Society for Institutional & Organizational Economics
Conference papers from 2012 (sessions were not tracked for this year)
Current political-economic theories of organizational life and, more specifically, leadership treat members’ willingness to go along with a leader as a purely instrumental decision; the members benefit sufficiently from the leader’s knowledge and coordination abilities that they are willing to tolerate various forms of leadership "rents." Such models leaves precious little room for the inspirational role some leaders seem to play and fails to anticipate important facets of organizational governance as well as clear evidence that organizational participation can profoundly transform the beliefs and, possibly, the interests of some members. In this paper we suggest a theoretical framework that can help us account for the observed transformation of some members. While some people have specific and deeply held political commitments, most people appear to hold only vague or ill-formed beliefs, revising and acting on them only when challenged to do so in particular contexts. Presenting members with an organized opportunity to act jointly and coherently forces them to crystallize their preferences and presents them with information about their own efficacy. Participation in an activist organization opens up the possibility that at least some members’ beliefs and actions can be transformed. Leaders embedded in specific organizations help create that context. We present oral histories and interview data to document self-reported changes in political beliefs among members of two politically activist labor unions in the United States and Australia.
The regulation of bank capital as a means of smoothing the credit cycle is a central element of forthcoming macro-prudential regimes internationally. For such regulation to be effective in controlling the aggregate supply of credit it must be the case that: (i) changes in capital requirements affect loan supply by regulated banks, and (ii) unregulated substitute sources of credit are unable to offset changes in credit supply by affected banks. This paper examines micro evidence—lacking to date—on both questions, using a unique dataset. In the UK, regulators have imposed time-varying, bank-specific minimum capital requirements since Basel I. It is found that regulated banks (UK-owned banks and resident foreign subsidiaries) reduce lending in response to tighter capital requirements. But unregulated banks (resident foreign branches) increase lending in response to tighter capital requirements on a relevant reference group of regulated banks. This “leakage” is substantial, amounting to about one-third of the initial impulse from the regulatory change.
How do firms build capabilities and resources to generate and sustain competitive advantage? This question lies at the very heart of strategic management and has long pre-occupied scholars and practitioners alike. A common thread running through much of the research to date is a focus on learning: learning by doing, learning by exporting, learning from competitors, users, or alliance partners. In this paper we focus attention on another locus of learning that has recently garnered significant interest among practitioners, but which has received less attention from academics: learning by supplying. By compiling an unusually detailed multi-year panel dataset on supply relationships in the mobile telecommunications handset industry, we are able to address the following questions: What factors contribute to a firm’s ability to ‘learn by supplying’ and build technological and market capabilities? Does it matter to whom the firm supplies? Is it more beneficial to supply to market leaders or to team up with market laggards? Must the supplier be actively involved in product design to effectively learn from its customers, or is manufacturing the key locus of learning? How does a supplier’s own initial resource endowment and capabilities play into the dynamic? Our empirical analysis yields several interesting findings that have potentially important implications for theory and practice, and that suggest interesting directions for further study.
The ability to cheaply procreate is a significant difference between heterosexual and non-heterosexual unions. A framework is proposed in which this difference increases the demand for lifestyles complementary to children (including marriage) for heterosexuals. This difference also influences the presence of children within the household, and the importance of genetic characteristics in choosing a mate for heterosexuals relative to other sexual orientations. Using a unique nationally representative probability sample data set that directly identifies sexual orientation, these predictions are confirmed.
Scholars and practitioners have long debated the merits of decentralization in the area of environmental policy. Here, we present new evidence regarding (a) the effects of decentralization on forest cover change, and (b) the conditions under which decentralization is likely to lead to better outcomes. Drawing on polycentric governance theory we build an argument about the institutional conditions under which decentralization will yield positive outcomes for common pool resource governance. We argue that local governments will be best equipped to address problems of deforestation when they are connected to and supported by other policy actors, including community organizations, national governments, and NGOs. We test this argument using multivariate matching and regression techniques employing a unique dataset on local forest governance and forest condition indicators in Peruvian and Bolivian municipalities. Three results challenge conventional wisdom. First, decentralization has an ambiguous effect on forest cover change. Second, polycentric governance arrangements are no more common in decentralized than in centralized regimes. And third, polycentric governance does have a stronger, positive effect on forest conservation in decentralized settings.
The Palestinian context is missing in the tax morale literature. Hence, in this paper we consider public spirit and associational activity two major expressions of pro-social behaviour and we estimate their impact on Palestinians’ tax morale (intrinsic motivation to pay taxes). The empirical analysis uses a unique dataset based on a survey conducted by the Palestine Economic Policy Research Institute in 2007 in West Bank and Gaza Strip. By using a bivariate probit model, we find that tax morale increases with public spirit but it is lower among Palestinians involved in associational activities. Predicted conditional probabilities indicate that public spirit has more impact when the respondent has low confidence in the institutions and in the rule of law. Finally, more public spirit is required for a self-employee in order to deal with tax compliance than for a worker in the public sector, unless the worker in the public sector has lower confidence in the institutions and in the rule of law than the self-employee worker.
The adequate path of regulation in a dynamic market is one major chal-lenge for the free and innovative development of markets, in particular if these markets need regulation after the privatization of a former monopo-list. This is the case in network industries such as the telecommunication sector; the regulatory needs change permanently. As a radical change of the regulatory regime could cause negative effects to a market as a whole, the objective is to find a transitory regime which limits regulatory errors and is thus more efficient. One way could be to combine the regulatory instruments of sunset-legislation and self-regulation. Conditions for successful self-regulation under sunset legislation are discussed. It seems obvious that a fast moving market such as the telecommunications sector may well be a subject to such an innovative regulatory regime.
What is the relationship between formal laws and informal networks? Do market transition and expansion of a formal legal system imply the declining significance of interpersonal connections, especially ties to the state? Addressing these broad themes, we examine the relationship between political connections and use of courts in dispute resolution among Chinese firms, using survey data of over 4,000 privately owned companies. We find that politically connected firms are more likely to adopt litigation over alternative means of dispute resolution than non-connected firms, holding all things equal. Going further, by exploiting variance in provincial-level legal services capacity as a moderator, our evidence suggests that the positive link between political connections and use of courts is driven primarily by political advantages of connected firms in exercising influence and secondarily by their informational advantages of the legal system. Collectively, our findings imply a perversely complementary relationship between political connections and willingness to utilize official avenues of adjudication. While use of and demand for courts may come primarily from politically connected firms, such demand may not equate a demand for judicial fairness and independence.
The economics and strategy literatures have shown that vertical integration decisions are determined by transaction costs and differential firm capabilities. The sources of differential capabilities, however, are not well understood. This paper studies the impact of new firms’ capability endowments on their early vertical decisions, and the implications for their survival chances. We do this by studying employee spinoffs: new firms founded by former employees of incumbents. We find that in the early U.S. auto industry, a spinoff was more likely to vertical integrate a key transaction if its parent firm did, even after controlling for asset specificity. This suggests a mechanism by which spinoffs seek to exploit production knowledge inherited from their parent firms. However, we argue and find evidence that this knowledge inheritance only enhances spinoff survival if it enables the spinoff to establish a defensible strategic position in the market.
In many auction settings, there is favoritism: the sellers welfare depends positively on the utility of a subset of potential bidders. However, laws or regulations may not allow the seller to discriminate among bidders. We fi nd the optimal nondiscriminatory auction in a private value, single-unit model under favoritism. At the optimal auction there is a reserve price, or an entry fee, which is decreasing in the proportion of preferred bidders and in the intensity of the preference. Otherwise, the highest-valuation bidder wins. We show that, at least under some conditions, imposing a no-discrimination constraint raises expected seller revenue.
Adopting a simplistic view of Coase (1960), most economic analyses of property rights disregard both the key advantage that legal property rights (that is, in rem rights) provide to rightholders in terms of enhanced enforcement, and the difficulties they pose to acquirers in terms of information asymmetry about legal title. Consequently, these analyses tend to overstate the role of “private ordering” and disregard the two key elements of property law: first, the essential conflict between property (that is, in rem) enforcement and transaction costs; and, second, the institutional solutions created to overcome it, mainly contractual registries capable of making truly impersonal (that is, asset-based) trade viable when previous relevant transactions on the same assets are not verifiable by judges. This paper fills this gap by reinterpreting both elements within the Coasean framework and thus redrawing the institutional foundations of both property and corporate contracting.
Most work on the British judiciary reflects the assumption that the British judiciary is professional and not political, and that attitudinal factors are irrelevant to the UK’s highest court: judges behave as the so-called ‘legal model’ predicts, with dissents being rare. In this paper, we challenge this assumption. We argue that the ‘legal model’ is intelligible within the ‘strategic model’. Judges’ differing approaches to legal doctrine represent ‘institutional strategies’–ways of embedding attitudes within the informal institutions of the judiciary so as to shape interactions with other actors. Adherence to a ‘legal model’ does not, therefore, affect the validity of the insights of the strategic model on the role of judges’ personal views. We elaborate upon this through an empirical analysis of decisions on challenges to state bodies, estimating judges’ ideological positions on a ‘legal’ scale. We find that there are meaningful and measurable differences in judicial positions on this scale which affect the outcomes of a significant minority of cases. Drawing on Mary Douglas’s grid-group theory, we posit an institutional explanation for the rarity of dissents, namely that consensus in the UK’s highest appellate court is a product of group-bounded as much as norm-bounded behaviour, which has the tendency to amplify rather than dampen the effect of bench-composition on the outcome of cases. Our findings point to the need for proper consideration of the institutional impact of reforms to the judiciary and for a proper institutional theory of the judiciary.
We investigate the interactions between managers' incentives to collude or compete, and their incentives to exert effort. A manager privately chooses the competitive strategy of the firm, and his own effort to improve productivity; He may substitute collusion to effort to increase profits. High profit targets --- i.e., strong effort incentives --- make participating in a cartel more attractive. To answer this two-tasks moral hazard, owners may have to give the manager information rents, and to choose inefficient effort levels --- or profit targets. Because of this reduced internal efficiency, welfare losses may arise even when the industry remains competitive. Antitrust policy has a novel value, specifically from individual sanctions: They foster internal efficiency in competing firms while worsening it in cartelized firms. This improves both efficiency under competition and cartel deterrence. Individual fines are thus more beneficial than corporate fines; Criminal sanctions are even more effective. All antitrust instruments make competition more attractive, and/or collusion less attractive, except for one: Individual leniency programs. The latter have ambiguous effects, even when not used in equilibrium.
The importance of international law has grown in an increasingly global world. States and their citizens are interconnected and depend on each other to enforce and comply with international law to meet common goals. Despite the expanding presence of international law, the question that remains is whether international law matters. Do individuals comply with international law? And when they comply, do they comply because they fear penalties or because they desire to behave appropriately? This Article presents results from a randomized field experiment designed to investigate these questions. Major findings include that roughly one in seven international actors is willing to violate international law and the existence of penalties actually motivates some actors to break international law in greater numbers. In the first and largest global field experiment to date, this Article not only advances the scope of research methods generally, but also marks new ground by providing theoretical insights on the central questions of international law.
Hollywood film studios, talent and other deal participants regularly commit to, and undertake production of, high-stakes film projects on the basis of unsigned “deal memos” or draft agreements whose legal enforceability is uncertain. These “soft contracts” constitute a hybrid instrument adapted to a transactional environment where neither formal contract nor reputation effects adequately protect parties against the holdup risk and project risk inherent to a film project. Parties negotiate (and renegotiate) the degree of contractual formality, which correlates with legal enforceability, as a proxy for allocating these risks at a transaction-cost savings relative to a fully formalized and specified instrument. Uncertainly enforceable contracts embed an implicit termination option that provides some protection against project risk while maintaining a threat of legal liability that provides some protection against holdup risk. Historical evidence suggests that soft contracts substitute in part for the vertically integrated structures that performed the same risk-allocation function in the “studio system” era.
Intellectual property rights are often characterized as the sole mechanism by which innovators can control the unconsented usage of technological and creative goods. This is false: public intellectual property rights always coexist with private intellectual property rights. The presence of “private IP” alters the anticipated effects of “public IP” on innovation investment. Those effects differ as a function of firms’ costs of substituting toward private IP. The effects of public IP are weakest in the case of large integrated incumbents, which are sheltered by economies of scale, brand capital, and other complementary assets that substitute for public IP, and strongest in the case of younger, smaller and less integrated entrants, which cannot easily replicate those private IP alternatives. The differential effects of public IP as a function of firm size and scale imply that changes in public IP influence the set of feasible organizational forms in innovation markets. Strong public IP promotes entrepreneurial environments in which innovators can select from an unrestricted set of organizational forms at each stage of the innovation and commercialization process. Weak public IP promotes hierarchical environments populated by a restricted set of organizational forms consisting of large integrated entities and governmental and private patronage institutions. These propositions are consistent with organizational and political-economic behavior in selected markets.
This paper provides evidence on the role of mission congruence on teachers’ pay-for-performance and delegation of decision-making decisions using a dataset of child-care facilities in Minnesota, the United States. We find the teachers’ pay-for-performance is negatively related to mission congruence. Also, we find that teachers’ autonomy is positively related to mission congruence. These results support the idea that the identity of workers plays an important role in the design of the organization. In addition, as in previous empirical studies, we found that pay-for-performance and autonomy are interrelated decisions.
Despite the importance of relational contracting, parties in ongoing relationships partially structure their dealings using formal contracts that are largely incomplete, leading to adaptation ex post and raising the question of how parties should formally contract with each other when a relational contract is in place. Here, we explore this question by developing both a model and an empirical test in a specific setting: the formal and informal contracts between movie distributors and exhibitors. These typically enter into formal contracts specifying how the box-office revenues for a given movie are to be shared, without requiring the exhibitor to actually show the movie creating a conflict of interest between them. Interestingly, the sharing rate is often renegotiated after the movie’s run is complete, with the exhibitor paying the distributor a lower sharing rate than formally specified. Since such transfers would not occur in one-shot transactions, our analysis considers a repeated game between both parties, where this ex post settling-up can be seen as “relational renegotiation.” We explore the implications of our theory using data from a major non-integrated Spanish movie exhibitor that includes contracted and renegotiated weekly sharing rates for all movies played between January 2001 and June 2002. First, we show that ex post renegotiation is the rule rather than the exception. Second, we hypothesize that both the probability of renegotiation and the size of the discount will be positively related to the opportunity cost of showing a given movie. Our initial findings are in line with our predictions.
This paper explores the effects of variability in commodity quality. Pricing and selling specimens individually is usually too expensive. Sellers may effect the choosing, but the cost of creating the needed trust is usually too high. So sellers may let buyers pick and choose. The analysis of the “pick and choose” determines commodities’ equilibrium set of prices. However, sellers first sort commodities and then adopt a number of arrangements to reduce their losses from buyers’ picking and choosing. Methods adopted to lower the cost of dealing with variability include: 1. Guaranteeing. 2 Bundling. 3. Making buyers more uniform. 4. Exchanging costly-to-measure services via the wage contract, which substitutes for measuring service output. 5. Measuring wageworkers’ effort that also substitutes for measuring goods. The last two methods explain why workers are placed in firms that may be vertically or horizontally integrated, thus contributing to the theory of the firm.
The theoretical literature on common pool problems in policy making suggests that government fragmentation increases public expenditures. In parliamentary regimes, the fragmentation hypothesis primarily refers to (i) coalition governments and (ii) cabinet size. This paper explores the effect of coalition governments and cabinet size on public expenditures with panel data covering all 16 German States over the period 1975-2005. Identification is facilitated by the large within-variation in the incidence of coalition governments and the size of the cabinet in the German States. I also exploit a feature of state electoral laws to construct an compelling instrument for the likelihood of coalition governments.
In this paper, we examine the link between innovative activity on the part of firms, the competitive pressure to introduce innovations and punitive damage awards. While innovative activity brings forth valuable new products for consumers, competitive pressure in the ensuing innovation race induces firms to launch innovations too early, thereby raising the likelihood of severe product risks above the optimal failure rate. Introducing innovations too early may call for the application of punitive damages instead of mere compensation of harm caused, in order to decelerate such welfare-reducing innovation races.
In this paper we propose a simple theoretical template that provides basic insights into the determinants of consumer decisions to complain, to switch, or to remain loyal to firms with whom they are dissatisfied. We show that, as a theoretical matter, the relationship between complaints and industry structure is ambiguous. We then utilize an extensive panel dataset to explore the empirical determinants of consumer complaining behavior in local exchange telephone service. The empirical results provide considerable support for the famous conjecture of Hirschman (1970) that complaints give way to switching as industries become more competitive.
Most state ownership of property is analogous to private property but for the identity of the owner. Using Demsetz’s classic article on the evolution of private property as a model, this Essay makes preliminary observations about the evolution and relative merits of state ownership. Analogizing the state to a firm, we note that state-owned property is potentially advantageous where partial internalization can prevent overuse or wasteful use of the asset, while the transaction costs involved in state management of the resource are relatively low. However, where state-owned property is not used for the provision of state services, it is likely that state ownership involves unnecessary agency costs. Additionally, state-owned property is vulnerable to the under-utilization and suboptimal use of resources characteristic of anticommons. Political management of state owned resources potentially permits multiple political actors to block efficient uses of the property, while raising excessive transaction costs for potential users. Managers of state-owned property may also underutilize the state’s rights of exclusion, leading to overuse characteristic of commons property. Finally, we show that state ownership is likely to be chosen over the alternatives when it creates localized gains that exceed the losses experienced by the relevant interest groups. In the benign case, state-owned property offers a lower-transaction cost means of managing exclusionary rights, due to, for example, economies of scale. In the less benign cases, state-ownership of property brings a net social loss, but is attractive because an interest group is able to capture a profitable use of the property more cheaply than it would in the private sector.
My research focuses on political economy of violence. In my dissertation project entitled “When Does Business Get Violent?” I look at why in postcommunist countries competition in business so often degenerates into physical violence. Violent competition is inimical to the development of true market economies as well as liberal societies as it leads to cultivation of force and coercion, not fair competition in both the economy and politics. Under what conditions do economic elites actively engage in, or become a target of, violent competition? Economic theory assumes that competition is a positive force in economic development. Yet, positive competitive strategies such as improving the quality of products and services are not the only possible ways to compete in a marketplace. Firms can resort to alternative strategies aimed at increasing the costs of production and distribution for other firms in the same market, artificially raising the barriers for new entrants, foreclosing competitor’s access to resources, and forcefully removing existing competitors. Political economists (Bates 2006; Bates, Greif, and Singh 2002; Dixit 2004, Weingast 1997), have identified the conditions under which a single specialist in violence would abstain from predation while citizens engage in productive economic activities and pay taxes, but they did it under two assumptions: that there exists only one potential specialist in violence that does not have to compete with any other violent entrepreneurs, and that producers (businessmen) do not use violence to compete with each other. Because Russia does not fit either of these assumptions, this project examines the role that violent practices may play in commercial activities using Russia as a case study.
Much of the recent political economy and political science literature views democracy in one-dimensional terms, primarily in terms of political rights. This feature is particularly pronounced in the empirical literature, especially in the recent strand that seeks to identify the determinants of democracy. We expand on this view of democracy by incorporating the role of civil liberties, noting that these are conceptually at the core of modern democracy. We offer a conceptual framework that identifies five sources of potential differences in the evolution of political rights and civil liberties. We investigate the empirical evidence on this differential evolution using cross-national panel data based on the Freedom House measures of political rights and civil liberties. We show that civil liberties are more persistent than political rights in affecting subsequent outcomes and that this result is robust to the addition of covariates, estimation techniques, and variations in our sample. Moreover, we also show that while prior levels of civil liberties impact substantially and positively current levels of political rights, the reverse is not the case. We then consider how the unbundling of democracy relates to two important recent findings: Acemoglu et al’s (2008) conclusion that long-run income changes do not affect democracy in terms of political rights holds as well for civil liberties; Tsui’s (2011) conclusion that changes in oil discoveries affect democracy in terms of political rights negatively is consistent with our finding that total oil reserves affect democracy negatively, not only in terms of political rights but also in terms of civil liberties.
Ability to make collective agreements determines life of many organizations. But does it matter for the decision to make a new organization? On the data of 82 homeowners associations (HOAs) in Moscow and Perm factors that underpin HOA formation are studied. A logit-regression analysis is used. Physical conditions of the housing stock, size of the buildings and socio-economic parameters of homeowners’ community are revealed; ability of tenants to resolve the collective action problem in operating housing infrastructure is shown to be of primary importance. Thus HOA formation by homeowners is a signal of their ability to manage a house. Collective action paradox begins to play role not only ex post, but also ex ante, prior to organization’s establishment.
Is it still the case that formal contracts are largely remote from day-to-day management of transactional relationships? Using a preliminary series of 30 interviews we find that in traditional stable industries, much like Macaulay (1963) suggested, little is invested in detailed contracting and unexpected contingencies are handled with little reference to contract language. Contracting partners in these relationships do not resort to formal court enforcement, relying instead on informal mechanisms such as reputation, repeat business, and norms to secure their agreements. We also found evidence, in contrast, that in industries with high rates of innovation, even though contracting partners continue to rely on informal rather than formal enforcement mechanisms, they make substantial use of formal documents and legal advice to plan and manage their relationships. To understand this twist on Macaulay's results, we develop a model that shows the relationship between formal contracting and informal enforcement mechanisms. We show that formal contracts and contract doctrine can serve as a mechanism by which, as the relationship evolves, classification of conduct as breach or not can be reached. With this common classification scheme, parties can use the simple set of strategies and a simple belief system to support an equilibrium in which breach is deterred through informal enforcement. We call this role for formal contracting scaffolding and claim that it provides a support system for the efficacy of informal enforcement mechanisms, including the endogenous development of trust, on which the relationship depends, precisely in settings subject to significant ambiguity and unpredictable change.
Accounts of Latin America's economic development in the middle of the twentieth century have been, and still are, dominated by interpretations framed under state-led and/or import-substituting industrialisation (ISI). This conventional literature attaches an extensive and penetrating role to the Latin American state in several policy fields, of which credit is a most important one. The current version goes that these states intervened heavily in money and capital markets to prioritise the channelling of ample and cheap supplies of credit to manufacturers, and in this way advanced official projects of protected industrialisation. This paper demonstrates that this was not always the case, as illustrated by the Colombian experience. In this case, the demands imposed by a highly clientelistic political system forced elected politicians to direct public financial resources away from manufacturing and into agriculture, particularly to coffee-growers. Preferential credit was channelled to agents competing in external markets rather than those producing for domestic markets in closed/protected economies.
The reforms that marked the early period of the reign of Louis XIV (1661-1715) were predicated i.a. on the marginalization of both the traditional representative institutions and the aristocracy. In-between a new model of centralized bureaucratic State emerged that was based partly on meritocratic principles, and partly on patronage and the farming out official positions. From this original set-up emerged the mercantilist project of Colbert (1661-1683), which aimed was to develop a diversified manufacturing basis and an integrated domestic economy. This included a tight control over market entry and the distribution of more or less extended Privilèges to industrial entrepreneurs. We have coded 90 such decisions, made by the Bureau de Commerce between 1724 and 1729. The early conclusions are: (i) The decision making process was explicitly plural and formalistic: the higher bureaucrats wanted to make sure that each stakeholder to each individual case could defend his interest within a collective deliberation; then they typically confirmed the outcome of this collective iteration, without considering its substance. (ii) The revealed hierarchy of bureaucratic preferences was to first support technically innovative projects, then those which would have a positive impact on the trade balance, and lastly those that served local/ regional markets. (iii) We identify the specific policy preferences of the main parties to this decision-making process: local financial intendants, the top bureaucracy, and the 12-14 Députés du Commerce, i.e. part experts/ part representatives of the largest commercial cities. (iv) However the main sources of rents in the economy were off-limit: the Bureau had little say on the more sensitive issues like the tax farms, colonial trade or the state-sponsored trading companies (Compagnie des Indes, etc).
China's economic structure stands in stark contrast to transitional countries and many developing countries at similar levels of economic development in its emphasis on industry and relative underdevelopment of the service sector. This distorted structure indicates that economic reforms require a shift in resource allocation among sectors of the economy. This paper focuses on land, a fundamental means of production, which remains under state and collective ownership more than three decades after economic reforms were launched. In the face of massive arable land loss, the central government imposed a land quota system that restricts the maximum amount of land used at the subnational level, but gives local governments enough autonomy to determine sectoral allocation of land quotas within their jurisdictions. What political economic factors drive sectoral allocation of land quotas in China? This paper argues that both the local revenue structure and the time horizon of local politicians have impacts on local land quota allocation. Using an original dataset for a probability sample of 120 cities, this paper finds that more land quotas are distributed to industry when the local revenue base relies more on the value-added tax and less on business tax, when local Party secretaries, but not mayors, have long time horizons, and when the locality is assigned more quotas.
Recent research emphasizes the origin of the legal system as a main explanation for the cross-country variation in employment protection legislation. Yet the supporting evidence is largely confined to levels of regulation and is almost exclusively based on international cross-section data for the post-1995 period. This paper introduces new data measuring the rigidity of employment protection legislation (LAMRIG) for an unbalanced panel of more than 140 countries since 1960 in 5-year intervals. Although the importance of legal origins in explaining the variation of the level of labor regulation across countries is replicated using LAMRIG, its explanatory power is much weaker in explaining changes in LAMRIG (i.e., labor market reform) over the 1960-2004 period. In its stead, the roles of the level of development and of other reforms become stronger. Our results show that per capita GDP levels and unemployment rates foster labor market reform while trade liberalization tends to hinder it.
This paper addresses the question how insecure property rights over a large immovable and discrete asset, such as land or dwellings, affect political outcomes. We argue that the authorities that hold some discretionary control of the asset’s allocation can use their power as a threat to suppress political support for their opponents, but not as a reward for politically compliant behavior. We show this result formally by means of a standard voting model that allows for clientelistic arrangements. We support our argument empirically by the analysis of over 10,000 Mexican municipal elections during the country’s democratic transition. Taking advantage of the data’s panel structure, we show that a large scale land certification program that ran in parallel during 1993-2007 had the effect of significantly raising turnout for the opposition to the former state party (PRI), thereby increasing the odds that the latter will lose power. This effect disappears once the PRI has lost an election at the municipal level for the first time, and hence its clientelistic powers. An important aspect of the land certification program is that it only handed out titles over pre-existing usage rights, making them enforceable by a third party without altering them de-jure. Our results are robust to the imposition of fixed effects on the first differences and instrumental variable specifications.
A commonly accepted view in the academic literature is that mitigating competition may solely be beneficial when tendering complex contracts. Yet, according to an OECD-report, restricted auctions are frequently used among EU-member states to procure small contracts. In this paper, we suggest to further investigate this paradox. First, regarding some public buyers’ particularities, we argue that the systematic use of open auctions may lead them to spend most of their resources on a small part of their overall activity. Second, using an original dataset of 180 contracts, attributed between 2006 and 2009 by a local public buyer of social housing, we show that discretion during the invitation of bidders may enable to limit the comparison of offers to the most efficient bidders. To do so, we investigate the rationale behind the determinants of bidders’ invitation; then, using a two-step Heckman model, we show that this invitation phase enables the buyer to receive more competitive bids - without loss of quality. As far as we know, we are the first to shed light on the advantages of using restricted auctions to tender small contracts.
The paper examines how transaction cost approaches (as developed by North and Williamson) can inform international tax law and policy discussions. The international tax regime evolved institutions and institutional arrangements to address transaction costs such as the risk that two countries might doubly tax the same cross-border business profits. It mainly sought to reduce this risk by serving as a ‘commitment projector’ that enables governments to make credible political promises to taxpayers, other members of the public and other governments that they will not overtax these cross-border profits. As a result of these political commitments, taxpayers do not need to incur transaction costs they would otherwise have to sustain to identify and protect their global tax liabilities. In other areas, however, the international tax regime does not facilitate credible commitments. First, the international tax regime does not promote credible political promises to effectively address the growing policy concern of undertaxation whereby, as a result of tax planning, cross-border profits are frequently never taxed by countries with high tax rates. Second, because the international tax regime is not constituted by any binding supranational institutions, governments are afforded opportunities for unilateralism (such as the 2010 U.S. proposal to create a global tax reporting system via the Foreign Account Tax Compliance Act) that subverts credible commitments and raises transaction costs for economic participants.
In many countries, politicians neglect the basic financial and personnel management systems that are essential to political oversight of bureaucratic performance. To explain this, we present a new perspective on the political economy of bureaucracy, arguing that politicians organized into programmatic political parties have stronger incentives to pursue public policies that require a well-functioning public administration. They are also better able to act collectively to demand that the executive provide such an administration. We find robust support for this argument with novel evidence: ratings of 511 World Bank public sector reform loans in 109 countries are systematically higher in countries with programmatic political parties.
In this paper, we explore the consequences of the allocation of demand risk in public-private contractual agreements, for infrastructure-based public services. Using an incomplete contract framework, our results show that when the operator bears the demand risk, he gets higher incentives to increase the quality of the service, but this may lead to exclude some citizens from accessing the service. When the demand risk is borne by the public authority, more citizens can access the service but the operator gets lower incentives to innovate and to care for quality. There is then a trade-off between economic performance of a service and equity concern, as regards to access the public service. Social rules that prevail in a society may in fluence the choice between these two types of contracts.
We analyze a policy experiment in an Alaskan commercial fishery that represents a promising way to reform the management of mobile natural resources. Unlike the individual quota system advocated by many economists, the policy explicitly encouraged coordinated fishing and did not require a detailed assignment of rights. One portion of an overall catch quota was assigned to a voluntary cooperative, with the remainder exploited competitively by those choosing to fish independently. We model the decision to join and behavior under cooperative and independent fishing. The data confirm our key predictions: the coop was comprised of the least skilled fishermen, it consolidated and coordinated effort among its most efficient members, and it provided shared infrastructure. We estimate that the resulting rent gains were at least 33 percent. A lawsuit filed by two disadvantaged independents led to the coop’s demise, an outcome also predicted by our model. Our analysis provides guidance for designing fishery reform that leads to Pareto improvements for fishermen of all skill levels, which enables reform without losers.
Environmental damage is often an unseen byproduct of other activities. Disclosing environmental impact privately to consumers can reduce the costs and/or increase the moral benefits of conservation behaviors, while publicly disclosing such information can provide an additional motivation for conservation - cultivating a green reputation. In a unique field experiment, we test the efficacy of private and public information on electricity conservation. Private information was given through real-time feedback and social norms over usage, and public information was given through a publicly visible conservation rating. While private information alone was ineffective, public information motivated a 20 percent reduction in electricity consumption.
The attitudes of citizens of countries with economies in transition toward the main political institutions in those countries has been formed in the last 20-25 years, when these institutions either emerged or completely transformed in such countries. At the same time, the attitude of residents of more economically developed countries toward the political institutions has been formed over a much longer period of time. Are the determinants of residents' trust such as education, age, income, gender, marital status, and social status in countries with economies in transition the same as those in economically developed countries. This article presents empirical evidence, introducing results obtained using the data from the fifth wave of the World Values Survey. To identify individual determinants of trust, ordered logit models were established. The dependent variables were the answers to the questions "How much do you trust the government” etc. The abovementioned characteristics of individuals were used as independent variables together with two macroeconomic indicators for entire nations: PPP GDP per capita and the CPI. The most interesting of the results obtained were as follows. In countries with economies in transition, the availability of higher education reduces the credibility of the main political institutions (although the opposite was found to be true for some institutions in OECD countries). The degree of confidence increases with individual personal income, but in transition countries with lower GDP per capita, the level of trust is higher (whereas this is not the case in OECD countries). The main results have been used to generate policy suggestions.
Transaction cost is boradly used to explain why firms exist, why markets may be inefficient, and why gridlocks occur. I believe such explanations are in error; and I will tell you why.
This paper investigates the question of appropriate institutional environment for intellectual property rights that would stimulate innovativeness within a country. First, efficiency and appropriateness of the current system of intellectual property rights protection, called “current private reward system”, are being critically analyzed. Arguments that support or criticize the current system of intellectual property rights protection are based on economic and philosophical perspectives. Own empirical research based on the most recent data from the EU and other countries support the substantial importance of strong intellectual property protection for innovativeness. However, the results cannot stipulate whether the old “reward system” is the best alternative. Second, alternative mechanisms to stimulate innovativeness and technological progress are introduced and analysed. They are grouped in two types: a) amendments within the present private reward system and b) totally new public intellectual property systems. These are possibilities that would encourage innovation without providing (excessive) monopolistic rights to inventors.
Public Law 280, passed by Congress in 1953, transferred jurisdictional authority over criminal and civil matters from the federal to state governments in selected areas of Indian country. As such, the law's implementation provides a unique opportunity to study the impact of legal institutions and their change on socio-economic outcomes. However, while the law's controversial content has attracted interest from legal scholars, empirical studies of its impact are very scarce and do not address the law's endogenous nature. We empirically examine the law's impact on crime and economic development using cross-sectional and panel data on U.S. counties with significant American Indian reservation population. To address the non-random selection of areas subject to Public Law 280, our empirical strategy draws on the political and historical context surrounding the law's enactment. Relying on different estimation methods and instrumental variable approaches, we, consistent with legal scholars' descriptive accounts and theoretical conjectures, find that the application of Public Law 280 is associated with more crime and lower incomes. The adverse impact of Public Law 280 is robust and large in magnitude.
Corporate operations are increasingly contested and occasionally disrupted by opposition from political and social actors. We argue that stakeholder capital, which we define as the level of mutual recognition, understanding and trust established by the firm with its stakeholders, mitigates the adverse financial impact of negative stakeholder events. Stakeholder capital preserves a firm’s social license to operate during times when the firm’s actions and operations are being challenged by opponents. The mechanism is two-fold: first, firms with higher levels of stakeholder capital are more likely to get the benefit of the doubt when they become the target of criticism, lowering the risk that stakeholders will be easily swayed to rally against them; second, these firms are also more likely to see some of their stakeholders rise to defend their activities, thus increasing the likelihood that the companies will maintain their social license when this is being challenged. In this way, investments in stakeholder capital can, like insurance, generate benefits or payoffs after adverse events. We use a media-based measure of stakeholder capital that considers a broad range of engagements, including activities related to community relations, CSR programs, lobbying, employee training and public relation campaigns. Using an event study, we evaluate the stock market impact of adverse stakeholder events affecting 19 gold mining firms and show that firms with higher levels of stakeholder capital fare better financially during tough times. Our results also analyze the evolution of stakeholder capital at the stakeholder level and, consistent with the underlying psychological mechanisms we identify, show that actors with low stakeholder capital reinforce their negative priors of the firm during tough times whereas stakeholders with high stakeholder capital actually rally to support the firm mitigating the impact of the event on the overall level of stakeholder capital.
This paper compares public land disposal and the emergence of property-rights on the frontier in the first half of the nineteenth century in the Province of Buenos Aires, Argentina, and New South Wales, Australia. The most prominent theory of the emergence of property rights on frontiers proposes a natural progression from open access, to de facto property rights from informal claims, to de jure rights, which evolve from growing political demands of settlers and entrants. We argue that this approach ignores the political supply side when, according to record, governments of these settlement economies often claim frontier land as public land to meet revenue demands. We show that a revenue-maximizing government, under certain conditions, when faced with competing claims of squatters, will not enforce its claim to public land, allowing squatters effectively to take it over. The government’s decision depends on the costs of enforcement, the opportunity costs of squatters, and the threat of violence on the frontier, especially from indigenous peoples who oppose settlement. The contrast between Argentina and Australia confirms the main predictions of the model and explains why the progression from de facto to de jure property rights is born out in the process of frontier settlement in the colony of New South Wales but not in the province of Buenos Aires, where settlement of frontier land was achieved by an original specification of de jure property rights.
Small and medium-sized enterprises (SMEs) are important for an economy’s employment, innovation and growth. However, due to their size, SMEs experience a number of restrictions, which also lead to a low degree of internationalization. To promote their internationalization, the European Union plans to introduce a private limited corporate law form (the Societas Privata Europaea, SPE). After an empirical overview of SMEs in the EU, we analyze whether the SPE draft regulation does indeed provide rules which result in (1) low transaction and coordination costs, (2) provide secure ownership rights and (3) reduce information asymmetries and thus mitigate agency relations among owners, management, employees and creditors. As this can be agreed to, we ask whether an additional 28th EU-wide private corporate law form is necessary. We discuss the available empirical findings about the extent of horizontal and vertical corporate law competition in the EU. Finally, we examine whether the theory of interjurisdictional competition provides normative arguments against or in favour of introducing the SPE. As a conclusion, we find no profound arguments against its introduction from the theory of regulatory competition.
Social enterprises, such as microfinance institutions, fair trade firms, and work integration social enterprises, pose a challenge to the traditional tenets of corporate law. On the one hand, they do not necessarily maximize profits, and on the other, contrary to nonprofit theory, they often distribute profits to their owners. The proliferation of social enterprises has led commentators to question both the profit maximization norm and the non-distribution constraint as essential elements of for-profit and nonprofit corporate law respectively. In this article, I present a theory of social enterprise that is consistent with the prevailing theories of corporate law. Social enterprises, I argue, perform a distinctive role, which I call the measurement function of social enterprise. More specifically, social enterprises that have a commitment to transact with their beneficiaries as patrons (e.g., customers, such as poor borrowers, or providers of input, such as disadvantaged employees) have incentives to measure or gather information on the attributes of their beneficiaries. This information enables social enterprises to enter into transactions with their patron-beneficiaries and allocate subsidies to them efficiently. The measurement function makes social enterprises efficient vehicles for channeling subsidies to certain categories of beneficiaries. In particular, social enterprises tend to be more efficient than other alternative mechanisms which bear a similar structure, but have a distinctly different function, such as corporate social responsibility initiatives and corporate charity. The measurement function can thus serve as the basis for informing legal policy, especially the design of a new social enterprise legal form.
The most vital debate in the field of franchise contract law over the last few decades has focused on the following issue: whether franchisees should be protected by law against franchisor opportunism. Franchisor advocates suggest that franchisee protection laws, commonly known as "franchise relationship laws," are undesirable. Their opposition to such laws is based primarily on an assumption that franchisees consider all relevant information before signing a franchise contract. In particular, franchisees are assumed to read the franchise disclosure documents made available to them, compare the various contracts and disclosure documents offered by different franchisors, and consult with a specialized franchise attorney regarding the terms of the franchise contract all prior to signing it. Based on a significant body of existing empirical research, which has so far been overlooked in the debate over franchise relationship laws, this article will argue that the assumption that franchisees consider all relevant information before signing a franchise contract and make a well-informed choice is questionable. Briefly summarized, the argument presented in this article is as follows. New franchisees who join a franchise network normally lack prior business ownership experience. This lack of experience presents significant cognitive obstacles for novice franchisees when attempting to consider all of the relevant information before acquiring ownership of a franchise unit. Such cognitive obstacles often lead franchisees – contrary to the franchisor advocates' view – to ignore franchise disclosure documents, avoid conducting a comparison between various franchise contracts and disclosure documents, and neglect to consult with a specialized franchise attorney prior to signing the franchise contract.
Private sector firms frequently sell `dual use products' that can be used to develop either civilian goods (e.g. medicines) or weapons of mass destruction (e.g. genetically engineered viruses). We assume two risks due to the `dual use' nature. First, the upstream makers face legal liability if their products lead to a disaster. Second, a disaster may produce regulatory backlash, i.e. excessive government regulation that effectively suppresses the tool along with downstream industry's expected profits from developing new products. This paper explores the economic conditions for downstream firms imposing strong industry-wide regulation on their upstream suppliers. We find that regulatory backlash is never an adequate substitute for perfect (i.e. full) liability and even makes the situation worse. Second, industry regulation enforced by downstream firms and optimal regulation converge when the downstream firms have strong market power. Next, we show that established upstream firms may be able to deter entry in proposing a high regulatory standard. Finally we analyze when and why large downstream firms are able to force their preference for high levels of regulation on upstream suppliers.
The internationalization of business and finance has brought out a need for a uniform, international set of accounting standards. International Financial Reporting Standards (IFRS) came out as a result and its reporting is used in 85 countries for all domestic companies. A company`s share prices are highly dependent on auditor reports and auditing is run over the financial reports prepared as International Accounting Standards Board (IASB) decides. Hence the standard-setters also set the rules of the corporate game. This paper focuses on the following main questions from an institutional economics perspective in order to enlighten the political interest problems related to the background of the internationalization process of the IFRS; Is IFRS really suitable for all the countries? What are the political forces behind the standard setting institutions? Are the countries that had a voting power on the formation of these standards are the ones that benefit from this application most? A theoretical cost-benefit analysis (CBA) of IFRS convergence and investor reactions is used to show the difference between the expected economic earnings of the developing countries and the industrialized countries after the convergence. The representational structure of the IASB shall be clarified in order to see whether an international accounting model set by a private institution could be strong enough to fend off governmental political pressures. The paper concludes that based on empirical studies in different countries after their convergence to IFRS, it can be clarified whether a more democratic standard setting board organization, where more countries are represented, could create a more efficient international set of standards.
By treating the bribery of a foreign public official by a firm similar to that of a domestic public official, the 1997 OECD Anti-Bribery Convention seeked a solution to enforcement issues that commonly plague the observance of international law. However, the application of the convention has been troublesome. Each jurisdiction has an incentive to free-ride, not to damage the prospects of home firms to obtain valued contracts abroad. Moreover, institutional asymmetries of various types may result in differences in the effectiveness of enforcement across jurisdictions and, possibly, also across branches of the public sector. We provide a simple theory capturing country institutional heterogeneity and how it affects the individual incentives to offer a bribe, and on the part of the foreign public official, to accept it. We expand this model by including variables aimed at capturing informal institutional dimensions, such as culture and culture distance between pairs of countries. We test our model using a novel dataset of alleged and convicted cases of foreign bribery that approximates for actual bribe flows between countries. The heterogeneity of formal institutions does not seem to play a role in determining the level of detected corruption. On the other hand, elements of informal institutions, such as cultural distance between countries, are found to matter. Within this broad picture, results vary significantly in different branches of the public sector.
There is ample evidence that institutions governing human relationships are persistent over time. I address this issue by stressing the role of commitment after a change in institutions is made. I explore under what conditions a new institution that is a best- t for the new technology will emerge. I accommodate claims made in the Political Economy literature, by focusing on the individuals that have the right to decide the change, and claims made in the New Institutional Economics literature, that more e efficient institutions tend to emerge. I propose a general model and two dierent institutions. Depending on the parameters of the model one mechanism is more e efficient than the other. I use a particular historical episode, irrigators communities is southern Spain, in which farmers changed from a market institution (auctions) to a non-market institution ( quotas) in the 1960s. I show that by focusing only of the distribution of power or the e ciency of each available institution we are unable to explain the institutional change. Moreover, I show how the role of collateral, due to the increase in savings, solve the commitment problem and lead to a change to a more e cient institution.
Achieving cooperation in natural resource management is always a challenge when incentives exist for an individual to maximise her short term benefits at the cost of a group. We assess the situation of a social dilemma in water supply cooperation within land reform projects in Namibia. In the context of the Namibian land reform, beneficiaries share the operation and maintenance of water infrastructure in order to gain economies of scale. Our paper assesses how alternative fairness norms affect the probability of cooperation. In the first step of our research we conducted an exploratory overview of the social-ecological system of central Namibian land reform projects. The SES-framework of Ostrom (2009) served as a guideline for this assessment. Taking into account the complexity of the cooperation situation we designed a role-play which is based on a social-ecological simulation model. The experiment simulates the real life decision situation of land reform beneficiaries where equilibriums are permanently changing. This approach helped us not only to better understand the cooperation challenges of Namibian land reform beneficiaries but provided support to stakeholders in their decision making and institution building. Our study provides evidence that different fairness norms overlap. Land reform beneficiaries increase their contributions as the other group members increase their payments (conditional cooperation), as they are more productive (inequality aversion) and own more livestock (congruence of appropriation and provision & inequality aversion). Decisions are made considering the overall context.
How does tax policy affect the behavior of corporations? In the midst of national debates about the corporate tax rate, job creation, and international competitiveness, the dizzying complexity of the tax code can make it difficult to see the jungle through the vines. Does tax policy make U.S. firms grow or shrink? Do firms respond mainly to economic forces or tax incentives? This Essay goes back to foundational ground—Coase’s inquiry into why firms exist at all—to gain some traction on these important questions. I make two main claims. First, tax law incentivizes firms to expand the boundaries of the firm beyond what we would observe in a world without taxes. Tax policy favors larger firms. Second, firms often respond to this pressure by expanding the legal boundaries of the firm while leaving the underlying economic relationships largely undisturbed. What we observe is an expansion of the legal boundaries of firms and a smaller distortion of economic production.
The main objections to fiscal and institutional competition are based on the “race to the bottom” theory. According to it, competition, reducing the tax burden, also reduces public expenditure to a suboptimal level. But this theory assumes: a/ that governments can identify the optimal level of public expenditure; and b/ that governments have incentives to fix public expenditure at that level. And both assumptions are wrong. If we assume that the main objective of governments is to have a high level of revenues in order to produce more public and merit goods to “buy” votes and stay in power, competition among jurisdictions can be explained as a prisoner’s dilemma, in which the non cooperative solution is the best outcome for taxpayers. To raise taxes, regional governments can either form an oligopoly or reduce their own self-government and centralize decisions at a higher level (national government or European Commission) Both oligopolies and centralization would maintain taxes higher than in a competitive equilibrium. But there is a substantial difference: oligopolies are not stable, since every state or region has incentives to breach the collusion agreement. The second part of the paper presents some experiences from Spanish fiscal federalism. Two examples of regional tax reforms are studied: the reform of inheritance tax and the reform of wealth tax (In Spain both taxes are subnational and are regulated by regional governments).These two examples show that the only effective strategy for governments to avoid fiscal competition is to centralize tax power.
This paper tries to shed some light on the politico economic mechanisms leading to a weakening of the fiscal situation of municipalities after amalgamations. Using a large panel of German municipalities who carried out a huge wave of amalgamations in the first half of the 1970s it tests whether the common pool problem affects the fiscal stance of the municipalities. After testing for the existence of a common pool we additionally test, if the overuse of this common pool depends on the number of municipalities participating and their size relative the municipality they are incorporated to. Several robustness tests, e.g. if the results hold for different size classes of municipalities, are performed.
Using a comprehensive data set of restatement announcements and regulatory filings by more than 1600 U.S.-listed firms between 2003 and 2009, we find evidence that some managers strategically time disclosures of negative information to minimize litigation risk by bundling negative information, such as earnings restatements, with other public announcements. The findings also suggest that some managers use bundling strategies to adapt to the litigation environment, particularly to a major 2005 Supreme Court decision requiring that plaintiffs show a causal relationship between a firm's revelation of negative information and a statistically significant decline in the firm's stock price. Our empirical results indicate that news bundling can discourage shareholder litigation by protecting the stock price and by obfuscating the negative effect of a restatement. Our study provides evidence that firms react to case law in choosing their disclosure strategies, and that some choose strategies to game the pleading standards established by the courts.
This Article reports results of an empirical study that suggests that the current economic crisis has changed managerial behavior in the US in a way that may impede economic recovery. The study finds a strong, statistically significant and economically meaningful, positive correlation between the CEO total annual compensation and corporate cash holdings during the economic crisis in the years 2008-2010. This correlation did not exist in comparable magnitudes in prior years. The empirical findings suggest that high CEO compensation increases managerial risk aversion in times of crisis. The Article considers several explanations for these empirical findings, some of which imply a market failure. The study has implications for the discussion on managerial pay arrangements and the implementation of the Dodd-Frank Act concerning say-on-pay.
We propose a new framework that distinguishes among individual and situational factors in the social comparison process that produces competitive behavior. The familiar individual factors naturally vary among similarly situated people, including the relevance of the performance dimension, the commensurability of rivals, and their relationship closeness to the individual. Researchers have long established that as relevance, commensurability, and closeness increase, so do social comparison concerns and competitive behavior. The more recently identified situational factors, on the other hand, are features of the social environment that affect similarly situated individuals, including proximity to a standard, social category lines, and the number of competitors. When rivals are proximate to a standard, members of different versus the same social category group, or among a few versus many competitors, social comparison concerns and competitive behavior intensify. The situational account not only uncovers an important set of hitherto unnoticed variables that shape social comparison, but also offers new insights regarding the role of social comparison in organizations and other policy-relevant settings and charts fruitful directions for future social comparison research.
Bundling has been over the years the origin of much antitrust litigation due to its impact on quality, variety and innovation. On the other hand, firms have argued that bundling lowers transaction and search costs and therefore its net effect on welfare is ambiguous. In the antitrust case of US vs. Paramount, the Supreme Court mandated in 1948 that Paramount and seven other studios to sell their US theater holdings and stop contracting practices such as bundling and price fixing. In this paper, I use this exogenous change in contractual practices in the US motion picture industry to measure the impact of bundling on product variety. For this purpose, I use a new data set collected from old Variety issues between 1945 and 1955. This data set provides weekly movie theater information on prices, revenues, theater ownership and movie screening for an unbalanced sample of 393 movie theaters located in 26 different cities in the US resulting in over 142,000 observations. The high frequency of the data allows the analysis to use city, year and theater fixed effects while focusing on the before and after of the change in contractual practices due to the Paramount decree. Preliminary findings show that movie theaters previously owned by major studios decreased the percentage of movies screened from their parent studios after disintegration and therefore increased their movie variety in their screens. The paper also offers results on the change in independent theaters.
Commentators have long debated the relative merits of private and public enforcement of the law. Environmental-law citizen suits, securities-law class actions, and qui tam litigation have been focal points for controversy about how and when to use private-enforcement rights to help execute government policy. U.S. patent law’s recently abrogated qui tam provision for false marking provides a recent example of the potential benefits and pathologies of private enforcement. Patent law also raises questions of private enforcement through debates over the extent to which third parties, including consumers, should have access to administrative or court proceedings to challenge patent rights. Most fundamentally, patents themselves can be viewed as private rights to sue—i.e., private-enforcement rights—that are granted to advance the public interest in promoting innovation. Concerns about so-called “patent trolls” or other litigation-focused patentees bring to the forefront the fact that patent holders are private parties endowed with legal authority to appropriate value generated through the activities of others. Thus, in various respects, patentees might be more properly analogized to privateers bearing letters of marque and reprisal than to real-property owners. Privateering, of course, can have benefits, particularly for governments relatively short on cash. But privateering can also lead to abuse or, at the very least, behavior not in line with overall social interests. By analogy with past and present restrictions on citizen suits, qui tam suits, and letters of marque and reprisal themselves, greater restriction or regulation of “patent privateering” might be worth considering. Contemporary and historical analogs provide guidance for the various forms that such restriction and regulation might take.
This paper tests the theoretical framework developed by North, Wallis and Weingast (2009) on the transition from limited to open access societies. They posit that societies need to meet three doorstep conditions: (i) the establishment of rule of law among elites; (ii) the adoption of perpetually existing organizations; and (iii) the political control of the military. We identify indicators reflecting these doorsteps and graphically test the correlation between them and a set of political and economic variables. Finally, through Identification through Heteroskedasticity we test these relationships econometrically. The paper broadly confirms the logic behind the doorsteps as necessary steps in the transition to open access societies. The doorsteps influence economic and political processes, as well as each other, with varying intensity. We also identify income inequality as a potentially important force leading to social change.
Standard mechanism design theory mostly relies on Nash equilibrium concepts. However studies of experimental games suggest that Nash Equilibria are rarely played and provide evidence that subjects may be thinking finite number of iterations. The purpose of this paper is to find out whether the standard expected externality mechanism (Arrow, D'Aspermont, Gerard-Varet) retains its properties under iterational thinking. The optimal strategies of finitely-rational players generally deviate from Bayesian Nash Equilibria, though the latter are often good approximation of the outcomes of iterative thinking.
The CG literature has recently focused on public and private enforcement and has revisited derivative and class action litigation from a more comparative perspective with the express intent of considering differences in procedure. Strikingly absent from this debate and the entire corporate governance literature since Romano hailed the “Genius of American Corporate Law,” is any mention of a truly unique feature of American civil procedure: modern civil discovery. This paper fills this gap, arguing that American civil discovery (adopted in 1938) has had profound effects on the evolution of American corporate governance. The impact of shareholder derivative-, and class actions is intimately bound up with how modern discovery (1) affords litigants unprecedented tools to investigate corporate internal wrongdoing, (2) significantly decentralizes and leverages judicial investigative powers, (3) empowers parties with the greatest incentives to uncover wrongdoing, and (4) structures the litigation process more generally. Not only does discovery routinely afford litigants, regulators, shareholders, and the public access to information about internal corporate practices that would not see the light of day in civil law jurisdictions. But the requirement to produce such information during discovery ex post forces corporations ex ante to produce, collect, store, and maintain information about internal practices, business decisions, and control systems. Because corporations must anticipate future involvement in litigation, civil discovery shapes corporate governance, organization and practice regardless of any concrete litigation threat. We conclude with some normative prescriptions for the comparative corporate governance debate.
The CG literature has recently focused on public and private enforcement and has revisited derivative and class action litigation from a more comparative perspective with the express intent of considering differences in procedure. Strikingly absent from this debate and the entire corporate governance literature since Romano hailed the “Genius of American Corporate Law,” is any mention of a truly unique feature of American civil procedure: modern civil discovery. This paper fills this gap, arguing that American civil discovery (adopted in 1938) has had profound effects on the evolution of American corporate governance. The impact of shareholder derivative-, and class actions is intimately bound up with how modern discovery (1) affords litigants unprecedented tools to investigate corporate internal wrongdoing, (2) significantly decentralizes and leverages judicial investigative powers, (3) empowers parties with the greatest incentives to uncover wrongdoing, and (4) structures the litigation process more generally. Not only does discovery routinely afford litigants, regulators, shareholders, and the public access to information about internal corporate practices that would not see the light of day in civil law jurisdictions. But the requirement to produce such information during discovery ex post forces corporations ex ante to produce, collect, store, and maintain information about internal practices, business decisions, and control systems. Because corporations must anticipate future involvement in litigation, civil discovery shapes corporate governance, organization and practice regardless of any concrete litigation threat. We conclude with some normative prescriptions for the comparative corporate governance debate.
he CG literature has recently focused on public and private enforcement and has revisited derivative and class action litigation from a more comparative perspective with the express intent of considering differences in procedure. Strikingly absent from this debate and the entire corporate governance literature since Romano hailed the “Genius of American Corporate Law,” is any mention of a truly unique feature of American civil procedure: modern civil discovery. This paper fills this gap, arguing that American civil discovery (adopted in 1938) has had profound effects on the evolution of American corporate governance. The impact of shareholder derivative-, and class actions is intimately bound up with how modern discovery (1) affords litigants unprecedented tools to investigate corporate internal wrongdoing, (2) significantly decentralizes and leverages judicial investigative powers, (3) empowers parties with the greatest incentives to uncover wrongdoing, and (4) structures the litigation process more generally. Not only does discovery routinely afford litigants, regulators, shareholders, and the public access to information about internal corporate practices that would not see the light of day in civil law jurisdictions. But the requirement to produce such information during discovery ex post forces corporations ex ante to produce, collect, store, and maintain information about internal practices, business decisions, and control systems. Because corporations must anticipate future involvement in litigation, civil discovery shapes corporate governance, organization and practice regardless of any concrete litigation threat. We conclude with some normative prescriptions for the comparative corporate governance debate.
This study represents the very first attempt towards applying economic analysis on Islamic criminal law, in particularly that related to the crime of theft. The study investigates what the economic theory of deterrence can tell us about the deterrence effects of Islamic law. Islamic criminal law offers two main punishments regarding theft; hadd, a fixed penalty which requires the amputation of the offender’s right hand under certain conditions and ta’zir, a punishment that is left to the discretion of the judge or ruler and is less severe than hadd. Deterrence is one of the main objectives for Islamic criminal law. Nevertheless, from the viewpoint of ‘marginal deterrence’ theory, lesser crimes with low social harm are punished severely in Islamic criminal law while crimes with high social harm are punished more leniently. Consequently, criminals would prefer to commit the latter type of crimes and economic cost of crime would significantly rise. The reason behind such an inefficient punishment setup is that the Islamic jurisprudence (fiqh) relating to the punishment of theft has been developed in archaic societies, where some crucial economic and legal concepts were not fully developed or taken into consideration by Muslim scholars in the 8th and 9th century A.D.. This study implies that if Islamic criminal law is introduced in Arab Spring countries in its current form, certain, socially very harmful, types of crimes are likely to become more frequent. A call for a modern reinterpretation and recoding of Islamic criminal law of theft is essential for any attempt to apply Shari’a in Islamic countries.
The most common ways of influencing new law and regulations throughout the world are business organizations and personal connections with bureaucrats and politicians. What are the relative benefits and disadvantages of these two lobbying strategies? How do firms choose between them? This empirical study aims to answer these questions using a comprehensive survey of a cross section of 1013 Russian firms. First, our data shows that lobbying is significantly correlated with risks of being captured by bureaucrats and politicians. Moreover, those firms who lobby using personal connections report relatively more often that they have high risks of being captured by the bureaucrats. The connections predictably are used more often when managers are familiar with governor or mayor or they have the experience in bodies of state administration. Older firms also use individual strategy more often. But these factors do not influence the decision to use business association as a way of lobbying. Finally, we compare the effectiveness of lobbying as viewed by the respondents and show that both methods give the similar average effectiveness and surpass all other methods of influencing (e.g. mass media, oligarchs etc.)
The core idea of the paper rests in exploring the main economic rationale behind the formation of international norms, regulating the interstate use of force. It seeks to determine the important features of these international legal constructions through lens of functional institutionalism. We argue that jus ad bellum norms under international law constitute specific institutional arrangements, which were designed and implemented by relevant stakeholders in order to construct the social context, address informational asymmetries, reduce strategic uncertainty between the parties and subsequently, act as (bounded) welfare-enhancing practices within the international markets of state jurisdictions. We propose that introduction of international norms governing interstate military conflicts, constitutes an important attempt to reduce the significant transaction costs of laissez-faire interactions between the main political units within the domain of war and peace, by means of institutionalization.
If markets are efficient, how can actively managed mutual funds be expected to outperform the market? Early empirical work found they cannot, concluding that the resources devoted to active management are socially wasteful and that the fees mutual fund investors pay for active management very likely reduce their returns. This view seems to have stuck, despite recent and sound theoretical findings that in an efficient market with rational shareholders any expectation of superior fund performance will prompt inflows to the fund until investor returns are normalized. If so, mutual fund management fees are irrelevant to investor returns. Lower fees will simply bring greater inflows until investors dissipate all excess returns. This paper shows how and why fund fees are relevant to investor welfare. Active fund management is an experience good subject to moral hazard; investors cannot tell high quality from low quality until after the fact. An active manager might promise to incur costly effort researching profitable stock selection in exchange for a fee sufficient to compensate for his higher research costs. Finding this promise credible, investors buy shares until their expected returns, net of fees, just equal the normal rate. The manager might then shirk (engage in "closet indexing") and pocket the excess fee, leaving investors worse off than if they had simply invested in the index. We model this moral hazard and show how it can be mitigated by paying the manager a premium fee sufficiently high that the one-time gain from shirking is less than the capitalized value of the premium stream the manager earns from maintaining his promise to provide high quality. Investors benefit from higher fees, rather than lower fees. Where quality is unobservable, any attempt to impose binding maximum fees will make investors worse off. Our model has a number of revealing extensions and comparative statics.
The liberalization of the natural gas industry has been based on the idea that the same infrastructure may be used by different gas owners. Different players using the same resources can give raise to ‘commons dilemmas’, which is defined by a conflict between individual rationality and group rationality. The individual rationality leads to an outcome that is not rational from the perspective of the group. To avoid 'commons' inefficiencies, it is necessary to establish rules that constrain the players’ use of the network. The rules of a 'common pool' may be established through external authority or by the users themselves. In gas industries, the regulators play the role of external authority. The definition of rules by the users themselves is implemented through players’ agreements. In the first case the access is completely opened and the same set of rules is applied to every player (common carriage). In the second case, the design of a system of rights is based on players’ commercial agreements (contract carriage). Traditionally, the choice is made paying attention to the impact of the rules on the allocation of existent resources (appropriation) and taking into account only an average consumer. We show that, as proposed by the common pool theory, the use of average consumer preferences to define the rules of infrastructure may result in inefficient output. Moreover, we show that there is also the dynamic impact of the choice of carriage system. One of the main incentives for new investment is the use of the current infrastructure. As the carriage system impacts on the use of the infrastructure, it also has consequences on the long-term dynamics of the gas infrastructure. We compare investment signals in EU industries, based on common carriage systems, and in USA, based on contract carriage systems. The analysis allows us to identify missing economic signals in the EU regulatory framework.
The relationship between gender, age, and employment has interested scholars – and inspired activists – since the advent of the women’s rights movement. In this paper, we examine the gender and age mix for an unusually visible profession: acting in motion pictures. Using almost a century of data, we find that although there are several interesting long run changes (e.g., “40 is the new 30”), the striking feature is stability – the gender-age profiles of actors today strongly resemble those of their silent-era predecessors. For the entire period, actors in leading roles have tended be on the younger side of the overall actor age distribution, and this is especially true for women. Current day female actors are, on average, 5-6 years younger than males, and in recent years, women over the age of 50 have played only 3% of leading roles, as compared to 14% played by men over the age of 50. Thus, the common lament about the paucity of roles for middle-aged women appears to be rooted in fact – but a similar complaint could have been made at any time since the silent-era. Moreover, it is not just older females that see a dearth: Roughly two-thirds of all roles are (and have long been) filled by males. These patterns could change if (i) the mix of film genres changed in a gender-relevant way (e.g., more romance and less action would, holding the gender-genre relationship constant, increase the share of roles played by women) or (ii) the genres that disproportionately employ men (e.g., action) increasingly employed women. The long run trends have not, however, been going in either of these directions – most probably because of consumer demand. The apparent stability of demand in the face of extraordinary institutional changes (e.g., industry structure, contracting processes) has implications for understanding the literature on returns to youth and appearance.
This paper examines the introduction of the wool lien and stock mortgage in New South Wales (NSW) in 1843 with two main aims: 1) to determine the role played by these legal innovations in supporting pastoral sector growth given the particular endowments of the colony and; 2) to analyse whether this legal innovation suggests law makers of the time acted as instrumentalists. The endowment set in NSW included a variable climate, abundance of grassland, and scarcity of labour that made it eminently suited to large-scale wool production. The property rights that evolved for land over the nineteenth century made it impossible for pastoralists to use that asset to raise capital. Against the backdrop of the 1840s depression the legislature needed to create a method for pastoralists to access capital where sheep were their only property and they did so via the wool lien and stock mortgage. The lien and stock mortgage were non-possessory chattel mortgages unknown in English common law. However, due to the extreme economic conditions of the depression, the British Colonial Office Secretary did not veto the use of these financial instruments. Moreover, the instruments continued to operate well after the depression had eased. The statistical analysis presented here shows that, stock mortgages had a positive and significant affect on pastoral sector GDP between 1843 and 1860. This indicates that politicians both in NSW and England acted as instrumentalists where legal innovations were aimed at expediting economic change and ensuring continued community prosperity by promoting growth in important sectors of the economy.
Why is environmental law and policy so resistant to change, even in the face of overwhelming evidence that the benefits of reform swamp the costs? Prevailing explanations fall broadly into three categories: (i) public choice, (ii) framing and education problems, and (iii) public doubts about the importance of the underlying environmental problem. This paper considers a fourth explanation: that physical, human, and social capital lock individuals, firms and organizations into a preference for the status quo. While a precise definition of capital is elusive, this article sets forth a working definition: a costly and long-lived asset that generates a stream of benefits. Durable capital is valuable because it provides productive benefits over a period of time or for a significant quantity of production. The problem with durable capital arises when some environmental problem emerges during its life that renders it less socially beneficial than believed when the capital was initially formed, and possibly even socially detrimental. If the continued exploitation of capital creates environmental externalities that were not appreciated (or consciously ignored) at its time of formation, a split in interests emerges: cessation of use of the capital may be desirable from the social point of view, but the owner of the capital will vigorously protect the capital to preserve the stream of benefits. This split accounts at least in part for almost every environmental problem that has ever arisen. The solution to almost every environmental problem requires a change or cessation of a practice, which inevitably embodies some physical, human, or social capital, and which therefore generates resistance.
Why is environmental law and policy so resistant to change, even in the face of overwhelming evidence that the benefits of reform swamp the costs? Prevailing explanations fall broadly into three categories: (i) public choice, (ii) framing and education problems, and (iii) public doubts about the importance of the underlying environmental problem. This paper considers a fourth explanation: that physical, human, and social capital lock individuals, firms and organizations into a strong preference for the status quo. While a precise definition of capital is elusive, this article sets forth a working definition: a costly and long-lived asset that generates a stream of benefits. Durable capital is valuable because it provides productive benefits over a period of time or for a significant quantity of production. The problem with durable capital arises when some environmental problem emerges during its life that renders it less socially beneficial than believed when the capital was initially formed, and possibly even socially detrimental. If the continued exploitation of capital creates environmental externalities that were not appreciated (or consciously ignored) at its time of formation, a split in interests emerges: cessation of use of the capital may be desirable from the social point of view, but the owner of the capital will vigorously protect the capital to preserve the stream of benefits. This split accounts at least in part for almost every environmental problem that has ever arisen. The solution to almost every environmental problem requires a change or cessation of a practice, which inevitably embodies some physical, human, or social capital, and which therefore generates resistance.
This paper explores the inherent links between different forms of property rights protection including coercive force, political power, and law from a historical or evolutional perspective. It finds that it is not possible to have a strong rule of law with a corrupt political system, or to have a democratic political system when the distribution of coercive force is too skewed. In other words, there seems to exist a clear sequence of different forms: only when individuals are relatively equal in using coercion to protect their own property would a just political system be adopted and sustained as the predominant form of property right protection, and only when a stable and just political system is operational would the rule of law gain support as the routine form of protection. The predictions of the model are consistent with general historical patterns in Western Europe.
Our review of mortgage securitization transactions from 2005 to 2007 suggests that many intermediate mortgage transfers structured as promissory note sales involved the exchange of only nominal consideration. The Uniform Commercial Code requires consideration “sufficient to support a simple contract” as a prerequisite for treatment of a transaction as a promissory note sale. The transactions’ status as sales of promissory notes may ultimately determine whether the mortgages were effectively transferred to the trusts intended to hold them on behalf of investors and whether the mortgages are enforceable. Status as a note sale apparently turns on the sufficiency of nominal consideration “to support a simple contract,” so the mortgage securitizations apparently present classic contract-law questions about nominal consideration in a context of contemporary practical importance. Because the effect of treating nominal consideration as sufficient in this context is to permit parties to opt into a regulatory regime that is more favorable to them and less favorable to third parties, the mid-2000s mortgage securitizations present an attractive case for finding nominal consideration ineffective on the ground that it is a sham.
Responding to the call for deeper analysis of the informal economy using innovative data and methods, our study tests and extends existing theory through transaction-level data involving off-the-books loans issued to employees by business owners. Our analysis of 459 separate transactions from 83 firms reveals that individuals will engage in informal economic activity even when formal market alternatives exist if those formal alternatives are unattractive or unfair. By extending key theoretical tenets of relational exchange and relational rents into this new context, we demonstrate that surplus can be created when owners and employees abandon formal markets and institutions by resorting to complementary exchange through informal economic mechanisms. This study of off-the-books transactions provides a rare portal to informal market decision-making and behavior. We find that business owners can internalize the information costs related to an employee's credit worthiness at a lower cost than can be achieved by formal credit markets. In complementary fashion, a valued employee can internalize more cheaply the owner's information costs related to identifying good and faithful labor. Paradoxically, however, we find that credit-challenged workers who obtain short-term financial relief through off-the-books loans also find themselves subject to disadvantageous forces of paternalism and peonage, particularly minority employees. Our study reveals that while both parties share in the creation of a relational surplus, business owners deftly appropriate the surplus by binding employees to the firm. The findings strongly support notions propounded by Venkatesh, Portes and others that the informal economy simultaneously creates opportunities and complications for disadvantaged participants.
Natural disasters that destroy urban areas leave opportunities to adapt city environments to contemporary needs. Since the durability of real estate inhibits cities from easily adapting to changing economic conditions, non-optimal land use patterns may emerge and persist over time. Using the destruction from the 1906 San Francisco fire as a laboratory, this study seeks to understand the role of durable capital and transaction costs in determining urban development patterns. All else equal, significant differences between pre- and post-disaster land use imply that the durability and specificity of real estate, and the transaction costs associated with adapting cities to contemporary needs, are important barriers to redevelopment. The disaster mitigates such barriers through the razing of over 28,000 buildings. Exploiting the border discontinuity in fire treatment using a unique data source, this study finds evidence of significant changes in the city's land use between 1899 and 1915, much of which is explained by the fire’s destruction. Specifically, residential density increases significantly in areas razed by fire relative to unburned areas, and is accompanied by a relative shift in land acreage away from residential and mixed uses. This finding implies that thriving cities may be constrained by past capital investment, suggesting a vital role for path dependence and institutions in understanding urban development.
This article constructs a sequential game theoretic model in which regulation is based on expert reports regarding a state of the world --- such as the social benefits from regulation – that is known to the expert but not observed by a decision maker. Experts are assumed to have policy preferences over regulation. When the expert’s preference is known but experts incur a positive cost to report to the regulator (or court), it is shown that there is a unique sequential equilibrium in which a pro-regulation expert falsely reports that regulatory benefits are high with a higher probability, the larger are ex ante regulatory benefits; in cases where a net benefit maximizing regulator is close to being ex ante indifferent between regulating or not, the pro-regulation expert is most truthful (in the sense of reporting honestly with a high probability). Two remedies for expert bias are considered: imperfect auditing by the regulatory decision-maker, and expert competition. It is shown that imperfect auditing increases the reliability of expert advice, and the more imperfect the audit, the more reliable is the expert advice. Expert competition between experts with conflicting preferences likewise always increases the information available to the decision-maker, although at least one expert will generally have to be compensated to provide advice against her interest. The result is generalized to the case where expert preferences are known only to the expert and where the expert must incur a positive cost to become perfectly informed with some positive probability. In this case, expert effort to become informed is maximized by the expert who is just indifferent between regulating and not ex ante. For this reason, the optimal expert from the point of view of the decision maker generally has preferences that lie between those of the decision maker and those which maximize expert effort.
Corruption is a major source of slow development in Africa – the poorest region of the world. While extant research has focused on the causes and consequences of corruption at the macro-level, less effort has been devoted to understanding the micro-foundation of corruption, as well as the mechanisms through which poverty may be related to corruption and bribery. In this paper, we develop a simple model of the relationship between poverty and corruption. The model suggests that poor people are more likely to be victims of corrupt behavior by street-level government bureaucrats. Poor people often rely heavily on services provided by governments and are therefore more likely to be met by demands for bribes in return for obtaining those services. We test this proposition using micro-level survey data from the Afrobarometer. Since individuals are surveyed in different countries, we use multilevel regressions to estimate the effect of poverty on people’s experience with paying bribes. The results show that poor people are indeed much more prone to pay bribes to government officials. This suggests that the people who are worst off materially are also more likely to be victims of corruption.
The recent literature on politically connected firms documents that connections between firms and politicians or political parties is both globally widespread and contributes value to such firms. However, there is little research on how entrepreneurs without direct political access cope with the grabbing hand of government. For entrepreneurs, the source of political influence is usually their social network. We develop a general model linking entrepreneurship, social networks, and political influence. The purpose of the model is to unravel the economic forces behind the trade-offs entrepreneurs face in such an environment and how entrepreneurial choices are altered by changes in the environment on the path to economic development, such as deregulation, market development, and economic growth.
What mechanisms allow reforms to be proposed, understood, accepted and eventually adopted throughout an organizational field? How do practices which diverge markedly from prior norms become both acceptable and widely imitated? In this paper, I explore the institutionalization of governance reforms resultant from the use of governance rankings as a calculative device. I examine the diffusion of these practices through an organizational field shaped by the introduction of rankings, using a heterogeneous diffusion model. The logic of activists, the structure of organizational fields and the rational decision making of individual firms each play an essential part in the process of institutionalizing new practices.
The purpose of this study is to identify obstacles to and explain the failure of the recent property rights formalization reform in Russia. The reform was expected to radically lower the costs of obtaining property deeds for millions of Russians who currently have only de facto ownership interest in small plots of suburban land and dwellings, known as dachas. However, the reform failed to achieve the desired results: only a small percentage of dacha owners have taken advantage of the new law. The study discusses factors that may affect the pace of reform: a lack of professional, financial, and administrative support for the reform from the government; resistance to the reform by local bureaucracy that benefits from excessive entry barriers; and low demand for formal property rights from de facto dacha owners. We also study the factors that affect individual decisions to formalize property rights to dachas, using micro data collected in the suburbs of St. Petersburg. The data comes from a specialized survey of 700 households that own a dacha, as well as in-depth interviews with real estate experts. The study concludes that corruption of local government, along with a lack of demand for formal property rights because of perceived informal tenure security, are the most important factors impeding the reform.
Constitutional rules according to which political power is acquired and exercised have a systematic influence on the nature of the political game and thus on policy outcomes. The present paper explores whether systematic differences in foreign policy outcomes follow from the workings of democratic accountability and from alternative constitutional arrangements. The following hypotheses linking domestic institutions to foreign policy choices are proposed. First, the number of institutional and partisan veto players is likely to affect the incentives of governments to use international agreements as a signaling device to lend credibility to reforms and as a tool to lock in domestic reforms. Second, electoral systems were found to influence the political decision to provide either public goods or benefits targeted to narrow groups. Politicians might find it useful to tie their hands through international agreements to thwart electoral pressures to please narrow groups. In brief, the focus lies on domestic political economy factors motivating governments to make use of international agreements.
Poverty is intricately linked to pervasive underlying health problems, including infectious diseases that are rare in wealthy countries. Prior research has documented that leading bio-pharmaceutical firms have not invested comprehensively in diseases that mainly affect patients in developing countries. Theory suggests that indigenous firms may have a greater incentive to invest in diseases that primarily affect poor patients than large biopharmaceutical multinationals. Yet little empirical evidence exists of significant biopharmaceutical innovation in emerging markets. In this paper, we provide evidence from three countries where poverty is prevalent -- Brazil, China, and India -- that a growing number of indigenous biopharmaceutical companies are investing in innovation on diseases that primarily affect the poor. The results suggest a subtle set of interrelationships as co-located firms benefit from spillovers across research projects. We identify complementarities for performance in the clustering of disease-targeted projects but substitution effects for performance in the clustering of firms. These results indicate that indigenous bio-pharmaceutical firms are most productive when they co-specialize to maximize knowledge spillovers and minimize competition for funding and knowledge workers.
The paper considers private and social costs and benefits of selective public enforcement of law (enforcement by public authority upon complaints of private parties) in comparison with private and pure public enforcement. The theoretical framework developed reflects the specific features of Russian system of law enforcement. Under certain conditions (no compensation of damages and low cost of complaint to public authority) selective public enforcement is privately desirable. Selective public enforcement underperforms both private and ‘pure’ public enforcement if acting upon complaints of interested parties increases the probability of Type I errors and selected for investigation cases are skewed towards violations those induce private harm in contrast to violations reducing social welfare. Conclusions on private choice of enforcement models are supported by the evidence on the enforcement of three branches of civil law in Russia, where private and public enforcement systems compete and selective enforcement is supported by the public agencies. Consumer protection law and labor law are the examples of legislations where private enforcement both provides potentially higher deterrence than public enforcement and reveals to be privately preferable. In contrast, antitrust law is an example of legislation where private enforcement is completely crowded out by formally public enforcement and ‘pure’ public enforcement protecting social welfare is largely replaced by selective public enforcement preventing harm on private parties.
This paper estimates the effect of economic shocks that affect families with young children on children’s health, educational and behavioral outcomes in adolescence. Transition period in Russia provides a natural experiment setting for estimating this effect. During the economic turmoil of early transition many people lost their jobs, experiences salary declines or occupational downgrading. These individual labor market shocks were mainly caused by the structural changes in the economy. Analyzing household survey data from Russia I find that children who were under the age of five and whose parents were negatively affected during the early transition have poorer health in adolescence and are less likely to have completed high school. For the comparison group – children who were at the school age during the early transition – there is an effect on educational outcomes and risky behaviors but not on health. Absence of a father in a family during the early transition years has a negative health effect only for the younger age group. I also find differential effects for boys and girls, by mother and father.
Will autocratic governments implement policies to satisfy the people’s demands in order to prevent large scale social unrest? This paper explores this question through quantitatively analysis of the political economy of public goods provision in Chinese provinces. I collected data on the number of labor disputes to measure collective actions. My sample includes provincial leaders whose incentives to deliver public goods can either be explained as a result of upward accountability towards the Center or downward accountability towards the citizens. The confounding factor of upward accountability is ruled out by using a recursive model; and the reverse causality between public goods provision and collective actions is controlled by using instrumental variables. Result suggests that provincial leaders will implement policies more in favor of the citizens in response to intensified labor disputes. Citizenry accountability is an informal accountability channel to constrain the behavior of politicians in autocracies.
The paper investigates the influence of outside options on the predatory behavior of autocrats. An outside option is referred to as the opportunity of an incumbent ruler to continue his career outside his current territory of control. The paper uses data on the effectiveness of tax collection and the repressiveness of tax jurisprudence for Russian regions in 2007-2009 and finds that regions ruled by governors with substantial outside options are characterized by more repressive behavior of tax authorities. However, surprisingly, the same tax authorities collect less additional revenues for the public budget. It conjectures that the presence of an outside option induces autocrats to behave like “roving bandits”: they use tax audits to establish control over regional companies, but exploit this control to extract private rents rather than revenues for the regional budget used for public goods provision.
Flexicurity type of labor market institutions (low employment protection together with high replacement rate of previous wage by unemployment benefit) are now being proposed as a balanced and efficient combination to solve employment problems. The question however arises of whether the cultural features of some countries (tendency to abuse benefits) risk undermining its efficiency. The objective of this paper is to explain to what degree searching or not searching for a job depends on labor market institutions, and how much on the values and attitudes of the person unemployed. It will be shown that flexicurity institutions play an important role, while a personal sense of fairness is among other personal features (as well as age, passivity and experience of previous periods of unemployment) that modify the decision to search for a job.
This study examines whether there is a relationship between economic freedom, as measured by the Economic Freedom of the World Index, and the large increases in obesity that have been observed worldwide. Using a panel of 82 middle- and high-income countries, the study finds that the level of economic freedom is related to increases in mean adult body-mass index. The effect is observed in both middle- and high-income countries, and is robust to controls for GDP per capita, education structure, and the fraction of females in the labor force. This suggests that, in a context of expanded personal choice and free markets, consumers make worse decisions from an obesity perspective.
Rent sharing is a common phenomenon in vertical settings. For example, a manufacturer may wish to award his dealers economic rents to motivate their provision of non-contractible services. We study a widely-used ordering process (“Early Bird Discounts for Dealers”) that generates downstream rents and characterize circumstances when a manufacturer would strictly prefer it to linear pricing and the standard two-part tariff contract with nonnegative access fees.
Most economists believe that we can model inefficiency or “market failure” with rational choice models, but we cannot. This paper identifies an implicit modeling error found in all rational choice models that claim to model inefficient behavior. Put simply, if we program an agent with a binary choice set containing just A and B, we can’t complain that they don’t choose C. If choice C is a worse option than A and B then the model is a valid simplification. But if there are any C choices that are better than A and/or B, as alleged in market failure claims, we have a “model failure” because the agent’s best possible option, C, has been incorrectly (and inexplicably) excluded from the modeled choice set. This modeling error is fixed by building the ex post market failure “solutions” into the ex ante choice sets of the agents. But with this correction we discover that the so-called “government”, “central planner” or ”bumbling bureaucrat” that we typically invoke ex post to mandate a tax or regulation is really just a “governance entrepreneur” offering an efficiently governed rule to the parties as an efficient choice. Correctly modeling governance as a choice sheds light on a vast market for privately ordered governance. It also generates a surprising but Coasian implication: just as the ability to easily transact over private rule choices can make the public law irrelevant, the ability to easily transact over private governance choices can make the public governance irrelevant.
This paper studies the long term effects of maternal fasting during the Islamic holy month of Ramadan. By exploiting exogenous variation in timing of Ramadan and timing of birth, including within family members, I compare outcomes for those potentially exposed to their mothers fasting to those not exposed. Using data from the Indonesian Family Life Survey(IFLS) Wave 3, I find that those potentially exposed work fewer hours and are more likely to be self-employed with disproportionate effects on females and rural borns. Though those exposed have worse adult general health, adult health does not seem to be an important channel through which exposure affects labor supply outcomes. When family fixed effects are used, the OLS estimates increase in magnitude suggesting that time invariant family levels co-variates are not explaining these results.
An influential thesis [Kuran, 2011, The Long Divergence] locates the economic failure of the Middle East in specific legal injunctions that were rooted in Islamic law and laid the basis for organizational deficiencies. This article critically scrutinizes this thesis using the lens of political economy and argues that tracing the impact of Islamic law without a discussion of the enforcement environment is unconvincing. Specifically, as a legal explanation for development, it is important to probe the extent to which Islamic law was embedded in the material domain and influenced by preferences of political incumbents. A key contention of the article is that Islamic law can be described, at best, as a proximate rather than a deep determinant of development, and that there is limited evidence to establish it as a causal claim. Finally, I propose that, rather than exclusively concentrating on legal impediments to development, a more promising avenue for research is to probe why the relationship between rulers and merchants differed so markedly between the Ottoman Empire and Europe.
An influential thesis [Kuran, 2011, The Long Divergence] locates the economic failure of the Middle East in specific legal injunctions that were rooted in Islamic law and laid the basis for organizational deficiencies. This article critically scrutinizes this thesis using the lens of political economy and argues that tracing the impact of Islamic law without a discussion of the enforcement environment is unconvincing. Specifically, as a legal explanation for development, it is important to probe the extent to which Islamic law was embedded in the material domain and influenced by preferences of political incumbents. A key contention of the article is that Islamic law can be described, at best, as a proximate rather than a deep determinant of development, and that there is limited evidence to establish it as a causal claim. Finally, I propose that, rather than exclusively concentrating on legal impediments to development, a more promising avenue for research is to focus on the co-evolution of economic and political exchange, and to probe why the relationship between rulers and merchants differed so markedly between the Ottoman Empire and Europe.
The recent uprisings in the Middle East have cast doubt on the degree to which existing theories of autocracy can correctly identify which groups threaten the autocrats rule at any given time. As a result, these theories are unable to predict fundamental upheavals in established autocracies. Who is the biggest threat to the autocrat, though, the elite or the populations as a whole? In this paper, we evaluate how autocrats respond to perceived threats from the population and elites. We advance the argument that elites with autonomous power resources – economic assets, connections to regional elite networks, etc. – and swing voters, who are easily co-opted to cause problems for the regime, are likely perceived as the greatest threats. We also argue that to the extent that economic growth generates support for the incumbent, in this case the autocrat, actors in areas with high growth will, all else equal, be perceived as posing less of a threat to the autocrat than those in slow growth areas. We assume autocrats put their money where their mouths are and test our argument using the combination of data on federal-regional transfers in the Russian federation between 2001 and 2008 and a novel dataset of regional executive level characteristics. We find limited support for our arguments. On the one hand, transfers do go to politically powerful governors, while growth diminishes the impact of measures of voters preferences on transfers. On the other hand, we find evidence that transfers were aimed towards core, not swing voters, and that powerful regional elites tended to get more transfers, not less, in fast growing regions. Key words: competitive autocracy, dominant party systems, regional elites, elite cooptation, federal transfers, Russia JEL codes: D72, H77, R50
For-profit hospitals in California contract out to a much greater extent than either public hospitals or private non-profit hospitals. To explain why, we build a model in which the outsourcing decision is a trade-off between net revenues and quality. Since non-profit firms must consume profits indirectly through perquisites, they will trade-off differently from for-profit firms. This difference will be emphasized when quality is important or the firm is hit with a positive net-revenue shock. We test these predictions in a panel of California hospitals, finding evidence for each. These results suggest that a model of public or non-profit make-or-buy decisions should be more than a simple relabeling of a model derived in the for-profit context.
Abstract: The United States Internal Revenue Code (the Code) is vast, complicated, and at times internally inconsistent. Nowhere is this inconsistency more apparent than the Code’s application to the environment. A survey of contemporary literature and public opinion show an increased awareness of and a recent focus on tax policy tooled for environmental protection. Indeed, though many Code provisions are explicitly environmentally flavored or can be easily seen to have an environmental component, there are many Code provisions that are at apparent odds with a sensible and cohesive environmental policy. The reality is that the Code is a complex stew of sound and unsound public policy, special interests, and situational pressures. This results in a Code that rewards the use of hybrid and electronic plug-in vehicles and encourages commuters to use public transportation and bicycles, while simultaneously promoting the use of motor vehicles with internal combustion engines, rewarding oil exploration and depletion of natural resources, and indirectly promoting urban sprawl. Against this landscape there exist structural and institutional barriers that impede reform. The paper uses just one aspect of the Code – the Code’s uneasy existence with environmental concerns – as the vehicle to evaluate the prospects for reform. This focus on a single area is undertaken with two underlying observations. First, the Code is necessarily complex. A focus on a single area is manageable and serves as a useful case study. Second, the issues we all face as a result of a degraded environment provides the possibility that attention will be paid. The paper will move from the general to the specific, first highlighting the strengths and the weaknesses of the Code, and second, highlighting structural problems that affect tax policy. The aim will be to guide legislators and policymakers toward a sane tax policy.
From the South Sea Bubble to the Stock market Crash of 1929 to Enron to General Motors and Countrywide Mortgage, corporate scandals and controversies invite fundamental questions. This article attempts to bring a fresh perspective to the question: “what is a corporation?” The article articulates a corporate metaphysics rooted in political philosophy. The dominant models of corporate law and philosophy are rooted in the realm of private law. Placing corporate law within a political venue, however, allows corporate law to ask more fundamental questions Based on Aristotelian political philosophy, this article constructs a theory of corporations as political entities. In this light corporate law is really a form of public law, not private ordering. Corporations are in the language of Aristotelian philosophy, imperfect communities which are one of several constituent parts of a perfect community, the civil polity. The end of Corporations, production of certain economic goods, is an imperfect end. Corporations also lack internally all the means to achieve their end and are dependent on the rest of civil society to attain it. Several implications flow from this vision. Those who command authority within the corporate community have obligations to the larger perfect community as well as to all the members of the corporate community. The imperfect ends of corporations must be harmonized to the common good of the civil society. Those exercising political authority within the imperfect community have the obligation to exercise that authority for the common good of the corporation, not just the individual good of any one member, be that managers, directors, shareholders, creditors, suppliers, customers or employees.
Environmental regulation often involves the need to impose limitations on the ways in which individuals can use their property. The paper generates empirical evidence on the role the strength of formal legal protection for property rights plays in influencing individuals attitudes toward such regulation. A survey vignette is administered to Canadian and US respondents, to exploit the underlying difference in the constitutional status of property rights between Canada and the US. While government faces constitutional limits on its ability to take property in the US, in Canada such a constitutional right was deliberately excluded from the Charter. Participants are asked to provide financial (scaled categories) and attitudinal responses (7 point scale) to a vignette that proposes development restrictions on a coastal property. Results are analyzed using ordered logit regressions and equivalence of means tests. The survey is structured to allow analysis of the results controlling for individuals’ prior legal beliefs, as well as differences in the formal legal status of property rights. The durability of individuals’ beliefs is assessed by giving “correct” information about the law, then soliciting further responses. The results indicate that there is no independent significance associated with the difference in the formal legal status of property rights between Canada and the US. However, there is significant variation in the individual attitudes and financial demands of respondents in both the Canadian and US samples. While legal beliefs appear to be a significant explanatory variable, these beliefs do not appear to remain significant once individuals receive “correct” information about the law.
When states create international institutions they can give the institution broad jurisdiction over a range of issues or narrow jurisdiction over a single issue. Broad jurisdiction creates the possibility of welfare-enhancing issue linkages within an institution. At the same time, broad jurisdiction also creates the risk that a state or states can hold up cooperation on a range of issues within the institution’s jurisdiction for the sake of achieving individual gains on a single issue. I refer to this risk as institutional governance risk. Narrow jurisdiction diversifies this risk by eliminating institutional issue linkages. If one institution becomes gridlocked, cooperation on other issues in other institutions can proceed. In some situations, however, institutions are functionally linked, meaning policies in one area affect economic activity in another area (for example, climate change and energy). By creating separate institutions with different procedural rules and different memberships, narrow jurisdiction increases coordination costs across functionally linked policy issues. Increased coordination costs mean that cooperation on one issue (for example, energy security) may crowd out cooperation on another issue (climate change) by distorting the incentives for governments and private actors to cooperate on the second issue. I refer to the risk that institutions undermine each other in this way as systemic governance risk. In designing institutions, states balance the net costs of increasing hold up power across issues within an institution (institutional governance risk) against the costs of coordinating policies across institutions (systemic governance risk). I illustrate the argument by applying the concept of governance risk to international energy, an area of international cooperation that is highly fragmented and has largely resisted the trend towards multilateral governance that has characterized the last twenty years of international relations.
Using a social capital framework, this paper argues that the dynamics of relationships within and between ethnic groups in ethnically-polarized societies creates a type of path dependence that locks such societies into "survival politics". I argue that ethnically-polarized developing countries are typically characterized by relatively high levels of intra-ethnic social capital but relatively low levels of inter-ethnic social capital. The juxtaposition of high levels of intra-ethnic social capital with low levels of inter-ethnic social capital generates and sustains survival politics. Survival politics makes it difficult to adopt growth-promoting policies and increases the risk that groups may adopt radical, extra-institutional strategies such as violence and insurgency. The literature on path dependence typically focuses on historic and cultural self-reinforcing institutional mechanisms. Relational dynamics have been relatively unexplored as a form of path dependence that constrains institutional reform. This paper aims to contribute to the literature on institutional reform in ethnically-polarized countries by exploring how varying levels of social capital create constraining relational dynamics in the polity.
We estimate the effect of electoral quotas in India’s state legislatures on the provision of public services to villages. To address endogeneity and selection concerns, we use a geographic discontinuity design, focusing on villages just inside and outside borders that delineate reserved and unreserved constituencies. By comparing villages that are on average highly similar except for reservation status, we estimate the effect of reservation on improving the provision of electricity from 1992 to 2009. Looking nationally, the average effect of reservation across India is negligible. Yet after unpacking the data, we show that the national average effect is in fact comprised of highly varying effects across states, swinging from positive to negative. We argue that the effects of reservation depends on whether reservation decreases political competition or not within state level politics.
Combined federal, state, and local taxes on wireless services are about twice as high as the average retail sales tax. While the normative justification for above-average taxation of wireless service is weak, there is a compelling public-choice explanation: The mobile service tax base appears to suffer from a tragedy of the anticommons. That is, multiple parties have the power to block or partially block access to a resource, resulting in underutilization of the resource. In our context, numerous overlapping tax authorities seek to obtain revenues through wireless-service taxation and this may lead to overexploitation of the tax base. The anticommons problem has two dimensions. First, the mobile-service tax base funds numerous distinct projects at each level of government. Second, the base is taxed by numerous overlapping levels of government. We use state-level data from three years to examine the possible economic, demographic, and political factors that might explain the variation in these rates. We find that wireless tax rates increase with the number of overlapping tax bases.
Abstract – This paper investigates how the institutional environment influences the property rights strategies of firms. The article proposes a heuristic model and defines three strategies for protection of property rights based on the quality of the institutional environment: strategy focused on the legal system, on the establishment of private mechanisms, and on the abandonment of valuable attributes. The study then examines empirical evidence. Specifically, the paper analyzes three cases of protection of property rights on genetically modified (GM) technology in soybean seeds: the US, Brazil, and Argentina. Each case represents, respectively, a strategy as defined by the heuristic model. Overall, this perspective paper develops an approach for examining the appropriation of value, placing itself in the interface between the property rights economics, the strategic analysis and the assessment of the institutional environment.
We analyze bidder collusion in public procurement. Our focus is on less than all-inclusive cartels. Using public information on convicted bid-rigging schemes taken from the decisions of the French Competition Authority, we have constructed a database on 33 different cartels operating in 114 public procurement markets. Our empirical work tackles the question of external cartel stability. Our goal is to investigate the impact of outside bidders on cartels. We first show that the number of outside firms is a significant determinant of the low-cartel bid. Moreover, we show that, due to the previous result, the number of outside firms does not significantly impact the probability of being awarded contracts. We believe that these results provide further evidence of the optimality of cartels. In addition, we show that restricted tenders may have a negative impact on the level of collusion while policies that aim at fighting collusion by encouraging entries in the market may have a positive effect on social welfare even when a collusive scheme is suspected.
The lack of flexibility in public procurement design and implementation is a political risk adaptation by which public agents limit hazards from opportunistic third parties --- political opponents, competitors, interest groups --- and externalize the associated adaptation costs to the public at large. Public agents endogenize the likelihood of opportunistic challenge lowering third parties’ expected gains and increasing litigation costs. We provide a comprehensible theoretical framework with empirically testable predictions: scrutiny increases public contracting efficiency in costly litigation environments, concentrated (politically) contestable markets, and with upwardly biased beliefs about benefits of challenge.
Reward theory, which represents the conventional economic view, suggests that the optimal strength of patents depends on a use-creation tradeoff; the inevitable production of dead-weight losses in the ex post market for the invention for the purpose of fostering technological progress. This paper demonstrates a caveat in this approach by using game theory. Strong patents increase the value of becoming an inventor. As such, more firms are attracted to R&D. However, each firm rationally discounts the probability that it will be the first to obtain a patent, and may therefore reduce or abandon its R&D investment. This leads to a lower invention probability per R&D firm, which in turn may lead to a lower aggregate invention probability. In such cases, weaker patent protections can simultaneously foster innovation and eliminate dead-weight losses in the ex post market for the invention. Hence, contrary to the conventional view, the use-creation tradeoff does not exist globally.
This aritcle considers the effect of relaxing the oft employed assumption in the law enforcement literature that individuals have fixed criminal benefits. It demonstrates that once fluctuating criminal tendencies are assumed and the incapcitative effect of punishment is considered, many legal practices can be justified based on efficiency grounds. These include the different treatment of repeat offenders and first time offenders, murder and voluntary manslaughter, and remorseful versus non-remorseful offenders.
This Paper examines the role of expertise in judicial opinion assignment and offers three contributions. First, I develop a general theory of opinion assignment on multimember courts. Second, I use that theory to predict how expertise might influence opinion assignment. Third, the Paper identifies a setting in which the theory the Paper advances should have observable implications, and the paper proceeds to test those implications empirically: It finds that, in the years following the initial adoption of the Sentencing Guidelines, judges who were Sentencing Commissioners were more likely to have opinions raising sentencing issues assigned to them. Fourth, because the theory advanced in the Paper suggests that the courts of appeals are far more likely to witness experience-based opinion assignment than is the Supreme Court, the Paper contributes to an understanding of opinion assignment practices in this under-studied area.
Although many streams of literature have recognized that firms with broader scope often underperform those with greater focus, relatively little research has examined the mechanisms that might account for these diseconomies of scope. One potential mechanism is that uncertainty shocks ---events or short-term periods that upset the normal course of business--- place unusual demands on the limited attention of managers. When managers of larger, more diverse firms allocate their time and organizational resources to address these events, they necessarily divert attention and resources away from other businesses, thereby converting these uncertainty shocks in one part of the organization to performance shocks in other parts of it. An empirical examination of the relationship between the distribution of films in theaters and videos for sale demonstrates that uncertainty shocks in theatrical distribution become performance shocks in the video market and that the magnitude of these effects increases for larger, more diversified firms.
We examine asset closure and deployment decisions using a natural experiment in industrial fishing that exogenously decreased the intensity of competition and changed firm incentives to close and deploy assets. After this industry shock, ship exit significantly increased, especially among larger firms. Controlling for capacity, ships with lower extraction capacity than other ships within the same firm showed a greater tendency to exit. Furthermore, the remaining ships shifted towards a more deliberate strategic deployment, consistent with an increase in efficiency due to less competition.
Institutions affect investment decisions, including the investments in human capital; hence institutions are relevant for the allocation of talent. Good market-supporting institutions attract talents to productive value-creating activities, whereas poor ones raise the appeal of rent-seeking. We propose a theoretical model which predicts that more talented individuals are particularly sensitive in their career choices to the quality of institutions, and test such predictions on a sample of around 95 countries of the world. We find strong positive association between the quality of institutions and graduation of college and university students in science, and an even stronger negative one – with graduation in law. Our findings are robust to various specifications of empirical models, including smaller samples of former colonies and transition countries. The quality of human capital makes the distinction between educational choices under strong and weak institutions particularly sharp. We show that the allocation of talent is an important link between institutions and growth.
Trust is an important dimension of economic behavior the absence of which is anathema to economic activity. China is widely characterized as a low-trust society; yet it has successfully developed most of the elements of a modern market economy. However, its legal system is still weak and vague with respect to key concerns regarding property rights and principal-agent relations. Property rights over land and intellectual property is vague and uncertain. Rent-seeking by government officials and bureaucrats at the local level especially is still an incorrigible problem, contributing to uncertainty. Although China has invested efforts to bring national legislation in line with international standards, law enforcement remains a critical concern. Litigation in disputes over contracts is cumbersome and often unreliable. Even if a favorable decision is taken, court rulings are often not enforced. To approach the question where thin trust comes from if reliable formal institutions are absent, we apply a multi-method approach combining a standard experimental design with survey evidence generated in China’s Yangzi delta region, a region famous for its thriving entrepreneurship. To elicit behavioral attitudes towards “trust in strangers” the authors invited 700 entrepreneurs to participate in a trust-game. Our results suggest that trusting behavior is neither an innate trait, nor does thin trust stem from good experience with local institutions. Instead thin trust is gained from personal experience. Economic actors who can draw on positive experiences within their closest network of family, friends, and relatives (such as financial support at the founding stage of the firm) are more likely to also develop trusting behavior outside of their own network. In other words if people you know deal with you well and trust you, you are likely to generalize from this experience to trust even people you don't know.
Under incomplete contracts, exclusivity clauses might prevent hold-up behavior and thus sustain specific investments like consumer promotion. However, exclusive dealing might generate a trade-off between the enforcement of incomplete contracts and market foreclosure, in particular when the investor is a dominant firm. A simple model and the analysis of two main US antitrust cases, clarify the nature of such trade-off in presence of investments in consumer promotion.
This article presents evidence on opportunistic behaviour by network operators in the liberalized British, Dutch and French electricity industries. The evidence is supplied by 303 regulatory decisions on dispute resolutions for the period 2002-2010. We observe a significant difference in how the regulators resolve disputes between network operators and producers on the one hand, and between network operators and consumers on the other hand. Consumers are negatively affected by the opportunistic behaviour of network operators, mainly by paying tariffs that are higher than is allowed by law. Policy recommendations focus on the protection of consumer interests in competitive electricity markets.
This article describes the processes involving the United States Patent and Trademark Office’s (PTO’s) implementation of administrative patent levers related to business methods. Administrative patent levers are conceptualized in this article as rules that represent a coordinated policy at the PTO to target a particular technology class, and are often motivated by signals sent by actors within all three branches of government, and can be explained by positive political theory. This article presents an account where policymakers in all branches of government reacted strongly to the dangers posed by business method patents. The PTO’s behavior is explained under the “fire-alarm” theory of regulatory change, whereby an administrative agency responds to external institutional pressures and actors. This conceptual analysis of administrative patent levers is then informed by a detailed analysis of business method rules that fall under this category of administrative policymaking at the PTO. A descriptive account is then offered that predicts how the U.S. Court of Appeals for the Federal Circuit (CAFC) would review the PTO’s use of administrative patent levers. Ultimately, the CAFC’s likely approach is deemed undesirable since it fails to recognize that the PTO engages in policymaking. A normative solution is offered whereby the reviewing courts would apply a “hard look” review under Section 706(2)(A) of the Administrative Procedure Act. This standard would require that the PTO offer objective evidence that any administrative patent levers are warranted. This standard would also require that the PTO address any valid arguments or evidence against the implementation of such technology-specific and policy-oriented rules. Under this line of analysis, it is proposed that current business method administrative patent levers would fail to meet this standard of review.
Given the rising importance of intellectual property—and patents in particular—in the modern economy, it is no surprise that intellectual property litigation activity has been increasing steadily for quite some time. With increased litigation activity, however, come increased litigation costs. Large firms are prime targets for plaintiffs seeking to earn money through strike lawsuits followed by quick settlements. Companies active in markets where the products sold are based entirely on some form of intellectual property have looked for ways to combat rising litigation costs. One strategy employed by several firms in recent years is the formation of a defensive patent pool. Defensive patent pools are meant to insure against losses due to patent litigation by taking possible problem patents off the market before they can be used to sue pool members. This paper will argue that defensive patent pools can have significant anticompetitive effects. However, those effects depend on the structure of the pool. Defensive patent pools that use a “catch and release” (CAR) strategy mitigate the anticompetitive effects of their behavior by re-licensing or selling patents purchased by pool members. Conversely, “catch and hold” (CAH) pools—which buy patents without re-licensing or selling them—are likely to impose significant barriers to entry in the markets in which they operate. Because there is no legitimate justification for “holding” rather than “releasing”, regulators and courts considering the impact of CAH behavior should view such pools with suspicion. Nevertheless, they should not be banned: the competitive restraints imposed by CAH pools do not result from the type of conduct typically categorized as illegal per se, and their anticompetitive effects depend heavily on pool structure and membership. Thus, CAH pools should be subject to evaluation under the Rule of Reason.
Securities class actions are criticized as wasteful suits that target temporary fluctuations in the stock prices of otherwise healthy companies. The securities class actions against Enron and Worldcom, companies that fell into bankruptcy in the wake of fraud, resulted in multi-billion dollar recoveries for permanent shareholder losses and provide a powerful counter-example to this critique. The context of bankruptcy may affect our perception of securities class actions and their merits, yet little is known about this subset of cases. This is the first extensive empirical study of securities class actions involving bankrupt companies. It examines 1466 securities class actions filed from 1996 to 2004, of which 234 (16%) involved companies that were in bankruptcy proceedings while the securities class action was pending. The study tests two hypotheses. First, securities class actions involving bankrupt companies (“bankruptcy cases”) are more likely to have actual merit than securities class actions involving companies that are not in bankruptcy (“non-bankruptcy cases”) Second, bankruptcy cases are more likely to be perceived as having more merit than non-bankruptcy cases, even when they are not more meritorious. The study finds stronger support for the second hypothesis than the first, suggesting that some form of hindsight bias affects the decisions of judges and parties with respect to bankruptcy cases. Even when controlling for various indicia of merit, bankruptcy cases are more likely to be successful in terms of dismissal rates, significant settlements, and third party settlements than non-bankruptcy cases. These results demonstrate that judges use heuristics not only to dismiss cases, but to avoid dismissing cases.
This paper examines the relationship between credit markets and legal institutions by exploiting exogenous variation in jurisdiction over debt contracts on American Indian reservations. The variation is due to federal legislation, passed in 1953, giving states jurisdiction on some reservations while tribes retained their jurisdiction on other reservations. Based on evidence from historical and modern data, state jurisdiction increased per capita credit for American Indians, and their probability of having a home loan application accepted, by over 50 percent. The sovereignty that tribes have struggled long and hard to retain appears to be a liability for Native Americans seeking loans.
Effective nonprofit organizations are crucial for the civil society. Whereas developed countries have decades of experience, nonprofits in post-Soviet states have started to emerge only two decades ago. Did this period provide enough time to learn how to create and run effective nonprofit? Is there still a difference in the way nonprofits function? Assuming that Ukraine is a good representation of other post-Soviet economies, this study shows that nonprofits are still lagging behind the global trend by having organization-centered marketing philosophy. This means that services are mainly provided based on funding requirements which organization is capable to meet, and not the needs of society. Unlike in Ukraine, nonprofits in the UK, USA and Australia did not differ in their use of marketing, suggesting that the similarity of market pressures is more influential than the differences in operating environments.
How have differences in political power and economic resources in 19th century Brazil affected the long-run evolution of institutions and living standards? With a closed political system limiting access to resources, Brazil managed to conduct an experiment in open social orders during the last years of the monarchical regime. Government sought to expand the small population base of the southern provinces by attracting foreign labor. To do this, it created near twenty small landholding settlements in regions with low population density. Their development was crucial for attracting more immigrants; for this reason the government provided these settlements with a special institutional environment that included housing subsidies and poor relief. Today, over a century later, these areas have some of the highest economic and social indicators in Brazil. This development is normally associated with the presence of immigrants from countries with better educational systems. This paper argues that local political institutions, not human capital, were the main factors for the development of the high standard of living in these regions. Using micro level data from archival documents, this study examines how social transfers can lift people out of a poverty trap and establish secure property rights. It concludes that open social orders can develop in a closed political system in the existence of institutional arrangements that control opportunistic governmental behavior.
The paper applies the concept of identity to investigate whether consumer behavior matters for a household’s financial security. It is assumed that considerable part of households may express their identity through status consumption. First, the index of financial security is built and used to investigate the level of financial security experienced by working-age families in Poland. Second, the simulation results based on an econometric model are employed to find the answer to the question: Does financial insecurity result more from the need to manifest consumption at the higher level than average in an income-group of which people are members, or people want to be distinguishable inside of own income-group but they do not identify with a group having consumption at visibly higher level, or from the need to improve self-image by bringing own consumption closer to the pattern of a group with higher wealth status of which they are not members? The source of data is the 2005-2009 Households Budget Surveys in Poland. The findings point at display consumption as a main cause of households’ financial insecurity in Poland. The need to be distinguishable inside own income-group shapes the consumption prototype of the insecure rich while a desire to improve self-image by approaching own consumption to the highest expenses seems to be the dominant consumer behavior rather for the insecure poor. Keywords: social identity, status consumption, financial insecurity
The most recent crisis in the U.S. financial system revealed serious structural vulnerabilities and resurrected debate about how to better govern the system. After extended inquiry, Congress passed and President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which among other provisions, establishes a new entity to address financial stability: The Financial Stability Oversight Council (FSOC). Yet public concerns and controversy about governing the financial system have not abated, leading us to wonder how we can better understand and investigate the FSOC as a governing mechanism. In this paper we extend work in institutional political economy to analyze the nature of the financial system, the governing principles of the FSOC, and the fit between them. We argue that the U.S. financial system and the FSOC are examples of polycentric systems and identify principles that can be further investigated to explore governing issues in polycentric systems.
During the last decade, many Brazilian consumers left the lower strata of the socioeconomic pyramid and ascended to the middle class. A large part this increased social mobility came from increased access to credit. Although borrowing led to a higher social status for some, for others it led to over-indebtedness. This paper takes a law and economics approach to analyze over-indebtedness in Brazil and discusses the necessity of wider regulation of consumer credit. It first investigates the available institutions in the Brazilian model and then considers the necessity of further regulation. If regulation is needed, should it be ex ante prohibitions, ex post liability rules, or a mixture of both?
Intellectual protection of plant varieties is a subject of intense debate and has recently been at the forefront of environmental degradation and the need to protect biodiversity. In this context, the role of the different actors involved in plant breeding has been emphasized by broadening the debate to the divergent interests of commercial breeders and farmers. The intellectual protection of plant varieties bred by commercial breeders has gradually limited the traditional farming practice of saving, resowing and exchanging seed. Against this background, this paper purports to analyze the incentives of the parties involved in the plant variety market as shaped by the change of the legal framework. Among various considerations it is argued that intellectual protection raised issues of biodiversity conservation. As a consequence, farming activities passed from being the main source of food production to the depositary of biodiversity conservation.
This paper investigates the impact of political uncertainty caused by U.S. gubernatorial elections on the borrowing costs of municipal bond issuers in the past twenty years. We nd that the o¤ering yields of municipal bonds issued during election periods are six to eight basis points higher than those of bonds issued during non-election periods. Bonds issued in states with an incumbent governor facing term limits or retirement are associated with o¤ering yields that are higher by an additional three basis points. To provide a scale for these results, the average yield di¤erence between investment-grade and non-investment-grade municipal bonds is six basis points, and the average yield di¤erence between rated bonds and non-rated bonds is 28 basis points. The impact of elections on the borrowing costs of municipal bond issuers is more pronounced during local economic downturns and among states with more outstanding debt. Several state scal and budgetary institutions, such as GAAP-based budgeting, spending limits, and tax-raise limits, mitigate the adverse impact of political uncertainty on the borrowing cost. Evidence from transactions of municipal bonds in the secondary market suggests that declining demand due to investorsuncertainty aversion is the driving force behind the escalated o¤ering yield during election periods. Key Words: Political Uncertainty; Elections
This paper presents a new framework to analyze the dynamic relationship between social capital and economic growth. This relationship has been analyzed in a variant of quality-ladder growth model. We consider three institutional environments: first, perfect and costless institutions, second, social capital is the only form of institutions and third, both social capital and formal institutions determine the strength of institutions. We characterize an equilibrium in which a higher level of social capital increases growth but higher growth itself weakens social capital by increasing labor reallocation rate and by reducing socialization time. We show that in the absence of formal institutions, a higher rate of innovation lowers R&D investment by weakening existing informal institutions highlighting the need to improve formal institutions. A poor country lacking in resources or will to develop formal institutions will be caught up in poverty trap even if they transplant the technologies of rich countries. The model, therefore, provides another explanation of why poor countries do not catch up.
In the Indian context, there are large land productivity differences between villages as well as within villages. There are extensive studies on the reasons for non equalization of land productivity differences intra village, in terms inactivity of the land market. But the conditions for non equalization of land productivity differences over village have not been studied. In addition to the nature of land market the paper explores whether non production costs constrain this equalization. One process of equalization of productivity differences is the migration of peasants from the high land productive/ high growth regions to the low land productive regions with an intention to organize production in the area that they have migrated into. This necessitates the identification of two economic spaces in which the individual negotiate and make decision. The peasant migrations are from one economic structure/space where the institutional structure is market oriented to another structure/space where the institutional structure/space is personalized exchanges. If one considers transactions costs as the costs of structuring exchanges, the movement of the peasant from the modern economic space to the traditional economic space, has an added non production costs as these agents have to understand the institutions of structuring exchanges in the traditional economic space and need to change the rules of structuring exchange if they want to succeed. If one considers the agents in the traditional economic space to be in a ‘quasi-equilibrium’ before the entry of the migrants, the success of the migrant de-stabilizes the local equilibrium generating a social costs to their intervention. These costs are identified as transition costs in the paper. If the peasants perceive that these costs are high and/or institutions to internalize these costs are incompletely formed there could be low levels of migration of peasants.
It has become conventional wisdom that effective competition policy is a necessary ingredient to economic development. But competition policy should be secondary to the more pressing priority of securing contract rights, and sometimes competition policy is at odds with the priority of securing contract rights. This is because in undeveloped legal systems, cartels are sometimes necessary to enforce contracts. When courts and other public instruments are unable to reliably enforce contracts, private ordering systems often arise to mobilize a group of affiliated merchants to direct coordinated punishments against parties who breach contracts. Yet such coordinated punishments is akin to a group boycott that normally invites antitrust scrutiny. This chapter focuses on this tension between the well-understood harms of group boycotts as restraints on competition and the unappreciated benefits of group boycotts as a pro-competitive solution to court failures. The chapter pays particular attention to development needs in India, which (in addition to hosting the conference that preceded this volume) is home both to courts that historically have not achieved the degree of reliable contract enforcement and to a burgeoning diamond industry that for generations has relied on cartel-like instruments to secure transactions. Accordingly, those who seek to wipe out India’s cartels in the name of competition policy should be careful not to undermine the diamond industry, which is an important contributor to India’s economic growth.
Law & society scholars have long been fascinated with the interplay of formal legal and informal extralegal sanctions. Unfortunately, there has been a conceptual conflation of very different mechanisms that spur the reliance of extralegal mechanisms. One mechanism might be described as “the shadow of the law,” made famous by seminal works by Macaulay & Galanter, in which social coercion and custom have force because formal legal rights are credible and reasonably defined. The other mechanism, recently explored by economic historians and legal institutionalists, might be described as “social norms” or “order without law”, borrowing from Robert Ellickson’s famous work. In this second mechanism, extralegal mechanisms – whether organized shunning, violence, or social disdain – replace legal coercion to bring social order and are an alternative to, not an extension of, formal legal sanctions. Various forms of arbitration contain elements that resemble both mechanisms, but the penumbra of systems has led to scholarly imprecision. Specifically, recent scholarship private legal systems—specifically, industry-wide systems of private law and private adjudication—has chiefly been put in the first category and understood as a system to economize on litigation and dispute resolution costs. Instead, it belongs in the second and should be understood as economizing on enforcement costs. The implications for institutional theory are significant, as confusion in the literature has led to both an over appreciation of private ordering, an under appreciation for social institutions, and Panglossian attitudes towards both lawlessness and legal development.
This paper describes a new commitment mechanism that is being used to manage and resolve monetary claims in the real world. The paper distinguishes the mechanism from conventional methods, such as litigation and mediation, by analyzing those methods as bargaining mechanisms and exploring some of their inherent flaws. In contrast to litigation, arbitration, mediation, negotiation, and traditional sealed-bid arrangements, the new mechanism has features that (1) negate any incentive or excuse for either party to try to use it to bluff or to posture (or to try to posture through a refusal to use it); and (2) allow it to be initiated and used unilaterally by one party without the other party’s cooperation or consent. In further contrast to conventional methods, self-interest obliges the initiating party to confidentially commit to a settlement that is reasonable and focal at the outset of the process, and self-interest obliges the other side to do so prior to a fixed deadline.
It is puzzling today to explain the diversity and imperfection of regulation applied to network monopolies. We argue that two sets of fundamental characteristics should be deemed when searching for the most appropriate regulatory tools to implement. First, the bounded endowment of regulators set by the governments and the legislators determines their abilities (staff, budget, judicial powers) to implement any of the regulatory tools. Ranging these tools from the easiest to the most complex to implement, they are: a- cost plus, b- price/revenue cap, c- output regulation, d- yardstick competition or e- menu of contracts. Besides, the regulator must take into account that the network monopolies perform multiple tasks with heterogeneous regulatory characteristics in terms of controllability, predictability and observability. These tasks characteristics determine what type of regulatory tool is more likely to better regulate each network monopoly’s tasks. In general, incentive schemes should be implemented with tasks responding well to the criteria of controllability and predictability. It is then the level of observability of these tasks which should set the particular incentive tool to implement. Conclusions for the regulation of network monopolies’ tasks are then derived from the actual regulatory capability of regulators.
Corporate social responsibility (CSR) is a model of corporate governance (CG) extending fiduciary duties from fulfillment of responsibilities towards the firm’s owners to fulfillment of analogous fiduciary duties towards all the firm’s stakeholders. After considering the place of CSR in the debate about alternative CG modes, a full-fledged social contract foundation of the multi-stakeholder and multi-fiduciary model is present. The paper shows that CSR is a social norm that would endogenously emerge from the stakeholders’ social contract seen as the first move in an equilibrium selection process that reaches the equilibrium state of a CG institution. The social contract provides a model of the impartial mediating reasoning performed by a board of directors striving to balance different claims of stakeholders. It also allows deducing the multi-stakeholder objective function that socially responsible firms maximize, and then provides a specification of the particular fiduciary duties owed to each stakeholder according to its position.
This study re-examines the theory of legal-origin on the basis of a new longitudinal dataset on creditor protection for four OECD countries over a long time span 1970-2005. It observes that the civil law countries (France and Germany) provided better creditor protection relating to debtors’ control while the common law countries (UK and USA) provided better creditor protection relating to credit contract and insolvency. Through dynamic panel data modelling our study shows that debtors’ control has a long-term favourable effect on credit market expansion while the credit contract component of creditor protection has the opposite effect. Keywords: Creditor Protection, Legal Origin Theory and Law and Finance. JEL Codes: G30, G38, K22, K40
In economics the local knowledge advantage is probably one of the key arguments in favor of decentralizing the public sector. However, the empirical investigations of this particular effect have been scarce. This paper tests the existence of the local knowledge advantage in a real world setting. Specifically, it looks at the variation of local knowledge across regions based on the origin and careers of regional politicians, assuming that politicians, who have spent a longer period of their life in a particular region, possess better knowledge of that region than outsiders. In order to avoid the endogeneity problem, the paper investigates how local origin affected the performance of the politicians in a natural experiment environment, studying the responses of regional governors in Russia to the disastrous forest fires in 2010. We confirm that local knowledge improves the performance of the governors. However, in a highly centralized federation like Russia, the effect is conditional on the access to federal resources through close ties to the federal center.
Despite the significant increase in FDI, the MENA region has unimpressive performance in attracting FDI when compared to other developing countries. This performance raises concerns regarding the past economic reforms in several MENA countries. In addition, the region is expected to acquire less FDI inflows in the coming years due to current political instability. This research aims to explain the relationship between the risk of the country and its ability to attract FDI and also aims to investigate whether the New Institutional Economics (NIE) do matter in FDI decisions to the MENA region. Multiple linear regressions and panel data analysis are used to consider unobserved heterogeneity and cross-country differences for twenty MENA countries during the period of 1999-2010. The results show that low levels of economic and financial risk has a positive but insignificant impact on FDI while high level of political risk has –unexpectedly- positive and significant impact on FDI flow. New Intuitional Economics measures also have mixed results. Investment freedom, monetary freedom, and regulatory quality have positive and significant impact on FDI while business freedom, and voice & accountability have negative and significant impact. The results show the importance of using the detailed sub-indicators instead of the composite measures. Regarding traditional determinants of FDI, market size and efficiency seeking motives represented in GDP and trade openness have significant positive impact on FDI while resource-seeking motives has negative impact. Based on these results, a set of policy recommendations and implemented actions are suggested for decision makers in order to attract more FDI to the MENA region.
Crimes against the historically marginalized Scheduled Castes and Scheduled Tribes (SC/ST) by the upper castes in India represent an extreme form of prejudice and discrimination. In this paper, we investigate the effect of changes in relative material standards of living between the SC/ST and upper castes, as measured by consumption expenditures, on changes in the incidence of crimes against SC/ST. Using official district level crime data for the period 2001-10, we find a positive association between crimes and expenditure of SC/ST vis-à-vis the upper castes suggesting that a widening of the gap between groups is associated with a decrease in caste-based crimes. Moreover, this effect seems to be driven by the upper castes’ responding to changes in status quo. The results are robust to changes in specifications and modeling assumptions.
In the aftermath of the 2007-2008 financial crisis, many firms responded to a widespread pressure to curb excessive risk taking by adopting Stock Ownership Policies (“SOPs”) that require top executives and directors to hold a certain value of their companies shares. Firms commonly cite these policies as a key element in their mitigation of risk and alignment of interests between managers and shareholders. However, by analyzing the 2010 SOPs as applied to S&P 500 CEOs, I suggest that despite the prominent objectives that firms declare for their SOPs, these policies hardly work. This striking fact is camouflaged in firms’ proxy statements. Therefore, I put forward a proposal to make SOPs transparent.
Using the synthetic control method of analysis, we provide the first measurements of the direct macroeconomic economic benefits of a unique robust security response to an insurgency. Of all the states affected by Naxalite violence in India, only one state i.e. Andhra Pradesh raised a specially trained and equipped police force in 1989 known as the Greyhounds, dedicated mainly to combating the Naxalite insurgency. Compared to a synthetic control region constructed from states affected by Naxalite violence that did not raise a specially trained anti-Naxalite police force, we find that Andhra Pradesh gained on average 17.22% of its per capita NSDP over the period 1989 to 2000. The effects on the various subsectors of the nonagricultural sector range from approximately 15% to 26%. Placebo tests indicate that all results are significant.
This paper analyzes the effects of a major economic crisis on firms’ boundary decisions. More specifically we use the economic theory of the firm to derive a number of hypotheses regarding the influence of decreasing demand and supply of risk willing capital on firms’ decisions to in-and outsource activities. We test these hypotheses using an original data set from a survey conducted among Norwegian firms. We find that in-and out sourcing decisions depend on whether activities were core to the firm and whether they are characterized by asset specificity. Further, we find that core activities are sensitive to both reductions in demand and reductions in access to credit, while non-core activities only are sensitive to demand reduction. In addition, we find a negative interaction effect between reduction in demand and reductions in access to credit for insourcing of core activities. We argue that the latter finding indicate that reductions in demand increases firms’ incentives to vertically integrate core activities, but that its ability to do so depends on their access to credit.
Concepts help economize on information. Conventional wisdom correctly associates conceptualism with formalism but misunderstands the role concepts play in law. Commentators from the Legal Realists onward have paid insufficient attention to the distinction between concepts and the categories they pick out (or, to borrow from philosophical semantics, the intension and extension of legal relations). Even though two concepts may identify the same category, they can differ greatly in terms of information costs. This Article applies some tools of cognitive science to explore the economics of legal concepts. Both the mind and the law are information-processing devices that manage complexity and economize on information by employing concepts and rules, the specific-over-general principle, modularity, and recursion. These devices work in tandem to produce the economizing architecture of property. As in cognitive science, we expect simplicity of description and generality of explanation to coincide. This Article then applies the cognitive theory of property to longstanding puzzles like the role of baselines--such as nemo dat (“one cannot give that which one does not have”) and ad coelum (“one who owns the soil owns to the heavens above and the depths below”)--the notion of title, and the function of equity as a safety valve for the law. The theory developed here provides a more elegant description of the law, generalizes to new situations better, and therefore helps to explain and justify the robustness of traditional baselines in property law. The cognitive theory also allows one to reconcile reductionism and holism in property theory, as well as static and process descriptions of the contours of property.
We consider the role of the state in the production of trust. The existing literature has examined how the state as a regulator is able to produce trust that facilitates market transactions. We propose that state ownership represents another mechanism of trust production in less developed countries where the state as a regulator is ineffective or corrupt. We consider the recent history of the Russian banking industry and describe events that led to the deterioration of trust in the market for household bank deposits. To repair trust and attract savings into the banking system, the Russian state relies on both regulation and ownership. To be effective, these institutional mechanisms need to be trusted and we develop hypotheses about antecedents and consequences of trust in state ownership and trust in state regulation. To test our argument about the trust-producing functions of the state, we use a survey of over 2,400 Russian individuals. We find that the antecedents and consequences of individual-level trust in state ownership differ from the antecedents and consequences of trust in state regulation, supporting the proposition that state ownership represents an independent mechanism of producing trust in the bank deposit market.
Most proposals for federal tax reform envision the repeal of the deduction for state and local taxes (i.e, the SALT deduction). These proposals are not without precedent. The Reagan Administration’s proposed repeal of the SALT deduction as part of its 1985 tax reform proposal generated substantial academic analysis of this reform option. Since that time, however, there have been numerous developments relevant to the possibility of repeal or reform of the SALT deduction. The growing significance of the alternative minimum tax, the influence of the Great Recession on state and local fiscal structures, mounting concerns with subnational revenue volatility, and various demographic changes have altered the framework for considering the influence of federal tax reform on state and local fiscal incentives. We consider three specific reform options—the 2005 Presidential Advisory Panel on Federal Tax Reform, the Rivlin/Domenici plan, and the Simpson-Bowles National Commission on Fiscal Responsibility and Reform. Each of these proposals would repeal the SALT deduction in its entirety, yet the experience of TRA 1986 suggests that outright repeal is likely to face considerable political opposition from state and local government lobbyists. In an effort to anticipate the likely political instinct for reforms short of outright repeal, we also consider the merits of three alternative half-measures:(i) limiting the SALT deduction to a subset of taxpayers, (ii) limiting the SALT deduction to a subset of taxes, and (iii) converting the deduction to a flat-rate credit. Because of their differential effect on the tax price faced by state and local taxpayers, these reform options have very different implications for state and local fiscal incentives. These alternative reform options also implicate broader questions about the proper role of the federal government in the design of subnational tax structures.
In this article, we investigate a new and widely discussed financial innovation: the supercharged initial public offering (IPO). A supercharged IPO differs from a conventional IPO because it involves a contract provision that enables the original owners of a firm to extract large amounts of money from the company in the post-IPO period. Stated most directly, the supercharged IPO involves an agreement—unseen and unheard of prior to 1993—whereby a newly public company agrees to pay (often) billions of dollars to its founding owners over the course of a fifteen-year period after the IPO takes place. The supercharged IPOs have generated substantial debate and controversy but no commentator has thus far posed the question: why now? After all, owners and founders have taken companies public for at least three hundred years, yet the unusual payout scheme emerged just two decades ago. Moreover, this new-style IPO, while not routine, has spread across industries and geographic areas, a process that raises the question of how and why innovations diffuse after the initial discovery takes place. Finally, and perhaps most importantly, the supercharged IPO raises the question of who actually benefits: the architects of the plan, the investing public, or both? In this study, we seek to find answers to these questions with the help of a large IPO database—the first of its kind—and one that includes both conventional and supercharged IPOs over the course of the last several decades.
The paper argues that the Legal Services Act 2007 lays down the basis for significant changes in how lawyers and others will provide legal services in England & Wales in the future. At the heart of the Act there is one fundamental change in the institutional infrastructure for the provision of legal services and a confirmation and consolidation of the trend in UK policy towards competitive self-regulation of markets for legal services. The licensing of Alternative Business Structures (ABSs) owned by non-lawyers to provide legal services has the potential to create a ‘technological revolution’ in ‘lawyering’ leading to innovation in not only how legal services are delivered but perhaps in the nature of legal services themselves. The two tier system of regulation inaugurated under LSA 2007 consolidates, strengthens and extends system of competition between regulators introduced by the Administration of Justice Act 1985 and the Courts and Legal Services Act 1990. Under LSA 2007 front-line regulators such as the Solicitors Regulatory Authority, the Bar Standards Board and the Council for Licensed Conveyancers are supervised in carrying out their regulatory activities by the Legal Services Board which is under an obligation to promote competition in the market for legal service. The paper will further consider why there has not been the predicted revolution in lawyering in the liberalised jurisdictions of Finland and New South Wales.
Optimal control theory and martingale methods are more elegant ways of modeling dynamic, stochastic processes than alternatives such as Monte Carlo simulation methods and equally powerful, but they are nevertheless rarely used in our field, due in part, perhaps, to their unfamiliarity. In this article we illustrate their power by completing one of the more compelling computational models of organizational process extant: the Crecine-Padgett model of the budgetary process. This model very accurately explains spending at the program or agency level in the period in which a budget is executed in terms of last year’s spending for the same purpose and revenue growth. But it lacks predictive power because its treats revenue change as an exogenous variable. Consequently, to close this model, a theory of revenue and/or aggregate spending growth that is endogenous to organizational process theories is needed. This article offers (and tests) just such a theory for jurisdictions that face a hard budget constraint, using optimal control theory and martingale methods. This theory takes a jurisdiction’s existing revenue structure and its fiscal assets (savings) as given, and treats revenue and savings growth as continuous-time, continuous-state stochastic processes. This means that next year’s revenues and, thereby, funds available for spending can be predicted using current (in the period of budget formulation or enactment) state variables only. Combined with Crecine-Padgett model of the budgetary process, this means that we can predict and not merely explain spending changes at the program or agency level. Keywords: Process • Mechanism • Martingale methods • Optimal stopping models JEL Classification Numbers: H71 • H72
A long-standing debate pits those who think economic development leads to democratization against those who argue that both result from distant historical causes. Using the most comprehensive estimates of national income available, I show that development is associated with more democratic government—but in the medium run (10 to 20 years). The reason is that higher income usually only prompts a breakthrough to more democratic politics after the incumbent leader leaves office. And in the short run, faster economic growth increases the leader’s odds of survival. I present evidence that leader turnover matters because conservatism grows with tenure and newer leaders are readier to risk political reform. This logic helps explain why democracy advances in waves followed by periods of stasis and why dictators, concerned only to entrench themselves in power, end up preparing their countries to leap to a higher level of democracy when they are eventually overthrown.
This paper considers how societies come to adopt and credibly enforce impersonal rules. Impersonal rules “treat everyone the same.” Impersonal rules are distinct from “anonymous rules.” Anonymous rules enable people who do not know one another personally to deal credibly with each other because they know the identity of the organization that the other belongs to. Anonymous rules are not “personal rules,” but they do not result in treating everyone the same. Most societies can support anonymous rules, not impersonal ones. Governments are inevitably involved in impersonal rules because they must be publicly known and publicly enforced to be credible. Governments are not inevitably involved in the creation and enforcement of anonymous rules, which require organizational identities. We examine the nature of rules, the nature of enforcement, and the nature of organizations. The standard way of defining the state as the organization with a monopoly on the legitimate use of violence (Weber), the organization with priority in the use of violence (Tilly), or a comparative advantage in violence (North), ignores the fact the rules that apply in most societies that are actually enforced are anonymous rules that rely on a substantial element of voluntary self-enforcement. Most rules are enforced because of the inherent value of coordination that arise between credible rule followers, made concrete by the organizations that individuals belong to. The paper argues that the social dynamics generated by coordination enable governments in modern developed societies is what enables governments to obtain a monopoly on legitimate violence.
This paper contrasts the curiosity style for doing social science research that asks the question “What is going on here?” with the more confident research approach that pronounces “This is the law here!” Inasmuch as the social sciences are much more complex than the physical sciences, there is much to be said for the former in our studies of institutions – although, in the spirit of pluralism, there is room for and (as a part of the “natural progression”) a need for both. I begin with an anecdote on the merits of asking good questions, then summarize the period 1930-1970 as it relates to the development of Transaction Cost Economics, then summarize the sequence of events by which TCE has taken shape since – to include questions posed by refinements and extensions and unmet needs.
For a generation the federal government has maintained programs promoting research joint ventures (RJV’s). The ostensible motivation late in the going was to promote knowledge spillovers. The real motivation, at least initially, was to stem the perceived decline of American competitiveness. It is not obvious, however, that federal government initiatives had any effect with respect to either knowledge spillovers or ‘competitiveness’. It is not obvious, for example, that public initiatives were good at identifying RJV’s that would be best situated to generate spillovers. If anything, federal initiatives appear to have channeled resources to ventures that involved little in the way of spillovers – that is, to just the kind of ventures that private parties could have been expected to pursue absent government supports. The conclusion derives from examination of the structure of 171 RJV contracts. RJV’s involving technologies that were less susceptible to unintended spillover have tended to exploit contractual mechanisms to contain spillovers. It turns out that government-subsidized ventures tended to aggressively exploit those same contractual mechanisms. In contrast, non-subsidized ventures as a whole have tended to be less aggressive about exploiting these mechanisms. One is left with the curious result that, insofar as any ventures were occupied with inducing knowledge spillovers – what RJV partners would then call ‘knowledge transfers’ – they tended to be non-subsidized ventures.
Religions are organized in a variety of ways. They may resemble an elected autocracy, a parliamentary democracy, or something akin to a monarchy, where heredity plays a primary role. This variation allows for a comparative study of their organization. These differing power arrangements call for different types of strategic behavior in the fight for control over church doctrine and finance. And they also induce different institutional responses. I show where screening is highly institutionalized and when the age of a person may be an important strategic factor in choosing a leader. I am thus able to explain what otherwise would be very puzzling differences in the age of appointment across religions and within a particular religion, overtime. In a nutshell, this paper is about politics and strategic behavior in the large (democracy versus autocracy) within the context of the small (religious institutions).
In this paper we investigate whether strict transparency laws influence the behavior of polit- ical donors at the state level. Channeling the late Justice Brandeis, we ask: to what degree does sunlight “disinfect” the political process? We utilize several data sources on state campaign spending and political competition to model the origin of transparency laws and to measure their effect. Specifically, we analyze the effect of strict disclosure laws on the proclivity of candidates and other organizations to run political attack ads. We also measure the effect of strict disclosure on the behavior of donors and campaigns. We find weak evidence that strict disclosure laws may inhibit the production of political attack ads. We also find evidence that stricter disclosure laws mitigate the effects of laws that make it easier to spend in elections.
During the Ming and Qing Dynasties, fixed-rent tenancy gradually replaced sharecropping as the dominant form of land tenancy in China. This paper posits that the shift in land tenancy was generated by the technological movement from annual cropping to multiple cropping. To test the hypothesis we exploit a unique dataset gathered from the rent collection archives of Confucius's Lineage in the Qing Dynasty. We estimate the effect of the adoption of wheat-soybean double cropping on the choice of tenancy contract, share contract versus fixed-rent contract. We find that double cropped plots were 30% more likely to be managed under fixed-rent contracts than annually cropped plots. Our findings are consistent with the implications of the factor imperfections theory. The adoption of double cropping made farming more complex and placed greater demands on managerial abilities of tenants. In the absence of a factor market for managerial ability, the optimal tenancy contract had adapted to provide tenants with a greater incentive to supply managerial inputs than had been the case in sharecropping arrangements.
The enforcement of contracts and property rights requires that violators are punished. However, punishments that are costly to administer may not be credible. In this paper we present a model where credible punishments depend on the social allocation of coercive power. We model society as a set of production ventures, whose members spend effort only if they can contract to share the receipts and if they are protected from external expropriation. Under decentralized enforcement, power is dispersed among the strong individuals in each venture, who are rewarded by a ruler for punishing violators. Under centralized enforcement, power is concentrated within the ruler, who directly punishes violators. By preventing violent expropriation across individuals, centralization allows to enforce the law through milder and hence more credible penalties. At the same time, centralization creates a temptation for the ruler to expropriate. Hence, centralized enforcement will be efficient when coercive power is more constrained and costly to use – for instance, due to the individuals’ ability to react or to the presence of moral constraints on the use of force.
his paper tests for nonlinearity in households' income dynamics using a decade-long rural household panel survey dataset from Ethiopia. The paper argues that non-linearity in income dynamics could arise from the historical dynamics of institutions, and supporting evidence is provided from Ethiopian history. The empirical results support non-linearity in income dynamics and hence the existence of poverty traps. The comparative static analysis of the empirical results shows the importance of policy interventions in terms of breaking out of the poverty trap.