue that if parties are assigned a property rights bundle with ex-post decision rights on (1) the terms of trade and (2) the durability of trade, a first-best outcome is implementable even with a simple contract. This is because the durability decision, motivated by actual legal practice, gives rise to an exit option that allows the otherwise underinvesting buyer to appropriate breakup rents that restore her investment incentives at the cost of seller's moral hazard from trying to avoid the buyer's breakup threat. For three cases of renegotiation rigidity, I present conditions under which a simple contract allows for an efficient outcome. The results imply that a strict compliance standard in (2) with high quality requirements for the seller may be necessary to induce efficient investment if buyer's weight in (1) is sufficiently low. This implication competes with the legal literature on compliance standards in U.S. and international contract law that promotes a restriction of buyer's exit options.
Mandatory disclosure of evidence and double jeopardy are considered to be among the most important bulwarks against prosecutorial misconducts. While protecting the generality of defendants in the criminal process, we show that under certain reasonable assumptions, these procedural mechanisms hurt innocent defendants by inducing prosecutors to adjust their behavior and thus triggering adverse practices.
In very general terms, we may identify two ideal typical divisions of labor: one vertical, the other horizontal. In the vertical, an individual performs every step of the production sequence. In the horizontal, specialization takes over, and an individual performs one step of the production sequence. Thus, horizontal production sees several individuals working together sequentially. In voluntary division of labor (e.g., open source software, scientific research) production is undertaken spontaneously rather than according to fiat. As such, several individuals simultaneously may be working on multiple tasks. This more generally means that voluntary division of labor can simultaneously present both vertical and horizontal division of labor characteristics, implying that there is some redundancy at play. The redundancy is not a shortcoming, however. It engenders economies that have the ability to capitalize on multiple, intersecting knowledge combinatorics. The proposed work will examine the costs and benefits of the redundancy embedded in voluntary production.
This paper has two related objectives. First, it seeks to identify the key determinants of some policies that have been at the heart of the reforms of the telecommunications industry in developing countries, namely, liberalization, privatization, and the (re)structuring of regulation. Second, it attempts to estimate the extent to which these policies have translated into actual deployment of telecommunications infrastructure. This simultaneous investigation is conducted by means of an econometric analysis of a 1985-1999 time-series-cross-sectional database on 86 developing countries. Sectoral as well as institutional and financial factors are found to be important determinants of the actual reforms implemented. We uncover a positive relationship between the decision to introduce competition in the digital cellular segment and the growth of the fixed-line segment, suggesting that these two segments have benefited from each other. We also find that countries facing increasing institutional risk and financial constraints are more likely to introduce competition in the digital cellular segment and to privatize the fixed-line incumbent, these policies being economically attractive to both investors and governments. In turn, these policies are those that enhance the deployment of fixed-line infrastructure. In contrast, competition in the analogue cellular segment and the creation of a separate regulator seem to be relatively less attractive policies as they are found to be less likely to be introduced in countries facing increasing institutional risk and budget constraints. Their impact on fixed network deployment is found to be negative or non significant.
This paper characterizes a two-sender cheap-talk game with unidimensional state space under simultaneous disclosure which is typically more informative than the canonical two-sender cheap talk game under sequential disclosure (Krishna and Morgan, QJE, 2001) and the one-sender N*-step equilibrium result characterized in Crawford and Sobel (1982). Specifically, we extend the Crawford and Sobel (1982) game to two senders, characterizing the equilibrium strategies and profiles of messages for each sender. The receiver can credibly refuse to update his beliefs and take a default action when receiving inconsistent reports, which is always known to the senders. This permits an N*+1 partition equilibrium that typically entails more information transmission compared with the game in which only one sender is consulted. This property holds for a very broad range of biases. The paper extends the literature on unidimensional cheap talk with two senders and is a novel rejoinder to the work of Krishna and Morgan, who show that when senders act in sequence, a single sender transmits as much information as do multiple like-biased senders.
This paper presents the introduction of managerial attention allocation constraints in optimal incentive contracts. There is an agent who provides non-contractible effort in a number of tasks and a principal who designs a linear incentive contract, composed by a variable and a fixed factor, and monitors the effort of the agent. The framework in Holmstrom and Milgrom (1991) is extended to allow the principal to decide the amount of monitoring allocated in each task. More attention allocated to a given task improves the task contractibility due to a decrease in the uncertainty about the effort provided by the agent. The principal allocates the same level of attention and provides the same incentive contract across tasks under symmetric decreasing returns to scale in production and monitoring. However, when there are increasing returns to scale in the monitoring technology, the principal offers an unbalanced incentive contract and allocates asymmetric amounts of attention across tasks.
Neo-Institutional Economics (NEI) has long shown that take-or-pay long-term contracts provide a robust framework for safeguarding the interests of both upstream and downstream parties in the gas industry. The case of gas trade between Brazil and Bolivia presents an opportunity to re-examine empirically and to review the robust nature of the take-or-pay framework over time. This case reveals that the positions of the contractors actually change giving rise to a veritable lifecycle of the contractual arrangement. Such a contract can be seen to span three successive phases. The first phase of the contract cycle begins when it is signed; allowing the investments to begin. The second phase starts when investments have been completed and the actual trade in gas begins. The third phase of the contract cycle comes when the increasing flow of gas comes close to saturating capacity and the volume levels for downstream market volume have been reached. These three contract phases are thus distinguished by how robust the alignment of the parties’ interests is.The added value of the paper is then both empirical and analytical: the case study provides a brand new lifecycle analysis of the performance of TOP long term contracting into an NIE framework.
This paper sets out to analyze contractual complexity and completeness in the context of Spanish franchise chains. First we examine whether franchise chains differ according to the complexity and completeness of their contracts, and then we analyze the factors that influence the degree of complexity of those contracts. For that purpose, 64 contracts held by different franchise chains operating in Spain have been taken as a sample. The results indicate, on the one hand, that there are two kinds of contracts in terms of their degree of complexity and, on the other hand, that i) the larger the relationship-specific investments, ii) the broader the experience of the chain in the market, and iii) the more important the effort of the person in charge of the outlet is to the success of the business, the more complex the contracts drawn up by the franchisors will be. The franchisor’s reputation, however, does not appear to influence the degree of detail with which the contract is drawn up.
This paper analyzes micro-level dynamics of changes in ownership structures. It investigates changes in ownership patterns currently taking place in Brazil. It contributes to the corporate governance literature, building on this empirical evidence to further advance theoretical understanding on how and why concentrated ownership structures can change towards dispersed ownership. The paper provides the first evidence on the decline of ownership concentration in the structure of Brazilian corporations. There is, however, an important caveat: ownership has become more “dispersed” in Novo Mercado, the listing segment that requires firms to comply with the one-share-one-vote rule. This paper, then, investigates firms’ migration patterns. It analyzes what companies have listed in Novo Mercado, Level 2 and Level 1. I find that 85% of Novo Mercado’s are “new entrants” firms. Traditional firms have mostly migrated to Level 1, the least stringent segment regarding corporate governance practices. This suggests that we can identify two very different corporate worlds in Brazilian capital markets: the new fashion corporations who adopt better corporate governance patterns, and the old fashion corporations, who still have not changed their main patterns of corporate governance or corporate ownership. The analysis enables us to advance our knowledge of corporate structures in other emerging countries.
Organizational economics tends to express a pessimistic view on the effectiveness of inter-firm contracts under uncertainty, and sees the use of authority and of relational governance as possible remedies. Organization theory inspires some skepticism on the effectiveness of these therapies. In particular, it identifies also reasons to expect a sustained level of formalization in strategic alliances and, conversely, to expect a moderate use of centralization. To help filling this gap, this study empirically assesses the relationship between uncertainty and complexity in the context of strategic alliances, and the use of formalization and centralization for their governance. The assessment extends to the intensity of use and the relationships of three modes of governance: contractual, formal extra-contractual, and informal and social. This exercise is carried out on a new database that collects information on 540 project-based alliances. We find that inter-organizational projects employ a mix of contractual and extra-contractual governance mechanisms. Different from usual conceptualization, these agreements are not characterized by high informality. Extra contractual governance seems to be employed to respond to additional factors, rather than to substitute or complement formal agreements. Finally, the pattern of allocation of property rights also interestingly deviates from standard property right theory predictions, to conform to a more pluralist, negotiation based view.
In every society, the law provides for a variety of standard organizational forms. In developed market economies, for example, these forms include, among many others, marriage, partnership, the business corporation, and the municipal corporation. In this essay, we define basic structural dimensions in which these various forms differ, identify patterns of correspondences among those dimensions across forms over time, and explore the economic considerations that produce those patterns. We focus on five dimensions in particular: owner control; owner withdrawal rights; owner liability for organizational debts; fiduciary duties of managers and owners; and transferability of ownership interests. Albert Hirschman famously alerted organization theorists to important tradeoffs between exit and voice. If, however, we examine the role of exit and voice as exercised by owners of organizations – which we can roughly identify with rights of withdrawal and rights of control -- they do not generally appear as alternative means of organizational discipline but tend to be complements instead. Other important mechanisms for owner influence in organizations interact more complexly with the withdrawal and control rights of owners. We seek to explain these patterns of interaction over time as the joint product of evolving transactional technology and the need to cope simultaneously with competing agency problems among an organization’s beneficiaries, managers, and creditors.
The Hollywood “studio system” – with production, distribution, and exhibition vertically integrated – flourished from the late teens until 1948, when the U.S. Supreme Court issued its famous Paramount decision. The Paramount consent decrees required the divestiture of affiliated theater chains and the abandonment of a number of vertical practices. Although many of the banned practices have since been posited to have increased efficiency, an efficiency-enhancing rationale for ownership of theater chains has not been developed. This paper explores the hypothesis that theater chain ownership promoted more efficient ex post adjustments in the length of film runs. Post-contractual run length adjustments are desirable, because demand for a given film is not revealed until the film is actually exhibited. To test the hypothesis, the paper employs a unique data set of cinema booking sheets. It finds that run lengths for releases by vertically integrated (into exhibition) film producers were significantly – economically and statistically – more likely to be altered ex post. The paper also discusses additional contractual practices intended to promote flexibility in run lengths, some of which were instituted following the Paramount divestitures.
In colonial Chiloe, Southern Chile, extreme geographical isolation and special historical circumstances helped to generate informal, self-supporting arrangements for peaceful intergroup cooperation (Fearon and Laitin, 1996; Leeson, 2006). Emigration to Chiloe had offered unique opportunities for self re-invention. The elite or encomendero class tended to use marriage choices mostly to start ‘melting-pot’ families, which combined ‘Old Christian’ and ‘New Christian’ surnames. Some were secret descendants of converted Jews, to whom emigration to the New World was forbidden. Rent seeking by ‘melting-pot’ families was particularly successful. These families gained privileged access to Indian labour and state lands. This paper uses econometric analysis of data from sources never used before, to examine whether individuals were aware of ‘New’ / ’Old Christian’ surname differences between groups, how they responded to this awareness, and how the system rewarded or punished their responses.
While conventional wisdom holds that policy risk—the risk that a government will opportunistically alter policies to expropriate a firm’s profits or assets—deters foreign direct investment (FDI), we argue that multinational firms vary in their response to host-country policy risk as the result of differences in organizational capabilities for assessing and managing such risk, which are shaped by the home-country policymaking environment. Specifically, we hypothesize that firms from home countries with weaker institutional constraints on policymakers, or more intense policy competition among interest groups divided along economic or ethnic lines, will be less sensitive to host-country policy risk in their international expansion strategies. Moreover, firms from sufficiently risky or contentious home-country environments will seek out riskier host countries for their international investments, in order to leverage their political capabilities and attain competitive advantage. We find support for our hypotheses in a statistical analysis of the FDI location choices of multinational firms in the electric power industry during the period 1990 – 1999, the industry’s first decade of internationalization.
The paper aims at characterizing the problem of patent ambushes and deriving policy proposals on how this problem should be tackled. To reach this aim, the paper is structured into four sections. The first two sections provide a brief overview of the basic rationale for a patent system and the incentives of IPR holders to make innovations available to other users. The third section introduces into the topic of submerged patents and especially assesses how this can give rise to patent ambushes. The fourth section first discusses the applicability of EU competition laws to tackle the problem of patent ambushes. The important finding that these laws do not appear to provide an effective safeguard against patent ambushes subsequently leads to an assessment of the question how the risk can be mitigated via the adoption of appropriate IP rules by standard-setting organizations. A checklist is developed which allows an assessment of IP rules with respect to their capability of mitigating the risk of patent ambushes.
The purpose of this paper is to flesh out more completely the relationship between the emergence of an external threat and the rise of the state. It begins by recognizing that combat is a team good. Whenever a combatant chooses to fight, he confers a positive externality on his comrades in arms. This fact encourages every combatant to shirk. Necessarily, any pre-state community’s ability to supply external defense was intimately connected to its ability to internalize this externality. The theory of the firm prescribes hierarchical direction. Pre-state societies implemented alternative mechanisms (costly rituals and physical restraints). These mechanisms worked as long as external defense could be secured by engaging in raids, surprise attacks and open-field ritual battles. Ritual battles consisted of opposing combatants arraying against each other in open-order parallel lines exchanging uncoordinated masses of missile weapons. Opposing combatants were reluctant to close the distance between each other. At some point, however, a pre-state community’s survival hinged upon its ability engage in pitched battles in which organized files of men had to do just that. This paper theorizes that the desire to cross the “killing zone” motivated some pre-state societies to adopt a hierarchical military organization. Moreover, this organizational innovation had the tendency to spread into other areas of their social life facilitating the emergence of the state.
The risks of operating multinational firms have been studied from the perspective of those factors that can be considered endogenous to a particular country or the economic system as a whole. The decision to internalize operations with a foreign subsidiary as opposed to arms-length transactions are understood by considering the various hazards that a particular market may present. However, global markets are not only subject to these institutional factors that can make particular markets more attractive but also a series of exogenous factors, which generally come in the form of a non-economic shock. The impact of non-economic shocks is more complex to recognize and can leave managers with information that lacks clarity or usefulness. When the source of these non-economic shocks can be isolated to an individual or group the event can have a socio-cultural spillover that systematically harms foreign markets which may be linked with that source but had no role in the event. Using the terrorist attacks of 9/11 as the empirical context and a novel econometric approach, we find that the costs of operating in Muslim-populated countries increase above what can be explained by those endogenous institutional factors. Our results suggest that a differential increase in costs of operations in particular foreign markets following an exogenous non-economic shock can be attributed to a manager’s likelihood to categorize countries together and link them with the source of the shock.
Although similar formal regulations to protect property rights have proliferated across many parts of the world, the adherence to these norms is not consistent across countries. As a result, countries with seemingly similar formal regulations pose very different hazards for investors. Departing from traditional studies have focused on formal regulations of host countries in explaining institutional hazards for Multinational Corporations’ (MNCs) strategic actions, this paper focuses on the extent of de facto protection. I argue that in making location choices for their multinational investments, MNCs identify institutional hazards from the extent of de facto protection. Their perceptions of de facto protection are influenced by global and local pressures that align the interests of the host country towards providing effective protection in addition to the formal regulations that govern them. Large MNCs, with extensive international experience, are better able overcome poor de facto protection in a host country. They do so by either transferring learning on managing poor institutions across their international operations or by their ability to arbitrage international location differences. Using a panel of 161 firms from 16 home countries and their foreign investments in up to 66 host countries in the information services offshoring sector from 2002-2005, the empirical results provide support for the arguments.
This paper attempts to extend existing models of political agency to an environment in which voting may be non-instrumental. It constructs a model where politicians may be good or populist. They differ because populists are more willing to pander to voters who may choose inferior policies in a large-group electoral setting where their vote is insignificant compared with those that voters would choose were their vote decisive in determining the electoral outcome. This links directly to the literature on rational ignorance following Downs (1957) and expressive voting following Brennan and Lomasky (1993). The paper investigates the incentives for good politicians to pool with or separate from populists and focuses on two key issues – (1) how far voter’s preferences are from those held by the better informed good politician and (2) the cost involved in persuading voters to change their views. This model provides a basis for which we can consider issues such as media influence and inter-jurisdictional comparisons. In political agency models (see Besley (2006)), bad politicians feature prominently. This paper finishes by considering how the inclusion of bad politicians may affect the behaviour of good politicians and concludes with the suggestion that a small amount of potential corruption may be socially useful if voters are risk-averse
This study uses data on Chinese privately-owned enterprises (POEs) to analyze the effects of firms’ market capabilities on their adoption of political strategies. I argue that firms with greater market capabilities (i.e., the ability to succeed in market competition) will have a higher propensity to use political strategies to reduce the risks of expropriation by public and private entities. These hazards are created by a lack of market-supporting institutions and constraints on government power, which are common in emerging economies such as China. My argument contrasts with prior studies conducted in developed countries, as previous studies suggest that firms with lower market capabilities more actively pursue political strategies in order to obtain government intervention and insulation from competitive forces. Empirical analyses provide evidence that Chinese POEs with stronger market capabilities (as represented by greater efficiency, R&D intensity and marketing intensity) tend to more-actively pursue political strategies. This suggests that hazard-reducing political strategies are important in the Chinese private sector and that the benefits of political strategies depend on firms’ market capabilities as well as the quality of the institutional environment.
In Kibera, Nairobi Kenya’s largest slum, getting property rights enforced is no simple matter. Structures are owned by one person and rented by another, neither of whom have rights to the land on which the structure stands. Rental contracts are the subject of frequent dispute for residents and government conflict resolution mechanisms are inaccessible. Using structured interviews and working with local community based organizations we were able to identify three different mechanisms for contract enforcement that developed apart from the formal government channel: 1) bureaucratic entrepreneurs willing to act outside of their area of authority; 2) community based organizations; and 3) ethnic gangs. All of these mechanisms assist people in getting their property rights contracts enforced. In this paper we establish a rubric for the assessment of welfare maximization based on extant literature in new institutional economics. We discuss each of these contract enforcement institutions and evaluate them against the rubric. We find that these organically developed solutions to the inaccessibility of government mechanisms for contact enforcement are not obviously superior to the formal institutions.
This paper evaluates the Economic Freedom of the World Index on the basis of the Hayekian concept of freedom (Hayek 1960), more precisely on that of its conceptualization in terms of the character of government actions developed in Kapás and Czeglédi (2007). As a result of a detailed criticism, the components of the EFW index are regrouped in freedom-related, policy and other categories. Although the EFW index is not considered a good measure of economic freedom, its components and the index itself are used in empirical investigations. In these examinations the aim is to show that using the freedom-related components of the EFW index (which is more in line with authors’ concept of economic freedom) instead of the index itself may lead to even more plausible propositions than those provided by the EFW index. The results provide support for this argument.
We analyze lawsuits involving publicly-appointed lawyers in a labor court in Mexico to study how a rigid law is enforced. We show that, even after a judge has awarded something to a worker, the award goes uncollected 56% of the time due to the highly formalistic nature of the enforcement process. Workers with more than seven years of tenure, however, do not leave these awards uncollected because their legally-mandated severance payments are larger. Differences in the probability of receiving compensation after trial, both across lawyers and across workers with different levels of tenure, are not due to differences in win rates at trial. These differences in the probability of receiving compensation are entirely attributable to post-trial differences in the probability of enforcing the judgment. Hence we show how excessive legal formalism generates ineffective and inconsistent enforcement. To better explain these facts, we develop a simple model of litigation that includes costs of collecting awards. Observed differences in lawsuit outcomes across lawyers are consistent with the predictions our model, in which firms take advantage of plaintiffs who either have bad information or are unwilling to undertake the costly task of enforcing a judgment.
The application of US antitrust and European competition law currently shifts from quite strict per-se rules towards the rule of reason. Between these extremes, some authors argue that there is some optimal amount of differentiation in the rules of competition law based on the ‘error cost approach’. In this paper we develop a more sophisticated sequential model of decision-making in applying competition law. We allow for multiple steps of trichotomous decisions: permit a certain behaviour, prohibit it, or go one step deeper into the investigation. We both model the decision process for single case decisions as it is actually carried out by competition authorities and derive consequences for the optimal design of legal rules determining such decision processes. The derivation of those optimal sequential investigation rules follows the error cost approach, i.e. the minimization of the sum of welfare losses through decision errors and (all direct and indirect) regulation costs through the application of competition law.
The incentives balance test was developed by the European Commission for proving abuse of a dominant position according to Article 82 EC, and was first applied in the Microsoft case. It can be used when the owner of an intellectual property right refuses to license this right to other firms. To assess whether there might be an objective justification for this refusal, the different incentives to innovate of the involved parties are balanced against each other. In case that the innovative effects evoked by a license are significantly higher than without access to the intellectual property, the owner of the intellectual property right is obliged to license. In the paper we pursue two objectives. Firstly, we analyze critically from an innovation eco-nomics perspective the economic arguments in the decisions of the Commission and the Court of First Instance as well as in the existing literature concerning the incentives balance test and its application. Secondly, we demonstrate that additional theories and empirical insights from innovation economics, especially from evolutionary innovation economics, can help to de-velop a more differentiated test. This paper helps to find a theoretically and empirically better substantiated test for dealing with the complex tension between intellectual property rights and competition law in the context of Article 82 "refusal to license" cases.
Property rule treatment of intellectual property (IP) is said to cause “excessive” transaction costs, thickets, anticommons, hold-ups, hold-outs, and trolls, unduly taxing and retarding innovation, competition, and economic growth. The popular response has been to offer a shift towards some limited use of weaker liability rule treatment, usually portrayed as “just enough” to facilitate transactions in those special cases where the bargaining problems are at their worst and where escape hatches are most needed. This paper shows how over just the past few years, the patent system has been hugely re-shaped from a system having several major, and helpful, liability-rule-pressure-release-valves, into a system that is almost devoid of significant property rule characteristics. The paper then explores some harmful effects of this shift, focusing on the ways liability rule treatment can seriously impede the beneficial deal-making mechanisms that facilitate innovation and competition. The basic intuition behind this bad effect of liability rules is that they seriously frustrate the ability for a start-up or other market-challenging patentee to attract and hold the constructive attention of a potential contracting party (especially one that is a larger more established player) while preserving the option to terminate the negotiations in favor of striking a deal with a different party.
This paper is based on a comparative case study on the development of electronic ordering systems – an example of inter-organizational information systems (IOIS) – linking pharmaceutical wholesalers and pharmacies in Ireland and Australia respectively. It uses the conceptual framework of practice theory and specifically addresses material, institutional, and ideational structures as they constrain and enable particular practices. Based on a brief account of the market structure we will reconstruct core elements of wholesalers’ and pharmacies’ strategies with respect to (electronic) ordering and delivery. In order to explain the implementation, enactment and subsequent modification of the wholesalers’ strategies in the two countries, we will scrutinize the role of third parties, namely the role of the pharmacy associations and the software vendors. The analysis emphasizes the role of associations and software vendors for the stabilization of the IOIS albeit in markedly different ways. Moreover the role of standards, specifically product codes, and systems architectures becomes obvious. The case studies cover a period of about 20 years and thus allow us to develop explanations for the observed dynamics and stability in a historical perspective based on the notion of path dependency.
Based on the question of technology choice between two competing IT innovations, research suggests bandwagon effects to explain adoption and diffusion of a single dominant technology (Leibenstein 1950). However, when neither direct nor indirect network effects exert an infrastructure-specific influence on the diffusion process – as in the case of German broadband competition between DSL and Cable infrastructures – bandwagon effects cannot explain the emergence of a single technology standard. Due to digital convergence and non-proprietary IP-infrastructures network effects work comprehensively for both technologies. Hence adoption patters should converge, when the two competing technologies are relatively similar in terms of performance and pricing. The quest is therefore to identify and measure consumer adoption mechanisms responsible for the continuous asymmetries in DSL and Cable adoption patterns. We show that information externalities may arise from high uncertainty involved in the purchase of IT services such as broadband. As a result a stable lock-in emerges and prevents significant competition between the alternatives by creating implicit switching costs.
The development of path-dependent processes refers basically to positive feedback in terms of increasing returns as the main driving forces of such processes. It is assumed, however, that path dependency could also be affected by contextual factors such as different degrees of complexity. Up to now it is unclear whether and how complexity impacts path-dependent processes and the probability of lock-in. In this paper we investigate the relationship between complexity and path dependency by means of an experimental study. By focusing on the mode of information load and decision quality in chronological sequences, the study explores the impact of complexity on decision-making processes. The results are helpful for both the development of path-dependency theory and for a better understanding of decision-making behaviour under conditions of positive feedback in different settings of complexity. As previous path research has applied qualitative case-study research and (to a minor part) simulations, this paper makes a further contribution by establishing experimental research for path-dependency issues.
Central and Eastern European (CEE) economies have been undergoing the transition from central planning to free market economy and capitalism. There is, however, a significant variation across these economies in terms of institutions to support private enterprises. Scholars argue that the CEE countries are prime examples of historical path dependence. This paper provides empirical documentation to this argument by comparing the development of formal institutions in two groups of CEE economies: the Orthodox group and the Latin group. Our data come from The World Bank Group’s World Business Environment Survey, which was administered to enterprises in 80 countries in late 1999 and early 2000. We found that private businesses perceive the state more favorably in terms of regulatory roles, participatory roles and supportive roles in the Latin group than in the Orthodox group.
Why some bureaucracies are autonomous regarding personnel policies? New Political Economy approaches to public administrations tend to explain bureaucratic autonomy as a result of the political exchange between citizens (or interest groups) and rulers. The general prediction is that bureaucratic autonomy increases with the degree of diffusion of political power among different agents. Nevertheless, administrative history shows us that many political systems with very restricted interactions between citizens and rulers created highly autonomous bureaucracies. Using developments from organizational theory, this paper focuses on an interaction that one can observe in all polities: the relationship between rulers and public employees. The main hypothesis is that polities systems where powers are highly concentrated tend to develop more autonomous bureaucracies as a way to craft credible commitments towards public employees. Only when rulers are exclusively concerned about civil servants’ loyalty, systems with high diffusion of political power lead to highly autonomous bureaucracies. Empirical examples from contemporary developing countries and narratives from the historical development of bureaucracies in Europe illustrate these hypotheses.
Much of the evidence about differences between integrated and non-integrated firms comes from cross-sectional comparisons of firms with different organizational forms. In this paper, we attempt to provide evidence that comes from examining the same firms which - at different points in time - operate under both vertical integration and contracts. Our setting is the U.S. airline industry. Large U.S. airlines subcontract portions of their network to regional affiliates. In the late 1990s, several airlines purchased some of their regional partners while in the last few years, several airlines have divested themselves of their regional partners. In all cases, the major and the regional continued to work together after the change in organizational form. We exploit this within-pair variation to document whether ownership affects coordination in this industry.
We examine the pattern of property rights demarcation in centralized and indiscriminate land survey systems and their economic effects.. The former results in a uniform grid of rectangular surveys (RS), whereas the latter results in haphazard localized bounding of properties, referred to as metes and bounds (MB). We develop an economic framework for examining land demarcation systems, focusing on a comparative analysis of RS and MB. The rectangular survey is likely to lead to more market transactions, fewer conflicts, greater property investment, higher land values, and more infrastructure than metes and bounds. Our empirical analysis focuses on a 22-county area of Ohio where MB is used relative to the remaining 66 counties that employ RS. Our data include parcel maps, U.S. census manuscripts, court opinions, and state reports on infrastructure, legal disputes, and productivity. The results indicate that topography influences parcel shape and size under a MB system; that parcel shapes are aligned under the RS; and that the RS is associated with higher land values, more roads, more land transactions, and fewer legal disputes than MB, all else equal. It may also be that the comparative limitations of MB contributed to the observed relative decline of that area relative to the rest of Ohio.
This paper considers the impact of governance on educational outcomes and economic performance. Specifically, we seek to establish the linkages by which institutional quality affects growth by considering its mediating impact on education. Studies that consider the contribution of human capital to growth (Mankiw, Romer & Weil 1992) typically find a large and significant influence of such capital---usually proxied by educational attainment---on income per capita. Concomitantly, recent theoretical and empirical work (Acemoglu, Johnson & Robinson 2005) has convincingly argued for how institutions matter for cross-country growth outcomes. The channels by which institutions affect human capital and, in turn, growth, has been relatively underexplored. Our empirical approach adopts a two-stage strategy. First, we estimate national-level educational production functions that include institutional governance as a covariate. Second, we use these estimates from the first stage as instruments for human capital in cross-country growth regressions. This method not only provides new cross-country estimates of the impact of governance on educational outcomes such as attainment and participation, but also addresses the endogeneity issues that arise when using direct measures of education in a growth regression.
Manufacturers often devise contractual mechanisms that enable downstream dealers to earn economic profit. One such mechanism is the two-stage ordering process with quantity discounts used by MNCs in their international distribution and other contexts. The authors theoretically and empirically demonstrate how an upstream profit-maximizing manufacturer can use the mechanism to ensure that its downstream dealers earn economic profits. They first construct a theory model that shows how it enables the manufacturer to control indirectly the intensity of downstream competition between its dealers. The authors then match the results of their model to a novel longitudinal data obtained from “Computec,” a leading Chinese manufacturer of a key computer accessory, and use the data to estimate the unobserved final retail prices, the price-cost markups, and the profits earned by their dealers over a one-year period. The authors show empirically that the ordering arrangement indeed is economically profitable for the dealers. The authors discuss the implications for research and practice in channel design and management.
Today economic activity is increasingly organized by fusing elements of hierarchies into market transactions (e.g., quasi-integration) or bringing aspects of markets within hierarchies (e.g., empowerment). These hybrid governance forms are not adequately addressed in most extant theories that envision a unidimensional continuum between markets and hierarchies, thereby ignoring true hybrids that are market-like in some ways yet hierarchy-like in others. We contribute first by creating a taxonomy of hybrid forms and second by developing a formal theory that predicts when a given hybrid form will be efficient. Our model is unique in that we consider cross-task synergies in a multi-task principal-agent model, where hybrid forms result as principals try to motivate cooperation among agents indirectly through incentives, ownership and formal authority. We conclude with a discussion of other mechanisms that might also help to understand and predict hybrid governance forms.
Among the rapid changes in the agri-food sector, the development of new modes of organization (e.g. supply change systems) has been particularly spectacular and raises important questions with respect to public policies and regulatory practices. Notwithstanding the fact that very few data are available, recent surveys suggest an increasing role of contracts in these organizational changes. Beside vertical integration which has also developed, contracting practices provide alternative governance mechanisms for improving the efficiency of food supply chains. However, despite the heightening interest for the role of contracts in a context of rapidly changing governance structure along the food supply chain, very little is known about the exact extent and significance of what is happening. The ongoing research project on which this paper is based is oriented towards establishing the role of contracts as means of coordination in a changing environment, and towards identifying the impact these new arrangements may have on public policies. The paper is organized in six sections. Section II summarizes some empirical observations about the significance and motivation of contracting practices in the agri-food sector. Section III develops our analytical framework. Section IV derives from this framework questions to be explored, with a special emphasis on policy issue. Section V presents preliminary results based on the (partial) data already collected. Section VI concludes.
Why did Ottoman successor states (Albania, Bulgaria, Macedonia) have a lower institutional performance (governance) as compared to Habsburg successors (Hungary, Croatia, Slovenia) during post-communist transition? In order to solve this puzzle, the author ex-amines the persistence and change of pre-communist institutions during different periods of accelerated institutional change. After having identified elite and institutional (dis)continuities, the author concludes that a combination of historical and recent factors is the most convincing explanation for institutional divergence of post-communist countries. In particular, he underlines the impact of “negative feedbacks” (wars and economic crisis), which blocked institutional reforms in many Balkan countries.
What are the determinants of contractual arrangements in producer-processor transactions in the Uruguayan beef industry? Coordination has become a strategic issue for this industry, which exports 75% of its production, not only to assure quality attributes of products but also to explore new market access opportunities. Two contractual arrangements coexist: direct-contracting (48%) and broker-induced transactions (52%). In addition, all processors and 46% of producers use both types of arrangements. Theory: Transaction Cost Economics offers helpful insights to understand reasons for the development and adaptation of different contractual arrangements. Method: we use a probit model with panel data to test the relationship between direct-contracting mechanism and asset specificity, site specificity and frequency. The panel contains population information of producer-processor transactions (77,458 transactions, 10,130 producers and 47 processors). Results: The probability of a transaction being aligned with the direct-contracting arrangement increases in transactions with a greater degree of asset specificity (e.g.,young steer), lower distance between producer and processor and higher frequency of transactions between the two parties involved. The direct-contracting arrangement is aligned with higher quality products. These results have implications for organizations in the beef industry and policy makers in terms of a “national strategy” focused on higher quality beef products.
Modern patent theory dismisses commercialization of patented inventions as either irrelevant to patent law or a necessary evil in which society pays monopoly deadweight losses in exchange for public disclosure of new inventions. This conventional wisdom, however, does not account for hoary patent doctrines that have long secured to inventors their rights to commercialize the valuable property in their inventions. This paper identifies this divide between theory and doctrine by explaining the positive property framework employed by nineteenth-century courts in creating the fundamental commercialization doctrines in patent law. In fact, legislatures and courts imported into patent law the conceptual terminology and doctrinal requirements used to explain how landowners commercialized their rights to use and dispose of their real property. This is significant insofar as patents are no longer defined in terms of such substantive rights, but rather as securing only a right to exclude. This creates a mismatch between patent theory and patent law, which has led to indeterminacy in the commercialization doctrines originally framed in terms of securing to patentees their exclusive rights to use and dispose of their inventions in the marketplace. In rediscovering the positive framework that animates the commercialization doctrines in patent law, modern patent theory can also rediscover the fundamental role of commercialization as a policy justification for the patent system.
As of the mid 1990s economic reforms in Brazil impacting on land conflicts have intensified due to uncertainties surrounding property rights on land. The objective of this paper is to study the invasions of land properties held by the so called Brazilian social movements. This conflict concerns the disputes between farmers and social movements in which the landowners questioned the legality of the invasion for agrarian reform and compliance with the immediate mandate of reinstatement of possession when there is invasion of property. On the side of the social movements land invasions have become the main form of pressure to speed up expropriation processes and settlements. Having as institutional landmark the “anti-invasion Law” associated with the report on properties invaded released by the Federation of Agriculture of the State of Parana, we developed an empirical model applied to land owners in conflict areas encompassing invasions occurred over 2000 and 2006. Based on the premises of the New Institutional Economics and on the analysis of land property rights and private investments this study examined the relation between the variable “invasion period” (property right insecurity) and “land productivity level” (investment), by comparing farmers productivity before and after the invasion. Analysis of the research results allowed concluding that the problem of land invasions is expressive and bears directly on the investment decisions made by farmers in the State of Parana.
This paper addresses questions relating to government’s decision to allocate property rights in a resource to societal actors based upon, and in proportion to, those actors’ prior behavior with respect to the resource at issue. First, assuming that government wishes to distribute property rights based upon a “grandfathering” system, but also wishes to avoid actors inefficiently engaging in a behavior to secure (additional) property rights, the government should allocate the property rights based upon a time period that precedes the announcement of the intent to allocate such grandfathered rights. Second, once societal actors begin to anticipate, and therefore to act in anticipation of, such grandfathering regimes, the government should resort to basing property allocations on constrained randomly varying criteria. A third issue is why should we expect government (i) to wish to employ a grandfathering regime, yet also (ii) to wish to cabin the ability of societal actors to “take full advantage” of grandfathering opportunities? Relying on considerations of public choice, the paper advances both a pessimistic and an optimistic account of this phenomenon.
Standard literature on incomplete contracts has focused on the hold-up problem that arises in the absence of ex-post verifiability. Investment in specific assets may expose investors to the risk of opportunistic behaviour by contractual counterparts, who may impose a renegotiation of the terms contracted upon (the so-called hold-up problem). Under this framework, contractual parties maintain strong incentives to under-invest in asset specificity due to the risk of counterpart’s opportunistic behaviour, the potential quasi-rents which might be generated by specific investments are almost completely dissipated. In this paper we argue that the hold-up problem is rather weakly founded. While it is generally assumed that the opportunistic agent is always able to impose a take-it-or leave-it offer to counterpart, we argue that the threat of quitting the contract is far to be credible under standard assumptions. As long as exit is costly a rational opportunistic agent will always be specific to some extent to the contract and will never quit the relationship. As a result, in our view, hold-up is effective only when outside options are binding and opportunist’s quasi-rents are null. This implies in turn that the hold-up problem raises in context of asymmetric information over parties’ outside options. This conclusion sheds new lights over the informational setting surrounding incomplete contracts and the hold-up problem.
We develop a simple general equilibrium framework where exchange costs are endogenous. The model implies a relation between the optimal exchange cost, institutions and the wealth of the economy that fits stylised facts. We draw preliminary implications for political economy issues with heterogeneous agents.
This paper calls into question the economic justification for Pigovian taxes and argues that existing empirical work is inadequate to justify the standard policy recommendations. In particular, it calls into question claims that the identification and measurement of a Pigovian externality is a sufficient condition for determining the optimal level of the tax. A claim about the optimal Pigou tax is a joint claim about the size of the externality and about the optimality of observed outcomes, not just the externality. Measuring the size of the observed Pigovian externality – even if done perfectly -- is not a reliable guide to the proper level of the Pigovian tax because in a world of efficient transfers we will still observe some externalities. Hence the debate about externalities should be about whether those compensating factors exist and not about measuring the externality itself. Contrary to received wisdom, we do not have strong evidence that any positive gas tax in the current economy is advisable, let alone information about what its level should be.
This paper develops a simple methodology to study the determinants of vertical integration emphasized by the transaction cost theories with particular emphasis on contract incompleteness and trade barriers. The empirical analysis uses new data on manufacturing firms operating in 65 countries coming from the ICA World Bank Surveys. This dataset is combined with the World Bank Doing Business database which gives general informations on countries' trade barriers and justicial system and with the UNCTAD TRAINS database which contains informations on import tariffs. I find that: 1) consistent with transaction cost theories, higher contract enforcement costs and higher trade barriers increase the likelihood of vertical integration; 2) asset specificity have a positive effect on the likelihood of vertical integration only in the presence of trade barriers to intermediate goods. I conclude that poor contract enforcement can distort firms' vertical structure in the presence of specific assets. This can have significant welfare costs. If improving home institutions is not feasible an equivalent solution is to reduce the trade barriers to specific assets produced in countries with better contract enforcement.
Previous models of corruption (Persson and Tabellini, 2000; Ferraz and Finan 2005, Alesina and Tabellini 2006) assume that informed voters value accountability: that all else equal, they express a low tolerance for corruption, which often translates into an anti-incumbent bias. This assumption is based on the expectation that honest or accountable politicians are likely to deliver more effective policies than their dishonest counterparts. Absent from these models, however, are transfers (public jobs, local policies, pork barrel politics, poverty alleviation policies, etc.) from corrupt incumbents to the public at large, transfers that might effectively compensate for reputation loss. In this paper, we specify an agent-based computational model to examine the conditions under which public goods are used for private gain, albeit with net public benefits. Specifically, if the incumbent has sufficient resources to compensate informed voters, even corrupt incumbents are likely to be re-elected. As the value placed on private goods or direct transfers by voters increases, the threshold for re-electing corrupt incumbents declines non-monotonically. To state this alternatively, individuals who stand to gain the most from such transfers are likely to vote, even for a corrupt incumbent, far from their ideal point.
Researchers have made different attempts to investigate the interaction between the quality and efficiency of a country’s institutions and a country’s economic performance. Within this framework, emphasis has been put on the relationship between the legal institutions and the financial system as essential factors in creating and enhancing overall economic growth. The link between legal institutions and the financial systems, however, is still somewhat controversial. This paper reports on a survey administered to 1,500 participants regarding preferences for investment under different legal and financial institutions. Results suggest that the performance of a country‘s legal institutions affects the willingness to invest money in that country and that people of different gender, age, political traditions, and professional experience react differently to these institutions.
This paper analyzes the relationship between business environment and trade in Africa. The business environment indicators include the number of documents (days) to export and import; number of procedures (days) to starting a business, registering a property, enforcing contract; investor's protection index; ports efficiency; and services infrastructure. We estimate a modified gravity equation, controlling for heterogeneity and shocks. The results suggest that both imports and exports for a country would increase with the improvements of the investor's protection and the reduction of the number of days to starting a business, enforcing a contract and registering a property. But the required number of procedures to starting a business, enforcing a contract, and registering a property would reduce trade. The results also show that the required number of documents (days) to export and import has a negative effect on trade. Ports efficiency and services infrastructure for the exporter and importer countries are positively related to trade.
Economic articles are published very slowly. We recommend that an auction market replace the current system for submitting papers and show a strict Pareto-improvement of equilibrium. Besides the benefits of speed, this mechanism increases the average quality of articles and journals and rewards editors and referees for their effort. In addition, the "academic dollars" for papers sold at auction go to the authors, editors and referees of cited articles. This nonpecuniary income indicates academic impact - facilitating decisions on tenure and promotion. We discuss practical issues and demonstrate that the auction market is implementable without relaxing current pecuniary or time constraints.
Forward sale of soybeans was one of the driving forces behind development of soybean agribusiness in Brazil. A specific issue motivated this study: breach of contract by soybean growers during a period of marked increase in soy prices and subsequent judicial rulings. Descriptive and econometric analysis (PROBIT) has been carried out in 161 judicial appeal decisions in the Goiás Court of Justice (Brazil) and a quantitative survey was done with 70 farmers. The core hypothesis of this study is that the instability created by judicial decisions raises transaction costs and hampers economic development. Contradictory court decisions were found between the first and appeal decisions, as well as in the case of same judicial level. The effects of court decisions are realized such as in the case of more requirements of guarantees and the reduction in the number of contracts. Those soybean farmers who did not breach their contracts also have been negatively affected by the strategic reactions of trading and processing companies. Use of the concept “social function of the contract” led to a high degree of instability in contracts. Therefore, the transaction costs have been increased for all the agents and the importance of economic sanctions has increased as well.
The corporate governance structure of monasteries is analyzed to derive new insights into solving agency problems of modern corporations. In the long history of monasteries, some abbots and friars lined their own pockets and convents were undisciplined. Monasteries developed special systems to check these excesses and therefore were able to survive for centuries. These features are studied from an economic perspective. Benedictine monasteries in Baden-Württemberg, Bavaria and German speaking Switzerland have an average lifetime of almost 500 years and only a quarter of them broke up as a result of agency problems. We argue that this is due to an appropriate governance structure relying strongly on the intrinsic motivation of the members and on internal control mechanisms.
Compliance with a social norm is a matter of self-enforceability and endogenous motivation to conform, which are relevant not just to the study of social norm, but also to a large array of social institutions. Endogenous mechanisms become effective once the game description is enriched with pre-play communication ad unanimous pre-play agreements over a norm (which remains nevertheless not binding in any sense). Behavioral models understand conformity as the maximization of some “enlarged” utility function, addressed to make room for an individual “desire” to comply with a norm reciprocally adhered to by other participants - which in turn is seen as depending on the expectation that the norm will be in fact reciprocally adhered. In this paper we present an experimental study of the “conformity-with-the-ideal preference theory” (Sacconi and Grimalda 2005), based of a simple experimental three person game called “exclusion game”. In case the players participate in a “constitutional stage” (under a veil of ignorance ) in which they decide unanimously the rule of division, the experimental data show a dramatic chance of the participants’ behavior pattern. Most of them conform to the fair rule of division they have agree before. This behavior is largely consistent with the predictions of our theory, but also suggest a weak form of what John Rawls (1971) called the “sense of justice”.
An important factor in all kinds of coordination is common knowledge; the knowledge that two or more persons share and know that they share. It increases the likelihood that communication is understood; allowing a speaker to formulate his or her message with an awareness of what the addressee knows and does not know. However, transaction cost economics and governance value analysis largely emphasize cooperation problems and not common knowledge, coordination and communication. This study thus develops and adapts the concept of common knowledge to a buyer-supplier setting and brings it into transaction cost economics and the governance value analysis framework. A model is tested on a sample of 305 purchasing relationships in the Scandinavian wood industry. It is found that it is possible to measure and analyze common knowledge as a construct with several dimensions. Common knowledge is important for coordination, communication and complex problem solving, and enables parties in a relationship to form expectations, communicate and negotiate effectively. This makes common knowledge important for cost reduction and end-product enhancement outcomes of relationships and for the ability to establish relational contracts. However, establishing common knowledge is costly, so agents are motivated to establish more common knowledge only when facing complex relationships, asset specificity, or uncertainty. Thesis with appendices: http://www.umb.no/ina/forskning/drgrader/2007-Sande.pdf
The purpose of the present paper is to contribute to the literature on country interlocks by illustrating and analysing the interlocking directorships in the Italian listed companies from 1998 to 2006. We find that over the entire period a high percentage of the Italian listed companies are connected with each other through a very small minority of directors. Such group of interlocking (overwhelmingly male) directors shows a remarkable stability over time with very few entrants and very few exits mainly related to the passing away of the director. We define them for brevity the Lords of the Italian stockmarket. Lords tend to belong to families of directors, with the first five families having more than 100 directorships in nine years. The highest level of connectivity concerns those companies that belong to the MIB 30/S&P-MIB 40 index, the Italian Blue Chips. In particular, practically all the financial Blue Chips are connected with each other through a web of directors continuously from 1998 to 2006. The extent, depth, and stability of the connections among the Italian listed companies, and in particular the main Italian financial companies, raise doubts on the extent of their competitive behaviour.
Internal organization relies heavily on psychological consistency requirements. This perspective has been emphasized in modern compensation theory, but has not been extended to organization theory. The idea is developed by starting from Williamson's discussion of idiosyncratic exchange. The perspective sheds new light on several topics in the theory of the firm, like the boundaries of the firm ("Williamson's puzzle"), the importance of fairness concerns within firms, the attenuation of incentives, or the role of routines. It implies a "perceptional" theory of the firm that is "realistic" in the sense advocated by Coase (1937).
This paper demonstrates that private incumbent firms engage in behavior to prevent potential entry by public agencies. From the late 1990s to the mid 2000s, incumbent US cable TV firms invested billions of dollars in new technology to upgrade their systems from one-way to two-way capability. I show that incumbent systems timed their upgrades so as to deter potential entry by cities with municipal electric utilities. On average, incumbent firms upgraded their systems 20% faster when the city owned a municipal electric utility. The result is robust to a number of alternative explanations; in particular, the effect disappears when a state passes a law restricting the city’s ability to build and operate a cable TV system. I also show that the incumbent firm’s response to potential entry by the city was greater than the response to potential entry by a private firm. The results suggest that incumbent firms engage in stronger ex ante deterring responses when the potential entrant is asymmetric. In the context of this study, the asymmetry arises from the different objectives pursued by private and public firms. These results should be of interest to firms that operate in regulated industries or in markets with potential or actual state-owned competitors such as those in China and the EU.
This paper examines downwards nominal wage rigidity in the late 19th and early 20th centuries using personnel records from the Union Bank of Australia, the Victoria Railways (Australia), and Williams Deacon’s Bank (England). Although it was common for workers at these firms to receive a zero nominal increment, wage cuts were very rare, even in years of low or negative inflation. Turnover at these firms was extremely low and, thus, despite flexibility in the wages of incoming workers, did not offset the effects of individual-level wage rigidity. Consequently both real wage levels and increments moved counter-cyclically.
The design of legal and contractual mechanism to control agency problems between firms and investors, namely the asset substitution (AS) and the private benefits’ extraction (PBE) problems, has long represented a core issue of the corporate governance agenda. This Essay suggests that hybrid financial instruments (HFI) including options may provide efficient solutions to such problems. More specifically, it makes three claims. First, the instruments conventionally adopted by the governance system to contain corporate agency problems, namely corporate fiduciary law and standard corporate contracts, implement a constraint strategy that fails to respond to a welfare-maximization criterion. Second, HFI contracts provide an option-based incentive strategy against the undertaking of AS and PBE, which is superior to the constraint strategy adopted by conventional instruments. Third, because the mandatory nature of corporate fiduciary law may jeopardize the incentive scheme provided by HFI, existing law should be amended so as to implement a permissive regime of fiduciary duties.
This paper studies the intellectual property strategy of firms that participate in the formal standards process. Specifically, we examine litigation rates in a sample of patents disclosed to thirteen voluntary Standard Setting Organizations (SSOs). We find that SSO patents have a relatively high litigation rate, and that SSO patents assigned to small firms are litigated more often than those of large publicly-traded firms. We also estimate a series of difference-in-differences models and find that small-firm litigation rates increase following a patent’s disclosure to an SSO while those of large firms remain unchanged or decline. We interpret this result as evidence of a “platform paradox”— while small entrepreneurial firms rely on open standards to lower the fixed cost of innovation, these firms are also more likely to pursue an aggressive IP strategy that may undermine the openness of a new standard.
In 1890, the Church of the Latter Day Saints officially banned the practice of plural marriage, thus bringing Mormons into conformity with the laws of the United States and paving the way for Utah’s statehood. This, however, was not the end of the political controversy over polygamy. Some Mormons persisted with the practice, and the stereotype that all Mormons were polygamous also persisted. This paper examines how and why the Mormons developed a norm of vigorous, public in-group policing to deal with these problems. In the late nineteenth and early twentieth centuries the Church had sent mixed signals about the continuation of plural marriage, but from the 1920s onwards church officials took a very hard-line anti-polygamous stance and actively collaborated with state governments in trying to crush the practice. This study has broader applicability to embattled minorities in general—why these groups at some times protect “wayward” group members from hostile outsiders and at other times participate in policing efforts against these group members to enhance the standing of the group as a whole. This dynamic is essential to the emergence of norms of inter-group trust.
This paper argues that property, intellectual property, and organizations all employ modular structures in order to manage complex interactions between economic actors. All three devices break complex systems of interactions between actors into constituent parts, within which interactions are intense but between which interfaces constrain the flow of information. The right to exclude in the law of trespass is the most basic and familiar example. This paper combines and extends an information-cost theory of property and a modularity-based theory of the firm to explain the property-like aspects of organizations—asset partitioning, legal personality, stability and flexibility over time, team production and the residual claim—as stemming from modular structures that go beyond the familiar “nexus of-contracts.” Similarly, intellectual property can achieve information-cost savings through the indirectness and simplicity of basic exclusion rules. Especially with a nonrival resource like information, the right mixture of exclusion, governance and open access remains an empirical question, but intellectual property, like property and organizational law, can be seen as a second-best solution of a complex coordination problem of attributing outputs to inputs.
The Uniform Sales Act was an early attempt to unify American sales law. Between 1906 and 1947 it was adopted in 34 American states. Transaction cost theory suggests that states’ adoption decisions should have been influenced by large manufacturing interests, neighborhood effects, and major transportation systems. Historians have also suggested that states' adoption decisions should have been influenced by whether the states' legal professions had adopted a state bar association and whether the states had been admitted to the union. This paper uses a logistic regression model to evaluate the contributions of these variables to states’ adoption decisions. The results suggest that manufacturing interests, neighborhood effects, and transportation systems all played an important role in the diffusion of the Uniform Sales Act. It appears that the Act ultimately failed to diffuse across all states primarily because the southern states resisted legal unification and because most of them were not well integrated into the national transportation network.
We study hiring decisions made by competing universities in a dynamic framework, focusing on the structure of university finance. Universities with annual state-approved financing underinvest in high-quality faculty, while universities that receive a significant part of their annual income from returns on endowments hire fewer but better faculty and provide long-term contracts. If university financing is linked to the number of students, there is additional pressure to hire low-quality short-term staff. An increase in the university’s budget might force the university to switch its priorities from ‘research’ to ‘teaching’ in equilibrium. We employ our model to discuss the necessity for state-financed endowments, and investigate the political economics of competition between universities, path-dependence in the development of the university system, and higher-education reform in emerging market economies.
We examine the comparative effectiveness of three alternative licensing systems in professional football. The three systems’ main concern is with the promulgation of responsible financial behaviour among football clubs. To that effect, all three systems rely on entry control and ex ante budget approval rights. However, the three structures also differ, especially with regard to the way in which they seek to impose ex post budgetary discipline. We analyse these differences, using Transaction Cost Economics as our basic frame of reference. Both theoretically and empirically, we demonstrate that the effectiveness of the licensing arrangements depends on the credibility of the punitive measures available to the governing body. We also find evidence to suggest that social ties may partly substitute for formal deterrence and enforcement.
Business tragedies, such as what happened at ENRON, have frequently been explored from the moral and ethical perspectives of the firms’ top executives but less often from the incentives-perspective of the employees. What drove ENRON employees to cheer for energy price increases that resulted from forest fires? Such behavior appears unethical, irrational, and even criminal to some extent. Yet this behavior can be explained with economic theories that analyze decision-making in the context of the environment. There are two types of environments we must consider: external, such as cultural norms, a subset of which is the culture within the firm, and internal environment, by which we mean the physical and chemical state of human brain. The state of the brain is largely established by the types and amounts of hormones released in response to the external environment. Though researchers artificially induce hormones to stimulate specific decision-making in human volunteers (Paul J. Zak et al. 2007; Michael Kosfeld et al. 2005; Angela A Stanton 2007), there is no need to carry bottles of hormones to stimulate a desired decision-making; changing environment will induce hormonal changes. This paper reviews human and animal research of the hormones that affect economic decision-making, how they affect it, and provides suggestions on how institutions may influence the hormones of the brain by stimulating the environment in which people live, work, and make decisions.
A rationale is developed for the numerus clausus - the principle that the number of property forms is limited by the law. Current theories, based on third party information costs, imply that as the cost of providing notice of novel forms decreases, the numerus clausus principle should weaken. Here, the numerus clausus is seen not as a limitation on the available number of forms (Smith), nor as a limitation on the divisibility of rights (Hansmann & Kraakman), but as a strong legal preference for maintaining rules of exclusion in the face of private pressures to move to fine grained modes of governance. Exclusionary rules are superior to governance rules because they compensate for the cognitive and motivational limitations of the parties to transactions. These limitations do not vary with the cost of notice, because they arise from the ‘human element’ inherent in the transacting process. Exclusionary rules allow for the operation of differential human capital, free from the need for restitution or permission that characterizes governance rules, thereby enabling a Hayekian search process. This search process (sometimes) requires that the control of a resource be spread across more than one decision-making unit over the lifetime of the resource. This implies that satisficing, in which any one decision-making unit finds a course of action that is ‘good enough’ rather than ‘best’, should be a goal of property law, and not just a clarifying assumption of rational choice theory.
Liberalizing European telecommunication markets during the 1990s has had ambiguous effects on quality investments in EU 15 countries which were beside others driven by diverse country-specific aspects. For analyzing the driving factors underlying the heterogenous European countries’ investment patterns I use the set-up of an investment adjustment model. A significant positive effect of competition on infrastructure investments is found. In a subsequent step I extend the model to find out how incumbents and new entrants deal with the transition period between the introduction of the European directive and the transition into national law. I show that investments were significantly increased during the transition period. Integration tests prove most of the underlying model parameters following a I(1) process. Subsequent Pedroni and Kao co-integration tests show ambiguous results. For the multivariate analyses three alternative econometric models are used, namely a standard REGLS, a LSDV-C and a dynamic panel data approach. All three models provide similar estimation results.
This paper examines how historical markets and institutions managed measurement issues. The paper makes a distinction between metrology (the science or systems of measurements) and mensuration (the activity or process of measurements), and argues that while historical metrology has been studied, few studies of mensuration practices exist. The main argument made here is that, historically, managing product measurements involved managing issues of mensuration as well as metrology. Focussing on the latter, this research uses three historical case studies of mensuration practices to make the following points. A standardized metrological system (i.e. a system of weights and measures) did not eliminate the need to have functioning market institutions that could manage this aspect of transactions. Institutions influenced the product attributes that were measured, the manner in which measurements were made, and the metrological standards that were used to make the measurements. Mensuration practices could be considered as ‘institutional packages’ that were comprised of standardized processes, measurement instruments, standards of comparison, and the rules and conventions that managed product measurements.
We address two problems with how trust is frequently measured in economics. First, we highlight the importance of clearly identifying the target of trust, which when ignored can lead to inconsistencies between trust measures. Second, we note the importance of distinguishing trust from other closely related concepts, which when overlooked can result in imprecise findings. To overcome these limitations, we conduct an experiment using a new behavioral measure of trust – individuals’ willingness to pay to avoid being vulnerable to the target of trust – and vary the target of trust. To assess the accuracy of our behavioral measure, we also collect data on potentially confounding effects (i.e., altruism and risk aversion) and on attitudinal measures of trust. The results provide support for our method of measuring trust. Subjects discriminate based on perceived characteristics of different targets in determining whether to trust, in a manner consistent with trust elicited using attitudinal measures and with actual trustworthiness. We also find that risk aversion and altruism do not correlate highly with our measure of trust, and in fact altruism is negatively related to trust when comparing across targets.
Antitrust law recognizes that an important stakeholder might be able to exercise influence over another party “by voting or otherwise.” My focus is on “otherwise” – specifically, can one party gain influence over another party through a (possibly) non-voting debt-like or equity-like financial stake? Ultimately, can two competing entities use such stakes to commit to each other to not compete? There is some case law that is consistent with the intuitively appealing suggestion that even the holder of a large non-voting stake (debt or equity) could exercise influence over a target firm. I develop this intuition and explore its limits by appealing to both the case law and to the governance attributes of alternative modes of financing.
Early Internet scholars proclaimed that the transnational nature of the Internet rendered it inherently unregulable by conventional governments. Instead, the Internet would be governed by customs and practices established by the end user community in a manner reminiscent of the lex mercatoria, which spontaneously emerged during medieval times to resolve international trade disputes independently and autonomously from national law. Subsequent events have revealed these claims to have been overly optimistic, as national governments have evinced both the inclination and the ability to exert influence, if not outright control, over the physical infrastructure, the domain name system, and the content flowing across the network. These failures have done little to lessen the allure of Internet self-governance. In particular, some scholars have suggested that more widespread use of open source software would increase the Internet’s ability to resist governmental control. This Article explores whether more widespread use of open source software might provide the basis for the type of bottom-up ordering associated with the lex mercatoria. Perhaps unsurprisingly, a system of self-governance based on open source implicates the same questions of spontaneity, universality, and autonomy that surround the lex mercatoria.
Automobile franchise contracts allocate between manufacturers and dealers the rights to choose future terms of trade. Independent of who is assigned these rights, manufacturers dictate performance standards, and dealers implement them in exchange for discounts on the wholesale price of cars, which manufacturers can change at will even after dealers have performed. These practices suggest formal decision rights are not instruments to efficiently divide surplus when contracting the terms of trade ex post, as implied by models in the property rights tradition. They suggest, instead, that contracting the terms of trades ex post is costly, and that manufacturers act as specialized decision-makers for the dealership network as a whole. In this context, formal decision rights may be a last resort against the manufacturers’ temptation to impose opportunistic decisions and the dealers’ temptation to reject efficient but costly ones.