Society for Institutional & Organizational Economics
Conference papers from 2010 (sessions were not tracked for this year)
A child support guideline is a formula used to calculate support payments based on a few family characteristics. Guidelines began replacing court awarded support payments in the late 1970s and early 1980s, and were later mandated by the federal government in 1988. Two fundamentally different types of guidelines are used: percentage obligor and income share models. This paper explores the incentives to divorce under the various schemes, and uses the NLSY data set to test the key predictions. We find that percentage obligor models are destabilizing for families with high incomes.
We present a conceptual framework of the emergence of de facto property rights for land on frontiers and the subsequent assignment by governments of de jure property rights. Potential rents associated with more exclusivity drives “demand” for commons arrangements but demand is not a sufficient explanation; norms and politics matter. Enhanced scarcity eventually drives demand for more exclusivity beyond what can be sustained with commons arrangements. Claimants petition government for de jure property rights to their claims – formal titles. Governments may not allocate de jure rights to first possessors. Moreover, governments may assign de jure rights but be unwilling to enforce the right. This generates potential or actual conflict over land. We examine land settlement and conflict on the frontiers of Australia, Brazil and the U.S. Our analysis indicates the emergence of de facto property rights arrangements will be relatively peaceful where claimants have reasons to organize collectively (Australia and the U.S.). The settlement process will be more prone to conflict when fewer collective activities are required. Consequently, claimants resort to periodic violent self-enforcement or third party enforcement (Brazil). In all three cases the movement from de facto to de jure property rights led to potential or actual conflict because of insufficient government enforcement.
The Procedure for Institutional Compatibility Assessment (PICA) has been developed as a formalised methodology to predict the compatibility between a policy option and the institutional context of its implementation. As a first empirical test of the tool, PICA was applied to the implementation of the EU Nitrate Directive in Allier and Puy-de-Dôme, Auvergne, France. The procedure proved to be a valuable tool for the ex-ante identification of institutional factors affecting the implementation of the Directive in the study areas. Further, the empirical application helped to evaluate the procedure from a methodological perspective. The ability of PICA to "predict" ex-ante the institutional constraints to the implementation of a policy option and the capacity of the tool to account for differences between distinct institutional contexts were highlighted. Finally, valuable insights were acquired on the choice of qualitative methods and the integration of stakeholders’ points of view for the collection of the information needed at each step of the assessment.
China’s transition to a low carbon economy through the reform of its energy sector is of critical importance the whole world. By examining the institutions of energy governance in China, this paper identifies a number of key features which are likely to determine the future evolution of its energy sector. At one level lie the embedded institutions which have their roots in more than four thousand years of history and derive from the country’s origin as an hydraulic agrarian regime. These include the preference for conformity, the importance of personal relationships, and attitudes towards truth. The way that natural resources are governed is also coloured by traditional views on the relationship between man and nature, on self-reliance, and on the role of the state. At another level, analysis of the current institutional environment shows how the formal structures government, the Communist Party and the legal system operate in the context of these deeply rooted values to determine policy making and implementation in the energy sector. As a consequence, China’s national energy policy is characterised by continuity and path-dependency and by incremental, unpredictable, short-term adjustments. Although the government’s aptitude for introducing new technologies and undertaking certain types of administrative measure play a positive role in the progress of its low-carbon strategies, many features of the institutions of energy governance may act to constrain this progress.
This research analyzes if the measurement costs of a traded good’s attributes reduce control sharing in contracts for the provision of industrial services, as forecasted by the contract theories of measurement and transaction costs. Theoretically, when an industry outsources an activity it used to perform internally, it yields partial or full control on the execution of the service and maintains service quality monitoring rights. The choice of the control level the contracting industry exerts on the service provider would affect that activity’s economic income. In a field study, 80 non-spot transactions at an iron and steel mill were analyzed, representing 81% of the mill’s annual service budget. In a quantitative approach, the contract documents were subject to content analysis. The evidences observed in the contracts were triangulated with interviews held with supervisors and operators, in addition to critical observation of the services involved in the mill’s production process. Through the contract design, the results confirm that the measurement costs of the contracted services, directly related to the complexity of the activities involved, encourage control maintenance by the contractor, deriving from lower expectations of using legal enforcement of the contracts and additional use of extra-contractual enforcement mechanisms. In addition, the misalignment between the enforcement mix expected by theory and what is found in practice influences service performance.
Registering originative business contracts allows entrepreneurs and creditors to choose, and courts to enforce market-friendly “contract” rules that protect innocent third parties when adjudicating disputes on subsequent contracts. This reduces information asymmetry for third parties, which enhances impersonal trade. It does so without seriously weakening property rights, because it is rightholders who choose or activate the legal rules and can, therefore, minimize the cost of any possible weakening. Registries are essential not only to make the chosen rules public but to ensure rightholders’ commitment and avoid rule-gaming, because independent registries make rightholders’ choices verifiable by courts. The theory is supported by comparative and historical analyses.
This paper explores the relative strength of strategic (North, 1990) versus evolutionary theories (Bowles, 2004) of institutional change to explain the reversal in fortunes of South Asian madrasas; once responsible for grooming the elite in Muslim India, they are today primarily viewed as a refuge for the poor. It compares the experience of South Asian madrasas with that of the University of Oxford, given their common origins in religious education. In the eleventh century, the two traditions started with similar initial resource endowment, comparable supply and demand pressures, and followed equal pace of consolidation over several centuries. Yet from the seventeenth century onwards, they followed different directions: Oxford and Christianity engaged with modernity, while madrasas and Islam disengaged. The chapter argues that the placement of informal vis-à-vis formal institutions is critical in determining the direction of institutional change. The displacement of madrasas by Western educational institutions established under the colonial rule, made madrasa education irrelevant for the modern economy and politics. Deprived of economic and human capital, ulama found security in consolidating old ways rather than experimentation. As part of the colonizing power, Oxford, on the other hand, faced additional pressures to innovate and experiment in response to the demands of the expanding empire and thus became steadily integrated into the modern society and economy.
In this article we attempt to provide empirical evidence on the role of uncertainty and job complexity in the pay-for-performance strength and autonomy provision decisions in the blue collar workers’ context. One of the predictions of the agency model is the trade-off between the workers’ pay-for-performance strength, intended to elicit effort, and the uncertainty on their performance realizations. The inconclusive evidence on this prediction has encouraged the development of alternative models. A common idea in them is that pay-for-performance is also a mechanism to take advantage of the workers’ private information observed in complex jobs. Strengthen pay-for-performance increases his interest to use his private knowledge. So, there is a positive effect on pay-for-performance of job complexity. Also, Prendergast (2002) suggests that this effect is through the provision of autonomy. Uncertainty is proxy by the demand variability and job complexity by an index on the complexity of several dimensions of the tasks. Relying on dataset of 358 Spanish industrial plants we found a positive effect on the provision of autonomy of job complexity and demand variability. We also found a positive effect on the pay-for-performance strength of workers’ autonomy. And then support for Prendergast (2002)’s suggestions. Also, once we control by autonomy, as suggested by the standard model, the effect of demand variability on the pay-for-performance strength is negative
Recent literature has been showing that conditional cooperation is essential for tax compliance. Only coercion mechanisms could not explain the willingness of people to pay tax. On the other hand enforcement costs of tax payments would be excessive high if governments depend only on coercion to collect. Based on the literature on tax morale and conditional cooperation this paper analyzes one crucial point on this discussion, which is the relationship between tax morale and perceptions on government response to tax payments and voice in Latin American and Caribbean countries. The data utilized came from Latinobarometro 2005, which is a survey carried on for several years in all LAC countries. The survey presents many useful questions concerning perception on tax morale. The results obtained show that there is a strong correlation between tax morale and the perception that money collected is well spend and voice. On the other hand the perception on being caught for not paying tax does not affect tax morale. Also demographic variables were important to the explanation of tax morale. These results show that there are some differences between LAC tax morale determinants pattern and the patterns observed in other regions of the world.
This paper looks at the effect of local governance decision rules on elite capture of community resources. In an experiment implemented across 250 villages in Afghanistan we study the impact of two randomly-assigned methods for electing local development councils and of two randomly-assigned methods for selecting local development projects on the choice of development projects. For project selection, we contrast outcomes of consultation meetings—at which villagers discuss and debate alternative projects—with secret-ballot referenda. For elections, we contrast outcomes of cluster elections, in which a male and female representative are elected from each section of the village separately, against at-large elections, in which council representatives are elected across the entire village. The results indicate that the choice of projects is generally responsive to the preferences of non-elite male villagers. Members of the village elite have substantial influence on the choice of projects only in villages that combine at-large elections of the council with the consultation meeting procedure for project selection.
Two major regulatory regimes for planting of genetically modified (GM) crops have emerged: one, where the property right of growing GM crops is mainly with the GM farmer and one where the property right is mainly with the non-GM farmer. In this contribution the regulatory model chosen by Canada and the United States will be compared with the model of the EU and its different variants, the ex-ante regulations and ex-post liability rules chosen by EU member states and analyzed from an efficiency point of view. While the general result in the literature on ex-ante regulation versus ex-post liability rules under uncertainty shows the most efficient regulatory regime does depend on the specific case under investigation, we will investigate the analytical conditions for one or the other regulatory system to be more efficient. The results show the property right systems are almost symmetric as long as transaction costs are not prohibitively high and using the court system is costless. As using the court system is not cost free, property right regimes where the GM farmer is not liable are preferable from a social welfare point of view.
Proponents of minority shareholder protection state that national legal institutions protecting small investors boost stock markets and, in turn, long-term countries’ performance. In this paper, we empirically challenge this argument by focusing, in particular, on country innovation performance, which is central to the long-term development of market economies. We perform three-stage least-square estimation on a sample of 48 countries over 1993-2006 and find that countries with stronger shareholder protection tend to have larger market capitalization but also lower innovation activity. We cope with stock market’s endogeneity and industry heterogeneity, so that this finding is unlikely to be driven by misspecification problems. We interpret our estimation results as follows. It is true that the risk of expropriation at the expenses of individual stockholders can occur as a consequence of block-holder discretion where investor protection is weak. However, small and extensively diversified shareholders are less likely to take interest in long-term corporate results than those who have their wealth disproportionately invested in a given company, and they may use an increased control power to play opportunistic actions against undiversified stockholders, after specific investments are undertaken by the company. Innovation activity, largely based on specific investing, is particularly exposed to such problem, and this turns out to be relevant even at the country-level.
Although departing from similar initial conditions, twenty years later the beginning of the transition Eastern European and Central Asian countries appear to be characterized by remarkably heterogeneous growth performances. In the light of the causal relationship between finance and growth, this article examines, first, whether the lack of convergence in these economies' GDP – per capita growth rates may be a side - effect of as well diversified financial architectures. To this aim, we investigate the occurrence of absolute and conditional convergence with reference to credit market development, as measured by the amount of credit provided to the private sector on GDP. Our findings show a tendency toward convergence, and thus a reduction in the heterogeneity of countries' financial market development. Then, to precisely address the relationship between patterns of financial development and convergence in GDP – per capita growth rates for our sample of economies, we investigate whether there exists a threshold of credit market development such to promote convergence in GDP – per capita growth rates. Actually, we find that this threshold exists and that economies with a level of financial development above this threshold converge to the growth rate of the best performing country of the sample while the others have a strictly lower long - run growth rate.
Deterrence depends on several factors such as the perceived probability of detection and conviction, the penalties on repeated offences, the combination of monetary and non-monetary sanctions, people’s reaction to warnings and learning. While the literature has separately considered each single issue, a comprehensive analysis is still missing. In this paper we analyze the effects of a complex deterrence system which embeds all the above features: the point - record driving license. We exploit a random sample of 50,000 drivers observed during the period July 1, 2003 - May 20, 2009, in Italy. Our results show that the point – record driving license had a positive but vanishing deterrent effect over time on recidivists. We also show that this reduction in deterrence has been stronger for those drivers who benefited from redemptive mechanisms (i.e. those who received the full or partial reinstatement of points, once their record has been kept clean for a given time – span). We then provide a theoretical explanation based on learning theories of deterrence to explain the failure of this sanction system in effectively deterring repeat offenders.
Evidence suggests that at the macro-level property rights have a greater influence on long-run economic performance than contracting institutions. It may be easier for actors to find alternative sources of contract enforcement than it is to defend against a predatory state. However, a micro-level natural experiment in a textile cluster in Lima, Peru indicates otherwise. Following property rights reforms in Peru, a pernicious small-business multiplier effect set in, creating new contract enforcement problems. The leading obstacle to individual firm growth shifted from one of ex ante property rights in the 1980s to ex post contract enforcement in the 2000s. This new context created 'play of the game' problems both between and within firms, which forced entrepreneurs to 'rationally' stay small, preventing them from specializing in order to export and capture gains from trade. At the micro-level, contracting institutions may matter just as much if not more when operating in concert with property rights institutions, indicating that both should be bundled when enacting reforms such as those proposed by the UN Commission for the Legal Empowerment of the Poor. Otherwise, unexpected and pernicious effects may result.
The economics of growth has shown that countries not only grow by deploying higher levels of inputs to production, but also by better allocating whatever resources are at their disposal and by introducing productivity-enhancing innovations. We proffer arguments as to why and how entrepreneurship as well institutions of liberty (i.e., economic freedom, including the rule of law, easy regulations, low taxes and limited government interference in the economy) positively impact total factor productivity (TFP): These institutions allow entrepreneurial experimentation with the combination of factors to take place at low transaction costs. We test these ideas on a unique panel data set derived from Compendia, World Bank data and the Fraser Institute’s economic freedom data. We find that while entrepreneurship positively impacts TFP, the marginal contribution of entrepreneurship to TFP is strongest in economies with substantial government activity.
This paper investigates the impact of legal tradition and firm size on investment performance for firms in 16 European countries. Europe as a region is of special interest since the legal systems differs widely. Anglo Saxon, German, French as well as Scandinavian variants of legal systems can be found in Europe. Previous studies suggest that minority shareholders enjoy a higher degree of property rights protection in common law (Anglo Saxon) countries compared to civil law (French, German and Scandinavian) countries. The cost of governance as a function of firm size is examined. We also look at expropriation of minority shareholders as a result of large organizations and hierarchies. This study differs from earlier studies by concentrating on the firm size and its effects on investment performance and by connecting it to the legal origin in each of the 16 European countries included in the study. For civil law countries we find, as expected, a negative relation between firm size and performance while there is no relation for common law countries. For individual countries, the effect of firm size and legal origin on investment performance is however ambiguous.
The recent political economy literature on regime change and non-democratic politics has not paid enough attention to the role of foreign influence. I look at the Cold War history of democracy in Latin America and construct a theory of power allocation in the presence of foreign influence. In this theory, the outcome of a distributional conflict between an incumbent group and a challenger is altered by the capacity of the incumbent to obtain external support from a key trading partner. This capacity is grounded in the incumbent's larger exposure to the international economy, which makes him easier to control from the exterior, using the threat of trade sanctions. I also allow for the possibility that there is international competition for the geopolitical alignment of the incumbent's country, and study how this choice of alignment is determined by economic or political self-interest. I argue that this theory can help understand the Cold War history of democracy in Latin America, but that it is useful in a number of other contexts as well.
Implicit contracts enforced by repeated interaction or reputation both require stability in the economic environment that simply is not present in a large number of transactions that exhibit limited reliance on external enforcement. Although instability of the environment forces contractual arrangements that are closer to the anonymity of market exchange, this instability leaves open an important avenue for contractual enforcement. This paper presents one class of such environments and shows how a simple mechanism can give rise to Pareto-improving implicit contracting. The key assumption is that in one-period relationships benefits and costs can arise which are extremely asymmetric; minimal cost to one party can cause large increases in the value of the transaction to the other party. We provide several motivating examples, such as new product development, the relationship between the journal editor/researcher and the expansion of trade to new, potentially unknown, partners.
The ‘New’ economics of regulation based on incentives, as exemplified by Laffont and Tirole (1993), consists of attempting to obtain the results of competition when competition cannot be implemented. Incentive mechanisms are nothing but means of transacting information as a hidden good needed to efficiently perform a given (regulatory) transaction. Their implementability relies on perfect knowledge by the ‘principal’ of all the dimensions of the coordination problem in question when dealing with an ‘agent’. As pointed out by Brousseau and Glachant (2010), when such knowledge is unavailable, a way of managing the regulatory game is to develop a pseudo and competitive market for information in which the various stakeholders are incited to disclose information and share knowledge. This is the logic of the new form of regulation, whereby the regulator in charge of completing and redrafting the ‘rules of the game’ in an industry organizes de facto a forum accessible by all stakeholders. These later compete to influence the regulator, which leads them to disclose information
Accountability is important as a means of punishing wrongdoers, improving public confidence in the political system, and deterring potential lawbreakers. But to what extent is the likelihood of accountability an outcome of group interactions and institutional rules? Is the likelihood of accountability within a legislature contingent on the power of legislators or on the publicity given to scandal? Do voting rules that encourage secrecy help to compensate for power differences between legislators or instead lead to backroom dealings that hurt accountability? The paper proceeds in three parts. In the first, we present a basic game theoretic model of congressional efforts to punish dirty peers in a prototypical lower house of a bicameral Congress. In the second, we test some of our basic findings using data from recent scandals and subsequent efforts to ensure accountability in the Brazilian lower house of Congress, the Câmara dos Deputados. In the third, we use an agent-based model to explore some of the theoretical implications of these empirical findings for the smooth functioning of accountability processes in Brazil and beyond.
Legislative organization matters for policy-making, and political rules determine the role of property rights, hierarchies, individual deputies, parliamentary groups, transactions and committees in the industrial organization of Congress. A relevant research program on legislative institutions has studied the different elements of the industrial organization of Congress, analyzing the relationship between institutions, incentives and transactions in the legislative organizations. This paper presents a comparative institutional analysis among several types of industrial organization of Congress, and it studies how political and electoral rules and the Committee systems establish the governance structure of legislative organization. While the American Congress represents a prototype model of Congress in which the congressmen have strong property rights that facilitate the legislative transaction (in base of a more candidate-based electoral politics with powerful committees and individual property rights), this paper presents a map of the hybrid organizational structures that exist in different democratic countries around the world. This comparative analysis shows how the electoral rules and the committee systems affect the incentives of legislators, the structure of parliamentary governance and the policy-making.
Our paper aims to contribute to the corporate governance literature mechanisms by studying the determinants of ownership held by the large shareholders and whether they enhance firms’ profitability. For a sample of Spanish listed companies within the period 2003-2008, we find that firms’ performance, risk and industry help explain differences in the percentage of shares hold by the largest/ultimate owner of listed firms. Besides, after controlling for the endogeneity of ownership structure, the results do not seem to support a significant effect of the holdings of the largest shareholder on firms’ profitability, but they do suggest that the presence of a second large shareholder may limit the private benefits of control of the largest shareholder and enhance firm profitability.
Internal affairs divisions are organizations crafted to monitor the behavior of police officers. However, like many other public bureaucracies, the police is plagued with the “who guards the guardians” dilemma, which is a typical organizational design problem that occurs when the agents to be monitored are appointed as monitors. Consequently, there are reasons to believe that investigations will be inherently biased towards of certain police officers and certain types of deviations. In this paper we examine reasons why some complaints against police officers are sustained or not and if these complaints foster or not consequential sanctions. We employ a distinct dataset containing detailed information on investigation processes against police officers performed by the internal affairs division of a police organization in Brazil. We find that while certain organizational procedures adopted by the internal affairs division increase the speed in which the investigation is concluded, certain officer-specific characteristics (such as the status and tenure of the officer) and the nature of the accusation significantly affect the final verdict, thus suggesting potential bias in the overall process.
This paper discusses the possible reasons that drive organizations to interrupt outsourcing and then to reintegrate activities formerly delegated to third parties. Contractual approaches offer some plausible explanations for reintegration originating from outsourcing failure. These explanations are related to asset specificity, poor contractual design and deficient monitoring. Although the examination of a real case of outsourcing interruption in industrial maintenance confirms these factors, other explanations can be added. Bandwagon behavior and isomorphic pressures exerted by external actors may also explain why some organizations reintegrate.
This paper is aimed at analysing the screening process in a case of extreme asymmetric information: 16th century Atlantic Trade. This historical framework was featured by new maritime routes, an unexplored territory, long distances and difficulties in communications. The conventional wisdom in Economic History relies in reputation and personal links as solutions for the adverse selection problem. By contrast, this paper argues that traders used written contracts to screen among low and high risk customers. With a data set of hand-collected original contracts the paper tests whether increments in collateral requirements and in the contracts’ provisions in general attracted high risk debtors. Results show an adverse selection effect since suspicious individuals are willing to accept higher requirements.
The role of formal and informal institutions in organizational economics is traditionally analyzed in terms of efficient governance mechanisms that minimize transaction costs. Based on a different perspective, the present paper focuses on organizational failures and the problem of lack of guarantees in sequential transactions. In particular, the paper examines a bundle of guarantees that supports a particular transaction and its relation with inefficiencies in the economic exchange. A model relating property rights, guarantees and institutions is proposed for the understanding of organizational failures. The model is then applied to contractual failures in the Brazilian Beef Chain. The authors perform a multiple logistic regression model regarding producers’ perception of the lack of guarantees. The analysis suggests the existence of a guarantee vacuum within transactions between cattle producers and the beef industry. The paper concludes by pointing out the consequences of the analysis for the examination of complex transactions.
This paper suggests that institutional factors which reward social networks at the expenses of productivity can play an important role in explaining brain drain. The effects of social networks on brain drain are analyzed in a decision theory framework with asymmetric information. We distinguish between the role of insidership and personal connections. The larger the cost of being an outsider, the smaller is the number and the average ability of researchers working in the domestic job market. Personal connections partly compensate for this effect by attracting highly connected researchers back. However, starting from a world with no distortions, personal connections also increase brain drain.
This paper intends to explain why some Chinese dominant coalitions may let go the economic privileges of the elites in the urban land market in recent years. By studying 316 Chinese cities from 2000 to 2007 on the fixed effect panel model, empirical results show that the proportion of land sale by public auction has positive effect on local GDP growth. The implication is that local officials who choose sale venues choose on the basis of their economic performance. If they have been growing relatively well, they choose more sales through nontransparent negotiations. If they are doing relatively badly, they choose more public auctions because auctions are more conducive to economic growth which enhances the promotion probabilities of local officials. To conclude, it is the incentive of climbing further up the career ladder that drives local officials to give up some of their rent-seeking privileges in China's urban land market.
The relative efficiency of auctions and negotiations is still a puzzle in the literature. While auctions are the prescribed procedures and the most used ones for public procurement, in the private sector, where buyers are free to choose their purchasing method, competitive tendering is far from being their preferred option (Bajari et al. 2009). In addition, recent empirical studies (Estache et al. 2009, Bajari et al. 2009) highlight some failures of auction procedures and identify conditions under which negotiation is more efficient. In particular, they show that auctions perform poorly when projects are complex. In this paper, our aim is to contribute to this debate by providing an empirical analysis of how awarding mechanisms are chosen in public procurement in France. To this end, we examine a comprehensive database of 76,188 observations corresponding to the entire set of public procurement work contracts awarded between 2005 and 2007 in the construction sector. We find empirical regularities regarding the choice of awarding procedures by public buyers. However, most of these regularities do not coincide with what the theoretical literature considers as transaction-cost minimizing behaviours. In particular, the size of the construction projects as well as the length of contracts do not appear as key determinants of the choice of awarding procedures, which translates into costly renegotiations.
Environmental policy instruments generate transaction costs for all parties that engage in the instrument. There is a growing body of literature reporting on the extent of transaction costs for environmental policy instruments. However, these studies tend to concentrate primarily on: 1) the extent of transaction costs borne by the public agency; and 2) price-based policy instruments such as government purchase of environmental goods. This paper contributes to the transaction cost literature through an analysis of the influences of transaction cost to all parties in a quantity-based environmental policy instrument. Based on Williamson (1985, 1999) and Coggan et al. (2010), the key influences to transaction costs to all parties are taken to be: 1) the characteristics of the transaction; 2) the characteristics of the transactors; and 3) the current institutional environment and arrangements. In this paper the extent to which these factors cause transaction costs to all parties involved in a quantity-based policy is explored. The policy application is a development offset applied to manage development impact on the endangered Australian Southern Cassowary. It is found that these factors do influence the transaction costs to all parties. Further, it is found that the extent to which each factor influences transaction costs varies across parties and due to actions of other parties in the policy environment.
We consider the impact of diplomatic intervention in civil wars on international trade. Using a large data set over the period 1948-2005, we obtain two striking results: (i) diplomatic intervention has a positive effect on trade for the country in which the civil war occurs (target country); and (ii) bilateral trade between the target and intervening country does not increase more than trade between the target country and the other countries. We argue that intervention induces an enhancement of trade-promoting capital in the target country and show that diplomatic intervention has a positive effect on institutional quality in the target country.
This paper investigates the impact of the legal system on the rental housing market in France. We argue that when the eviction procedure is relatively formalized to protect tenants and when the resources allocated to the enforcement of rental contracts are limited, a ''rent-distrust spiral'' arises. To insure themselves against the default risk of tenants, landlords charge a high rent, thus inducing a lot of involuntary rent non-payments. Since courts have limited resources to deal with rental conflicts, they become congested, which reinforces the perceived risk associated with investing in a rental unit for landlords. They get more distrustful and charge an even higher rent, which causes even more difficult financial circumstances for tenants and make them more distrustful too. We propose to neutralize the perverse effects of a procedure protective towards tenants by slightly raising the resources allocated to the legal system. Our model shows that the positive externalities caused by the behavior of each agent trigger a multiplier effect which allows substantial positive changes in the rental housing market, especially a lower rent, fewer rental conflicts and more trustful individuals.
A 2006 survey of 28,000 individuals in 28 post-communist countries reveals overwhelming support for revising privatization, but also that most respondents prefer to leave firms in private hands. We test whether individuals support revising privatization primarily due to a preference for state property or due to concerns about the legitimacy of privatization. We find that a lack of human capital and privately owned assets affects the support for revising privatization primarily via a preference for state property over private property; whereas transition-related hardships influence support for revising privatization via both a preference for state property and concerns about the illegitimacy of privatization. These results suggest the value of analyses that not only link respondent traits with support for policy, but that also probe the motivations that underpin this support.
In this paper, we exploit the fact that the labour markets in Canada are a provincial jusrisdiction. We have carefully documented seven legal instruments related to employment protection at the provincial level. Among these seven instruments, four are related to job security and three to working time regulations. The legal instruments are included in an econometric specification which is allowing for homogenous but unobservable macroeconomic shocks. The model is estimated on provincial panel data from 1976 to 2008 (330 observations). The results clearly indicate that several legal instruments have a significant impact on three economic performance variables: employment, work intensity and labour productivity.
The political economy literature underlines that in presidential regimes politicians are more accountable to citizens because of the greater executive constraints and "checks and balances" system. However, the empirical studies testify the contrary effect that parliamentary regimes perform better; in particular, in terms of the quality of governance and political stability. This paper contributes to finding an explanation of such a puzzle by studying a scope of bureaucratic power in political decision-making process in view of information defficiency of politicians. By bureaucratic power we mean rubber-stamping or conscious approval by politicians of their bureaucrats' policy propositions without effective control. We demonstrate that the parliamentary regime has institutional constraints to limit the power of bureaucrats while the institutional structure of presidential regimes tends to promote informal agreements between politicians and bureaucrats.
The major focus of this paper is on the relationship between political, social and economic institutions and Foreign Direct Investment in Turkey. For a decade, the relationship between institutions and Foreign Direct Investment has been receiving growing attention. The link between the quality of institutions and FDI in developing countries, especially in transition economies, has led scholars to focus on the quality of institutions as determinants of FDI in developing countries. In order to attract higher amounts of FDI, numerous developing countries have liberalized their investment environment since 1980. Turkey is not an exception. However, not all countries succeed at attracting FDI as they expected. The volume of FDI flows differ among the countries. One of the countries which did not succeed at attracting FDI as expected is Turkey. This article explores how social economic and political institutions help explain the low level of FDI flows into Turkey by offering a political economy approach and applying a questionnaire survey for the recent period.
This paper examines the causes of the Smoot-Hawley tariff. A large literature exists that debates whether the tariff law of 1930 was a result of interest-group politics or strict partisanship. We argue that neither explanation offers a satisfactory explanation because each fails to recognize that a multiplicity of decisions and institutions determined, first, how the tariff bill was shaped at each stage of the legislative process, then, why in passage it took the form it took. Econometric analysis shows that interest-group and party politics arguments each have validity to explain some stage of the process, but neither fully captures the process. A satisfactory explanation requires reference to the procedural rules at various stages of the decision-making process. The rules that mattered support the roles of gatekeeping and committee veto, as in Shepsle and Weingast (1987), and party organization as legislative cartel, as in Cox and McCubbins (1993). As we show, it is easy to find a plausible counterfactual in which, holding party membership and interests constant, but allowing different rules, the tariff bill might have taken a different shape at the time it was passed.
This study uses panel data to explore economic efficiency of corporate governance systems by examining the effects of cross-sectional differences among Japanese firms selecting one of two legal systems. The paper presents evidence that the adoption by Japanese firms of a shareholder-oriented, more transparent, system of corporate governance creates greater corporate value in comparison to the traditional system of statutory auditors. The effect is not only significant, it is important in magnitude. This paper takes advantage of the unique opportunity afforded by Japan’s introduction of a dual system of corporate governance in 2003, when companies were offered a choice to adopt a new system of outside directors, which is a shareholder-oriented committee system. Data analysis shows a significant increase in firm valuation, as measured by Tobin’s q, for companies that adopted the committee system, even though comparative financial data show little difference. This finding is attributed to signal sending, as companies that adopted this system signal a choice toward transparency via monitoring by outsiders.
Several cross-section empirical studies argue that a higher tax burden or different indicators of statutory tax rates are associated with a smaller informal economy. I show that the turnover of governments provides the key to understanding this relation. To this end, I present evidence that once political turnover is controlled for, the data shows no association between the tax burden and the size of the informal economy. This result is empirically robust in a panel data consisting of 80 countries and 5 years. To account for this observation, I develop a dynamic political economy model with two political parties alternating in office. In equilibrium, if the incumbent party faces a higher probability of staying in office, it sets a higher tax rate to invest more in productive public capital, while spending less for current office rent. I argue that public capital is mainly utilized by the formal sector and this implies that countries in which incumbent parties are more likely to stay in power, have a higher tax burden but a smaller informal sector. Finally, I compare the model against the data and present evidence that my theory is consistent with empirical observations.
We examine the inseparability of capital formation and economic organization. Capital possesses a complex, multi-level (micro, meso, macro) structure that is always in the process of transformation. Levels of the capital structure are interdependent and interactive. Correspondingly, economic organization at these various levels is not an independent entity in itself—it occurs as a by-product and structural aspect of capital formation. Rather than the transaction, our focal unit of analysis is a production notion: the capital combination which emanates from the kinetic organization of material by entrepreneurs. We consider the behavior of entrepreneurs as causal agents in specifying and appraising potential capital combinations, remodularizing production and scrapping capital. Entrepreneurs’ combinatorial actions often change existing materials to serve functions for which they were not originally designed, thereby changing capital structures and the shape and boundaries of economic organizations. Capital is created in a dynamic knowledge-generation process that turns on perceptions of gaps in the capital structure.
In our research region in southern Namibia ineffective enforcement contributes to natural resource degradation. We analyze the root causes of ineffective enforcement applying diverse methods such as small surveys, economic experiments as well as case studies. Our conceptual framework distinguishes between moral, social, and material enforcement. We analyze water and rangeland management regulations in the research area through the filter of this conceptual framework. We observe that the rural water supply reform is also making considerable progress because an institutional framework has been established which makes efficient use of different enforcement instruments. In contrast, rangeland management is characterized by ambiguous and inconsequent exogenous and endogenous material enforcement and conflicting moral norms. In a next step we apply economic experiments in order to gain additional insights into the characteristics of selected elements of the framework in the context of our case studies. The experiments help us to bridge the gap between abstract concepts and real life observations. We conclude that existing moral and social norms should be considered as starting points for the establishment of formal rules because norms are more costly to establish but cheaper to apply. The rule addressees’ acceptance of external material enforcement influences whether it substitutes or complements more internal enforcement.
We investigate the role of political determinants of deregulation policies in thirty OECD network industries, unbundling privatization and liberalization decisions. Contrary to conventional wisdom, we find that both right-wing and left-wing governments promote a policy mix of liberalization and privatization policies. Moreover, deregulation is implemented on average by smooth gradualism rather than by big-bang. However, while left-oriented governments show a positive and statistically significant preference towards liberalization over privatization, the opposite is shown for right-wing governments. The observed sequencing of liberalization-privatization paths confirms our results. We then argue that political determinants in a country turns out to be a prerequisite to predicting its evolution in terms of liberalization-privatization patterns.
The UNESCO World Heritage List contains the 900 most treasured Sites of humanity’s culture and landscapes. In our paper the List is regarded as institution, which serves to protect cultural heritage. An empirical overview of the List according to various characteristics is presented. The officially stated intention of the World Heritage List is the protection of global heritage. We focus on the imbalance of the existing List. It turns out that the World Heritage List is unbalanced with respect to a distribution of Sites according to population, area or per capita income. The unbalanced distribution raises question about potential alternatives to the World Heritage List. A comparative analysis is conducted to identify the conditions under which the World Heritage List is beneficial and the conditions under which alternatives, such as the market and national conservation lists, are more beneficial. This paper wants to reveal facts about the existing distribution, and is designed to help a reasoned discussion of potential alternatives to emerge.
Economists argue that prices for environment-related services should reflect full-cost recovery and therefore provide incentives for sustainable use. Efficient pricing, however, is likely to conflict with other competing objectives, amongst others ensuring affordable access to services for all sections of the population, including the poorest (affordability). Welfare economics literature suggests to neglect affordability aspects by separating allocative from distributive impacts of pricing. In practice, this approach runs the risk of rendering impossible any sustainability-oriented price reform. An Institutional Economics approach takes competing objectives into account. Hence, the question arises how can water prices be so arranged that they provide the desired incentives and at the same time are socially acceptable, especially affordable? The research on affordability features a tendency from the traditional ratio measure to a residual income approach. In our paper we first analyze affordability measures in the framework of the microeconomic household theory. With this approach we consider three objections against the ratio measure. We find that (only) two of them appear reasonable. But these two build a double step argument to the residual income approach. We conclude that the ratio measure appears hardly to be an appropriate foundation for political interventions with respect to service pricing.
Constitutions are often perceived as national products. This paper develops and empirically tests a different hypothesis, which is that constitutions are also externally driven, or shaped through transnational influence or ‘diffusion’. Constitutional norms can diffuse through four possible mechanisms: competition, coercion, learning and acculturation. Using a new panel dataset based on our coding of the constitutions of 192 countries between 1946 and 2006, we estimate a spatial lag model to explain the adoption of constitutional provisions. We find evidence of diffusion among countries with the same legal origin, the same religion, and the same former colonizer. Such patterns indicate that constitution-makers learn from, or simply emulate, the constitutional arrangements of states with similar cultural and legal backgrounds. But we also find that constitution-making is affected by the constitutional choices of former colonizers and by foreign aid flows. These findings suggest that the carrots and sticks of powerful states are an important force behind constitutional design around the world.
The paper presents the results of the empirical study of location effects in the Russian manufacturing industry. Agglomerations effects are understood as productivity and other performance advantages gained by companies through co-location in the areas of geographical concentration of industries and markets. The study is based on manufacturing industry survey data (1000 companies in 49 regions and 8 sectors). The main finding is the quantitative importance of agglomeration externalities. We proved that large cities, urban scale and diversity can be an important source of economic growth for the neighboring towns.
How did the institution of serfdom influence the agricultural performance of peasants? What form of rent was allowed to maximize the serfs’ efficiency? Our paper addresses these questions by comparing agricultural productivity in the provinces with the different contributions made by various categories of peasants. We operate with province-level data for 50 provinces of European Russia that covers the period from the 1800s to the 1880s. Our findings are the following. 1) Serfs demonstrated significantly lower efficiency than state peasants and free people. The last two categories of peasants farmed producing about double the yield of serfs. 2) The form of rent significantly affected serf productivity. However, the evidence that we provide is not conclusive because of the possibility of reversed causality problem that is not solved yet. 3) The effect of serfdom lasted for a considerable time after the implementation of the Emancipation reforms.
Studies of the impact of FDI on the recipient country’s economy have identified the establishment of backward linkages with local companies as a main channel for the realisation of positive spillovers. The aim of this paper is to investigate the determinants of the European Union investors’ choice of suppliers in Bulgaria. The analysis accounts for potential differences in factors influencing the general preference for the type of supplier (local or foreign) of the foreign companies and the choice of providers of strategic inputs. The explicative factors considered include the investment characteristics and objectives usually found in FDI studies but, drawing on the new-institutional economics, the analysis is broadened to introduce the influence of the institutional environment as well. The paper is based on an extensive firm-level survey of EU manufacturing firms established in Bulgaria. Results show that access to local networks, subsidiary’s autonomy as well the quality of the institutional framework influence the foreign companies’ choice of partners but that the main determining factors are different depending on the type of supplier considered.
Drawing on organization theory, organizational economics and law, this paper distinguishes two types of documents capable of establishing formal organization: contractual , externally enforceable documents; and extra-contractual internally enforceable documents. Reviewing the extant literature, it is shown that formalization is quite generally believed to be in contrast with flexibility and innovativeness, but necessary to protect against conflicts of interest and to support computational capacity and organizational memory. While a common way to address the problem of ‘optimal formalization’ is to trade-off between these contrasting criteria, this study proposes that a better solution exists. That solution rests on disentangling the dimension of formalization and on identifying components that are both formal (protective) and flexible (adaptive), so that they fit to conditions of high uncertainty and non-negligible conflict potential. An empirical study on a large multinational sample of 500 inter-firm projects provides a test of the model. Results are generally supportive of the theory but also suggestive of interesting refinements.
In this paper I develop a finance-based political economy model in which the interests and behavior of different types of banks—state-owned, private domestic, and foreign—are mediated by the ownership and institutional structures of the domestic financial system and affect the choice and sustainability of exchange rate regimes. This paper also presents an empirical investigation of the exchange rate regime choices of the twenty-five transition economies in Eastern Europe during the period 1990–2004. The primary analysis uses binary and multinomial logistic models on panel data. Also addressed in the analysis is the question of endogeneity and causality that arise in this context by using an instrumental variables approach via the generalized method of moments estimations. The analysis proposes the method of banking and industrial privatization as a new instrument for financial development. Empirical results support the premise that countries with financial systems characterized by a greater participation by foreign banks in financial intermediation, accompanied by strong monetary and regulatory institutions, are more willing and able to commit to and sustain fixed exchange rate arrangements than countries with financial systems dominated by incumbent state-owned banks. The paper also shows that the de facto exchange rate regimes in EE diverge considerably from what is announced.
Monitors hired to minimize cheating are themselves vulnerable to collusion and extortion. In this paper we first attempt to understand why an important historical institution – that of the trade fairs at Champagne with their private judges – survived for centuries instead of instantly crumbling in the face of overwhelming incentives to collude – and then derive implications for the larger problem of “monitoring the monitor”. We argue that the seminal paper on the Champagne fairs –by Milgrom, North and Weingast – is not collusion-proof and hence cannot explain the survival of this institution. Drawing on historical evidence we build a model which better fits the historical reality of the Champagne fairs and is invulnerable to collusion, extortion and “reverse extortion” (unscrupulous clients threatening to smear a monitor’s reputation unless bribed). Our model contains a competing fair and a guild. We contrast our insights with other literature on collusion. Our analysis highlights the crucial roles of competition among monitors, the existence of a collective body to organize coordinated punishment of monitors caught colluding, and network effects among a monitor’s customers that would exacerbate any punishment.
In this paper I argue that our legal infrastructure—the socially available set of legal materials that economic actors can use to help govern relationships—has not kept up with the transformation in the economic demand for law wrought by the changes associated with globalization and the new economy. Empirical evidence for this claim includes the increasing levels of dissatisfaction in even the most elite corporate legal markets, the unprecedented impact of the Great Recession of 2009 on large law firms, and surveys and interviews conducted with corporate counsel. The primary basis for the claim of a mismatch, however, is theoretical: the attributes of our existing legal infrastructure—a heavy reliance on densely-worded and complex statutes, regulations and contracts; human-capital-intensive craft production methods; undiversified legal business models; almost exclusive reliance on mandatory legal rules imposed by public actors—are poorly suited to the nature of economic activity in the new economy. The reason our legal infrastructure has not adapted, I argue, is attributable to an even deeper level of legal infrastructure: the severe limitations on who may produce legal rules and other legal inputs (such as advice, document templates, norms and practices) imposed by our continued reliance on publicly produced rules and the excessively closed nature of our lawyer- and judge-controlled legal markets.
Access to finance is a prerequisite for economic development. Existing studies measure access by the use of finance. We develop a direct measurement for access to finance, using data from the Business Environment and Enterprise Performance Survey 2005 data. Thereby we determine whether a firm without a loan is indeed credit-constrained or merely does not have demand for external finance and control for potential selection bias. We show considerable differences between the determinants of access and the determinants of use. This implies the conclusion that analyzing information on the use of finance is not sufficient to identify financially constrained firms.
The adoption of a hybrid approach to water rights (the California doctrine) in some western states of the US and Australia creates some doubt as to what factors drive scarcity and the evolution of property rights to water. Commentators have argued climate is the only variable that affects water scarcity. This can explain why private rights (prior appropriation) were adopted in western states of the US during the nineteenth century. However, it cannot explain why the hybrid approach, where common and private rights co-existed, persisted in nine of seventeen arid US states and two Australian colonies. This paper shows that in addition to climate, the dominant type of asset investment impacts water scarcity via the mobility constraint. We present a framework that combines climate and asset type in order to determine the net effects on water scarcity to predict when and where common and/or private water rights will evolve. Empirical evidence from several countries is used to verify the frameworks predicative capacity. The findings show the combination of these two variables is better able to explain the emergence and persistence of the hybrid California doctrine as well as the adoption of ‘pure’ private rights (the Colorado doctrine) in eight of seventeen US states than if we rely on climate alone.
A uniquely New Zealand evidential model is constructed to explain the process of accelerated tax policy change whereby, Governor Fitzroy, 1844-45, attempted/accomplished New Zealand’s first major economic reform. After theorising on what may actually have occurred, hypotheses are formed and, via a standard political economy framework, in an inductive manner a simple evidential model is constructed. The model is then tested for explanatory power using a later tax reform, also from New Zealand. The paper finds (1), that the theoretical explanation ably describes the period’s tax policy development process; and (2), that the derived model may explain other past New Zealand tax reforms. (3), the simple abstract model may also have implications for future tax policy development.
Suppliers play a major role in innovation processes. We analyze ownership allocations and the choice of R&D technology in vertical R&D cooperations. Given incomplete contracts on the R&D outcome, there is a trade-off between R&D specifically designed towards a manufacturer (increasing investment productivity) and a general technology (hold-up reduction). We find that the market solution yields the specific technology in too few cases. If the expertise of the supplier is important ex-post, combining manufacturer ownership with the specific technology becomes optimal. More intense product market competition shifts optimal ownership towards the supplier.
Significant work has been done focusing on the extensive agency problems in companies. However, little has been said about identical problems in the governance of empire. This article extends the work of Carlos, which examines the agency problem within British chartered companies, and investigates the mechanisms the British Colonial Office put in place to mitigate the serious agency problem inherent in their use of governors who were incredibly distant, both geographically and in terms of communication time. This article uses a novel data set of governor salary from 1864 through 1911 as well as the exogenous extension of the telegraph network to examine whether an efficiency wage was employed or whether a specific form of residual claimancy was preferred. In the end, it is found that the central strategy employed was one of residual claimancy.
This paper addresses the issue of how intra-organizational incentive alignment mechanisms evolve to solve the free rider problem in collective bargaining. We focus on agricultural bargaining cooperatives (ABCs), a particular form of producer-owned firms mainly observed in the West Coast states of the US. These organizations play several crucial institutional roles that include, among others, enhancing farmers’ countervailing power vis-à-vis powerful processors, deterring postcontractual opportunism, enabling price discovery, and ameliorating moral hazard and adverse selection problems. The single most important factor that constrains ABCs’ ability to play such roles is the free rider problem. We review quantitative and qualitative evidence collected for more than ten years from ABCs to explore the evolution of solution instruments used to align member incentives and thus minimize the inefficiencies arising from the free rider problem. The obtained results suggest that mechanisms evolve from Market to Community to Contract to Hierarchy solutions. In organizations characterized by highly heterogeneous memberships the provision of a combination of intra-organizational incentives is the only means to addressing the free rider problem efficiently.
Transacting parties sometimes write contracts that are unenforceable in courts. Why do they write such contracts despite of ``ink costs''? To answer this question, I analyze contractual relationships in context in the sense that there is a large population of principals and agents, a principal and an agent are randomly matched and engage in transaction, and at the end of each period, they can choose to continue or terminate the current partnership. I adopt an extreme assumption that written contracts are never legally enforced. I then show that writing a contract can help relational contracting between principals and agents more enforceable than relying on tacit understanding of their agreement for three reasons: (i) ink costs of writing a contract make a new match more costly and hence continuing the current match more valuable; (ii) the existence of a written document, with signatures of a principal and an agent, helps parties in the matching pool to identify (some of) those who reneged in the previous transaction; and (iii) the existence of a written document can raise motivation to engage in prosocial behavior (e.g., go to court to punish reneging parties), and hence increasing the probability that the matching pool learns about past transaction.
This paper develops a stylized model that describes the relationship between the composition of board of trustees and the performance of universities that has been empirically documented. Two parties compose the board: the faculty members and the outside stakeholders. Both parties have private, soft and complementary information about a strategic decision that has to be taken. Due to conflict of interests, the communication will be noisy. Keeping the structure of information possessed by outside stakeholders fixed, we focus on the incentives to become informed faced by each faculty member who is also trustee. By choosing the number of board seats allocated to faculty members, it is possible to mitigate the costs related with the information (from its acquisition and transmission) and the agency problem. In the lights of this analysis, recommendations concerning public policies relating to the composition of board of trustees are discussed.
The aim of this paper is to provide some additional results concerning how and why economic freedom enhances growth and/or long-run income. Our hypothesis, based on the theory of entrepreneurship, is that institutions and policies of economic freedom may have different effects and work through different channels. We first present the theoretical arguments, then we empirically investigate the effects of institutions and policies of economic freedom on growth and long-run income. To do this, we categorize the components of the Economic Freedom of the World (EFW) index as institutions and policy variables and apply both Acemoglu et al.’s (2001) and Mankiw et al.’s (1992) modeling strategies in our cross-country regression analyses. The major finding is that institutions and policies of economic freedom have different effects on long-run income/growth both in terms of their size and working mechanisms. While the institutions of economic freedom have a positive significant effect both on long-run income and growth, and this effect has a direct and an indirect channel as well, monetary policy takes effect only during the catch-up process and this effect is direct, and fiscal policy does not have a significant impact.
This paper discusses the common problem of Internet and computer users clicking and agreeing to online and electronic contract terms without first reading and evaluating them. The clicking without reading problem is an extension to the signing without reading problem occurring with paper-based contracts. In this paper I examine the reasons why it might be efficient for individuals to click without reading, although it might lead to a socially inefficient outcome. A behavioural approach will be used to analyse this problem, and paternalistic approach such as the UK Unfair Contract Terms Act 1977 and the European Directive on Unfair Terms in Consumer Contracts are examined. Finally, taking into account the unique characteristics of online and electronic contracts and the associated goods and services, this paper suggests a solution in favour of paternalism as against libertarian paternalism.
Is there a neurological foundation for institutions? Recent neuroscience research has expanded our understanding of the cognitive foundations of economic decision-making at the individual level, but the implications of this research for institutions and institutional design have not yet been fully explored using the tools and concepts of new institutional economics. This paper explores these implications generally, focusing in part on the implications of mirror neuron systems research and the possible connection of the mirror system with the concepts of sympathy and mutual sympathy that Smith (1759) characterized as being at the foundation of evolved human institutions that enable civil society. Smith's connection between mutual sympathy and institutions also generates some hypotheses regarding the role of social distance in the form that institutions can take (an analysis that is similar in many ways to that of Hayek (1973) on laws and extended orders), and why those institutions change, for example, in the move from personal to impersonal exchange. The connection of mirror neurons with these concepts is consistent with their hypotheses, as well as the experimental research on the effects of social distance and social cues in dictator games.
We design a damage measure through which courts can elicit not only socially optimal behavior but also voluntary participation from contracting parties. Although a rich body of existing literature examined the optimality of specific damage measures, a universal testing standard has yet to be offered. Further, existing studies tend not to consider explicitly voluntary participation conditions. We attempt to fill the gap by a new measure, i.e., ‘optimal damages’ (OD) satisfying the full list of such conditions. Constituting a comprehensive set of optimal damage measures, OD is subsequently utilized to re-examine, in a fairly unified manner, the optimality of the measures widely discussed so far; some results contrary to the prevailing understanding are confirmed. OD can also be used to analyze new types of measures, and in fact allows for portraying numerous damage measures in terms of systematic ‘set-relationships.’ Finally, from analytical and practical perspectives, we highlight the potential merits that OD-related tasks will bring forth for ensuing studies in this area of substantive law.
The governance of common pool resources (CPR) implies establishing compatibility between ecosystems and social systems and enforcing governance institutions as essential links to maintain the capacity of socio-ecological systems. In the given context a behavioural experiment with a CPR was conducted, inspired by the innovative work of recent Nobel Prize laureate Elinor Ostrom and the Center for the Study of Institutional Diversity, Arizona State University. As such an experimental study on dilemmas on the commons, following the field experiment protocol for forest game used in Colombia and Thailand, was replicated within the European Marie Curie Research Training Network “GoverNat: The experiment was further developed by the authors to address the effects of communication and conducted in three new member states that joined the EU in 2004: Cyprus, the Czech Republic, and Slovakia.The EU membership brought an end to a relatively long period of isolation of the three countries from (Western) European discourses due to completely different reasons but which nevertheless led to some shared characteristics. From this perspective, our study identified the process of institutional rebuild of political institutions co-existing with long-established informal institutions. Results indicates positive effect of communication and local knowledge on the formation and acceptance of informal and customised rules and sustainable use of natural resources.
For the last two decades, users have been taking active part in the regulation process of water and sanitation services in developing and developed countries. Some examples are well-known, such as the involvement of users in the breach of the Buenos Aires contract in the early 2000’s or in the revelation of the corruption case in Grenoble (France) in the 90’s. Besides or in response to those spectacular actions, institutionalised participation of users has emerged. In France for instance, the legal framework compels local public authorities to consult a committee consisting of politicians and users’ representatives before signing a public-private partnership or in evaluating the service performance every year. The main achievements expected from users’ participation are better transparency and fairer access to the services. However, until now, very few studies have analysed the impact of these new participative institutions on the regulatory governance. From a new institutional economics perspective, it is interesting to question the role of users’ participation in the regulation of water and sanitation services. Are the new participative institutions structures of cooperation that resolve collective action problems in line with the theory of Weingast and Marshall (1988) or Ostrom (1990)? Or are they rather new structures of power benefiting to some groups, the insiders, but being detrimental to the outsiders, in line with the theory of Moe (1990)?
The development of canal irrigation as a whole reflects the dynamics of interaction between technology, institutions and society. The need for institutional change in water management in irrigation command is well established. Canal commands in India are remarkable for their institutional vacuum. One finds very little intermediation between irrigation engineers and irrigators. Little effort is made to bring into play rules, norms, policies designed to maximize productivity benefits and farmer welfare. Upper Krishna Project in Southern India is an exception to this rule. Ever since the thinking about UKP began in 1964, a range of policy interventions have been thought about debated and designed. Some of these are in operation and have produced a vibrant dynamic. The study attempted to explain how the design and transformation of irrigation institutions, as a result of years of trial and error, are related to the dynamics inherent in the socio-technical system. A key concept used for analyzing the emergence and stabilization of new irrigation institutions is water control through daily practices and strategies. The context of planning and design does not stop at the borders of a system, but fundamentally shapes irrigation management practices. The forms of organization at water distributary level and emergence of informal rule making at outlet have more to do with technology and embeddedness of engineers in the society in the changed socio-technical context.
This paper analyzes the dynamic emergence of property rights in a decentralized economy devoid of an exogenous enforcement mechanism. Imperfection in property rights enforcement gives rise to appropriative activities, which take away resources from productive activities, and thus, hampers the performance of the economy. Therefore, agents in the economy strategically invest in definition and enforcement of property rights to limit the detrimental appropriative competitions for the use of resources. Using a differential game framework, this paper obtains the open-loop and the Markov-perfect equilibrium level of property rights enforcement in an economy. The exact level depends on the economy's characteristics, such as fractionalization, value of affected assets, productivity of the tools employed to build the institution of property rights, future discount rate, as well as the economy's norms, culture and traditions.
This paper compares alternative pollution regulation. Emission charges, emission standards, and tradable emission permits are addressed from the perspective of property rights and transaction cost theory. In the first part, the supply and demand curves of pollution under each policy are associated with different property right structures. The property right distribution is a key factor in determining the strength and weakness of alternative policies in terms of the polluter-pay-principle, acceptability, incentive intensity, and transaction costs. The transaction cost analysis of Williamson has been extended to encompass the governance structures of public sector transactions, and identifies regulation as one of the six types of public sector transaction: procurement, redistributional, regulatory, sovereign, judicial, and infrastructure. The second part evaluates the transaction costs of regulatory policies by comparing ex ante costs such as information and negotiation costs, as well as ex post costs, such as monitoring and enforcement costs. One key attribute determining the relative size of the transaction costs of tradable emission permits is the emissions monitoring technology used, most notably the CMS (Continuous Monitoring System). Some guiding principles for choosing policy instruments are also suggested on the basis of our comparison of alternatives in terms of the polluter-pay-principle, acceptability, incentive intensity, and specifically, transaction costs.
Resource curse is often explained by the specifics of political and institutional factors. The aim of this paper is to study the interaction between the quality of institutions and the resources in a framework of a hybrid regime (i.e. allowing only for a moderate improvements of the property rights protection and democracy not sufficient to achieve the level of the industrialized nations), looking separately at economic and political institutions. Unlike almost all empirical papers in the literature, this paper applies the intra-national variation of institutional environment and access to political decision-making, using a dataset from the Russian regions. It shows that in a hybrid regime (i.e. comparing "bad" and "worse" in terms of the quality of institutions) economic institutions follow the traditional “resource curse” results: resources have a negative impact on growth if the quality of institutions is low. On the other hand, increasing level of democracy has negative consequences for regions with substantial resources. The results, however, differ for different types of natural endowments and dimensions of democracy.
This paper examines factors explaining the choice of an indefinite duration for inter-firm contracts from the transaction cost perspective using a sample of subcontracting agreements in the Spanish electronics industry. We particularly consider the impact of the classical transactional attributes, such as specificity and uncertainty, along with other governance mechanisms, such as contractual completeness and relational governance, on duration clauses. The results show that the probability of signing an indefinite-duration contract is related positively to the specificity of the activity and negatively to the degree of completeness of the contract and the uncertainty regarding future demand. Contrary to some classical arguments, these findings suggest that an explicitly long-term contract is not always needed to protect against contractual hazards. Indefinite-duration contracts may also provide protection while improving the flexibility to adjust the relationship to the changing environment.
We investigate the impact of the occupational segregation within establishments and the establishment level proportion of females on the gender wage gap. Segregation explains about 10 percent of the discriminatory part of the wage gap in levels regressions. The effect becomes insignificant, however, in fixed establishment effects (difference) regressions. The proportion of female which explains a similar share of the discriminatory wage gap remains relevant even in difference models.
We combine theory and research on technology transfer transactions and on governance forms to investigate the impact of variation in design of technology licensing agreements (TLAs) on their early performance. We hypothesize that companies can enhance their deal’s performance by: 1) configuring agreements in a way that allows them to mitigate opportunistic hazards without bearing, however, additional costs of transacting, and 2) balancing interests of both licensor and licensee via the payment formula implemented in the agreement. We further test our hypothesis on the unique sample of 120 deals collected through the survey of technology transfer transactions on the French innovative. Overall, our findings demonstrate that governance selected according to Transaction Costs Economics (TCE) logic improves benefits from technology transfer transactions, especially as they relate to innovative performance and pecuniary benefits. In addition we show that the inclusion of balanced payment formula (consisting of both variable and fixed fees) in TLAs alone cannot bring to greater performance of a licensing deal. We finally discuss some implications for IP managers of the companies.
NIE is a success story by many measures: four Nobel laureates in under 20 years, increasing penetration of mainstream journals, and significant impacts on major policy debates ranging from anti-trust law to development aid. This success is remarkable for a field that took shape in the 1970’s around some relatively vague intuitions. But over time NIE’s early intuitions have been progressively transformed into powerful conceptual and analytical tools that have spawned a robust base of empirical research. NIE’s success is even more remarkable when we consider that it was divided from its birth into several distinct schools of thought. One such school of thought, identified with Coase and Williamson, has focused on property rights and contracts at the firm level. Another, identified with Douglass North, has analyzed broader institutional environments and the role of the state. These and other approaches began productive discussions and attracted new adherents with the creation of an international society, the International Society for New Institutional Economics or ISNIE. NIE’s successful institutionalization should not obscure its roots as a revolutionary paradigm. Nor should it mask NIE’s persistent divisions and the continued resistance to some aspects of its research program. This paper reviews the history of NIE including the creation of ISNIE, documents the sometimes bumpy road to its current successes, and elucidates the challenges ahead.
In his pioneering work on transaction costs, Ronald Coase presupposed a picture of property – of property as a bundle of government-prescribed use rights – that is not only not essential to what Coase was trying to do, but its limitations emerge when we apply Coase’s central insights to analyze the structure of property itself. This leads to what we term the Coase Corollary: in a world of zero transaction costs the nature of property does not matter to allocative efficiency. But as with the Coase Theorem itself, the real point is the implication for a positive transaction cost world: where transaction costs – including information costs – are positive, simple lumpy packages of property rights form an important baseline that furnishes presumptive answers to bilateral use conflicts. The Coase Corollary points back to a picture of property more like the traditional one furnished by the law.
The paper presents a theory of policy timing that relies on uncertainty and transaction costs to explain the optimal timing and length of policy reforms. Delaying reforms resolves some uncertainty by gaining valuable information and saves transaction costs. Implementing reforms without waiting increases welfare by adjusting domestic policies to changed market parameters. Optimal policy timing is found by balancing the trade-off between delaying reforms and implementing reforms without waiting. Our theory offers an explanation of why countries differ with respect to the length of their policy reforms, and why applied studies often judge agricultural policies to be inefficient.
We present an analysis on the impact of regulation, industrial policy and jurisdictional allocation on broadband deployment. Although central powers may be more focused and internalize interjurisdictional externalities, decentralized powers may internalize horizontal local policy spillovers and use a diversity of objectives as a commitment device in the presence of sunk investments. They may for example alleviate the collective action problem of the joint use of rights of way and other physical infrastructures. In the empirical exercise we examine whether centralization is necessary to promote new telecommunications markets, in particular the broadband access market. The existing literature mostly says yes, but we do not find support for this claim in our data. Our results show that indicators of national industrial policy are a weakly positive determinant of broadband deployment and that different measures of centralization are either irrelevant or have a negative impact on broadband penetration
A fundamental question in economic development is how societies first acquire a successful set of institutions. To examine this question, the paper focuses on a paradigmatic example, England in the years surrounding the Glorious Revolution of 1688. North and Weingast (1989) view the constitutional changes following 1688 as an explicit attempt to design a new polity, having the effect of radically altering the functioning of the English political and economic system. In contrast, Hayek (1960) views the late 17th century changes as simply summarizing what was already in existence, a product of experience accumulated through trial and error and selective survival of productive institutions, ideas, and habits. This paper argues that the rise of England fits Hayek's evolutionary perspective. This conclusion rests on three composite pieces of evidence. First, a search for structural breaks in myriad data sets reveals that socioeconomic change was under way well before 1688. Second, an examination of the historical context and institutional content of each clause of the critical laws shows either that the clauses were already a part of effective law by 1688 or that they did not survive as viable constitutional measures. Third, an analysis of institutional and administrative innovations shows that many key developments affecting government finance were a product of the era before 1688.
Growth is one of the central concepts in economic theory, but after decades of theoretical and empirical analysis a residual remains to be explained by traditional factors. Two decades ago Douglass North called attention into the effects of institutions in economic performance and empirical work began to flourish. Nevertheless, much of the empirical analysis is done on a cross-country basis where differences in the institutional framework are sufficiently clear. But a question that remains to be examined is what happens at the local level. Differences in economic performance remain important and despite national institutions being the same there are big differences in the way institutions are applied, the effects they have, or the extent to which they can be changed, enforced, control, or ignored by local actors. Understanding the factors that account for local growth is important not only for local governments but for the entire country since the existence of inefficient local institutions hindering local growth will cause not only within-country differences, but also lower national income (Acemoglu & Dell, 2009). Mexico is a big country organized as a Federal State and integrated by 32 states and more than 2,400 municipalities with enormous disparities. We develop an index of local political institutions and using data on municipal GDP we assess the effects of political institutions and the policy implications for growth at the local level.
Contemporary research stresses the importance of economic institutions in enhancing economic growth and human well-being. The present paper builds on that research by integrating the economics of institutions with the economics of population. Empirical analysis in this paper shows that strong property rights in a country reduce fertility rates even after accounting for other factors. Empirical analysis also shows that population growth has only modest adverse effects on cross-national poverty measures while stronger property rights have powerful positive effects in reducing poverty. The data also show that while population growth does have some adverse effects on the environment, stronger property rights can ameliorate those adverse effects.
The effects of human capital are central to the modern theory of economic development Indeed, some scholars, such as Robert E. Lucas, go so far as to attribute the core of economic development to investment in human capital. Other scholars stress the presence of well-being enhancing institutions as the essential ingredient in the elimination of poverty. The effect of economic institutions—well-specified property rights, the rule of law, economic freedom and the quality of government—on economic performance is an important research stream in recent years. The absence of effective economic institutions must also contribute to measures of world poverty. The analysis below builds on these findings by examining human well-being using standard measures developed by the United Nations. The empirical results indicate that both economic institutions and human capital play an important role in reducing poverty. Both powerfully reduce the measures of human poverty. Because property rights and economic freedom reduce the proportion of unschooled in a country, it seems reasonable to infer that economic institutions indirectly reduce that type of poverty. The data therefore show that the human capital theorists and neo-institutional economists are correct. There are robust statistical results to support both views. Institutional and human capital explanations for enhanced human well-being are well founded.
This study assesses the ‘fair-wage-effort’ hypothesis, by examining (a) the relationship between relative wage comparisons and job satisfaction and quitting intensions, and (b) the relative ranking of stated effort inducing-incentives, in a novel dataset of unionised and non-unionised European employees. By distinguishing between downward and upward-looking wage comparisons, it is shown that wage comparisons to similar workers exert an asymmetric impact on the job satisfaction of union workers, a pattern consistent with inequity-aversion and conformism to the reference point. Moreover, union workers evaluate peer observation and good industrial relations more highly than payment and other incentives. In contrast, non-union workers are found to be more status-seeking in their satisfaction responses and less dependent on their peers in their effort choices The results are robust to endogenous union membership, considerations of generic loss aversion and across different tenure profiles. They are supportive of the individual egalitarian bias of collective wage determination and self-enforcing effort norms.
This paper argues that veto players theory is particularly useful in examining the phenomenon of corruption. After developing some possible theoretical connections between these two elements, I empirically assess the consistency of this relationship using data from Latin American and European countries. The results support the hypothesis that the perception of corruption is higher in systems with more veto players. Ideological distance, in turn, was found to be negatively correlated with perceived corruption. Similarly, a significant and positive correlation between the number of veto players and the incidence of corruption scandals was found. The linear regression test for the ideological distance between veto players and corruption scandals was, however, not significant. The argument that the number of veto players of a given political system can increase corrupt practices was borne out by the empirical tests undertaken in this paper. However, this is a very ambitious and complex assumption that still needs to be further tested and analyzed. Both the findings and the considerations pointed out here serve as a good starting point for a broader research agenda that I intend to pursue in the near future.
We analyze the interaction between a government and citizens in which, in each period, the government has an option to predate. Citizens prefer a government that is competent and non-predatory and strive to replace a government if it is in their interests to do so. Regimes differ in the degree to which citizens can succeed in doing so. In pure democracies, they displace incumbent regimes; in pure autocracies, they cannot; and in intermediate cases, they can do so in probability. After economic downturns, the posterior probability that the government is competent and benevolent declines. According to the model, in intermediate regimes, but not in others, governments can separate by type. The implication, then, is that they are politically and economically more volatile, with higher levels of variation in assessments of political risk and in economic performance. We test our argument by measuring the impact of economic downturns on the perceived risk of political expropriation n different regime types, using as instruments the incidence of natural disasters and unexpected terms of trade shocks.
Nested markets are segments of wider (more global) markets where the specificities of place and networks provide room for specific products, extra trade and premium prices. Nested markets imply boundaries (and often boundary organizations that actively deal with these boundaries). These boundaries are permeable. Nonetheless, they define a space that allows for premium prices, cost-reductions, specific connections, reduced transaction costs and differential development trends. Nested markets can only be dealt with, if adequate concepts and a proper analytical approach are being used. The common pool resource theory is such a concept. This enriches the concept of multifunctional agriculture. Two empirical cases are analysed with these concepts.
In The Rise and Decline of Nations, Olson (1982) proposed that lobbying organizations whose members collectively represent a broader range of sectors are less apt to seek from government the types of policies (e.g., subsidies, tariffs, tax loopholes and competition-limiting regulations) that might impose noteworthy external costs. By drawing on a unique pair of surveys, targeted to managers of both Russian business lobbies and their enterprise constituents, we provide what we believe to be the first direct test of this hypothesis. Similar response patterns to questions gauging the intensity of preferences for government intervention support the relationship predicted by Olson.
Most futures markets for consumer goods fail - a defect that appears to be better bridged by a mix of markets and competing (privately owned) hierarchies (firms) than by state ownership of firms. It is assumed firms would be headed by entrepreneurs (in the sense of Knight and Schumpeter) who are also future traders and market makers. Given positive transaction costs, incomplete foresight and bounded individual rationality (the conditions of the NIE), intertemporal coordination of supply and demand for consumer goods is assumed to be largely controlled by five elementary institutions: relational contracts, (industrial and financial) firms, market organizations, claims for money, financial markets. Relational contracts and their governance structures (among them firms) are central to our consideration. They compensate the failures of financial markets, leave room for the adoption to the unforeseen, and serve as shock absorbers. Financial markets, the centerpiece of capitalism, facilitate intertemporal economic planning. However, it would be a gross mistake to equate transaction costs with information costs and to conclude that the advances in information technology and the resulting reduction of information costs would, so to speak, draw reality nearer to prevailing finance theory. The paper is interspersed with a few blatant examples from antecedents of the present state of global finance.
This paper investigates the institutional factors that affect the international diffusion of beneficial technological innovations across firms. The absence of clear contract enforcement processes and well-defined property rights discourages investments in technology, due to the difficulty in allocating the residual surplus gained from productive assets. Uncertainty increases the challenge of avoiding contractual hazards, requiring greater learning when undertaking investment decisions. State ownership encourages competing firm goals that diminish the incentive to promote technological improvements. Electronic ticketing is a critical tool for cutting costs in the airline industry; yet despite the myriad gains provided to individual firms, the pace at which this technology was adopted occurred unevenly across the world. Using a unique dataset consisting of more than 180 airlines operating in 120 different countries, my analyses indicate that controlling for firm-specific factors, state governance characteristics have a significant impact on the pace at which individual airlines adapt the e-ticketing technology. However, I find that state ownership of firms does not significantly affect the pace of technological diffusion. Moreover, my results suggest that the diffusion of technology operates not on a global scale but along regional lines, alluding to the need to also focus supra-national institutions to properly understand global processes.
Recent empirical studies provide evidence that economic freedom, as measured by the Economic Freedom of the World (EFW) Index of the Frazer Institute, is strongly related to economic growth. None the less, the nature of this effect is subject to debate. Criticism regarding the arbitrary composition of the index has been voiced, inspired by the unclear effect of its categories on GDP p.c. growth rates. This paper develops alternative categories for the 42 individual variables of the EFW Index, by using cluster analysis. Theory is very important in telling us which variables can be used to measure economic freedom, but it certainly tells us much less as to how these variables should be grouped together. Based on that premise, the new index categories will not be pre-determined in their composition. Using a cross-sectional data set, the performance of the recalculated index is then compared to that of the original EFW Index. It is shown how the results may help to solve some of the open issues regarding the effect of economic freedom on GDP growth. Particularly, multicollinearity between index categories is reduced and new conclusions are reached on what parts of economic freedom are responsible for causing elevated growth rates, depending on the use of the freedom level or increase.
We provide a dynamic model of natural resource management where the optimal institutional structure that governs resource use changes with resource depletion. Copeland and Taylor (2009) analyze how characteristics of a natural resource determine whether its steady-state management regime is open access, communal property, or private property. We extend this and other studies of endogenous institutions to analyze how and when resource governance may change in transition to the steady state, taking into account the fixed costs of institutional change and the variable costs of enforcement and governance. Assuming that governance cost is increasing in the difference between open-access and the actual harvest, we show that open access can be optimal if the resource is abundant relative to its demand and/or if governance costs are high. Once open access is rendered inefficient due to increased resource scarcity, further depletion warrants institutional change. In the face of set-up costs, optimal governance implies non-monotonic resource dynamics. These findings explain the co-evolution of resource scarcity and property rights—from open access to common property and beyond. We also extend the Demsetz-Taylor theory that price induced scarcity may or may not be sufficient to induce institutional change by adding dynamics to the steady state conditions of Taylor (2008).
Only a handful of studies have examined the performance consequences of formal contracting while accounting for endogeneity. In this paper, the authors investigate the relationship between detailed contract drafting (DCD) and two major dimensions of overall relationship performance—cost reductions (CR) and end-product enhancements (EPE). These outcomes, respectively, contribute to implementing cost leadership and differentiation strategies. The authors test their hypotheses on survey questionnaire data from 305 long-term industrial buyer-supplier relationships in the wood industry using control function and instrumental variable estimators. Provided the parties align DCD with transaction attributes, DCD positively affects both CR and EPE outcomes. However, deviating from the expected levels of DCD reduces both CR and EPE out-comes. CR and EPE outcomes differ on three accounts. Firstly, DCD has a diminishing (inverted u-shape) effect on EPE outcomes, because they are more difficult to specify contractually ex ante compared to CR outcomes. Secondly, and for the same reason, the effect of DCD on EPE outcomes increases with the level of ex ante relational norms. Finally, EPE seems more sensitive to misalignments.
Public Audit Offices are fundamental institutions to supervise government agents. Without accurate information principals would find it hard to make adequate decisions. Since agents face strong incentives to misreport, competent audits of financial information are crucial. This paper is the first attempt to study the relationship between auditor expertise and fiscal performance. More competent auditors are more effective supervisors; they reduce the leeway of agents to misreport and improve fiscal outcomes. The empirical results support this hypothesis. I find that States requiring the auditor to hold a professional degree feature significantly higher credit ratings and lower debt and expenditures.
Applicants for any given job are more or less suited to fill it, and the firm will select the best among them. Increasing the wage offer attracts more applicants and makes it possible to raise the hiring standard, thereby improving the productivity of the staff. Wages that optimize on the trade-off between the wage level and the productivity of the workforce are known as selection wages. As men react more strongly to wage differentials than females, the trade-off is more pronounced for men and a profit-maximizing firm will offer a higher wage for men than for women in equilibrium. Such discrimination is generated by prevailing social norms, roles, and stereotypes and is amplified on the market level by social multiplier processes, re-confirming the social norms and stereotypes in turn. The argument is not confined to issues of sex discrimination; rather it is of relevance for all labor markets where labor heterogeneity is important and supply elasticities vary systematically across occupations.
Previous empirical research has developed stochastic electoral models for Britain, the United States Israel, and other polities. The work suggests that convergence to an electoral center (often predicted by electoral models) is a non-generic phenomenon. In an attempt to explain non-convergence, a formal model based on activist valence is presented. Since activists provide crucial resources of time and money to their chosen party, the party can use these resources to enhance its image before the electorate, thus affecting its overall valence. The theoretical result presented in this paper is a (first order) balance condition which encapsulates the logic of this trade off. It is possible to infer conditions under which there will exist a "Nash equilibrium" of party positions. The theoretical model is complemented with a comparison of elections in polities with plurality electoral systems such as the United States, Canada and Britain in contrast to those with proportional systems such as Israel, Turkey and Poland. Finally, we discuss political choice in non-democratic regimes.
Botswana has achieved astonishing economic success and an impressive record of institutions that distinguishes it from many other African countries. The article examines the reasons for Botswana’s strong institutional setup, which is considered fundamental to the country’s economic success since independence. To do so, it will utilize the analytical framework provided by institutional economics. The article argues that Botswana ended up with better institutions than most of its African counterparts for three reasons: a) Pre-colonial Tswana culture comprised a number of informal institutions which were useful for creating a modern state. Most strikingly, the chiefs’ powers were restrained and the political elite pursued strong economic interests. b) “Light” colonial rule by the British largely left Tswana institutions in place. c) Tswana institutions were successfully merged with modern institutions many of which modelled on European examples.
Enhancing banking system transparency – making banks disclose more information related to their financial position, risks and capital adequacy – is considered to be one of the urgent measures needed to stimulate market discipline. We attempt to discover the statistically significant relationship between market discipline and banking system transparency using the cross-country data (1990-2003). We consider both quantitative and price-based disciplining. Measuring banking system transparency we use Nier index as well as the index based on the results of the World Bank “Bank Regulation and Supervision” Surveys. We control for countries’ economic development level and their banking systems’ structure, regulation and stability. We found no statistically significant positive and stable influence of banking system transparency on the probability of market discipline being at force. This result implies that measures aimed to increase transparency, not being accompanied with requirements related to information availability and/or interpretability, may be not efficient in reaching the goal of market discipline stimulation.
How often and in which circumstances do courts from different jurisdictions cite each other? In this paper we present new data on cross-citations between the supreme courts of ten European countries. It is based on decisions of these supreme courts from 2000 to 2007. In total we have searched 636,172 decisions and found 1,430 instances in which these courts have cited the supreme courts of the other nine countries. Whether such citations take place and in what quantity depends on the particular legal culture and its relationship to others. We use regression analysis in order to interpret the cross-citations between supreme courts. We find that language skills, membership in the same legal family, cultural factors, economic indicators, and the population size of the cited country all matter for which countries are cited. In the terms of the New Institutional Economics we are therefore able to confirm a link between the social and cultural foundations of institutions (i.e., the first level of Williamson’s classification) and the way how formal institutions, like the legal system, operate.
The distinction between law and equity is usually regarded as an anachronism or as reducible to simple dichotomies between rules versus standards, property rules versus liability rules, or efficiency versus fairness as the goal of private law. Why did courts invoke equity to a murderer from benefiting from the victim’s estate? What does it mean for a court to deny enforcement of contracts on grounds of “unconscionability”? This paper argues that the notion of equity can be given an economic analysis under which it makes sense to have a separate decision making mode like equity (and civil-law doctrines such as abuse of law). Equity in private law is best regarded as a coherent package of features motivated largely by one goal: preventing opportunism. Equity deals with the threat that actors will manipulate the relatively clear rules of private law for unintended purposes by dealing harshly with the open-ended set of opportunistic behaviors as they arise. Seeing the equitable decision making mode as addressing opportunism helps explain a wide range of integral features of equity, including its in personam operation, ex post discretionary decision making, the emphasis on good faith and notice, the employment of moral standards, and equity’s inherent vagueness. Some of these features of equity potentially place limits on the use of equity in order to prevent it from swallowing up the basic structures of the common law.
Formal and informal institutions are closely linked and greatly depend on each other to shape economic and social policy. The Russian Orthodox Church is one of the most important informal institutions that shape people’s values, attitudes, and behavior. We use data from the 1999 wave of the EVS to investigate the causal relationship between a religious denomination (Catholics versus Orthodox) and a variety of political-economic attitudes in the Ukrainian population. We perform a multivariate analysis that permits us to assess which political-economic attitudes were still linked to a particular religious domination, even when controlling for many other individual characteristics. The dependent variables are the individual attitudes towards freedom, authority, democracy, and economic conceptions (perception of competition and state redistribution). We show that the Orthodox are more likely to have anti-democratic (pro-autocratic), anti-competitive (pro-government redistribution) and pro-state control preferences, as compared to Catholics and atheists. Because of the problem of omitted variables, our estimates are unlikely to uncover any causal effect of the denomination on political-economic attitudes. To isolate the direction of causation from the Russian Orthodox Church domination to political-economic attitudes, we propose distance from local religious centers as potential instruments in the next draft of this paper.
We analyze factors determining the degree of contractual completeness in franchising. We argue that heterogeneity in firms’ contract design capabilities is an important factor along with different contractual hazards. Our results support these hypotheses showing that experienced franchisors draw up more complete contracts. Additionally, we observe that the effects of contractual hazards on completeness are not always positive and direct and that there may be a substitution effect between formal and relational governance mechanisms because risks of bilateral expropriations might serve as a mutual guarantee. This also suggests that contract analysis must not focus on particular clauses but on the contract as a whole.
Three types of institutions have been advocated to improve local public service provision in developing countries. Local elections, participatory governance, and improved citizen access to information have each been argued to overcome the principal-agent prob-lem between a local government and its mainly poor electorate. This paper examines which combination of these institutions increases the responsiveness of Guatemalan local gov-ernments to the needs of the rural poor. Drawing on primary data from ten Guatemalan municipalities, the empirical assessment is carried out as a fuzzy-set Qualitative Comparative Analysis (fsQCA). The paper finds that local elections and participatory governance arrangements, which are often portrayed as alternative approaches to good governance, jointly foster local government responsiveness. Information provision through the media is not found to contribute to responsive local governance. This is explained by the fact that local media in Guatemala usually do not have the resources to undertake investigative journalism. Finally, a high level of education can increase the effectiveness of participatory governance or local elections but it is not found to be a necessary condition for responsive local governance.
The design of bankruptcy institutions influences the extent to which parties to the defaulted contracts are attracted to judicial procedures (instead of privately renegotiating their contracts). Interestingly, Claessens and Klapper (2005, ALER) show the existence of a large variation in the use of bankruptcy institutions across countries, with rates decreasing in systems which promote restructuring (as opposed to liquidation) and where debtors’ management is favoured. While macroeconomic data imply that this is the case in Spain, in our study we use a large firm level dataset to explore for the possible causes. In particular, we present a decision model based on three observable outcomes: restructuring, failed restructuring within the procedure, and direct liquidation. We observe that, once the firm’s financial characteristics are controlled for, the initiative of creditors petitioning for bankruptcy (in which case the procedure is legally defined as necessary) is positively related with failed restructurings. While attempting restructuring supposes no costs for the owners of unviable firms, but offers them further extension of control, it also results in significant delays of liquidation. We suggest that this delay option acts as a deterrent for creditors’ initiative of filing with the procedure, therefore contributing a plausible explanation for the reduced use of Spanish bankruptcy institutions by creditors.
The distribution of development assistance for health in sub-Saharan Africa is the visible result of decisions made by donors and aid intermediaries. Aid intermediaries have become increasingly important as connecting link between donors and recipients transferring. Their heterogeneous group comprises bilateral aid agencies, multilateral organizations, private foundations, public-private partnerships and international non-governmental organizations. Institutions, as rules of the aid game, constrain the actions of aid intermediaries and influence transaction costs and incentives for the organizations. The strategic decisions made by donors and aid intermediaries are isolated using a game-theoretical approach. The process of aid allocation is portrayed as a repeated game with two sets of players. Simply speaking, donors pursue an array of goals by donating financial resources, while aid intermediaries aim at securing funding in order to guarantee their organizational survival. Potential donors evaluate aid intermediaries based on their trustworthiness. This evaluation influences volume, duration and frequency of a donation, ultimately defining the strategy played by a donor. The strategic decision made by an aid intermediary depends on its reputation, history and dependency on funding. The aid intermediary decides the aid-financed health intervention. However, the donor has an indirect but powerful voice in the aid allocation process because of the importance of funding.
This paper sets out the main reasons for introducing upstream competition in the water supply industry of England & Wales i.e. competition in the supply or raw and potable water to retailers and large users as well as some competition options. The paper discusses the possibilities for trade in abstraction rights and in bulk water. The paper covers the issues that would need to be resolved for such competition to be effective, including rents, stranded assets and the concentration of water rights ownership. A lot of attention is given to transitional issues drawing on the lessons learned in UK natural gas industry liberalization and EU energy sector reforms over the last 15 years. This paper is intended as a contribution to the discussion of introducing competition to the England and Wales water market in the light of the recent Cave Review. It concentrates on upstream competition i.e. competition in the supply of raw and potable water to retailers and large users . In particular, it tries to identify an approach that would enable substantive progress to be made over the next 5 years or so.
The standard approach to language in economics is that talk is cheap. Here, instead, language is a social convention that affects utility. We apply this approach to the market for lemons. When the buyer and the seller arrange to meet, the words they use are signs that carry a conventional meaning, and talk is effective if mutual trust exists. Uninformative equilibria only come about with completely pessimistic expectations. In the negotiation stage, uninformative equilibria disappear if misrepresentation is costly. Utility leads words to become signals.
Formal and relational governance mechanisms are used in interfirm innovation projects to coordinate interfirm value creation and mitigate the risk of opportunistic behavior. While recent work has shown that the performance effects of such governance modes may vary with transaction attributes and industry conditions, our knowledge about when one contractual governance mode is superior to the other is still inadequate. Using data on the governance choices and subsequent performances of interfirm innovation projects in the Norwegian offshore oil and gas cluster, we find that the performance effects of such interfirm projects depend on project governance, project specific investments and their interactions, as well as on the type of performance being pursued. Whereas both governance modes may function as safeguard against the hazards of project specific investment in project heading for ordinary project performance and in project heading for extraordinary customer performance, formal governance seems best suited as such safeguard in project heading for extraordinary contractor performance. Our findings contribute to transaction cost economics, to the literature on relational governance, to recent literature studying their interactions, and indirectly also to the resource based view and to cluster theory.
The Scandinavian welfare states hold the highest social trust scores in the world. Why? Based on the stationary bandit model by Olson (1993), we first demonstrate that early state building during Viking Age facilitated public good provision and extensive trade. Social trust were probably not destroyed but rather accumulated in the following centuries up till the universal welfare state of the 20th century. Focusing on the case of Denmark, our tentative argument is that social trust was not destroyed through five subsequent phases of state building but rather enhanced. Long-run political stability arguably allows such a self-reinforcing process over time between institutions and social trust.
Behavioural economics literature thinks of process fairness either in terms of reciprocating the perceived kindness of intentions or as an influence on the judgment of distributive fairness. In contrast ruling out reciprocity motives and concerns for equal outcomes we propose that individuals display preferences for procedures itself. We show that subjects involved in a process of hierarchical decision making prefer a transparent over an opaque mechanism, while the information revealing the process has no payoff relevance.
Regulatory independence has been proposed as a mechanism to alleviate the commitment problem associated to the sunk nature of investments in network industries. This paper summarizes the author’s and others’ work in this field (in a pause to take stock of several years of research) and, in addition, includes a new exercise that uses instrumental variables to endogenize both de jure and de facto regulatory independence. The institution of regulatory independence has costs as well as benefits; the positive and significant impact on industry performance is however most likely quantitatively modest. As a result of the empirical evidence and the assessment of the literature, some reform proposals are made to improve the effectiveness of the institution.
This paper models how a nation's military manpower procurement system affects popular sup- port for war and political choices regarding war. When citizens have idiosyncratic benefits from war and costs from serving, I characterize when a volunteer military maximizes support, and when a mixture of volunteer and conscripted forces does. Pure conscription never maximizes support. The personnel systems cannot be ranked ex-ante by efficiency, because each makes mistakes the other avoids. Ceteris paribus, political systems requiring only weak support to initiate wars have more war under pure conscription, while those requiring strong support have more war under a volunteer system.
Regulation, even inefficient regulation, can be incredibly persistent. We propose a new explanation for regulatory persistence based on "regulatory fog", where regulation obscures information about the effects of deregulation. This paper presents a dynamic model of regulation, in which the environment is stochastic such that the imposition of regulation can either be efficient or inefficient, and in which the regulator's ability to observe the underlying need for regulation is reduced when regulation is imposed. As compared to a full-information benchmark, regulation is highly persistent, even if there is a high probability of transition to a state in which regulation is inefficient. This regulatory persistence decreases welfare and dramatically increases the proportion of time the economy spends under regulation. The ability to perform deregulatory experiments can improve outcomes, but only if they are sufficiently inexpensive and effective, and regulation will still remain more persistent than in the full-information benchmark.
One view of government programs to support R&D is that they should encourage positive informational externalities or “knowledge spillovers.” It is not obvious, however, that private parties always exploit such programs in ways conducive to spillovers. Specifically, firms might only participate in R&D joint ventures if they would not be required to contribute important knowledge inputs or if they could get away with contributing knowledge inputs that are less susceptible to spillover. Indeed, the purpose of contributing knowledge inputs often appears to involve less in the way of inducing knowledge transfers and more in the way of providing joint venture partners rights-of-way to conduct collaborative R&D. Another view is that government programs should enable firms to avoid duplicative costs. There is evidence that cost-sharing is, indeed, the principal motivation for organizing certain ventures.
Using the data of a 2009 survey of 957 manufacturing enterprises, this paper examines relations between the state and business as well as differences in priority concerning the distribution of governmental support by federal, regional and municipal authorities. Regression analysis of this data reveals that a “model of exchange” is the generally predominant pattern as opposed to the “state capture” (in the case of big firms) and the “grabbing hand” (in the case of SMEs), both of which were typical of the 1990s. However, there are some differences in priorities at different levels of government. The federal government in 2007-2008 preferentially provided support to state-owned and mixed enterprises with stable employment, while regional authorities more often gave support to firms that were involved in modernization activities. These trends could pave the way for a shift in governmental policy at the regional level from the ”state capture”/”grabbing hand” models to the Chinese-style “helping hand” model.