Society for Institutional & Organizational Economics
Conference papers from 2009 (sessions were not tracked for this year)
This paper presents a simple model of elite formation emanating from a coloniser's quest to maximise extracted output from it's colonies. Under alternative specifications of the production function, the results of the model suggests multiple equilibria associated with varying combinations of elite dimension and human capital transfers that maximise the coloniser's objective function, depending on both the technology of governance chosen by the coloniser, as well as on the parameterisation of the productivity distance between elites and the population masses and on the returns to human capital. Under an additively separable production function, these equilibria range from (1) high human capital transfers to a fairly large elite under a governance technology by numbers, to (2) either high or low human capital transfers to a fairly large elite under a governance technology by quality, to (3) high human capital transfers to a relatively small elite or low human capital transfers to either a fairly small or large elite under a composite governance technology. This insight is useful in understanding why the pace of, and the approaches to decolonisation might have varied considerably across colonial experiences.
We propose a new test of Acemoglu and Robinson's model of political transition. We draw upon a hitherto unexplored prediction of the model: a "transfer" to newly established political regimes causes regime instability. We use exogenous variation in such transfers to test the theory. The variations comes from the neighborhood e ects which can be considered to be exogenous from the point of view of each country.
We propose a novel instrument for land conflict in Brazil: the number of priests across counties. Catholic priests provided the organizational skills to galvanize the landless peasants to overcome the inherent free-rider problem of large scale land invasions. We also argue that the Landless Peasants Movement, beginning the late 1980s, drew their motivation from the activities of priests. Whereas there is good reason to expect the number of priests to affect the number of conflicts in a given region, there is no apparent reason why the presence of priests would have a direct impact on land tenure. We use a panel for all of the 5,561 counties (municipios) in Brazil in 1985 and 1996 and show that the presence of priests effectively instruments for conflict (security of property rights) and allows for consistent estimation of its impact on land tenure. We estimate the impact of land conflict on land tenure. We test two hypotheses: 1) landowners don’t rent because it prompts land conflict which causes the government to expropriate the land; and 2) changes from labor intensive to capital intensive crops, because of changes in relative prices, has caused fewer rentals. We test our hypotheses for their impact across the various tenure categories.: owners; renters, and squatters inter alia.. Our results have policy implications concerning land reform. To the extent that land conflict reduces land rental it is blocking one of the avenues for economic mobility of farmers.
In this article, our aim is to study the determinants of the trade-off between in-house and outsourced utilities provision. More precisely, we focus on the French urban public transport sector. With regard to the issue we are interested in, this case is a particularly rich domain since, in France, the local authorities in charge of regulating the procurement of urban public transport services can choose between direct provision and outsourcing. In this latter case, they even have an additional option since they can contract out the operation of service either to semi-public companies or to fully private firms. Using an original database covering 154 different French urban transport networks (out of 210), we estimate the impact on organisational choices of network and service characteristics and institutional dimensions. Our results allow shedding light on the economic rationale behind the choice of a mode of governance. Indeed, although most of the interpretations of the organizational decisions made by local governments in utilities sectors concentrate on political factors, we show that there are rooms for economic explanations.
Most contemporary scholarship on decentralization assesses the impacts of these reforms by studying the decisions and activities of local government administrations: the targeted actors of the decentralization reforms. Meso-level analyses of this sort fail to capture an important determinant of aggregate governance performance: the institutional conditions for community self-governance. These conditions can only be observed by finer-scaled analysis of community organization.We argue that to come to come up with more nuanced explanations of the mixed governance outcomes of decentralized forest policy, scholars need to engage in multi-level analyses that include outcomes at sub-municipal levels. Our empirical analysis tests and discusses some of the conditions that are believed to be conducive to community self-governance of forests in Bolivia. In particular, we compare and contrast the effects of repeated interactions between local communities and a variety of external actors, including NGOs, local governments, regional as well as central government agencies on the likelihood of self-organization for forest governance. Controlling for the security of property rights as well as a range of documented determinants of effective self-governance, we find that of all the external actors that rural villages interact with it is the relatively frequency with which they interact with municipal government that has the most consistently positive effect on their efforts of self-governance.
This paper investigates the coordination of Brazilian infra-structure public work contracts. Those contracts are audited by the Brazilian Court of Audit (TCU), trying to reduce information asymmetry in the bidding and execution process of these works. We analyzed all TCU auditing reports of 228 federal public works related to 728 contracts, surveying the works’ features and their irregularities as identified by TCU and stated on their inspection’s reports. Besides that, we surveyed TCU’s analysts in order to measure the complexity of public works, and the analysts’ perception of the difficulties in the auditing process. Results suggest that the following variables are negatively associated with auditing efficiency: (i) specificity and auditing complexity, as indicated by the attributes’ measurement costs, and (ii) capture probability by the private agent, as indicated by expected sunk costs if the supplier were replaced. In an environment marked by weak enforcement, those factors increase the potential of public value expropriation by the private agent.
Foreign aid plays an important role in many developing countries but little is empirically known how it affects incentives and behavior in public bureaucracies. This article aims to provide a model and case study to shed light on how incentive problems embedded in aid - particularly the moral hazard problem and aid fungibility – affect the incentives faced by public bureaucracies in developing countries. In this model are two players, the donors and the public agency. The public agency’s objective is to ensure bureaucratic survival while the donor seeks to grow its loan portfolio. Both players are engaged in a strategic game hypothesized to be fraught with the double moral hazard problem compounded by the fungibility of aid. To ensure bureaucratic survival, the public irrigation agency needs a steady stream of irrigation projects. This creates strong incentives for the agency to under invest in the maintenance of irrigation systems because this would justify new loans from donors which – because of aid fungibility – help ensure bureaucratic survival. This behavior by the irrigation agency is implicitly sustained by the double moral hazard problem found in aid: donors need irrigation agencies as clients to grow their loan portfolio while financially struggling irrigation agencies need donors to finance their capital expenditures and subsidize their operations. My findings are broadly consistent with these theoretical expectations.
The theory of collective action is a central subject in the social sciences with significant implications in the design of institutions. Collective action problems are situations where individually rational decisions do not lead to collectively rational outcomes. They can result from conflicting interests, inadequate information, the characteristics of a good as well as those of the players. Empirically, collective action problems have been studied in terms of political parties, coalitions, voting and elections, international cooperation, mass movements, evolution of institutions for long distance trade, decentralization, common pool goods, self-governance and foreign aid. Theoretically, they have been modeled as public goods game, common-pool resource games, chicken and assurance games, dictator games as well as prisoner’s dilemma game. I examine the effects of formal property rights on collective action among a large and heterogeneous group of users of a common pool resource. Using econometric analyses on a data set of 1,958 irrigation associations in the Philippines, I find that land tenure security has a negative and statistically significant effects on collective action. I attribute this effect to the problem of missing information and institutional path dependence.
This paper provides evidence on how fairness concerns affect the impact of market institutions, focusing on two particularly important institutions: dismissal barriers, and bonus pay. We implement settings with incomplete contracts and endogenous long-term relationships. Theoretical solutions to incompleteness typically involve firms using rents and firing threat to incentivize selfish workers, or else using generous wages to appeal to worker fairness concerns. Experiments show, however, that there is typically a mix of selfish and fair agents. Our paper shows that understanding the impact of institutions requires an appreciation of this heterogeneity, because some institutions allow “fairness compatible” incentives, whereas others force firms to tradeoff incentivizing selfish workers against demoralizing fair workers. In particular, dismissal barriers remove the threat of firing as an incentive device, and lead firms in our experiments to endogenously implement rising wage profiles to incentivize selfish workers. But low initial wages tend to demoralize fair workers and cause them to exert low effort, so market efficiency is low. This loss in efficiency means that dismissal barriers do not help workers. We find that introducing bonus pay largely undoes the negative effects of dismissal barriers, by allowing firms to incentivize selfish workers while also rewarding good performance by fair workers.
This paper empirically shows that innovation in Information Technology (IT) has become increasingly dependent on and intertwined with innovation in software. This change in the nature of IT innovation has had differential effects on the performance of the United States and Japan, two of the largest producers of IT globally. We document this linkage between software’s contribution in IT innovation and the differential innovation performance of US and Japanese electronics, semiconductors, and hardware firms. We collect patent data from USPTO in the period 1980-2002 and use a citation function approach to formally show the trend of increasing software dependence of IT innovation. Then, using a broad unbalanced panel of the largest US and Japanese publicly listed IT firms in the period 1983-1999, we show that (a) Japanese IT innovation relies less on software advances than US IT innovation, (b) the innovation performance of Japanese IT firms is increasingly lagging behind that of their US counterparts, particularly on IT sectors that are more software intensive, and (c) that US IT firms are increasingly outperforming their Japanese counterparts, particularly in more software intensive sectors. The findings of this paper could provide a fresh explanation for the relative decline of the Japanese IT industry in the 1990s.
Previous work has posed a supply-side hypothesis on the nature of judicial decisions in American courts: the civil law origin of some states led them to constrain judicial independence, thus diminishing the quality of their courts. We introduce a complementary hypothesis: entrenched economic interests may use their de facto political power to constrain the supply of judicial decisions. The results suggest that firms representing large, out-of-state economic interests have a low opinion of courts in states dominated by intra-state interests. Further, once controlling for the impact of intra-state interests, a state's legal origin has no significant effect on court output.
Most economic interactions happen in a context of sequential exchange in which innocent third parties suffer information asymmetry with respect to previous originative contracts. The law reduces transaction costs by protecting these third parties; but, to avoid too much damage to property, it preserves some element of consent by property right holders (e.g., they choose the agent in the originative contract). This requires judicial verifiability of originative contracts, which is obtained either as an automatic byproduct of transactions or, when these would have remained private, by requiring them to be made public. This provides the market with legal commodities that make impersonal trade viable. However, it is taking Western law more than a thousand years to generalize this legal commoditization paradigm, due to path dependency—the law first developed for personal trade—; sunk costs—jurists still think in personal terms—; and vested interests—luddite legal professionals confront weak public bureaucracies—.
We develop a theory of strategic problem formulation for complex, ill-structured problems. Based on a limited number of assumptions, we theoretically identify a core set of impediments that limit the comprehensiveness of the formulation activity. We then use these impediments to derive design goals, which, if satisfied by an appropriately designed mechanism, can expand problem formulation comprehensiveness. We design a structured process that indeed satisfies the goals and discuss its use in several real-world applications.
The role of individual inventors, small firms and entrepreneurs in the patent courts has become controversial for two, somewhat contradictory, reasons. First, small parties may not have the financial resources to overcome the transaction costs of litigation and may therefore be at a serious disadvantage in defending their intellectual property rights in the courts. However, there is also a fear that some small inventors, particularly patent licensing firms, may operate as “trolls,” using the courts to extract economic rents from large companies. We analyze a cohort of patent cases and find that small parties suing large defendants are the most likely among all plaintiff categories to litigate a case to a judgment; they are also as likely as large firms to litigate to a trial when suing a large alleged infringer. Thus, institutional arrangement such as contingency fee lawyers may allow small parties to overcome the barriers created by high transaction costs. However, the characteristics of the litigated patents suggest that small firms may only be enforcing their most “valuable” patents and that the “average” patent may be filtered out. On the other hand, patent licensing firms do not follow the pattern of other small firms—they are less likely to seek judgments or trials. Nonetheless, they are only a very small percentage of all plaintiffs in patent cases, so while their behavior may be different from other small firms, they are not dominating the patent courts.
The cooperative movement in Poland has a long but difficult history. The socialistic regime introduced a command and control system into cooperatives which was destructive to their self-governing functions and eventually led to a lack of member involvement. There was a mass neglecting and abandonment after the transformation in particular of rural cooperatives. Nonetheless, in the early 1990s the first farmers’ cooperative marketing organizations, called agricultural producer groups, appeared on the market. They are bottom-up, voluntary organizations whose main purpose is to jointly sell their members’ output. Although producer groups functions similarly to marketing cooperatives, farmers establishing producer groups have been choosing other legal forms than cooperatives. In this paper we investigate why the new forms of governance of cooperative arrangements are chosen and what are the implication of these choices for the success of the groups on the market. We discuss the impact of invested capital, the impact of advisors, and the impact of institutional environment on this choice. The empirical data was collected on 62 producer groups functioning in one province of Poland. Keywords: Co-operatives, Governance, Organizational choice, Poland, Producer groups, Socialist legacy
Empirical inquiries can neither confirm nor deny the assertion that innovation markets suffer from excessive intellectual property. Assuming we cannot assess directly whether intellectual property coverage is excessive, an alternative query is proposed: can the market make this assessment and then undertake actions to reach a preferred outcome? This approach envisions that innovator populations make rent-seeking investments that select among a range of innovation regimes that trade off securing innovation gains against reducing transaction costs and associated losses. If we can identify conditions under which these private investments in lobbying, enforcement and transactional technologies are likely to yield socially-interested levels of intellectual-property coverage, then the underlying datum at issue—whether there is “too much” intellectual property—can be determined indirectly at some reasonable approximation. This approach identifies circumstances where privately-interested regime selection is likely to coincide approximately with the social interest: assuming sufficiently low coordination costs, adversely-affected entities that rely substantially on outside sources for innovation inputs have incentives and capacities to undertake actions that weaken property rights, including constrained enforcement, forming cooperative arrangements, or even voluntary forfeiture of intellectual property.
In this paper, we investigate the relative importance of cooperative behavior and environment for economic growth in simulated economies. We consider a simple world populated by individuals who can either utilize resources from their environment or create wealth within interactions with other agents. Each newly created piece of wealth is then divided among agents participating in that particular interaction similarly to the prisoner's dilemma game. Along with the other literature, the cooperative behavior and the ability to enforce cooperation are the key factors for long-term sustainable economic growth in our simulations. Interestingly, the effect of enforcement and punishment of piracy was not always positive: Introducing such mechanism caused elimination of the most successful agents without the positive effects on cooperation and productive economic activities. Hence, the income was lower for low enforcement rate than for the economies without any mechanism supporting cooperation. Similar effects occurred in the simulations of institutional change. In case of a discontinuous change, a radical enforcement mechanism was implemented in one point of time and it caused a sharp fall of wealth. Nevertheless, after some time the positive effects of cooperation dominated and economic growth emerged. As far as gradual approach to an institutional change concerns, steady stagnation instead of sharp fall was generated and the recovery was slower, too.
Most pre-crisis explanations of the various corporate governance explanations have considered the separation between ownership and control to be an advantage of the Anglo-American economies and have attributed the failure of other countries to achieve these efficient arrangements to their different legal and/or electoral systems. In this paper we compare this view with the co-evolution hypothesis that countries have a tendency to cluster along complementary politics-business interaction paths. We argue that this hypothesis provides a more convincing explanation of the past histories of major capitalist economies and can suggest some useful possible scenarios of their future institutional development. In support of the co-evolution hypothesis we run Bayesian simultaneous equation estimation and perform Bayesian model comparison of the various theories on employment protection determination.
Abstract: A large literature suggests that government owned banks produce inferior outcomes to privately owned banks. These findings are based, however, on data from the 1990s onwards. We do not know whether government owned, or mixed government-private ownership, banks were less efficient than privately owned banks during earlier stages of economic development. We therefore build a unique bank-level data set for Brazil from 1870 to 1929. The data allow us to estimate rates of return on equity on a semi-annual basis, as well as compute market shares, and to decompose banks by ownership class. Our preliminary findings indicate that, at least during the early stages of economic growth, public ownership was not associated with an efficiency loss.
This paper examines the role of initial conditions in shaping the relationship between state legislatures and state courts. Thirteen American states were settled by France, Spain or Mexico and had operational civil-law courts around the time of acquisition. During this period, civil law and common law differed in their conception of the appropriate balance of power between the legislature and the judiciary. In common law countries, the two were relatively equal, whereas in the civil law countries the legislature was dominant. We find that civil-law and common-law legislatures have behaved differently towards their judiciary in ways that are consistent with these views. In cross section, civil law states selected and retained their judiciaries in ways that led to lower judicial independence and spent less on their courts. To better understand these patterns, we examine the conditions under which states changed their methods of selecting and retaining judges and how legislatures changed budgets following these reforms. Common-law states did not change how they selected and retained the judiciary in periods of above average political competition, whereas civil-law states did. This difference is reinforced when we turn to the budget data. Following a reform, common-law states maintained existing spending levels, while civil-law states decreased spending significantly.
In this book, we explain how initial conditions including access to water transportation, climate and legal origins have shaped the evolution of legislatures and courts in the American States. In these two chapters, we focus on political institutions. In Chapter 3, we use panel methods that control for fixed effects and allow initial conditions to have time varying effects, and show that access to water transportation and climate have had a persistent influence on the evolution of political competition in state legislatures during roughly 1870-2000.In Chapter 4, we develop the occuupational homogeneity of elites hypothesis to explain political persistence. The testable prediction is that when state elites have very similar occupations, political competition will be weak; and, when state elites work in many professions, political competition will be strong. We measure the occupational homogeneity of state elites prior to the Civil War (1860) used detailed census data. Using water transportation as a source of exogenous variation, we show that elites in 1860 drive political compettion during 1866-2000. Even though the Civil War has shaped state politics, state elites prior to the Civil have also had a strong and persistent impact. Thus, our findings are consistent with the view that elites have a peristent influence on politics (see Acemoglu and Robinson, 2008; Engerman and Sokoloff, 1997 and 2000).
We document that the Russian crude oil pipeline is a potentially massive source of rents. Using a unique data set describing export routes and company characteristics, we find that by 2005 the Russian federal government used cost-based criterion including company-level transport costs, production costs and productivity to determine the allocation of export routes on the crude-oil pipeline. However, between 1999 and 2005 tariff rates increased, and the federal government continued to grant preferential access and the granting of preferential access to companies that have significant state representation on their boards. Thus, throughout the Putin years the federal government used its control over the pipeline for political advantages, despite the efficiency losses. Moreover, federal ownership positions in companies are more important determinants export access at the beginning of the Putin regime in 1999. Thus, by 2005 the Russian federal government appears to be controlling its rent-seeking activities. These results suggest the recent Russian growth may be sustainable.
Japanese development aid disbursements and bilateral investment treaty (BIT) ratification behavior are considered as two alternative foreign economic policy devices supporting Japanese businesses abroad. It is hypothesized that they replace each other in their capacity to promote Japanese foreign direct investment (FDI) activities in developing and emerging economies. To verify the hypothesis I use Toyo Keizai data on the investment activities of Japanese firms abroad grouped to an industry-country-year panel for the period 1990-2004. The results show that both BITs and foreign aid exert a positive influence on Japanese affiliate employment, but BITs only robustly in reduced sample specifications. There is robust evidence that the capacity of a BIT to act as an investment safeguard is lower when foreign aid is high and vice versa.
This article deals with the effects of reputation in the contracting-out of public services. Using the framework of Tirole [2008], we consider that contractors are all the more willing to write incomplete contracts and support relational agreements than they trust their partner. In this context, we show that informal practices depend both on future transactions and past experiences. Then, reputation is built over time, which leads progressively to lower contracting costs and more contractual incompleteness. To benefit of these lower costs, parties tend to renew contracts with the same “trusted” partners that they identify through time.
Reputation, a source of rents, cannot be conveniently insured. Anybody with a brand or public name must be concerned with the costs of badmouthing and can be ready to give up revenue to prevent circulation and propagation of false and damaging information. As a result, badmouthing is an instrument of racket and the press is likely to be used as a tool of extortion. This paper applies this argument in the context of the market for financial information in France during the period 1880-1914 focusing on the incidence of weak property rights arising partly from soft legal restrictions. Using empirical evidence on the industrial organization of the press and on a major badmouthing racket, we provide two main results. First we show that disinformation and racketeering do happen in specific segments of the market for news and in special situations only. This is owing to the emergence of organizational solutions to deal with rumors. We show that rackets occurred in smaller and less reputable journals, what we call “bad” or “zombie” journals which were – in the extreme cases - called or recalled to life only to wage a press campaign. Second a natural consequence of the existence of threats of badmouthing directs a flow of income towards good journals because the best insurance against bad mouthing by bad journals consists in paying for good mouthing by good journals. This conclusion may contribute to solve the puzzle of why rating managed to charge borrowers for their services.
In many instances, both voters and politicians are imperfectly informed about which policies are optimal. We analyze politicians’ policy choice in such situations. A distinctive element of our analysis is that we investigate how the strategic sophistication of voters’ beliefs about politicians’ behavior affects policy choice. This provides a novel approach in political economy that leads to a number of important insights. We show that these beliefs determine the strength of self-serving politicians’ incentives to engage in populism. Surprisingly, limited strategic sophistication of voters weakens politicians’ incentives to pander to public opinion. The reason is that politicians know that such voters expect them to choose a policy that is not perfectly pandering to public opinion. Furthermore, when comparing the welfare ranking of different constitutional regimes, we find that limited strategic sophistication of voters makes indirect democracy relatively more attractive compared to the case of full strategic rationality – and often more attractive than alternative constitutional regimes.
This article reports the results of a study that uses social network analysis to compare the persuasiveness of legal precedents in the diffusion of the strict liability rule for manufacturing defects. This new study tests which legal precedents were most influential and also whether certain state judicial variables influenced the diffusion process. The results are striking. The federal circuit regions appeared to define a dominant reference group in the diffusion process and social network effects dominated economic and political variables. In addition, the de facto separation of powers in the enactment of new state legislation appeared to influence courts’ propensities to adopt the strict liability rule. When the executive and legislative branches were dominated by the same political party – regardless whether it was the Republican or Democratic Party – state courts were more inclined to adopt the strict liability rule. This last result contradicts an economic hypothesis that predicts courts should be less inclined to exercise discretion when the de facto separation of powers between the executive and legislative branches is narrower.
Transport infrastructure investment increased substantially in Britain between the seventeenth and eighteenth century. This paper argues that the Glorious Revolution of 1688-89 contributed to transportation investment by reducing uncertainty about the security of improvement rights. It shows that road and river investment was low in the 1600s when several undertakers had their rights violated by major political changes or decrees from the King. It also shows that investment permanently increased after the Glorious Revolution when there was a lower likelihood that undertakers had their rights voided by acts. Together the evidence suggests that the political and institutional changes following Glorious Revolution made rights to improve infrastructure more secure and that promoters and investors responded to greater security by proposing and financing more projects.
This paper studies the evolution of the land tenure institutions of Bulgaria, an Eastern European country in transition from a socialist centrally planned to a capitalist market economy. The focus is on the period 1839–1878 during which the country was still under Ottoman rule and on the period after liberation, 1878–1944. The major factors which determined the shape of these institutions and the mechanisms of transition between land tenure regimes are identified and analyzed by critically evaluating two theories of institutional change — the efficiency theory developed by Demsetz (1967) and the social conflict theory developed by Acemoglu, Johnson, and Robinson (2005). Consistent with the latter theory, the paper argues that political institutions and the distribution of resources determined the prevailing political balance which in turn determined the structure of land tenure institutions during those two periods. The process of institutional change during 1839–1878 was endogenous to the Ottoman Empire but exogenous to Bulgaria as the institutions of the latter were embedded into those of the former. The shift to the post-liberation land tenure regime (1878–1944) was an endogenous process but the initial source of prevailing political power was an external factor — the Russian occupation forces. The paper suggests that the social conflict theory be expanded to include the embeddedness factor and the role of external factors in the process of institutional change.
The paper analyses the equilibria in an economy with a search labour market and a matching marriage market. The economy is populated by ex-ante homogeneous workers, firms, and marriage partners. Workers simultaneously search for firms in order to work and for marriage partners in order to marry. Firms post wages to attract workers; while marriage partners look for workers in order to marry. I assume that married workers receive a pre-determined flow utility, and that marriage partners derive flow utility equal to the worker's earnings. This provides the link between the two markets. I use noisy search in the labour market to generate a distribution of wages offered and of wages earned. I show that the so called married wage premium can be the consequence of frictions in both markets, without having to resort to the typical explanations, and I give the conditions for this to be the case.
This paper explores the politics and economics of state-led industrialisation. Focussing on Colombia, it analyses the role of the Instituto de Fomento Industrial (IFI), a government agency, to challenge assumptions in the conventional historiography. First, that the Colombian experience can be categorised as import-substituting industrialisation; secondly, that IFI promoted industrial growth effectively. The conventional literature claims that IFI fulfilled its fundamental mission of promoting industrial enterprise. The paper demonstrates that it did not do so for several reasons. In part, this was due to the funding model: the agency was inadequately funded. Further, IFI lacked institutional autonomy over its promotional ventures. Based on an examination of IFI board memoranda, balance sheets and annual reports, the paper shows how undermining the autonomy of IFI resulted in poor returns from flawed investments that consumed its capital and prevented it from generating a stream of new resources. Although minor investments were allocated according to criteria set out in the agency’s charter, large investments were subject to regional, nationalistic and sector-specific special pleading. Political interventions by state and private actors often prevailed over technical and financial considerations, compromising the overall performance of the Institute and its capacity to deliver support for industry.
To analyze how states influence the building of institutional frameworks, we contrast behavior establishing institutions (BEI) with rights establishing institutions (REI). The former prescribe agents’ behaviors, while the later allows them to make decisions. REI are economically superior to BEI because they decrease the cost of innovation and of organization. However, they can lead to critical discrepancies between observed distribution of wealth and power and expected one, which ends up in a crisis: a socially non acceptable result. State intervention can be called either for correcting the distribution of wealth, or for redesigning components of the institutional framework to get a more acceptable result. We highlight a cumulative process where BEI and REI develop successively: a phase of liberalization generating processes of regulation and vice versa. This allows understanding why open access societies combine open competition with a considerable body of regulation and a high level state intervention. Our framework also points out possibilities of bifurcations due to the choices made when disequilibria and crises occur. We then propose explanations for the emergence and evolution of alternative socio-political models.
The paper aims to provide a unified framework for the analysis of the governance of intellectual property resources, starting from methodological assumptions drawing on both New Institutional Economics strictu sensu and a broader institutional approach that allows to encompass the analysis of private orderings along with that of markets and formal and informal institutions. According to this view, the governance system adopted for a given set of knowledge resources – an intellectual property regime – can be defined as the combination of the entire set of institutions that contributes to defining, both ex-ante and ex-post, the nature and extent of the bundle of rights to intangible resources attributed to right-holders and to enforce the defined specification. The analysis highlights the main characteristics and trade-offs involved by the adoption of different intellectual property regimes, linking them to the relevant features of knowledge domains.
This paper studies the emergence and persistence of legislative malapportionment and analyzes its political and economic consequences using a political economy approach. Legislative malapportionment denotes a discrepancy between the share of legislative seats and the share of population held by electoral districts. We argue that legislative malapportionment enhances the elites’ de jure political influence by over-representing certain areas. This biased political representation survives in equilibrium as long as it helps democratic consolidation because pre- democracy elites manipulate democracy to preserve their power. At the same time, it reduces political competition and distorts public policies, hampering economic development. Empirical evidence from Latin America supports this theoretical framework. In a panel dataset for 11 Latin American countries for 1970-2000, we document that countries with higher lower-chamber malapportionment have lower GDP per capita. The same dataset also shows that higher malapportionment increases the probability of democratic consolidation. Finally, using within country data, we find that overrepresented electoral districts have a higher share of delegates from parties close to the pre-democracy ruling groups. Moreover, overrepresented states have stronger local elites, they have lower levels of political competition, and they also receive more transfers per capita from the central government.
Our paper aims to contribute to the empirical evidence that analyses the privatisation processes by studying the determinants of post privatisation ownership concentration and whether the chosen ownership structure of privatised firms constitutes an efficient governance mechanism and may help explain their effiency. For a cross section of 41 Spanish privatised firms within the period 1985-2003, we find that the method of privatisation and firms growth help explain differences in ownership concentration of divested firms. Furthermore, after controlling for the endogeneity of ownership concentration the results show a positive and significant effect of ownership concentration on firms’ post privatisation efficiency.
In the police, the internal affairs division has the role of investigating professional misconduct attributed to police officers. When an improper conduct is detected, an investigation process is triggered. At the end of the investigation process, the complaint can be sustained or not. If the investigation discloses sufficient evidence to prove the accusation, the officer should suffer reprimand, suspension, termination of employment and criminal prosecution. There is room, however, for concerns regarding whether the process will be impartial, given that police officers may attempt at influencing decisions for their own benefit or, at least, try to postpone the conclusion of the investigation. In our paper, we analyze a sample of 143 investigation processes against police officers in the Internal Affairs Division of the Civil Police of the State of Bahia, Brazil. We seek to identify the factors that contribute to the investigation process are concluded or not. Our econometric results show that the position that the police officer has in the organization and his tenure on the job (which should be correlated with the extent of informal relationships developed within the organization) do influence the probability of the investigation will concluded or not. Thus, results indicate that police officers seem to use formal and informal channels of influence to mitigate the threat of punishment—a conduct that is, therefore, misaligned with the public interest.
Different theories of decision-making on the U.S. Supreme Court make radically different predictions about the impact of a new justice on the Court. Using a new method for locating average majority opinion locations in a policy space, we test the predictions. We find direct effects from new justices: the majority opinions of the new justice differ from those of the old justice even absent a move in the median voter. In addition, the new justice's appearance on the Court induces strong but varying peer effects among the other justices. These findings appear quite harsh to the Median Voter Model of Supreme Court decision-making and diverge in important ways from the predictions of the Median Majority and Monopoly Author models. They appear somewhat friendlier to recent “author influence” theories. We discuss the implications for the president’s ability to shape the Court’s policy through appointments. The evidence suggests those opportunities are substantial.
What are the main causes of international terrorism? The lessons from the surge of academic research that followed 9/11 remain elusive. The careful investigation of the relative roles of economic and political conditions did little to change the fact that existing econometric estimates diverge in size, sign and significance. In this paper we present a new rationale (the escalation effect) stressing domestic political instability as the main reason for international terrorism. Econometric evidence from a panel of more than 130 countries (yearly from 1968 to 2003) shows this to be a much more promising avenue for future research than the available alternatives.
Using a new dataset on Indian railways, we study the effects of ownership structure on performance across public and private companies, within different types of public companies (such as those owned by the Government of India versus a Native State) and within individual companies between 1880 and 1913. Colonial India is an especially unique context because we can analyze the traditional public-private differences and also compare performance within public railways operated by the Imperial Government versus the Native States that faced differential capital costs and performance incentives. By focusing on different ownership structures within the same country and analyzing performance over a longer time period, we reduce the omitted variables bias associated with traditional cross-country comparisons and thus provide a stronger understanding of the relationship between ownership and efficiency.
We study the effect of legal constraints in an environment in which agents face demand shocks they would like to smooth, but the agents also have weakness of will: their long and short run preferences are misaligned. Some agents are sophisticated -- they know they will make inconsistent intertemporal choices -- while other agents are naive. The consequent public policy problem is complex. The state apparently should facilitate consumer borrowing, to help agents cushion the effect of shocks, but also should facilitate pre-commitment, to help agents control excessive present-based preferences. We show that naive and sophisticated agents make similar consumption/savings choices, which simplifies the policy problem. We also show that all agents borrow when they experience consumption shocks, and that agents with relatively strong present-based preferences who face relatively mild consumption shocks will borrow to finance excessive current consumption. Other agents save appropriately. Legal constraints that severely restrict agents' access to credit thus would be overinclusive. Offering agents access to both a liquid and an illiquid savings vehicle is welfare improving relative to allowing agents complete freedom to borrow or strongly restricting their access to the credit market.
History tells that institutions evolve gradually over time, pushing new ideas across borders and cultures. Globalisation is argued to accelerate this process. We examine the spatial links of different political institutions across borders. Applying various tests for spatial proximity, we do not find evidence of contemporaneous spatial links. This result is robust to various measures of distance and of cultural proximity across countries. Instead, when we analyse long run dynamics diffusion of institutions seems to occur only gradually.
The paper tackles the broad issue of contract incompleteness, property rights and conflicts in the context of rural Côte d'Ivoire. Thru a "Plant & Share" contract, a landowner provides land to a farmer who develops a tree crop plantation. When the plantation starts to produce, three types of sharing arrangements occur, depending on what is shared: the plantation, the plantation and the land, or the production. P&S contracts remain usually informal (no legal validation of the transaction by a public authority) and are quite incomplete. Some elements of the arrangement are rarely or never specified explicitly: the length of the contract, the right to transfer the plantation, the technical process involved in the creation of the plantation. Sometimes it is not even explicitly clear if it is only the plantation, or the plantation and the land that will be shared. In their current form, these contracts therefore convey a real potential for conflicts between landowners and farmers. The aim of the paper will be to provide insights into the rationale for the rapid spread of this institutional arrangement. Its incompleteness will be discussed as well as its potentially conflictive features. More crucially, the paper will show how this contract, in spite of its incompleteness, constitutes an alternative to much more conflictive land "sales" that currently dominate the Ivorian land market. A discussion of the socio-political embeddedness of contractual practices will thus be provided.
Competition law in many countries prohibits firms from making false claims about product quality or performance to potential buyers and also requires that the truth of specific claims be supported by adequate prior testing. This paper explores the differences between these two policies and asks, among other questions, whether a policy of mandatory prior substantiation has any incremental effect if a ban on false claims is in place. This paper develops a model in which firms have private information about their probability of having a high quality product and are able to determine product quality with certainty through costly learning. Penalties for false claims and for unsubstantiated claims create an opportunity for firms to credibly reveal their information and for signaling to emerge in equilibrium. I show that the two kinds of penalties affect the possibility of signaling in different ways, and that the mandatory substantiation requirement in many circumstances improves buyer information and social welfare beyond what is achieved by a ban on false claims alone. It is therefore not redundant to a false claims ban, but is a useful additional policy tool in markets characterized by asymmetric information.
This article analyses the relationship between institutions’ quality and natural resources through a rent seeking model. Depending on the quality of the institutions, each country has a specific structural capacity to stand natural resources dependency. It is shown that there exists a threshold for each country, so that beyond this point, any additional amount of natural resources begins to have a negative impact on institutions. As the stock of natural resources increases, the expected profitability of rent seeking improves which, in turn, lowers the quality of institutions. The mechanism stems from a new balance of power within the country. However, the intensity of institutional degradation is determined by social interactions and depends on both the nature of resources and their appropriability level. The inverse U-shaped curve obtained by empirical studies, presented in this article, supports the notion of non-monotonic effect of natural resources on the institutions found in the model.
This paper examines how criminalizing the act of bribing a foreign public official affects international trade flows using a watershed global anti-corruption initiative – the 1997 OECD Anti-Bribery Convention. This multilateral agreement criminalized foreign bribery (previously illegal only for U.S. firms) in countries that represent over 75% of world exports. I exploit temporal variation in the implementation of the Convention along with variation in the level of corruption of importing countries to quantify the effects of the Convention on bilateral exports. I use a large panel of exporters and importers to control for a broad range of confounding global and national trends and shocks. I find that, on average, the Convention caused a reduction in bilateral exports from signatory countries to high corruption importing countries relative to low corruption importing countries. This suggests that by creating large penalties for foreign bribery, the Convention indirectly increased transaction costs between corrupt importing countries with high levels of corruption and exporting countries that criminalized foreign bribery. The Convention may have induced OECD firms to divert their exports to less corrupt countries; while at the same time, non-OECD firms that are not bound by the Convention may have increased their exports to corrupt countries. I also find evidence that the effects of the Convention differed across product categories.
The aim of this paper is to discuss the co-evolution between agricultural biotechnology and biosafety process, with a special focus on Brazilian case. The rapid diffusion process of transgenic varieties has occurred in parallel with a high transaction cost process of regulation, combining local, territorial, national and supranational evolution of rules and norms involving public sector, private representatives and other stakeholders. In this context, technological complexity and social ambiguity have to be taken into account in the study of the co-evolution of agricultural biotechnology and biosafety regulation. ((Pisano, 1997; MckMeekin, et al. 2000; Meyer e Nikerson, 1998; Silveira et al, 2007; Hall & Martin, 2005; Just, Alston and Zilberman 2006; Phillips, Smyth and Kerrt al, 2006; Silveira et al, 2007 ). The first methodological step is to create a typology of stakeholders based on their position in the regulation process. Once a typology is defined, the second step is to identify the critical factors explaining their behavior. The multicriteria analysis is used to characterize the processes associated to the evolution of agricultural biotechnology and to the improvement of biosafety assessment methods. The multicriteria approach is developed based on the opinion of nearly 60 experts covering the complete span of biotechnology actors in Brazil. Finally, is the aim of the paper to define the friction and convergence zones between those groups.
We evaluate the effects of the duration of legislative terms on the performance of legislators. We exploit a natural experiment in the Argentine House of Representatives where term lengths were assigned randomly. Results for various objective measures of legislative output show that longer terms enhance legislative performance. We use a second experiment in the Argentine Senate to determine whether our results are specific to a particular chamber and a particular time. The results from the Senate reinforce the idea that longer terms enhance legislative productivity. Our results highlight limits to classic theories of electoral discipline (Barro 1973, Ferejohn 1986) predicting that shorter terms, by tightening accountability, will incentivize hard work by politicians. We discuss and test possible explanations. Our results suggest that the "accountability logic" is overcome by an "investment logic."
We present results from a novel experiment on the effect of a policy designed to encourage cooperation in a prisoner’s dilemma game. We find that the effect of this policy on the level of cooperation is greater when it was chosen democratically by the subjects than when it was exogenously imposed. In contrast to the previous literature, our experimental design allows us to control for selection effects (e.g. those who choose the policy may be affected differently by it). Our finding implies that democratic institutions may affect behavior in addition to its effect through the choice of policies. More generally, our findings have implications for empirical studies of treatment effects in other contexts: the effect of a treatment can differ depending on whether it is endogenous or exogenous.
This paper discusses trust and trust perceptions in infrastructure contracts and supporting institutions. We focus on perceptions of the trustworthiness of the government purchasers of infrastructure services by the supplying companies and by the governments themselves. In particular, we allow for trust updating and trust misalignments which may give rise to ‘undertrusting’ and ‘overtrusting’. The core of the paper sets out a game theoretic model of contracts with dynamic adjustment of trust perceptions, which we use to explore the impact of trust misalignment both on economic efficiency (measured by economic welfare) and on investment levels. We explore flexible contracts with and without pre-payments, rigid contracts (which do not allow for post-investment renegotiation) and hybrid contracts. We then compare the efficiency of the flexible contracts to that of the hybrid contracts using as a criterion the expected welfare implications of each contract. The model is used to shed light on current issues on the sustainability of private investment infrastructure contracts in developed and developing countries, including the role of regulatory institutions.
This paper examines the implications for economic welfare of the speed and scope of deregulation. Based primarily on case studies of six industries--railroads, natural gas, banking, airlines, cable television, and mobile telephony--we find that when strong competitive conditions existed, the slow and incremental approach to deregulation in these industries not only delayed the benefits to consumers from deregulation but also created economic distortions and dislocations. Based on these case studies, we develop a framework that could be used by public policy practitioners for evaluating whether industries are good candidates for deregulation.
This paper examines how skill, luck and reputation influence firm product diversification decisions. We develop a model where skill and luck drive firm performance, which in turn determines reputation, and show that the propensity to engage in product diversification is increasing in firm reputation. However, conditional on current reputation, future expected reputation effects reduce the attractiveness of product diversification for lower ability firms. We test these predictions using a large panel dataset on the global hedge fund industry. Our key results show that within-fund changes in returns are negative following diversification, but post diversification returns are 15-20 basis points per month higher in multi-fund firms compared to a matched control sample of focused firms. We interpret the results as evidence that firms exploit asymmetric information about their own ability to time new product launches, yet, reputation effects limit product diversification opportunities for lower ability firms.
Interests in the US telecommunications industry are shown to have a sophisticated understanding of the political process, and to behave strategically in their allocation of contributions to state legislators as if seeking to purchase influence over regulatory policy. We find that interests respond defensively to contributions from rivals, take into account the configuration of support available to them in both the legislature and the regulatory commission, and vary their contributions according to variations in supply prices for influence by different legislatures. This strategic behavior supports a theory that commercially motivated interests contribute campaign resources in order to mobilize legislators to influence the decisions of regulatory agencies. We also report evidence that restrictions on campaign finance do not affect all interests equally. Our results suggest that prohibitions on corporate contributions disadvantage interests lacking effective associated Political Action Committees (PACs), while limits on corporate and PAC contributions constrain the contributions of some well resourced interests but not others.
The institutional design in Brazil authorizes all States of the Federation and the Federal District to produce legislation in pre-defined themes selected in the Federal Constitution. State legislators must obey such limits and respect constitutional norms in rule making process to preserve a desirable rule of law enviroment. This paper focuses on the analysis of Supreme Court’s decisions in state legislation judicial review in other to identify the cases where can be found constitutional violations in relevant issues, as tax law, administrative law or basic rights, pointing the quality of Brazilian States’ law and testing a set of hypothesis related to the production of unconstitutional norms.
Using survey data from 28 transition countries, we test for the complementarity and substitutability of market-relevant skills and institutions. We show that democracy and good governance complement market skills in transition economies. Under autocracy and weak governance institutions there is no significant difference in support for revising privatization between high and low-skilled respondents. As the level of democracy and the quality of governance increases, the difference in the level of support for revising privatization between the high and low skilled grows dramatically. This finding contributes to our understanding of the microfoundations of the politics of economic reform.
We use data from the 2006 round of the Russian Longitudinal Monitoring Survey (RLMS) to describe perceptions of Russian people about the transition process and the role of the state. We also study which groups of the population hold more positive and more negative views of transition. Overall, we find that the Russian population is divided in their assessment of transition. About one half is deeply disappointed with transition results and has serious nostalgia about the life under the communist regime. There is a lot more unanimity about the role of the state in the economy. A vast majority of Russians opts for a very high state intervention into all spheres of economic life. However, an average Russian faces a cognitive dissonance: a perception that the state should be more involved in the economy is combined with a deep mistrust of specific state institutions. The variation in these perceptions is systematically related to age, education, employment histories and transition experiences.
How do institutions evolve when subject to random shocks? And how does this affect the convergence of informal and formal institutions? We propose to model these changes in an evolutionary game in which we distinguish between the Meta set of all existing and potential institutional arrangements and the de facto set of institutions that agents actually choose to uphold in equilibrium. We propose new evolutionary dynamics which relax some of the more rigid features of evolutionary games that limit their adaptability to social phenomena. In general we can provide a plausible model of institutional path dependence in which the destruction of “old” institutions and the creation of new are unpredictable. We can distinguish between the medium run – when the risk dominant, more “rational choice” strategy persists – vs. the long and ultra-long run when complex change may cause too much drift wafy from the risk dominant strategy in equlibrium. In general this provides a richer, and more intuitive framework in which to consider the role of path dependence in the endogenous evolution of social institutions.
How do institutions evolve when subject to random shocks and uncertainty? And how does this affect the convergence of informal and formal institutions? We propose to model these changes in an evolutionary game in which we distinguish between the Meta set of all existing and potential institutional arrangements and the de facto set of institutions that agents actually choose to uphold in equilibrium. In general, we formulate new stochastic evolutionary dynamics with drift and time-varying mutation rates, thereby relaxing some of the more rigid features of evolutionary games which limit their adaptability to social phenomena. Specifically, this provides a plausible model of institutional change in which, at the Meta level, the destruction of old institutions and the creation of new are unpredictable, which in turn defines, at the de facto level, the extent of agents’ bounded rationality and choice of strategy. We distinguish between the medium run – when the risk dominant, more “rational choice” strategy persists – vs. the long and ultra-long run when complex change may cause too much drift away from the risk dominant strategy in equilibrium. This provides a richer, and more intuitive framework in which to consider the scope of path dependence and the role of randomness in the endogenous evolution of social institutions.
This Article deploys network and statistical analyses to conduct an empirical study of standards of heightened scrutiny in Delaware corporate law. It is a follow up to an article analyzing the fairness standard—considered to be the most plaintiff-friendly standard of review, in marked distinction to the well-known business judgment rule (BJR). But there are also four other prominent standards of heightened scrutiny in Delaware jurisprudence, each of which purports to protect plaintiffs beyond the BJR: Unocal/Unitrin with respect to defensive measures in the face of a change-in-control transactions, Revlon in the context of auctioning a change-in-control, Blasius where the shareholder franchise might have been violated, and the Zapata "two-step" which sometimes requires a court to exercise its business judgment in the context of presuit demand. Despite the intuition of commentators that such standards get watered down, they had yet to be explored in a systematic fashion. The discussion is structured into three principal sections. Part I outlines what these standards of review are and what they purport to do. Part II describes the empirical methods used—from data gathering to analysis to the display of results. It culminates in four network maps, one for each standard. Finally, Part III considers the implications of the analysis, with a focus on whether these heightened standards offer more than rhetorical solace to shareholder-plaintiffs.
We present a game-theoretic model of debate and a laboratory experiment that explore how strategic incentives to make potentially persuasive arguments vary across di fferent informational and institutional contexts. In our model, a key feature of the informational environment is the extent to which members of a debate audience are able to extract informational content from exposure to an argument that they nd unconvincing. Our theoretical results show that when the informational content of unconvincing arguments is relatively high, speakers are discouraged from arguing irrespective of the distinct institutional rules of debate that we consider. By contrast, when the informational content of unconvincing arguments is relatively low, debate rules matter: speakers may be lead towards maximally or minimally informative debate, depending on the debate rule. In a laboratory experiment, we vary the informational and institutional settings for debate across four distinct treatments, and observe patterns of behavior which are broadly consistent with the predictions of our model.
This paper compares markets, cooperatives and hierarchies in terms of organizational efficiency. In particular, we analyze the knowledge economics of these three alternative forms of organization. We show that the three alternatives differ with respect to the acquisition of general versus idiosyncratic knowledge and with respect to their effectiveness to solve hold up problems. Markets are a marvel with respect to the aggregation and communication of idiosyncratic knowledge, but cause hold up problems when actors have to make specific investments. Cooperatives and hierarchies, on the other hand, solve hold up problems and effectively economize on the acquisition and use of general knowledge. Moreover, we show that cooperatives dominate markets (hierarchies) in terms of efficiency if the acquisition of general (idiosyncratic) knowledge is important for value creation.
This paper uses a new panel data set to perform a statistical analysis of political regimes and financial rectitude over the long run. Old Regime polities in Europe typically suffered from fiscal fragmentation and absolutist rule. By the start of World War I, however, many such countries had centralized institutions and limited government. Panel regressions indicate that political transformations towards centralized and limited regimes led to significant improvements in fiscal prudence. Dynamic estimations and structural breaks tests reinforce these findings. The results suggest that good financial housekeeping is one mechanism through which political reforms reduce sovereign credit risk.
This paper examines the effect of campaign contributions on firm performance in Latvia, using a unique dataset of firm-level campaign contributions by identifying all firms that donated directly or through its board member or shareholder. To address endogeneity issues, it focuses on an unanticipated result of the 2002 elections, when the ‘Latvian Way’ party failed to be re-elected and was replaced by the ‘First Party’. This paper finds that firms that provided contributions to the ‘Latvian Way’ experienced substantial decrease in sales in the after-election year. In contrast, firms that contributed to the ‘First Party’ experienced significant increase in sales.
This paper provides a political-economic model to study the impact of low-skilled immigration on the host country's education system, which is characterized by sources of school funding, the average expenditure per pupil, and the type of parents who are more likely to send their children to publicly or privately funded schools. Four main effects of immigration are considered: (1) greater congestion in public schools; (2) a lower average tax base for education funding; (3) reduced wages for low-skilled workers and so more dependence by low-skilled locals on public education; (4) a greater skill premium, which makes it easier for high-skilled locals to afford private education for their children, and hence weakens their support for financing public school. It is found that when the number of low-skilled immigrants is large, the education regime tends to become more segregated with wealthier locals more likely to opt out of the public system into private schools. The fertility differential between high- and low-skilled locals increase due to a quantity/quality trade-off. The theoretical predictions conform to stylized facts revealed in both the U.S. census data and the OECD Programme for International Student Assessment (2003).
While the existing research on licensing agreements is rather abundant, the role of third parties in these agreements has received very limited attention. However, although licensing agreements are essentially dyadic agreements, licensors and licensees frequently decide to resort to services proposed by third parties in order to secure and ease their relationships. Third parties that may intervene in the licensing context are technology brokers, consulting firms, collective research centers, patent attorneys, auditing firms, law firms, or professional associations. Our intent in this paper is to shed light on the existence of these third parties, which have almost been ignored in the literature up to now, and to understand the factors motivating firms to resort to these third parties' services in the licensing context. We argue that the main motive for the use of third-party services is their ability to help partners face two main managerial imperatives: the need to control and the need to cooperate. In other words, these third parties may enable the licensing partners to reduce the ‘costs of control’ and/or the ‘costs of cooperation’ associated with managing their licensing agreement. To test our conceptual framework, we use a detailed database of 112 licensing agreements negotiated in the Belgian technology industry.
As Joseph Schumpeter developed his argument for “creative destruction,” it was motivated, in part, as a warning against contemporary policies intended to obstruct it. Little work has examined the consequences of obstructing it, even though Schumpeter warned of the dangers of nations that were “determined not to allow [it] to function.” This paper addresses that issue by contrasting two post-crisis periods in which one would expect the process of creative destruction to be active – that is, in two important episodes in the economic history of Cuba, from 1898 to 1929, and from 1929 to 1939, through the examination of entry, survival and exit patterns of sugar mills and firms. Discrete survival analysis tests for differences in entry, survival and exit patterns in the favorable institutional environment of the former period against the unfavorable institutional environment of the latter. An institutional environment that obstructed the process of creative destruction in the latter period is shown to have had a distortionary effect with negative long-run consequences, as Schumpeter predicted.
We reexamine the recent and well-publicized finding that privatization increased mortality in postcommunist countries. First, we check robustness of the observed correlation to changes in model specification and address concerns about measurement of key determinants. Second, we exploit variation in privatization outcomes and mortality across Russian regions, holding constant many features of the macroeconomic and institutional environment that cannot be easily controlled for in a cross-country panel analysis.
We examine the economic consequences of US covert interventions undertaken to install and prop up political leaders in other countries during the Cold War period. To this point the absence of reliable information on covert interventions has served as an obstacle to seriously addressing this question. The recent declassification of CIA documents now makes it possible to systematically address this question in the Cold War context. We develop a new panel dataset of US interventions between 1947 and 1989. We find that the economic consequences of US interventions are limited to political environments with limited checks and balance, namely autocratic regimes. Interventions increase the flow of US goods into autocracies, raising the share of total imports into the country from US firms. However, US interventions yield few economic benefits to intervened countries; they have no impact on income levels, and on exports from and foreign direct investment into the intervened country. We conclude that the main economic beneficiaries of US interventions are US exporters and identify the industries that were the largest beneficiaries.
The current financial and economic crisis shows again that the 27 EU member states are not able to react unanimously to common challenges. So far, not even the “big” member states like France, Germany and the UK have been able to follow a unified approach to cope with the upcoming problems of a global recession. By following the approach proposed by Spiller and Tommasi (2007) our paper analyses whether an effective and efficient public policy in the EU is possible at all given the current institutional framework. According to this line of reasoning, public policies are seen as the outcome of complex intertemporal exchanges among politicians. They depend on the given basic institutions (like the constitution of a country) and on the characteristics of the political institutions which have evolved within the thus defined political environment. Together with the particular features of specific policy issues they set the framework for the resulting public policies and their qualities. Using this framework, we focus on the so-called Lisbon Strategy which is a first attempt to introduce a common public policy in the EU beyond that of creating a common market. Based on what has been achieved so far, we identify the main institutional features which limit the evolution of an effective and efficient common public policy in the EU. Besides, we make some proposals for the post-Lisbon Strategy which will be introduced in the upcoming year.
In an experiment designed to test for expressive voting, Tyran (JPubEc 2004) found a strong positive correlation between the participants’ approval for a proposal to donate money for charity and their expected approval rate for fellow voters. This phenomenon can be due to bandwagon voting or a false consensus effect. The social science literature reports both effects for voting decisions. Replicating Tyran’s experiment and adding new treatments, we provide evidence for a false consensus effect but find no support for bandwagon voting.
Financial manias and subsequent crashes are classic, recurrent and well documented side-effects of capitalism. In this paper we examine whether the explosive rise of modern banking in Iceland and the subsequent crash of the country’s financial system involved new or unusual features. We ask two main questions: First, how in less than five years did inexperienced local financers of this mini economy manage to become significant players in international capital markets? Second, why did Iceland’s entire financial system fail when the global credit bubble burst? The paper is organized as follows: First we briefly describe the institutional transition that took place in Iceland toward the end of the 20th century and during the first years of the 21st century, setting the stage for subsequent events. We then explain the financial bubble in terms of a chance concurrence of several factors that enabled the small country to enter international financial markets in a big way. The following section explains why the country’s three main banks collapsed simultaneously and crushed Iceland’s financial system. Finally we summarizes our results and briefly considers the economic outlook for the country.
So-called open source software (OSS) is marked by free access to the software and its source code. Copyright-based OSS licenses permit users to use, change, improve and redistribute the software, which is designed and developed in a public, collaborative manner. High quality OSS-products like Linux, Apache etc. are developed by thousands of volunteers, who often do not receive direct monetary reward. Hence, OSS seems to be an example of a ‘private provision of a public good’, and some argue that OSS is a ‘new intellectual property paradigm’ for the digital economy. Thus, OSS has been in the focus of economic research for some years. However, it is still not known which institutional and cultural factors favor OSS development. For this reason, we have performed a cross-country study of how the number of OSS developers per inhabitants of a country depends on institutional and cultural factors. We made use of data about OSS developers at SourceForge. Regarding country-specific factors we took into account protection of intellectual property rights (IPRs), regulation, social capital, openness to novelty, degree of individualism of a society and its attitude toward competition. We found that a culture of individualism/self-determination and of interpersonal trust is in favor of OSS as well as openness to scientific progress. The attitude towards competition was never significant, but less regulated countries have more OSS. Furthermore, protection of IPRs has a positive impact.
Consensus standardization often involves bargaining without side payments or substantive compromise, creating a war of attrition that selects through delay. We investigate the tradeoff between screening and delay when this process selects for socially valuable but privately observed quality. Immediate random choice may outperform the war of attrition, or vice versa. Allowing an uninformed neutral player to break deadlocks can improve on both mechanisms. Policies that reduce players' vested interest, and hence delays, can strengthen the ex ante incentive to improve proposals.
Cultural factors and especially common languages are well-known determinants of trade. By contrast, the knowledge of foreign languages was not explored in the literature so far. We combine traditional gravity models with data on fluency in the main languages used in EU and candidate countries. We show that widespread knowledge of languages is an important determinant for foreign trade, with English playing an especially important role. Other languages (French, German, and Russian) play an important role mainly in particular regions. Furthermore, we argue that the effect of foreign languages on trade may be non-linear. The robustness of our results is confirmed by quantile regressions.
Divided ownership has been shown to dilute economic incentives in a variety of contexts. Severed mineral rights are a widely-held form of divided ownership and have been a topic of recent policy interest. Using well-level production data from coalbed methane (CBM) wells in Wyoming during the years 1987-2006, wells on federal minerals with private surface are compared to those on federal minerals with federal surface. Federal minerals are studied to avoid the endogeneity problems found on private minerals, but the selection of well sites still requires econometric controls. Delays in entry on split estate are found, but are not associated with reduced production after entry. Some support is found for strategic incentives firms face regarding transaction costs inherent in different property rights. The role of the accommodation doctrine in preventing holdup is discussed.
We study organizational forms in rural conflict-ridden zones of Colombia, and analyze the impact of violence and subjective perceptions of insecurity on the choice of hybrid organizational modes. Based on a survey of 743 rural producers in five geographical regions, we find that the perceptions of personal and political insecurity correlate positively with hybridization in the organization of production and that the perception of personal insecurity correlates positively with the hybridization in the organization of distribution. Objective measures of violence also correlate positively with the degree of hybridization: homicide rate is related to hybridization in distribution, and displaced population is related to hybridization in production. The distinction between the organizational forms of production and distribution appears to be important, since the determinants of hybridization substantially differ between these two types of activity.
Using a new data set from 1890 to today, we estimate how the adoption of proportional representation affects policies in Swiss cantons. We show that proportional systems tilt spending toward public goods like education and welfare benefits but decrease spending for targeted transfers like roads and agricultural subsidies. However, we find little evidence that proportional representation increases the size of government. We also demonstrate that compositional changes of the legislature, i.e. party fragmentation and better representation of left-wing parties, are associated with more spending, while the direct electoral incentives of proportional rule appear to reduce government spending.
We study the interaction between social and economic incentives in determining the level of corruption. Using social rewards as incentives for civil servants may help to reduce corruption. A decrease in corruption produces an externality that makes wage schemes which avert corruption (efficiency wages) cheaper. We show that the existence of this externality reduces the “optimal” level of corruption in a society, the greater the power of social status, the lower the level of corruption.
Informality is widespread in most developing countries. Three stylized facts characterize informality: 1) small firms tend to operate informally while large firms tend to operate formally; 2) unskilled workers tend to be informal while skilled ones have formal jobs; 3) Ceteris paribus, secondary workers are less likely to operate formally than primary workers. We develop a model that account for all these facts. At the policy front, the main lesson from our paper is that governments should not only consider labor demand but also labor supply when tackling informality. Policies that reduce the supply of workers in the informal labor market at given wages will increase the level of formality in the economy. This has noteworthy implications for the design of welfare programs in developing countries.
This work analyzes the emergence of bad institutions in the Gold Coast (contemporary Ghana) from 1843 to 1966. To do so, it modifies Olson’s familiar bandit metaphor by introducing the notion of myopic foreign banditry, a situation that manifests when a colonial power does not have long term settlement objectives. Using simple game theory to characterize the political-economic dynamics of the modified bandit metaphor, it suggests that the exogenous institutional shock of myopic British colonization at the Gold Coast lowered the discount factors of local agents. As a result, time horizons shortened and agents starting preferring appropriation over production.
Political economy models suggest that proportional representation affects politicians’ incentives and public spending decisions. These have important implications for policy recommendations and electoral reform. However, little is known which differences between proportional and majoritarian systems actually matter empirically. This paper compares the role of district size in proportional and majoritarian systems for the provision of public goods and the total size of government. We find that district size has sizeable effects on education and welfare spending, and the magnitude of the effect is much larger than for the electoral rule. We also show that there are important differences between proportional and majoritarian systems: while larger voting districts increase spending in majoritarian systems, they lower spending in proportional systems.
JEL classification: D40, D82, C72, L10. Keywords: Platform contracting, component developers, stochastic contracts, adverse selection followed by moral hazard, exclusivity, type-dependent participation constraints and countervailing incentives, common value setting.
We examine the impact of relationships between contractors and subcontractors on firm pricing and entry decisions in the California highway procurement market using data from auctions conducted by the California Department of Transportation. Relationships in this market are valuable if they mitigate potential hold-up problems and incentives for ex post renegotiation due to contractual incompleteness. An important characteristic of informal contracts are that they must be self-enforcing, so that the value of relationships between firms and suppliers depend on the extent of possibilities for future interaction. We construct measures of the stock of contractors’ prior interactions with relevant subcontractors and find that a larger stock of relationships leads to lower bids and a greater likelihood of entry. Importantly, this relationship does not hold in periods of time and areas with little future contract volume, suggesting that the self-enforcement mechanism is crucial in providing value for informal contracts.
This paper empirically examines the interplay of formal, informal and relational contracts in the Spanish movie exhibition industry. In this industry, distributors contract with exhibitors to show their movies in their theaters using formal or informal contracts and an ex-post renegotiation mechanism that only compensates the latter. The paper develops a theory of renegotiation and learning with incomplete contracts. I adapt the theoretical framework in Baker, Gibbons and Murphy (1994) to the institutional detail of the movie industry and derive clear testable implications that I take to the data. For this purpose, I use a new dataset of revenue-sharing contracts and renegotiation outcomes in the Spanish movie industry. I find that distributors are more likely to use formal contracts when the reneging temptation is stronger and that movies that perform overall below expectations are renegotiated more often. Following this, I find evidence that economic agents learn across periods about the real movie audience appeal and use the new information to adjust their beliefs and make optimal movie run stopping decisions. Finally, I provide an upper bound estimate of the gains of using informal contracts (through contractual incompleteness) in both movie run length and theater revenues.
Our paper shows how “institutional” is the production of regulation’s ruling by studying the production of a new ruling in a federal structure with two levels of regulatory decision –making and two levels of judicial review. We show that a new applied regulation is produced in a process of trials and corrections induced by the incompleteness of the basic law and the limited rationality of regulators and judicial reviewers at the local and at the federal level. In a multi-level regulatory structure, being typically federal, that process of regulatory production is very cyclical (with five steps of innovation, imitation and correction). That process is both diversified (different units creating independently and differently the applied regulatory frame) and sequential (all units not entering the regulatory production on the same point and at the same moment). We applied that new analytical frame to a case study being the new regulation for renewable energy in India (a typically federal country).
The adverse effect of absolutism on financial development was famously shown by North and Weingast with the example of England before and after the Glorious Revolution. This example has been challenged by claims that things were not that bad before the Revolution or not that good after it. I provide independent evidence regarding the effect of Stuart absolutism on financial development – in America. In 1686 a scheme for a semi-private land bank was launched in locally-ruled Massachusetts. Soon afterwards an English royal governor was imposed on Massachusetts. Scholars have not figured out why the bank was aborted in 1688 shortly before starting operations. I relate this event to a specific policy of the Stuart-appointed governor – the invalidation of all land titles. Since the bank was based on mortgaged private lands, it is no surprise that it was aborted four days after the governor started prosecuting land owners.
This paper analyzes micro-level dynamics of changes in ownership structures. It investigates changes in ownership patterns currently taking place in Brazil. It builds upon empirical evidence to advance the theoretical understanding of how and why concentrated ownership structures can change towards dispersed ownership. Commentators argue that the Brazilian capital markets are finally taking off. Firms are migrating to Bovespa’s special listing segments, which require higher standards of corporate governance. Companies have sold control in the market, and the stock market has recently seen an attempted hostile takeover. This paper discusses these current developments and analyzes ownership structures of companies listed on Bovespa’s listing segments. It provides the first evidence of the decline of ownership concentration in Brazilian corporations. However, dispersed ownership is mainly found in Novo Mercado, the listing segment that requires the one-share-one-vote rule. This paper, then, investigates firms’ migration patterns, and finds that eighty-five percent of Novo Mercado’s firms are “new entrant” firms. Traditional firms have mostly migrated to Level 1, the least stringent corporate governance segment. Thus, there are two corporate worlds in Brazilian capital markets: new corporations that adopt proactive corporate governance patterns, and established corporations that retain their main patterns of corporate governance or ownership structure.
Drawing on organization theory , organizational economics and law the paper argues that the ‘nature of the firm’ can be more completely understood if the firm is considered a particular case in a more general class of ‘contracts of society’, allowing the discovery of unknown streams of actions (projects and tasks), complemented by constitutional pacts on fair procedures for the selection of actions – rather than a nexus of incomplete transactional contracts complemented by authority or power. Empirical evidence from published studies as well as from newly gathered data on firm founding and project-based alliance contracts (500 record database) document that actual contracts under uncertainty do fit the hypothesized pattern. This view offers an explanation of the nature of ‘firm-like’ organization that is independent of the particular governance regime adopted (authority-based or other), and rooted in the governance of knowledge in addition to the governance of conflict of interests.
By using micro-level data from a household survey in 27 European and central Asian transition countries and Turkey, this paper develops a gravitational approach that allows to empirically investigate the respective roles of local social interactions, proxied by geographic localization data, and of distant history, in particular the influence of former dynastic empires, on the distribution of opinions and on some economic outcomes. The focus is on opinions and economic outcomes for which both vertical and horizontal transmission have been shown or conjectured to play a role, such as: preferences for the welfare state, general trust, corruption, economic occupation and female labor force participation. The theoretical model predicts that cultural distance and dissimilarity of economic outcome will in increase in physical distance. This is confirmed by empirical results. Other results show evidence of significant negative “border effects” on cultural and economic dissimilarity, and a strong negative effect of past empires, as well as of EU integration and internet penetration. The results also indicate that Turkey is quite dissimilar to the new Europe, but not fundamentally different from other EU candidates.
The question of how to develop a relationship is central to business and management. This is especially true when the environment is characterized by informational asymmetries and subjectivity, as for example in management consulting. This paper presents a model of relationship building inspired by features of the consultant-client relationship. I develop a model in which the consultant may have private information about the difficulty of the client's problem, and the client has private information about his decision to exert costly, difficulty-reducing effort. Consistent with the evidence, I show that consultants and clients optimally start with low-risk, low-return assignments, and move up to high-risk, high-return assignments over time as they accumulate relationship capital. The probability of conflict and breakup of the relationship due to differences of opinion about the magnitude of the client's problem is decreasing over the course of the relationship, but may jump when the parties switch to a higher-risk assignment. Implications for other relationships are briefly discussed.
The U.S. public biomedical research system is renowned for its “peer-review” process that awards federal funds to meritorious research performers. Although Congressional appropriators do not earmark federal funds for biomedical research performers, I argue that they support allocations for those research fields that are most likely to benefit performers in their constituencies. Such disguised transfers mitigate the reputational penalties to appropriators of interfering with a merit-driven system. I use data on all peer reviewed grants by the National Institutes of Health during the years 1984 – 2003, and find that performers in the states of certain House appropriations committee members receive 5.9 – 10.3 percent more research funds as compared to unrepresented institutions. The returns to representation are concentrated in state universities and small businesses. Members support funding for the projects of represented research performers in fields in which they are relatively weak, and counteract the distributive effect of the peer review process.
The use of contracts as a way of vertically organizing transactions is spreading in many agricultural sectors. Contractual arrangements vary a lot across different chains or relations between downstream firms and primary growers. Our paper aims to explore why some contracts are more complete than others. We adopt multiple case studies as our research method. Based on 6 cases, we empirically examine three determinants of the completeness of a contract in the context of fruit and vegetable contracting in China. Four main conclusions follow. Firstly, it is shown that the extent of completeness of a contract varies substantially across different supply chains in China. Secondly, a contract is more complex when the firm designing the contract sells high quality products. Thirdly, our cases are indeterminate regarding market uncertainty determining the completeness of a contract. Fourthly, reputation has no effect on the completeness of a contract.
The highly concentrated nature and significant size of foreign investors relative to other sources of capital at the disposition of host country governments can lead to influence over the policymaking process which generates or sustains policies that benefit the interest for foreign investors at the expense of broad-based economic. Such outcomes are, however, by no means a necessary result of foreign direct investment inflows. The benefits of technology transfer, job creation, capacity building and integration into the international economy are real as is the potential that foreign investors may promote rather than retard economic and social modernization. These benefits are, however, more likely to dominate and generate net benefits to an economy from foreign direct investment when that investment is diffuse across industries, home countries and firms than when the same magnitude of flows are more concentrated. The question is not whether the economic benefits of foreign direct investment trump the costs of dependency but how often. In an empirical analysis examining the impact of concentration of FDI on economic growth in countries with varying degrees of concentration of political power, I identify the contingent effect of FDI on growth based on the degree of concentration of economic and political power.
This articles examines the impact of two themes in Kenneth Sokoloff’s research on mid nineteenth-century French mortgage markets. In particular, the negative effects of inequality and the positive effects of large, competitive markets. We document negative externalities from inequality: when the distribution of wealth is too skewed, the middle class gets excluded from the market. The second externality is a positive one that is generated by the geographical density of markets. We further distinguish its effects in the credit market itself from possible spillovers from the comparable externality in product markets. We proceed in four steps. We begin by summarizing the sources of our data and our aggregate findings of our research on French credit markets. We then move to an analysis of local credit markets, which suggests that inequality had adverse effects on lending. The next step is to search for the positive externality by examining loans between inhabitants of different cities and towns. We show that there were indeed positive network externalities in credit markets, which are consistent with a queuing model. Although most loans were local, the credit network allowed for significant inter-market flows of resources
We examine how firms use nonmarket strategies to protect economic rents created by corporate mergers and acquisitions. Since the early 1990s over 35% of all investor owned electric utilities (IOUs), have been the target of an M&A offer with an aggregate deal value of nearly 300 billion dollars. Mergers are typically rationalized on the basis of creating economic rents by achieving scale or scope economies. State regulatory agencies, however, have the ability to capture rents by imposing conditions such as electricity rate reductions or freezes before approving a merger. Utilities thus have an incentive to use nonmarket strategy to limit the extent of regulatory conditions imposed on a proposed M&A transaction. In this paper we contribute to the nonmarket strategy literature by conducting one of the first empirical investigations of how firms design integrated market and nonmarket strategies. Specifically, we investigate the conditions under which electric utilities use electoral campaign contributions to state politicians to achieve more favorable merger approval conditions. In our preliminary empirical results we find that target utilities significantly increase the level of their contributions in the 12 month period before the announcement of a proposed merger transaction.
In a principal--agent framework, principals can mitigate moral hazard problems not only through extrinsic incentives such as monitoring, but also through agents' intrinsic trustworthiness. Their relative usage, however, changes over time and varies across societies. This paper attempts to explain this phenomenon by endogenizing agent trustworthiness as a response to potential returns. It finds that agents acquire lower trustworthiness when monitoring becomes relatively cheaper over time, which may actually drive up the overall governance cost in society. Across societies, those giving employees lower weights in choosing governance methods tend to have higher monitoring intensities and lower trust.
We explore agency issues in Liverpool shipbuilding, 1743-1784. The typical ship had 2-12 owners, each contributing capital towards construction and owning a share of the ship. The construction/operation of a ship entailed two potential sources of agency problems. Owners rarely observed construction of a ship, and lacked knowledge to gauge its quality. And, a ship’s operation took it far from the oversight of these owners. When a ship sank or was captured, it was rarely clear whether the culprit was shoddy construction, poor captaincy, or unavoidable hazards. And while a captain would be primarily concerned with his life and subject to classic shirking incentives, owners were also (primarily?) concerned with the freight and ship. We explore this by exploiting a unique database of Liverpool ships. For each ship we observe date of construction; identity of owners; occupation of most owners; sailing history of most ships; and name of the captain for most trips. We identify which ships include captain and/or shipbuilder as owner, thus identifying cases where a ship provides key agents with residual claimancy. We measure a ship’s performance – how many trips before sinking or capture – to test whether ships with captain or shipbuilder as owner perform differently from ships without such ownership. Finally, a large minority of owners are “Gentlemen”—people of high class. We test whether high-status owners are afflicted differently than low-status owners by agency problems
In this paper we explore theoretically the relationship between explicit and implicit/relational contracting distinguishing between the ex-ante decision to sign an explicit contract and the ex-post decision wheter to actually apply it. We show, among other things, that the relational efficient explicit contract tends to display overcontracting on tasks or qualitative requirements (A) that are verifiable but apparently of little use for the principal. The ex-post (non)implementation of such explicit contract can then be discretionally exchanged against the provision of non contractible tasks (B) that are highly valuable for the principal. An empirical implication of the result, consistent with casual observation in procurement, is that penalties for infringements established by explicit contracts are seldom exercised, even though violations take place and are easy to monitor and verify.
The informal economy has been on an upward trend around the world since the 1980s. While most of the latest research has concentrated on the labor and size measurement aspects of the informal economy, there is little research on the business aspect of the informal economy. This study investigates the institutional mix that determines business formation, including the informal economy. It constructs an entrepreneurial choice model, based on the payoffs associated with existing opportunities. The available choices are: opening a business in the formal sector, obtaining a rent seeking position, and opening a business in the informal sector. The expected income is treated as the profit of a firm and as a function of capital investment in the enterprise. The entrepreneurial choice is influenced by the institutional incentives in an economy, expressed as a mix of public goods and cost of doing business. The purpose of this research is to bring a framework to entrepreneurial choice under the impact of institutions.
In 2001 Peru started a major decentralization reform. Since then legislation aimed at redefining the roles of regional and local government has been produced and implemented. This paper looks at Peru’s local governments and their involvement in rural development and agricultural services in this changing environment. Specifically, we draw on a unique nationally representative rural municipality panel dataset that covers the period before and after the decentralization reform to evaluate the role of collective action in the delivery of public services for agriculture. Prior to reform collective action (existence of a consensus-building forum) at the district level played an important role in both the provision of agricultural public services and the perception of their quality. Post-reform data suggest that to some degree these largely informal participatory fora have been substituted for by legally-mandated participatory budgeting processes. We present qualitative evidence that suggests that these fora function primarily as information-transmission mechanisms, encouraging better decision-making in municipal governments, and more effective accountability among voters. Although independent of decentralization reforms, participatory budgeting at the local level may be doing as much in strengthening local governance.
A key challenge for developing societies is to build coalitions across disparate interests in favour of beneficial policies. This paper documents the role of a financial innovation--shares-- in aligning disparate interests in favour of representative government during England's Civil War (1642-48). Using novel micro-data, the paper shows that shareholding was a major determinant of support for political reform by members of parliament. The paper suggests that shares allowed a broad spectrum of investors to benefit from new opportunities overseas. However, overseas rights belonged chiefly to the executive. Thus the introduction of shares aligned incentives in favour of political reforms and overseas policies crucial for growth.
In this paper, I develop a theoretical model to address the question of which firms invest more in political strategies. In particular, I examine whether it is stronger competitors (i.e., firms with greater market capabilities, the ability to succeed in market competition) or weaker firms that invest more in political strategies to reduce the hazards of public and private expropriation. Prior research has focused primarily on rent-seeking political strategy, arguing that weaker firms are more likely to use political strategies to seek refuge from competitive forces; however, when political strategy helps firms to safeguard their market production, intuition suggests that stronger competitors should stand to benefit from it. In this paper I develop a theoretical model that reveals how a firm’s market capabilities affect key tradeoffs in allocating resources between market and non-market activities (i.e., political strategies). My main finding is that, when political strategies are used to reduce the hazards of public and private expropriation, stronger competitors will invest more in political strategies than weaker firms. In extensions of the basic model, I also show that, when both rent-seeking and hazard-reducing political strategies are present, less capable firms invest in rent-seeking political strategies while more capable firms invest in hazard-reducing political strategies.
We collect data on trust and trustworthy behavior from eighty-four iterations of the Berg, Dickhaut, and McCabe Investment game (the “trust” game). We perform a meta-analysis of these games in order to identify the effect of experimental protocols and cross-country cultural differences on trust and trustworthiness. We find that approximately 40% of the variance in trust and 30% of the variance in trustworthiness is explained by changes to experimental protocols. We also find that cultural variables that are highly correlated with a country’s stock of social capital, such as ethnic fractionalization and income inequality, are most closely related to trustworthiness rather than trust. We use these findings to show that the negative relationship between diversity and social capital disappears as competitive free markets become more prevalent in a country.
This paper analyzes interjurisdictional bargaining over transboundary pollution. It focuses on the difference between bargaining by representatives of political jurisdictions over the the resolution of pollution disputes versus bargaining by individuals. We show that under quite general assumptions regarding the way that voter preferences are represented by politicians, the likelihood of efficient resolution of interjurisdictional pollution disputes is quite likely when jurisdictions are symmetric, but not likely when jurisdictions are asymmetric with regard to experiencing both the costs and benefits of polluting activities. This result may explain why courts have been reluctant to intervene to clearly resolve interjurisdictional pollution disputes, and why legislative resolution has only been possible via uniform allocation of tradeable rights to pollute.
Since electric power consumption and generation availability are highly uncertain, public authorities have traditionally determined a given reliability level above which it was considered as uneconomical from the society point of view to further invest. The investment decisions are now taken in a competitive environment and have to be sufficiently profitable for the generators.. Investing such that a relatively high reliability level is satisfied also implies expectations of rather high energy prices for the investors. It obviously questions their sustainability from a political and societal point of view, all the more as the risk premium that are required by competitive agents to invest in generation units that should run only once or twice per year also contributes to inflate prices. It suggests to find alternatives to these “energy-only markets” situation. This paper aims at assessing the efficiency properties of one of these mechanisms: the “forward capacity market". This mechanism has been designed taking into account the main drawbacks that have been experienced with other capacity mechanisms but as far as we know, its own performances have still not been analytically or empirically assessed. The results we obtain show that this mechanism leads the correct level of investment. On the contrary for a "energy-only markets" situation, the level of investment is not sufficient to have the adequate level of production for extra-high demand period.
Differences in property rights are often identified as being among the most robust variables in terms of explaining cross-national differences in economic growth and development. If secure and universally enforced property rights contribute to produce collectively beneficial economic outcomes, an important question becomes why there is so much variation in the institutions and rules that regulate property rights. This paper analyses why governments in some countries establish and enforce property rights that are good for growth while governments in other countries do not. The argument emphasises that the incentive to enforce and protect property rights is shaped by the type of political institutions in the political system. The role of coalition institutions in particular is emphasised as important, whereas power sharing institutions are hypothesized to be inconsequential for property rights. Based on a panel data set and various estimation techniques, empirical analyses are conducted that support the theoretical propositions.
This paper, relying on a conceptualization of economic freedom in terms of kinds of government actions, develops a new measure of economic freedom. However, this is not art for art’s sake; instead, it allows us to provide an explanation for how particular institutions of economic freedom enhance economic development, a view upon which scholars agree. We develop two concepts related to economic freedom, namely the freedom-compatible and freedom-non-compatible institutions and use them as tools in an analysis of the process of economic growth, especially the relationship between economic freedom and long-run income. The major argument is that freedom-compatible institutions are primary determinants of income, while freedom-non-compatible institutions depend upon them and are partly the outcomes of the growth process itself, a fact which is explained by the Misesian theory of interventionism. Our regression analyses support our theoretical insights.
Perceptions-based indicators are sometimes used to measure the quality of the business environment. For instance, firms are asked about the major constraints on business operations and expansion. Little is known, however, about what shapes their responses. In this paper, using perceptions-based indicators from 38 countries and 84 years from the World Bank Enterprise Surveys, we argue that firm responses are critically influenced by macroeconomic conditions. Paradoxically, we find that perceptions worsen during periods of high GDP growth. We also examine other indicators from the Enterprise Surveys which are objective measures of constraints and find that the objectives measures remain unchanged during high-growth years. We conclude that changes in firms’ perceptions over time may not reflect changes in the business environment.
Over the past three decades, an increasing number of policy decisions have been made at the ballot box by citizens. While some of these proposals sought to modify existing statutes, Krislov & Katz 2008 document the rapidly growing number of proposals attempting to amend state constitutions—the highest level institutional form for the political subunit. Given the lack of a legislative filter, the growing constitutional flavor of American direct democracy raises fundamental questions about the signaling environment under which these semi-permanent institutional modifications are being considered. Specifically, does the distinction between constitutional and statutory ballot measures matter for individual voters as they render their voting decisions? We employ a laboratory experiment that manipulates the scope of the ballot measure and the formatting of the ballot, all the while keeping content constant. Our experiment represents a significant contribution to the extant literature as it clarifies the conditions under which individuals vote for certain types of ballot measures. Therefore, this article has important implications not only for ballot design, but also for our understanding of voter decision-making. In addition, we believe this study speaks to broader themes highlighted both by institutional scholars such as North (1990), Ostrom (1990) as well as the constitutional political economy literature (e.g. Brennan & Buchanan (1986), Buchanan & Tullock (1962)).
A central argument of much of the political economy literature is that competitive elections give greater incentives to governments to redistribute, but those incentives, and democratization itself, depend on the distribution of “market” income – income net of the redistributive effects of government fiscal policies. The absence of data on market income has made these arguments difficult to examine. This paper uses new data on income distribution in 59 countries, including 20 Latin American countries, that for the first time allows these questions to be examined precisely. Consistent with theory, the data indicate that democratization increases redistribution. Less clearly consistent, additional years of democracy have a stronger effect on redistribution than democratization itself. Inconsistent with the predictions of a number of recent studies of the role of the impact of inequality on democratization, we find no significant difference among stable democracies, stable autocracies and regime-changing countries in the pre-market distribution of income.
‘Red flags’ are indicators of potential issues regarding governance failure, collusion or corruption in projects. This paper examines project documentation from a small, semi-random sample of past World Bank water and sanitation projects, including two publicly linked with allegations of corruption, in an attempt to collect data on the presence or absence of thirteen commonly accepted red flags. It compares results to a parallel analysis of transport contracts from the Africa region. This paper finds that: (i) almost every contract reviewed raised at least one of thirteen red flags analyzed; and (ii) potentially tainted contracts did not exhibit notably more red flags than control contracts. The ubiquity of red flags suggests that their roll-out as a monitoring tool requires additional thought as to interpretation, context and use.
Competition can be analyzed as an evolutionary (Schumpeterian or Hayekian) process of parallel experimentation and mutual learning (or variation and selection of new problem solutions), which allows to apply arguments and models of evolutionary innovation economics. Then the number and diversity of independently experimenting competitors can have a positive effect on the knowledge-generating function of competition, because a more diverse pool of problem solutions (as technologies) can increase the probability of being capable of responding quickly to exogenous shocks and of developing superior innovations. Therefore mergers and R&D agreements might also have a negative effect on the effectiveness of competition as process of parallel experimentation (parallel research). A number of positive and negative effects of a larger or smaller number of parallel experimenting firms are shown (trade off problems). Should and can competition law protect competition as a process of parallel experimentation? Although the Innovation Market Analysis developed interesting criteria for maintaining parallel research projects and protecting diversity, they used no appropriate theory about the benefits of protecting parallel research. An evolutionary approach to competition might be much better suited. Some ideas are discussed how competition law might be able to consider diversity and parallel experimentation.
Fiscal pressures faced by American cities in the late 1970s renewed attention of fiscal policy analysts to financial health of the localities. Numerous efforts were made to evaluate governments’ fiscal conditions, and to identify new forms of activity that could assist in maintaining fiscal health of the communities. Essentially, fiscal difficulties faced by U.S. cities stimulated their governments to innovate. From the perspective of the innovation literature though, innovation is an expensive process that requires upfront and continuous investments. Given these two sets of arguments the question raises whether or not availability of financial resources is a determinant of city innovation. This study examines the relationship between fiscal health of the U.S. city governments and the scope of their adopted innovation. The importance of fiscal slack, existing institutional arrangements, city government type and its fiscal authority for a government’s incentives to innovate is analyzed. A multifaceted index of government fiscal health and a measure of the innovation scope are developed in the course of the study of 140 cities in 8 states. More precisely, this research will analyze how the variation in governments’ ability to meet their financial and service obligations affects the degree of their performance measurement innovation implementation. The research findings will contribute to better understanding of innovation management issues the public sector faces today.
This paper presents and analyzes the results of a recent field experiment in which residential electricity customers in Washington State with price-responsive in-home devices could use those devices to change their electricity consumption autonomously. Doing so also required an important institutional change: the regulatory institutions had to change to allow dynamic pricing. Customers could choose a retail pricing contract from a portfolio of contracts, instead of the fixed, regulated retail rate. Here we focus on the results of the real-time contract, under which homeowners participate in a double auction with a market clearing occurring every five minutes. These customers saved money, and their peak demand (and pressure on infrastructure at peak capacity) fell by 15 percent. Moreover, this combination of technology and institutional design enabled decentralized coordination, and we use complexity science to interpret results that show that the real-time market outcomes were those of a self-organizing and scalable complex adaptive system. We also draw policy implications from these results.
Legal Fictions were one of the most distinctive and reviled features of the common law. Until the mid-nineteenth century, nearly every civil case required the plaintiff to make false allegations which judges would not allow the defendant to contest. Why did the common law resort to fictions so often? Prior scholarship attributes legal fictions to a "superstitious derelish for change" or to a deceitful attempt to steal legislative power. This paper provides a new explanation for the pervasive use of legal fictions-- jurisdictional competition and the limited nature of appellate review. Before 1800, judicial compensation came, in part, from fees paid by litigants. Because plaintiffs chose the forum, judges had an incentive to expand their jurisdictions and create new causes of action. Judicial innovations, however, could be thwarted by appellate review. Appellate review was especially dangerous to legal innovation, because cases from one court were generally reviewed by judges of competing courts. Appellate review, however, was ordinarily restricted to the official legal record, which consisted primarily of the plaintiff's allegations and the jury's findings. Legal fictions effectively insulated innovation from appellate review, because the legal record concealed the change-- the plaintiff's allegations were in accord with prior doctrine, and the defendant's attempt to contest fictitious facts was not included in the record.
We conduct a field experiment on direct and indirect transfer mechanisms. It shows that people are willing to donate significantly more if the donation is indirect, i.e., it is tied to the purchase of a good with a price premium, rather than made directly. This points to an efficiency-effectiveness trade-off: even though indirect donations are less efficient than direct donations, they are more effective in mobilizing resources. Our findings hold for 'Fair Trade' coffee as well as for 'normal' coffee. However, the strength of the efficiency-effectiveness trade-off is higher in the case of 'Fair Trade'.
Each year, diarrheal diseases claim the lives of nearly 2 million people--ninety percent of them children under the age of five. The problem is especially critical in Africa, a continent that contains ten percent of the world's population, but accounts for forty percent of the deaths of children under age five. Can politically-controversial private sector participation (PSP) in the urban piped water industry improve child health? This paper uses panel data on the sub-national regions of 26 African countries over 1985-2006 to shed light on this question. This is the period during which nearly all African countries that today have PSP in water introduced those arrangements. A fixed effects analysis suggests that the introduction of PSP is associated with a decrease in diarrhea among under-five children of about five percentage points, and an instrumental variables analysis suggests that the effects may be even larger. PSP in water also appears to be associated with significantly higher rates of reliance on piped water as the primary water source, suggesting that increased access may be driving child health improvements.
We use data on the largest U.S.-based franchised chains, measured by worldwide sales, from 1998 to 2007, to explore scale and scope externalities (or spillovers) "within" and "among" the chains of the same parent company. Because franchised chains are fundamentally single-product or single-concept entities, we can distinguish scale and scope effects much better than has been done in most of the literature to date. We can also identify takeovers much more straightforwardly. After controlling for chain unobserved heterogeneity using fixed effects, we find strong evidence of positive scale effects within a chain, suggesting positive spillovers or network advantages from being large. As for the effect of parent company scope, measured by worldwide sales of other chains owned by the parent in the previous year, we find no effect on chain-level sales per store, but a negative effect on the number of outlets. Our analyses of what occurs upon chain takeovers further support these findings and conclusions. Specifically, we find that takeovers have no effect on sales per unit in the target chain, but that they also have a negative effect on the number of units in that chain in the years that follow. Hence, our findings are consistent with firms engaging in some form of rationalization, or reducing competition among their chains, after taking over other chains.
In a moral-hazard environment, I compare the profitabilities of a rank-order tournament and independent bonus contracts when a firm employs two envious workers whose individual performances are not verifiable. Whereas the bonus scheme must then be self-enforcing, the tournament is contractible. Yet the former incentive regime outperforms the latter as long as credibility problems are not too severe. This is due the fact that the tournament requires unequal pay across peers with certainty, thereby imposing large inequity premium costs on the firm. For a simple example, I show that the more envious the agents are, the larger is the range of interest rates for which the bonus scheme dominates the tournament.
This paper contributes to the evaluation of the impact of FDI on host countries by taking into account the regional dimension of FDI spillover effects. The methodology accounts for the effects of FDI on the change in technology as well as the change in efficiency of domestic firms. The empirical analysis focuses on Ukraine. The conclusions indicate that foreign presence has negative effects on the productivity change in Ukraine and on technical change. The nature of the impact of foreign presence on the performance of firms in the western and eastern parts of the country differs. It is argued that the results reflect a complex nature of FDI inflows into the two distinct parts of Ukraine as well as deep economic and institutional difference within the regions.
In a well-functioning stock market, issuing firms publicly disclose all relevant information to investors and prices approximate the true value of those firms. This disclosure generates liquidity as investors large and small engage in trading. While it is tempting to take this “good equilibrium” for granted, the current banking crisis suggests a “bad equilibrium” in which disclosure is suspect so banks stop lending to each other and small investors flee the market. In this paper, we argue that a good equilibrium was in place when the New York Stock Exchange operated as a non-profit organization. We argue that far from being an outdated and elitist holdover, the mutual form allowed underwriters, who dominated NYSE membership, to extract hostages from managers of firms listed on the NYSE. That is, managers were expected to invest personal funds in shares of other listed firms, including new issuers (“IPOs”). Since the hostage arrangement was tied to the non-profit form of the NYSE, we predict a decline in information quality after the NYSE became a for-profit firm in March 2006. By comparing the bid-ask spread before and after demutualization, we show that information quality did indeed decline. This finding holds after controlling for market-level variation measured by the bid-ask spread of the NASDAQ National Market. We believe our results can help shed light on the current banking crisis, which originated in areas of the financial system that lack a hostage structure.
Yardstick competition models (YC) assume a perfect regulatory commitment that relies on complete and rigid yardstick contracts, which are never renegotiated. Therefore, YC makes it possible to provide strong incentives to firms, while decreasing the informational asymmetries. However, in reality, renegotiation may occur with YC, as noted by Hesseling and Sari [2006] for instance, in the case of the Dutch energy regulator. In this paper, I build a yardstick model that can explain the enforcement difficulties encountered in reality. I show that the introduction of a limited regulatory commitment leads to potential renegotiation of yardstick contracts and creates a trade-off in terms of contractual design. I show that a limited regulatory commitment doesn’t prevent from the implementation of YC, but requires an adaptation of the contractual design. The contractual design choice depends on the efficiency of renegotiation, the cost of public funds as well as the regulator's ability to manage endogenous and exogenous pressures (i.e. the probability that a rigid contract is renegotiated). These points (enforcement problems and choice of contractual design) are not taken into account in the literature on YC. However, as regards concrete implementation made by regulators, it seems that they are key variables in understanding the reality of this regulatory scheme.
The effect of users’ heterogeneity in power status on decentralized governance of common pool resources is understudied. As power matters more when resources are scarce, the combined effect of power differences and resource scarcity on the success in sustainably and equitably governing common pool resources is to be studied. Successfully tackling appropriation challenges in self-governed irrigation systems depends on users’ compliance with rules and sanctioning mechanisms. Users are expected to differ in compliance and in their reaction to scarcity according to their power status. To test this, a field experiment was conducted in Tanzania with users of self-governed irrigation systems of whom a proxy measure for relative power status was obtained via a participatory ranking exercise. Compliance to equally sharing resource units is the norm even under scarcity. But upstream users with a high power status are more likely to shirk than those of low power status, especially under scarcity. Moreover, low power status users who shirk appropriate only slightly more than half of the resource units. Surprisingly, sanctioning by the downstream user does not often invoke rule compliance especially not when water is scarce and least among upstream users of low power status. Lastly, in times of scarcity, low power status downstream users are less likely to comply with sanctioning than others. Overall, low power status users act cautiously which affects their claim on resources.
A fundamental question in strategic management is whether and how the choice of organization affects firms’ abilities to develop capabilities important to performance. Transaction Cost Economics and the Knowledge–Based View represent two prominent perspectives applied to address this question. These two logics differ in their statement of the problem and their proposed solution, however. This paper applies a problem-solving perspective in the context of alliances to explore variance in both exchange problems and organizational mechanisms emphasized by these theories. After identifying four distinct types of business problems and four distinct types of alliance forms, we propose that the influence of specific alliance arrangements on performance is dependent on the nature of the underlying economic activity. Based on a sample of 664 alliances in the semiconductor industry and a two-stage analysis, we find that the exchange scope and problem difficulty of alliance activities affect the selection of alliance forms that vary in their provision of underlying cross-ownership and coordination mechanisms as well as subsequent technological performance.
This paper proposes a dynamic politico-economic theory on the evolution of dictatorship. I characterize the Markov Perfect Equilibrium of the dynamic game and derive the analytical solution to the equilibrium. The main conclusion is that the demise of any dictatorial regime is inevitable if there are discontinuity of power caused by dictator's physical death and the delegation of the dictator's unbalanced power, which are two common properties shared by all dictatorial regimes. Consistent with historical evidence, the model shows the overall pattern of the evolution of dictatorial regime is increasing real burden on the citizen caused by increasing bureaucrats'tax surcharge due to weakering dictator, and the decreasing fi scal revenue of the dictator due to the decreasing of tax base, as will cause the demise of dictatorship in the long run.
The use of “Branded Components” is an increasingly popular strategy employed by industrial Original Equipment Manufacturers (OEMs) to differentiate their products. Contracts for branded components between OEMs and their component vendors are relational exchanges where both parties contractually agree that the OEM and the vendor would co-brand the OEM’s end-product. In this paper, we use the logic of transaction cost economics to show that safeguarding and adaptation concerns are simultaneously operative in the governance choices in these relational exchanges. Specifically, we ask: Under what conditions are prices for branded components agreed upon ex ante versus negotiated ex post? This choice of pricing formats is determined by whether the differentiation offered by the component is due to either the vendor’s pre-contractual brand strength or the post-contractual customization activities. We argue that vendors possessing pre-existing assets would use more fixed price formats to safeguard these “extra-relational” assets. In contrast, differentiation emanating from post-contractual customization activities is supported by relatively flexible price formats to permit adaptation to product development. Data from 70 branded component contracts is supportive of these hypotheses. Furthermore, we find that fixed price formats are also used when the market strength of the OEMs on their downstream customer side is high. Theoretical and managerial implications are drawn.
We analyze the influence of the ownership structure on the attitude towards corporate social responsibility among European firms. We have measured CSR with two complete and highly reliable sustainability indexes, namely Dow Jones Sustainability STOXX and Ethibel Excellence Index. Using data from 1248 firms form the main five European Union countries (UK, Germany, France, Italy and Spain) for 2000-2004, we find that the power of the largest shareholder is negatively related to CSR actions. Therefore, the higher the fraction of shares owned by the largest shareholder, the less his/her incentives to engage in CSR. Similarly, a higher contest to the power of the main shareholder by other reference shareholders improves the commitment social responsibility of the firms in which they participate. Our results also suggest that family shareholders are more prone to CSR than other kind of investors, whereas the percentage of ownership in the hands of institutional investors has a negative effect on CSR. These results are conditional upon the availability of profitable growth opportunities by firms.
The level of press freedom in non-democratic states is commonly interpreted as the outcome of a contest between a civil society pushing for greater press freedom and an authoritarian regime struggling to suppress all independent voices. This paper presents a formal model showing that significant press freedom may in fact be desirable to an authoritarian central government as a check on difficult-to-control local officials, and explores how this motivation is balanced against the potentially destabilizing effects of negative media reports. The model helps to explain why the Chinese Communist Party has permitted greater media freedom since the early 1990s despite its continued strength.
Scholarly interest in private settlement of contract disputes has generated a rich body of theory but relatively few empirical studies. We address this gap by exploiting a unique dataset capturing actual dispute resolution procedures in a sample of contract disputes between vertical exchange partners. We observe the highest rates of private dispute resolution in disputes involving either the simplest contracts or the most complex contracts in our sample. We argue that this pattern is consistent with a combination of motivations for private resolution: cost-avoidance for simple disputes, and enhanced flexibility for disputes involving particularly complex contracts. We also compare different private dispute resolution procedures and find that arbitration is in some respects closer to litigation and in other respects closer to mediation or negotiation. Our findings are consistent with the argument that disputing firms are able to effectively educate arbitrators and mediators in a way that is not feasible for judges in a court of law
It has always been argued in the economic literature that in the frame of technology transfer transactions attempts of licensor to mitigate misbehavior of the partners could undermine their ability to learn. We study a recent sample of 237 technology licensing agreements in various industries and across several countries and we show that companies design their collaborative relationships in a way that, from one side, allows them to constraint the temptation of the partners to exploit for private purposes information exchanged in the frame of a transaction, but from another side, does not limit learning possibilities built into relationships. For this purpose we create an integral measure of functional scope of a technology transfer transaction which embodies its learning potential and demonstrate its positive effect on the choice of the specific governance mechanisms by licensor. We do not find any support for the idea that licensing agreements are wider in terms of the rights given to the licensee when parties are engaged in a more complex joint technology development project. However we find a support for the view consisting in a partial substitution of formal governance mechanisms for relational ones. We show that in the presence of prior deals with the same partner licensor inclines to optimize its total contracting costs by sparing on costly implementation of explicit formal mechanisms and to rely instead on implicit relational mechanisms.
Scholars have long argued that institutional context significantly influences business strategy and economic performance. Research on the relationship between institutions and business strategy, however, has overwhelmingly focused on the decisions of larger, established corporations, largely neglecting the strategic thinking of smaller, more entrepreneurial ventures. This paper seeks to correct this bias by focusing the analysis directly on the critical decision of small-scale entrepreneurs to move from the informal and largely unregulated sector into operation as formal companies. Using a unique dataset and ranking of provincial governance institutions from Vietnam, we show that improvements in institutions make firms more likely to choose the formal sector from the start and, for those who do not, to spend less time in the informal sector. We also find that property rights have a more salient impact on formalization than other types of institutions.
We generalize a standard technology diffusion model by allowing for IPRs regimes to be endogenously de ned by the development level of each country. Also we insert differences in in the compsition of human capital between North (leader) and South (followers)which shape the relative costs of innovation and imitation. Results show how an optimal growth trajectory is found for the follower country which initially imitates and that, once a "threshold development stage" is reached, optimally switches to innovation by fully enforcing IPRs achieving a higher proximity with the technology frontier in the long-run. Other scenarios, such as a premature increase in the enforcement of IPRs or a switch from imitation to innovation at early stages of development of the followers are found to be sub-optimal.
How do property rights become secure? How does rule of law take hold in an economy? These issues have been primarily addressed through historical research or formal modeling. I use an original large-N survey of 516 firms in Russia and Ukraine to re-examine these fundamental issues of political economy. The survey design improves our measures of ownership security by estimating concrete threats to property rights and correcting for possible question misinterpretations by the respondents. At the theoretical level, the existing literature proceeds from the assumption of a rational sovereign. Yet most states in the developing world lack long time horizons and institutional capacity. In this context, I argue that firms can enforce their property rights through alliances with stakeholders such as foreign actors, community residents, labor, and other firms. These stakeholders can impose costs on the potential aggressors through diverse mechanisms. Through such political strategies, firms can defend their property rights from the state or private predators. Case studies supplement the survey data to demonstrate the potential of stakeholder alliances to resolve conflicts over ownership.
This paper seeks to answer the question of which international development projects must be outsourced from the public bureaucracies when the contractor is a non-profit organization. The make-or-buy decisions made by Spanish public bureaucracies for the delivery of development aid projects during three years are analysed. The results show that specialization of the public agency and the complexity and risk of the project matters. In addition, the nonprofits with more reputation will ‘benefit’ of the more uncertain and complex projects.
There is a large literature arguing that the endowments of a country determine institutions in the long run and may even explain regional inequality within countries. We show that endowments do not seem to explain today’s regional inequality in Brazil if we do not take into account the changes in expenditures on public goods per capita during the first republican period (1890-1930), when the Brazilian government adopted an extreme form of fiscal federalism. Since states got the right to tax exports, we show that state endowments led to differences in the level of exports per state and in revenues per capita, which ended up determining differences in expenditures in public goods, such as education, police, and public works. For our empirical analysis we use a newly created database of state level fiscal and trade data. We find a positive and significant relation between export revenues per capita at the state level and expenditures on public goods (per capita). To avoid possible endogeneity we instrument for exports per capita using a price index of commodity exports by state. Our results are confirmed when used IVs.
Contractual arrangements are of great importance in Agri-Food sector, while qualitative and safety characteristics of the final products are crucially influenced by accurate technological prescriptions. As a consequence, the specification of tasks in the Agri-Food productive processes depends also on the choices of the contractual rules. The study considers the relationship between food safety strategies, technology and organizational choices in Agri-Food chains. The first objective is to elaborate on the relationship between safety-oriented technology and organization in hybrid forms, in terms of contractual rules. In this context potential maladapation costs may arise which influence the effectiveness of the coordinating devices chosen to achieve the safety degree expected. The second objective of the study is to provide empirical evidence of the relationship between technology and organizational choices. A Choice Experiments has been carried out carried out on a sample of growers and focused on contractual terms in the Italian poultry sector. The empirical findings provide, to some extent, estimates of the maladaptation costs and, therefore, information about the adaptation and the possibilities of implementing technology by drawing up contracts.
Two decades of re-unification have done little to bring down economic disparities between East and West Germany. Since formal institutions have been equalized between East and West, any institutional explanation for enduring divergence has to lie in norms, beliefs, and values. An oft-heard argument is that Germany suffers from a “wall in the head” that continues to feed differences in economic performance between East and West. The question is whether such structural differences in norms and values indeed exist in such a way that they can explain the gap in economic performance. The little research that has been done provides ambiguous results (Shiller et al. AER, 1991; Corneo and Grüner JPUBE, 2002; Alesina and Fuchs-Schündeln AER, 2007). This paper presents a more direct assessment of the differences in preferences between East and West Germans by studying the structure of happiness and analyze how the East and the West differentially transform situational factors into well-being. Our analysis convincingly shows that preferences do not vary much between East and West, and that, if anything, the East entertains values that are more usually associated with economic performance than those of the West. The “wall in the head”-thesis appears to be a myth.
Markets play an important role in Africa. Studies of the actual performance of markets in Africa have found that institutional arrangements and transaction costs shape patterns of trade and partly determine the extent to which allocative efficiency is achieved. Yet we know little about how markets operate in practice. The problems African market institutions attempt to solve are the usual ones – commitment failure, asymmetric information, and transaction risks and costs – but the solutions are often are new. The paper develops a framework to identify how transaction risks lead to transaction costs and it builds on literature on trust and risk to identify how these concepts are related and can be identified in trader relationships in Ethiopia. The paper uses a database of farmers, intermediate traders and wholesalers in two sesame producing regions of Ethiopia. The results give an insight into which risks buyers and sellers face, how they lead to transaction costs and what mechanisms are employed by buyers and sellers to reduce these risks and costs. An interesting result is that it seems that geography leads to different production circumstances, risk, specialisation and therefore different trust relations between farmers and traders, leading to different transaction costs.
The popular response to a series of fraudulent elections in Serbia, Georgia, Ukraine, and Kyrgyzstan has attracted a great deal of attention from scholars. Left relatively unexplored, however, has been the legacy of these ”Colored Revolutions” for the future of political protest for the countries in which they occurred. In particular, an understanding of protests in a dynamic context raises a tension. In settings in which individual opposition is likely to be strong or coordinated enough to result in protests, we might think that subsequent organized protests become more likely. But the possibility of subsequent protests might limit the ability of a government to respond to an initial protest, thereby diminishing the value of protesting in the first place. Furthermore, the need for subsequent protest may call into question the value of the benefits gained from the original protest, thus making participation in future protests less likely. To address these tensions, we formulate a dynamic model of policy making and protest behavior and apply its insights to understanding recent political developments in Colored Revolution countries.
There is a bewildering variety of organizational arrangements in which ‘parent firms’ share some assets as well as some rights, from franchising to strategic alliances, joint-ventures, and so forth. However there are few developments in the literature about how multiple parents who otherwise remain competitors monitor their relationships when involved in joint activities that create new assets. Using extensive information and data collected on a complex joint venture in the French milling industry, we exhibit a “private order” in which owners transfer substantial decision rights to a Strategic Center that has the power to develop initiatives of its own and to discipline partners. The paper analyzes the governance structure implemented, the contractual provisions delineating a self-enforcing range of action, and resulting performance that confirm the durable success of this arrangement in a highly competitive environment.
The pricing of water is particularly akin to political, socio-economic, and cultural influence. Empirical evidence suggests that the level and the structure of water prices rarely correspond to welfare-optimality. Increasing block tariffs (IBTs), by which higher-income consumers cross-subsidize poorer consumers, prevail (Whittington, 2003). In this paper, we try to explain why water pricing, as observed in reality, differs considerably from the first-best, welfarist approach of standard regulation theory (e.g. Goldman, Leland, and Sibley, 1984). Our theoretical model is based on the assumption that policy makers are concerned with “fairness” and “transparency”. We also introduce asymmetric information into the model (i.e. income is not observable) and construct incentive compatible constraints. From there we calculate the “fair” and “incentive-compatible” nonlinear expenditure function for water. The model is indeed able to explain the dominance of increasing block-tariffs, observed particularly in developing and emerging countries. Increasing block tariffs can be derived using a “fair” approach, and the construction is transparent and easy, thus in sharp contrast to the welfare approach. We also perform numerical simulation for real data from the Water sector of Bangladesh. We finish with policy conclusions; and suggest that further research should look more deeply into the “fairness” issue in order to indicate the sensitivity to the new system.
Why do some countries have good institutions while others do not? Such is the question that we try to answer in this article. To do so, we empirically assess four different theories relating to the determinants of the quality of private property rights institutions: (a) The Economic Approach maintains that private property rights institutions are created when the benefits of their creation exceed their costs.(b) The Cultural Approach stipulates that countries have different institutions because of differences in the beliefs of their leaders about what would be good for the society.(c) The Historical Approach contends that cross country differences in the quality of private property rights institutions are the byproduct of historical accidents.(d) The Political Approach defends the premise that institutions are voluntarily chosen by the individuals who control political power. These individuals choose institutions aimed at maximizing their personal payoffs and not necessarily for the benefit of the whole society. The results of cross-sectional analysis over the period 1970-2005, with a sample of 142 countries (116 developing and 26 developed countries) show that the political approach is the most relevant. Indeed, the political approach is the most robust and it better fits private property rights institutions index. Independently of econometric specification and country sample, democracy positively affects private property rights institutions.
In this paper using data covering the period 1960-2003, I find a causal, positive and significant effect of democracy on inflation in a sample of 62 developing countries former extractive colonies. Democracy increases inflation because democracy stimulates money creation and compromises trade liberalization in developing countries. However, when I exclude Latin American countries from my sample, the significant effect of democracy on inflation disappears. In addition, though the coefficient associated with democracy is no more significant, it is still positive after excluding Latin American countries from my sample. This suggests that the significant effect but not the positive effect of democracy on inflation in my sample is due to the experiences of Latin American countries. Thus, my results reconcile two views: one that “populist democracy” is a Latin American phenomenon, the other according to which democracy does not necessarily induce better macroeconomic management in developing countries. Case studies based on the experiences of Chile, Ghana and Sri Lanka illustrate the relationships between inflation and democracy in my sample.
Political economy explanations of public debt and deficit policy have a tradition of more than 30 years, and research in this field did not cease so far. Yet, international differences in public debt and deficit still remain unexplained in considerable parts. While most of the literature concentrates on differences in political and budget institutions in order to explain debt and deficit differences, the original contribution of our paper is to shift focus to the personal characteristics of political agents, i.e. their expertise, their political experience, their political attitudes, preferences, values etc. We show that the personal background of a political leader considerably contributes to the explanation of his/her respective deficit policy. For instance, those political leaders who have been professional science economists before becoming politicians generate significantly higher deficits than the average. Also, career politicians (i.e. leaders who have been professional politicians for their whole work life or at least a very long time) with law education generate significantly higher deficits than career politicians with other educational background.
Scholars differ as to how much impact an increased role by the Federal Reserve would have had in halting U.S. banking panics during the Great Depression. Friedman and Schwartz suggest that banking panics were exacerbated by the Fed’s unwillingness or inability to act as a lender of last resort whereas Calomiris and Mason argue that most bank failures during the Great Depression resulted from insolvency, implying central bank intervention would have done little to stop bank failures. We shed light on this debate by examining the last banking panic prior to the start of the Great Depression. In the spring of 1929, a fruit fly epidemic struck Florida and the U.S. government quarantined Florida citrus fruit. In July, banks in citrus growing areas and Tampa faced heavy withdrawals as depositors worried about asset quality. These withdrawals led some banks to suspend payment, prompting depositor runs on correspondent banks. In response, the Federal Reserve Bank of Atlanta rushed currency member banks in Tampa to halt the spread of the panic. The Fed’s actions allow us to test directly the role of lender of last resort liquidity provision in halting banking panics. We assemble a new micro-level database on commercial banks in Florida and test whether, all else equal, banks receiving Federal Reserve infusions had a greater probability of surviving the panic.
This paper introduces the analysis of the entrepreneur to a more comprehensive understanding of strategies in Agribusiness. Current theories on Economic literature explain strategy adoption according to forces of the competitive environment (Porter 1985), organization arrangements and coordination among agents by the characteristics of the transactions (Williamson 1985) but provide limited explanations about what firms innovate and induce heterogeneity of strategies. Indeed, firms seek alternatives to the equilibrium to create and appropriate value. In this sense, the literature on Entrepreneur’s human capital provides a broader understanding of strategy choice. For instance, the creative destruction from Schumpeter (1961), entrepreneur’s alertness from Kirzner (1973), entrepreneur’s judgment capacity from Knight (1964) and entrepreneur’s education and experience from Schultz (1961). We investigate the entrepreneurial ability assessed by human capital framework to understand strategy choice due to an institutional change in the late 80s, based on a survey of 409 Brazilian coffee producers. Our findings suggest that entrepreneur’s formal education and experience explain strategy choice. For instance, higher formal education improves the probability to adopt a differentiation strategy which is a more entrepreneurial decision compared to the commodity strategy.
Recent studies indicate that strong systems of property rights are not a necessary condition for the operation of the soybean seed market in the Americas (Wright; Pardey, 2006; Endres; Goldsmith, 2007). These studies are based on a dichotomy. The North – represented by the U.S. – is a strong institutional environment in which agrobiotechnology firms adopt an optimal strategy, setting technological rates charged at the time of acquisition of the seed. The South – represented by Argentina – corresponds to a weak institutional environment in which firms adopt a sub-optimal strategy. Nevertheless, the operation of the seed market in Brazil is based on a different, more complex scheme of collecting royalties from seeds. In face of the institutional differences among the U.S., Argentina, and Brazil, the multiplicity of schemes for the collection of royalties from seeds suggests that strategic decisions in this industry are not trivial. This research assumes that agrobiotechnology companies do not face a choice between optimal and sub-optimal strategies. Firms, in fact, have to choose from a constellation of strategies which are influenced by the quality of the institutional control. The study aims to answer the question: How property rights influence firms’ strategic choices in the seed industry?
We offer a model of negative vote buying paying voters to abstain. While negative vote buying is feasible under the open ballot, it is never optimal. In contrast, a combination of positive and negative vote buying is optimal under the secret ballot: Lukewarm supporters are paid to show up at the polls, while lukewarm opponents are paid to stay home. Surprisingly, the imposition of the secret ballot increases the amount of vote buying---a greater fraction of the electorate votes insincerely than under the open ballot. Moreover, the secret ballot may reduce the costs of buying an election.
Compulsory licensing, which is permissible under the Trade Related Intellectual Property Rights (TRIPS) agreement, allows domestic firms to produce inventions that are patented by foreign nationals, without the consent of patent owners. As an emergency measure, compulsory licensing offers clear benefits: It helps deliver life-saving drugs to millions of patients. The long run effects of compulsory licensing, however, are unclear. This paper uses an exogenous event of compulsory licensing after World War I to measure the long-run effects of compulsory licensing on domestic invention. Specifically, the analysis compares changes in patents by domestic inventors across U.S. chemical inventions that were differentially affected by compulsory licensing under the Trading with the Enemy Act (TWEA). Our data suggest that compulsory licensing has a large positive effect on domestic invention. Firm-level analyses indicate that most of the increase in domestic invention results from learning-by-doing, as compulsory licensing enables a new set of firms to produce an invention. Our data also show that the full effects of compulsory licensing take up to ten years to materialize, suggesting that they will be missed in analyses of contemporary data.
Members of a patent pool agree to use a set of patents as if they were jointly owned by all members and license them as a package to other firms. Regulators favor pools as a means to encourage innovation: Pools are expected to reduce litigation risks for their members and lower license fees and transactions costs for other firms. This paper uses the example of the first patent pool in U.S. history, the Sewing Machine Combination (1856-1877) to perform the first empirical test of the effects of a patent pool on innovation. Contrary to theoretical predictions, the sewing machine pool appears to have discouraged patenting and innovation, in particular for the members of the pool. Data on stitches per minute, as an objectively quantifiable measure of innovation, confirm these findings. Innovation for both members and outside firms slowed as soon as the pool had been established and resumed only after it had dissolved.
How can we most effectively weaken property rights? Property law confronts circumstances where owner’s excessive perceptions of their ownership rights impose social costs, frustrate policy goals, and hamper the very institutions meant to support private property. Groundbreaking research on cognitive framing suggests an answer to the question of how to selectively attenuate ownership perceptions. In a novel application of this research, we investigate how property law may “set frames” for individual owners. Specifically, we hypothesize that framing property as bundles of rights and forewarning of limitations weakens perceptions of ownership and decreases resistance to subsequent restrictions. We conducted experiments to evaluate this claim and found that both bundle/discrete asset framing and forewarning framing affect perceptions of ownership, rights infringement, valuation, and satisfaction. Our study shows that “layering” both of these conditions (bundle of rights framing and forewarning) has a stronger, synergistic impact than the sum of each effect alone.
Although the organization of firm boundaries is widely acknowledged as a fundamental dimension of economic performance, there is little evidence on its relation with the investment process. In particular, little is known about how firms identify, select, and pursue investment opportunities depending on their organizational form. I analyze over 3,000 projects in the movie industry in the United States requiring about $114 billion of investments in the period 1985-2007 to find that multidivisional firms invest differently from focused firms. Although multidivisional firms invest more than focused firms for otherwise identical projects, they also seem to be more responsive to short-term signals from the market, updating their beliefs and investing accordingly.
The paper applies a transaction-focused institutional analysis to compare the value of political connections in different types of economic transactions across a broad spectrum of distinct markets. Our analysis is based on a large-scale national survey conducted by the World Bank in 2003 covering 2400 firms in 18 municipalities in China. Our results show that the value of political capital is associated with the institutional domain of markets in which agents use political connections to secure advantages. Only in state-dominated markets does political capital confer to the firm competitive advantages. In this sense, the value of political connections in China does not differ much from patterns observable in established market economies. We interpret this as evidence suggesting China may have experienced a tipping point in its transition to a market economy around the turn of the new century.
taly shows one of the highest level of road fatalities across European countries. Speeding is ascertained to be the first cause for motorways fatal accidents. In order to increase road safety, in 2001 the Italian Parliament enabled the Government to review the traffic code in force and to adopt, in addition to the already existing monetary sanctions, a penalty system based on demerit points, which would have come into force on July 2003. Using Italian data, this article presents an econometric investigation of the effects the latter produced on speeding infractions and mortal accidents. Our main finding is that the coming into force of the Italian DPS produced only a temporary and weak effect on the drivers' speeding behavior, as well as on the number of fatal accidents, while the announcement of the decision of the Italian Government to introduce it produced a stronger and more lasting deterrent effect on the former. The coming into force of the Italian DPS has been prevented by exerting a lasting deterrent effect on speeding behaviors because drivers' learning about the effective probability of being detected made them perceive the new measure' s sanctioning aims less credible. Data on the implemented generic enforcement support this hypothesis. In addition, we claim that the credibility of the new point license system has been also treathened by the Italian DPS' s specific functioning modalities.
An established tradition in law and economics is that aboriginal property rights reflect the human propensity to economize on all margins including institutional margins. Bailey and Posner have argued separately that this propensity leads to well-being maximizing institutions and behavior even in the most culturally isolated contexts. The present paper examines that proposition. The paper builds on Acemoglu and Johnson who distinguish property rights for large aggregations of human groups from “contracting institutions,” or the ‘property rights’ of smaller groups of people. The paper argues that there may be good reason to believe that contracting institutions evolve toward a near optimum, but property rights institutions for larger entities do not necessarily evolve toward maximum well-being configurations. The net result is dispersion of property rights across nation states and corresponding dispersion in performance. Performance data for Africa are examined. The evidence shows that property rights at the nation-state level enhance productivity but measures associated with aboriginal economic institutions do not.
This study exploits the changes in agricultural productivity brought about by the introduction of potatoes to the Old World from the New World, and provides an estimate of the impact of agricultural productivity on population growth and economic development. Using a difference-in-differences estimation strategy, we examine whether countries with a greater geographic suitability for the adoption of potatoes witness a larger increase in population and urbanization growth after potatoes were introduced to the OldWorld. According to our most conservative estimates, the adoption of potatoes explains 18% of the observed post-1700 increase in population growth and 37% of the increase in urbanization growth. We show that our results are robust to a wide range of alternative determinants of population growth and economic development during this period, including lobalization, colonial rule, and the slave trade.
To what extent do politicians reward voters who are members of their own ethnic or racial group? Using data from 40 large cities in the United States, we study how black employment outcomes are affected by changes in the race of the cities’ mayors between 1971 and 2003. We find that black employment rises during the tenure of black mayors both in absolute terms and relative to white employment. We also find that the effect of black mayors on black employment is stronger in cities that have a large black community. This suggests that electoral incentives may be an important determinant of racial favoritism
This study explores management monitoring in state-owned firms by explicitly distinguishing between the profit and size motives and estimating their relative importance in determining the forced turnover of Chief Executive Officers (CEOs). Based on a sample of 1,555 turnover cases among listed firms in China during the period 1999 to 2003, we obtain three main results. First, CEO turnover is negatively related to the asset turnover but not the profit margin of the core business. Second, the negative relationship between CEO turnover and asset turnover is stronger for firms with excessive employment and a higher organizational slack. Third, there is a significant post-turnover increase in asset turnover but a decline in profit margin. Overall, our evidence is consistent with the hypothesis that state shareholders put a greater emphasis on sales generation than on profitability when they monitor their CEOs. To our knowledge, this is the first study to provide evidence that the inherent preference of state shareholders for size maximization over profit maximization has material consequences for CEO monitoring.
This paper provides evidence that a certain prehistorical event, namely the Neolithic Revolution, has profoundly affected modern institutions through its impact on group cultures. Using carbon dates of initial agricultural adoption from various Neolithic archaeological sites, and a panel data of institutional performance measures, the results show a strong inverse relationship between a society's initial agricultural adoption date and its subsequent institutional and economic performance. The paper interprets this as evidence that late adopters of agriculture developed culture conducive for establishing bet- ter institutions, and argues that the introduction of settled agriculture caused a cultural divergence between early adopters and late adopters of agriculture; such divergence has persisted over many generations and led to differences in institutions.
This study evaluates behavioural differences between union and non-union workers in their preferences regarding reciprocal loyalty in the employment relationship. It uses a vignettes approach to elicit preferences and a novel dataset with unusually rich information on semi-skilled employees from four European countries. It focuses on reciprocal employer-employee arrangements stating that if the employee exerts higher effort, the employer reciprocates by offering higher job security. Such reciprocal arrangements are found to be valued more highly by unionized workers. The evidence suggests that the norm-enhancing role of union membership is the key candidate explanation of this pattern. Union workers are also found more likely to exercise the ‘voice’ rather than the ‘exit’ option in their current job.
At the beginnings of the 1980’s Chile liberalized the entry of auctioneers and partially the auction fees. The reform, though, kept two restrictions for judicial auctions only: i) new maximum fees, and ii) the obligation for judges to assign auctions in a non-discriminatory manner among the different registered auctioneers. Competition policy concerns were severely reduced since freedom of entry, and maximum legal fees were considered enough disciplinary mechanism to avoid monopolistic inefficiencies. Using a sample of 680 and 1300 judicial and private auctions respectively, we find that Courts assign the judicial auctions in a discretional manner, and that the assigned auctioneers charge fees which are substantially higher than those permitted by law. We test the hypothesis that the judicial auctions’ design has additional costs and, consistent with the predictions of a simple model, that it is more likely for Courts to appoint the less efficient auctioneers. We conclude also that, as the model predicts, the net price received by creditors and debtors in judicial auctions are about 18% to 33% below those possible to obtain in private auctions, where freedom of entry and freedom to set prices exists.
Most theories on private sector participation in water infrastructure are based on the sole supposed difference of efficiency between the public and the private sector. The review of 22 empirical tests and 51 case studies shows that private sector participation per se in water supply does not systematically have a significant positive effect on efficiency. Thus, the choice between public and private water delivery is probably not only a question of efficiency. We developed a complete theory of the choice between public and private water supply based on four components: difference of cost of funds, transaction costs of outsourcing, difference of efficiency and potential political cost of privatizing. Since determinants of the theory fluctuate over the time and depend on the local context, this theory can explain both privatization and municipalization movements as well as why some local governments outsource water supply, while others opt for direct provision. The tests on 459 US counties in charge of water supply in 45 states provide substantial support for the theory. Moreover, we tested other literature’s theories, which suggest employment as a motive of public provision and cost of public wages as a cause of privatization. These two arguments seem to be irrelevant. We additionally tested the influence of ownership on the number of drinking water environmental violations and found no significance.
In this paper we investigate the extension of the use of creative accounting at the subnational level in Brazil. Despite the hard budget constraints imposed by the Fiscal Responsibility Law in 2000, the Brazilian state governors retain some strategically ability to undertake fiscal window-dressing as a response to fiscal stress. The Fiscal Responsibility Law mandated that state audit institutions (Tribunais de Contas) must audit the enforcement of the law. There is ample evidence of creative accounting in the states, which in itself represents indication that the influence of the audit institutions is binding and that there are costs for breaching the law. Because the Tribunais de Contas are not immune to the influence legislature and state governor, there is evidence that the institutional quality of those institutions is associated with more creative accounting. More independent and active institutions constrain the use of creative accounting. In addition, political competition also matters for creative accounting. Specifically, we find evidence of the correlation between alternation of the elite in power and unpaid commitments which are delayed to the subsequent fiscal year, whereby postponing their impact on the primary balance) as well as unpaid commitments and the quality of the Tribunais de Contas. The Achilles’ heel of the Fiscal Responsibility Law in Brazil is therefore the quality of subnational audit institutions.
This paper analyzes the success of wind energy in Spain from 1986 to 2007. Certain special characteristics have emerged in Spain that provide credibility to the feed-in tariff (FIT) device to promote this energy source. To explain this success, the analysis will focus on the intrinsic characteristics of FIT using the concepts of the transaction cost theory (TCE). Nevertheless, in this framework, special attention is placed on the role that specific political and institutional factors have played in providing stability to this instrument. Thanks to an early start and an on-going and generous FIT device, wind energy promotion for electricity has become a political success story in Spain. The main implication of this analysis is that this success is mainly due to the trade-off between stability and flexibility in the use of Spanish FIT.
The variation in performance and public policy of Chinese provinces to a large extent are determined by backgrounds of CEOs of the provinces, i.e., provincial party secretaries. Provinces under the leadership of party secretaries with work experience in other provinces or the center perform worse, are less open, have higher share of SOE employment, and shift more revenues off budget compared to provinces with party secretaries who built their careers within the province. The magnitude of these effects is large even after we control for differences in fiscal incentives of provinces, career concerns of provincial leaders, cross-province variation, and macroeconomic trends. The results contradict the “local capture” hypothesis, which predicts that “homegrown” provincial leaders are more influenced by local vested interests. The results are consistent with a combination of two (not mutually-exclusive) explanations: differences in central entrenchment and differences in preferences.
Does economic development stimulates media freedom? Do higher advertising revenues make media outlets more willing to be independent from external political groups of influence? I use data on 19th century American newspapers to show that in places with higher potential advertising revenues newspapers were more likely to be independent from political parties. I find similar results when local advertising rates are instrumented by regulations of outdoor advertising and of newspaper distribution. I also show that newly created newspapers were more likely to enter the market as independents in places with higher advertising rates. Finally, I present evidence that economic development alone cannot explain the observed growth of independent newspapers, and some political factors also played the role.
Can the new theoretical developments in New Institutional Economics suggested by Douglas C. North (2005) be used for analysing the establishment of publicly initiated strategic networks? North suggest a theory of institutional change which emphasises the initiatives by institutional entrepreneurs and analyses how the institutional framework provides incentives for entrepreneurs to develop new knowledge, which leads to path dependent, non-ergonic institutional changes. The theory of institutional change is here applied to a case, the “The Rich Wetlands of Kristianstad”, describing how a small hub organization of a local strategic network was established by the municipality of Kristianstad, Sweden. By applying the “Northean view” to the case, a possible theoretical development of the analysis of publicly initiated strategic networks is suggested. The case shows how institutional entrepreneurs develop knowledge and how they take initiatives which result in an institutional change. The local opinion has changed towards the wetlands and the strategic network has emerged as an innovative governance structure for natural resources with multiple social functions. A theoretical development is suggested where concept innovations and multi-purpose proposals are identified as vehicles used by institutional entrepreneurs and a more nuanced view of institutional levels is suggested in analysing institutional change.
The purpose of this paper is to analyse cultural influences on the choice of coordination mechanisms. Based on the Globe report, propositions are developed on how different cultural dimensions affect the choice of coordination mechanisms. Market mechanisms are proposed to be preferred in cultures characterized by a high level of performance orientation, assertiveness, in-group collectivism and low levels of institutional collectivism, power distance and uncertainty avoidance. Societies with the opposite profile are expected to have a bias in favour of hierarchical mechanisms. Based on the propositions, the cultural clusters identified in the Globe report are analysed and categorized according to their relative preferences for market or hierarchical mechanisms. Finally, an experimental study was performed to study cultural biases in choice of coordination mechanisms. In the experiment, two groups of students of Swedish and Chinese origin performed roles as principals and agents in a multi-task situation. According to the previous analysis Swedish students were expected to show a strong preference for hierarchal mechanisms whereas Chinese students were expected to have preference for market mechanisms. The result supported these predictions.
Scholarship of the origins of Greek democracy has traditionally concentrated on the big picture. The Mainstream emphasizes that the democratization of politics was the result of interconnected economic, institutional, and technological trends that reach back as far as the eighth-century B.C. and which are thought of as promoting democratic development. Regarding the the introduction of formal votes in political assemblies not much is known; the specialized literature is very limited. We argue that voting may have emerged spontaneously as a substitute for fighting. It can be shown that under the circumstances of hoplite battle fighting and voting were close substitutes. We then explore whether these conditions were given in Greece in the period 700--500 B.C. The approach chosen is interdisciplinary, bringing together scholarship of the classics, military history, the institutional-economic approach to human conflict. It will be shown that geography, technology and institutions produced a unique `microtechnology of conflict' which meant that voting may have come into being not as an invention but rather an imitation of an idiosyncratic form of warfare.
Societies have a choice between different institutions serving similar purposes, and exercise it depending on costs and benefits of various alternatives. One example of such selection from an “institutional menu” is corporate social responsibility (CSR) – a contemporary pattern of corporate behavior which requires companies to be guided not only by narrow financial objectives, but by broader societal interests in sustainable development, clean environment, ethical conduct, protection of social and economic rights etc. Corporate social responsibility has become a standard practice in the modern world, and yet its purpose, rationales, mechanisms and outcomes are still intensely debated. CSR is considered in the paper as Coasean bargains between companies and their external stakeholders, reached over externalities that companies produce. CSR is thus treated as a private institutional alternative to government regulation, and the choice between these two options depends on their relative costs and benefits. We identify and analyze several factors that affect comparative advantages of CSR vs. regulation, and offer a simple model to illustrate their interplay. The proposed approach can be used to explain, assess and map various CSR models, and we consider the Russian case as an illustration. Our analysis reveals strong institutional complementarity between CSR, on the one hand, and protection of property rights and availability of social capital, on the other.
The process of innovation is driven by two main factors: new inventions and institutions supporting the transformation of inventions into marketable innovations. This paper proposes a new institution, called a semi-public contest, that has been neglected by the economic literature but exists frequently in practice. I show how semi-public contests can mitigate a dilemma that arises at a very early stage of innovative activity and specify the general requirements for situations in which a semi-public contest can increase welfare. This paper's results suggest that governments promote knowledge about the semi-public contest mechanism but refrain from direct public funding of contests.
We analyze the international development of firms in regulated industries. The access to new markets involves demanding conditions in this type of industries. We analyze the impact of the regulatory governance on the entry and performance level of firms in such environment. We focus on the case of mobile telecommunications services. Presumably, the characteristics of the country, technology, institutional environment and regulatory characteristics weigh heavily on the decision of entry, but also on future firms’ profitability. The article explores the relationship between the existing national regulatory governance, competitive environment and performance of mobile network operators (MNO) in Europe. We examine explanatory variables for MNO international investment decisions, and then performance. This paper analyzes whether MNO, as entrants in the European mobile telephony industry, have an advantage vis-à-vis incumbents because they deal easier and better with the regulatory framework. We also study to what extent former historic operators as new entrants take advantage or not of their international expansion in mobile activity. We exploit a unique dataset comprising firm-level information over the 2000-2007 period. The first results indicate that the market size and geographical proximity could explain the decision of entry. The transparency and credibility of regulation also help entry into new markets.
This article empirically examines the determinants of the resolution choice i.e. choice between §363 sales and traditional Chapter 11 reorganization; the determinants of the availability and size of debtor-in-possession financing; and the effects of resolution choice on recovery rates. We find that business justification standard for not going though the traditional process of disclosure and plan confirmation is not randomly applied. The resolution choice doesn’t influence on the availability or on the magnitude of DIP financing. Predominant factor explaining difference in recovery rates is profitability prior to bankruptcy rather than the resolution choice. After controlling for self-selection (which is significant and effective), traditional reorganization does seem to offer higher recovery rates comparable to preplan sale, but results are neither statistically robust, nor as important as it is argued in LoPucki and Doherty (2007). Availability of DIP financing doesn’t significantly affect recovery rates unless its size is considerable. The increase in relative size of DIP financing makes everyone better-off. Although results suggest that there is no systemic error with respect to companies that opt for preplan sales there are certainly several important procedural issues that could be improved while keeping the flexibility of section 363(b).
This paper provides a new assessment of ethnic favoritism in Sub-Saharan Africa. Using data from 18 African countries, we study how primary education and infant mortality of ethnic groups were affected by changes in the ethnicity of the countries’ leaders during the last fifty years. Our results indicate that the effects of ethnic favoritism are large and widespread, thus providing support for ethnicity-based explanations of Africa’s underdevelopment. We also find that ethnic favoritism is more prevalent in countries where governments have greater fiscal resources and is less prevalent in countries with one dominant religion. In contrast, countries whose ethnic groups speak structurally unrelated languages or live in more segregated areas do not display higher levels of ethnic favoritism.
An agreement among competitors to refuse to deal with another party is traditionally per se illegal under the antitrust laws. But coordinated refusals to deal are often necessary to punish wrongdoers, and thus to deter undesirable behavior that state-sponsored courts cannot reach. When viewed as a mechanism to govern transactions and induce socially desirable cooperative behavior, coordinated refusals to deal can support valuable reputation mechanisms. This paper employs institutional economics to understand the role of coordinated refusals to deal in merchant circles and to evaluate the economic desirability of permitting such coordinated actions among competitors. It concludes that if the objective of antitrust law is to promote economic efficiency, then the per se rule for group boycotts should be reconsidered, and antitrust policy towards concerted refusals should apply a more systematic approach that considers the economics of complex organizations.
This paper investigates the role domestic firm-level political connections play in determining a firm’s propensity to cross-list securities in equity markets outside its traditional home country. The paper finds that maintaining domestic political connections enables firms to access foreign capital markets across countries. It characterizes the role political connections with domestic governments play by showing that the implicit property rights protections they provide dominate any potential benefits received through domestic back-channel financial contracting arrangements resulting from government coercion of banks, suggesting the role political connections play in obtaining preferential financing terms has more to do with protections from a weak operating environment than it has to do with capital market manipulation. The weaker the domestic institutional environment is, the less likely the average firm is to cross-list. For connected firms, however, the weaker domestic property rights institutions are the more likely they are to cross-list. The paper employs, in its empirical analysis, a multi-level, cross-sectional dataset containing information spanning 46 countries (of varying institutional quality), in which 12,395 firms belong to a wide range of industries and have different political statuses (among other corporate financing characteristics) that influence their global financing behavior.
This paper examines how transmission coordinates with generation to the long term in a liberalized power system. We rely on a modular analysis to separate the mechanisms of coordination between generation and transmission of electricity into distinct modules. The governance structure of transmission completes this analysis framework. We then show that in a logic of complementarity, this governance structure influences the options that TSO implements to manage effectively power flows. Although locational signals are necessary to guide the installation of new power plants, the governance structure explains that investment in network may be the only effective method of long-term coordination between generation and transmission.
This paper provides a new explanation for puzzles surrounding credit card prices. The theory suggests that the consolidation in the US banking industry, particularly the consolidation among major credit card issuers, could be a main driving force of rising merchant (interchange) fees. As a result, card issuers’ profits increase with interchange fees, but merchant profits and consumer welfare are reduced. The theoretical findings are shown to be supported by empirical evidence. Based on our analysis, the pros and cons of policy interventions are discussed.
The evaluation of the causal effects of tenure length on political dynasties is a difficult task as tenure length is potentially endogenous in a model of political dynasties. To overcome this identification problem I exploit a natural experiment in the allocation of the duration of legislators’ terms in Argentina. With the return to democracy and the formation of the Congress of 1983, the duration of elected legislators’ terms was randomly allocated. I exploit this exogenous variation for the duration of legislators’ terms as an instrument for tenure length. I find that having a longer tenure in Congress increases significantly the probability of having a relative in future congresses.
In the last decade, the concept of co-regulation has been developed and increasingly promoted as an important instrument of regulation. In enforcement of food safety rules, there is a very broad range of enforcement approaches that may be defined as modes of co-regulation. In these, regulation is designed and set by public authorities and enforced by coordinated actions provided by public authorities and regulated by firms. This paper contributes to the analysis of modes of co-regulation within the enforcement regimes of food safety regulations. We present a framework for evaluating the shift toward co-regulation and from a punishment to a prevention approach from an enforcement agency’s perspective. We show that the linear descending alignment between philosophy, strategy, actions of the enforcement regime outlined by May and Burby (1998 ) no longer holds. This results in a shift from economic incentives based on punishment to incentives based on prevention and the use of new monitoring and enforcement tools. We then illustrate our purpose using a case study of the use of co-regulation in the enforcement of pesticide residue limits in the French import industry for fresh produce.
This paper provides an empirical assessment of liquefied natural gas (LNG) supply contracts to determine optimal contract duration. We study the trade-off between contracting costs due to repeated bilateral bargaining versus flexibility. Estimation results of a simultaneous equation model show that the presence of high dedicated asset specificity results in longer contracts thus confirming the predictions of transaction cost economics, whereas the need for flexibility reduces contract duration. With increasing bilateral trading experience contract duration decreases. We furthermore observe that countries heavily reliant on natural gas imports via LNG are willing to forgo some flexibility in favor of supply security.
This paper investigates the impact of governance structure on firm performance. We use a database of 765 German water suppliers to analyze the relationship between organizational form (i.e. private sector participation in water supply versus public service provision) and retail prices controlling for scale economies as well as technical and structural characteristics of the suppliers. Assuming that managers make strategic decisions (e.g. governance form) not randomly but rather decide based on expectations of how their choices affect future performance we correct this “self-selection” applying a two stage Heckman model. Amongst others, we show that private sector participation results in higher prices whereas structural parameters such as a high share of underground water or the delivery to a large city may decrease consumer prices. Eastern states on average feature higher prices mirroring significant investments during the last two decades as well as in some cases network over-dimension.
Corporate Social Responsibility (CSR) is here defined as a multi-stakeholder model of corporate governance and fiduciary duties naturally emerging from a critical assessment of the incomplete contracts view of the firm. As far as the normative point of view is concerned, multi-stakeholder fiduciary duties are deduced from a theory of the firm’s stakeholders Social Contract. This provide for a clear cut and calculable objective function, a criterion for governance and strategic management no less able to set a bottom-line to the firm management than the profit maximization principle. As far as implementation of the normative model is concerned, four roles of voluntary but explicit CSR norms are presented in terms of a non-cooperative game theory of implementation. It is shown that they allow • the description of equilibria, even if multiple, in a game played under unforeseen contingencies. • the ex ante selection of the equilibrium point that meets the requirements of an impartial choice. • to calculate conformist psychological equilibria, and the quite surprisingly result that mixed strategy equilibria are absent in the repeated Trust Game. • to provide an equilibrium selection mechanism that generates a state of mutually consistent expectations converging on the psychological equilibrium fully consistent with the norm
I analyze the relationship between political institutions and sovereign borrowing in a simple model where institutions are endogenous and governments vary in their credit risk and political goals. The model demonstrates that there is an inverse relationship between institutional constraints and the cost of borrowing, which is consistent with the North-Weingast thesis. The model also explains why previous empirical studies on this subject, which rely mostly on observational data to make casual inferences, have reached disparate conclusions. I use extensive data on the risk premia of Argentine bonds in the nineteenth-century to evaluate the model's central implications. My analysis indicates that the adoption of constitutional constraints in the 1850s led to a considerable drop in Argentina's cost of borrowing. I also use the value of Argentina's public debt issued in international and domestic markets to examine how credibility affects borrowing costs when rulers are responsive to some creditors but not others (i.e. institutions are exogenous). The findings indicate that when the country's perceived creditworthiness deteriorated, the only creditors who demanded a higher risk premia where those with no significant influence over the authorities. In contrast, changes in the country's perceived risk failed to have any effect on the interest rates charged by influential lenders.
We extend models of policymaking within formal institutions to include in the action set of players alternative political actions (such as road blockades). There are various self-reinforcing mechanisms in the choice of venues and styles for political participation, leading to multiple equilibria. Polities in more institutionalized equilibria will behave as predicted in the “tidy” literature on political institutions and policies. Polities in less institutionalized equilibria might behave differently, with important implications for cross national empirical analysis of the effects of formal political rules on public policy. We derive a number of comparative statics results. For instance, lower institutionalization is more likely, the more asymmetric the distribution of de jure political power. Three levels of empirical evidence support our argument: cross-country correlations, survey responses for 18 Latin American countries, and a narrative of the case of a switch from a more to a less institutionalized equilibrium in Bolivia.
This paper studies experimentally how firms choose between using a centralized market and bilateral negotiations to recruit new personnel. In the market firms interact with several employees but do not have information about employees’ behavior in the past. In the bilateral negotiations firms negotiate bilaterally with prospective employees and learn about employees’ performance in previous jobs. We show that the interaction between social preferences, the incompleteness of contracts and the existence of information about a worker’s past performance provides an explanation for firms forgoing market opportunities and bilaterally negotiating with a worker. We observe that approximately 30% of all job contracts were bilaterally negotiated when these contracts are incomplete as opposed to only 10% when contracts were complete. The surplus from trade is higher when incomplete contracts can be bilaterally negotiated which can be attributed to the presence of information.
This paper investigates how bureaucrats set bribes and whether these payments impose significant economic costs. We generate an original dataset on bribe payments at ports in Southern Africa that allows us to take an unusually close look into the blackbox of corruption. We find that bribes are product-specific, frequent and substantial. Bribes can represent up to a 14% increase in total shipping costs for a standard 20ft container and a 600% increase in the monthly salary of a port official. Bribes are paid primarily to evade tariffs, protect cargo on the docks and avoid costly storage. We identify three systemic effects associated with this type of corruption: a "diversion effect" where firms go the long way around to avoid the most corrupt port; a "revenue effect" as bribes reduce overall tariff revenue; and a "congestion effect" as the re-routing of firms increases congestion and transport costs in the region by generating imbalanced flows of cargo in the transport network. The evidence supports the theory that bribe payments at ports represent a significant distortionary tax on trade, as opposed to just a transfer between shippers and port officials that greases slow-moving clearing queues.
Between the 1620’s and the 1880’s, English bankruptcy law forbid the confirmation of majority votes by creditors on continuation arrangements. By making collective action more difficult, this rule affected in a major way the working of this institution, both before and after default. It also set English law apart from mainstream European traditions, namely the Italian, and later French legacies. In accounting for the initial divergence, this article gives a decisive role to early-modern conflicts between courts over the jurisdiction on trade issues; in the background commercial expansion and unsettled relations between the executive, legislative and judicial powers did also weigh heavily. Ulterior stability then responded, first, to the comprehensive constitutional commitments that had to be taken in order to protect market discipline against rent-seeking interests; and, second, to the internal microeconomic coherence attained by the respective regimes. Lastly, the slow return of English law to confirmed arrangement, over the course of the 19th century, reflected changing economic conditions and a more stable environment, where the overall commitment to market discipline was better institutionalised. The strictures built into the initial regime could thus be relaxed. This comparative historical paper is thus a contribution to the debate on the fragile transition from “limited access” to “open access” economies, in the terms recently used by North, Wallis and Weingast (2009).
Recent literature suggests that opportunistic political budget cycles are a phenomenon of new rather than established democracies. The literature also suggests that this cannot be explained as the result of naïve voters because voters in new democracies are just as likely to punish executives for deficits as are voters in established democracies (Brender and Drazen 2008). This leaves two puzzles: why do these cycles exist at all? And what part of the democratization process explains this amelioration? We suggest that the answers to both puzzles lie in the system of accountability. The budget process is a legislative phenomenon and the manner in which voters hold their representatives accountable is a function of the informal institutions that govern political competition. We develop a class of models to show that political budget cycles are possible in the legislative context. We further show that the development of a strong party system can dampen these legislative budget cycles. In sum, political budget cycles are a legislative phenomenon and institutionalization of the legislature limits the scope of this form of electioneering.
We augment existing studies of spot procurement contracts by introducing relational contracting. We first show that at intermediate interest rates, the form of procurement contract affects the parties' reneging temptation on a given relational contract, and hence affects the best relational contract that is sustainable. Using a novel data set on information technology outsourcing contracts, we find that lower reneging temptation, measured by narrowly varying alternative vendors' modification costs, favors relational fixed-price contracts. Second, we find that a vendor with high reputation capital in fair bargaining (cost-cutting) is more likely to be awarded a fixed-price (cost-plus) contract. Lastly, we find that relational contracting makes fixed-price contracts less complete and complexity matters less in the choice between fixed-price versus cost-plus contracts with relational contracting. JEL Codes: D2, D86, L24, M15
About half, probably more, of all patented inventions are never commercially exploited. Even many of the most commercially significant inventions take decades to come to market. In this paper, I contend that the patent system is substantially retarding the commercialization of valuable inventions. This neglect should not come as a surprise--the dominant framework undergirding patent law, the "reward" theory, is premised on providing incentives for nascent inventions, not commercialized end-products. Although more recent "prospect" theories properly recognize the importance of patent protection for commercializing inventions, they incorrectly conclude that strong, real property-like rights are necessary to spur robust commercialization. In analyzing these dominant theories of patent law, I conclude that it is effectively impossible to adjust the timing, duration, and scope of traditional patent rights in order to encourage substantial commercialization. In place of efforts to reform the traditional patent, whose quid pro quo is the disclosure of novel and non-obvious information, I propose a new IP right--a "commercialization" patent--granted in exchange for the commitment to make and sell a substantially novel product. Decoupling the invention and commercialization functions of patent law into dual rights would yield more commercialization than the existing system, without unduly decreasing competition, encouraging legislative rent-seeking, or increasing administrative costs.
What factors explain the occupation of leadership positions in the Brazilian Congress? Understanding the selection process as a problem of agency, we test the hypothesis that there is a homogeneous profile of leadership based on both prestige and credibility. Technically, congressmen will try to minimize adverse selection problems during the selection of their representatives. On methodological grounds, we used a multinomial logistic model with six independent variables divided in two dimensions: (1) Prestige: seniority, political experience and incumbency. (2) Credibility: party seniority, partisan expertise and party shifting. The units of analysis are the selection of party leaders, committees’ chair and majority speakers during the 51st and 52nd national legislatures. Our preliminary findings suggest that leaders gather, comparatively to rank filed members, more accurate knowledge of the congressional machine and higher alignment with the party interests. In addition, similarly to the U.S. Congress, seniority strongly explains patterns of leadership. Therefore, despite of conventional wisdom about Brazilian Congress, these results suggest some degree of institutionalization in the national House of Representatives following the Poslby’s (1968) definition.
This paper investigates the organization of criminal enterprise by examining extortion of non-incarcerated criminals by incarcerated ones. Despite high information costs and the constraints of imprisonment prison gangs often have substantial control over the operations of street gangs, including "taxing" their illicit earnings and even, at times, directing narcotics distribution. Extortion from behind bars depends on the inmates' ability to establish power in prison, the characteristics of the victim, and the nature of the illegal activity, if any, conducted by the extortion victim. The paper provides evidence on the Mexican Mafia's criminal enterprise by drawing on the gang's written constitution, gang informants, and law enforcement documents.
This paper examines the impact of a reform designed to curtail the strategic manipulation of the liver transplant waiting list. Prior to March 1, 2002, livers were allocated by a standards based regime in which strategic misrepresentation of severity of patient illness could enhance a center’s chances of performing a transplant. After March 1, 2002, a rules-based allocation regime was introduced that eliminated subjective factors in the allocation of livers. Using this policy change to identify strategic manipulation of the waiting list, I show an association between highly competitive transplant markets and an increased willingness to misrepresent patient need to obtain livers.
The division of property rights affects the probability of marriage dissolution. However, this effect depends on the institutional environment. Throughout a comparative institutional analysis, we use data from the 2000 censuses of Brazil and the United States. The results, following previous economic predictions, indicate that the probability of divorce, both in Brazil and the United States, is negatively related to the amount of property and income, as well as to the costs of leaving the relationship. Additionally, we founded that this relation is moderate by the enforcement and coercion degrees presents on each country, including divorce laws (formal institutions) and social coercion, as religious orientation (informal institutions). Specifically for social coercion, our results present that religious orientation is relevant for marital dissolution in both countries. However, the divorce laws and formal institutional environment as a whole reduce the probability of divorce in Brazilian jurisdiction, while among the USA couples this do not affect the divorce occurrence, even controlled for each state legislation in the USA. We suggested that this difference on law’ impact is related with a greater subjectivity on North American law, if compared with the written Brazilian code. Keywords: Marriage Contract; Marital Dissolution; Institutional Environment.
We present and estimate an asset pricing model based on an intertemporal asset allocation problem with n available assets, in which agents have heterogeneous expectations about the future. We, thus, want to bridge the literatures on intertemporal asset allocation and on heterogeneous beliefs. In our model, the interaction between two switching types of agents, e.g. fundamentalists and chartists, is responsible for endogenously generating the observed price trends. We assume that agents have a long horizon objective, based on a stream of consumption, maximizing a recursive utility function. Agents in our model may try to make profits using strategies that are not driven by fundamentals, not necessarily meaning that they behave irrationally. Among the new features in our model, we can mention that the usual representative agent approach for long term investors is no longer valid. Besides, assuming that investors have a long term investment horizon changes the resulting optimum asset allocations and, thus, relative asset prices when compared to short term models. This last feature is even more important since we consider more than one risky asset. We estimate the model considering an investor from USA who can trade four major stock indices: Dow Jones, FTSE, Nikkei and Hang Seng. This lets us check wether or not price movements are driven by fundamentals, helping predicting the creation of bubbles.
We explore whether effective checks and balances, measured by the presence of veto players in countries with high compliance with the law, moderate electoral cycles in fiscal and monetary policy. Annual data from 39 Latin American and OECD countries over the 1980-2005 period show that the aggregate budget surplus (our fiscal variable) and the rate of change of international reserves (our monetary variable) fall significantly before elections and rise afterwards only in Latin America, not in the OECD. Quarterly data allow to identify the electoral period much more precisely, suggesting the presence of cycles in the OECD. Moreover, our measure of institutional constraints on executive discretion turns out to be significant in explaining variations in electoral cycles across regions. Quarterly data show that effective checks and balances are significant in moderating fiscal and monetary cycles in both regions.
High capital spending is favored by economists and politicians for its beneficial effects on economic growth. However, there is empirical research associating high levels of public investment and low economic growth due to corruption. I provide an endogenous growth model with Ramsey taxation that is consistent with this empirical finding. In the model, government maximizes the weighted average of consumers’ utility and its own utility coming from expropriation of tax revenues. The weight determines the benevolence of the government. I show that a self-interested government sets a higher public-to-private-capital ratio than a benevolent one in order to increase the before-tax returns to private investment and hence increase tax revenues that can be expropriated. However, after-tax returns to private investment are lower and hence the growth rate is lower. Another result is that self-interested governments choose a high level of non-productive public investment, which provides a channel for the government to expropriate tax revenues for its private gain, thereby inflating total public investment.
This paper examines the institutional factors underlying the successful integration of Thailand’s automotive industry into the global production network of Japanese automobile assemblers. More specifically, I explore the role of Japanese firms in developing and creating local supplier networks and the evolution of the technological capability of local firms. Based on questionnaire surveys and interviews with assemblers and suppliers, conducted over the past five years, firms’ boundaries and procurement structures, i.e., make-or-buy decisions, have evolved significantly during the past four decades. Japanese firms employed relational contracts for parts procurement, but they were unable to replicate the Japanese-style supplier system in Thailand. This was due mainly to the limited capability of Thai suppliers. To reduce the transaction costs of procurement and improve productive efficiency, ‘social’ and ‘physical’ technology has been transferred to suppliers directly and indirectly, through ‘supplier development programs’ and ‘knowledge-sharing’ at the network level. As a result, 'trust' and ‘social technology’ have been developed, which in turn enables assemblers to rely on suppliers for some parts that normally require specific investment or capability, such as outer panels. In addition, there is clear evidence that ‘social technology’ is diffused and reused with other customers. Hence, newly established firms can free-ride incumbents’ efforts.
In this article, we present a positive political theory (PPT) of how and why the dominant doctrinal forms of rules and standards are created. In contrast to many scholars who claim that one approach is uniformly preferable to another, we illustrate that rules and standards can each be advantageous. We identify a range of factors, including the political-ideological makeup of both higher and lower courts, that determine which doctrinal approach will be preferable under given circumstances.
We present an analysis of the evolution of regulatory independence in practice for 23 Latin American and Caribbean countries in the telecommunications industry. Based on this analysis, we construct realistic indices of regulatory independence, which improve upon the measures of independence that have been used so far in the empirical regulation literature. We show that legal indices may give a partially distorted picture of the commitment ability of institutions. The combination of de facto and de jure independence has a positive and significant impact on network penetration both in old and in new telecommunications markets.
This article starts by surveying the literature on economic federalism and relating it to network industries. Some new developments are then added and used to analyze the determinants of specific investments and the interaction between structural and behavioral regulation. Central or federal policy making is more focused and especialized and makes it more difficult for interest groups to organize. Under some conditions, however, central powers will be associated with more underinvestment than local powers. The latter may use other policy objectives as a commitment device. When technology allows the introduction of competition in some segments, the possibilities for organizing the institutional architecture of regulation expand. Liberalization will typically require institutional cooperation, but cooperation has costs and may be inhibited by distributional concerns.
The notion of a resource-based competitive advantage contains a paradox. How can superior and inimitable resources that are so widely believed to be the source of competitive advantage also be a source of competitive advantage for multinational companies that compete by replicating their highly standardized and increasingly imitable business models in foreign markets? This article examines the competitive advantage of multinational replicator companies through the combined lens of the resource-based view and transaction cost economics. I ask what it is that distinguishes business model transactions (replications) after which I compare the efficacy of multinational and national firms for managing such transactions (replications). I conclude that there is a source of sustainable competitive advantage for multinational replicators, that such an advantage is more likely to be found in the multinationals’ dynamic capabilities than in their locally operative business models, but also that such capabilities and business models may contain the seeds of their own demise partly caused by the replication strategy itself, partly by attributes of the business model such as open and non-proprietary global standards and weak appropriability regimes.
Following Max Weber’s seminal study, many recent studies have examined religious variation in work attitudes, also relating this variation to differences in economic performance. This work, largely based on values surveys, has not resulted in unambiguous confirmation of Weber’s original thesis about a Protestant work ethic. In this paper, we suggest that part of the reason for this lack of clear support for the Weber thesis lies in problems with the interpretation of values surveys data. In response, we test the relation between Protestantism and work attitudes using a novel method that addresses fundamental limitations of previous analyses. Work ethic is operationalised as the involuntariness of joblessness as reflected in unemployment’s adverse effect on individuals’ happiness. Empirical findings—using data on 130,000 individuals from 78 countries—strongly support a Protestant work ethic: unemployment hurts Protestants more, and hurts more in Protestant societies. The results shed new light on the Protestant work ethic debate. Also, our method has wider applicability in cross-cultural comparative research.
In his catch-up theory, Gerschenkron argued that it is possible for a relative backward economy to engineer industrial growth through government intervention. In the case of late 19th century Russia, active state intervention took the form of channelling investments to favoured industries. This included the state’s pivotal role of raising inflows of foreign investment capital. We revisit Gerschenkron’s theory, which assumes that a backward economy such as Russia can successfully imitate more advanced market economies. We argue that the Putin regime was designed to offset inefficiencies generated by a weak property rights system, which otherwise led to severe hold-up costs from the desire of oligarchs to divert wealth through asset-stripping. The state also re-asserted control over Russia’s natural resources, in order to channel economic rents to subsidise other corporate sectors. Moreover, the state became pivotal in commanding the flow of funds through its direct or indirect control over the banking sector. We test the significance of the above policies on the performance of Russia’s corporate sector. Our findings suggest that the new state-private co-partnership system is positively related to firms’ improved performance. We find evidence that energy sector rents are channelled to favoured economic projects, while private investors earn a risk-adjusted competitive return. Furthermore, we find that such rents are channelled through Russia’s developing banking sector.
It is often conjectured that non-state dispute resolution blossoms when state courts are not independent or are perceived as low-quality courts. This conjecture implies a substitutive relationship between state and non-state dispute resolution. An alternative hypothesis argues that both the quality and the frequency of use of these two alternative mechanisms are complementary: societies with high-quality state courts would also be able to provide high-quality non-state dispute resolution. This is the first study that puts these hypotheses to an empirical test. It turns out that the lower the perceived quality of state courts, the less frequently conflicting firms resort to them. Second, firms in common-law countries turn away from state courts significantly more often than firms in civil-law countries. This result sheds doubt on the robustness of results generated within the legal traditions literature. Finally, in states that have created the preconditions for arbitration, businesspeople resort significantly more often to state courts. We interpret this as evidence in favor of the complementarity hypothesis.
The statement “institutions matter” has become commonplace. A precondition for it to be supported by empirical evidence, is, however, that institutions are measurable. Glaeser et al. (2004) attacks many studies claiming to prove the relevance of institutions for economic development as being based on flawed measures of institutions, or not even on institutions at all. This paper shows that their criticism deserves to be taken seriously, but that it is somewhat overblown. Some of the difficulties in measuring institutions are described and some ways of measuring them are proposed.
Over the years, an extensive empirical literature has been developed to address theoretical propositions concerning vertical integration of a business enterprise (particularly, the "Coase-Williamson" framework). To operationalize the dependent variable, a number of works in this area employed a vertical integration index, which measures the fraction of economic activities carried out "in house". Despite this large body of knowledge, there were few, if any, coherent attempts to apply it in order to formally test a much-publicized notion that the adoption and use of the Internet throughout the business sector disintegrates well-established corporate hierarchies. To bridge this gap, this study focuses on diagnostic radiology services provided by U.S. hospitals to their patients to analyze whether the hospitals’ capability to transmit images over the Internet to remote parties for interpretation or consultation (known as "Internet-based teleradiology") transforms the traditional hierarchical arrangement characterizing hospital radiology practices. The vertical integration index was calculated using Medicare Part B claims data. The estimation of a set of linear and logistic regression models shows that the hospitals’ involvement with Internet-based teleradiology has a positive and statistically significant effect on the volume of interpretations provided using contractual arrangements with off-site radiology practices relative to that provided using the "in-house" radiologists.
Using a unique dataset containing 398 technology commercialization agreements signed between 1978 & 2008 that involve the transfer of U.S. marketing rights to 866 identifiable products, this paper analyzes how the structure of technology commercialization agreements between biotech and pharmaceutical firms has evolved since the pioneering Genentech/Lilly alliance was signed in 1978. Many empirical researchers have used biotech alliances to test theories in economics, and strategic management. However, that literature largely ignores how alliance structure may have changed as industry norms have evolved over time. We present evidence that while traditionally the biotech firm licensed all the rights to perform the commercialization activities (i.e., clinical development, marketing, and distribution) to the pharmaceutical firm in exchange for financial payments, over time biotech firms have become increasingly more integrated into the commercialization activities of the alliance product through Co-Development and Co-Promotion arrangements. At the same time, the pharmaceutical firm has become less likely to retain an Equity stake or enter an equity-based Joint Venture. We argue that this trend is related to the demand from public financial markets, and particularly a preference for full integrated, product-based firms over ‘platform’ or licensing-based firms, which we attribute to the informational problems that public equity investors face in evaluating technology.
An important target set by the Chinese government for market reform is to promote scientific management practices among the state-owned enterprises. This paper investigates whether Chinese state-owned satellite television channels are adopting market oriented management practices by testing for competitive strategic conducts. Under the previously planned economy system, SOE bureaucrats were neither familiar with competitive strategy nor motivated to act strategically. Moreover, the selections of television programs were often politically motivated. Using a near-census panel dataset, I examine the programming portfolios of 30 province-level government-owned satellite channels before and after a central government policy change in 2003. The policy allowed the central government-owned television channel, CCTV1, to broadcast a greater proportion of commercially oriented shows. I construct a product distance metric to compare the pre- and post-policy programming portfolios. I find the satellite channels execute programming strategy towards CCTV1 that is consistent with spatial competition and dominant-firm-competitive-fringe theories.
Although now it is widely conceded that organization matters, it was not always so. Indeed, for economists, organization matters if and as it is susceptible to analysis. This paper begins with some historical and transitional perpsective on the status of organization in economics. I then examine different strategies for analysis, with emphasis on the focal transaction -- especially comparing the employment relation with the intermediate product market transaction. The logic of organization and of interface mediation as between alternative modes of governance are then worked up; empirical testing and public policy ramifications are then examined; and new challenges -- real time startups and contract laws (plural)-- are folded in. The paper ends where it began: organization matters for economists if and as it can be and is made susceptible to analysis.
In this paper, we analyze the influence of the state on the improvement of corporate governance in Russia of the early 2000s. Taking into account the low quality of market institutions in the 1990s (i.e., the market failure phenomenon), we assume that state intervention as the “second best” solution had a positive impact in this case. Using a dataset of 822 joint-stock companies, we tested this hypothesis in two types of corporate models – state-owned or mixed firms and “politically connected” firms. The first model confirmed a strong positive influence of state ownership on the corporate governance in Russia in 2001-2004. The estimation results of this model are statistically robust in different specifications. We connect this result with attempts of the Russian government to use standard mechanisms and procedures of corporate governance to defend its property rights in its relations with state-owned and mixed enterprises.
The Brazilian judiciary is well-known for its inefficiency and delay. Yet, such conclusions are often based on anedoctal evidence. Little effort has been made to objectively measure the efficiency in Brazilian courts. Studies that combine quantitative and qualitative analysis are even harder to find. This paper uses Data Envelopment Analysis (DEA) to measure the efficiency of State Courts in Brazil. Results show that relative efficiency varies substantially across different Courts. Moreover, the typical usual criticisms which blame judicial inefficiency on a lack of material and human resources are not supported. Instead, efficiency in courts seems to be related to the organizational climate, staff motivation, and management quality.
An empirical study of U.S pharmaceutical industry was conducted to directly investigate the validity of the once hotly-debated tragedy of anti-commons for the first time. An index based on Theil’s entropy measure and the Herfindahl type indices were applied to measure the transaction cost difficulty resulting from fragmental patent right ownership structure in pharmaceutical industry. The empirical analysis has confirmed the existence of the tragedy of anti-commons.
Relational contracts allow to enforce actions the parties would not undertake in an arm’s length transaction. In an agency context, relational contracts will thus produce fiat — a principal’s ability to dictate her agent’s performance. This paper shows that, as the agent’s task becomes more critical, vertical integration increases the principal’s (informal) power of fiat, by reducing the agent’s reneging temptation. The paper also shows that vertical integration increases the principal’s (informal) power of fiat when the parties are in a closer relationship, suggesting that integration and relational contracts are complements. An implication of the model is that, while the level of fiat observed under separation is smaller than under integration, it is still greater than what would be feasible if integration governed the corresponding relation. This sheds new light on the classic tenet that fiat is an organizational advantage of firms over markets, suggesting it may be the result of selection bias.
Command and control or regulatory reallocation of water among those who own rights and/or those who want to use water is hard to plan and frequently puts water in the wrong places at the wrong prices. Market allocation can be more efficient but may suffer from "illiquidity," i.e., low participation among potential sellers. I propose a hybrid system in which regulators force full participation but allocation is decided through market forces, i.e., an All-in Auction (AiA). The AiA has four important features: 1) Water owners can opt out by bidding for the same number of units (as buyers) as they are selling. This means that the AiA does not result in regulatory taking. 2) Because all participants are bidding to buy water, the AiA design circumvents a common problem in auctions, i.e., endowment effects (the gap between willingness to pay and accept) that reduce the number of transactions. 3) Because ALL water is up for sale, it is possible to achieve the maximum number of trades and thus maximize the benefits from redistribution. This means that the AiA avoids participation effects. 4) The AiA can be opened to as many participant groups (e.g., urban, agricultural, environmental) as necessary. As participation increases, the social benefit of the AiA also increases. I will present these theoretical advantages and give an update on lab and field experiments designed to test and implement the AiA among farmers in irrigation districts.
The paper studies asymmetric awareness of the appropriateness of a status quo product between a seller and a buyer, where the latter can invest cognitive resources before contracting `a la Tirole (2008). In the one-shot interaction, we show that there is no separating equilibrium in which the seller always truthfully reports the appropriate product. If the extent of mis-selling and the transfer from the seller to the buyer in the case of mis-selling are low, we have a pooling equilibrium where the seller always announces that the status quo product is appropriate. Otherwise, we obtain a semi-separating equilibrium where the seller randomizes between telling the truth and mis-selling if the status quo product is inappropriate. The transaction cost of pre-contractual cognition increases with the extent of mis-selling as the extent of mis-selling is small and decreases thereafter. Finally, reputation with a “tip” mechanism or competition between sellers may yield a separating equilibrium where the transaction cost vanishes.
Ronald Coase offered strong motivation for scholars to engage in empirical analysis of contracts. In his famous speech at the Swedish Academy he stated that there is a large amount of information available about business contracts that are unknown to economists. The establishment of centers of studies of contracts, have been observed since then, aiming to collect contracts and prepare databases to facilitate research focused on the institutional structure of production deepening the knowledge about the functioning of the real economic system. As a result of his initiative, different research centers around the world initiated consistent collections of business contracts. The leitmotif offered by Prof. Coase has shown positive results, allowing the research on institutional structure of production to be carried on a more consistent way. The motivation for the present study is to contrast the evolution of the economy of organization theory and the profile of the data of contracts that are collected. If the goal of organization economists is to study how the real economic system works, then we should recognize that the use of data collections of contracts is insufficient and can only picture part of the incentives present in most of the institutional arrangements. The basic proposition is that if data based on contract collections is used without the necessary care, the results can lead to false conclusions
Abstract: The exhaustion of natural resources is a central problem in the international agenda. The particular case of Amazon forest is at the top on the international environmental discussion. The predatory use of the natural resources of the forest mainly timber and genetic resources.The region is populated by initiatives of international non-governmental-organizations, most of them carrying good intentions but lacking the necessary knowledge on local formal and informal institutions to find ways to reach sustainable development. The result is the accelerated process of natural resources depletion, and social disorganization. The case of the production of Brazilian Nuts stands as a corollary of the lack of an institutional structure of property rights that does not provide incentives for sustainable development. The opposite effect is being observed as a result of the fragility of observable institutional arrangements.