Society for Institutional & Organizational Economics
Conference papers from 2011 (sessions were not tracked for this year)
Studies of change in Islamic law tend to be exclusive: Islamic law is either rigid as its jurists are limited to the application and explanation of the law as laid down in the formative centuries of Islam, or flexible due to the availability of various reasoning tools (ijtihad). Looking at its long development, however, change in Islamic law is incremental, leading to slow adaptation and, in some cases, stagnation. This paper develops an analytical framework that explains both rigidity and change in Islamic law. It argues that while tools of interpretation are necessary for Islamic law to adapt, they are not sufficient to initiate change. Willingness of jurists to utilize these tools should coexist. The framework, accordingly, focuses on the agents operating the system, their incentives and motives, and the dynamics of their interactions. These agents are jurists who interpret the law (muftis), judges (qadis), and regular Muslims as seekers of legal opinion or litigants. The dynamics of three markets within the Islamic juristic system in the pre-modern era are analyzed: the job market muftis and qadis faced, fatwa shopping, and judicial review. Jurists’ and judges’ manuals, fatwa collections, and judges’ decisions are consulted to reconstruct each market. While the interactions of these markets created opportunities for adaptation and change, the individualistic structure of Islamic juristic institutions, lack of central organization, and the legitimization process jurists faced provided incentives to conform, limiting the frequency by which jurists flexibly resorted to ijtihad tools. Innovative attempts were left individualistic and uncoordinated, limiting the scale of change.
Utilizing data on criminal charges lodged against candidates to the Fourteenth and Fifteenth Lok Sabha, India's lower house of representatives, we study the conditions that resulted in approximately a quarter of members of parliament elected in 2004 and in 2009 facing or having previously faced criminal charges. Indian political parties are more likely to select alleged criminal candidates when facing greater electoral uncertainty and in parliamentary constituencies whose populations exhibit lower levels of literacy. We interpret allegations of criminality of parliamentary candidates as related to their capacity to intimidate voters, and we show that criminal candidates depress electoral turnout. Finally, we document that the well-known incumbency disadvantage characterizing Indian legislative elections stems from the superior electoral performance of allegedly criminal candidates, who drive incumbents from office. Our results raise questions for democratic theory, which claims that electoral competition improves accountability, and for the future of the Indian polity, which is experiencing a growing criminalization of the national political arena.
The aim of this study is to analyze the behaviour of governments at sub national levels and their influence on economic activity. Two aspects of public sector intervention in the economies of Spain’s Regions have been studied: on one hand, the dimension of its public administration, its role in the distribution of public property and merit goods and the financing instruments used for such. Secondly, regulation of economic activities carried out by the Regions; in other words, the design of self-regulatory systems within the frameworks of the EU and Spain. In this paper we made an Economic Freedom Index on Spain’s Regions. The international indexes of economic freedom have become very useful tools for the study of comparative economic policies since they allow analyzing correlations between regulatory framework and growth rates. A few indexes of economic freedom applied to different regions at sub national level has been made but has not been done -so far- a study of its kind in Europe. One of the basic requirements for this type of indexes is that the regions have a high degree of autonomy in the field of economic policy. This is the case in Spain, where the autonomous regions have significant fiscal and regulatory powers.
Vietnam is a leader in foreign direct investment with about US$47B in investments in 2008 but a laggard in public private partnerships in infrastructure with negligible amount of investment. I explore this paradox and argue that while it is able to make credible commitments for FDI, it was unable to do so for PPP in infrastructure. The reason for this is its inability to address inherent risks such as large sunk cost, length of time to recoup investments, asset specificity and political salience of infrastructure. The policy implication is that the problem of credible commitment in PPP for infrastructure can be approached using risk analysis.
The market for Internet search is not only economically and socially important, it is also highly concentrated. Is this a problem? We study the question whether "competition is only a free click away". We argue that the market for Internet search is characterized by indirect network externalities and construct a simple model of search engine competition, which produces a market share development that fits the empirically observed development since 2003 well. We find that there is a strong tendency towards market tipping and, subsequently, monopolization, with negative consequences on economic welfare. Therefore, we propose to require search engines to share their data on previous searches. We compare the resulting "competitive oligopoly" market structure with the less competitive current situation and show that our proposal would spur innovation, search quality, consumer surplus, and total welfare. We also discuss the practical feasibility of our policy proposal and sketch the legal issues involved.
The role of corporate registries in supporting corporate contracting has traditionally been ignored or trivialized, which has often lead to narrow policies focused on creating minimalist registries and reducing registration costs. Arruñada (2010) proposed a theory that explains how these registries facilitate corporate transactions. We test this theory by constructing and exploiting a dataset of model transactional legal opinion comments and using the lengths of these comments as proxies for legal opinion costs. In particular, we test for whether stronger registration requirements decrease the length of lawyer comments on model legal opinions included in an authoritative report on legal opinions created by the International Bar Association. We confirm the presence of this tradeoff by finding that in countries with less stringent registration requirements, legal opinion comments are longer, even after controlling for the legal origin, European Union affiliation, and judicial quality of each country.
We consider an incomplete contract relationship between a public authority and a private manager (Public Private Partnership), where parties can hold-up each other. We compare availability and concession contracts, the two more frequently used contractual designs for delegating public services to private operators, which di¤er in terms of allocation of demand risk (demand risk being on the private provider in a concession contract and on the public authority in an availability contract). Contrary to common wisdom, we show that contracting parties' efforts are lower when they bear demand risk. We also determine the proper choice of contractual design and the model is applied to understanding two famous highway concession and school catering availability contract case studies.
Until the 1970s, in most Muslim societies formal teaching of Islamic religious texts has remained an exclusive preserve of ‘ulama (male scholars) trained in madrasas (Islamic schools). In the last three decades, however, the religious authority in Islam has undergone an important transformation whereby space has emerged for female preachers to speak in the name of Islam. These preachers are today visible across the Muslim world and so are their growing pools of followers. This paper maps the complex and diverse networks of female Islamic movements that have emerged in Pakistan, Nigeria and Syria since late 1970s and identifies the factors leading to their rise. The three-country comparison shows that the growing absorption of western values by states in Muslim societies has forced informal institutions, including religious institutions, to adapt in order to survive. Finding support in strategic theories of institutional change, the evidence from the three countries shows that the space for female preachers was created because of conscious calculations and strategic efforts on part of the ‘ulama. Conscious of the appeal of western-style modernity (promoted by the state) for young women, the ‘ulama preferred to share their authority with women from their households grooming them into leadership roles so that they could complement their efforts to promote religious piety within female segments of the society. The paper differentiates between the triggers for institutional change, and institutional consolidation.
The Brazilian judicial review system allows nine actors between political, institutional, subnational and federal ones to claim on the Supreme Court federal and state's law by their adequacy to Federal Constitution. So, who is more powerful? The political or the institutional actor? There is some difference on national or subnational actor hole? This research focuses on measuring in national and subnational levels, the quality of Brazilian legislative production based in the results of constitutional actions (Adins) judged by Brazilian Supreme Court, where Federal or States' laws were considered totally or partially unconstitutional. The Legislative Quality Index (LQI) is a proportion between the universe of suited actions and the amount of laws totally or partially contrary to Brazilian Federal Constitution, in a scale from 0 to 1, as a continuous variable, driven to statically estimate when, and where, better or worse legislative acts were produced. That index will be explored to test the hypotheses that Brazilian Supreme Court is more receptive to political actors claims and that national actors are powerful to obtain the exclusion of unconstitutional laws than subnational ones.
It is well-known in the literature that income per capita is strongly correlated with the level of democracy across countries. In an influential paper, Acemoglu et al. (2008) find that this linear correlation disappears once they control for country-specific effects focusing on within-country variation. In this paper we find evidence of a non-linear effect from income to democracy even after controlling for country-specific effects. While a positive effect emerges for poor countries, this effect vanishes for rich countries.
Corporate Social Responsibility (CSR) and advertising are strategic complements. However, it could be that communicating on CSR represents by itself a good strategy. If the claim about the environmental or social benefits of the product is unsubstantiated or misleading, this practice is known under the name of greenwashing (GW). If consumers do not discover there is no CSR, they may be attracted by a so-called CSR product because of the advertising. The model clearly identifies some ``usual suspects'' that will prefer GW over CSR. We then conduct an empirical analysis using data on CSR, economic data of the 500 largest European firms to test the predictions. Several instruments are used in order to estimate the propensity to prefer GW. We show that ``hard greenwashing'', i.e active communication with no CSR at all, is not a credible strategy and therefore propose the concept of ``light greenwashing'' that is empirically verified.
In this talk, I present an empirical study of workers’ job turnover intentions across European welfare regimes. During the last decade, flexicurity as the combination of labor market flexibility and social security has become one of the main political issues within the EU. One common rational-choice based argument is that labor market institutions create (dis)incentives for voluntary job mobility. Recent developments in political sociology challenge this assumption, suggesting that the welfare state also impacts the formation of normative expectations and value orientations. Bringing together these different theoretical perspectives and drawing on the notion of ‘policy feedback’, I explore whether turnover intentions at the micro-level can partly be explained by (1) differences in the most prominent institutional security incentives, legal job protection, unemployment benefits and activating policies, (2) differences in individual and societal normative orientations towards job flexibility, and (3) interaction effects between institutional factors and normative attitudes. Empirical analyses build on a multilevel approach and data from the cross-country comparative special Eurobarometer survey 2005 and from the OECD. The results show a significant and robust effect of normative security beliefs on turnover intention, lending support to the ‘normative feedback’ hypothesis, whereas evidence for institutional ‘incentive feedback’ is rather mixed, calling for further research.
It has become customary in both the political economy and the political science literature to define democracy in terms of a single dimension, the political rights or free and fair elections dimension. In this paper, we discuss two additional dimensions, civil liberties and legitimacy, as well as important economic implications of all three dimensions. By including the civil liberties dimension the often cited conclusion of recent empirical literature that there is no causal effect between democracy and development is thrown into question. By including the legitimacy dimension, calls for the use of the analytical narratives approach to understand growth by economist and democracy by political scientists is supported. Finally, an application of these ideas to the recent Honduran political crisis illustrates how these additional dimensions are necessary to understand the evolution of democracy in a specific historical context that befuddled pundits, governments and international organizations.
This paper empirically investigates the interaction between relational contracting and endogenous contractual incompleteness. We design an infinitely repeated games experiment between identifiable players, where the probability of continuation and the level of shared information vary, and the level of contractual completeness is decided by participants. Our results allow us to show that relational contract can be regarded as a determinant of contractual incompleteness.
A key challenge for development lies in generating broad coalitions in favor of reforms that span economic and ethnic divisions. The mobilization of India's remarkably diverse population in favour of independence--one of the first mass political movements and the first major reversal of colonization by Europeans since the early 19th century--provides an important historical example of a success. Using novel data, we find evidence that districts that were negatively impacted by the Great Depression and Britain's policy shift from free trade to an imperial preference regime favoring British manufactures were more likely to support the Congress, the party of independence, in 1937 and 1946 and more likely to engage in violent insurrection in the Quit India rebellion of 1942. However, positive and extreme negative shocks in this period were associated with less, rather than more, support for Independence. We interpret our results as inconsistent with a ``peasant rebellion'' interpretation of India's independence and instead as reflecting the role of the Great Depression in aligning the incentives of South Asia's exporters with import substituters in favour of political independence, even while Imperial protectionism forged new pro-Empire constituencies.
This paper investigates the political origins of Europe's economic rise by examining the emergence of increasing ruler durability in Western Europe when compared with the Islamic world. While European rulers were less durable than their Muslim counterparts in 800 CE, Christian kings became increasingly long-lived compared to Muslim sultans whose rule became less stable over time. The "break date" in Western European political stability coincides with the emergence of feudal institutions, suggesting a first step in a political evolution that eventually led to medieval parliaments and the emergence of a unique degree of constraint imposed on many Western European sovereigns. While feudal institutions served as the basis for military recruitment by European monarchs, Muslim sultans relied on mamlukism -- or the use of military slaves imported from non-Muslim lands. Dependence on mamluk armies limited the bargaining strength of local notables vis-a-vis the sultan, hindering the development of a productively adversarial relationship between ruler and local elites. We argue that Muslim societies' reliance on mamluks, rather than local elites as the basis for military leadership, may explain why the Glorious Revolution occurred in England, not Egypt.
This paper examines the combined effects of agricultural and environmental policies. The development of irrigation since the 1970s explains much of the disequilibrium observed in many territories between the water resources available and the quantity of anthropogenic traces in water withdrawals. The management of water resources must take into account the policies affecting farming practices, agricultural policy on the one hand, and environmental policy on the other. Despite a process of better integration of environmental issues into agricultural production, certain areas of agricultural policy (in certain contexts of production) result in the continued exertion of pressure on water resources. It is in light of this that we propose here to analyse the issue of whether or not measures in favour of the environment (agri-environmental regulation within the agricultural policy and instruments for managing water demand within the environmental policy) have an effect on the evolution of agricultural practices with respect to water resources. To do this, we chose the Charente-Maritime department (region of Poitou-Charentes, France) as the land area of study, a territory whose characteristics seem to us particularly relevant to our research topic.
Historically violence has often required as much organization as commerce or peaceful political activity. Unsurprisingly collective action problems have long been identified by scholars concerned with violent political rebellions. More recently the connection between violence and social order has been to the forefront of institutional research. The Ulster Volunteer Force (UVF), which was established in January 1913 as a militant expression of Ulster Unionist opposition to the Third Home Rule Bill, provides such a case study of violence in a social order that had both open and limited access characteristics. Drawing on the collective action and contemporary organizational and institutional economics literatures, empirical evidence, previously neglected and newly opened archival sources, this paper offers a new perspective on the economic and social organization of the UVF as well as the economic organization of political violence more generally. While the role of business in overcoming collective action problems is highlighted, it is equally demonstrated empirically that the UVF was not as well funded as some historians have argued. There are elements of the UVF that indicate that selective incentives were at work as well as features that suggest that public good aspects were also important. .
The paper explores the design of institutional framework based on several “levels” of governance (i.e. when an order is implemented by governance mechanisms applied to nested sub-sets of a population of agents). In the fiscal federalist literature, centralization of governance at high level, draws the benefit of a uniform order, to the costs of adaptation to local specificities. In this literature, the government should have a multi-level structure because it must provide public goods with various scopes in term of externalities. We provide an alternative explanation for the coexistence of several layers of governance. The root of this coexistence lies in complementarities among levels — in the spirit of the notion introduced by Milgrom and Roberts (1990) to analyze organizational complementarities: the effectiveness of one level is reinforced by the presence of another level. What we stress here is the fact that each level has strength and weaknesses and that the coexistence of levels is a way to overcome some of these weaknesses in order to improve efficiency at the “system level”; namely the efficiency of the overall institutional framework. Even in the case of a single public goods with given characteristics, we argue that efficiency could lead to their provision by several level of governance among which a principle of checks and balance would play; while fiscal federalism would recommend compliance with the principle of subsidiarity.
Some fear that the profit-maximizing orientation of private entrepreneurs conflicts with societal goals expected in the provision of complex public services. Received contractual theories advocate that private involvement in public services will result in cost reductions at the expense of quality. Using prisons as our empirical context, we benefit from an event involving the outsourcing and subsequent statization of correctional facilities in Brazil. Triangulating between quantitative and qualitative information, we do not find evidence of quality deterioration in outsourced prisons and suggest that a key mechanism driving this result is the presence of public supervisors closely working on site with private entrepreneurs in a hybrid governance fashion. We then deliver a set of new propositions that move beyond hazard considerations to examine how the combination of heterogeneous public and private capabilities might yield learning and spillover effects unattainable through pure government management or full-fledged privatization.
The mainstream literature explaining economic growth in China emphasizes competition across local governments. Departing from this literature, this paper examines a widespread but largely overlooked phenomenon of cooperation in land quota transfers across jurisdictions, referred to as “flying land.” I argue that cooperation in land quota transfers is an institutional innovation arising from the conflicting goals for local governments of promoting local economic growth and fulfilling land quota requirements imposed by the central government. Land quota transfers across jurisdictions help local governments with land scarcity overcome the bottleneck in gaining the construction land necessary to promote further economic growth as well as help local governments with land abundance gain revenue and investments. The paper concludes that intergovernmental competition occurs between jurisdictions with similar economic profiles. When an important endowment, land, is factored in, cooperation emerges between jurisdictions with different economic profiles.
In academia or in politics, the theme of industrial policy returned to the center of discussions. Not that at some point it had completely disappeared, but it was for some time relegated to the sidelines. The debate is controversial and sometimes heated. In Brazil, one area where the debate over industrial policy is on the rise is in the meat-packing sector. Although the goals of this recent industrial policy - Productive Development Policy (PDP) - are essentially sectoral, political practice has shown that specific private groups seem to have benefited more than others. A possible problem caused by the PDP is a disruption of the internal meat market since the companies that got the financial aid, besides growing bigger, bought small companies that were struggling to survive the 2008 crisis. The result of this acquisition movement is that meat-packing sector became less competitive. The empirical approach uses the difference and difference methodology with a database of over 128 observations and 6 variables. Preliminary results show that the farmer’s received price decreased and the consumer’s paid price increased. These results indicate that meat producers and consumers are worst off after the PDP implemented by the Brazilian Development Bank (BNDES). More precisely, the PDP has made the meat market more concentrated allowing a handful of companies to control this market.
We carried out experiments and survey in Tajikistan on 426 randomly selected subjects 13 years after the end of the 1992-1997 civil war to investigate the effects of conflict-related violence on social and economic preferences. Our results indicate that exposure to warfare violence is strongly associated with the disruption of those kinds of social norms that are at the very foundation of market development. Conflict exposure destroys local trust and fairness, decreases the willingness to engage in impersonal exchange and reinforces kinship-based norms of morality. At the same time, we find evidence that trust, generosity and egalitarianism are at the highest among the mostly affected individuals when matched with a distant partner, in accordance with a growing body of literature showing surprisingly positive outcomes for social behavior in the aftermath of very traumatic events. The robustness of the results to the use of pre-war controls, village fixed effects and alternative samples suggests that selection into victimization is unlikely to be the factor driving the results.
Over the course of 15 years, between 1992 and 2007, Mexico carried out a major land titling program that handed out certificates over usage rights for more than 90% of its communally held land (ejidos). Importantly, formally specifying usage rights through certification can reduce ambiguity in claims to property. This paper analyzes the long run impact of this program using data from 1991 and 2007, focusing on the average length of time land holdings have been certified. In order to control for selection, we take advantage of the program’s peculiar implementation strategy. We find that certification decreases investment in activities that traditionally maintained tenure security. We argue that this encourages movement to non-farm activities, such as migration. While these findings stand alone as measures of outcomes of an important land reform, we view them as evidence that greater specificity improves the coordination of production plans.
This paper presents a New Institutional Economics (the NIE) approach to government regulation. We analyze and model the institutional determinants of the regulatory policy-making processes by looking at regulation as the outcome of complex intertemporal exchanges among the political institutions of regulation. According to our model, regulation is implemented as the outcome of a strategic game among legal and political institutions. The interaction among the political institutions of regulation reveals transaction costs of regulation and regulatory commitment. We introduce a basic sequential model and a graphical analysis, which show the trade-off between transaction costs and regulatory commitment in the regulatory policy-making processes. It also explains what happens in terms of transaction costs and regulatory commitment if the supply for regulation by the institutions of regulation responds to the demand for regulation by interest groups.
Common law and civil law property appear to be quite different, with the former emphasizing pieces of ownership called estates and the latter focusing on holistic ownership. And yet the two systems are remarkably similar in their broad outlines, for functional reasons. This paper offers a transaction cost explanation for the practical similarity and the differing styles of delineating property and ownership in the two systems. As opposed to the “complete” property system that could obtain in the world of zero transaction costs, actual property systems use exclusion strategies as a shortcut to protect interests in use. Overlooking this relationship between use interests and the devices that protect them leads to the bundle of rights picture of property, even though property is a structured bundle of relationships. The architecture of property consists in part of four basic relationships, and a number of characteristic features of property automatically arise out this architecture, including exclusion rights, in rem status, and running to successors. Where civil law and common law differ is in their style of delineation, which reflects the path dependence of initial investment in feudal fragmentation in the common law and Roman-inspired holistic dominion in civil law. This transaction cost explanation for the functional similarities but different delineation process in the two systems promises to put the comparative law of property on a sounder descriptive footing.
Should public authorities use competitive bidding or negotiation to select a contractor for public procurement contracts? While competitive bidding has traditionally been seen as the most effective procedure to achieve value for money and to avoid favouritism and corruption in public procurement while ensuring a transparent and competitive process (Bulow and Klemperer, 1996 etc.), recent developments in the economic literature tend to mitigate this common wisdom and suggest that the advantages of competitive bidding are not as clear cut (Bajari, MacMillan and Tadelis, 2010; Guasch, 2008; Estache et al., 2009 etc.). More specifically, these works show that it is more efficient to select providers of complex goods or services through negotiated procedures. In this paper; we investigate the motivations of public authorities to award public works procurement contracts using either auction or negotiation. In addition to the economic efficiency argument presented previously, we take Spiller (2008) seriously and consider that transactions between public and private agents can be driven by considerations beyond the economic efficiency. In particular, public authorities may be biased towards the use of auctions in public procurement since they are politically elected and subject to public scrutiny. Our empirical study relies on an exhaustive database of 2,671 public work procurement contracts in 2007 undertaken by 897 French municipalities, to which we have added information on municipal elections. Our empirical results show that electoral pressure does play a role in a municipality’s decision to award public procurement contracts through auctions or negotiations. More specifically, a more concentrated political market and a higher level of votes obtained by the opposition party increases the probability that a municipality relies on auction to award a public work procurement contract. Our empirical study therefore provides some support to Spiller (2008).
In this paper we are interested in the way the distribution of water is organized in France. Local authorities may decide to organize water public service through direct public management or may delegate the provision of this public service to a private operator through a public-private partnership. Whatever their choice, it is reversible and local authorities might switch from public to private management at any time, or from private to public management at contract renewal times. We investigate the reasons why French public authorities decide or not to switch from one organizational arrangement to another. Using original data describing organizational choices made by about 3 300 French local authorities through time (Panel data over four periods: 1998, 2001, 2004 and 2008) we first assess the relative efficiency of observed organizational choices to assess in a second step, if economic reasons drive observed switches and their consequences on future performances. Our results suggest that local public authorities do not choose randomly how they organize water services, and that organizational changes is driven by past performances. Nevertheless, political consideration also play a crucial role.
The international cocoa industry provides an instrumental case study for analysing how an industry has collectively and individually responded to advocacy attacks. In 2000 the international media published targeted reports that accused the NMEs within the global cocoa industry of supporting child labour and trafficking through lack of governance of their procurement channels. To counter this challenge, industry collectively draw upon the lessons of other sectors and established the Cocoa Industry Protocols – a common set of institutional rules to create more a transparent, responsible and sustainable supply chain - while concurrently attempting to ensure that they incentivized farmer and channel agents to adopt responsible farming practices. Recognizing that the collective efforts had not fully addressed these issues, some leading cocoa processors and manufacturers developed and implemented their own private institutional responses, including certification, farmer field schools and development programs, to address the shortcomings. The more successful private institutions have since been adopted by a majority of the industry. In this paper we analyze the collective and industry responses of the cocoa industry in the development and adoption of public and private institutions to child labour advocacy and the public policy implications of these responses.
The “creative destruction” process, intensified during economic downturns, is an important driver of productivity growth. The current downturn, however, due to its synchronized nature and association with a deep financial crisis, is unusually severe. Could this “Great Recession” adversely affect firms which could lead productivity growth in a context of normal business cycle? In this paper, we focus our analysis on the impact of the crisis on innovation and learning, two important sources of productivity growth. We apply panel data estimators and Juhn-Murphy Pierce decomposition technique to a unique firm-level dataset – composed by information from 3,363 firms in seven countries (Bulgaria, Hungary, Kazakhstan, Latvia, Lithuania, Romania, and Turkey) – for 2007, June 2009, January 2010 and June 2010 – in order to investigate the differential impact of the global economic crisis on sales performance of innovative (vs. no-innovative) and young (vs. older) firms in Eastern European countries. We found that the decline in sales growth of innovative and young firms was significantly larger when compared to no-innovative and older companies, respectively, even when controlling for different idiosyncratic firm characteristics, including financial conditions. These results were robust to the estimator applied. We also found that the premium for innovation and the ability of young firms to learn became increasingly negative during the crisis, suggesting that neither factors played a relevant role in innovative and young firms survival in those countries. We interpret these results as evidence that the crisis may not have a productivity-enhancing (“purgative”) effect as other periods of economic downturn.
The causal relationship between trade openness and economic growth/income has been widely studied in the literature. The main challenge is to disentangle causation from correlation because of reverse causality and omitted variable bias such as geography or institutions. One way to circumvent the endogeneity issue is to identify events in third countries that affect national trade but do not directly affect domestic growth. In this paper, we propose to identify the trade / growth relationship by using civil war in third countries as an exogenous shock to trade. A civil war in a neighboring country is likely to impact domestic growth in two ways. First, directly, through negative security spillover and migration of refugees, and second, indirectly, through reduced trade. We use this indirect effect to instrument for trade openness in a growth equation. This second effect is particularly relevant for landlocked countries, whose neighbors serve as transit countries for a large share of their exports. In this case, a civil war in a transit country will reduce bilateral trade but also overseas trade since the access to international port is less secure. Civil wars in transit countries can be considered as a good time varying exogenous instrument for trade openness in a growth equation, since we are able to isolate the impact of a civil war in a neighboring country from the additional impact on multilateral trade of a civil war in a transit country. We estimate the impact of civil wars on trade within a gravity framework. We find that civil war in neighboring countries have a negative effect on bilateral trade, and an additional negative effect on overseas trade when the civil war takes place in a transit country of a landlocked country. We then use this shock to instrument trade openness in a growth regression and show that trade openness has a positive and robust effect on GDP per capita.
This article analyzes the effects on ex ante incentives to invest in the development of complementary innovations of two alternative appropriability strategies: a strategy of exclusion of third parties from access (through active enforcement of IPRs or technical means) vis-a-vis an openness strategy, i.e. an ex-ante commitment not to exclude. Assuming that the complementary innovations constitute a common input and that agents make complementary investments in its private exploitation, we find that, when complementarities are sufficiently strong, a commitment to openness may provide greater incentives than an exclusion strategy. The theoretical framework is used to provide an interpretation of Open Source Software licenses and the ``Open Science'' system.
The purpose of this paper is to survey two different approaches to the governance of the corporation: one based on agency theory and the other based on the notion of trusteeship. It is argued that while agency focuses on divergence of interests and on obedience to the agenda set by the principal, trusteeship asks directors to behave as trustworthy mediators. The paper then reviews an influential line of thought in American corporate law claiming that the analysis of the case and statutory law favors a trusteeship, rather than agency, interpretation of the role of corporate directors. I then argue that the trusteeship approach to corporate governance forms a natural basis in order to advocate for extended fiduciary duties to all legitimate stakeholders. Finally, I outline a model that provides foundations for the stakeholders’ choice whether to transact via the market or via the trustee.
Distributive conflict takes place in spaces where competition for assets makes economic, political, and/or strategic sense, where no overarching authority defines and enforces a given allocation of those assets, and where commons management costs are too high for competitors to reach agreements on their own. Based on the work of Alston, Libecap and Mueller on property rights and conflict on the Amazon land frontier, the framework proposed here tries to address the limitations of existing theories of distributive conflict, which contemplate either conflict in the absence of property rights, or trace distributive conflict to the inadequacies of that provision, but not both at the same time.
In this paper we shed some light on the issue of renegotiations. Using an original dataset of 262 expired public-private contracts in the French car park sector, we assess the impact of renegotiations on the contractual relationship. More precisely, we investigate the link between renegotiations and contract renewals. Indeed, if renegotiations led to surplus decrease, then parties would not be prone to contract again together. Our econometric results reveal that some renegotiation types, their frequency and their scope clearly impact on the probability to see a contract renewed as soon as public authorities have discretionary power on the decision to renew a contract with the same private partner. Hence, our results suggest a positive, negative or neutral impact on the contractual surplus depending on the kind of renegotiation and the kind of contract that is considered.
Using an incomplete contract framework, we evaluate the total net eect of allot- ment in public procurement, which has been promoted by the recent European Direc- tive 2004/18/EC. More precisely, we explore the consequences of this legislation on the global surplus and on the payo of the public authority. Our results show that al- lotment does not maximize the total surplus but may maximize the payo of the public authority representing the citizens.
This paper first reviews some of the main contributions of the new institutional economics to the analysis of the process of competitive transformation of network industries. It shows that neoinstitutional analysis is complementary to the microeconomics of rational pricing, since it accounts for the decisive role of an institutional framework adapted to new transactions. It emphasizes the importance of the political reform process, which draws on the conditions of attractiveness and feasibility to define an initial reorganization of property rights in these industries. The paper then analyzes in this light some of the main challenges ahead for electricity regulation: the question of investment in generation capacities and the link to long term contracts, the regulation of wholesale market power, the support to Renewable Energy Sources for Electricity (RES-E) and the design of new regulatory authorities.
This paper examines the nature of the dynamic interaction between resource dependence, measured as the share of mineral fuels in total exports, and the evolution of six dimensions of institutional quality. These are based on the Governance and Anti-Corruption Project of the World Bank Institute, which estimates six indicators (Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption), covering 212 countries and territories for the period 1996 to 2009. Results indicate that a high degree of resource dependence is associated with worse government effectiveness, as well as with reduced levels of competition across the economy
We look at the role of the justice budget when individuals have bounded rationality regarding the judiciary and consequently need to refer to stimuli to decipher the legal environment. We first examine how and why the justice budget may affect people's perception of the judiciary and, by extension, influence economic decision-making in this context. We then test this proposition using a cross-section of European countries. We use data from the World Value Survey measuring trust in justice as proxies for perception of the judiciary and several budget-related variables extracted from databases produced by the European Commission for the Efficiency of Justice. We show that increasing public resources devoted to the judiciary is positively associated with higher levels of trust in justice. We also show that the justice budget is likely to have a greater impact on trust in relatively less economically and institutionally developed countries. Finally, our paper yields some implications for public policy since we show that the budgetary determinants of factors of trust in justice are not the same for all prior levels of confidence in the judiciary or stages of institutional and economic development of countries.
The paper studies the relationship between social capital (SC) and Corporate Social Responsibility (CSR) by investigating the idea of a virtuous circle between the level of SC and the implementation of CSR as an extended model of corporate governance. By joint use of the tools of network analysis and psychological game theory, the paper shows the role of cognitive SC and CSR in promoting the emergence of cooperative networks between the firm and all its stakeholders (structural SC). In particular, (a) the level of cognitive SC, in terms of community or society-wide disposition to comply with fair social norms, plays a key role in providing opportunities for the firm to agree (with strong stakeholders) on CSR principles. (b) The explicit agreement on CSR principles and norms engenders cognitive social capital on its own, by creating room for conformist preferences, and positively affects beliefs about reciprocal conformity. (c) The level of cognitive social capital (both beliefs and dispositions) principles generate structural social capital understood as long-term cooperative relationships between the firm and its (strong and weak) stakeholders. Alongside the notion of sub game prefect equilibria and credible threats, we show that strong stakeholders endowed with high cognitive social capital, have an incentive in punishing the firm if it is not cooperative with weak stakeholders.
To what degree does trust in basic social and political institutions depend on the individual characteristics of citizens of different countries? To answer this question, three types of models have been estimated using the data of the fifth wave of the World Value Survey. The first model is based on the assumption of a generalized relationship for all countries, the second takes into account the heterogeneity of countries (using an introduction of the country-level variables), and the third applies a preliminary subdivision of countries into five clusters. The obtained results are used to suggest possible actions to increase public confidence in basic institutions.
A well-designed market keeps a variety of “off the equilibrium” path behaviors at bay. Unfortunately, forgotten hazards, such as the classic “lemons” problem, can re-emerge and pose a special threat to market participants when institutional change weakens deterrence. We argue this is occurring in the U.S. capital markets in the wake of the 2006 IPO of the New York Stock Exchange (“NYSE”). The IPO was the central event in a complex process that undermined institutional features of the NYSE that had been the basis of its stability and success for 200 years, including an open-outcry auction, the monopolistic “specialist,” and the “clubby” membership system. Contrary to the conventional wisdom in the literature, which focuses on trading activity, we argue that these features all contributed to the efficient pricing of securities listed on the underwriter governed non-profit NYSE. Today’s for-profit, shareholder owned NYSE generates revenue from trading fees rather than the underwriting fees that underlay the pre-IPO NYSE and thus the Exchange now lacks the incentives to minimize volatility. Instead, we argue, the NYSE has come to resemble the NASDAQ, a venue long controlled by traders rather than underwriters. We use stock market data on the bid-ask spread of both trading venues to demonstrate this convergence and to highlight the difference in institutional design between a non-profit exchange governed underwriters and a publicly traded for-profit exchange.
Despite advances in social development, and the presence of a very stable political order, during much of the 20th century Mexico was unable to produce rapid economic growth. Even after dramatic economic transformations at the close of the century, including trade liberalization, privatization and deregulation, economic performance has remained mediocre at best. Mexico has already fulfilled the “doorstep conditions” for transition to an open-access society (rule of law for elites, perpetually lived organizations in the public and private spheres, and consolidated control of the military), but the prevailing political arrangement and the organization of economic interests have produced entrenched insiders who are preventing such a transition. To illustrate the nature of the socio-economic and political equilibrium prevailing in Mexico, the paper analyzes: 1) the failure of land reform as a strategy allowing for the formation of assets among poor peasants; 2) the limited role played by stock markets in the formation of capital for the vast majority of firms; 3) the regulatory framework that has assured the dominance of a small number of economic organizations, including monopolistic firms and unions; and 4) the role played by oil rents in the preservation of a ruling coalition that can be insulated from societal pressures.
Despite advances in social development, and the presence of a very stable political order, during much of the 20th century Mexico was unable to produce rapid economic growth. Even after dramatic economic transformations at the close of the century, including trade liberalization, privatization and deregulation, economic performance has remained mediocre at best. Mexico has already fulfilled the “doorstep conditions” for transition to an open-access society (rule of law for elites, perpetually lived organizations in the public and private spheres, and consolidated control of the military), but the prevailing political arrangement and the organization of economic interests have produced entrenched insiders who are preventing such a transition. To illustrate the nature of the socio-economic and political equilibrium prevailing in Mexico, the paper analyzes: 1) the failure of land reform as a strategy allowing for the formation of assets among poor peasants; 2) the limited role played by stock markets in the formation of capital for the vast majority of firms; 3) the regulatory framework that has assured the dominance of a small number of economic organizations, including monopolistic firms and unions; and 4) the role played by oil rents in the preservation of a ruling coalition that can be insulated from societal pressures.
Several countries have implemented bonus taxes for corporate executives in response to the financial crisis of 2007-2010. Using a principal-agent model, this study analyzes how bonus taxes affect the agent's effort, compensation package, tax revenue and social welfare. We show that, contrary to its intention, a bonus tax may even increase the pay-performance sensitivity and decrease the fixed salary component. In addition, a bonus tax can induce the principal to pay higher bonuses even though the agent's effort always decreases. Finally, a bonus tax decreases social welfare unless the social planner puts a sufficiently high weight on tax revenue.
Executive pay regulation is widely discussed as a measure to reduce financial mismanagement in corporations. We show that the professional team sports industry, the only industry with substantial experience in the regulation of compensation arrangements, provides valuable insights for the regulation of executive pay. Based on the experience from professional sports leagues, we develop implications for the corporate sector regarding the establishment and enforcement of executive pay regulation as well as the level, structure, and rigidity of such regulatory measures.
This paper studies a size of bureaucracy subject to various political regimes and political institutions' performance. We review such reasons of enlarging bureaucracy as patronage, welfare state requirements and rent-seeking behavior. The results help to understand why regimes of higher accountability have larger government bureaucracies. Further, using a panel data on government administration employment from the International Labor Office ``Laborsta'' we find some evidence for a non-monotonic relationship between the level of political accountability and the size of government, which could be explained by the dominance of different incentive mechanisms between politicians and bureaucrats.
Studies analyzing the relationship between gun ownership and crime in the United States have predominantly focused on teasing out any effects that allowing citizens to carry concealed weapons have on violent crime, particularly on murders. A much less developed strand of research has explored the expansion of stand-your-ground laws and their effect on defensive gun use. Our present research draws upon both areas to conduct a comprehensive analysis of the confluence between right-to-carry laws and the expansion of stand-your-ground laws and their effect on justifiable homicides.
This article is premised on the belief that people co-exist in modern society because they willingly get along with each other and abide by the laws governing social and economic interaction, much more so than as a result of the enforcement of laws. As Rousseau said, “It is in the end the law that is written in the hearts of the people that count.” The article explains the role played by courts in advancing cooperative norms and considers the influence of the judiciary in creating norms that lead people to willingly comply with the law. In order to influence cooperative behavior, the judiciary must be perceived by the public as a legitimate branch of government. In examining judicial legitimacy, the article will contrast the segment of the public that knows little and cares less about the workings of courts with educated court observers. For the general population, the article will emphasize the importance of secondary and college education, as well as symbols and rituals, that show the courts to be a non-political branch of government. For educated observers, legitimacy also depends on the self-restraint of the courts, the respect shown by the other branches of government, and the quality of court decisions and opinions. The article applies theories of legitimacy from political science and psychology and uses survey data of public opinion of courts in its analysis of how the judicial system achieves a public perception of legitimacy.
This paper analyzes an ongoing bargaining situation in which i) preferences evolve over time, ii) the interests of individuals are not perfectly aligned, and iii) the previous agreement becomes the next status quo and determines the payoffs until a new agreement is reached. We show that the endogeneity of the status quo exacerbates the players' conflict of interest and decreases the responsiveness of the bargaining outcome to the environment. Players with arbitrarily similar preferences can behave as if their interests were highly discordant. When players become very patient, the endogeneity of the status quo can bring the negotiations to a complete gridlock. Under mild regularity conditions, fixing the status quo throughout the game via an automatic sunset provision improves welfare. The detrimental effect of the endogeneity of the status quo can also be mitigated by concentrating decision rights, for instance, by lowering the supermajority requirement.
We explore the choice of corporate governance with a game theoretic mechanism where the choice influences firm valuation and performance. The research is motivated by a natural experiment in Japan that allowed for two distinct governance systems to coexist. This paper seeks to resolve the empirical conundrum that, given the established strategic value of a shareholder oriented corporate governance system including outside directors, few firms self-select such a system when a choice is offered. We explore the incentives and payoffs to both management and shareholders to examine if there is a reasonable incentive for management to signal truthful information. We find, using a database of Japanese public corporations, that without an exogenous structure allowing compensating management for truthful revelation, management will not have incentive to select such a system. Thus we resolve an empirical conundrum that firms may not select systems of corporate governance that are the most beneficial to shareholders because they might not anticipate sharing in the gains.
Boundedly rational agents commit type I and/or type II errors in the selection of projects. The incidence of these errors is to a certain extent determined by the governance structure. A governance structure is characterized as an allocation of cognitive units between the upstream and downstream agent. The governance structures Market, Cooperative, Forward Integration, and Backward Integration are distinguished. Each governance structure can be efficient, depending on the probability distribution of the states and the ratio of the payoffs of selecting the right and wrong project. We also show that the Cooperative is less (more) conservative in proposal selection than the other governance structures when the probability associated with the upstream states is below (above) a certain level.
When a ruling elite is unable to commit to future growth-promoting policies, it may cede political power to a broader segment of the public, as in North and Weingast (1989). Alternatively, as we show in this paper, commitment may be achieved by moving in the opposite direction: installing a single authoritarian ruler who favors growth-promoting policies. Although this narrows the distribution of power in the short run, it may – as our model illustrates – be a step toward, not away from, democracy. We apply the model to ancient Greece. Many of the famously democratic poleis (city-states) of Greece’s Classical period were ruled by tyrants in the earlier Archaic period. The tyrannies of Archaic Greece were transitory institutions, generally lasting only a few decades, with strong similarities across poleis in the factors that led to their appearance and the types of policies enacted. Using a unique data set, we examine the relationships between the potential for economic growth, Archaic period tyranny, and Classical period democracy. We conclude that a high potential for economic growth led to a pro-growth political institution (the tyrant) that led in turn to increased wealth and, eventually, to democracy. These findings are consistent with critical junctures theory – the institutional path determines both wealth and democracy.
We hypothesize that regulatory externalities (i.e., regulations in jurisdictions beyond where a firm operates) can influence a firm’s environmental behavior. Specifically, we predict that firms will be sensitive to regulations both in neighboring jurisdictions and in jurisdictions where peer firms operate. By examining the use of renewable-generating technologies in the U.S. electrical utility sector between 2001 and 2006, we find evidence of regulatory externalities while controlling for firm capabilities and regulations within the jurisdictions where a firm operates. Firms adopt more renewable power generation when their peers face greater renewable power standards elsewhere. Thus, in the electrical utility sector, we find that regulatory externalities spur a race to the top.
Viewing individual contributions as investments in emission reduction we rely on the familiar linear public goods-game to set global reduction targets which, if missed, imply that all payoffs are destroyed with a certain probability. Regulation by milestones does not only impose a final reduction target but also intermediate ones. In our leading example the regulating agency is Mother Nature but our analysis can, of course, be applied to other regulating agencies as well. We are mainly testing for milestone effects by varying the size of milestones in addition to changing the marginal productivity of individual contributions and the probability to lose.
By examining the Fiscal Effects of the large scale municipal amalgamations in the German State of Baden-Württemberg from 1967-1975 this paper contributes to the economic literature on municipal public debt by focusing on the often neglected aspect of the appropriate size of local institutions. Using Data from 1964 to 1988 aggregated to the size of the 1111 municipalities still in existence after the amalgamation (down from 3379) and employing a difference in difference strategy we find, that amalgamation increases municipal debt and general expenditures. Expenditures for administrative staff, by contrast, shrinks in most specifications.
This paper aims to explore the impact of ex-ante legal status of creator on ex-post open license choice. It first describes the emergents Creative Commons licenses in Open Cultural Contents production and distribution. It introduces the two open models of diffusion and production, followed by creators. It orders the licenses according with their degree of openness in production as well as in diffusion. Then the paper presents an empirical analysis of the impact of legal status of creators on open license choice using an original database of video under Creative Commons licenses, created from the Internet Archive. The results show the existence of two models, Open Diffusion model and Open Production, that the creator has to balance when he/she decides the license. The results also show that in order to obtain benefit from the community, the For-Profit actors are more likely to adopt a high degree of openness in license.
We exploit shifting international relationships to analyze political shocks to the supply of financing for microfinance institutions (MFIs). MFIs whose host nations improve their relationships with the nations of their lenders receive more credit and enjoy reduced borrowing costs. These MFIs quickly hire more credit staff and increase lending in the medium-term, but portfolio quality and productivity decline. Compensation policies at subsidized MFIs display no evidence of rent extraction, as average wages remain stable. The emphasis on incentive pay increases, reflecting an appropriate response to the diminished termination risk for employees.
Many U.S. states are facing severe budgetary shortfalls. At the same time, there is unprecedented demand for transportation infrastructure construction and renovation. As a result, states are increasingly turning to private firms for assistance with their transportation infrastructure needs. Twenty-nine states have legislation that would better enable them to utilize public-private partnerships (PPPs) to help finance the construction of new transportation infrastructure and the renovation of existing infrastructure. Key elements of this legislation include provisions regarding unsolicited proposals, prior legislative approval of contracts, and the mixing of public and private funds. Using a series of the basic elements of PPP enabling laws, we develop an index that measures the degree to which a state’s law encourages the private sector to invest their resources in that state. We explore reasons why states pass such laws, and why some states pass legislation that is relatively friendlier to the private sector. We consider economic, fiscal, and political drivers of passage, and find that political factors and congestion levels are important predictors of both the passage and private-sector friendliness of PPP legislation. We find some evidence that fiscal stress leads states to adopt PPP enabling legislation, and very little evidence that supports the importance of traditional finance variables in the models.
We examine the role of political stability on reform outcomes, exploiting a unique panel dataset of over 7,000 Ukrainian manufacturing enterprises, many of which were privatized following the collapse of communism. Our analysis focuses on the performance of these firms before and after the 2004 Orange Revolution, which resulted in a dramatic shift in the balance of power among regions in Ukraine. We find a sharp divergence after the Orange Revolution in the relative performance of privatized firms between regions supportive of and opposed to Viktor Yushchenko, eventual winner of the 2004 Ukrainian presidential election. This effect is driven by disproportionately weak productivity gains among privatized firms in regions outside of Yushchenko's geographic base in far western Ukraine, possibly reflecting conflict within the coalition that took power after the Orange Revolution.
Theory suggests that pay-for-performance incentives need to be aligned with appropriate levels of delegation. Empirical research on the extent of delegation, and on the relationship between delegation and pay-for-performance, remains scarce, however. We offer evidence regarding these in the context of industrial sales forces. Consistent with theory, we find that sales people are given more pricing authority when they have superior local information, but less pricing authority when the need for coordination within the firm is greater. Our data also show that managers give more pricing authority to sales people who are more experienced. Most importantly, we find that sales persons’ pay-for-performance is positively and robustly related to the level of delegation of pricing authority.
In this paper we investigate a novel twist to the classic “scope of the firm” problem. Research in organizational economics has hitherto primarily focused on how the production of a given output is governed (e.g., the canonical make versus buy issue). In contrast, we ask the related marketing question: What output does a firm sell? Said otherwise, what is the product-form that a firm offers in the marketplace (and derive revenues from it)? Specifically, in the context of engineered industrial products, we ask: Under what conditions would we observe a firm selling systems (i.e. final products) versus components (i.e. intermediate products)? We treat these product-form choices as alternative institutional arrangements and argue that this decision can be looked at as whether the firm (sell systems) or the market (sell components) is more effective in coordinating the design, development, and marketing of the final product. Crucially, this coordination does not necessarily imply that the firm vertically integrates into the production of the constituent components/parts. We develop refutable predictions on how certain technology-side, customer-side, and firm-level resource factors might differentially impact the ability of the firm (vis-à-vis the market) to coordinate these activities. Micro-level data obtained from 259 firms from 4 industry sectors support our arguments and provide the first systematic evidence on why firms choose a particular product-form location to participate in a value chain. We also test the performance implications of this choice. Our core contribution is to show how the efficiency rationale embodied in the Coase Theorem can provide insights at product-line level (instead of transaction level) decisions and provide an explanation on why firms, and the industries they compete in, might be organized the way they are.
Spengler (1950) argued that while horizontal integration may lower welfare through price increases, vertical integration may actually increase welfare through the elimination of double-marginalization and lower prices. Therefore, antitrust policy should not ban all types of integration and rule on a case by case basis. While this may apply to many industries, Spengler was inspired by the antitrust case where Paramount and seven others were accused of using their downstream market power to prevent entry in movie production and distribution. As a result, the Supreme Court mandated in 1948 that Paramount and the others to stop movie bundling practices and sell their US theatre holdings. In this paper, I empirically analyze whether vertically separated theaters charged lower prices than vertically integrated theaters. For this purpose, I use a unique data set collected from old issues of Variety magazine between 1945 and 1955. This data set provides weekly movie theater information on prices, revenues and theater ownership for a sample of 392 theaters located in 26 different metropolitan areas. My findings show that vertically integrated theaters charged lower prices and sold more admission tickets than non-vertically integrated theaters. I also find that the rate at which prices increase in theaters were slower before vertical separation than it was after separation.
In this paper we study monitoring behavior, punishment behavior, and their interaction in a simple exchange experiment. We assess whether and to what extent subjects will monitor, that is, engage in costly information acquisition prior to potential punishment in order to be able to condition damage inflicted on the target player's behavior. We do so by manipulating the monitoring costs both in a second party and a third party monitoring condition. This allows a bifocal investigation of (1) responses to changes in those costs and (2) potential differences in behavior between second and third parties. We find that some individuals withhold punishment altogether when monitoring gets costly while others switch to untargeted punishment with the result that the demand for monitoring information obeys the law of demand. Controlling for risk preferences, third parties are more likely to go for the risk of erroneous punishment. Overall, average net costs inflicted on defectors diminish considerably as monitoring gets costly.
According to the culture of honor hypothesis, the high prevalence of homicides in the US South originates from the settlement of the region by herders from the fringes of Britain. This paper confirms that Scot or Scots-Irish settlements are associated with higher homicide today, but only in the South. The effect is strongest among whites and more pronounced where herding was more prevalent and institutional quality weaker. Results indicate that other white settlers adopted the Scots-Irish culture. The interpretation is that the culture of honor persisted in the South as an adaptive behavior to economic vulnerability and weak institutions.
The political legacy of conflict is the object of intense debate between proponents of two opposing models. The Conflict Trap model argues that conflicts lead to political and social disintegration. In the other camp, the State Building model asserts that inter-group competition and warfare build social capital and form the cement that binds nations. This paper uses new evidence from a survey conducted in 35 countries to shed light on how the experience of conflict shapes political and social preferences. The investigation covers World War II, recent international conflicts and civil wars. International conflict is associated with survey responses towards higher legitimacy of national institutions in countries that were victorious -consistent with the state capacity model; but the effect is not robust within countries. In contrast, civil conflict and being on the losing side of an international war are associated with lower perceived legitimacy and effectiveness of national institutions- a result consistent with the Conflict Trap model and that is robust within country. The paper also finds that conflict spurs collective action. Again, the nature of such action depends on the nature of the conflict. Civil war and losing an international conflict lead to collective action that is associated with further erosion of institutional trust. The results also echo an emerging literature that highlights the resilience of social norms and the long-term influence of violent events.
Legal philosophers have long debated the question, what is law? But few in social science have attempted to explain the phenomenon of legal order. In this paper we build a rational choice model of legal order in an environment that relies exclusively on decentralized enforcement, such as we find in human societies prior to the emergence of the nation state and in many modern settings. We begin with a simple set of axioms about what counts as legal order. We then demonstrate that we can support an equilibrium in which wrongful behavior is effectively deterred by exclusively decentralized enforcement, speci cally collective punishment. Equilibrium is achieved by an institution that supplies a common logic for classifying behavior as wrongful or not. We demonstrate that several features ordinarily associated with legal ordersuch as generality, impersonality, open process and stability can be explained by the incentive and coordination problems facing collective punishment.
This paper advances and tests a novel explanation for both vote-buying and political budget cycles. The former occurs because politicians cannot make credible commitments to voters regarding future policies and, instead, use pre-electoral transfers to mobilize electoral support. Such transfers trigger political budget cycles: they are often large in the aggregate, underwritten by government resources, and are rationally concentrated in the period just before elections are held. We use three proxies for the ability of politicians to make credible commitments to voters: the average age of all parties and the age of the government party at the time the current leader took office; and average country responses to a World Values Survey question asking about respondents’ confidence in political parties. Using any of these variables, political budget cycles are significantly larger in countries where politicians are less able to make credible commitments.
Empirical studies have established that franchise extension has positive effects on long-run growth because democratisation leads to greater equality of access to resources. However, in the short-run franchise may lead to a redistribution of resources away from important sectors of an economy. This paper examines this proposition by considering the case of land reform in the colony of New South Wales between 1862 and 1882. Reform was a direct result of franchise extension in preceding years that attempted to reallocate land away from the wool sector to small agriculturalists. Wool producers tried to avoid redistribution of their holdings by expending resources on evading reform legislation. These were resources that could have been invested in productive activities and therefore, it is expected that franchise reduced short-run growth because of the institutional changes it induced. The results presented here confirm that evasion efforts acted to reduce both pastoral sector and total GDP in the short-run.
We examine how competition between governments affects economic growth. Using data on metropolitan statistical areas in the United States, and exploiting exogenous variation in the country's natural topography to instrument for the number of local governments, we find that the number of local governments significantly and positively a ects the growth rate of income per employee over 1969-2006. In particular, doubling the number of county governments is associated with an 18% increase in the income growth rate, which implies an approximate $3900 difference in 2006 income. Decomposing this effect, we find that 60% stems from inter-jurisdictional competition changing the composition of the workforce, while 40% comes from making existing workers more productive.
Firms’ social or environmental reputation is influenced by both Corporate Social Responsibility (CSR) and philanthropic (or donations) efforts. I develop a model of CSR, in which firms invest in safe production process or not, and on strategic CSR disclosure. In addition, they may invest in philanthropic activities to signal their propensity to be socially responsible, and NGOs may audit and punish information withholding firms. Thus, I explore theoretically and empirically the correlation between CSR and philanthropic records of firms. Indeed, I use the Covalence EthicalQuote dataset that reports CSR as philanthropic records for multinational firms, to estimate the correlation between both types of social and environmental investments.
This paper argues that judicial ideology pervades civil procedure. When ideological judges have procedural discretion, they act in ways that are statistically predictable. We show this using two recent decisions by the Supreme Court, Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal. These decisions substantially increased the discretion judges had to summarily dismiss cases. We compare summary dismissal behavior of federal district court judges in pre- Twombly / Iqbal environmental cases to post-Twombly / Iqbal environmental cases. We show that before these cases, Democratic-appointed and Republican-appointed judges dismissed cases brought by pro-environment plaintiffs with no statistically different behavior. However, after these two cases, Republicans-appointed judges were much more likely to summarily dismiss environmental cases than Democratic-appointed judges. We believe this is likely only the tip of iceberg in understanding how judicial ideology and political partisanship may pervade civil procedure.
We provide direct empirical evidence in support of instrumental stakeholder theory‟s argument that increasing cooperation and reducing conflict with stakeholders enhances the financial valuation of a firm holding constant the objective valuation of the physical assets under its control. We undertake this analysis using panel data on 26 gold mines owned by 19 publicly traded firms over the period 1993-2008. We code over 50,000 stakeholder events from media reports to develop an index of the degree of stakeholder cooperation or conflict for these mines. By incorporating this index in a market capitalization analysis, we reduce the discount placed by financial markets on the net present value of the gold controlled by these firms from 72 to 9 percent.
We integrate, extend and apply economic, legal, sociological and psychological governance perspectives on relational contracts in the face of the heretofore neglected contractual hazard of ―displaced agency‖ (i.e., the costs that accrue to a series of interdependent transactions as a result of counterparties‘ incentives to pass through or shift costs or responsibilities to a counterparty not represented in the current transaction to the long-term detriment of the current residual claimant). We draw upon evidence from interdependent transactions in large, cross-sectoral, multi-phased civil infrastructure projects—including one-off transactions with no strong ―shadow of the future,‖ but where elements of relational contracting are still ubiquitous. We use this evidence to demonstrate the presence of strategies designed to enhance the efficacy of relational contracts that draw not only on regulative supports (e.g., laws, regulations, contracts and their enforcement through litigation, arbitration of incentive compatible self-regulation) but also normative (e.g., socially shared expectations of appropriate behavior, and social exchange processes) and cognitive (e.g., creating shared identities, scripts or conceptual frameworks to bridge differences in values or interests) supports. Finally, we propose transaction-, counterparty-, relationship-, field- and country-level characteristics that alter the incidence and efficacy of these regulative, normative and cognitive supports for relational contracting.
This paper studies whether corruption in the public sector is more likely to prevail when right-wing parties are in power, which is a question that has so far not been investigated in the existing literature. The underlying theoretical link between government ideology and corruption relies on the observation that politicians of right-wing parties maintain closer ties to representatives of the private sector in conjunction with the fact that corruption is more likely to occur in a long-term relationship characterized by mutual trust and reciprocity. The empirical analysis for 106 countries over the 1984 – 2008 period provides robust evidence in favor of this hypothesis. The empirical results additionally suggest that this effect is weaker in democratic countries and in countries with a free press, an independent judiciary, and a high share of women in parliament.
We examine how firms use nonmarket strategies to protect economic rents created by corporate mergers and acquisitions. Mergers are typically rationalized on the basis of creating rents by achieving scale or scope economies implying, all else equal, improved returns for investors in the acquiring and/or target firms. In many industries, however, regulatory agencies have the discretion to reduce investor returns by imposing costly ex ante structural or ex post behavioral conditions before approving a merger. Firms thus have an incentive to use nonmarket strategy to limit the extent of regulatory conditions imposed on a proposed merger. In this paper we contribute to the nonmarket strategy literature by conducting one of the first empirical investigations of how firms design integrated market and nonmarket strategies. We investigate the conditions under which electric utilities use campaign contributions to state politicians to achieve more favorable merger approval conditions. In this sector, state regulators commonly request rate reductions as a condition of approval. In our empirical analysis of all electric utility merger proposals from 1999-2006, we find that utilities significantly increased their political contributions in the 12 month period before the announcement of a proposed merger.
A central insight of agency theory is that when a principal offers a contract to a privately informed agent, the principal trades off ex post efficiency in the bad state of nature against a larger profit in the good state of nature. We report about an experiment with 508 participants designed to test whether this fundamental trade-off is actually relevant. In particular, we investigate settings with both exogenous and endogenous information structures. We find that theory is indeed a useful predictor for the relative magnitudes of the principals' offers, the agents' information gathering decisions, and the occurrence of ex post inefficiencies.
A government agency wants a facility to be built and managed to provide a public service. Two different modes of provision are considered. In a public-private partnership, the tasks of building and managing are bundled, while under traditional procurement, these tasks are delegated to separate private contractors. The two modes differ in their incentives to innovate and to gather private information about future costs to adapt the service provision to changing circumstances. Depending on the potential benefits of such adaptations, the government agency's preferred mode of provision may be different from the one that should be chosen from a welfare perspective.
How has the Chinese Communist Party (CCP) maintained its economic influence during China’s transition from a planned economy to a market economy? Using individual-level data from urban China, we argue that one way the CCP has managed to maintain its economic power is by co-opting employees in monopolistic sectors during the transitional period. We base this on three findings: (1) CCP members who have joined the Party before they start their career are more likely to obtain a job in monopolistic sectors. Also, compared to employees in competitive sectors, employees already in monopolistic sectors are more likely to join the CCP. (2) CCP members in monopolistic sectors enjoy premiums in earnings and greater opportunities for promotion compared to their counterparts in competitive sectors and to non-CCP members in monopolistic sectors. As a result CCP members in competitive sectors have incentives to switch to monopolistic sectors and non-CCP members already there want to join the CCP. (3) Further investigation suggests a bilateral selection during the Party’s recruiting process: People working in monopolistic sectors are more eager to submit applications to the CCP organization, and those working in monopolistic sectors find it easier to get accepted. The results are robust to various specifications including OLS, fixed-effects and endogenous switching model. This implies that the CCP organization has adapted its recruiting criteria to favor those who control economic rents.
This paper establishes a simple model of long-run economic and political development that is driven by the inherent technical features of different production factors and the political conflicts among factor owners on how to divide the outputs. The main production factor in the economy evolves from land to physical capital and then to human capital, which enables their respective owners (landlords, capitalists, and workers) to gain political power in the same sequence, shaping the political development path from monarchy to oligarchy and finally to democracy with full suffrage. When it is too costly for any group of factor owners to repress others, political compromise is reached and economic progress is not blocked; otherwise, the political conflicts may lead to economic stagnation.
one of the most important pitfalls generally associated with public-private partnerships schemes conducted in natural monopoly industries lies in the difficulty to replace the winning firm once the agreement is signed. The advantages of incumbency may in turn foster firms’ opportunistic behaviours. However, the literature also emphasizes that reputation effects may contribute to lower incumbents’ bad conducts, even if they are placed in a monopoly situation after winning the contract. Whether these reputation effects are powerful enough to curb opportunism is an empirical question we intend to address here. Using a database of 5000 observations collected in the French water industry in 2004, we show that incumbents may have incentives to take decisions that raise rivals’ entry costs at contract’s renewal. We find little evidence that reputation effects may weaken this particular kind of opportunism.
This paper builds formal models to examine an endogenous decision of investing in relationship-specific assets, and to address the question of how competition affects a supplier’s choice of producing a general-purpose product or a relationship-specific product for its buyer, and when the availability of a governance arrangement designed to share investment cost increases the relationship-specific investment. We offer a balanced perspective that both emphasizes the superior transaction value of the relationship-specific product in addition to its high transaction cost and considers the competing effect of alternative investment plans. Using bi-form games to formalize value creation and value appropriation, we show that, depending on multiple factors including the return and the cost of the relationship-specific product and the outside market price of its general-purpose substitute, competition among suppliers may make a supplier switch from producing the general-purpose product to producing the relationship-specific product, or switch in the opposite direction; in addition, the parameters also determine when the buyer and the supplier would agree to the governance arrangement and to what extent the governance agreement leads to greater relationship-specific investments. The model and its extensions generate new insights on investment decisions in relationship-specific assets.
This study discusses how the growth of the modern state promoted greater trade and a more integrated market at the national level. It uses data on wine production in France, whose consumers are still known to prefer local goods produced by small and traditional producers, and focuses on a policy change which lowered wine tax rates throughout the country. It is found that the existence of high internal taxes protected local producers and delayed the integration of the French market. Once these taxes were removed, French consumers abandoned their local producers for other winemakers who produced cheaper wine.
We investigate whether laws restricting fiscal policies across U.S. states lead politicians to regulate more instead. We first show that partisan policy outcomes do exist across U.S. states using panel budget data from 1970 to 2009. Then we demonstrate that these partisan policy outcomes are moderated in states with no-carry restrictions on public deficits. We then test whether unified Republican or Democratic state governments regulate more when they are constrained by no-carry restrictions. We find no-carry laws restrict partisan fiscal outcomes but tend to lead to more-partisan regulatory outcomes.
Governmental liberalization policies provide a natural experiment for examining firms’ preferences for governance structures when adapting, voluntarily or involuntarily, to regulatory changes in the business environment. We investigate the involuntary governance choices of the energy firms in the Dutch electricity industry after the European electricity directives of 1996 and 2003. The governance choices are involuntary, because the directives prohibit the energy firms to organize their electricity transactions in the comparatively efficient governance solution of the vertically integrated firm. After the implementation of the directives, the energy firms claim to prefer quasi-integration instead of the market that is prescribed by the directives and national laws for the electricity industry. In this paper, we use transaction cost economics to study the governance structures. We complement the standard transaction cost analysis by incorporating adaptation as the process of adjustment between governance structures that can explain the involuntary governance choices. We explain how suboptimal governance choices are made, on the basis of both adaptation costs and misalignment costs. We present evidence on the relation between the preferred governance structures, expected adaptation costs and expected misalignment costs, based on expert information.
This paper studies the endogenous emergence of political regimes, in particular democracy, oligarchy and mass dictatorship, in societies in which productive resources are distributed unequally and institutions do not ensure political commitments. The political regime is shown to depend on resource inequality as well as on economic development, reflected in the production structure. The main results imply that for any level of development there exists a distribution of resources such that democracy is the political outcome. This distribution is even independent of the particular development level if the income share generated by the poor is sufficiently large. On the other hand, there are distributions of resources for which democracy is infeasible in equilibrium irrespective of the level of development. The model also delivers results on the stability of democracy. Variations in inequality across several dimensions due to unbalanced technological change, immigration or changes in the demographic structure affect the scope for democracy or may even lead to its breakdown. The results are consistent with the different political regimes that emerged in Germany after its unification in 1871.
The traditional problem with externalities is well known: self-interested individuals and profit-maximizing firms often generate harm as an unintended byproduct of their use of property. I examine situations in which individuals and firms purposely seek to generate harm, in order to extract payments in exchange for desisting. Situations involving such “strategic spillovers” have received relatively little systematic attention, but the underlying problem is a perennial one. From the “livery stable scam” in Chicago during the nineteenth century to “pollution entrepreneurs” in China in the twenty-first century, various parties have an incentive to engage in externality-generating activities they otherwise would not have undertaken, or increase the level of harm given that they are engaging in such activities, to profit through subsequent bargaining or subsidies. I investigate the costs of strategic spillovers, the circumstances in which threats to engage in these spillovers are credible, and solutions for eliminating, or at least mitigating, this type of opportunism through externalities.
The present study investigates the relationship between poverty and agriculture sector during 1990-2010 using variables GDP, rural poverty, fertilizers, tractors, improved seeds, water irrigation and agriculture credit. The main objective of this study is to see how agriculture effects and reduces poverty. The productivity of agriculture sector depends upon the agricultural inputs (fertilizers, seeds), irrigation system, and technology and agriculture credit. These inputs range from efficient provision of easy credit to the small farmer, availability of fertilizer, tractor and seeds, improvement in the effectiveness of the vast irrigation system, and finally farmer education. Furthermore, the high rate of population growth needs to be checked in order for the increased agricultural productivity to have any significant effect on poverty. Any effort to alleviate poverty in Pakistan needs a focused attention to this sector because of the bulk of the population attached to this sector and the reliance of other sectors on it through backward and forward linkages. The results indicate the importance of increasing the productivity of fertilizers, number of tractors, seeds and water irrigation system for overall decrease in poverty.
The availability of high speed broadband access networks is widely considered a key factor for national competitiveness and economic growth. However, the construction of these networks creates two main challenges in the liberalized and privatized telecommunication markets, which may lead to private undersupply. First, the replacement of the access network wiring requires large asset specific investments, which are subject to regulatory hold-up. Second, access networks possibly create very large positive externalities. We are interested, if and under what conditions public provisioning is a superior provisioning regime in contrast to (regulated) private provisioning. Public provisioning can be used as an instrument to address market failure, facilitate economic growth, or provide non-cash transfers. We adopt a politico-economic perspective and view policy makers as utility maximizing individuals, whose scope of actions are constraint by a set of incomplete contracts. Public provisioning may thus be influenced by political bargaining about the quasi rents of the infrastructure investments. A distinctive feature of the public sector is that the outcomes of the political bargaining process can be, within the limits of the institutional environment, administered to the market by coercion. We provide long term case studies on the organizational structure of telecommunications provisioning from the mid 19th century to the present in Europe (Germany, and the United Kingdom), North America (the USA), and Asia (Japan, and South Korea), to analyze the motivations and outcomes of public provisioning.
The current financial crisis has generated interest in better understanding how to promote more responsible and prudent individual saving and borrowing behavior. The ability of consumers to make informed financial decisions is critical to developing sound personal finance, which can contribute to increased saving rates, more efficient allocation of financial resources, and greater financial stability. In this paper we use a unique panel dataset (2008 and 2009) from Russia, an economy where consumer loans grew at an astounding rate – from about US$ 10 billion in 2003 to over US$ 170 billion in 2008. The survey contains financial literacy questions, as well as questions on consumer borrowing (formal and informal), savings, and spending behavior. We use this dataset to study both the financial consequences and the real consequences of lower financial literacy. For instance, even though consumer borrowing is increasing very rapidly in Russia, only 41% of respondents in our sample know about the working of interest compounding and only 46% can answer a simple question about inflation. We find that financial literacy is significantly related to participation in financial markets and negatively related to the use of informal sources of borrowing, using the number of regional newspapers and universities as valid instrumental variables. Individuals with higher financial literacy are also significantly more likely to report greater unspent income and levels of spending. In addition, the relationship between financial literacy and unspent income is higher during the financial crisis, after controlling for household characteristics.
As an alternative to privatization, corporatization implies a shift of control rights over a firm from a politician to a manager while the public retains ownership. Although organizations with such features are fairly common, both in Europe and the US, there is little empirical work trying to assess the effects of corporatizations. This paper tries to fill this gap by analyzing the effect of corporatization on the price setting behavior of public firms. Based on a simplified version of Shleifer and Vishny (1994), I test the hypothesis that a corporatization decreases political interference in price setting. The empirical evidence from a dataset on Austrian water providers largely corroborates this hypothesis. Specifically, the effect of the political business cycle and partisan politics on price setting is significantly restrained in corporatized firms. This result is confirmed by a series of robustness and sensitivity tests.
Public lawmakers lack incentives to engage in a socially optimal amount of legal innovation. Private lawmaking is a potential solution to this problem. However, private lawmaking faces a dilemma: In order to be effective privately produced laws need to be publicly enacted, but under current law enactment eliminates the intellectual property rights that are essential to motivate private lawmakers. Because of this dilemma, much private lawmaking is done as a byproduct of other activities. The mixed incentives entailed in this "byproduct" approach make it a second-best response to the problems of public lawmaking. Potential solutions involve finding a better balance between public access and private rights.
In early 19th century England there was no professional police force and most prosecutions were private. This paper examines how associations for the prosecution of felons arose to internalise the positive externalities produced by private prosecutions. Drawing upon new historical evidence, it examines how the internal governance and incentive structures of prosecution associations enabled them to provide public goods. Consistent with Demsetz (1970), prosecution associations were economic clubs that bundled the private good of insurance with the public good of deterrence. Associations used local newspapers to advertise rewards and attract new members. Price discrimination was employed in order to elicit contributions from individuals with different security demands. Selective incentives helped overcome to free-rider problems between members.
Numerous experiments have shown that players cooperate in a prisoner's dilemma (PD) game. I contribute to this literature by showing that emotions might be the key to overcoming the coordination failure. I model emotions by generally distinguishing between two types of emotions: First, expected emotions play a central role. These are experienced not during the decision-making, but are rather ex post, i. e. after the outcomes are realized. In this regard, standard theory accounts for expected emotions by allowing for phenomenons such as fairness considerations, inequality aversion and temptation in iterated PD games. I describe how expected emotions - in particular satisfaction, anger, remorse and disappointment - may have an impact on the perceived payoff in a PD game. Second, immediate emotions seem to be equally important in my model. Immediate emotions, just as expected emotions, arise from considering the consequences of one's decision. The crucial difference, however, is that they are experienced during the decision-making. In introducing immediate emotions I apply the projection bias model developed by Loewenstein et al. (2003) and embed the perceived payoff into the projection bias model. I find that expected emotions might lead to the emergence of a new Pareto-efficient Nash equilibrium in which all players cooperate. However, immediate emotions might destroy this equilibrium instantaneously.
The present study explores the antecedents and consequences of vertical integration choices in the context of new product development using project-level data from the motion picture industry. I show that uncertain access to specialized complementary assets can generate market failures for high-cost projects, which drive the owners of these assets to vertically integrate into upstream innovation. Furthermore, I explore whether vertical integration affects downstream investments in specialized complementary resources and ultimately, the commercial performance of new products. I find that vertical integration promotes greater commercial success and that this effect is completely mediated by enhanced downstream investments.
There is little discussion in the literature about trade intermediaries because data is rare. However, in TCE brokers would help buyers and sellers to reduce transaction costs. Using very original data, our article sheds light on the recourse of brokers when importing fresh produce in France. To do so, we distinguish among direct and indirect imports. We then investigate the impact of country level data on the share of indirect/direct flows of imports by country of origin at the 8-digit level that enter the french market. We show that brokers are more likely to operate in context when fixed and variable costs to trade are high whereas retailers are sensitive to tariffs and product sensitivity.
This paper evaluates the efficiency of public versus private managed water services in 2009, using a mixture of data envelopment analysis and stochastic frontier analysis. Previous empirical results mostly suggest that either private companies are more efficient or that the relative efficiency between private and public companies is ambiguous. Contrary to that, our preliminary results indicate a strong advantage for publicly managed water companies in terms of technical efficiency.
Property is a powerful concept. It features prominently in academic and public discourse. But it is also a source of ongoing confusion. While some of this disarray may be attributed to the success of “disintegrative” normative agendas, much of it is the result of a methodological and conceptual disconnect both within and among different fields of study. Aimed at narrowing this gap, the paper analyzes the transformation of property from a moral and social concept into a legal construct. It seeks not to develop a historical or intellectual account of such an evolution, but to analyze the institutional and structural features of property once it is incorporated into the legal realm. The paper identifies the unique jurisprudential ingredients of a system of rules by which society allocates, governs, and enforces rights and duties among persons in relation to resources. It examines the work of decisionmaking institutions entrusted with the task of designing property norms over time. Clarifying the institutional and structural attributes of property does not require, however, adhering to a uniform body of norms or to a single set of underlying values. Illuminating the construction of property allows rather for a better informed debate about the socially-desirable content of property rights.
In this paper we discuss vertical relationships between airports and retailers in terms of their potential pro- and anti-competitive effects. To distinguish those effects, we look at the impact of vertical relationships (captured under concession management approaches) on retail sales and rent revenues to an airport at US American airports during 2004-2008. In our analysis we estimate sales and rent revenue equations for food&beverage, specialty retail and news&gifts retail areas. According to our preliminary results, we find that as compared to the direct operation of retail concessions by an airport, a private developer, a management company, or multiple prime operators (that appear to foster retail competition) lead to higher consumer consumption (approximated by retail sales per passenger). These approaches may also benefit a retailer (since it gets higher retail sales). A combination of different concession management approaches ("hybrid structure") appears to be less productive than the direct operation of concessions by an airport. While leasing the retail space to multiple prime operators, the aiport appears to get more rent revenue than in case of direct operation.
How does the internal institutional structure affect government performances in autocracies? In this paper, we focus on modern China, trying to explain what the mechanisms are that might induce an autocratic government to adopt congruent policies. Although there is no party or electoral competition, the leader worries deposition by coup d'état by the selectorate and revolutionary threats from the citizens. We build a three players political-agency model, with the leader being the agency, the selectorate and the citizens being the principles. The effectiveness of the selectorate and the existence of revolutionary threats are two factors determine the outcomes. As the size of the selectorate and the willingness to revolt vary dramatically across countries, different types of autocracies arise, with some being kleptocraitc and some being accountable.
Different empirical research has suggested a deficit of cooperative attitudes and of social trust in post-transition countries. The objective of this paper is to consider the characteristics and determinants of the propensity to cooperate in post-transition countries and to measure the degree to which they differ from other European countries. In the first part of the paper the notions of trust and cooperative attitudes are discussed. Next, the literature on the sources of the propensity to cooperate is reviewed. Further, the hypotheses on particular barriers to cooperation and trust in post-transition countries are discussed. The report of the results of research based on the ESS follows. The taxonomy of European countries based on the features of cooperative attitudes and the results of econometric research on the factors impacting on trust are provided. It is found that, while it is true that post-socialist countries have substantially lower trust in general society, it is rooted more in lower quality of political institutions than in lower trustworthiness of the members of the society. Those countries share the general pattern of factors of trust with the other European societies, in which trust does not depend any more on associative activity but, besides quality of institutions, on individual optimism, mind openness and education. The major feature of post-socialist societies is also distrustfulness of younger generation including this brought up after transition.
Does additional government spending improve the electoral chances of incumbent political parties? This paper provides the first quasi-experimental evidence on this question. Our research design exploits discontinuities in federal funding to local governments in Brazil around several population cutoffs over the period 1982-1985. We find that extra fiscal transfers resulted in a 20% increase in local government spending per capita, and an increase of about 10 percentage points in the re-election probability of local incumbent parties. We also find positive effects of the government spending on education outcomes and earnings, which we interpret as indirect evidence of public service improvements. Together, our results provide evidence that electoral rewards encourage incumbents to spend part of additional revenues on public services valued by voters, a finding in line with agency models of electoral accountability.
In recent years, the Chinese Communist Party has experimented with a variety of mechanisms designed to improve bottom-up accountability and information flow within a fundamentally authoritarian single-party system. These include the institution of village elections, the relaxation of restrictions on journalists, and a more tolerant attitude toward small-scale protests, among other developments. The most recent such innovation has been the introduction of national regulations mandating the increased sharing of government-collected information. We exploit a newly released index of environmental transparency in Chinese cities to understand what political and economic barriers may inhibit or encourage a shift toward this new model of authoritarian rule. This exercise generates two key results. First, the financial strength of a city’s government is a crucial determinant of transparency. Establishing the institutions to collect, organize, and disseminate information is costly and remains a low priority for cash-strapped local governments. Secondly, the legacies of the planned economy still have a major influence over what municipal governments are willing or (politically) able to do. Cities whose economies are relatively dependent on a single industrial firm tend to resist implementing transparency requirements when compared to those dealing with a less concentrated industrial base.
Do village elections in rural China with open nominations select better qualified leaders as compared to the previous appointment system? Using a unique sample of elections between 1982 and 2006 in 246 villages from 29 provinces, this paper analyzes the effect of elections on the years of schooling and pre-election managerial background of elected leaders, under both two-way fixed effects and ordered probit specifications. Using elections with open nominations has a significantly positive effect on both measures of leaders’ qualifications. Compared to appointed leaders, elected leaders have about one year more of education and a doubled probability of having previous management experience. Endogeneity issues are addressed with a quasi-natural experiment of an election law enacted in 1998. Future research will examine the correlation between leaders’ qualifications and subsequent village performance in this context.
In order to commercialize their ideas, most entrepreneurs need to cooperate with another party. When there are significant and irreversible investments at stake, how far should an entrepreneur develop his idea before selling it? This question is important for entrepreneurs in a variety of contexts, such as research alliances, technology licensing, and VC financing. I study this question in the context of the U.S. movie industry, in which the screenwriter decides to sell a storyline versus a complete script. I first build a formal model, in which the writer and the buyer meet to transact an idea. The model incorporates important features of a market for ideas: uncertainty, information asymmetry, expropriation risk, and the heterogeneous observable quality of the seller. I then test the model’s predictions on a novel sample of idea sales from Hollywood. The empirical results confirm the predictions: 1) conditional on sale, the likelihood of a complete script has a non-monotonic relationship with respect to the writer’s observable quality; and 2) conditional on release, a movie purchased as a complete script, on average, performs better than a movie purchased as a storyline when the writer’s observable quality is relatively high. The paper highlights the access barriers to a desirable audience faced by a seller of relatively low observable quality, as well as the seller’s selection behavior in choosing when to sell. These results have interesting implications for the strategies of both the entrepreneurs and the buyers, as well as for policies on protection for idea/intellectual property transactions.
This paper introduces a simple, positive model of choice that is empirically grounded in the natural blind search mechanisms that are fundamental in all biological and evolutionary processes. This generalized rational choice model can be explicitly derived from the standard rational choice model by converting its implicit fixed assumptions into explicit variables, such as nonzero times and costs to evaluate choices. One novel implication of recognizing positive “choice costs” is that the human mind no longer has an insurmountable competitive advantage in its ability to do choice evaluation. The “rational” calculation of optimal potential actions might be more efficiently accomplished with faster, cheaper or better processes for choice evaluation that operate outside the mind. In other words, a theory of economic substitutes emerges for rational choice, ranging from traditional rational choice, which is 100% vicarious trials of choices in the mind, to 100% actual choice trials in the real world. Countless substitute methods for evaluating choices are predicted (and observed) to appear between these endpoints, but have been previously ignored. Many real institutions can be freshly understood as manifestations of efficient serial (and parallel) allocation of blind choice trials among search stages with economic tradeoffs: from low costs and times to evaluate a choice with low predictive accuracy, to higher costs, times and accuracies up to the full-cost trials of real actions.
A commonly held assumption is that large firms are more influential in shaping governmental policies than their smaller counterparts. The ability to rigorously examine this relation is hampered by inabilities to secure direct measures of firms’ political influence. We overcome this impediment by offering a more systematic analysis of the firm size-governmental influence relationship using a novel database that directly measures firms’ perceived influence over governmental decision-making entities. The paper develops and tests a conceptual model that captures the firm size-governmental influence relationship, along with other direct and moderating influences from country-level and industry-level determinants. In some circumstances, variations in country-level institutions or industry-level structural variations profoundly affect the standard firm size-governmental influence relationship. Nonmarket strategy implications that flow from this refined understanding are discussed.
The 2007-2008 food crisis and current food price swings led economists to re-evaluate the potential for policy instruments to manage food price volatility. Despite a consensus on the need for a price volatility regulation, we have to recognize the actual difficulty for many countries to achieve a reasonable price stability. Drawing from the case of maize prices in Kenya, we show that the ability of a stabilization policy to lower food price volatility does not depend on the nature of the policy instrument only, but also on the institutional conditions of its enforcement. The predictability of the policy for economic agents appears key factor of price stability. To test this, we elaborate an autoregressive conditionally heteroskedastic model of price determination in which prices and prices volatility are jointly estimated, using monthly data over the 1994-2009 period in Kenya. We find that policy predictability -approximated by the import tariff policy stability - decreases price volatility, whereas the stock level does not appear to play a significant role on volatility. Our results appeal for a better integration of institutional conditions in the analysis of food prices stabilization policies.
The relationship between economic conditions and corruption has been subject of an intense discussion in the empirical literature due to the lack of good quality data on objective measures of corruption and the presence of omitted variables, measurement error and reverse causality problems. Using a rich and novel dataset that includes a complete set of bribery-related questions for the period 2002-2006, I exploit an exogenous variation in the economic conditions of a set of mineral-rich local governments in Peru which is due to an interaction between a fiscal rule that forces the central government to allocate 50% of the income taxes paid by mining companies to these governments and the extraordinary rise of the international prices of mineral resources observed since 2003. Using different empirical strategies, I find that, after the increase of prices of mineral resources, the predicted probability of being asked to pay a bribe by a local public official reduces by 1.5-1.8 percentage points in districts with access to this type of transfers, being the effect larger in mineral producer districts (2.7 percentage points). This represents a 52-62% reduction on the average probability. However, when focusing in areas most benefited from the positive shock of mineral prices, I find a positive effect on corruption with an increase in the former predicted probability of 4.3 percentage points. Taken together, these results suggest that the increase of transfers due to positive shocks in mineral prices have differential effects on corruption depending on the magnitude of the shock in local government revenues.
This paper estimates the average effect of regulatory intensity and administrative redtape on productivity and innovation. For this purpose we exploit the exogenous variation of the decentralization process that has taken place in Spain during the last three decades. Using objective proxies for legislative and regulatory activity such as the number of pages and number of new norms published in the regional legislative reporters we find a strong negative impact of regulatory intensity on regional innovation and productivity. This negative effect of regional regulation is not only statistically significant but also of large economic importance and can help to explain the absence of productivity growth of Spain in the last decades. Finally, we provide evidence that regulatory intensity has affected the size distribution of business establishment reducing its skewness and therefore affecting asymmetrically more those business establishments that are more likely to innovate.
Do cultural attitudes have an effect on institutions and economic performance? This paper suggests that they do. To measure cultural attitudes, we use prevalence rates of the common parasite toxoplasma gondii, infection of which is known to affect individual attitudes and societal value orientations in predictable ways. By using prevalence rates of toxoplasma gondii as instrument for cultural variation, we are able to isolate the effects of cultural attitudes on institutions, distinguishing them from the effects of institutions and economic outcomes on culture. We thus find that variation in our indicators of cultural attitudes are strongly correlated with economic performance, and significant determinants of several dimensions of institutional quality.
This paper investigates the effect of differences in informal institutions on economic relations between countries. Starting point is the argument by North (1990) and Williamson (2000) that firms evolve in a symbiotic relationship with their institutional environment. This argument implies that firms are less effective when moving to different institutional contexts that do no fit firms’ knowledge, objectives, and organizational structure. The paper argues that this effect causes firms to opt for FDI in countries with a large degree of overlap in informal institutions. More specifically, the larger the segment of the population in a country that has the same values as people in the firm’s home environment, the more effective firms will be able to operate in that country. To test this proposition, we construct a ‘cultural overlap’ measure on basis of a set of values from the World Values Survey. We show that it has significant effects on MNE location decisions. We conclude that cultural overlap is a theoretically and empirically relevant determinant of international economic relations.
What are bid-protests? What functions do they perform? This article proposes that government contracting, especially the source-selection process, gives rise to a particularly intractable set of transactional hazards: governmental opportunism and third-party opportunism. It shows how the first of these hazards can be addressed by third-party intervention and how third-party intervention leads to third-party opportunism. It argues that existing arrangements governing the source-selection process, primarily the GAO’s bid-protest mechanism, effectively mitigate the consequences of governmental opportunism and, owing to this mechanism’s design, reduce the direct harm resulting from third-party opportunism as well. More formally put, it concludes that this mechanism works to minimize the maximum losses resulting from opportunistic behavior in the source-selection process and, therefore, that these governance arrangements are effective solutions to the idiosyncratic transactional hazards associated with government contracting.
Impersonal exchange has been a major driver of economic development. But transactors with no stake in maintaining an ongoing relationship have little incentive to honor deals. Therefore, all economies have developed institutions to support honest trade and realize the gains of impersonal exchange. We analyze the relative capacities of communities (or social networks) and courts to secure cooperation among heterogeneous, impersonal transactors. We find that communities and courts are complementary in the sense that they tend to support cooperation for different sets of transactions, but that the existence of courts weakens the effectiveness of community enforcement. By relating the effectiveness of enforcement institutions to changes the cost and risks of long-distance trade, driven in part by improvement in shipbuilding methods, our analysis also provides an explanation for the (endogenous) emergence of the medieval Law Merchant and its subsequent supersession by state courts.
Pro-social norms and other ingredients of social capital are shown to be conducive for economic development, institutional performance, and quality of governance. No such analyses were available for Russia so far, and the present paper fills this gap. We propose a model which dierentiates the economic impact of bridging and bonding social capital - while the former increases government accountability, the latter is mobilized to seek protection from government predation and make up for insucient public provision of social services. We show that in equilibrium such grassroots private alternatives to publicly supplied institutions and programs could have overall detrimental impact on development by reducing the political costs of abuse of power. These conclusions are conrmed empirically by using data of a major Russia-wide survey held in 2007. We establish a significant positive relationship between bridging social capital and urban development in Russia; bonding social capital has a strong negative impact on development.
Recent work suggests that there may be a reciprocal relationship between law and non-legal social influences that arises through the role of law as a reference point in the definition of individual preferences and in the formation of social norms. The paper empirically tests the hypothesis that constitutional law provides such a reference point. Specifically, the paper investigates whether the presence of a constitutional right to property influences the extent to which the residents of a jurisdiction are opposed to government expropriation. To do so, I submit a survey to Canadians mirroring that administered in the US in Nadler & Diamond (2008). Canadians and Americans display very similar attitudes. There are some results that indicate a potential role for law as a reference point, but overall the similarity of responses suggests that this is not a strong determinant of individual attitudes.
In this paper we use four Canadian Supreme Court decisions that significantly altered the constitutional status of Aboriginal rights to assess the impact of discontinuous changes in property rights on economic growth. We use a series of event studies to assess the effect of the court decisions for Canadian forestry firms. A simulation model based on the resource industry's dynamic optimization problem is used to isolate the access and uncertainty effects reflected in the event study results. Changes in the resource industry's simulated profits are then used within a GE framework to estimate the impact of the decisions on Canadian real GDP per capita growth from 1970-2005.
With the financial crisis, the amount of subsidies provided by government has increased considerably. To some extent, the financial crisis could be considered as comparable to a natural catastrophe in the sense that a quick intervention by government is necessary. Therefore, a goal of this contribution is to address whether there is an integrative legal and economic framework to analyse this type of financial intervention by governments in crisis situations. We will more particularly argue that the economic approach towards compensation of victims in case of natural catastrophes can also provide an important contribution to the interventions of a government during the financial crisis. It is more particularly striking that in case of natural catastrophes to an important (and increasing) extent, still a large whole is played by insurance. We argue that also for risks emerging from the financial crisis, insurance may provide an attractive solution.
This work relates the ex ante distribution of quasi-rent to the notion of embeddedness. Since the mid-1970s, the governance perspective has been dedicated to explaining the mechanisms used for the ex post protection of quasi-rent. Aspects related to the ex ante distribution of this value, however, are neglected in the literature. In the following pages, it is argued that the use of an abstract conception of the market from the governance perspective contributes to the adoption of heroic assumptions, and consequently to inattention to the issue of distribution. In particular, the theory assumes that agents are fully capable of determining ex ante what the reward is for their contributions in a cooperative relationship. This paper questions this assumption, as well as the design used by the market governance perspective. More specifically, it posits that the difficulty of obtaining the relevant prices for specification of the quasi-rent increases as specific investments are made. As a result, the incentives offered to agents in a cooperative relationship can differ from their actual contribution to the achievement of a goal. Two main consequences derive from the theoretical redefinition of the interaction space of economic agents: i) enrichment of the idea of “transaction cost”, with the use of the idea of the existence of “costs of using the price mechanism”; and ii) the effective integration of the concept of embeddedness to the perspective of governance.
Using a unique data set on shadow bank transactions of firms in Russia, we show that firms which get public procurement contracts have abnormally high transfers to flight-by-night firms within 4 weeks from the date of elections of regional governors in regions where these firms are located. In contrast, firms with no public procurement have no political cycle in their transfers to flight-by-night firms. Using variation in the quality of tax inspectors as a source of exogenous variation in shadow transfers made by firms, we document a causal relationship from the shadow election financing to obtaining public procurement contracts. We also show that shadow transactions are more closely related to public procurement in more corruption regions. A placebo experiment with election dates confirms the validity of our estimates.
In the (agricultural) economics literature, agricultural policies are frequently explained by either specific policy objectives or by public choice arguments (voters, political power of specialised interest groups). This paper illustrates how the policy decision-making process itself can play a decisive role in explaining observed policies. For more than 60 years, the farmers’ organisations in Norway have been granted the legal and exclusive right to enter into negotiations with the government about direct budget support and administered prices. The institution stands out when compared to institutions that govern agricultural policy decision-making in other developed countries, or to institutions that govern decision-making for the self-employed in other sectors of the Norwegian economy. We start out with a detailed description of the institution. A discussion of potential drivers of institutional change and evaluation of the institution’s performance with respect to good governance follows. Finally, we provide a sketch of a formal model to study the institution’s effects on policy design and sector performance. The model enables us to discuss the possible effects of institutional change on agricultural policy and the agricultural sector.
This paper examines the governance of property rights on genetically modified (GM) soybean seeds. Specifically, the article undertakes a comparative analysis on the collection of royalties in GM soybean seeds in the US and Brazil. For each country, the authors describe the regulatory framework governing the protection of biotechnology innovations in agriculture and investigate the mechanisms of royalty collection in GM soybean seeds. The paper also examines econometric evidence linking the capture of value on biotech innovations and the protection mechanisms deployed by biotech firms. The results suggest that, subject to the institutional environment, the firm may choose to transact a GM attribute separated from the seed, building specialized governance structures framed around the genetic attribute and not around the seed as a whole.
In the last 30 years, historians of Greece and Rome have documented small but sustained rises in living standards in the 1st millennium BC, with per capita consumption perhaps rising by 50%; and in the last 10 years they have used the tools of NIE to help explain this. However, the ancient world’s greatest potential for economic historians lies in the study of huge areas across millennia, providing multiple natural experiments. In the 1st millennium BC, while economies were growing and state capacities increasing in the Mediterranean basin, much the same things were happening in the Ganges and Yellow River valleys. In this paper I present evidence for this, and argue that the ultimate drivers were largely exogenous forces of climate change and population growth. Despite their institutional, cultural, and historical differences, people in the complex societies of eastern, southern, and western Eurasia all responded in similar ways, deepening state capacity, shifting from statist toward market economies, expanding literacy, and developing more rational philosophies. Toward the end of the 1st millennium BC there was some diffusion of innovations between Eurasian regions as empires and trade networks expanded, but the early stages of the process were independent in the three major regions. I conclude that while institutional differences did affect each region’s economic performance, working at a large scale shows the limits of institutionalism. Large groups of people are much the same wherever we find them, and, over the long run, respond to challenges in much the same ways.
How important are immigrants as a source of innovation? This paper examines the case of German-Jewish chemists who fled the Nazi regime in Germany. After Hitler took power in 1933, German scientists who had at least one Jewish grandparent were dismissed from German universities, and many of them fled to the United States. We use data on patents and patent citations to assess the effects of émigré chemists on U.S. invention. Specifically, we compare changes in U.S. invention research areas that build on inventions of émigrés with research areas that build on inventions of other German chemists. This analysis indicates that the arrival of German Jewish refugees had a positive and statistically significant effect on U.S. invention.
After the Portuguese first transposed the sea route to Asia in 1498 no other country managed to do the same for nearly 100 years, allowing the Portuguese to dominate much of the trade between Europe and Asia. When the Dutch and English companies finally managed to muster the technology to sail that route near the turn to the 17th century, they almost instantly displaced the Portuguese and took over that trade. This paper confronts the history of the rise and demise of the Portuguese enterprise in Asia with the recent literature on colonial origins of economic development. The paper analyzes whether the choice by the Portuguese to explore their naval superiority through violence and redistribution rather than through commerce was determined by culture and colonial origin (Steensgaard, 1974; Landes 1998) or by the initial factor endowments encountered in local Asian trade (Engerman and Sokoloff, 2002, 2005; Acemolgu, Johnson and Robinson, 2001, 2002). This choice determined the extractive nature of the institutions that emerged and evolved in the Portuguese enterprise. One of the consequences of this was a pronounced principal-agent problem between the Portuguese Crown and its agents in Asia, who increasing pursued their own interests in detriment to those of the Crown. We show how the Crown’s many attempts to mitigate these losses by changing the organization of its Asian enterprise were systematically undermined by those agents leading to a persistence of the underlying institutions despite the obvious inefficiencies they engendered. The reversal of fortune was completed when the Dutch and English companies arrived and took over most of the Asian trade with Europe.
Little is known about how cultural and institutional development interact over time. To study this process, we construct new annual measures of cultural dynamics and institutional development for a paradigmatic episode of change, seventeenth century England. The institutional measures reflect citations of cases and statutes in later legal decisions, thereby capturing the growth of formal legal institutions weighted by usage. The cultural measures reflect frequency of word use in publications, interpreted using a model of social learning that elucidates the relationship between cultural diffusion and word frequency. Institutional development takes place over the whole period that we study (1559-1714). Especially fecund years are from the mid-1580's to the mid-1620's and from 1660-1680. There is no indication that the Glorious Revolution of 1688 spurred institutional development. The diffusion of modern ('whig') political culture is much more concentrated in time than is institutional development. Until 1640, the diffusion of whig culture is limited, but then dramatic change occurs, with over half of the cultural diffusion that we focus upon completed by 1660. The process of cultural change was largely completed by the time of the major changes in constitutional legislation of the late 17th century. Vector-error-correction estimates of the relationships in the annual data suggest that culture and case-law coevolve but that statute law is a product of the other two.
Authority is characterized by the right to give orders and hold the residual claims of the firm. Using satellite-tracked real-time data on the operations of a vertically integrated fishing firm’s own ships and its long-term supplier ships, this paper studies the effect of increased control after the acquisition of those suppliers. The results suggest an increase in fishing effort and speed, an improved coordination with downstream plants, higher ship productivity, and higher downstream product quality brought about by control. Evidence consistent with improved fleet deployment and coordination, and inconsistent with other mechanisms, is provided.
Using historical data on compulsory secondary school enrollment as an instrumental variable, we find that education is the strongest factor that affects the level of trust in regions across Russia. An increase of one standard deviation in the average education level in a region leads to an increase in trust of more than one standard deviation. For individuals, education is the strongest predictor of trust and civic activities, such as organizational participation. We also find that the likelihood of trust among less educated people depends only on the education level in their social environment. Conversely, for individuals with higher levels of education (13 years or more) the likelihood of trust depends both on their own education and their educational environment.
Our paper provides a detailed analysis of the development of endogenous institutional change and the bottom up construction of economic institutions in the rise of private enterprise-led capitalism in China. Our approach examines the social mechanisms that give lead to self-enforcing economic institutions sufficiently robust and durable to ensure contract enforcement without the involvement of the state. Specifically, our focus is on examining the emergence of economic institutions supporting the supply and marketing networks of private manufacturing firms. Critical to our argument is the confirmation of independent supplier and distribution networks through repeated exchange in networks and backed by social norms of the business community. We maintain that spatial proximity in industrial clusters in the Yangzi delta region facilitated the monitoring and enforcement of contractual agreements between manufacturers, suppliers and clients. Our findings show that in the Yangzi delta region, spatial concentration in industrial clusters facilitated the development of social norms and informal economic institutions decisive in allowing the private sector to de-couple from the state-owned and controlled economy. In sum, we explain the rise of private enterprise led capitalist economic development as a process that turns on endogenous institutional change characterized by first bottom-up construction of economic institutions, followed by formal rules legitimizing institutional arrangements already in place. The data comes from a stratified random sample of more than 700 private firms we have selected in seven municipalities in the Yangzi River Delta, one of China’s most dynamically developing private sector economies.
We argue that Williamson’s approach to the hold-up problem, largely ignores the potential entry deterrence effect induced by assets specificity. Indeed, comparing the literature on hold-up and specific investments (Williamson, 1985) and the one on strategic entry deterrence originated by Dixit (1980) leads to a puzzling role for sunk or specific investments, in affecting investor’s incentive. In one case, non-redeployable investments decrease investor’s ex-post bargaining power, in the other they increase it. When the entry deterrence effect is acknowledged, the threat of hold-up against investor is largely weakened and assets specificity may even constitute an endogenous enforcement device for incomplete contracts. We conclude that the impact of asset specificity on investor’s post-contractual power, far from being general, depends on the nature of contract-market interactions.
Many theories on the economics of the firm assume that economic actors are opportunistic. The focus of these theories is on the mitigation of the uncertainty that economic actors may behave opportunistically, and on the ability of contracts and governance structures to reduce this behavioral uncertainty. Previous studies did not analyze the properties of behavioral uncertainty in detail, nor did they emphasize the empirical verification of behavioral uncertainty with revealed opportunistic behavior. This article addresses both of these lacunae in the literature, by focusing on incentive alignment between parties to information transactions and on empirical proof of opportunistic behavior. When a context aligns incentives, contracting parties do not behave opportunistically. When a context does not align incentives, contracting parties strategically distort or disguise information. A study of 239 regulatory decisions on dispute resolutions and enforcements of energy laws in the Dutch and French electricity industries confirms these propositions.
Since 1996, the European Commission and the national governments in the EU have aimed for a market to balance the supply and demand for electricity in real time. We hypothesize why this politically favored market for balancing power did not materialize in the Netherlands. On the basis of a survey among the energy firms responsible for the supply of balancing power, we demonstrate that the balancing transaction is more efficiently governed by the existing hybrid structure.
The limited access order (LAO) framework explains how political and economic institutions limit violence. In LAOs the political system creates rents and manipulates economic interests so that powerful groups have an interest in restraining violence. Because fighting reduces rents, granting privileges and rents to organizations with violence capacity gives them an incentive to cooperate rather than fight—to make and sustain elite bargains. Our research with nine case studies shows how some LAOs have been able to promote substantial development, income growth and poverty reduction. But sometimes they have failed. The session presents an overview of the findings and three of the case studies—Mexico, Philippines and South Korea. In our cases, the rent-sharing commitments were initially on a personal level, and sometimes these converted into rule-based institutions. The LAOs were not static. As circumstances changed, so too did important features of each LAO, even while they remained in the LAO logic for decades and centuries. LAOs in our cases matured at times, and this was along several dimensions—control of violence, the credibility of rule of law, and the durability of organizations and agreements. But typically the pace and even the direction of change was not the same on all dimensions. LAOs often copied institutions from upper income countries – elections, commercial banks, stock markets, etc—but these institutions operated differently in LAOs and thus had different effects than in open access societies.
The nighttime streetlight imagery has been used as a viable measure of economic activities and level of infrastructure. The satellite snapshots of how brightly lit one area is over others may be especially useful for analyzing patterns of public goods provision in states where it is difficult to obtain unbiased socioeconomic data. Interpreting these images as representative of the level of public goods provision, this paper presents findings based on a set of spatial data of China between 1990 and 2000. It shows that counties which saw an increase in the ethnic minority fraction in total population experienced a small decrease in the level of streetlights provided in their areas, after controlling for factors such as urbanization and demographic changes. The paper argues that this variation in the level of provision may be an inadvertent outcome of China's policy on economic development.
Relocations in terms of outsourcing to a non-affiliated company and offshoring, the cross-border relocation within the company, are widely used in recent years and in many cases cause collective employee layoffs. Even if one of the main intentions is the reduction of costs, relocations may not produce the highly anticipated financial benefits that most companies pursue. One reason is that organizations often have overlooked and underestimated social or 'hidden' consequences of relocations. The goal of the project was to investigate the research question whether there is a kind of hierarchical 'shadow'. Do former hierarchical structures still exists among victims and survivors of the relocation? How is this structure affected by hierarchy even years after the event and how is the shadow affecting the hierarchy of the firm itself? To answer these questions and to test whether former employees are still connected among one other, a pilot study was carried out among a German manufacturer of electrical equipment which relocated its entire workforce in 2006. The pilot study also tested the feasibility of Respondent-Driven-Sampling (RDS) as an effective and efficient form to sample rare and hidden populations. The paper will introduce the RDS methodology to the institutional research community and gives advice for the implementation of a RDS-study.
The last decade for the U.S. federal government has been one of exceptional growth in the level of acquisitions contracting, but relatively limited growth in acquisitions manpower. Acquisitions offices must now act in a situation of relatively high workload, as individual contracting officer are necessarily spread much thinner. The economic consequences of this state of affairs are not well understood. This paper endeavors to provide that information by building a model of the contracting process and using this model to analyze a panel of contracts. The model predicts that increasing workload leads to less use of fixed-price contracts, lower utilization of full-and-open competition, more ex-post modifications, and higher prices. The empirical estimates from both FE-OLS and 2SLS are broadly consistent with these predictions.
This paper examines the choice of players and strategies in the application of game theoretic models to political institutions. Drawing on Ariel Rubinstein’s perceptive interpretation of game theory, I argue that the choice should be guided by the principle of relevancy; models should include only factors which are perceived by the players to be relevant. Extending Rubinstein’s concept to the choice of players and strategies, I interpret the literature on democracy as self-enforcing equilibrium and argue that the criterion I provide can help settle an argument between researchers in the field regarding the relevant players. Moreover, the approach provides criteria which define what counts as empirical evidence in support of a proposed model.
The long and difficult history of the Byzantine, or, more precisely, East Roman, Empire provides a plethora of contexts for research into the institutions and political economy of medieval states. In the present paper we concentrate on monetary developments in Byzantium between 650 and 900 AD. This period saw three important and interdependent developments: An economic and fiscal crisis due to the Islamic conquests, important administrative and military reforms, and ecclesiastical strife. Our main aim is to throw a light on the possible relationships between the debasement of the Byzantine gold currency (the solidus) and politico-economic developments. More specifically, we aim at elaborating an empirical picture of how the purities of gold coins issued by the imperial mints of Sicily and Constantinople were affected by various politico-economic variables. In doing so, we exploit the recent advances in the field of numismatics regarding the analysis of Byzantine coinage, treating coins as data sources which can provide a lot of information about the relevant politico-economic background. For our empirical approach we have created a dataset with time series data over 250 years regarding the purity of gold solidi struck in Sicily and Constantinople, the estimated size of Byzantine imperial territory, violent regime change, civil wars, dynastic transitions etc.; although the results are still preliminary there appears to be a significant influence of territorial losses and coups d'etat. This result may provide confirmatory evidence of a mainly fiscal motivation to debase the gold currency.
We propose a theoretical model and provide empirical evidence that show that rotation of ruling elites could improve property rights protection, and that such association holds for non-democratic political regimes when it is based on elites’ concerns about security of their own property rights in the event they lose power. Such incentives provide a solution to credible commitment problem in maintaining secured property rights when institutional restrictions on expropriation are weak or absent. It is further shown that the strength of such immediate incentives to maintain secured property rights depends positively on the size of elites’ market assets. These conclusions are confirmed empirically by using a panel of 58 developed and developing nations for the period from 1975 through 2005.
In this paper we explore the development of Spanish industrial relations institutions in the late 1920s and early 1930s. This period witnessed a change from a semifascist dictatorship towards a democratic regime as well as from economic growth to a deep economic recession. In spite of these changes we evidence remarkable continuity in the corporatist industrial relations institutions created in the last years of the Primo de Rivera dictatorship. The analysis of collective bargaining practices in two regions with different trade union history and industrial configuration shows how the experience of Comités Paritarios (Joint Committees) initiated in 1926 had lasting institutional effects. This goes against the views expressed by some authors as well as an extended wisdom according to which state corporatism is necessarily rhetorical and accounts to little more than a mechanism to disarm the labor movement. Based on historiographic analysis and a previously unexploited source we provide further support to the view that Primo de Rivera contributed to the modernization of labor relations in Spain. Collective bargaining increased significantly during this period and the joint committees system was an institutional innovation that persisted, with minor changes, during the Second Republic (1931-1936).
This paper investigates in which respect farm land sales differ from other kinds of land transaction. In an environment of relative individualization of property rights, different avenues are available to households wishing to transfer plots of agricultural land. They can either sell, make plots available on the renting market, or hand it over through non-market transmission mechanisms -mainly pre-mortem bequests, gift, or lending. In our perspective, selling is the only kind of transfer that both implies an irreversible loss of land rights and a disinvestment in local social networks. If access to land can provide a safety net against potential loss of income and consumption failure, and if local social networks play a role in protecting households against falls under poverty thresholds, then selling land increases households economic vulnerability. We use data from the Vietnamese Access to Resources Survey 2006 (VARHS) to test this hypothesis. We find that households who transfer land are either old or not very productive. Moreover, those who go through sales to exchange there plots are at once more intensely involved in off-farm activities, wealthier, more educated, better insured, and have access to more secure sources of income than all other ''land transferring" households. On the other hand, we do not find that rental transfers differ from non-market transactions in these respects, and therefore conclude that sale, as a complete loss of access to land and food producing activities, is for economically well-protected households only.
This paper emphasizes the role of individuals in explaining firm learning through network. Focusing on firm learning as the extent to which key individuals involved in the alliance learn, we consider learning as the process of acquisition or creation of new knowledge through interactions between individuals. We assume that individual experiences are subsequently converted to organizational properties (physical capital, routines and organizational culture). Thus, we develop and test a model linking the social network theory to the learning theory. We aim to explain the personal relationships as an important determinant of the absorptive capacity of individuals in inter-organisational networks (ION). Our empirical work show that weak and heterogeneous ties between key individuals in an ION are central mechanisms that influence the firm’s ability to capitalize on external information through the ability of individuals to access, assimilate, transform and utilize information (e.g., absorptive capacity). Nevertheless, indirect ties does not show a positive impact on absorptive capacity as it was hypothesised. Our findings add to the literature on the role of individuals in inter-firm learning either on focusing on personal relationships or by stressing his own information processing capabilities.
Firms' interests are nowadays disseminated worldwide. When a country is facing a crisis, many foreign firms' interests may be threatened. This paper investigates the effect domestic lobbying may have on International Financial Institutions (IFIs) loans decisions or multilateral loans. This paper also explores the interconnections between political and diplomatic interests. The main result is that lobbying may raise the probability of a consensus for two reasons. First, its position may be closer of the mean position of the international community. Second, it can increase the range over which its government gains if the loan is granted. Lastly, a high diplomatic proximity with the country facing the crisis may reduce the effect of lobbying whereas the share of the population the lobby represents increases the positive effect of lobbying on the probability of reaching a consensus.
German “Ordnungstheorie” relates essentially to Walter Eucken who attempted to strike a balance between the economics of the German Historic School, still relevant in Germany of the 1930s, and its opposing neoclassical analysis. The paper starts with a brief description of Eucken’s morphological approach, his “isolated abstraction,” as an analytic method that is focusing on a description of the institutional framework of the analysed economy with only vague assumptions on human wants, behaviour, behavioural constraints etc. Target of Eucken’s Ordnungspolitik is to minimize power instead of striving for Pareto efficiency. Eucken’s questioning of the regulative ability of laissez faire anticipates (instinctively) the consequences of Olson’s logic of collective actions. Eucken, together with the other members of the Freiburg school, demand from the state the establishment and guarantee of an economic constitution of a free market economy based on David Hume’s principles of natural law: private property, freedom of contract and personal liability. This paper continues with a neoinstitutional discussion of Eucken’s ordo-liberal principles of Ordnungspolitik, which served as basis of the West German Wirtschaftswunder after the currency reform of 1948. It ends with a critique of Eucken’s deliberations and some reflections on Douglass North’s “adaptive efficiency” as another substitute for the empty concept of “Pareto efficiency”.
This paper is motivated by the remark of Coase (1988, p. 7) that “although economists claim to study the working of the market, in modern economic theory the market itself has an even more shadowy role than the firm.” It is argued that under conditions of the New Institutional Economics the institutional framework not only of firms but also of markets matters. Actors who plan to buy or sell a good under conditions of NIE are facing two institutional choice problems: First, to choose or establish a specific market system within which to trade the good and, second, to choose a specific exchange contract. Both are nonmarket coordination problems. Only the first problem is object of this paper. Our hypothesis is that the organization of “the market itself” (the institutional structure within which trade happens) is a collective good, which may be a product of laissez faire or of planned collective action. So far there exists no systematic theory of the NIE of “the market itself”, only a number of considerations on specific issues concerning the organization of the basic functions of trade, viz., the activities of search, inspection, bargaining, contract execution, control, and enforcement. We content ourselves to describe and comment on some prominent examples from the NIE literature and related approaches to illustrate the kind of considerations that are part of an evolving new institutional economic theory of “the market itself.”
Power generation and transmission are complementary activities that must be coordinated to ensure an optimal use and development of the transmission network. This coordination is today more difficult in a liberalized system, because of unbundling and the freedom for investors to choose their generation technologies (Joskow, 2006). Shorter investment time between generation and network create uncertainty for the network planning and congestions. In the economic literature, the efficiency of anticipating generation investment has been under-evaluated assuming that it is a cost free activity. Our model evaluates the effect of anticipation costs and defines in which cases the previous results by Sauma and Oren (2006, 2007) could still hold.
The transaction cost economics project finance framework suggests equity is better suited to projects with high levels of asset specificity while debt is better suited to projects with low levels of asset specificity. We apply this framework to the entrepreneurial finance setting and generate a set of hypotheses. We test these hypotheses using data from the Kauffman Firm Survey to show that (1) firms align their debt ratio with their asset specificity and (2) firm performance is adversely affected when debt and equity are not properly aligned with asset specificity. Our findings highlight the importance of matching the type of finance used to the characteristics of the project.
In the past two decades, the Sub-Saharan African (SSA henceforth) region has seen conflicting growth and developmental outcomes. According to IMF statistics, the region has shown a steady rate of growth in the past two decades. However, in terms of simultaneous development in institutional qualities, like governance and political stability, the region has not shown much promise. The conflicting development story in the region can be attributed to a large number of social, political, cultural and demographic factors. Of these, political stability is often cited as a key determinant of the development discourse of the region (Armah and Amoah, 2010). As mentioned earlier and acknowledged by adequate academic literature, a robust media sector is considered to be a determinant of political stability in a country. To consider greater independence of the media sector along with a greater access to information as pertinent determinants of political stability in particular, and good governance in general, is intuitive. An unbiased media sector holds the key to ensure greater accountability and exchange between the ones in power and the populace and lessen corruption. However, for the media sector to perform its role effectively there needs to be other factors in place – especially greater reach of the media outputs and a sufficiently literate populace to understand and interpret the media propagations meaningfully. In this paper we build on the above intuition and investigate the explanatory power of independence of the press and access to information on aspects of economic development – namely political stability. The importance of the research lies in the fact that it adds to the very scare group of literature that looks at the importance of an efficient media sector for development specifically in the SSA region. Secondly, this paper does not rely only on the importance of press freedom but also includes the effect of greater access to information.
Because of their perishable nature on the one hand and the impact of their quality on consumers on the other hand, agricultural products have always raised important problems of coordination and control with high transaction costs. In the agrifood industry, the recent period has registered substantial evolution in devices intended to provide vertical coordination among the various agents of value chains. The most noticeable evolution might be the progressive dismantlement of collective organizations in favor of a contractual approach that would be more compatible with the requirements of a market-oriented policy. In this paper, we revisit the role of marketing boards, mainly through the Canadian experience, more specifically in the Province of Quebec. Examining their nature and their role, we intend to better understand the type of problems marketing boards were trying to face and still do, and their success and failures in terms of an efficient organization of complex transactions with strong asymmetries among partners. We shall argue that their occurrence in very different contexts as well as their resilience is rooted in a relatively successful combination of organizational properties, embedded in their hybrid nature, and institutional legitimacy, thanks to the guarantees they provide.
This paper intends to shed light on aspects of organizational design, in particular the firm’s (entrepreneur’s) choice in concomitantly making and outsourcing production. To this end, it proposes the knowledge view to help understand the persistence of the plural forms phenomenon. We describe plural forms as an organizational strategy aiming both: i. to provide tacit knowledge allowing for the experience of market opportunities; and ii. to codify and replicate the knowledge acquired through the firm’s activities in order to better control its use and maximize economies of scale. Considering the dynamic market situation, in which product and service innovation is continually required in the competitive process, the successive generation of tacit knowledge is impeded. Moreover, contingencies emerge which raise the need for decisions in environments of uncertainty. Under these conditions, the firm cannot defer its capacity to generate knowledge in order to benefit from economies of scale when there are gains to be had in maintaining the concomitant use of different governance systems with similar structures: vertical integration and outsourcing. Gaining a strategic advantage requires the integration of external activities and technologies, while the ease of transferring codified knowledge will lead to the market. In other words, the scope of the firm will result from the balance between the use of economies of scale in the outsourcing of codified activities and in the exploitation of new resources developed within it. Empirical evidence from franchising is provided in support of our theoretical arguments.
In this paper we introduce an innovative method to diagnose electoral fraud using vote counts. Specifically, we use synthetic data to develop and train a fraud detection prototype. We employ naive Bayes classifier as our learning algorithm and rely on digital analysis to identify the features that are most informative about class distinctions. To evaluate the detection capability of the classifier we use authentic data drawn from a novel dataset of district-level vote counts in the province of Buenos Aires (Argentina) between 1931 and 1941, a period with a checkered history of fraud. Our results corroborate the validity of our approach: the elections considered to be irregular (legitimate) by most historical accounts are unambiguously classified as fraudulent (clean) by the learner. More generally, our findings demonstrate the feasibility of generating and using synthetic data for training and testing an electoral fraud detection system.
Voters’ ability to make use of the electoral instruments at hand is crucial for the workings of democracies. We show that voters take the institutional environment into account when making electoral decisions. Voters recognize that executives who face a binding term limit, i.e. ’lame ducks’, have incentives to deviate from voters’ preferences, since they are not subject to a reelection restriction. This weakened accountability can be counterbalanced by an alternative mechanism, namely divided government. By dividing government control between the executive and the legislative voters can force a lame duck to compromise on policy with an opposing legislature. In a panel data analysis for the US states from 1975-2000, we show that the probability of divided government is 10-15 percent higher when governors are lame ducks. This effect remains robust and significant even after controlling for many relevant covariates. The finding is evidence for voters’ considerable capacity to process information and use alternative electoral instruments to control an otherwise unaccountable executive.
Studies on complex organizations, such as networks, are recent and deserve more in-depth empirical analysis. This paper contributes to this literature by investigating a network that operates within the Agro-Industrial System of wine in Vale dos Vinhedos, South region of Brazil. The network encompasses wineries, grape growers, hotels, restaurants and craftworkers. Within this complex system, several collective actions take shape with special mention to the existence of a certification of origin (Indication of Origin label) for fine wines. Although this certification is supposed to affect the several agents within the network, the actual impact of the certification is unknown. The present paper aims to identify (i) whether the network of Vale dos Vinhedos enables the creation of value for the different agents that operate within it and (ii) how the appropriation of value occurs within the network. Based on interviews and questionnaires conducted with wineries and grape growers, the article performs panel estimations. The main results point to a value creation scenario in the network. Specifically, the certification of origin has a positive impact on sales of both fine and common wines. Results also suggest that the certification has a positive influence on local producers’ income. Regarding the appropriation of value, results suggest that the wineries are able to appropriate a greater amount of the value created within the network.
Most institutional economists agree that Africa’s overall poor economic performance is connected with its weak institutions. Among others, institutional research has highlighted the importance of cultural norms and the colonial past. In this context, colonialism presents a “natural experiment” – a phase in which European institutions were imposed on local and predominantly informal institutions. While the persistence of informal institutions have been highlighted among others by Douglass North and Oliver Williamson, case studies investigating their influence on institutional development are rare. This article aims to contribute to filling this gap. It explores the institutional development of the Kanuri, a larger ethnic group in north-eastern Nigeria. The article uses a theoretical framework of institutional hierarchy to examine the development of key institutions throughout the pre-colonial, colonial and post-colonial period of the Kanuri. The article argues that informal Kanuri institutions have prevailed throughout colonial times and still present powerful norms today. Wherever Kanuri pre-colonial institutions conflict with modern, formal institutions of the Nigerian federal state, they set adverse incentives for economic behavior. Furthermore, the article’s findings shed light on the hitherto neglected role of informal institutions in the institutional development of former African colonies.
Women were first employed in large numbers by the British banking industry during the First World War, and were an essential part of the industry’s labour force thereafter. During the interwar period, women were often confined to routine back office positions, and could not advance past the level of clerk. Evidence from Williams Deacon’s Bank shows that the salaries of younger women were very similar to their male counterparts; however, an ever-widening gender pay gap emerged after about 5 years seniority. The main reasons for this pay gap were higher exit rates for women, largely due to marriage bars, and lower returns to seniority. Promotion restrictions, though ubiquitous, account for a relatively small proportion of the gender pay gap. Despite the pay gap, the marriage bar, and the lack of promotion opportunities, a sizable proportion of female clerks were very loyal to the Bank and remained for 10 or more years. This was due to the absence of better opportunities elsewhere in the labour market.
Intermediaries facilitate exchanges between buyers and sellers. Intermediation activities are an important part of the formal economy. Anecdotal evidence suggests that intermediaries are ubiquitous in corrupt activities; however, empirical evidence on their role as facilitators of corrupt transactions is scarce. This paper asks whether, besides eliminating uncertainty, intermediaries facilitate corruption by reducing the moral or psychological costs of possible bribers and bribees. Indeed, intermediaries might create psychological distance between the briber and the corrupt transaction, and might institutionalize corruption. We address our research question using a specifically designed bribery lab experiment that simulates petty corruption transactions between private citizens and public officials. The experimental data confirm that intermediaries lower the moral costs of citizens and officials and, thus, increase corruption.
We compare two generic instruments of crisis-management: bankruptcy law and the lender of last resort. They are generally not considered simultaneously either in the academic literature or in the policy-debate. Bankruptcy is a retail institution that is operated by a court, it works out-of-the-market, it is about the enforcement of the solvency constraint and the reallocation of individual property rights. Conversely, the LLR is a highly centralized act by a Central bank, it works for within the market (contractual rights are not suspended), it targets liquidity concerns and, in principle, it has not impact on the distribution of wealth. It is argued here that these two instruments are exclusive one to the other, yet complementary, though in good doctrine never supplementary. In other terms, the by-default doctrine is: first, that any actual instrument being mobilized in a context of crisis belongs to either one or the other of these two models; second, that at any point in time, a key strategic choice for crisis-managers is which one to choose and possibly when to switch to the other; and thirdly that they do not respond to the same diagnostic, hence they cannot be substitute. The two first sections of the paper develop this set of opposing patterns whereas the latter sections address two further issues that contribute to a more realistic view of crisis-management. One is how the socialization of losses affects these two generic instruments. Then is the rule of interaction between bankruptcy and the LLR, which is arguably one of the great sources of policy failure at time of crisis.
We study the optimal hierarchical structure of an organization under limited commitment. The organization can commit to its hierarchical structure, but not to long term wages. In our model, the optimal hierarchy is horizontal only for fast growing organizations with small uncertainty about the employees' efficiency. When such uncertainty is large or the organization's growth is slow, the optimal hierarchy is vertical. We show that vertical hierarchies mitigate dynamic incentive problems linked to limited commitment, and tie employees closer to the organization. Our analysis also indicates that seniority rather than merit is the decisive factor for promoting employees.
Firms basically have two behavioural options concerning their institutional environment: They can stick to the existing rules, in other words accept the institutional environment as given, and try to compete successfully within the “rules of the game” (North 1990, 3) - Market-orientation would be the name of the game in this case. Or they can try to shape the institutional environment in their own favour in order to achieve a competitive advantage through favourable “rules of the game”. Corporate political activity or non-market-orientation would be the label for this type of behaviour. In this paper we aim at shedding some light onto this matter. We combine a new institutionalism with research results from path dependence theory and the resource based view. By doing so, we are able to better understand the drivers or rather the motivation of economic actors and their efforts towards shaping the institutional environment. Our empirical research confirms that a lock-in into a public-affairs orientation (non-market strategy) seems to be a good explanation of the firms’ activities to shape their institutional environment. The influence of corporations focussing on CPA might well result in an institutional environment that does not aim to solve the problem of (repeated) market failure but rather shapes the environment in the firms’ interests. Furthermore it seems that a non-market strategy focus of firms might actually reduce their market performance even further.
How did early capitalists manage agency problems? We examine the pattern of captain-ownership among vessels engaged in transatlantic shipping during 1744-1785, at the dawn of shareholder capitalism. The typical vessel had four owners, each contributing capital towards purchase/operation. A vessel traveled far from the oversight of its owners. When a vessel sank, was captured by “privateers,” or arrived sufficiently late that its cargo was devalued, it was rarely clear whether the culprit was poor captaincy or unavoidable hazards. While owners were concerned with the freight and vessel, a captain was primarily concerned with his life and was subject to classic shirking incentives. In sum, one can conceive of a vessel as a floating corporation with the captain as CEO, subject to familiar principal-agent problems. We analyze the performance incentives used by shipowners to motivate captains, notably sales commissions, bonuses, and partial ownership of the vessel. In theory, these incentives – particularly vessel ownership – should be used selectively to deal with specific hazards that create divergent incentives between captain and owners. We then exploit a unique database of Liverpool vessels to explore the pattern of vessel ownership. We find that captain ownership is more prevalent on voyages where hazards are more likely. Also, captain-owned vessels are less likely to sink or be captured, and more likely to arrive late than their non-captain-owned counterparts.
I present some key results of my research, which seeks to understand ancient Greek oligarchy from a new-institutional perspective. An understandable interest in the emergence of democracy has discouraged work on Greek oligarchy, which is considered “natural” and thus uninteresting (the Iron Law of Oligarchy). However, when we consider the democracy-fostering nature of many of the structural conditions of the ancient Greek world – relatively low inequality, weak central coercive capacities, small territories conducive to high levels of joint action – we should wonder how oligarchy managed to survive in the face of democracy. Previous accounts of oligarchic persistence have stressed the traditionalist character of the majority population or the ability of the elite to exact compliance through ideological manipulation. I propose instead that oligarchs designed institutions to repress and co-opt the majority through such common authoritarian techniques as perverse incentives, clientelism, and preference falsification. After summarizing the nature of intra-elite politics in oligarchic regimes, I focus on two areas where NIE-based approaches have proved particularly fruitful: the use (and abuse) of popular assemblies in oligarchies, and the dynamics of oligarchic breakdown. Based on the results of these analyses I suggest that an institutionalist framework makes better sense of the punctuated equilibria found in the historical evidence, wherein seemingly stable oligarchies suddenly and often violently transition into democracies.
Part of the controversy over intellectual property stems from inadequacies in the economic theory of property rights. Property is assumed in both law and economics and in New Institutional Economics to be any expectation of being able to act upon or derive value from a resource. Such Legal Realist-inspired, thin notions of entitlement cannot explain why society would grant property rights in information, as opposed to government rewards and the like. By contrast, a theory of property that stresses its architecture of in rem rights, starting with modular exclusion strategies for defining things and supplemented with interface conditions of governance rules, helps explain how property rights promote the commercialization of inventions and coordination over rival inputs to nonrival information. Modular property is contrasted with full contracting and restitution-with-tracing as methods for promoting the appropriation of returns from such rival inputs. The basic architecture of modular exclusion and interfaces of governance rules manifests itself in dynamic changes in intellectual property, in the asset-partitioning function of intellectual property, and in the issue of the compatibility of intellectual property rights. It is the basic architectural features that result from the information costs involved in the appropriation/access tradeoff, rather than the provision of rewards to innovation, that bring property and intellectual property closer together.
In parliament, individual representatives vote with a certain probability according to their constituents’ preferences. Thus, the mechanism of the Condorcet Jury Theorem can be fruitfully applied to parliamentary representation: The probability that a majority of representatives votes according to the preferences of the majority of their constituents increases with the number of representatives per district. The political economy literature has so far disregarded this aspect. We provide a theoretical discussion and quasi-experimental evidence for the validity of the Condorcet Jury Theorem in parliamentary representation by contrasting unique data from parliamentary roll call votes and popular referenda decisions.
Current empirical work and discussions of the impact of institutions on economic performance either implicitly or explicitly assume that institutions persist and that the quality of such institutions impacts investment. We incorporate these empirical patterns into a dynamic model of institutional choice, wherein the government invests in the legal infrastructure in response to the need for the protection of output from appropriation by households. In modeling the government's choice of policy as a dynamic problem, we must consider whether the government is capable of committing to a sequence of investments in legal infrastructure. When the government is able to commit to policy over the infinite horizon, we find a unique equilibrium. However, discretionary policy permits a lower steady state to exist, under which the government over-responds to appropriation of output, succeeding in the reduction of property theft, but at the cost of lower consumption. These results would suggest that a measure of institutional quality must not only consider the extent to which current policies protect property rights, but also include the ability of the government to commit to reform in the long run.
Positional goods are a subset of economic goods whose consumption (and subsequent utility), also conditioned by Giffen-like pricing, depends negatively on consumption of others. We, hence, present a microeconomic foundation of positional good, in accordance with textbook treatment of the consumption of standard economic goods, i.e. private and public good. In particular, positional good is here defined as both double rival and double excludable good. It leads to institutional concerns, which we explore in the article. (JEL Code: D01, D11, D62, H23)
Bounded rationality (BR) is a fundamental behavioral assumption in most major strategy theories, including transaction cost economics (TCE), the resource-based view and positivist agency theory. Critics suggest, however, that the application of BR in these theories is incomplete, remaining largely compatible with the strict rationality assumption employed in neo-classical economics. In response to the criticisms, we expand the notion of bounded rationality to address both interpretative limitations on rationality, as well as processing limitations, which have been traditionally embraced in economic-based strategy theories. Using TCE as an example, we show how a more comprehensive bounded rationality assumption allows us to refine theoretical concepts (uncertainty), identify significant impacts of processing limitations on intra- and inter-firm activity (novel transaction costs), expand the theory’s predictions (hybrid governance under uncertainty), and address new applications (relational governance and the make-or-buy decision under hierarchy).
How did European merchants finance the Commercial Revolution? The principal narrative highlights a role for commenda contracts in enabling merchants to share risks and mobilize investment for long-distance trade. This study illuminates tradeoffs merchants and their agents encountered in choosing between equity-like schemes (commenda) and debt financing. The study works out of a dataset of 1,823 maritime contracts and 291 non-maritime contracts that span 3,099 unique contracting dyads (principal-agent pairs). The study demonstrates that it was debt, not commenda, that financed trade on the frontiers of the trade economy. It further demonstrates that most trade was conducted through one-shot relationships, not repeated relationships. The results delimit the roles of both formal and relational enforcement mechanisms in enabling long-distance trade.
Property rights institutions are recognized as a fundamental determinant to economic performance. However, understanding how to secure property remains elusive. This paper attempts to provide a theoretical framework and empirical analysis to unpack the black box of property rights. The framework entails distinguishing between private versus public predation and subsequent enforcement mechanisms. This study asks two critical questions for understanding how to secure property: 1) How is both private and public predation constrained – through formal or informal mechanisms? and 2) Which is more important to constrain - public or private predation? The empirical results suggest that constraining public predation is at the core of providing overall secure property rights institutions; however, constraints on government stem from private, informal mechanisms that may or may not be reflected in codified formally provided political constraints. These results are robust to a variety of model specifications, multiple instrumental variables and a range of control variables.
This paper extends existing approaches to explain vertical scope by introducing tacit knowledge as an important factor shaping processes of integration and disintegration. Considering the impact of tacit knowledge in interaction with knowledge similarities across vertical stages, we provide a resource-based view argument for the emergence of different governance modes. The paper analyzes the specific conditions, under which organizations not only chose between markets and hierarchies but implement different governance modes such as close cooperation with other companies and the integration in networks and alliances. Then, we apply this framework in the context of regulated industries. Distinguishing between three types of regulatory regimes, we assess the impact of knowledge similarities and tacit knowledge on vertical integration and disintegration in regulated sectors. Our findings suggest that knowledge similarities and tacitness generate integrative and disintegrative forces that may be in conflict with the established regulatory framework. We derive implications on some managerial and regulatory issues, and how to address them.
International lessons from emerging economies suggest that business associations may provide an effective channel of communication between the government and the private sector in imperfect institutional environment. In this context, Russian experience is a matter of interest, because Russia was regarded for a long time as a striking example of state failures and market failures. Consequently, the key point of our study was a description of the role and place of business associations in the present-day Russian economy and their interaction with member firms and governments. Relying on the new survey data of 957 manufacturing firms we found that business associations are more frequently joined by larger companies, firms located in regional capital cities, and firms active in investment and innovation. By contrast, business associations tend to be less frequently joined by business groups’ subsidiaries and firms that were non-responsive about their respective ownership structures. Our regression analysis has also confirmed that business associations are a component of an “elite exchange”– although only on regional and local levels. Our results show that at present, business associations (especially the industry-wide and “leading” ones) consolidate the most active, advanced companies, act as collective representatives of their interests and can be regarded as a possible instrument for promotion of economic development.
When judges are believed to be politically biased and judicial decisions are considered to be unpredictable, many nasty consequences may derive from it. The economic literature in Brazil shows some controversies over what is the direction of the bias, but mainly, economists believe that courts tend to favor debtors, leading to high disincentives for investment decisions and credit granting. Oddly, this controversial debate has never been accompanied by empirical data. The main objective of this paper is to test the hypotheses of political bias and uncertainty in Brazilian courts. A population of 1,687 decisions of the STJ (Superior Tribunal de Justiça, one of the highest level courts in the country) over private debts was analyzed case by case, and the variables were regressed in a logit model. Results indicate that judges in the higher courts very frequently change the decisions made in lower courts, which may suggest high unpredictability in the Brazilian Judiciary. On the other hand, the existence of judicial bias, in any direction, was not confirmed by the data.
During the second half of the 20th century South Korea (Korea, hereafter) transformed itself from a poor nation to a rich and democratic country. Korea is one of the few countries outside of Europe and the Anglo-American countries that has completed or moved far along the transition to an open access order In the post-colonial development of Korea. The role of land reform in opening access to economic opportunities and establishing state monopoly of violence was critical to later economic and political development. The land reform also contributed to expanding education and establishing meritocratic and autonomous bureaucracy. The relatively open access economy not only brought about rapid and sustained economic growth but also created increasing pressures for open access polity, which led to democratic transition of 1987. Although export-led industrialization helped to increase open access and competition in the economy, economic concentration by the chaebols and collusion between government and the chaebols increasingly limited access and competition. Sweeping economic reforms after the 1997 financial crisis helped Korea to make transition to an open access order. The Korean case also suggests that the doorstep conditions may not work the same way in today’s developing countries as they did in the historical experiences of Western Europe and North America. Whereas in Western Europe and North America the rule of law was established for elites first and expanded to broader population over time, it developed at the same time for both elites and non-elites in Korea.
Firms often bring pre-existing capabilities such as brands and market strength into cooperative ventures. We model price terms in these ventures as a choice between ex ante design costs and ex post opportunism, in the shadow of judicial behavior. On the one hand, to save on design costs, parties can leave the price open for future negotiations. This will induce them to gather proprietary information during the venture’s exploratory stage in the hope of using it as a bargaining chip. Eventually, the parties may prefer to use this information for actions that yield them private benefits but dilute the counterpart’s capabilities, resulting in ex post inefficiencies. On the other hand, parties can incur the cost of specifying contract terms at the outset, thus preventing ex post bargaining through a credible threat of having those terms reinstated by courts. This reduces their incentives to gather information ex ante and, therefore, their ability to dilute each other’s capabilities ex post. Consequently, firms will choose specific contracts when pre-existing capabilities are valuable and contract design costs are low. Our theory adds to Transaction Cost Economics by (1) formalizing in a novel way the idea that contracts reduce ex post inefficiencies and (2) showing that contracts also protect non-specific assets, such as firms’ capabilities.
In property rights theory, firm is an organizational response to reduce transaction cost associated with hold-up of using market mechanism. We claim that strategic alliance – without changing firm boundaries or asset ownership – is another type of organizational response. We construct a model to investigate individual firms’ strategic choice on specialization or diversification when producing intermediate products and their further choice of organizational form: autarchy or forming strategic alliance. We introduce fixed learning costs as an indicator of scales of economy and show that only if fixed learning costs are large enough, will firms have incentive to be specialization and form strategic alliance. We distinguish between asymmetric strategic alliance and symmetric strategic alliance and show that transaction cost is not monotonic with respect to fixed learning costs. In particular, for asymmetric strategic alliance, there exists overinvestment with un-utilized capacity. Further, asymmetric strategic alliance is always unstable, while symmetric strategic alliance is stable only if fixed learning costs are large enough. The firm who is entitled with higher learning cost gets higher payoff – rewards for the endeavor. If firms are more patient, they are less likely to form strategic alliance.
Public-private hybrid strategy is one of the key strategies that many private entrepreneurs during gradual market transition have adopted. Under this strategy, a private entrepreneur either rents a public firm and operates it as though it is his own (a way of informal privatization of public firms) or registers his private firm as a public firm to cover up de facto private ownership (wearing a “red cap”). This study examines the effect of this strategy on entrepreneurial reinvestment – the primary source of entrepreneurial financing in transition economies –as institutional environment changes based on the case of the rapidly emerging private sector in China. Conventional wisdom in economics expects that such a strategy would discourage entrepreneurial investment because it results in ambiguous property rights structure. Based on the new institutional perspective, this study argues that this strategy could facilitate entrepreneurial investment because the legitimacy benefits of this strategy outweigh its costs during gradual reform when the government still favors the public sector over the private one and thus the playing field between the two sectors is not level. Yet, as the market economy expands, the positive effect of this strategy may decrease and even turn negative. The hypotheses are supported by large scale national survey data on private entrepreneurs from China.
What impact does the introduction of voting for village committee in China have on the allocation of local public funds? Does that effect vary with local Communist Party's role in elections? I examine these questions for a sample of 241 villages from 1987 – 2002. Employing a differences-in-differences approach with village fixed effects, I find that introduction of elections increased the probability of yearly village-funded public goods investments by 36%, increased village-to-household transfers by 16%. However, when a Party branch member won the election as village committee chair the probability of public goods investment increased only 28% and village-to-household transfers were essentially no different from those in villages without elections. While the consent of the Party branch is necessary for the village committee to make these allocations, controls by the Party are greater when its local branch member is elected as village chair. Committee chairs who were also Party branch members were more likely to be re-elected subsequently than others. The results suggest that Party oversight reduces the effect of holding village elections.