Society for Institutional & Organizational Economics
Conference papers from 2013 (sessions were not tracked for this year)
The Roman remedies for failure to disclose in sales contracts were developed by two different institutions: the aediles, with jurisdiction on market transactions effected through auctions, and the praetor, with general jurisdiction including private transactions. The aedilitian remedies—the actiones redhibitoria and quanti minoris—allowed for rapid negotiations and inexpensive litigation but generated some allocative losses ex post, as they did not enable the parties to exchange information about idiosyncratic characteristics of the goods for sale. In contrast, the remedy developed by the praetor—the actio ex empto—implied lengthier negotiations and more expensive litigation but eliminated the ex post allocative loss, as it fully protected the buyers’ idiosyncratic interests. Our analysis sheds some light on how differences in lawmaking institutions affect the laws produced by them.
All around the world, many smallholders are striving to comply with the increasingly stringent quality requirements. Whether they are successful depends to a large extent on the way production and distribution is coordinated along the value chain. Different institutional arrangements, such as contract farming, vertical integration and producer organizations, have emerged in agrifood chains to successfully address these new challenges. There are, however, still many chains in Sub-Saharan Africa where middlemen play an important role in linking farmers to traders and final market. However, middlemen in developing countries are a much debated institution. We conducted a survey in the fall of 2010 among 345 potato growers in the Rift Valley region of Ethiopia, where potato is the dominant crop and middlemen are highly involved in potato marketing. Using propensity score matching, we analyse the impact of this institution on farmers’ income and the implication for smallholders’ commercialisation in the Ethiopian context, where middlemen dominate trading relations in the potato market. Although the literature emphasises the positive contribution of middlemen, our findings show that farmers who rely on middlemen are economically inefficient from the welfare perspective. The main reason for farmers’ use of middlemen appears to be ethnic ties. We conclude that ethnically-based trading relations may lead to economic inefficiency due to lock-in effects.
Standard models of democratic political economy assume that politicians respond to widening income gaps with fiscal redistribution. Yet prominent accounts of the global financial crisis have argued the politicians in the United States responded to increasing inequality and decreased economic mobility not with the fiscal redistribution but with policies extending credit further down the income distribution, enabling consumption. How this works is underspecified. We formalize one way in which this process might play out; a key implication is that politicians' responses to widening gaps in pre-tax income will be conditional on the electoral system: PR systems will exhibit greater fiscal redistribution while SMD systems will resort to credit and consumption stimulus. We examine these expectations using OECD data from 1980-2010 and find that SMD systems are indeed significantly more likely to expand credit as pre-fisc inequality grows while no such relationship is visible in PR systems. Our findings have implications for the financial system risk: SMD democracies are marginally more prone to credit booms and financial crises than countries functioning under PR systems.
Nations stay together when citizens share enough values and preferences and can communicate with each other. Homogeneity amongst people can be built with education, teaching a common language to facilitate communication, but also by brute force such as prohibiting local cultures. Democracies and non-democracies have different incentives when it comes to choosing how much and by what means to homogenize the population. We study and we compare both regimes in a model where the size of countries and the degree of active homogenization is endogenous. We also offer some historical discussions of cases which illustrate our theoretical results.
Over the past twenty years the ratio of cash rent to cropshare contracts across the United States has more than doubled. Predictably, some economists attribute this to ad hoc changes in the relative risk preferences of farmer and landowners. We suggest that it is the result of changes in cultivation practices. The switch from conventional to conservation tillage brought about by changes in herbicide technologies, fuel costs, and knowledge of the benefits of soil micro-organisms, has reduced the ability of farmers to exploit soil attributes. This removes the major incentive of cropsharing and makes cash renting more attractive. Using USDA field level data from across the United States, we find strong support for this hypothesis.
A lesson from the scholarship on institutions and development is that economic and political development does reach most countries because it is not in the interest of those in power, whose goal is to protect their rents. We know more about persistence than we do about making the critical transition to sustained prosperity. We focus on the question: how have some countries managed to break away and transition to becoming open societies? We highlight the roles played by three concepts: windows of opportunity; beliefs and leadership. We wed these concepts to institutions. After presenting our framework, we flesh out the dynamics with a case study of Brazil from 1964-2012. In the early 1990s Brazil seized a window of opportunity with the leadership of President Cardoso and his economic team. Over time, they changed beliefs within Brazil which has set them on a trajectory towards an open economic and political society.
In this paper, we use a natural experiment to identify a causal relationship between income and trust. We use a panel dataset on Russia where GDP experienced a 8% drop in 2009 (the largest decline in G20). The eff ect of the crisis had been very uneven among Russian regions because of their diff erent industrial structure inherited from the Soviet economy. We find that the regions that specialize in producing capital goods, had a more substantial income decline during the crisis. The variation in the industrial structure therefore allows us create an instrument for the change in income. After instrumenting average regional income we find that the effect of income on trust is statistically and economically significant. Controlling for other conventional determinants of trust, we show that 10 percent decrease in income is associated with 2.6 percentage point decrease in the level of trust (the share of respondents saying that most people can be trusted). Given that the average level of trust in Russia is only 18 per cent, this magnitude is substantial.
What are the drivers of sub-national variation in forestry outcomes under a uniform national decentralization policy? The literature on decentralized governance of natural resources in developing countries is decidedly mixed in terms of theory and findings. Some scholars argue that decentralization reforms will lead to improved policy outcomes, other scholars view decentralization with great skepticism, and a third group believes that whether governance reforms will lead to positive or negative environmental outcomes is conditional on an array of ancillary factors. Unfortunately, many empirical investigations of decentralization’s effects fail to evaluate these competing explanations under circumstances where there are tangible tradeoffs pushing actors toward disparate environmental outcomes. Our contribution to this policy-relevant debate involves innovations in both theory and empirics. First, this study builds upon and applies polycentric governance theory, arguing that the strength of connections between actors across levels of government shapes forest cover change under decentralization. Specifically, we hypothesize that municipalities exhibiting higher levels of polycentricity will be more effective in improving forest conditions. Second, we test this theory using a unique longitudinal dataset on forestry governance for 100 municipalities in Guatemala, combining socio-economic information, two waves of surveys with mayors, and remote-sensed data on forest change over twenty years. Preliminary results suggest that governance systems characterized by higher polycentricity are able to counteract the pressures towards deforestation when agriculture is important for a municipality, whereas those with lower polycentricity are not.
Committee voting has mostly been investigated from the perspective of the standard Baron-Ferejohn model of bargaining over the division of a pie, in which bargaining ends as soon as the committee reaches an agreement. In standing committees, however, existing agreements can be amended. This paper studies an extension of the Baron-Ferejohn framework to a model with an evolving default that reflects this important feature of policymaking in standing committees: In each of an infinite number of periods, the ongoing default can be amended to a new policy (which is, in turn, the default for the next period). The model provides a number of quite different predictions. (i) From a positive perspective, the key distinction turns on whether the quota is less than unanimity. In that case, patient enough players waste substantial shares of the pie each period and the size principle fails in some pure strategy Markov perfect equilibria. By contrast, the unique equilibrium outcome in a unanimity committee coincides with that in the corresponding Baron-Ferejohn framework. (ii) If players have heterogeneous discounts then every equilibrium is inefficient, irrespective of the quota.
In the Northern Region of the Philippines can be found at least three different types of property rights in the same production system operated by the same ethnolinguistic group that has survived for long periods of time. To explain this puzzle, I provide a geographic risk model and building on Libecap’s (1989) contracting costs of property rights. I argue that these property systems essentially evolved in equilibrium overtime in response to these geographic risks. I illustrate my model with a comparative study of ancient commons (irrigation) with varied geography and property rights. My findings are consistent with the theoretical expectations. In the mountainous Ifugao region, where there is a need to maintain the ecological integrity of the watershed, the size of rice terraces, and kinship as basis of social order, the primogeniture system of property rights has developed in the last 2000 years. In the 400 year-old Zangjeras, where flooding and droughts require regular mobilization of labor, a unique property system of membership shares – atar – has developed. In the Cagayan Valley, where there is little risk of floods and droughts, typical modern private property rights have been adopted. The paper has four implications. First, it suggests that risk analysis should be incorporated into the study of the emergence and evolution of institutions in general and property rights in the commons in particular. Second, it helps explain the causes, consequences, diversity and vulnerability of institutions governing the commons. Third, the emergence, assignment, enforcement and transfer of property rights have important implications for the allocation of resources and the nature of production in the commons. Finally, understanding the effects of geographic risks has important practical implications for climate adaption in the commons and smallholder agriculture in particular.
We contest the loss aversion theory of the endowment effect, in which the effect depends on the status of endowment alone. Instead, we propose that the nature of the trading process determines whether people resist or accept an exchange by affecting the responsibility people feel for their choice. The more they feel responsible for the decision, the more they expect experiencing regret over a negative outcome. Aversion to regret causes people to resist a rational trade and exhibit the endowment effect. In a series of experiments, we analyze two institutions that alter the trading process and reduce perceived responsibility --agency and markets. We find that both mute the endowment effect; moreover, participants intentionally use them to self-debias. Since many institutions shift responsibility, we conclude that the endowment effect is not present in many domains previously thought to implicate it. Institutional design often need not rely on paternalistic intervention.
Public registries are a fundamental institution that allow impersonal exchange to develop. There exist at least two main variations of this institution in western countries: the recordation system and the registration system. In the legal and economic scholarship it is somehow common wisdom to assume that recordation is less effective than registration in avoiding title uncertainty. Because of this, the thousands of reform and land titling programs sponsored by International Developing Agencies have promoted the development of registration systems. However, there is no empirical test so far that can credibly show why the registration system is superior to the recording system in any measure relevant for development. We provide such evidence by exploiting a natural experiment in the north-east Italian provinces which until WWI belonged to the Austro-Hungarian empire and, as such, have implemented and maintained the registration system in place.
This paper develops a theory of contracts where agents can legally commit their principals. In contrast with standard models, adverse selection arises even if the quality of the goods being exchanged is observable and verifiable. The reason is that a third party who contracts with the agent may be uninformed about the legal authority the agent has been granted by the principal and hence on the extent to which the agent’s acts commit the principal. Private ordering solutions to this “legal lemons” problem, such as voluntary disclosure of information by the principal, and certification of the agent’s authority by a professional, fail to achieve the first best. In a variety of circumstances, public ordering solutions, such as restrictions on the choice of the certifying professional, and the public registration of contracts, may be efficient. Our model explains numerous empirical regularities in both corporate and property law, including rules protecting good-faith third acquirers.
We report results of a project that leverages the random assignment of over $1,000$ domestic elections observers to polling places during Ghana's 2012 general elections to study three measures of likely election day fraud in a developing democracy. Our research strategy is designed to measure the impact of observers on fraud at the stations where they are deployed and to detect whether election observers induce the strategic movement of fraud from the polling places where they are stationed to nearby but unobserved polling places. We find evidence that observers reduce the probability that more voters will vote in a polling place than are officially registered by about 60 percent, and they similarly reduce unnaturally high levels of election turnout. In party strongholds observers also reduce instances of ballot stuffing. We additionally find evidence of spatial spillover effects. Unobserved polling places spatially proximate to observed polling places are 75 percent more likely to experience fraud than unobserved polling places in areas without observers nearby. These spillover effects are concentrated in the strongholds of Ghana's two major political parties, empirical evidence that political parties are most effective at coordinating fraud by moving it away from polling stations under observation where the party's local organizational capacity is greatest. Our results suggest that fraud on election day in Ghana is the product of deliberate behavior by well-organized political parties seeking to inflate their national vote totals to win the presidency, and have implications for our general understanding of the conditions in which parties are able to coordinate electoral fraud.
Is there a connection between state-law tort reform and the explosive growth of U.S. intellectual property (IP) litigation? The literature has established that the number of tort claims in states with tort reform has gone down. How do personal injury (PI) plaintiff lawyers deal with decreased demand for their services? How do district court judges respond to the lightening of their dockets due to the reduction in tort suits? There is anecdotal evidence that some PI lawyers have switched substantially to IP and that some judges have found ways to attract IP litigation instead of PI litigation. Using data gathered from various sources, including Lex Machina, DocketX, and the Database of State Tort Law Reforms, we have found evidence associating state tort reform with significant increases in copyright and patent filings in U.S. district courts in states that have undergone tort reform. We explore two competing hypotheses for this phenomenon. The “retooling” hypothesis suggests that PI attorneys moving into other areas of practice are more likely to gravitate toward patent litigation and copyright litigation, rather than trademark litigation or trade-secret litigation, perhaps because patent litigation and copyright litigation offer more opportunities for lucrative suits brought by non-incumbent industry players (e.g., independent inventors or startup firms) who might be most likely to seek the services of former PI attorneys. Alternatively, the apparent differential growth of patent and copyright litigation in states that have undergone tort reform might be court-based. In the “vacuum” hypothesis a post-reform decrease in docket congestion creates a “vacuum” that could make a state’s U.S. district courts significantly more attractive for IP filings, either directly by making litigation in those courts speedier or indirectly by freeing time for the courts to adopt rules for IP litigation that parties find attractive.
In this paper, we argue that the notion of equity as a safety valve on the law can be seen as part of the law’s response to the problem of opportunism. We define equity as the use of a more flexible, morally judgmental, and subjective mode of legal decision making that roughly corresponds with historical equity. We distinguish opportunists as agents who have unusual willingness and ability to take advantage of necessary imperfections in the law. We present a simple contracting model that captures the role of equity as a safety valve, and show how it can solve problems posed by opportunists. In our model, a simple but imperfect formal legal regime is able to achieve first best in the absence of opportunists. But when opportunists are added, a more flexible regime (equity)–specifically, one that denies damages to parties who exploit contractual gaps–can be preferred. However, equity is also vulnerable to being used opportunistically by the parties it intends to protect. For this reason, we show that it is often preferable to limit equity, reserving it for use only against those who appear sufficiently likely to be opportunists. Our model generates intuitive comparative statics that describe the optimal expansiveness or restrictiveness of equity.
In this paper, a setting of bilateral selfish reliance investments and post contractual two-sided asymmetric information is explored. Since the pioneering work of Rogerson (1992) and Hermalin-Katz (1993), it is by now well known that comprehensive contracts can implement the first best even if the parties' valuations are private information and reliance investments are of selfish types (with quasi-linear utilities). However, real world contracts seem to be rather simple - fixed-price incomplete contracts which are sometimes renegotiated later. Hence, it is of interest to analyse whether breach remedies can introduce the first best in this set-up. Paper tries to fill this gap in the literature. Some interesting results are obtained: both the parties tend to over-invest under Restitution (i.e. no-damage) which is contrary to the conventional literature on hold up, also under Reliance damage. Further analysis of the Subjective Valuation and the Objective Valuation (Expected Expectation Damage) - two Court adopted methods of establishing a breach-victim's expectation interest under asymmetric information - shows that Expected Expectation damage is superior to the others but still falls short of what party-designed liquidated damage could achieve. Analysis also shows that it may be of the parties mutual interest to set a very high liquidated damage to protect their investment upfront, and Court should recognise this fact. However, first best is generally not achievable.
Two parties bargaining over a pie, the size of which is determined by their previous investment decisions. Investment costs are heterogenoeus. The bargaining rule is sensitive to investment behavior. Two games are studied which differ for the considered socio-political structure: communal property in one case and private property in the other. We hereby show that in both games when a unique stochastically stable outcome exists a norm of investment and a norm of surplus division must coevolve. While the investment norm always supports the efficient investment profile, the surplus division norm may differ among the two games, depending on the size of investment cost gap. Under private property only the egalitarian surplus division evolves. Under communal property instead two different bargaining norms may evolve: the egalitarian one and an inegalitarian norm. We show that no cap to payoffs inequality emerges under private property while an inequality payoffs cap endogenously evolve under communal property. The games have been proposed to explain the social norms used in modern hunter-gatherer societies.
The availability of information is an important determinant of the prices in auctions. On the one hand, information affects prices through number of bidders: more bidders lead to lower prices. On the other hand, it could allow them to bid strategically and to increase prices. We show that higher level of information transparency in the region (the amount of information available through public procurement website) leads to lower relative prices on public gasoline market and to decrease in number of bidders at the same time. The main reason is a specific structure of gasoline markets where local monopolists have significantly lower production costs than other participants.
We examine the implications of products liability in a setting where oligopolistic firms cannot differentiate themselves from rivals, but rather share a collective reputation for product safety. Aware of the industry's collective reputation, consumers know the average industry-wide likelihood of harm, but not the likelihood of harm of a particular firm's product. We characterize equilibrium accident probability, industry output, and social welfare under no liability and under strict liability for different assumptions about the extent to which consumers are compensated for harm in the case of accident. We show that, first, unlike in the traditional products liability model, firms' incentives to invest in precaution in general depend on the market structure. Second, no liability can welfare-dominate strict liability. Third, the relationship between social welfare and industry size depends on the legal regime in place. Under certain legal regimes, restricting industry size is unambiguously welfare-enhancing.
Research predicts that pro-social organizations, such as governments, are likely to have more pro-social employees. We investigate this prediction. Comparing the behavior of over 1,000 subjects from the public and private sectors in Indonesia, we find that even individuals in government ministries that are not particularly "caring", such as ministries of finance, are significantly more pro-social than their private-sector counterparts. Is this because of selection, or socialization? A well-identified comparison of pre-career subjects indicates that more pro-social individuals select into the public sector. However, we also find evidence for socialization: service in the public sector significantly increases employee pro-sociality.
We investigate banks' corporate social responsibility. Banks offer loans to standard and motivated borrowers in the credit market and can finance both standard and ethical projects. Standard banks loan both kinds of projects. Ethical banks commit to financing only ethical projects, which have social profitability but lower expected revenues. Motivated borrowers are keen to invest in ethical projects and to deal with ethical banks. Conditions for existence and social efficiency of ethical banks are stated. Efficiency is mainly induced by the "ethical collateral" provided by motivated borrowers to ethical banks. Model predictions are consistent with available data on ethical banks.
Is government ideology important for fiscal policy? I study this question with both aggregated and disaggregated public spending data from the German States over the period 1975-2010. To identify the effect of ideology, I rely on a fuzzy regression discontinuity design. I find that aggregated expenditures under left-wing state governments are higher than under right-wing governments. An analysis for different spending categories indicates that ideological differences are particularly important for education and social expenditures. The results are consistent with the view that politicians are policy rather than office motivated.
The inadvertent waiver (IW) doctrine is part of the attorney client privilege but its application lacks uniformity and is thus a major cause for distress for lawyers and clients. The concerns about an IW of the privilege intensify as technology changes the way attorneys and clients interact. Seeking legal advice has become a dangerous activity. This article first shows that courts treat IW as a type of accident without duly attending to the implications of the concept. Drawing on economic analysis of tort law, I identify how the liability regimes and unique harm rules applied by courts to determine whether IW has occurred undermine the objective of the privilege to encourage full and frank exchange of information between attorneys and clients. The second part of this article asserts that imputing inadvertent disclosure of privileged evidence by attorneys to their clients contradicts the prevalent rationale of the attorney client privilege. Imputing IW by attorneys to their clients creates a moral hazard problem. This problem is not sufficiently mitigated by incentives such as the attorney's ethical duties, concerns about malpractice liability or professional reputation. I suggest that the practice should be eliminated or at least minimized.
The goal of this paper is to study the influence of corporate environmental responsibility (CER) and national environmental standards on the location choices of the 600 biggest European firms. By using the environmental score provided by Vigeo , we are able to test the influence of the environmental performances of firms. We find a negative interaction effect between these environmental performances and national environmental regulations. Thus, we argue that national standards can be a substitute for CER. All things being equal, firms with better environmental performances tend to be located in dirtier countries. CER can therefore be seen as an answer to the location choices of firms which invest in countries with poor environmental policies. This result is only valid when considering de facto environmental standards, not de jure environmental standards. It suggests a possible strategic behavior of firms which exploit these differences between formal environmental regulations and their effective enforcement.
According to Arrow and Lind (1970), as the net returns of an investment are shared by a larger pool of shareholders, the aggregate of shareholders' risk premiums approaches zero. Employing a dataset of investor-level ownership records, asset pricing measures, and managerial discretion proxies, we test Arrow and Lind's hypothesis of the relationship between ownership concentration and risk premium and its implication for company valuation. We find strong and robust results that: (i) contrary to the previous studies on institutional ownership, greater ownership dispersion is associated with higher company valuation and (ii) managers are more likely to invest in fixed assets and hold less cash in companies with dispersed ownership. We argue that both results are interconnected: when ownership concentration is low, investors' lower premiums and managers' risk-neutral behavior contribute to higher valuations.
Intellectual property systems all over the world are modeled on the one-size-fits-all principle. However important, inventions and original works of authorship receive the same scope of protection, for the same period, backed by the same legal remedies. Metaphorically speaking, all intellectual property is equal under the law. This equality comes at a heavy price. The equality principle gives all creators access to the same remedies, even when those remedies create perverse incentives. Moreover, society overpays for innovation by inflicting on society more monopoly losses than are strictly necessary to incentivize production. In this Article, we propose a solution for these problems in the form of a modular system of intellectual property rights. The modular system would allow inventors and creators to self-select the optimal protection for their intellectual works. Working from the bottom up, our modular system would give each innovator a basic package of intellectual property rights and enforcement powers and then allow her to add additional rights and legal elements in exchange for a fee. Our modular system would reduce wasteful litigation while encouraging wider dissemination and more extensive use of inventions and expressive works. In addition, our proposal would lower the social cost of granting monopoly protection to intellectual goods while at the same time, maintaining an adequate level of economic incentives to create and invent. Accordingly, our modular system would constitute a marked improvement over the extant one-size-fits all design of intellectual property rights. Unlike other proposals for reform that seek to improve access to expressive works and inventions via the use of compulsory licenses and other coercive policies, our model is purely voluntary. It respects authors’ and inventors’ autonomy and uses market mechanisms—specifically, pricing—to recalibrate our intellectual property system in a way that improves societal well-being.
Using a longitudinal dataset of 70 italian medieval cities (observed for 300 years) we show two basic facts: 1) a city's short run probability of shifting from a feudal political regime to communal institutions (free cities) sharply decreases when the city is hit by an earthquake; 2) The probability of adopting communal institutions is negatively correlated with the distance from the closest university after the university foundation. We present a conceptual framework that is consistent with both facts. The framework captures the fundamental tradoff between disorder and dictatorship faced by any society. In such a framework we show that our results are consistent with a modernization theory interpretation of institutional change.
This paper is concerned with the effects of diversity on individual and team performance, asking: (1) How does diversity in ethnic, national and linguistic background of workers affect individual and collective performance in a production environment characterized by high interdependence? (2) Do the effects of diversity vary with tasks? (3) Does common experience of workers – joint tenure on a team – alter the effects of diversity? Does this vary with tasks and workers’ place of origin or majority/minority status? We analyze data for 28 teams and 1,723 players that played 6,120 in the Bundesliga during the decade 2000/1-2009/10, games, for a total of 77,406 player/game observations. We study game scores and player objective performance ratings. We control for players’ place of origin, talent, position and demographics, team fixed effects, manager, opposing team, and other factors. The overall effect of diversity on performance is small. Performance effects of diversity at the individual player and team level can be identified when teams are disaggregated into subgroups, by domestic versus foreign born players (German vs. non-German) and by task or position (defense, midfield and forward), and when the role of joint tenure or time spent together on the team is incorporated in individual games, when injuries, suspensions and other random factors affect the deployment of players and controlling for team fixed effects and talent. Longer tenure of German players in conjunction with team diversity contributes to team and individual performance whereas the opposite holds, and with greater strength, for non-German players. Diversity in the defense is good for all players’ and team’s performance, and this effect is enhanced by greater joint tenure of defenders, whereas the opposite is more or less true of the forward team.
Understanding the impact of legal protection on investment is of major importance. This paper provides a framework for addressing this issue, and shows that investment may actually be higher in the absence of legal protection. Focusing on the application to innovation, in an environment where an innovator (the host) repeatedly faces the same imitators (parasites), we show that investment can take place even without patent protection, as parasites limit their imitation to preserve the innovator's incentives to invest. We show further that an innovator might be more active more without legal protection: it is forced to increase its investment to keep the parasites satisfied and, thus, cooperative. We provide experimental evidence consistent with the theoretical results: in the experiment, investment levels with and without legal protection are comparable, and sometimes greater without patents. Our framework is general enough to apply to other situations such as investment in developing countries, commons'management and long-distance trade.
A focus on the transaction or single dyad is traditionally adopted in the study of vertical relationships. While much has been learned from this narrow focus, there is the concern that our understanding remains incomplete since, in practice, it is relatively rare for a dyad to exist in isolation. Rather, most dyads are embedded, interdependent elements of a broader system of interactions. Interconnected exchanges may occur simultaneously, as in the case of franchise systems, project networks, and supply chains or they may occur sequentially as in the case of ongoing research and development programs. In this paper, we review the small body of (TCE-based) literature that moves beyond a dyad perspective towards a systems perspective of contracting. We build from this foundation to highlight key theoretical questions and empirical challenges of, per Williamson (1985: 393) giving “greater attention to the multilateral ramifications of contract.” We close by detailing exploratory empirical studies of interconnected exchanges.
More than one half of all US state governments are typically divided. Divided government is often thought of as causing legislative deadlock. Accordingly, when being dominated by different parties the executive and the legislative politically block each other hindering economic reforms. This paper is the first to systematically analyze this issue using novel data on welfare reforms conducted by US states between 1978 and 2010. First, I conduct a differences-in-differences analysis including a wide range of controls and taking potentially confounding effects from policy spillovers between states and the 1996 US Welfare Reform at the federal level into account. I find that under divided government a US state is between 25 and 50% more likely to adopt a welfare reform than under unified government. Second, I show how a standard regression discontinuity design (RDD) focusing on close elections can be adjusted to the divided government setting. This paper is the first to use an RDD with multiple interdependent assignment variables. This approach confirms the counter-intuitive result from before.
We provide a critical assessment on how agent based models (ABMs) may improve and extend the traditional theoretical approaches on the origin and evolution of property rights, namely the economics of property rights and the evolutionary game models on contest behavior. The former applies a cost-benefit framework to investigate how changes in relative resource values and transaction costs affect the optimality of property regimes, but it offers only a rather comparative static analysis of the evolutionary process. The latter address the dynamics of rights evolution emerging from the repeated interactions by agents, but they are still grounded on rational choice theory assumptions and often neglect the complexity of social systems. With this perspective, we contend that ABMs, through their focus on adaptive complex systems, may integrate and foster the analytical capacity of traditional approaches in several directions. First, ABMs may test the application of behavioral rules, such as those deriving from cultural traits, which go beyond rational choice theory. Second, agent based simulations not only allow identifying stationary outcomes such as in evolutionary game models, but also enable a better understanding of the timing of evolutionary patterns. Third, unlike traditional approaches ABMs are better suited to highlight how the structure of interactions among agents influence the emergence and evolution of property rights.
We investigate the historical determinants of the education gender gap in Italy in the late nineteenth century, immediately following the country’s Unification. We use a comprehensive newly-assembled database including 69 provinces over twenty-year sub-samples covering the 1861-1901 period. We find robust evidence that female primary school attainment, relative to that of males, is positively associated with the medieval pattern of commerce, along the routes that connected Italian cities among themselves and with the rest of the world. The effect of medieval commerce is particularly strong at the non-compulsory upper-primary level and persists even after controlling for alternative long-term determinants reflecting the geographic, economic, political, and cultural differentiation of medieval Italy. The long-term influence of medieval commerce quickly dissipates after national compulsory primary schooling is imposed at Unification, suggesting that the channel of transmission was the larger provision of education for girls in commercial centers.
We assess the impact of introducing a tiered caps system (i.e. schedules) of non-economic damages on commercial insurers' decisions related to the medical liability market. The novelty of our approach is twofold: we provide an evaluation of tiered caps, which differ from flat caps, usually adopted in the U.S. institutional system, and we control for the performance of the judiciary system, measured as the level of backlog of Courthouses. We use the Italian case study to assess the policy impact, because in Italy schedules of tiered caps were adopted by different Courts in different years and Courts differ in performance terms. The institutional framework allows to implement a Difference-in-Differences strategy to estimate the effect of caps' adoption on premiums and number of insures in the reference market. Using a unique dataset on claims, we test the channels of the treatment effect. To cope with omitted variables problems we exploit the partial overlapping between Courts districts and healthcare providers districts.
This paper estimates the impact of contract design and monitoring on the delivered quality of services provided through outsourcing. If the literature on competitive tendering had shown that contracting out allows to reduce costs, there exist up to now few evidences concerning the fact that costs savings could be achieved through lower quality of the service (quality shading hypothesis). Mixed results obtained by the previous literature on this issue seems to suggest that adverse effects on quality are the consequence of poor application of outsourcing process rather than outsourcing per se. Unlike previous studies, which have relied on case studies or cross-sectional data and on subjective measures of service quality, a four-year panel data of 102 contracts is used to estimate a series of fixed-effects regression models. These panel estimates suggest that quality can effectively be improved by implementing better contract specification and management.
We provide the first systematic evidence on the relative importance of economic factors in mobilizing the Indian subcontinent's remarkably diverse population into one of the world's first mass political movements in favor of democratic self-government. We show that residents of exports-producing districts that were negatively impacted by inter-war trade shocks, including the Great Depression, were more likely to support the Congress, the party of independence, in 1937 and 1946 and more likely to engage in violent insurrection in the Quit India rebellion of 1942. However, districts experiencing both positive and extreme negative shocks were associated with lowered support. Further, violent resistance was greater in districts with a greater share of non-cultivating landowners. We interpret our results as inconsistent with a ``peasant rebellion" interpretation of mass mobilization. Instead we suggest that negative world trade shocks reduced the benefits to India's rural labourers of openness to world trade and trade intermediation by non-cultivating landowners, making more attractive the deal, offered by Congress's industrialist supporters, for post-Independence trade protectionism in exchange for land reforms that democratic rule helped make credible.
Renegotiations of positive covenants in loan contracts and their impact on corporate financing and investment decisions received a lot of attention in the finance literature recently. Action-limiting covenants in bonds, which are different in nature but no less important in impact, have been much less researched possibly because they are very difficult to renegotiate. This paper shows that an option granted to the issuer to remove the covenants upon exercise can effectively substitute for renegotiation and can implement endogenous control right allocation when no verifiable signal is available. Our model predicts and our empirical analysis documents that (1) with the option to remove covenants, issuers are willing to accept more action-limiting covenants ex ante; (2) the exercise price is set high enough so that the option is only exercised in the good state; (3)financially constrained firms with high growth opportunities and higher degree of uncertainty are more likely to include this option; (4) investors trade o_ the yield for reduced risk upon exercise in the good state and higher number of covenants in the bad state; (5) investors accept a lower yield on bonds with the option to remove covenants even after controlling for the number of covenants.
High Performance paradigm and New Public Management are implemented both in the private and the public sectors in a context of organisational rationalisation and cost containment. Using a French linked employer-employee survey on organisational change and computerisation (COI), we first analyse the effects of organisational changes in the private sector and the state civil service on work intensification, job enrichment, work involvement and recognition at work. Organisational changes are more intense in the state civil service than in the private sector, which confirms the importance of changes in the working environment of employees within the context of the modernisation of the state. However, these reforms have not resulted into work intensification. Only in the private sector, changes are related to work enrichment. The contrasts between the private sector and the state civil service are the greatest, in the areas of involvement and recognition at work. In the private sector, organisational changes increase involvement and feeling of recognition as long as the intensity of change is not too great. On the contrary, state officials express a decline in work involvement and their perception of work non-recognition is reinforced due to even moderate changes. We then test the moderating role of three forms of employee participation: within change contexts: consultation on changes, presence of union representatives and the existence of informal discussion groups. We show that they contribute to explaining the observed differences between the private and the public sectors.
This paper develops a new insight for the empirical study of media capture. Capture is impossible to observe but its value should be reflected in transactions involving journal stocks. Interwar France provides a unique setting to document this because key newspapers floated voting and non-voting stocks. Combined with takeover prices, this data yields estimates of amounts paid by owners to capture journals and of the time series evolution of this price. Comparison with Britain suggests that Britain protected its newspapers better. These results are also interesting for the light they shed on the French history
Despite the theoretical importance institutional economics places on third-party contract enforcement, most of which has empirical grounding in case studies or laboratory experiments, more detailed models of contract enforcement have yet to be rigorously tested with real-world subjects and/or in more real-world settings. This study tests a third-party contract enforcement mechanism – assessing the individual influence of information and punishment components – via a framed field experiment with members of a Peruvian garment cluster. Results will inform the design of a subsequent randomized-controlled trial (RCT) evaluation of the third-party contract enforcement mechanism’s impact in a real-world online platform, thus offering a unique combination of field experimental evidence on the influence of contract enforcement institutions.
While the United Nations and NGOs are pushing for the introduction of economic, social and cultural rights in most countries, little is known of their consequences. We provide evidence on the effects of introducing three types of social rights into the constitution: the rights to education, health and social security. Employing a large panel covering annual data from 160 countries in the period 1960-2010, we find no robust evidence of positive effects of social rights. We do, however, document adverse medium-term effects on education and inflation.
This paper focuses on political knowledge, which we define as the knowledge firms can use to influence public policies or, more broadly, to participate in public policy processes. Our goal is to answer three key questions: What is the nature of political knowledge? How does a firm’s political knowledge affect their corporate political strategy? In which institutional context is political knowledge most valuable? Building upon insights from New Institutional Economics, Public Choice, and the Political Markets literatures, we propose several hypotheses about how the interaction between the firm’s political knowledge and the characteristics of both political institutions and interest group rivals affects a firm’s incentive to participate in the public policy process. We develop a unique data set to test these hypotheses. Using a 32 year panel, we track every interaction between investor owned electric utilities and state-level regulators (within the U.S.) for the time period 1980 through 2011, and we analyze utility decisions to initiate regulatory proceedings. One of the most striking results of our study is that political knowledge accumulated experientially matters the most in situations where the demand side is unattractive (i.e., high competition from other interest groups), but the supply side is attractive (i.e., bureaucrats and politicians are relatively weak). In other words, political knowledge seems to be mainly about demand-side uncertainty limitation, and about seizing opportunities in the supply side. These findings have important implications for future research on how firms develop political activities, on the knowledge from which nonmarket capabilities originate, and on the integration of market and nonmarket strategies.
The paper develops a theoretical model of trade and hegemonic war, in which dependence on trade may induce a follower nation to make war on the existing hegemon. It argues that this mechanism may have been at work at key moments in the early twentieth century.
Despite the substantial evidence documenting the relevance of democracy and a culture of cooperation, we still lack a framework that identifies their origins and interaction. In a model where citizens and elite members try to share consumption risk and cooperate in investment, we show that the elite's willingness to grant democracy is mainly driven by investment-specific factors, and accumulation of culture has an inverse U-shaped relationship with the forces aggravating consumption risk. In addition, shocks shrinking investment surplus can push the citizens to over-invest in culture to credibly commit to future cooperation and so preserve democracy. This is consistent with the geography and the evolution of monasticism and politics in Medieval Europe.
Sustaining cooperation in highly fragmented groups is an issue of major concern for modern societies. Whereas increased migration magnifies the economic relevance of the problem, the causes for the public goods underprovision remain largely untapped. We experimentally study cooperation among natives and migrants in a laboratory Public Goods Game with and without punishment. Participants were recruited from the general public and roughly half of the participants in each session were migrants. We varied our study along two dimensions: group composition and information about group composition. We find that homogeneous groups cooperate more than mixed groups with natives cooperating more than migrants under both conditions. Interestingly enough, differences between homogeneous and mixed groups, as well as natives and migrants, vanish as soon as no information about the group composition is provided. The data suggest substantial differences in norms of punishment between the two samples and the difference seems to be robust to variations in both information modes and group composition.
The majority runoff system is widely used around the world. Yet, our understanding of its properties and of voters’ behavior is limited. In this paper, we fully characterize the set of strictly perfect equilibria in large three-candidate majority runoff elections. Considering all possible distributions of preference orderings and intensities, we prove that only two types of equilibria can exist. First, there are always equilibria in which only two candidates receive votes. Second, there may exist an equilibrium in which three candidates receive votes. Its characteristics challenge common beliefs: (i) neither sincere voting by all voters, nor push over tactics (i.e. supporters of the front-runner voting for a less-preferred candidate in order to influence who will face the front-runner in the second round) are supported in equilibrium, and (ii) the winner does not necessarily have democratic legitimacy since the Condorcet winner may not even participate in the second round.
What factors affect citizens' willingness to cooperate with the state? We explore this question through a study of citizens' willingness to report crimes to the police, one of the quintessential forms of cooperation with the state apparatus. We develop a ``calculus of cooperation'' that highlights three sets of factors that potentially influence citizens' incentives to report a crime: benefits of cooperation received only if the crime is solved, benefits of cooperation received regardless of whether the crime is solved, and costs of cooperation. We evaluate the importance of these considerations using data from a set of survey experiments conducted in Russia and Georgia in late 2012 and early 2013.
Under weak law-enforcement institutions a positive shock to the value of natural resources can increase demand for private protection and opportunities for rent appropriation through extortion, favoring the emergence of mafia-type organizations specialized in such activities. We test this hypothesis by investigating mafia's emergence in XIX century Sicilian municipalities, where a severe lack of state property-right enforcement coincided with a steep rise in international demand for sulfur, Sicily's most valuable export commodity. We find robust evidence of higher early mafia activity in municipalities with greater sulfur availability. Other proposed drivers of mafia's origins are neither clearly identifiable nor statistically relevant.
Are high-ability individuals more likely to quit egalitarian regimes? Does the threat of exit by talented individuals restrict the redistributive capacity of democratic organizations? This paper revisits that long-standing debate by analyzing the interplay between compensation structure and quit behavior in the distinct yet underexplored institutional setting of worker-managed firms. The study exploits two novel administrative data sources: a panel of Uruguayan workers employed in both worker-managed and conventional firms; and a linked employer–employee panel data set covering the population of Uruguayan worker-managed firms and their workers from January 1997 to April 2010. A key advantage of the data is that it enables one to rank the ability of workers via their relative positions in the intrafirm wage distribution. The paper's four main findings are that (1) the wage policies of worker-managed firms are more egalitarian than those of conventional firms; (2) in worker-managed firms, high-ability members are more likely than other members to exit; (3) the hazard ratio of high-ability members is lower for founding members and for those employed by worker-managed firms in which there is less pay compression; and (4) high-ability members are less likely to quit when labor market conditions in the capitalist sector are less attractive. This paper contributes to the study of the interplay between equality and incentives that permeates many debates in public finance, comparative economic systems, personnel and organizational economics.
Formal fiscal rules are currently introduced in several countries. In fact, a recent survey reveals that their number has risen from five in 1990 to almost 80 in 2012. While most studies focus on intra-jurisdictional effects of fiscal rules, vertical impacts on the finances of other government tiers have hardly been discussed so far. Hence, this paper studies the influence of Swiss cantonal debt brakes on municipal finances. In order to investigate that matter, a unique database that encompasses the 141 largest Swiss municipalities and cities between the years 1982 and 2007 is examined in a panel analysis. The estimation results suggest that municipal expenditures and revenues significantly decreased in the aftermath of a cantonal debt brake implementation. This holds in particular, in the case of rigid debt brake and if local spending on security, education and health is considered.
This paper reports results from a laboratory experiment exploring the relationship between reputation and entry in procurement. We propose a repeated procurement model with reputation and entry assigning to the entrant a reputational score of varying size across treatments. There is widespread concern among regulators that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new firms in public procurement markets. Our results suggest that while some reputational mechanisms indeed reduce the frequency of entry, appropriately designed reputation mechanisms actually stimulate it. Since quality increases but not prices, our data also suggest that the introduction of this kind of reputation mechanism may generate large welfare gains for the buyer.
This paper presents a model of international trade agreements in which the executive branches of each government negotiate agreements while the legislative branches, subject to political pressure, can disrupt them. Lobbying is in the style of Grossman and Helpman (1994) with a new feature: all actors face uncertainty arising from the complexity of the legislative process. I demonstrate that the lower the executives set tariffs in a trade agreement, the more effort lobbies put forth to prevent its ratification. Thus trade agreements act as a domestic political commitment device: executives set relatively high tariffs to discourage lobbying and help the legislatures to withstand political pressure. This reconciles the result from tests of Grossman and Helpman's model that protection levels are high relative to contributions given estimates of governments' social-welfare weights. The need to balance conflicting repeated-game incentives of the legislature and lobby lead to new predictions for the optimal design of mechanisms for resolving the disputes that arise in the course of trade-agreement relationships.
Among the variety of alternatives of organizing economic activity, public-private partnerships (PPP) stand apart as a relatively new and underexplored phenomenon. Embodying long-term collaborative relationships between private and public actors to deliver public goods or services, these arrangements differ from traditional forms of organization. They involve cooperation between two distinct types of organizational actors and overlapping economic as well as political markets. By proposing an innovative empirical research study, focused on public-private organizational choices, financing and partnership structure in the case of large infrastructures, we aim to shed an important light on both the public capabilities and institutional determinants to explain the governance structure of PPP, and the characteristics of the public involvement We use a sample of 889 PPP projects extracted from the Thomson Reuters and World bank databases, covering 60 countries and 14 different industries from 1992 to 2012, in a cross-country and cross-industry analysis.
What institutions can sustain cooperation in groups of strangers? Here we study the role of monetary systems. In an experiment, subjects sometimes needed help and sometimes could incur a cost to help an anonymous counterpart. In the absence of money, the intertemporal exchange of help, which could be supported by a norm of community punishment of defectors, did not emerge. Introducing intrinsically worthless tokens substantially altered patterns of behavior. Monetary trade emerged, which increased predictability of play and promoted cooperation when strangers could trade help for a token.
We model personnel policies in public agencies, examining how wages and promotion standards can partially o¤set a fundamental contracting problem: the inability of public sector workers to contract on performance, and the inability of political masters to contract on forbearance from meddling. Despite the dual contracting problem, properly constructed personnel policies can encourage intrinsically motivated public sector employees to invest in expertise, seek promotion, remain in the public sector, and develop policy projects. However, doing so requires internal personnel policies that sort "slackers" from "zealots." Personnel policies that accomplish this task are quite different in agencies where acquired expertise has little value in the private sector,and agencies where acquired expertise commands a premium in the private sector. Finally, even with well-designed personnel policies, there remains an inescapable trade-off between political control and expertise acquisition.
We estimate the growth and productivity effects from becoming a member of the European Union (EU). We simulate time series of hypothetical economic growth and productivity trajectories, which show how these would have developed if the countries that became EU members in the 1973, 1980s, 1995 and 2004 enlargements had not joined the EU. Using this model, we identify large positive effects from EU membership. These effects differ across countries and over time, but are negative in only one case (Greece.) We calculate that without European integration, per capita incomes would have been, on average, approximately 10 percent lower today.
Market wages reflect expected productivity by using signals of past performance and past experience. These signals are generated at least partially on the job and create incentives for agents to choose high-profile and highly visible tasks. If agents have private information about the profitability of different tasks, firms may wish to prevent over-investment in visible tasks by increasing their opportunity costs. Firms can do so, for instance, by their choice of corporate infrastructure such as employee perks. Heterogeneity in employee types induces substantial diversity in organizational and contractual choices, particularly regarding the extent to which conspicuous activities are tolerated or encouraged, the use of employee perks, and contingent wages.
In the past couple of decades, scholars have predominantly employed rent-seeking models to analyze litigation problems. In this paper, we build on the existing literature to show how alternative fee-shifting arrangements (e.g., the American rule and English rule) affect parties' litigation expenditures and their decisions to litigate. Contrary to the prevailing wisdom, we discover some interrelated advantages of the English rule over the American rule, including the reduction of litigation rates and the possible reduction of expected litigation expenditures. Our results unveil a hidden virtue of the English rule, showing that an increase in fee-shifting may lead to a desirable sorting of socially valuable litigation.
The phenomenon of the so-called German labor market miracle is the point of departure for our analysis. Yet a consistent theoretical explanation of jobs safeguarding during the Great Recession is lacking, important ad-hoc hypotheses exist. For example, Burda/Hunt (2011) are intuitively convinced that using labor adjustment along the intensive margin through working time accounts is a key element in the puzzle. The major objective of this paper is to close this research gap. Therefore, we introduce a formal model of adjustment practice working time accounts as a mutual insurance device. As an extension and generalization of the quite well-known labor market practice of work sharing, working time accounts allow for adjustable sharing coefficients, while holding remuneration constant, regardless the sign of hour deviation compared to standard hours. Such generalized work sharing is achieved via intertemporal shifting of hours worked by an employee, with every single transfer being recorded in a time banking system. This paper contributes to theoretically resolving the remaining jobs safeguarding puzzle and derives a model of labor adjustment based on well-defined probability mass shifts and application of stochastic dominance rules. The associated solution is characterized by features of a silver bullet for employment. In sum, our model not only explains the remaining puzzle of missing employment decline in the Great Recession, but also helps to fill the research gap on missing employment increases due to reluctant hiring behavior in the preceding expansion. In fact, working time accounts are capable to eliminate antipodal labor market risks. Moreover, when facing unprecedented downturn they even impose a mean increasing decrease in risk. Therefore, we conclude that there are lessons to be learnt from German labor market practices and industrial relations.
The paper explores why many traditional societies are characterised by patrilineal inheritance systems and not by egalitarian inheritance systems. Reasons can be found in the economic failure of egalitarian inheritance systems vis-à-vis gender-biased inheritance systems. The egalitarian inheritance system allows insiders, regardless of their gender, to marry outsiders and still keeping the access to the commons and transmitting the rights over the commons to the offspring. These marriages impoverish insiders by lowering the per-capita endowment of common property. To counteract this phenomenon, communities tend to discourage marriages with outsiders through a change in the inheritance system such that women tend to lose their insider status. The analysis applies agame theoretical model to a case study in which gender-biased inheritance systems replaced over time egalitarian systems. The case study examines the common property of forests and pastures in the Trentino region of the Italian Alps in a long term perspective (i.e., 13th-19th centuries). Trentino consisted of few hundred small communities each regulating autonomously the access and transmission of the commons. Thus, this set up is consistent with the endogenous evolution of the inheritance systems, and consequently it applies to this investigation. The empirical and anecdotal investigation relies on a large dataset of 878 observations, many of them consisting on documents describing the rules of management and transmission of the commons, ranging from 1202 to 1803, and covering 85.5% of the entire Trentino. This case study finally confirms theoretical predictions.
We provide an axiomatic foundation for a personality trait which has important implications for economic behavior, Conscientiousness, and two aspects of that factor, the inhibitive and the proactive. We refer to these two aspects here with the names, probably more intuitive for economists, of control and motivation. The first aspect is commonly associated in analysis of individual behavior with the ability to override impulses and distractions when pursuing a goal. The second is usually associated with the inclination to set ambitious goals. Our setup and analysis closely follow those of standard decision theoretic analysis. In our model an individual is characterized by a preference order over acts, which are maps from states to lotteries over prizes. In the framework of Dreze, we allow the possibility that the individual can affect the probability of the state which is realized, at some cost. The differences in this cost of control make formal the differences in conscientiousness among individuals: a higher cost of control over the probability corresponds to a lower degree of inhibitive side of conscientiousness. The utility in each state deriving from the realization of an outcome is state dependent. An important part of the research reported here is an axiomatic foundation of preferences with moral hazard and state dependent preferences, first treated in Dreze. This utility evaluated by the individual in reference to a subjective benchmark, or aspiration level. An extreme and simple example is given by an individual who sets an aspiration level, which is a point in a partially ordered space, and derives a positive utility when his outcome is larger than the set level, and does not when the outcome is lower. The level of the aspiration set by the individual corresponds to his motivation, which corresponds to the proactive side of Conscientiousness.
This paper empirically investigates the effects of economic regulation in the regulated markets. We develop an innovative cointegration model with structural breaks to test the hypothesis that government regulation increases the price of the regulated good and/or causes the monopoly price. We examine the Istanbul and New York taxicab markets and argue that regulation brings about artificial rents by increasing medallion prices, and an increase in medallion prices gives rises to upward pressure on taxi fares. The evidence presented shows that regulation of the both Istanbul and New York taxicab markets increases medallion prices, and this increase in medallion prices pressures on taxi fares.
Against the law and economics literature that focuses on opportunistic behaviours by lawyers in a self-regulated market, we show that a high-quality steady-state exists in a market for legal services and that the likelihood of high quality increases when the market is self-regulated by the legal profession as compared with the situation where there is no self-regulation. Indeed, absent self-regulation in the market, individual reputation is the only informative and disciplinary device which operates. Introducing collective reputation of the legal profession into the analysis provides additional information to clients. The profession has an incentive to maintain a good collective reputation as this increases the clients’ willingness to pay for legal services and, therefore, the rent that accrues to the legal profession. We conclude that self-regulation of the legal profession may help to regulate quality when clients are faced with opportunistic lawyers.
The new European legislative proposals on public procurement suggest widening the possibility for public buyers to use negotiated procedures with publication, that is multilateral negotiations after an auction phase. Such procedures have been available to French public buyers for contracts up to 5 million euros since 2004. We use an original and comprehensive database from Paris Habitat-OPH, the largest social housing constructor in Europe, to empirically assess the impact of negotiated procedures on price. As offers are evaluated according to price and quality criteria, we use technical rankings created by our public buyer to account for differences in quality across offers. After satisfyingly dealing with the endogeneity issue associated with the use of negotiated procedures, we find that such procedures significantly decreased the received bids by close to 26%. If anything, similar results are found when analysing the amount of the winning bids. Some drivers of the positive effects we observe are highlighted, enabling us to derive practical implications of these results for public policies.
Energy Performance Contracts (EPCs) are a new contractual to procure energy services, and are lately seen as a major policy tool towards improving efficiency of energy use. In the European Union, a legal framework for such contracts has been adopted in 2006 for this contractual tool, with the hope that this would encourage public authorities to take initiatives towards enhancing energy efficiency of public buildings. In France, while there have been a strong political will to promote energy efficiency projects for public buildings through CPEs, there has been relatively few such contracts that has been signed. In this paper, we try to empirically access the reasons why public deciders in France shy away from EPCs for energy efficiency projects in public buildings. We turn to recent developments in contract theories to identify the extent to which these contracts are adapted for energy efficiency projects. At the empirical level, we investigated the 9 exhaustive EPCs in France relying on interviews with public deciders involved in these projects. We find that EPC contracting involves the use of a lot of public resources (expenses incurred to employ experts and consultants to prepare for the contract and its award, human resources etc.). This suggests that transaction costs associated with CPEs may be high. Nevertheless, we show that public deciders involved in these EPCs are globally satisfied with the outcome of the project.
Highly centralised countries like Italy and Spain have devolved fiscal power to regions in an asymmetric way. Some well-off regions get transfers that turn them into net recipients of the fiscal system. We demonstrate in a political economy model of fiscal federalism that in centralised countries, side-payments are used to compensate regions that are set back by the fiscal system and can credibly threaten to secede. Compensation blocks political negotiation on alternative –more efficient– fiscal systems. We study two regions, Valle d’Aosta in Italy and País Vasco in Spain, as an example.
This paper estimates the effect of inspection intensity on enforcement on oil platforms in the Gulf of Mexico. The paper estimates the causal effect that an additional inspector joining an inspection has on the likelihood that violations will be detected and cited, and the severity of any sanction imposed. Important limitations to investigating the effect of an additional inspector are endogeneity and selection bias. To deal with this issue, we use exogenous variation in helicopter flying conditions as an instrumental variable for the number of inspectors that are sent to offshore oil and gas platforms. We find that an additional inspector results in an increase in the number of severe sanctions that are issued. To further understand why an additional inspector matters, we consider several alternative explanations---ingroup bias and regulatory capture. First, we examine the effect of conducting the inspection in a familiar group (as opposed to a group that has not worked together before) and find no effect. Second, as a measure of regulatory capture, we examine whether the enforcement actions are affected by the frequency with which an inspector has visited the platform or the operator before. Using these measures, we find no evidence of regulatory capture.
We present results from a multiple public goods experiment, where each public good produces benefi ts only if total contributions to it reach a minimum threshold. The experiment allows us to compare subjects' behavior in a benchmark treatment with a single public good and in treatments with more public goods than can be funded. We show how the availability of numerous, more-efficient public goods may not make subjects better off. This is because multiple options decrease the probability of coordination and discourage contributions. The availability of several less-efficient options does not alter coordination and contributions relative to the benchmark.
We uncover interpersonal violence (murder, assaults) as a dimension of the resource curse. Relying on a historical natural experiment in the United States, in which mineral discoveries occurred at various stages of governmental territorial expansion, we show that “early” mineral discoveries, which take place before full-fledge rule of law is in place in a county or a state, are associated with higher levels of interpersonal violence, both historically and today. Our results highlight the role of violence for intimidation rather than expropriation. We provide direct evidence that the persistence of this “homicidal resource curse” is partly mediated by the deterioration of the quality of judicial institutions and the capture of state legislatures. Local persistence is also sustained by different cultural attitudes, namely towards the use of interpersonal violence. The specificity of geological exploration in the United States and the robustness of the results to state-specific effects warrant a causal interpretation to the results.
Contracts are a good deterrent for opportunistic behavior only insofar they are credibly and effectively enforced by the direct application their rules and the functioning of the judicial system. We study the effects of local courts’ inefficiency - i.e. the court average length in ending a trial - on contractors’ incentives to delay public works in Italy, a setting where disputes on penalty for delay public procurement contracts are solved in local court. We first present a simple model showing how courts’ inefficiency may lead public buyers to refrain for enforcing penalties for late delivery in the aim to avoid the costly dispute in court of the claim filed by the contractor. Then we discuss our empirical results showing that in provinces where local court are inefficient, i) public works are delivered with higher delay, and this is stronger for higher value - i.e. complex - project; ii) the contract are awarded to larger firm, and iii) on average, a higher share of final payment higher is adopted. These results are not driven by omitted environmental variables, since we show that the delays in contracts' delivery are still affected by courts efficiency when province fixed effect are included in the model.
Expectations about the future state of the world, regions, companies, or goods influence peoples’ decisions. Expectations are shaped by the available forecasts of experts from the various markets. In man-made markets, the forecasters’ estimates do not only influence the peoples’ expectations and the decisions based on them, but thereby also the actual outcome. However, this reactivity does not exist in any market. We compare reactive markets where forecasters’ estimates influence the outcome, namely the stock and the art market, with a non-reactive market, namely the market for weather forecasts. We exploit this difference in reactivity to explain the diverse incentives for forecasters and their resulting forecasting behavior as well as the distinct institutional setting of these markets.
This paper is an attempt to contribute to the literature on the relationship between economic development and democratic institutions. The paper focuses on civil liberties and interprets them in a framework in which there is no dividing line drawn between “civil” and “property” rights. An important distinction that is made is rather the one between the “scope” of rights and the level of their enforcement as two different dimensions of a constitutional decision. The paper shows that this framework suggests a possible mechanism for informal factors to affect the level of civil liberties that are provided by a rent-seeking government. The argument is that informal factors that are less benign towards rent seeking will provide more incentives for the rent seeking government to make it possible for a wider scope of rights to be used in production. The paper provides some simple regression results that are in line with the main argument.
The theory of asymmetric information suggests that economic agents tend to use their informational power to exploit less informed players. In this paper we prove that even in the presence of sophisticated consumers who can read contract terms at some positive cost, a monopoly seems to ensure an outcome which turns out overall less inefficient than in competition. Precisely, we find that competitive sellers may not disclose their terms in equilibrium even if the related cost is lower than the cost for consumers to read; conversely a monopolist may not disclose in equilibrium only if the related cost is higher than the reading cost. Such results overturn the traditional belief that competition among sellers, contrary to a monopoly, leads the market to an efficient outcome, and suggest that regulations to ensure contract disclosure may benefit consumers, who gain in terms of payoffs, only if the market is competitive.
Albeit the relevance of property rights is well documented, their determinants are still poorly understood. Because of transaction costs, societies solve a trade-off between private expropriation and value misallocation. Stronger property rights enhance voluntary transfers and hence limit value-misallocation but shrink the consumption set of low-valuation buyers who can consume only through expropriation. Thus, the strength of property rights will rise with factors limiting consumption by middle-valuation buyers and fostering private expropriation by low valuation buyers, e.g., preference heterogeneity. This prediction is consistent with instrumental variables estimates based on a novel cross-country dataset on the rules regulating government takings of real property and adverse possession of personal property.
The collection, retention and stewardship of scientific data are activities that in publicly funded science typically involve the construction of ‘knowledge commons’ –institutionalized agreements that afford both suitable access to research resources and facilitate the development of governance structures assuring that those participating in both the assembly and use of data benefit from the resulting data stores. Nevertheless, there are many impediments and some seemingly insurmountable barriers to realising the full potential of such commons. It is of increasing importance to consider the conditions that give rise to under-utilisation of database content and the difficulties of constructing such commons. The paper considers five key issues contributing to under-utilisation: 1. Asymmetries in the costs and benefits to participants preparing dataset for use by other parties giving rise to confusions or opportunistic behaviours impeding shared use: 2. Uncertainties arising from ‘latent’ property rights in scientific data contributed to knowledge commons. 3. Tensions arising from the interests of employers in controlling access to the knowledge gained by employees engaged in scientific and technological research activities, particularly the tacit knowledge and un-codified information that is not subject to explicit intellectual property rights. 4. Motives and consequences exist for ‘data hoarding’ in the emerging ‘big data’ era. 5. Problems in defining and governing ‘hybrid’ commons where freely accessible data is combined with data that is proprietary. Methods of governance as well as voluntary agreement are considered for addressing each of these issues.
Internet and digital technologies allowed for the emergence of new modes of production involving cooperation and collaboration amongst peers (peer-production) and oriented towards the maximization of the common good—as opposed to the maximization of profits. To ensure that content will always remain available to the public, the output of production is often released under a specific regime that prevents anyone from subsequently turning it into a commodity (the regime of information commons). While this might reduce the likelihood of commodification, information commons can nonetheless be exploited by the market economy. Indeed, since they have been made available for use by anyone, large online service providers can indirectly benefit from the commons by capturing the value derived from it. While this is not a problem as such, problems arise when the exploitation of the commons by one agent is likely to preclude others from doing the same—often as a result of commodification. This is especially true in the context of cloud computing, where the content holder has become as powerful, if not more powerful than the copyright owner. Nowadays, regardless of their legal status, information commons are increasingly controlled by large corporations who can precisely define the manner in which they can be used or accessed. Digital communities need to be aware of these risks. This article proposes a theoretical and normative exploration of these issues, based on the analysis of recent trends in the area of cloud computing. It argues that, in order to reduce the likelihood of commodification, but still benefit from the advantages offered by cloud computing, digital communities should rely on decentralized platforms based on peer-to-peer architectures—thereby escaping from the centralized control of large service providers while nonetheless preserving the autonomy of the commons they produce.
We propose a model in which an autocrat, who rules over an ethnically divided society, selects the tax rate over domestic production and the nation's natural resources to maximize his rents under the threat of a regime-switching revolution. We show that a weak ruler may let the country plunge in civil war to increase his personal rents. Indeed inter-group fighting weakens potential opposition to the ruler, thereby allowing him to increase fiscal pressure. We show that the presence of natural resources exacerbates the incentives of the ruler to promote civil conflict for his own profit, especially if the resources are unequally distributed across ethnic groups. We validate the main predictions of the model using cross-country data over the period 1960-2007, and show that our empirical results are not likely to be driven by omitted observable determinants of civil war incidence or by unobservable country-specific heterogeneity.
This paper revisits the question of why there are so few labor-managed firms in capitalist economies. We analyze the processes of creation (entries) and destruction (exits) of labormanaged firms, compare to capitalist firms. We focus on macroeconomic conditions changes that affect firms favoring its creation or dissolution. And particularly if these changes affect labor-managed firms and capitalist firms differently. We use a panel data of the universe of Uruguayan firms in 31 activity sectors (ISIC 3 digits) with a strong presence of cooperatives, during the period 1996-2009. While part of the theoretical and empirical literature suggests that entries and exits of labor-managed firms follow a countercyclical pattern, we do not find evidence that support this hypothesis. Furthermore our evidence suggests that creation and dissolution flows of this kind of firms are rather driven by institutional factors.
This paper studies entry and bidding in procurement auctions were contracts are awarded to the bid closest to a trimmed average bid. We characterize equilibrium under competition and show that it is weak due to strong incentives for cooperation. We present statistical tests motivated by a model of coalition entry and bidding. We show that our tests perform well in a validation dataset with known cartels. We also use them to investigate cooperation in a larger dataset where cartels are suspected but not known. We detect several suspiciously cooperative groups with potentially substantial, positive effects upon auctioneers revenues.
In this paper we develop a theoretical model of the mechanisms behind the voluntary provision of impure public goods in coalitions in presence of important social networks effects. The model builds on the large empirical literature on coalitions for voluntary provision of pooled public knowledge goods, such as in social networks of open source software developers and consortia producing open data repositories. This literature shows that, under some conditions, the provision of public goods can be facilitated by social network effects such as group identity and social approval of individual pro-social attitudes. To integrate these effects in standard public good theory this paper follows a two-step strategy, based on the introduction of two types of “impureness” in standard public good theory: (1) impureness related to private excludable benefits (so-called ancillary private benefits of the public good); (2) impureness related to the satisfaction of the individuals’ social preferences. In a first step, the paper analyses the introduction of combined public and private benefits in coalition theory with standard preferences. In a second step the model is broadened to the case of impureness related to the social preferences. The analysis shows that, when the private benefit component of the impure public good is important, the effect of the social preferences on the coalition formation is ambiguous: with increasing/decreasing relative weight of the social approval of individual pro-social attitudes compared to the relative weight of the social group identity, the coalition size to be reached will be respectively larger/smaller compared to the coalitions formed by agents with standard preferences. Applications of the theoretical model to large-scale surveys of Free/Libre/Open-Source (FLOSS) software developers confirm the results of the model.
This paper briefly reviews the relevant property rights theory and provides recent examples where the property rights theory found a practical application in managing interference situations in spectrum, as well as possibilities for efficient re-allocation of spectrum through Coasian bargaining.
Using the incomplete contract theory, we propose a model that explores the role of third parties to solve conflicts in public-private partnerships. In some cases, some third parties like arbitrators or judges can determine ex post whose party (public or private) gets the residual decision right. We consider contractual ambiguities or complexities that prevent full verifiability by the third party, and we also allow for bribery. We derive the conditions under which control allocation by a third party increases the efficiency of public-private partnerships. These results have direct consequences for the implementation of PPPs and for the Comparative Law and Economics.
We present new city-level evidence about the military origins of Europe's economic "backbone," the prosperous urban belt that runs from the Low Countries to northern Italy. Military conflict was a defining feature of pre-industrial Europe. The destructive effects of conflict were worse in the countryside, leading rural inhabitants to relocate behind urban fortifications. Conflict-related urbanization in turn had persistent economic effects. Using GIS software, we construct a novel conflict exposure measure that computes city distances from nearly 300 major conflicts from 1000 to 1799. We find that conflict exposure had significant, positive, and robust impacts on historical urbanization. Next, we use luminosity data to construct a novel measure of current city-level economic activity. We show robust evidence that the economic legacy of historical conflict exposure endures to the present day.
We a study a U.S. federal court ruling that had major impacts on the structure of property rights in—and the distribution of revenue from—Washington state’s commercial fisheries. Known as the “Boldt Decision”, the 1974 ruling affirmed the right of Native American tribes to 50 percent of the fishery based on treaties signed in the 1850s. The ruling was an unexpected (but not undeserved) windfall for impoverished tribes because they had caught less than six percent of the salmon in the 25 years preceding 1974, and because half of the fishery revenues in 1973 amounted to $10,189 per tribal member. We find that the ruling conveyed limited long-run economic benefits to tribes, however, in part because it failed to re-create the efficient system of riparian property rights used by Pacific tribes at the time of the treaties. Instead, the post-1974 tribal fishery evolved to mimic the economically wasteful “rule of capture” and capital-intensive mobile fishing regime that is prevalent in non-tribal fisheries throughout the industrialized world. Our theory describes how individually rational decisions leads to rent dissipation and possibly a resource curse, and our empirical analysis identifies symptoms of a curse using data on fishing activity, schooling decisions, and income growth.
This paper evaluates the effects of changes in the supply of news provided by newspapers on electoral participation, political selection, and government efficiency. We address these issues in the Italian context by constructing a new dataset covering the presence of local news by different types of newspapers (i.e., local and national) for all cities above 15,000 inhabitants in the period 1993–2010. The identification strategy exploits discrete changes in the number of newspapers supplying local news and the precise timing of these events. The results show that the entry of newspapers in the market for local news leads to an increase in turnout in municipal elections, a higher probability of the incumbent mayor being reelected, and an improvement in the efficiency of the municipal government (as measured by the speed of revenue collection). The effect of newspapers on government efficiency is larger when mayors are not term-limited and thus face reelection incentives. Our evidence shows that newspapers do not have a major impact on the selection of politicians, but they play a relevant role in keeping politicians accountable once they are in office. Competition plays a relevant role, as the effects are not limited to the first newspaper entering the market.
There is a considerable body of evidence which suggests that the French Huguenots were highly skilled individuals who made positive economic contributions to whichever country they settled in. In an earlier analysis of wine production at the Cape, Fourie and von Fintel (2011) find that Huguenot immigrants, particularly from wine-producing regions, were more productive than their Dutch and German counterparts. We first examine some theoretical reasons for higher agricultural productivity due to network subscription, followed by an investigation of possible ways in which Huguenots from wine-producing regions may have benefited from network externalities at the Cape. In the second section we show how the development of property rights at the Cape Colony impacted on the performance of the economy in a number of ways. It is our contention that the evolution of property rights for farmers at the Cape explains the growth and changing composition of the agricultural sector in the eighteenth century. Property rights significantly changed how farmers could produce, despite the fact that markets remained monopsonistic.
How does foreign aid affect recipient countries’ political institutions? Two competing hypotheses offer contradictory predictions. The first sees aid, when delivered correctly, as an important means of making dictatorial recipient countries more democratic. The second sees aid as a corrosive force on recipient countries’ political institutions that makes them more dictatorial. This paper offers a third hypothesis about how aid affects recipients’ political institutions that we call the “amplification effect.” We argue that foreign aid has neither the power to make dictatorships more democratic nor to make democracies more dictatorial. It only amplifies recipients’ existing political institutions. We investigate this hypothesis using panel data for 124 countries between 1960 and 2009. Our findings support the amplification effect. Aid strengthens democracy in already democratic countries and dictatorship in already dictatorial regimes. It doesn’t alter the trajectory of recipients’ political institutions.
Farm organization literature often focuses on the farm firm as a simple entity, where ownership and control is largely combined, a large amount of contractual relationships are informal, and optimal organizational choice can be examined using comparative static analysis. In this paper, we suggest a framework in which we distinguish how some U.S. farm firms have evolved to be a different organizational form in the 20th century. These differences include more separation of ownership and control, more formality, and more complexity. Farm firm evolution involves more complexity because of the interdependency of farm firms to improve performance and the addition of property rights to the farm manager to reduce transaction costs. Because of the assumptions on farm firm simplicity (lack of interdependency), and limiting discussion of optimal farm organization choice to the land and employment transaction, the current frameworks in the literature may fail to understand the evolution of farm organization. We develop a conceptual framework that incorporates the important dimensions to understand farm firm evolution.
In democratic countries, traditional mass media provide an important mechanism of uncovering corruption and fostering accountability. Can new media such as blogs play a similar role in authoritarian countries, where offline media are often suppressed? We study consequences of blog postings about corruption in state-controlled companies by Russian activist Alexei Navalny. We identify a negative impact of the blog postings on stock return of these companies, using five-minute within-day data. We also find long-term effects of the posts on stock returns, trading volume, and volatility. We use data on distributed denial-of-services (DDoS) attacks on related blogs to confirm that our results are not driven by unobserved heterogeneity. We observe that after the audience of the blog becomes sufficiently large the effect of blog postings changes its sign from negative to positive, possibly reflecting the increased probability of a remedial action by the government.
We investigate the effect of social incentives on participation in political protest with a particular focus on the effect of social media. We provide a simple model that illustrates how social media can protest participation and provide empirical evidence on the effect of online social networks on protest participation. First, we show that the structure of online social networks affects political protests. In particular, the protests where less likely to occur in cities with higher fractionalization of users across different social network services. Second, using a list experiment in a survey of Russian protest participants, we show that social motivation operating through both offline and online networks affect protest participation. Finally, we show that participation in protests across Russia in 2011-2012 was associated with higher stocks of social capital and civic culture.
This paper explores under what conditions social stigma exists as an additional sanction in criminal law. A distinction is made between the court as an institution specialized at discovering and assigning blame and the rest of the society that relies on judgment heuristics in assigning the informal sanction. It is shown that a criminal conviction carries an additional social stigma depending on the legal standard, the population variance, and the beliefs of the society. The substitutability between the fine and the probability of conviction also depends on the variance which is different from what the Becker model predicts.
This paper contributes to a growing literature on the empirical investigation of judicial decision-making in Constitutional Courts. To analyze the pressure for consensus-seeking in Civil Law Constitutional Courts, we construct a database of abstract judicial review decisions of the French Conseil Constitutionnel between 1995 and 2013. Our findings indicate that French Justices seek for both internal and external consensus when ruling on the conformity of laws with the Constitution. These results confirm previous findings on the pressure for consensus in Civil Law courts and infirm predictions about political and ideological competition at the Constitutional Court’s level.
We model the emergence of an innate, biological sense of property rights where resource scarcity and output contestability reign. Preferences evolve such that, in evolutionarily stable equilibrium, an object is valued more by an individual who possesses it, or has produced it, than if he is neither possessor nor producer. In a distributional contest for the object, the possessor/producer will devote more effort to retaining it than an interloper will to expropriating it. Asymmetry in preferences for an object between possessor/producer and interloper, and consequent asymmetry of efforts defending or expropriating it, constitute our concept of innate property rights.
We analyze a rationale for hiding information in open auction formats. We focus on the incentives for a bidder to call a price higher than the highest standing one in order to prevent the remaining active bidders from aggregating more accurate information that could be gathered by observing the exact drop out values of the exiting bidders. Necessary conditions for the existence of jump bids with such motivations are provided. Finally, we show that there is no clear-cut effect of jump bids on efficiency and expected revenue and introduce several specific results.
Legal systems sometimes employ ambiguous standards and moral language in instructing people to behave. Economic analysis of such directives, often associated with “equity” or “abuse of right,” focuses on their role in deterring opportunists or in saving the costs of ex ante specification – or finds them problematic as too chilling of behavior. Rational choice approaches to equity expect ambiguity to increase the cost of deciding how to behave, which at best is intended to nudge people toward greater compliance, assuming a certain risk aversion on their part. Or ambiguity may harm opportunistic and "bad" individuals than "good" people because the former have greater difficulty circumventing an ambiguous law. The present paper challenges these behavioral assumptions and the legal paradigms that are based on them. We use the findings of psychology, behavioral economics, and behavioral ethics to revisit three main related assumptions of the rational choice approach to equity, by developing three points: first, not only bad people try to circumvent the law; second, behavior depends on the relationship between specificity, trust, and the type of motivation triggered; and, third, moral priming has a different effect on good versus bad people. Based on these three modifications of rational choice assumptions about the law versus equity distinction, we suggest two normative prescriptions: first, we offer a dynamic “acoustic separation” model that attempts to examine the effect of law versus equity on both good and bad people; and second, we offer an initial taxonomy of the optimal mixture of law versus equity.
The impact of economic institutions on development is presently taken for granted but there is surprisingly scarce evidence on the channels through which institutions affect the organization of output. Imperfections in contractual enforcement, for example, could lead firms to adopt technologies that inefficiently minimize dependence on other sectors, thus going hand in hand with a reduction in productivity. Another channel would be the concentration of economic activity in sectors that have fewer interactions with other sectors. Using a dataset on manufacturing, this paper presents empirical evidence supporting both effects: better contractual enforcement raises relatively more the labor share of sectors that interact more with other sectors; further, good governance also boosts relatively more labor productivity in more complex subsectors of manufacturing. Both effects are strongest among countries whose labor productivity ranks in the second and third quartiles of the world productivity distribution and they are mute for the two extreme groups of poor and developed economies.
There are no generally accepted results regarding the objectives, decisions, and economic outcomes of nonprofit organizations, as compared to for-profit or public firms. We posit that this inconclusiveness is due to a too broad definition of nonprofits and that different types of nonprofits exist. This conjecture is investigated by constructing a model in which nonprofits differ by religious affiliation and testing the resulting hypotheses on the observed behavior of German nonprofit hospitals. We find that Catholic and Protestant nonprofits adopt significantly different strategies in the market. This confirms our conjecture and the importance of religion for economic outcomes.
As far back as ancient Greece, scholars have recognized that majority rule can produce socially undesirable outcomes. In recent years, even as research has shown that the “good institutions” bundle includes democracy – good places to live are generally democratic – there has been growing attention paid to the potentially negative (as well as positive) effects of democracy on economic development. In this paper, we examine the circumstances under which majority rule will promote, rather than impede, wealth-creation. We develop a model (inspired by Aristotle) that illustrates the importance of matching political institutions to economic circumstances, so that when citizens vote on the basis of what they stand individually to gain or lose from a policy decision, they will vote as if they are seeking to maximize net social benefits. We then use the model to guide our analysis of two pioneering majority-rule systems – those of Athens and Sparta. Athenians and Spartans went to great lengths to design institutions that kept voters’ incentives aligned; moreover, they redesigned their institutions in response to changes in the nature of their opportunities for wealth creation. We also discuss lessons for the modern world.
This paper investigates the institutional process that characterized political change and state capacity in the late medieval independent commune of Siena. After the mid- 14th century economic crisis, Italian city-states were either turning to oligarchic forms of power or they were losing independence under the pressure of external threats. Siena, instead, developed an institutional framework based on extended participation of social groups to administrative and political power. In the following two centuries the city remained independent and preserved its capacity to collect and use financial resources. Combining historical and theoretical analysis, the paper underlines the mechanisms through which different forms of administrative organization were selecting and supporting different equilibria in political power motivating the existence, after the mid-14th century, of coalitional governments. The use of data from original communal registers will show that the increased cooperation maintained the capacity of the state to collect resources from the community and to provide public services to the city and the controlled territory.
We assess the impact of U.S. government intervention on the performance of Chrysler which, following the financial crisis in 2008, accepted government support in return for on-going Treasury oversight. To conduct our analysis, we introduce a recently developed statistical methodology—synthetic control—to management research. The method overcomes challenges to causal inference in contexts like ours that are constrained by small samples or few occurrences of the phenomenon of interest. Our synthetic control analysis constructs a replica of the focal firm based on a weighted combination of other firms with similar attributes. We quantify the magnitude and direction of the treatment effect by comparing the actual performance of Chrysler to its counterfactual replica without treatment. We estimate that Chrysler, or its surviving components, would have sold approximately 20% more vehicles in the U.S. through summer 2011 had the company instead relied on private financing and market forces.
This article is a tribute to Elinor Ostrom. It explores two enduring lessons she taught: a substantive lesson that involves embracing complexity and context, and a methodological lesson that involves embracing a framework-driven approach to systematic, evolutionary learning through various interdisciplinary methodologies, theories, and empirical approaches. First, I discuss Ostrom’s work on environmental commons. I illustrate the two lessons through a discussion of the tragedy of the commons. Next, I explain how the two lessons play a significant role in recent efforts to extend Ostrom’s work on environmental commons to knowledge/cultural commons. I draw a parallel between the tragedy of the commons allegory and the free rider allegory, and show how many of the problems Ostrom explored in the environmental context are manifest in the cultural environmental context. This leads to a critique of conventional analyses of solutions to free rider problems (e.g., government subsidies versus intellectual property rights). I discuss an ongoing research project that follows the path that Ostrom blazed and systematically studies commons in the cultural environment.
We explore how modern autocrats win elections by inducing employers to mobilize their employees to vote for the regime and thereby subvert the electoral process. Using two original surveys of employers and workers conducted around the 2011 parliamentary elections in Russia, we find that just under one quarter of employers engaged in some form of political mobilization. We then develop a simple framework for identifying which firms engage in voter mobilization and which workers are targeted for mobilization. Firms that are vulnerable to state pressure— financially dependent firms and those in sectors characterized by asset immobility—are among the most common sites of workplace-based electoral subversion. We also find that workers who are especially dependent on their employer are more likely to be targeted for mobilization. By identifying the conditions under which workplace mobilization occurs in authoritarian regimes we contribute to the longstanding debate about the economic bases of democratization. In addition, we explore an understudied means of subverting elections in contemporary autocracies: the use of economic coercion to mobilize voters. Moreover, our research finds that clientelist exchange can thrive in industrial settings and in the absence of deeply embedded political parties.
How do political shocks influence economic behavior? We take advantage of a natural experiment to identify the effects of two political shocks on investment plans in Russian firms: the December 4th parliamentary elections and the protests of December 10th 2011. By comparing the responses of the “control” group of managers interviewed prior to the shock with those in the “treatment” group interviewed just after the shock, we estimate the impact of this political shock on reported economic plans. We find little support for the “political uncertainty” argument as firm managers were 12 percentage points more likely to report plans for a major investment after the protest shock than before. We find strong evidence for the “partisan” view of investment as firms with weak ties to the regime were about 12 percentage points more likely to report investment plans after the elections, while firms with strong ties to the regime were about 9 percentage points less likely to report plans for investment after the election. This paper contributes to debates on the economic impacts of political events, the value of political connections, and the importance of partisan preferences of economic agents. Moreover, it advances the literature by measuring managers’ political preferences directly rather than inferring them from firm characteristics.
This paper argues that the different pattern of evolution of business groups in Brazil, Chile and Argentina between 1990-2003 is better explained by differences in state involvement in the governance structure of business groups, than by state policies towards investor protection. Business groups are firms bound together by equity and social ties sometimes structured in a pyramidal way with a controlling wealthy family owner in the apex. Such business groups, ubiquitous in developing countries, went through a period of restructuring in the 1980’s and 1990’s in Brazil, Chile and Argentina. Two decades after this restructuring period, new groups emerged in Brazil, existing ones expanded in Chile, while they were sold out in Argentina. This paper aims to explain why the pattern of evolution of business groups in the three countries followed such different paths. The corporate finance literature on business groups focuses on the conflict of interest between controlling shareholders and investors and argues that business groups are prominent when minority investor protection is poor. We argue that the nature of investor protection is not a satisfactory basis for explaining the different pattern across these countries. We argue that state involvement in corporate finance was a critical factor in establishing the cross-country pattern observed for Brazil, Chile and Argentina. Business groups emerged or expanded (were bought out) if the state was (not) involved in equity financing of business groups. The State channeled public savings to business groups in the form of equity in Brazil and Chile through state related institutions and a mandatory private pension system, respectively. In Argentina, business groups were mainly financed with foreign loans. During the financial crisis of the late 1990’s, business groups already highly indebted sold their assets in Argentina while business groups in Brazil and Chile could share losses with domestic investors.
Delegation is a central feature of organizational design that theory suggests should be aligned with the power of incentives in performance pay schemes. Empirical research on factors that influence delegation, and on the relationship between delegation and pay-for-performance, however, remains scarce. We develop a simple model of the delegation decision in the context of industrial sales forces, where delegation takes the form of pricing authority given to sales persons. Consistent with the predictions of our model, we show that the power of incentives is positively and robustly related to the level of pricing authority. We also find that sales people are given more pricing authority when they have superior local information and are less biased. Finally, we find evidence that the positive effect of local information on the extent of delegation is increasing in pay-for-performance but decreasing in agent bias.
Does more information lead to less investment? In the context of de-facto non-independence of regulation, civil society actors produce information and try to change voter strategy. Their aim is to bring about a regime change and hence a new regulatory set-up which will generate more favorable regulation. However, we show using a linked action situation approach through stylized games that in the short run, biased information produced by public interest groups and amplified by media actually tends to reduce regulatory commitment, irrespective of a regime change. This leads to a ‘low investment trap’. We give some indicative support to this claim through one instance of public monitoring of electricity in India. Finally, we argue that in the long-run this dilemma will be solved under a repeated game situation where state regulators make only public interest moves ‘knowing’ that a perennial investment trap would otherwise be created. However, this will be possible only under the condition that an institutional mechanism for information production exists.
In this paper, I use the exogenous change in contractual practices in the US motion picture industry due to the Paramount antitrust case of 1948 to empirically test whether theaters changed the type and portfolio of movies showed in their screens after the Supreme Court resolution and 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 for an unbalanced sample of 393 movie theaters located in 26 different cities in the US. I find that movie theaters previously owned by major studios change their movie portfolios toward movies of other studios, but there was no change in behavior of independent theaters. I also show that the number of movies screened per theater increased after 1949 suggesting a potential increase in efficiency due to the ban of bundling practices.
In this paper we empirically investigate whether changes in product market competition affect firm boundaries — the perennial make-or-buy problem. Exploiting regulation-induced shocks to entry barriers and differences in regulation enforcement across cities to obtain a source of exogenous variation in product-market competition, we establish a negative causal effect of competition (through reduced entry barriers and a larger number of rival firms) on vertical integration in the setting of the Spanish local television industry between 1995 and 2002. We also find that stations located in larger markets are on average more likely to produce their content in-house than stations in smaller markets, and that private stations and stations belonging to a network tend to outsource more.
Regulation of any specific economic issue depends on the severity and importance of the problem it tries to address, the economic ideology of the legislature, and the constitutional nature of the regime. These three factors are substitutes in a formal production function of economic regulation. I illustrate this substitutability and the working of the production function with a law that criminalizes rejection of official money. Enacted in the French Revolution to support hyperinflated money, it was transplanted all over the world, crossed legal systems, and still survives, because it catered to the needs of belligerents, socialists, and dictators.
We show that reducing social interaction increases the diversity of products purchased by consumers in two retail settings. First, we consider a field experiment conducted by Sweden's monopoly alcohol retailer and find that moving purchases from behind the counter to self-service disproportionately increases the sales of difficult-to-pronounce products. Second, we use individual-level panel data from a pizza delivery restaurant to show that online orders have more complexity, calories, and diversity, and measure the consequences for consumer and producer surplus. Combined, these results suggest that social frictions can substantially affect market outcomes.
How do the political institutions shape the way that firms pursue the laws and regulatory changes that they desire? We contrast firms that choose to influence policy directly, through un-mediated contacts with executive and legislative branch personnel, and those that do so collectively, through lobby group acting as intermediaries. Assuming that the firms’ choice between direct and indirect strategies will depend upon the relative costs and benefits in expected value terms and considering different mechanisms of how the institutions condition these costs and benefits, we infer that direct lobbying through government officials should be encouraged in autocratic settings while collective strategy becomes more attractive in democratic environment. We test this implication by using a multi-level hierarchical design and data from a 2010 survey of 1013 Russian firms across 61 regions and a regional level dataset. The data contains answers to the direct question about the channels that firms use to influence laws and regulations. For the variation in political environment we exploit the substantial variation in regional governance across Russia measured by the results of regional and federal parliament elections and press freedom index. Our data shows that in more democratic settings firms are more likely to use business associations when trying to influence their institutional environment. In less democratic settings Russian firms more frequently report approaching government personnel directly.
The paper contributes to revising the notion of the firm by a)reconstructing the conditions in which the constitution of an entity may be necessary for conducting economic action; b) showing that such an entity can be established by an agreement or contract associating and dedicating partners and/or assets (in most Civil Law countries called a contract of ‘societas’); and c) arguing that such an entity, as any legally recognized association, in modern constitutional democratic legal orders, is bound to be governed according to democratic principles and procedures. Different types of firms differ according to who are the principals in the democracy, and whether the ‘societas’ is a society of assets or of people. Those theses allow to derive some other relevant implications of the nature and governance of the firm (for example, the irrelevance of the objectives pursued, and the intrinsic relevance of responsibility toward third parties, for defining a firm). The whole set of propositions is exposed in ‘ten theses’.
We use spatial regression discontinuity analysis to test whether the historical partition of Poland among three empires—Russia, Austria-Hungary, and Prussia—has a persistent effect on political outcomes in contemporary Poland and to examine the channels of this influence. We find that the main difference in voting across Polish territories attributed by many observers to the legacy of empires is driven by omitted variables. However, empires do have a significant causal effect. The lands that belonged to Prussia (compared with those that belonged to Russia) vote more for anticommunist (post-Solidarity) parties. This difference is largely explained by the persistent effect of infrastructure built by Prussians at the time of industrialization. The former Austrian lands (compared with former Russian lands) votes more for religious conservatives and for liberals. The difference in the vote for religious conservatives is explained by persistent differences in church attendance driven by vastly different policies of the two empires toward the Catholic Church. Higher support for liberals on the Austrian side is partly explained by a persistent belief in democracy, which is a legacy of decentralized democratic governance of the Austrian empire.
This empirical study examines the effects of ownership networks and organizational transparency on the long-term resource commitments of large Russian firms. Building on resource dependence and agency theories, we argue that ownership networks may compensate for lack of institutional structures in emerging economies and provide the necessary resources or accountability to enable firm growth through long-term commitments of capital. We use a unique panel dataset of Russian listed firms complemented by information on firms’ transparency and disclosure (TD) practices, major owners, and membership in a leading industry association. These data allow us to analyse the network of ownership and association ties to Russian oligarchs and to the state. We find that a firm’s position in an ownership network and its corporate governance practices in terms of transparency and disclosure are positively associated with long-term investment. We find also that ownership network position and transparency practices significantly interact: firms in peripheral network positions tend to benefit more from improvements to their TD practices. However, this interaction depends on the type of ownership. To analyse this further, we compare different types of network ties: single or multiple controlling owners, state, conglomerate and industry association ties allow us to distinguish the types of resources or oversight that might be available through the network. We find that firms with a single controlling oligarch owner, conglomerate owner, or industry association tie benefit particularly from transparency practices in committing to long-term investment. We interpret these findings through reference to resource dependence and agency theories.
Due to dire financial circumstances, between 1687 and 1750 the Spanish Crown appointed colonial officials based on the monetary bids of those aspiring to office. This paper uses variation in prices to show how selling appointments made profiting from office a standard price within the Peruvian colonial administration: positions with greater access to rents exhibit higher prices than those where no such rents exist. Such difference in prices is not explicable by the salary received or the desire to serve the Crown. Rather, high prices are explained by the profits derived from a exploitative practice known as "repartimiento" or forced sales of merchandise. In addition, prices for offices were also influenced by the possibility of extraction due to the decline in the oversight ability of institutions that could represent a check to corrupt behavior. Finally, tracing colonial provinces with their contemporary counterpart I find that highly priced and demanded provinces in the 18th century exhibit worse development outcomes today. Such reversal in the fortunes of previously demanded provinces is due to the persistence of extractive practices during the episodes of sales. Overall, this paper provides the first estimates of the consequences of sale of appointments on the extractive nature of the colonial administration.
If voters of different countries adhere to different and deeply rooted cultural norms, the country leaders may find it impossible to agree on efficient policies especially in hard times. The conformity constraint -political leaders' unwillingness or impossibility to depart from these norms - has resulted in lack of timely intervention which has amplified an initially manageable debt crisis for some European countries to the point of threatening the Euro as a single currency. We show the conditions under which the introduction of a fiscal union can be obtained with consensus and be beneficial. Perhaps counter-intuitively, cultural diversity makes a fiscal union even more desirable.\ Some general lessons can also be drawn on the interaction of cultural evolution and institutional choice.
The basic question underlying this paper is why do inefficient institutions persist in paddy rice market in Indonesia. The problem of market failures in paddy rice market is indicated by the wide price margins between the low sale price at which farmers sell the commodities or factor and the high purchased price at which they could buy the products or factors. Some literature suggested the role of inefficient agrarian institutions, such as the middlemen and sharecropping, to this issue. The middlemen’s margin contributes to the wide margin and causes the household farmers to hardly get a fair pricing for the products. Meanwhile, sharecropping has been claimed to bring losses to farmer’s welfare. With the help of Transaction Costs Economics and Economics of Governance approaches, that suggest that markets may fail due to the high transaction costs associated with using the market mode, which leads the agents to conduct transactions through institutional arrangements other than the market, this paper analyzes how do household farmers deal with the existing transaction costs in paddy rice market. Using a household model with market failure, this paper compares the level of efficiency in terms of net income between modes of governance in paddy rice production. This paper found that paddy rice farmers get benefits from institutional arrangements available due to the role of middlemen and sharecropping institutions, which obtained through private ordering. Meanwhile, a government intervening institutional arrangement, the association of farmers group, has brought no significant benefit to farmers. These findings give a highlight to the understanding of why such inefficient institutions, the middlemen and sharecropping, remain as the widely prevalent agrarian institutions.
In this paper, we study panel data on region-to-region gross migration flows in Russia for 1995-2010. We find that barriers to labor mobility that hindered internal migration in 1990s, have been generally eliminated by the end of 2000s. In 1990s many poor Russian regions were in a poverty trap: potential workers wanted to leave those regions but could not afford to finance the move. In 2000s (especially in late 2000s), these barriers were no longer binding. Overall economic growth and development of financial markets allowed even poorest Russian regions to grow out of the poverty traps. This resulted in convergence in Russian labor market in 2000s; the interregional gaps in incomes, wages and unemployment rates decreased substantially and are now comparable to those in Europe.
For a long time and with few exceptions, political economists have assumed the military to be a faithful government agent. The frequent occurrence of military coups all over the world, however, indicates that this assumption is not in line with reality. In this paper, the determinants of coups are identified. Particular attention is paid to constitutional rules that could possibly reduce the likelihood of military coups. We find that economic conditions, the type and age of the political regime and political instability appear to be reliable predictors of coup attempts by the military. For many other variables discussed in the literature an effect on coups cannot be established.
This paper empirically studies the voting outcomes of Egypt’s first parliamentary elections after the Arab Spring. In light of the strong Islamist success in the polls, we explore the main determinants of Islamist vs. secular voting. We identify three dimensions that affect voting outcomes at the constituency level: the socio-economic profile, the economic structure and the electoral institutional framework. Our results show that education is negatively associated with Islamist voting. Interestingly, we find significant evidence which suggests that higher poverty levels are associated with a lower vote share for Islamist parties. Later voting stages in the sequential voting setup do not exhibit a bandwagon effect.
This paper offers some preliminary insights into the impact of a particular type of credit instrument, the lien, on the distribution of de facto and de jure political power in the postbellum US South and the Australian colony of New South Wales. De facto political power arises when wealth increases and, once acquired, it can be used to challenge the prevailing distribution of de jure political power. The design and operation of lien laws in these two locations resulted in very different outcomes for the allocation of de facto and de jure political power and this had implications for long run growth outcomes. In the postbellum South the operation of liens evolved to favour landlord elites over competing claimants thereby supporting the continued unequal distribution of de facto and de jure political power. This skewed distribution of political power is likely to have resulted in lower growth rates in the long run for many Southern economies. In New South Wales the pastoral elites themselves were credit constrained and therefore, relied on another colonial group, merchants, to provide credit via liens. This led to greater de facto political power of merchants which, over time, allowed this group to mount an effective challenge to the prevailing de jure political power of pastoralists. In turn, this contributed to a shift toward a more equal allocation of property rights as well as liberalisation of the political sector including universal franchise and the secret ballot.
We investigate the classic question of how the provision of a local publicly-provided good--air quality--varies with the degree of decentralization of policymaking. Exploiting exogenous variation in the natural topography of the United States to instrument for the number of local government jurisdictions in a metropolitan area, we show that areas with more jurisdictions have significantly lower air quality, and significantly higher concentrations of the toxic air pollutants most closely associated with cancer and non-cancer health risks. Moreover, we estimate that this increase in pollution lowers housing values by at least 3%. By contrast, local drinking water quality--a publicly-provided good not subject to spillovers--does not vary with the number of jurisdictions. Differences in industrial activity explain much of the difference in air quality; areas with more jurisdictions have significantly higher employment in power generation and distribution, and this difference explains the majority of variation in sulfur dioxide emissions--a major component of air quality. Further, areas with more jurisdictions have higher employment in chemical manufacturing, and this explains the majority of variation in concentrations of toxic air pollutants used heavily in this industry.
The nature of the relation between cognitive skills and economic preferences is a key question in psychology and economics. Examining subject’s intelligence (IQ) and responses to probabilistic feedback during a simple decision task allows us to investigate neural correlates of cognitive ability at the foundational level of gain/loss processing. Our neuroimaging results for 94 subjects show that typical declines in striatal BOLD signal after monetary punishment are significantly less pronounced for subjects with higher IQ. This finding strongly implicates IQ in the ex post processing of decision outcomes, thereby opening up the hitherto unconsidered possibility that cognitive mechanisms underlying outcome evaluation may be central to how intelligence influences preferences and decision, especially attitudes towards risk. We further investigate the role of IQ for outcome evaluation on subject’s behavior on our decision task to demonstrate a correlation between IQ and the extent to which past decision outcomes influence future choices. Specifically we find that larger IQ predicts behavior to be more strongly correlated with an extended period of previously experienced decision outcomes, while lower IQ predicts behavior to be correlated exclusively to the most recent decision outcomes. In addition to showing the moderating effect of intelligence on neural responses to gains and losses, our findings illustrate the existence of a link between intelligence and choice behavior that extends beyond the ex-ante comparison of decision options to include ex-post evaluation of decision outcomes. Importantly, this identified link suggests that observed correlations between intelligence and preferences may be rooted in a unitary process of how decision outcomes are experienced.
This paper studies the factors driving changes in judicial independence (JI) as incorporated in constitutions. Two indicators of constitutionally safeguarded JI are constructed. Variations in these indicators are identified based on changes in the constitutions of as many as 100 countries that occurred between 1950 and 2005. Four groups of factors are conjectured to be relevant for explaining these changes. We find only weak evidence for the insurance theory of judicial independence but strong evidence that the characteristics of individual leaders—such as how they acquired or lost power—play an important role in explaining changes in constitutionally safeguarded JI. This paper contributes not only to the literature on JI but also to the theory of endogenous constitutions.
A cooperative is an enterprise owned by a society of members. It advances the interests of the members, individual as well as social. Members of a cooperative differ from shareholders of a corporation by having an ownership and a transaction relationship with the cooperative, while shareholders have only an ownership relationship with the corporation. Most countries have incorporated cooperatives under the Association law, i.e. a cooperative is legally an association of persons, and the members run an enterprise within the legal entity of the association. However, countries differ regarding the freedom allowed to structure the bylaws. Some countries specify various ideological and societal objectives to be included in the bylaws, while other countries have a focus on facilitating different types of entrepreneurial activities for the members. Many countries specify the one-member-one-vote rule, but there are also countries allowing proportional voting. We highlight how the interplay between the society of members and the cooperative enterprise will channel participatory activities in cooperatives compared to corporations. Various attributes of participation are distinguished: voting, voice procedures, information exchange, decision making (bodies), CEO power, and training / education. Participation in successful cooperatives and corporations consist of aligned attributes in the (participatory) system, but the choices regarding the various attributes differ between organizational forms. However, behavior in terms of production technologies and product portfolios may be quite similar, despite the governance structure differences.
This paper seeks to probe into the optimal degree (or level) of public disclosure regarding 'tax compliance information (TCI),' an area not yet fully explored in existing literature. Starting from the recognition that the issue can be portrayed as an 'allocation of the competing rights' regarding a property among various parties involved, we heuristically examine the legal institution corresponding to such an optimal allocation that minimizes the relevant total social cost. In particular, from a perspective of new institutional economics, we highlight the endogeneity embedded in determining the degree of public disclosure by associated law enforcers; it tends to lower the actual disclosure degree.
Providing adequate animal health services to smallholder farmers in developing countries has remained a challenge, in spite of various reform efforts during the past decades. The focuses of the past reforms were on market failures to decide what the public sector, the private sector, and the “third sector” (the community-based sector) should do with regard to providing animal health services. However, such frameworks have paid limited attention to the governance challenges inherent in the provision of animal health services. This paper presents a framework for analyzing institutional arrangements for providing animal health services that focus not only on market failures, but also on governance challenges, such as elite capture, and absenteeism of staff. As an analytical basis, Williamson’s discriminating alignment hypothesis is applied to assess the cost-effectiveness of different institutional arrangements for animal health services in view of both market failures and governance challenges. This framework is used to generate testable hypotheses on the appropriateness of different institutional arrangements for providing animal health services, depending on context-specific circumstances. Data from Uganda and Kenya on clinical veterinary services is used to provide an empirical test of these hypotheses and to demonstrate application of Williamson’s transaction cost theory to veterinary service delivery. The paper concludes that strong public sector involvement, especially in building and strengthening a synergistic relation-based referral arrangement between paraprofessionals and veterinarians is imperative in improving animal health service delivery in developing countries.
Banerjee and Iyer (henceforth, BI) (American Economic Review, 2005) find that districts which the British assigned to landlord revenue systems systematically underperform districts with non-landlord based revenue systems, especially in agricultural investment and productivity and mainly after the onset of the Green Revolution in the mid 1960s. On this basis BI claim there were long-lasting effects of the Land Revenue system instituted in British India on a variety of variables after independence. We correct a mis-interpretation of the land revenue system in Central Provinces, which BI characterise as landlord based, when reliable historical evidence suggest that this region should have been attributed to a mixed landlord/non-landlord based revenue system. Using a more appropriate classification of the land revenue system of the Central Provinces constructed from documented archival research, we find no evidence that agricultural performance of Indian districts in the post-independence period was adversely affected by the colonial landlord land revenue system. Our results demonstrate that the key BI argument that the more ‘oppressive’ landlord based colonial land revenue systems mattered for post-independent agricultural development in India rests on fragile historical and statistical foundations.
This paper studies the role played by a minor party in parliamentary politics, by assessing both theoretically and empirically how changes in the minor party's policy positions affect its political power and through that ideological policy outcomes. By adopting socio-economically a more moderate overall policy position, the minor party increases its role as an attractive coalition party for the major parties, thereby increasing its political power. First, I show the importance of agenda-setting in a two-dimensional policy framework, where policy outcomes are determined at the post-election stage. Then, I calculate parties' political power based on their left-right positions to empirically test the hypothesis with data of green parties and environmental policies from 9 European countries for a period of twenty years. Results support the hypothesis that front-line policy positions play a role through determining parties' political power, whereas changes in the green party's environmental policy position have an insignificant impact on policy outcomes.
We conduct a controlled field experiment in 52 communities in rural Bolivia to investigate the effect that local authorities have on voluntary public good provision. In our study, community members pool resources to provide environmental education material for local schools. We find that voluntary contributions increase when democratically elected local authorities lead by example. The results are driven by two factors: (1) individuals give more when they are called upon to lead than when they give in private, and (2) high leader contributions increase the contributions of others. Both effects are stronger when authorities, as compared to randomly selected community members, lead by example. We explore two underlying channels of leadership influence. First, we show that leaders signal information about the quality of the public good through their contribution decisions. Second, we explore how leader characteristics affect the likelihood that others follow. Specifically, our study shows that randomly selected community members are more influential the more they resemble authorities on observable characteristics.
The public sector in most advanced economies accounts for a major share of the economy. In Norway, for example, the public sector purchases goods and services for more than 300 billion kroner annually (about 41 billion Euros, or about 15% of the GDP of mainland Norway). Yet, the public sector is often reported to fail in terms of procurement efficiency. In this study, we consider the extent to which public agencies follow the logic of transaction cost economics, and if following the logic of transaction cost economics is contingent on the decision maker’s institutional context. Specifically, we examine how bureaucratic pressure moderates the relationship between asset specificity and the use of different contractual governance forms in public sector procurement. In a Scandinavian survey of 310 relationships between public agencies (buyers) and external service suppliers, we find a moderating effect of institutional context on public agencies attentiveness to the logic of transaction costs. Bureaucratic pressure decreases the expected relations between buyer-held investments and contracting, both for (i) formal contract detail, (ii) formal contract flexibility and (iii) relational norms. However, our findings are more mixed related to supplier-held specific investments. This paper suggests that more research should explore how strategic sensitivity to the logic of transaction costs is contingent on decision makers’ institutional context.
The ability of poor or disenfranchised groups to organize and credibly threaten violence has often been seen as a fundamental driver of institutional change. In this paper, we examine the role of shocks to the local organizational capacity of non-elites in driving political mobilization during the French Revolution, the Partition of South Asia and other settings. Drawing on novel data, among the shocks we examine in the French case are the role played by combat experience in the American War of Independence and other conflicts in fostering organizational capacity and leading to changes in the grievances expressed on the eve of Revolution, the membership and the political affiliations of the National Assembly, and the class cleansing that occurred during the Reign of Terror.
This article critically analyzes the three primary justifications for the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 and provides a normative evaluation and positive explanation of the way that Dodd Frank regulates consumer mortgage contracts. Among the conclusions: the contractual features targeted by Dodd Frank likely had little to do with the housing collapse and the Great Recession, but instead were targeted for various fairness reasons; substantively, Dodd Frank does not implement the kind of policy changes recommended by behavioral economics, but instead consists of a set of contractual prohibitions, mandates and modestly revised old-style disclosure regulations; these reforms are explained primarily by the positive political economy of competition in the financial services industry and the liability risks imposed by the relevant consumer financial protection laws. In the actual Dodd Frank world, where lenders face potentially massive ex post liability for allowing consumers to choose “predatory” mortgages, nudges inevitably collapse into mandates. This restriction of the set of contracts from which consumers may choose is likely to harm the very subset of consumers that it is intended to help and will inevitably entail huge consumer welfare losses.
In the last three decades, the organisation of production has undergone a major transformation from vertical integration towards de-verticalisation, with associated increases in outsourcing and the international fragmentation of production into global value chains (GVCs). Among the most important consequences of GVCs are the creation of new opportunities for developing countries to participate in international markets and cross-border business networks, and the development of new contractual practices and new models of collaboration among firms, including network forms of organization. This paper examines these two aspects of GVCs through a case study of the commercial aircraft industry in Brazil. First, I provide an analysis of the role of multilateral contractual networks as an instrument to promote developing countries’ small and medium enterprises (SMEs) access to GVCs, and increase the benefits derived. Second, I examine the lack of the proper legal tools in Brazil to regulate the different forms of inter-firm collaboration that exist within multilateral contractual networks.
We analyze the effects of synergies from horizontal mergers on managerial incentives. In contrast to synergies, efficiency gains resulting from managerial effort are not merger specific, i.e., they may be realized by all firms before and after a merger. We show that synergies suppress managerial incentives within the non-merging firms, whereas the effect on the merged firm critically depends on the number of agents employed by its principal. An important implication for merger policy is that consumer surplus may be monotonically decreasing in the synergy level, which opposes the use of an efficiency defense in merger control.
Firms often make relationship specific investments, that is, investments that are heavily specialized to their buyers or suppliers but expose the investing firm potentially to a loss if they are utilized outside of their intended purpose. Such investments occupy a central role in explaining contractual choice, among other economic arrangements. Demonstrating the causal chain from investments to contract choice, is difficult, however, as investment and contracting decisions are decided simultaneously and selectively. To address the problem, I study 20 years of coal procurement information for electric utilities in the US. I argue that the Clean Air Act Amendment came in as an exogenous shock to investment strategies of the utilities. By requiring plants to reduce emissions, engineers were forced to alter their boilers to accommodate a larger variety of coal, and thus lowering the level of specialized investment. I exploit two exogenous sources of variation - policy induced, as the Amendment placed separate limits on Phase I and Phase II plants, and geographical, as plants closer to western coal mines are more inclined to engage in boiler retrots - to define a simple difference-in-difference model. I find that Phase 1 plants in the Midwest were more likely to change their pricing arrangements and adopt shorter duration contracts, in line with theoretical prediction. This result is robust to alternate definitions of the dependent variable, sample specification and other regulatory changes enacted over the period of study. I therefore provide strong evidence for one of the central predictions of incomplete contract theory, even after controlling for the choice of investment.
The recent literature on politically connected firms documents that connections between firms and politicians or political parties are both globally widespread and contribute 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 practices and patterns that motivate our model are widespread in many emerging economies in Asia, Latin America, and the Middle East. One of the best documented examples in the academic literature comes from Jordan. We justify our modeling assumptions by discussing in detail how "wasta" works in Jordan and its impact on the business climate. The model unravels the economic forces behind the trade-offs entrepreneurs face in such environments 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.
By looking at the allocation of European Union Structural Funds (EU SF) in Hungary for 2004-2008, this paper addresses if and how these are influenced by political and institutional factors. Taking the political economy of intergovernmental grants framework (among others Johannson 2003, Bodenstein-Kemmerling,2006, Veiga-Pinho, 2007 etc.) it comes up with hypotheses specially relevant for the Hungarian context. Data is analysed in search for possible political influences, election motivated/pork barrel type grant allocation decisions. For checking what is affecting the chances of grant receivals (of any applicant or of local government) Probit models have been tested with different sets of political and socio-economic control variables on a combined dataset (created from five different data sources containing socio-economic, budget and election data for all Hungarian municipalities (n=3168)). This period (starting with the country’s 2004 EU Accession) spans two election cycles (2002-2006; 2006-2010) with general and local elections being held in 2006. Estimations are carried out on the whole database and sub-samples by size and different periods pre- and post-election too. Results show partisanship elements (same colour favouritism) raising chances for getting EU SF grants in case of MPs and mayors for certain municipality size categories. Findings also reinforce what the EU SF literature stresses - efficient usage of EU funds depends mostly on institutional conditions - here proxies for local administrative capacity and earlier EU project experience are strongly significant and positive, adding to probabilities of successful EU SF grant receipiency. Socio-economic and need controls show a mixed picture, reflecting the conflict of efficiency vs. equity-driven goals of development policy today.
The aim of this paper is to contribute to a theoretical underpinning of the economic freedom–political freedom relationship. In this endeavor we use the theory of social orders (North et al. 2009) to interpret the Hayek-Friedman Hypothesis (HFH), which leads us to propose a new interpretation. The core insight of this weak form of the hypothesis is that economic freedom is a necessary condition for maintaining political freedom in open access orders, that is, once achieved, political freedom needs economic freedom to be stable; but the HFH is not relevant for limited access orders. Our empirical investigations, based on cluster analysis, survival probabilities and probit regressions, by using a panel database for 130 countries for the period 1970-2005 provide support for the weak interpretation.
The strengthening of land rights has become one of the most widely discussed policy prescriptions for reducing financial market frictions and promoting private investment in low and middle income countries. But empirical assessments of these potential effects have produced only mixed results. One important reason, we feel, may be that the existing literature has focused exclusively on actors that face difficulties accessing credit for reasons that transcend the security of land tenure. That is, although strengthening the land rights of small-scale farmers or poor urban households might be necessary for increasing credit access and promoting investment, it might not be sufficient. We thus explore the effect of greater tenure security over land in a setting in which non-land-related financial market frictions are apt to be less severe – i.e., among large, urban, industrial enterprises. Exploiting policy variation in the pace of land privatization across Russian regions, we use recent, firm-level survey data to show that private rights to land do indeed facilitate access to external financing and promote investment. We supplement this finding with direct survey evidence of firms’ managers pointing to private land as an important source of collateral to secure external loans.
Recent scholarship has created new interest in the right to exclude. But there is comparatively little analysis of an owner’s right to include. An owner may include others via nonenforcement or waiver of exclusion rights; division of existing rights by contract or property forms (such as easements, leases, or trusts); or creation of new rights (like security interests, condos, and other forms of co-ownership). Inclusion is socially beneficial insofar as it enables sharing and exchange, facilitates financing and risk-spreading, and promotes specialization. Yet inclusion entails costs, including conflicts over use, excessive utilization or inadequate maintenance, and fragmentation. The law authorizes competing institutional arrangements—not only informal and contractual inclusion but also proprietary inclusion—to reduce opportunism, minimize disputes, and ensure the private incentive to include does not diverge from what is socially optimal. Understanding how the law promotes the social use of property provides insights into debates about the property/contract interface, numerus clausus, and right to exclude.
We theorize and examine the channels by which corruption may affect voting behavior. First, motivated by low empirical correlation between exposure to corruption and perceptions thereof, we postulate two distinct channels: pocketbook corruption voting, defined as the effect of personal experiences with corruption on voting behavior; and sociotropic corruption voting, defined as the effect of perceptions of corruption in one's society on voting behavior. Second, we argue that the weight the voters place on each channel depends on the salience of each source of corruption. Since importance of bribe victimization to those victimized is inherently high and overall levels of bribe-taking in society are slow-changing, pocketbook corruption voting is expected to be persistent. Conversely, salience of societal corruption depends on the actions of elites, such as corruption scandals, campaigns, or entry of a new anti-corruption party, and so sociotropic voting is expected to be variable. Using data from Slovakia, we find support for our theoretical arguments. In the absence of events that raise salience of sociotropic corruption, we only find pocketbook voting. Sociotropic voting is not activated by scandals alone but it is by the entry of a credible anti-corruption party, which brings about a shift in the media coverage of corruption. Our results suggest that previous studies may have underestimated the effect of corruption on voting by missing pocketbook effects.
This presentation summarizes, synthesizes, and extends a recent stream of research on the nature and development of entrepreneurial capabilities in public and nonprofit enterprises, and the relationship between entrepreneurship and the public sector more generally (Klein, 2010, 2011; Klein, Mahoney, McGahan, and Pitelis, 2010, 2012, 2013; Foss and Klein, 2010, 2012; Klein, McGahan, and Rezaie, 2012). Public organizations are relatively understudied in the strategy and entrepreneurship literatures. But public organizations. But public organizations can be characterized as stocks of human and non-human resources, including routines and capabilities; they can acquire and/or develop excess capacity in these resources; and they may grow and diversify in predictable (Penrosean) patterns. As they try to create and capture value, public organizations can act entrepreneurially by creating or leveraging bundles of capabilities, which may then shape subsequent entrepreneurial action. Such processes can involve complex interactions among public and private actors. For example, public organizations often partner with private firms to produce existing products, create new products, and establish new markets which, in turn, generate new capabilities for both public and private actors. Yet such coevolutionary processes are not guaranteed to create value, and capabilities acquired in the pursuit of public interests may, over time, enable activities that damage those same interests. This presentation shows how a capabilities approach helps explain the nature and evolution of public organizations and applies this approach to a series of cases on the entrepreneurial growth and diversification of public organizations, the private provision of public goods, and related issues.
Transaction cost economics, like other approaches to firms, contracts, and organizations, tends to focus on the characteristics of transactions already in place. Questions about origins and emergence are central to entrepreneurship research, but have not been treated systematically within the larger field of comparative economic organization. This paper explores how constructs, theories, and approaches from the entrepreneurship literature can inform TCE and other theories of organization, and vice versa. First, entrepreneurs can be modeled as the speculating and coordinating agents who organize activities to economize on transaction costs, particularly in a world of Knightian uncertainty and incomplete contracts. Second, the concept of entrepreneurial judgment as ultimate decision-making over the deployment of heterogeneous resources gives new answers to the classic Coasean questions of firm existence, boundaries, and internal organization. Third, TCE’s careful treatment of alternative institutions of governance challenges the entrepreneurship literature to move beyond its current emphasis on the cognitive acts of creative individuals to investigate more systematically how entrepreneurs acquire, deploy, and control productive resources to put entrepreneurial ideas into practice.
Using a fairly large data set covering more than 10,000 elections, this paper analyzes the effect of elections on municipal spending in Austria. The paper not only produces further evidence that there is an electoral cycle in fiscal policy but emphasizes the role of dynamics in government spending. In contrast to recent suggestions to look for the cycle in monthly data immediately before an election, this paper tests the hypothesis that pre-electoral spending increases may begin well before the election year. The paper shows that getting the dynamic specification right is crucial to identify the effect of elections on government spending decisions. Separating elections early and late during the year and allowing for differential dynamic processes may not only explain insignificant results in previous studies but also confirms the idea of pre electoral expansions that will commence well before the election year.
I analyze the interaction between post-election lobbying and the voting decisions of forward-looking voters. The existing literature has shown that in models with citizen candidates from a dispersed distribution of preferences, lobbying has no influence on implemented policy. In my model with ideological parties, lobbying is shown to have an effect on policy. In terms of welfare, I show that the median voter and the majority of voters are often better off with lobbying.
Beginning in 1987, a major criterion for eligibility for the World Bank’s concessionary IDA loans and grants has been whether or not a country is below a certain threshold on per capita income. The effects of this rule on total aid from all donors are not obvious. Other donors might view a relatively steep and sudden decline in IDA as an overreaction to a relatively small and gradual increase in income, and compensate for much of the decline in IDA aid by increasing aid to recipients after they exceed the threshold. On the other hand, other donors might view crossing the threshold as a signal that countries are in less need of aid, and reinforce the (negative) effects of graduation from IDA (and regional development bank funds) on aid levels. We show in this paper that the latter effect dominates the former. Using panel data with country fixed effects, we show that aid from the DAC bilateral donor countries is significantly reduced after countries cross the income threshold, controlling for other determinants of aid including a continuous measure of per capita income. Therefore, crossing the income threshold for IDA eligibility turns out to be a strong predictor of total aid levels. Because crossing the income threshold for IDA eligibility significantly reduces aid levels from other donors as well as the World Bank, government officials in recipient countries may have an incentive to manipulate their national accounts data to understate their per capita income levels, as their income levels approach the IDA threshold. Preliminary tests indicate underreporting is likely rare, as there is no evidence of significant "bunching" of observations just below the income threshold.
We introduce a mixed quantity-setting duopoly with a socially concerned firm and a profit-maximizing firm. Both firms can either hire a selfish manager solely interested in monetary compensation or an intrinsically motivated manager who is also partially interested in the goal of the firm. We derive the optimal combination of the organization's type and the organization's managerial compensation structure. Although both firms prefer to hire an intrinsically motivated manager to save on compensation costs, we find that the structure of the compensation system offered to the manager depends on the firm's strategic orientation. In equilibrium, the profit-maximizing firm uses a high-powered (strategic) incentive contract based on profit and sales revenue. In contrast and in line with empirical evidence, the socially concerned firm uses a straight salary to compensate its manager. We further discuss the endogenous choice of social strategy and demonstrate that in a strategic setting it is optimal for profit-maximizing investors to consider the welfare of consumers. In summary, we provide a further justification for the recent increase of social responsibility as a competitive strategy and the widespread use of low-powered incentives in socially concerned firms.
Different forest property regimes based on individual, collective or state ownership co-exist in various countries as a result of their institutional evolution in the past. The government regulation of forest management goes across all property right structures. Empirical studies and theoretical discussions try to reveal sustainable forest property regimes that would balance both use and protection over time. The aim of the paper is to complement this research agenda by comparing the behaviour of owners within an individual property regime and owners within a common property regime. The comparison is done via field experiment within which players express their preferences toward harvesting of a hypothetical forest. The experiment was carried out in two post-socialist countries – the Czech and Slovak Republic. The results of the experiment revealed the higher sustainability of owners within common property regimes which has been proven by numerous scholars. The research also highlighted the importance of communication and informal rules between stakeholders and agents concerning the management of a common pool resource.
Estimates of the extent of corruption rely largely on the self-reports of individuals, business managers, and government officials. Yet it is well known that survey respondents are reticent to tell the truth about activities to which social and legal stigma are attached, implying a downward bias in survey-based estimates of corruption. We develop a method to estimate the prevalence of reticent behaviour, in order to isolate rates of corruption that fully reflect respondent reticence in answering sensitive questions. We do this by developing a statistical model of how respondents behave when answering a combination of conventional and random-response survey questions. The responses to these different types of questions reflect three probabilities—that the respondent has done the sensitive act in question, that the respondent exhibits reticence in answering sensitive questions, and that a reticent respondent is not candid in answering any specific sensitive question. We show how these probabilities can be estimated using a method of moments estimator. We implement this methodology using data from the 2010 World Bank Enterprise survey in Peru, and find reticence-adjusted estimates of corruption that are roughly twice as large as indicated by responses to standard questions. We also find substantially higher reticence-adjusted estimates of corruption in a set of 10 Asian countries covered in the Gallup World Poll.
This paper aims to revisit the link between corporate governance, value, and firm performance by focusing on convergence, understood as the way that non-US firms are adopting US best practice in terms of corporate governance, and the implications of this adoption. We examine theoretical questions related to conventional models (agency theory, transaction cost economics, new property rights theory),which tend to suggest rational adoption of best practice, and contributions that alternatively consider country- and firm-level differences as possible barriers to convergence. We contribute to the empirical literature by using a large international database to show how non-US firms’ adoption of US best practice is having an impact on performance.
We attempt to explain why popular unrest during “the Arab Spring” have not ceased after the successful ousting of the incumbent. In our model, the next leader is drawn from the pool of citizens who participated in the protest. As people’s willingness to participate in a revolt depends on the policy platform of the incumbent and the policy platform of the expected next leader, there is a possibility of revolt that ends up with a more radical incumbent, who is more likely to be overthrown in the next period. The exogenous parameters that affect the protest dynamics include the personal cost of citizens’participation and cost of coordination, which was greatly reduced by the spread of new social media. We juxtapose the predictions of the model with the observed data of 18 countries of Arab Spring and use case studies of Syria, Libya, Yemen, Saudi Arabia and Algeria.
Governments, in theory, use development banks to either alleviate capital constraints, benefit politically-connected capitalists, or bail out inefficient firms. Using a new database of publicly-traded firms between 2002-2009, we study the effect of loans and equity investments of the Brazilian National Development Bank (BNDES) on firm performance and investment and find that they do no significant effect, except for a reduction in financial expenditures when companies receive subsidized loans from this bank. We show, however, that BNDES does not systematically lend to underperforming firms. Firms that receive subsidized loans tend to be good performers and those that donate to political candidates who win elections. Therefore, our results reject the view of development banks are used as bailout mechanisms, yet indicate that loans are transferring subsidies to large firms without any substantial firm-level improvement in performance or increase in investment.
Hot spot policing is a place-based policing strategy which addresses crime by assigning limited police resources to areas where crimes are more highly concentrated. We evaluate the theoretical soundness of this strategy using a game theoretic approach. The main argument against focusing police resources on hot spots is that doing so would simply displace criminal activity from one area to another. Our results give new insights into the nature of the displacement effect as well as useful hints for the econometric analysis of crime-reduction effects of police reallocation. We also propose alternative place-based policies that display attractive properties regarding crime reduction.
This paper employs a novel dataset on government wages to investigate the relationship between government remuneration policy and corruption. Our dataset, as derived from national household or labor surveys, is more reliable than the data on government wages as used in previous research. When the relationship between government wages and corruption is modeled to vary with the level of income, we find that the impact of government wages on corruption is negative and strong at relatively low-income levels.
The Chicago School of law and economics revolutionized antitrust law. By applying insights from microeconomics, scholars associated with the Chicago School introduced more rigor into antitrust analysis. Antitrust law is now viewed through an economics lens. Today, it is essentially impossible to practice antitrust law without understanding several economic concepts. The field of economics, however, has evolved in ways that undermine many of the fundamental insights of the Chicago School. This paper explores how behavioral economics has improved upon the basic microeconomic models that have been so influential in antitrust jurisprudence over the past few decades. The insights from behavioral economics challenge the policy prescriptions associated with the Chicago School. The traditional form of Law and economics associated with the Chicago School argues that many aspects of antitrust law are unnecessary because business decision-makers are rational and markets are self-correcting. According to this theory, firms do not engage in costly anticompetitive conduct. Behavioral economics identifies several ways in which individuals – and firms – deviate from so-called rationality. The lessons from behavioral economics demonstrate how antitrust enforcement can make markets more efficient than a strict laissez-faire approach. Behavioral economics represents a refinement and improvement over traditional microeconomics. Unfortunately, courts may be resistant to incorporating the insights from behavioral economics into antitrust jurisprudence. This paper explores why. The reasons include the relative simplicity of basic microeconomics compared to the more nuanced explanation of business behavior offered by behavioral economics. The paper examines some of the benefits of including behavioral economic concepts in antitrust analysis and the barriers to doing so. It argues for less reliance on theory and greater appreciation of facts.
Criticisms levied against the conventional measures of institutions and the assumption that institutions are persistent often made explicitly or implicitly in institution-development debates, calls for the construction of new alternative indicators of institutions that can be used to either validate or refute these criticisms, and to test empirically the assumption that institutions are persistent. In this paper, we present a new database for indicators of Political Institutions and Economic Institutions for Kenya for the period 1880 to 2010. These de-jure indicators are constructed from formal legislature governing immovable property to capture permanency characteristic of institutions implied in the influential works of Douglas North. We then correlate these indicators with the conventional indicators of institutions for the time period for which these conventional indicators are available. The results from these correlations show high correlations, which signal some efficacy of our newly constructed indicators. We use our newly constructed indicators to empirically test the assumption that institutions are persistent. Our results validate this theoretical assumption. We perform the first application of our institutional indicators by looking at the interdependence among them and their interdependence with social economic indicators. Our results reveal a significant level of institutional interdependence as well as their positive interdependence with socio-economic indicators. The implication of the results is that institutions do explain the process of economic development in Kenya. This paper contributes to the institutions-development debates by empirically testing the assumption that institutions are persistent
In a model of evolution driven by conflict between societies more powerful states have an advantage. When the influence of outsiders is small we show that this results in a tendency to hegemony. In a simple example in which institutions differ in their “exclusiveness” we find that these hegemonies will be inefficiently “extractive” in the sense of having inefficiently high taxes, high compensation for state officials, and low welfare.
Most agricultural markets show differentiated products and coexistence of cooperatives and investor-owned firms (IOFs). We highlight a difference in the price policy and the objective function between these governance structures. The IOF charges different procurement prices from the farmers based on their quality and maximizes its profits, whereas the cooperative pays a (partial) pooling price to all its members and retains no profits. Three markets are analysed: IOF market, mixed market, and cooperative market. We show in a non-cooperative game that the low (high) quality farmer(s) supply to the cooperative (IOF) in the mixed market. The choice of outlet, i.e. cooperative or IOF, results in the mixed (cooperative) market being an equilibrium market structure when the sunk costs of erecting a governance structure is above (below) a certain level of the extent of product differentiation. The competitive yardstick effect of cooperatives arises as an externality of the governance structure choices. Both the market share of cooperatives and the extent of payment differentiation inside a cooperative have a positive effect on the prices received by farmers.
This review examines collective action to address global environmental externalities with a transaction cost framework to examine why the results can be so mixed. The approach views international cooperation as a contractual process that assigns property rights to long-term benefits and costs of externality mitigation. It focuses on the costs of negotiations among politicians and organized parties and among country politicians in establishing national positions and negotiating international agreements. It differs from the literature on international environmental agreements that models states as primary actors and thereby abstracts from the process by which internal parties assess the net gains of collaboration and how their objectives are aggregated into cross-country efforts. National leaders cooperate if it serves domestic interests to do so. Four factors raise the transaction costs of assigning property rights: (i) scientific uncertainty regarding the externality and its response to collective efforts; (ii) varying preferences and perceptions as affected by wealth and the marginal value of consumption; (iii) asymmetric information about the benefits and costs of mitigation; and (iv) lack of compliance with agreements and new entry. Testable implications are drawn and used to examine local common-pool resources (CPRs); to draw implications for scaling up; and then to analyze global externalities, including the provision of reserved areas and national parks, application of the Convention on the International Trade in Endangered Species, the Montreal Protocol to control the emissions that damage the stratospheric ozone layer, limits on the harvest of highly-migratory ocean fish stocks, and efforts to limit emissions of greenhouse gases (GHG) and related climate change. A transaction costs framework provides a fruitful way of analyzing the potential for successful collective action to address global environmental externalities.
Many Developing Countries ratified ILO Fundamental Conventions and raised domestic labor laws. Multinational companies producing in these countries pay more when international NGOs campaigns take place and reputation counts. However, whether domestic NGOs' actions benefit local workers outside MNEs affiliates in host countries remains an open issue. This paper addresses the impact of NGOs activism on wages and employment in domestic firms in Indonesia. We use data on Indonesian manufacturing firms, before and after the authorization of labor unions, in presence or not of labor NGOs, in domestic firms or not. We find that the NGOs activism led a large increase in wage for unskilled workers in small and domestic firms after the authorization of labor unions. This suggests that non-governmental labor organizations have an impact on labor market outcomes as a complement of traditional labor institutions.
In this paper, we consider a knowledge accumulation problem within an organization. We depart from the human capital theory initiated by Becker (1962, 1964) and consider an organization that cannot prevent the worker from quitting and using the knowledge outside the organization. We study how the employer optimally distorts the knowledge accumulation path and chooses a wage pro le in order to mitigate the opportunism problem. We show that knowledge accumulation is delayed: the fraction of working time allocated to knowledge creation is highest at the early career stage, falls gradually, then rises again, before falling fi nally toward zero. We determine the effect of a change in the severity of the enforcement problem (or the speci city of knowledge). We also discuss the form of the optimal life-cycle earning pro les, the role of the initial knowledge level and the role of discounting.
Wildfires are destructive events, costing billions of dollars each year in damage, suppression and recovery costs. Fires also have rather unusual characteristics that make their management and control rather complex and seemingly irrational. Their occurrence has great spatiotemporal variance and preparation and timeliness is crucial for effective fire suppression. Fires tend not to coincide with landownership boundaries, so that land tenure and land use characteristics affect both private and public agency incentives to fight fires. Fire suppression institutions vary substantially over time and environments, ranging from private individual and cooperative action to large scale centralized government intervention, military style organization, specialization, and pre-positioned investments. Building on economic theories of contracts and institutional design, this article examines the economic rationale for the structure of observed wildfire suppression institutions and examines implications of the model in relation to several dimensions of fire policy historically across the US and the world. We utilize a set of historical and cross-sectional case studies to test our hypotheses about the organization of suppression. Finally we consider the implications for contemporary wildfire management.
Ancient Rome was an expansive and wealthy empire that created a trading network that relied on common language, law, money, and a system of measurement. An important component this network was the rectangular system (RS) of land demarcation known as centuriation, which was the forerunner of similar systems adopted in the US and Canada. Centuriation was a system in which land was surveyed into rectangles (usually squares) and each parcel was given and address and mapped. The system was developed in the 3rd century BCE and lasted until the fall of the Empire and was administered by a well-organized bureaucracy of land surveyors (agrimensors). This demarcation persists and can still be found in the landscape throughout the range of the former empire, especially in Italy and North Africa. The alternative to centuriation (RS) was to demarcate by defining a plot perimeter with geographical features in a system known as metes and bounds (MB). This paper examines the determinants of centuriation by developing a model in which the state chooses between MB and RS to demarcate new lands. The model emphasized the tradeoff between the higher upfront costs of RS with its more precisely demarcated borders and its network of roads and canals against MB which is less costly to establish but also does not have the precise borders and network of centuration. Our prediction is that centuriation is more likely to be chosen when the land is more valuable and when the land had no prior demarcation system in place. To test these predictions we have collected data on the locations and characteristics of over 200 centuriated landscapes in the territory of Ancient Rome. Our preliminary findings are that centuriation was adopted in flatter, more fertile lands. We also find that alignment tended to be perpendicular to rivers and streams in order to minimize demarcation costs and to facilitate a network of canals for drainage.
In many markets and industries, firms face adverse regulatory events to their normal business operations. These events can be represent any change to market or industry status quo, and can trigger strategic and competitive responses by firms and shape subsequent performance. Understanding and examining competitive responses to adverse regulatory events is important, given the effects on customers, regulators, the firm itself and its rivals. In this paper, we examine the performance effects of an adverse regulatory event (a black box warning) on the competitive responses of pharmaceutical firms and their proximate and distant rivals via sales visit and promotion strategies. Black box warnings are medication-related safety warnings that appear on the package insert of prescription drug products that indicate major drug-related risks based on post-market surveillance. Sales visit and promotion strategies are the efforts by pharmaceutical firms’ sales representatives to market or otherwise promote their pharmaceutical drugs directly to doctors. We utilize a combination of publicly-available FDA data on black box warnings, and proprietary-level data on pharmaceutical firm sales visit and promotion strategies and prescriptions (Rx) written by primary care physicians (PCPs). We posit that (1) firms act strategically by changing their sales visit and promotion strategies when they or their rivals are faced with black box warnings; and (2) black box warnings and firms’ responses have direct consequences on performance. Using a variety of econometric models, we find strong overall support for our hypotheses.
New Institutional Economics has provided inputs for market-assisted land reform based on land redistribution through endogenous institutions. Theory and prior evidence have stated the following features as determinants of production efficiency: the establishment of complete property rights, owner-cultivator and the inverse relationship, peer monitoring in rural credit markets, decentralised governance with community-based self-selection and land selection with bargaining. We develop a theoretical framework to explain land reform beneficiaries' production efficiency based on the aforementioned features extended with high individual heterogeneity and a diversity of institutional constraints. Using an empirical strategy based on Agricultural Economics’ recognition of farmers’ responsiveness to changing incentives in a dynamic world and of the existence of systematic deviations from optimal production, we estimate a production function model with time-varying inefficiency effects. The model is performed for 204 households for the years 2000 and 2006 with a sampling procedure devised for an impact evaluation of the Programa Cédula da Terra, which solves the policy endogeneity problem. Results indicate that beneficiaries’ success depend on a fine-tuning of a set of variables in very rigid and restrictive environmental and institutional settings. Therefore, household production efficiency and the refinement of the policy’s targeting process are certainly open issues.
At a very broad level, firms and municipalities share a number of features. Among other things, both are self-governing entities that make investments and purchase, produce, and distribute goods and services, sometimes, but not always, for an explicit price. Yet towns and firms are perceived as being governed differently: Whereas municipalities are governed democratically, the archetypal firm is viewed as an autocracy. The sharp contrast conventionally drawn between ‘autocratic’ firms and more ‘democratic’ entities like towns and cooperatives is misleading, however. As Henry Hansmann (1988) has pointed out, traditional business corporations are, in essence, lender cooperatives, organizations over which investors exercise democratic control. From this perspective, the issue becomes less one of whether communities or enterprises are democratically governed but who gets to vote. This chapter explores the role and limitations of democratic governance and the factors that contribute to the dominant forms of governance observed in political and commercial settings. Following an overview of the functions of democracy, I discuss some of the distinctive and common features of town and firms. I then present evidence on the extent of faculty participation in decision making in American (United States) colleges and universities and discuss the origins and possible reasons for the existence of and observed variations in democratic governance in academic institutions. I conclude that a primary function of democratic governance is protecting the interests of parties for whom markets and contracts are least effective and discuss the implications of this function for the governance of business enterprises.
Research suggests that U.S. legislators represent their richer constituents. We show theoretically that this is due to the institutional structure in the US, in which legislators are expected to provide particularistic benefits to their constituents. We develop a citizen-candidate model of redistribution between both rich and poor citizens, and between legislative districts, where citizens that are more productive in the private sector are also more effective at directing transfers to their district if elected to a public office. When competition between legislators to secure funds for their districts is weak, tax rates are set by the median voter of the median district. However, when competition between legislators is strong, all districts prefer legislators who are successful in the private sector. As these citizen-candidates will be richer than the median voter of the median district, this will lead, in equilibrium, to lower redistribution between rich and poor. We show that this result is exacerbated by larger legislatures, and cannot be prevented by almost entirely policy motivated parties with perfect control over candidate selection. We also show that increasing professionalization, by increasing the wage a politician is paid, exacerbates this problem by making legislators more dissimilar to the median voter, that is, by creating a political class.
We explore whether the creation of the Ethiopian Commodity Exchange (ECX) and its formal monitoring and enforcement institutions has affected social capital and trust in the Ethiopian segment of the sesame value chain. Consistent with a simple theoretical marketing model, our panel data suggest this is indeed the case. Trade in sesame is increasingly governed by formal rather than informal institutions, and in response traders have broadened their trading network, rely more frequently on traders with whom they do not have social relations, and have reduced the extending of credit that cements personalized relationships. They also have lower levels of trust in the intentions and capabilities of their trading partners, and attach less weight to trust.
One of the enduring puzzles about property is why the law protects both ownership and possession. Protection of possession is said to discourage violence, to serve as a surrogate for protecting ownership, and to reflect the endowment effect. But these explanations are inadequate, especially as the costs of documenting ownership fall. This paper offers another explanation, based on the differential information costs associated with the different audiences of property. With respect to the audience of strangers, property presents a daunting information cost problem: How can one communicate to all the world that something is yours, as opposed to being up for grabs? Protection of possession functions as a system for informing strangers about existing claims to resources in a cost-appropriate fashion. Possession applies only to physical resources, is grounded in clues based on direct observation of physical facts, and (ordinarily) establishes only usufructuary rights. Ownership comes into play with respect to the audience of potential transactors, a much smaller group with higher stakes. This makes it possible to impose a higher burden of investigating and processing information. Ownership is established by documentary and testamentary information, which is inherently more costly to gather and process, but still not so large as to impede potential transactors from investigating claims of ownership. The theory helps explain why the law continues to protect possession independently of ownership, and illuminates some of the many ways in which ownership and possession interact.
This paper presents an empirical assessment of the economic consequences that have resulted from judicial disruptions in formal legal property rights in an otherwise institutionally stable jurisdiction. We use an event study methodology to estimate the market response to a series of five landmark Supreme Court of Canada decisions that reinterpreted aboriginal rights in Canada, thereby disrupting the stability and security of the existing property rights regime. Representatives of Canada's resource industries have argued that these judgments created a "cloud of uncertainty" surrounding the security of their property rights, constrained their access to resource stocks, and imposed significant economic costs on their commercial activities. We test these claims using firm level equity market and financial micro-data. Our results provide support for view that disruptions in formal property rights as a result of judicial decisions have measurable economic impacts. However, we find that these impacts are not uniform in size or direction across decisions, industries, or firm-types.
This research examines the economic origins and spread of Islam in the Old World and uncovers two empirical regularities. First, Muslim countries and ethnic groups exhibit highly unequal regional agricultural endowments. Second, Muslim adherence is systematically higher along the pre-Islamic trade routes. We discuss the possible mechanisms that may give rise to the observed pattern and provide a simple theoretical argument that highlights the interplay between an unequal geography and proximity to lucrative trade routes. We argue that these elements exacerbated inequalities across diverse tribal societies producing a conflictual environment that had the potential to disrupt trade flows. Any credible movement attempting to centralize these heterogeneous populations had to offer moral and economic rules addressing the underlying economic inequalities. Islam was such a movement. In line with this conjecture, we utilize anthropological information on pre-colonial traits of African ethnicities and show that Muslim groups have distinct economic, political, and societal arrangements featuring a subsistence pattern skewed towards animal husbandry, more equitable inheritance rules, and more politically centralized societies with a strong belief in a moralizing God.
The purpose of this paper is to introduce the concept of evil social institutions: rules that shape human interactions just like other social institutions but which actively incite social conflict by explicitly condoning socially destructive behavior. They are presented as an additional (and more radical) reason for the endurance of social conflict and underdevelopment in a given community besides other forms of perverse institutions. These institutions do not even intend to protect property rights, albeit unfair ones, but put them willingly at risk. To empirically prove their existence, rigidity, and economic relevance the paper conducts behavioral and institutional research in the virtual world of the online video game “EVE Online”. Thanks to collaboration with the game’s developer, the empirical part can build on data that encompasses practically everything the 390,000 players did in the month of January 2011. Thus, it can build on rich and objective empirical evidence about economic behavior in a natural state from a highly controllable environment; something difficult to achieve in real world or laboratory conflict settings.
Unlike most other mature industries, the agricultural production sector is dominated by family firms, partnerships, and cooperatives, with few corporations and limited access to capital derived from a source other than retained earnings and existing owners. However, use of external equity capital in agriculture has in-creased dramatically since 1990. This funding source allows farms to exploit entrepreneurial opportunities not easily financed by debt. Following Williamson (1988), we view debt and equity as alternative governance structures and argue that transaction cost economics offers insights on firms’ financial structure beyond those provided by agency theory. We relate capital structure to asset specificity, a particularly important attribute in agricultural production. We construct an international dataset of agricultural companies receiving external private equity and show that the attributes of the assets involved in production are important determinants of financial structure.
In this study we empirically test the effects of regulated access prices and firms’ multinational status on firms’ performance by using firm, group, and country level information for the European broadband market over the period 2002-2010. Three measures of firms’ performance are used, namely; market share, turnover and productivity. Special attention is devoted to differences in the effects on performance measures depending on firms’ position as incumbent or entrant in the markets. We find that, while access prices exert a negative effect on entrants’ market share and turnover, the effect on incumbents’ turnover and productivity is positive. With regard to firms’ multinational status, we find that multinational entrants perform better than national entrants in terms of their market share but worst in terms of their turnover and productivity. The opposite happens with the incumbent multinationals; confirming that firms’ multinational status has a significant impact on performance, and that this impact is different for incumbents and entrants.
This paper investigates the effects of local financial development and quality of socio-institutional environment on firms productivity in Italy. We argue that social capital, judicial efficiency, and the presence of criminal organizations might impact the real economy through three channels: a) they have a direct impact through the creation of a business environment; b) they have an indirect impact, as they are among the main determinants of private credit development and lending risk conditions; c) they might act as constraints to the effects of financial development on the real economy through misallocation of credit to highly profitable investments. We study the Italian case, using firm level data for productivity and taking advantage of the variation in terms of banking sector development, judicial efficiency, and social capital among Italian provinces. After controlling for potential endogeneity, our empirical results confirm that the real effects of financial development are conditional on the quality of socio-institutional environment. In particular, we find that a) a larger local banking market has higher positive effects on firm productivity when the socio-institutional environment is sufficiently developed; b) an improvement of lending condition (reduction of lending rates) has higher effects when the socioinstitutional environment is not developed. These evidences highlight that an improvement of socio-institutional environment might spur a virtuous cycle.
We explore why authority within firms helps trading parties immediately settle ex post disputes over trade value, which are invited by unprogrammed adaptation, despite the possibility of a subordinate's disobedience to the orders of his boss. By employing three crucial behavioral assumptions (reference-dependent preference, self-serving bias, and shading), we point out that the choice of governance structure affects trading parties' expectations about outcome of ex post value split and show that a subordinate is likely to obey orders of his boss because he is expected to do so. Nevertheless, our study also points out that such a positive aspect of authority comes with subordinate's psychological disutility.
This paper proposes a method of bid-rigging detection, which allows to reveal cartels in procurement auctions without any prior knowledge of the market structure. We apply it to data on highway construction procurements in one of the Russian regions and show that five suppliers demonstrated passive bidding behavior, which is consistent with the so called ‘rotating bidding’ scheme of collusion. The suggested methodology can be potentially used by both researchers and anti-trust agencies for cartel disclosure in various markets.
We applied algorithmic data reading and textual analysis to compare the complexity of public contracts in regulated industries subject to public scrutiny with relational private contracts. We show that public contracts are larger, feature more arbitration, evaluation, litigation, and termination clauses, and their renegotiation is formalized in amendments with more arbitration clauses. We sustain that the higher rigidity of public contracts is a political risk adaptation of public agents by which they lower the likelihood of success of third-party opportunistic challenges.
Opportunism---either governmental hold-up by unfair regulation and expropriation, or private monopoly pricing and investment and quality curbing---is a powerful deterrent from successful-to-be public-private partnerships with large sunk investments and welfare externalities. The agents can overcome this double-sided moral hazard by exchanging an exit (put) option for the investor and a bail-out (call) option for the public agent on the investor's outlay. The exit/bail-out option mechanism increases the set of payoffs by offsetting deviation, and thus facilitates cooperation. The mechanism is applicable to other settings with partially aligned goals and informational asymmetries.
We study the impact of violent conflict on social capital, as measured by citizen participation in community groups, defined by four activity types: governance, social service, infrastructure development and risk-sharing. Combining household panel data from Indonesia with conflict event information, we find an overall decrease in citizen contributions in districts affected by group violence in the early post-Suharto transition period. However, participation in communities with a high degree of ethnic polarization is less affected, and is even stimulated for local governance and risk-sharing activities. Moreover, individual engagement appears to depend on the involvement of other members from the same ethnic group, which points toward building of intra-ethnic social networks in the presence of violence. Finally, our results show the danger of generalization when dealing with citizen participation in community activities. We find a large variety of responses depending on the activity and its economic and social functions. We also find large observed and unobserved individual heterogeneities of the effect of violence on participation. Once an appropriate nomenclature of activities is used and controls for heterogeneity are applied, we find that the ethnic and social configuration of society is central in understanding citizen participation.
We document the reinvention of state capitalism that occurred around the world at the end of the twentieth century. The model of state capitalism in which the government was an owner and manager (the model we call Leviathan as an entrepreneur) reached a major crisis in the 1980s. Given governments’ temptation to use state-owned enterprises (SOEs) for political or social goals, the model had becoame too costly to sustain. As a way to attract minority private capital, many SOEs adopted new governance practices such as public listing and professional management, giving rise to a new model of state capitalism, Leviathan as a majority investor. The 1990s wave of reform and privatization brought about yet another new model of state capitalism. The state retained minority equity positions in some of the privatized firms and began to use sovereign wealth funds, holding companies, and development banks to acquire minority positions in private firms. This transformation gave rise to the model of state capitalism which we call Leviathan as a minority investor. Although we present a general discussion of these new varieties of state capitalism, most of our detailed empirical analyses are based on firm-level data for Brazil, which is a typical case of state capitalism in its many forms. Testing a host of distinct hypotheses, we propose conditions that might allow a government to use each of new models of state ownership to more effectively improve firm-level performance and achieve its development objectives.
This paper proposes a model to study the main factors that influence the preferences of different population groups over presidential and parliamentary systems. Our theory suggests that the parliamentary regime leads to a type of fiscal decentralization in the form of more transfers to constituencies. Ceteris paribus, the poor groups of the population tend to prefer the presidential system relatively more than the rich, since the lower quality of their local accountability institutions (e.g. local media and judicial courts) makes them more vulnerable to the expropriation of rents by their legislators. We also show that, in order to perform adequately, the parliamentary regime depends on the existence of a class of politicians that can be trusted to represent well the interests of voters. Our model is able to account for the main stylized facts emerging from the analysis of referendum data from Brazil.
This Article challenges the underpinnings of the principal-agent understanding of judicial hierarchies. While principals select their agents, higher court judges usually do not select lower court judges. Moreover, while lower court judges may cast votes with an eye to the possibility of elevation to a higher court, the higher court judges who review the lower court's decisions usually do not decide whether to elevate judges. This Article empirically examines whether judicial actors behave as the theory suggests in a setting where application of the theory should be at its apex—the federal bankruptcy litigation system. Bankruptcy court judges who sit as trial judges are appointed for renewable time-limited terms by the court of appeals. Moreover, the court of appeals provides a second intermediate level of appellate review of bankruptcy court decisions. Initially, such decisions are appealed to a bankruptcy appellate panel (BAP) if the circuit has created one. BAP judges are selected from the circuit’s bankruptcy judges by the circuit’s judicial council, over which the court of appeals has dominant sway. If the principal-agent theory of judging has traction, evidence of it should exist in this setting. Our study examines the voting behavior of circuit judges and bankruptcy judges (both as trial judges and as appellate judges when sitting on the BAP) in student-loan-discharge proceedings in consumer bankruptcy cases. While we find that circuit judges’ ideological preferences predict their voting behavior, we find no evidence that bankruptcy judges’ voting conforms to circuit court preferences. These findings cast doubt on the principal-agent theory of judging.
I exploit differences in proportion of Russian settlers in the North Caucasus during colonization to estimate the effect of human capital on long-term development. The main purpose of Russian colonization was to protect its access to the warm-water ports. Therefore settlement was an exogenous treatment on indigenous population that varied depending on the proximity to the Black Sea coast. Instrumenting the share of settlers by the distance to the coast I show their causal positive impact on literacy among the indigenous population in late XIX century with long-term effect on income, educational attainment and quality of local governance today.
What explains the existence of predatory criminal persecution practices? Is it rent seeking behavior and private interests of law enforcement officials, or the inefficiency of the police institution? In this paper we empirically test the relationship between indicators of economic crimes in Russia’s regions, the level of economic activity, and turnover of regional elites. Our main goal is to find out whether private interests or the so-called “stick” system are responsible for the overall upward trend in economic crimes observed in 2004–2009. We use a unique ICSID database, which contains official MVD’s (Ministry of Internal Affairs) data on economic crimes (according to the articles of the Russian Criminal Code), along with biographical data for chiefs of regional police departments. Our results suggest that “stick” system based on key performance indicators is responsible for the intensifying upward trend in the dynamics of economic crime rates in 2004–2009, which overshadows negative consequences of predatory persecution practices.
We use NOMINATE (Nominal Three Step Estimation) to estimate ideal points for all Supreme Court Justices in Brazil from 2002 to 2012. Based on these estimated preferences we identify the nature of the two main dimensions along which disagreements tend to occur in this Court. These estimates correctly predict over 95% of the votes on constitutional review cases in each of the compositions of the Court which we analyze. The estimates are also used to (i) identify the median justice in each Court; (ii) analyze the strategic possibilities for the President to shift the median voter in the coming years; (iii) test different theories of judicial behavior; and (iv) analyze some specific seminal cases, including the landmark Mensalão trial, in which the court surprised experts and citizens by convicting high profile politicians members of the current ruling coalition. Although there is a large literature applying these methods to the US Supreme Court, their extension to non-US context is still underexplored. The main contribution of the paper is to identify that the main dimension along which preferences align in the Brazilian Supreme Court is for and against the economic interest of the Executive. This is significantly different than the conservative-liberal polarization of the US Supreme Court. Our estimates show that along this dimension the composition of the Court has been clearly favorable to the Executive’s economic interests, providing the setting in which the dramatic transformation in institutions and policies that the country has undergone in last two decades could take place. Given that the Brazilian Supreme Court is highly independent and has the power to act as a crucial veto point, understanding its members’ preferences and how they make their choices is key to understand the policy-making process and outcomes.
We test the hypothesis that a political majority addresses the concerns of the political minority on a three-judge panel. The hypothesis suggests that the ideological content of written opinions varies with the ideological make up of the presiding panel. We test whether this is reflected in the precedents cited in U.S. Court of Appeals decisions using a unique dataset of federal appellate opinions from 1971-2007 of every citation to United States Supreme Court decisions from 1953-2007. The results provide strong evidence that judicial ideology influences how judges cite precedent in our universe of cases. Panels cite more conservative precedent as the number of Republican-appointed judges on the panel increase. When we focus, however, on a subset of “political” cases where the outcome is correlated with the panel composition, we find very little evidence of moderation in the ideological content of written opinions.
Civil law jurisdictions treat the recovery of private rewards and prizes differently to common law jurisdictions. The recovery of rewards and prizes in civil law jurisdictions are “unconditional” whereas common law jurisdictions commonly require that the claimant has knowledge of the reward or prize in order to recover. This paper illustrates the differences in private incentives to offer rewards and prizes under different legal rules. I present a game theory model illustrating how the civil law rule can generate underinvestment in discovering socially-valuable information: The private incentive to offer a reward will depart from the socially-optimal outcome.
The factors identified by economic theory as determining migrants’ decisions appear less relevant to the choices of the highly skilled, a fairly small but significant group which is able to wield a major economic impact on regional economies. This paper is based on the idea that in their migration choices the highly skilled are motivated to look for an area or context able to ensure a higher income and better employment opportunities. At the same time, it should be a favourable socio-economic environment with well-functioning local government institutions. The decisive impact of institutional quality on the level of services, the environment, regional development and the overall quality of life in the destination area has been extensively studied in the literature. Building on such previous studies, by using data from the “Survey on the professional recruitment of graduates” in Italy conducted by the National Statistics Office (ISTAT) in 2007 on a sample of 47,300 individuals who graduated in 2004, we study the impact of provincial institution quality on the probability of resident graduates migrating. Our Heckman Probit estimation indicates that institutions do matter for migration decisions and their importance is comparable to that of per-capita income provincial differences.
This paper aims to contribute to the debate on the determinants of differentials in firms productivity. The case of Italy looks particularly interesting, since there is a substantial and long-lasting productivity gap between industrial firms located in the southern regions and those in the rest of the country. We test the hypothesis that macro factors, especially the quality of institutions, play a central role in explaining firm productivity in Italy. Consistent with previous studies, our results show that institutional quality is one of the basic determinants of the observed TFP differentials across firms in different Italian regions.
There is a worldwide tendency for more educated people to trust in markets, private business, and trade, and to distrust government regulation and public provision relative to the less educated even in countries where people generally favor regulation (Aghion, et al. 2010). Individual survey data drawn from the Russian RMLS indicate that for Russia, as for most of the world, respondents with higher levels of education are more likely to trust private businesses, foreign banks, and privatization, to distrust government regulation, and to favor lesser provision of services by the State (vs. the private sector). This matches the macro survey findings of Aghion et al. (2010) for the transition economies and the work of Caplan (2001, 2002, 2007). However, it is not clear whether education is a causal factor in these preferences or whether education is proxying for different levels of cognitive ability, health or other forms of human capital. We use individual height data as instruments for education to remove the contemporaneous effects of schooling itself on the education trust link. We find that this IV estimation leaves us with clear and persistent links between education and market friendly attitudes in Russia. This human capital effect is also quite independent of the role of age in determining liberal attitudes and is not simply a cohort effect. This seems to conform to the worldwide observation that – whatever the independent changing institutions – greater health and cognitive ability seems to promote liberal beliefs in and of themselves.
To what extent is an individual’s trust driven by contemporaneous institutions and environmental conditions and to what extent is it determined by the individual’s human capital? It is now well-established that highly developed countries tend to score well on measures of social capital and have higher levels of generalized trust. In turn, the willingness to trust has been shown to be correlated with various social and environmental factors (e.g. institutions, culture) on one hand, and accumulated human capital on the other. We collect data from students in Moscow and Manila and determine that in both countries high achieving students are more likely to trust. Then we use the variation in their height and gender to instrument for measures of their human capital to identify the causal effect of the latter on trust. We find that human capital positively affects the propensity to trust, and its contribution appears larger than the combined effect of other omitted variables including, plausibly, social and environmental factors.
This paper investigates rural communities in the Trentino region of the Italian Alps who for centuries managed their communal forests and grazing land through self-governance. Many of these villages adopted legal charters to regulate their common property, however these institutions were forcefully abolished following the invasion by Napoleon's armies in 1796. We collect archival data on fertility and mortality before and after Napoleon's invasion for several hundred villages in the region. Statistical evidence shows that following Napoleon's intervention, charter villages experience an increase in population growth relative to non-charter populations, followed by a later increase in mortality rates. This appears consistent with historical accounts of increasing deforestation and exploitation of grazing lands following the institutional changes initiated by Napoleon.
North/Wallis/Weingast (2009) define the problem of development as the transition from natural state to open access order and propose a theory of the natural state as a stable system. Yet some natural states develop by moving to "doorstep conditions" that led to open access orders in a few modern states. NWW’s focus on early modern Europe gives the impression that the transition happened only once in human history and leaves the theory vulnerable to confounding variables (industrial revolution, technology, colonialism). If the conditions predicted by the theory produced a similar result prior to modernity, the theory's robustness is supported. We consider ancient Athens as an out-of-sample test, showing that conditions similar to those NWW assert for early modern Europe held in Athens, and tests that support our claim. Changes in Athenian policy in the direction of open access are predicted and explained by reference to changing Athenian revenue demands, sources of revenue, and capacity for coercion. We offer a new implication about dignity as immunity from humiliation. Athens offered legal immunities against acts of hubris (intentional humiliation) to all residents of Athenian territory. Why were these immunities not limited to adult, native males citizens? The extended immunity was costly in respect to enforcement, and it diluted the privileges of Athenian citizens. We argue that Athens’s expansion of inclusion reflected their gains from trade, from specialization and exchange, and from tax revenue.
This study investigates whether the Japanese magazine market in which resale price maintenance is a common marketing practice, is competitive or cooperative, explicitly incorporating the two-sidedness of the market into the analytical framework. First, the demand models on the reader side and the advertiser side are estimated using the unique panel data of the Japanese magazines from 1992 to 2007. Using the estimated parameters, the price-cost margins on reader and advertiser sides under alternative supply models, competition or cooperation on each side of the market, are computed. After that, we perform non-nested statistical tests to select the supply model which has the best fit to the data. The empirical results show that the model of cooperation on reader side and competition on advertiser side has a better fit to the data than other alternative supply models.
The study is motivated by the increasing large scale Foreign Land Acquisitions (FLAs) in developing countries particularly in Africa where there is supposedly the availability of cheap land. For example, land in Zambia that happens to be the most expensive in Africa cost one-eighth the price in Argentina/Brazil, and less than one-twentieth in Germany. Out of the 1217 publicly reported deals, 62% of the projects covering a total area of 56.2 million hectares are in Africa. Some research efforts have been made to investigate the determinants of FLAs at the global level. These studies have identified a number of determinants/drivers of FLAs including: global financial/economic crises, bio-fuel policies, rising food prices, sales of certificate for reducing carbon emissions etc. However, little is known regarding the characteristics of target communities in a given country. The characteristics of the target localities can will shape the socio-economic outcomes of FLAs. This can result to “land grabs” with negative implications for affected local populations or positive impact on the socio-economic development of the host communities. Prodded with this observed gap,this study aims at providing evidence on the determinants of FLAs in Nigeria, an important receptor of FLAs. It compares and contrasts the localities where FLAs occurs. The anticipated results include: better understanding of the internal and external factors that shape FLAs; the impacts; the political economy shrouding them at the international and local level (forces from above); and insights into the effects on households in the communities (voices from below).
The corporate governance literature increasingly recognizes that firms can benefit from protecting and thereby inducing firm-specific investments of various stakeholders. Such investments by shareholders, employees, suppliers, customers, and the local community strengthen the sustainable competitive advantage of the firm. However, substantial implementation problems exist with regard to the protection of multiple stakeholders’ interests. This paper explores a novel approach to do so, based on the creative use of random selection procedures in the appointment of stakeholder representatives on the board. These procedures are the foundation of demarchy, a form of governance that was successfully implemented in ancient Athenian democracy. The paper presents advantages and disadvantages of demarchy, develops a corporate governance proposal that combines demarchy with representative voting, and addresses key issues concerning its implementation. It is suggested that the use of demarchy opens new avenues for stakeholder involvement in corporate governance.
Privatized knowledge must now be included among the most important technical assets available to a firm, and the skills of an organization’s members are likely to become highly co-specific to those assets. The extent of the knowledge owned by the firm sets limits on its possible future technological development, including the skills which are worth developing within the organization. Firms may find themselves in a virtuous circle where the ownership of intellectual assets stimulates the acquisition of the co-specific skills and, vice versa, the availability of these skills makes it possible to acquire new intellectual property rights. However, if a firm is to enjoy this virtuous circle, it must have monopoly on certain technical assets. This monopoly implies that some other firms will find themselves in a vicious circle: because of the lack of intellectual property rights, they do not find it convenient to enhance their skills, and because of the lack of the relevant skills, they are unable to acquire intellectual property. These virtuous and vicious circles can be seen as different organizational equilibria generated by different configurations of property rights and technical assets. The polarization of organizations between these different organizational equilibria may be another undesirable consequence of intellectual monopoly. The two main novelties of globalization – the integration of financial markets and the privatization of knowledge – push in the same direction. A potential world of small democratic firms can be replaced by an actual world of few hierarchical corporations.
We study how the individual performance of university students is influenced by characteristics and achievements of peers from individual’s social network. Data on network ties in randomly formed student groups enables us to address the endogeneity problem and disentangle the influence of peers’ performance from the effect that a peer’s background has on students. We show that a one-point increase in the average GPA of peers is associated with an increase in an individual student’s own GPA of approximately one fourth. No effect from a student’s classmates is found in the model that assumes group interactions occur between group mates.
This paper looks at the reasons for and results of make or buy in local public services, with specific regards to its possible effects on price and other performance determinants. It uses a rich city-level dataset of water utilities in France for several years. We find evidence that private management is associated with higher prices on average ceteris paribus. This pattern is consistent with the study of units switching from an organization to another. We find that municipalities switching from public to private management face increased price but the effect is not always significant. Our results also show that switching from private to public management does not always foster decreasing prices. We finally discuss several reasons for the price gap between public and private management using extrasamples. We also present some methodological implications for researchers working on the link between organization and efficiency.
This paper explores organizational responses to influence activities - costly activities aimed at persuading decision makers. As Milgrom and Roberts (1988) argued, rigid practices that otherwise seem inefficient can optimally arise. If more complex decisions are more susceptible to influence activities, optimal selection may partially account for observed correlations between firm performance and management-practice quality reported in Bloom and Van Reenen (2007). Further, A firm's boundaries can be shaped by influence-activity considerations, providing a theory of the firm based on ex-post inefficiencies. Finally, boundaries and rigid practices interact: rules under non-integration should be less restrictive than under integration.
This paper proposes empirical insights to analyze the relationship between the safety net value of land and the determination of supply to the land sale market, using data collected among permanent rural-urban migrants in Thailand. As a general hypothesis, the safety net value provided by land ownership could hold back mi- grants’ decisions to sell land, except for the case of distress sale. More precisely, Thai permanent rural-urban migrants with a greater non-land economic stability are expected to sell their land more frequently, as they credit it with a lower safety net value. The results of the paper confirm both the idea that Thai permanent rural-urban migrants with a greater economic stability are more likely to sell, and the idea of distress sales in case of livelihood shocks.
To distance themselves from the specter of special- interests, some Congressional candidates instituted personal bans on campaign contributions from corporate-linked political action committees (PACs). We leverage these to identify how corporate executives adapt their personal campaign contribution patterns in response to restrictions applied only to corporate-linked PACs but not to executives as individuals. In a newly constructed dataset, with 6,803,661 observations, that includes all executive-firm-candidate contribution pairs for active S&P500 firms over an 18-year period, we find that corporate executives increase personal giving to specific candidates in lieu of their corporate-linked PACs in a form of cross-actor substitution among corporate-linked sources of campaign contributions. This finding has important implications for regulatory design in scenarios where cross-actor substitution is possible. Vis-à-vis campaign finance regulation, it suggests that bans on corporate-linked PAC contributions alone cannot prevent corporate-linked money from finding its way into candidates’ campaign coffers.
Demand response is a cornerstone problem in electricity markets under climate change constraint. Most liberalized electricity markets have a poor track record at encouraging the deployment of smart meters and the development of demand response. In Europe, different models are considered for demand response, from a development under a regulated regime to a development under competitive perspectives. In this paper, focusing on demand response and smart metering for mid-size and small consumers, we investigate which types of market signals should be sent to demand managers to see demand response emerge as a competitive activity. Using data from the French power system over the last 8 years, we compare the possible market design options to allow demand response to develop. Our simulations demonstrate that with the current market rules, demand response is not a profitable activity in the French electricity industry. Introducing a reserve and/or capacity remuneration could bring additional revenues to demand response providers and improve incentives to put in place demand response programs in a market environment.
Wild forests products benefit many rural communities in developing countries. Often these forests also contain globally valuable ecosystem services, such as biodiversity and carbon, which may not be as important to local communities. This paper develops a spatial model for harvesting non-timber forest products (NTFPs), like wild mushrooms or medicinal plants. It asks: how much can management of harvests simultaneously improve welfare and ecological outcomes? I develop a theoretical model that accounts for the shape of the forest, the size of the harvest community, and incorporates real-world constraints. The results first show that even under open access conditions (uncooperative competition), if the forest is large relative to the size of the community then harvesters still profit. Second, managing a forest to maximize NTFP value does not always protect other regionally or globally important ecosystem services like biodiversity or water storage capacity. Using a unique dataset of mushroom harvests in Yunnan, China, I test for characteristics associated with harvester’s foraging distance. The results support the theoretical model’s spatial foundation, suggesting harvesters travel farther to avoid competition. More experienced and less-wealthy households tend to rely on more distant harvests. There are livelihood benefits to cooperation but potential ecological costs in some contexts. Regardless, limiting access likely disproportionately affects the most vulnerable.
In this article, we are interested in the influence of the liability rule both on modes of coordination for food safety and on the shape of the food supply chain. To our knowledge, there is little discussion in the literature on this issue. Since natural experiments are not available, we highlight the impact of the liability regimes developing two case studies in the fresh produce import industry in France. First, we analyze a regulatory change leading to the enforcement of the French strict liability rule of the importer who first supplied the product to the domestic market. This regulatory change led fresh produce importers to develop a horizontal, collective governance structure to monitor the safety of imported produce. Second, we argue that as regards the probability of being liable, supermarkets will prefer to delegate the liability linked to importing risky product in their shelves. In this respect, supermarkets’ decisions as regards liability shape the length and coordination of the supply chain.
Increases in the incidence of food-borne illness together with the steadily occurrence of high-profile outbreaks linked to food in a number of countries have created both political and economic demands for more effective food safety controls. Over the last decade, co-regulation has been progressively used as an instrument to implement and monitor food safety regulations and traceability system in many countries. Although increasingly used, our knowledge on the drivers, success and drawbacks of co-regulation in a food safety context is still limited, especially co-regulation programs involving both private and public agents, which take the form of Public Private Partnerships (PPPs). In this article, we examine the nature and governance of these emerging PPPs for food safety. We develop a typology of PPPs in food safety using insights from the co-regulation and the PPPs’ literatures. We provide a new framework where public-private partnerships (PPP) represent another model of co-regulation for food safety where the current literature most often considers two models of co-regulation, creating an analytical dichotomy that may not be suitable to study such hybrid arrangements. Relying on these two strands of literature, we identify related benefits, drawbacks and conditions of success of PPPs considering food safety specificities. We complement our current knowledge with two case studies of hybrid PPPs: the industry-wide cattle traceability system in Québec (Canada) and the co-regulated food safety enforcement regime in the French import industry of fresh produce.
This paper takes an institutional look (as Dasgupta and David do for Science and Technology at open collaborative innovation communities Community). Drawing from the community of practice literature to describe communitarian social processes, we develop a model in which Community is confronted with Technology with respect to its ability to attract researchers. We find that the number of individuals that initially chooses each institution is crucial, as it determines a threshold size that divides the realm of communities doomed to remain small from the set of communities that are able to grow endogenously fast and large. We examine how communities can reach that threshold and discuss this result in light of the strategies firms that invest in communities can apply to exploit this effect. We also discuss how changing the level of openness protection and the importance of the social environment in Community affect innovativeness and find that what really solves any ambiguity in this sense is the way Technology, not Community, is structured. We finally discuss the policy implications of this effect.
We build a model of overlapping generations with imperfect observability to study the strategic role played by Self-Commitment-Institutions (SCI) in relaxing agents' inclination toward opportunistic behavior and improve efficiency. When SCI are in place, agents voluntarily exert a perfectly observable but costly action, which can affect the incentives to exert the imperfect observable cooperative action. We characterize social norms both with and without SCI, and provide sufficient and necessary conditions under which social norms with SCI exhibit the highest degree of cooperation. Our results are broadly consistent with evidence of cooperation and SCI practices in clubs and ongoing organizations. The role of memory and the impact of growth have been also investigated.
Privatization changes incentives and, as such, changes how efficiently a good or service is provided. Privatization may also be used as a political strategy, inasmuch as it restricts the discretion of future incumbents. We claim that political competition is a key variable for explaining the decision to privatize as a public service. This paper tests this hypothesis in the context of the privatization of sanitation services in Brazil (water supply and sewage collection). Based on a panel of municipalities from 1997 to 2007, we found that privatization becomes more likely the higher the political risk (i.e., the likelihood of not remaining in power) to mitigate the discretion of the future incumbent. Privatization is also more likely in municipalities in which mayors do not belong to the coalition parties of their states’ governors, which we also interpret as a strategy to reduce the discretion of political rivals because public provision is sometimes undertaken by state companies. Furthermore, our findings indicate that legislative control is relevant for promoting privatization and that electoral cycles are consistent with the decision to privatize as a strategy to reduce the discretion of future incumbents. Inasmuch as privatization is, by and large, associated with the improved provision of water and sewage services, we submit that political competition leads to better public policy in this case.
Abstract: This paper investigates the effect of informal ties between court chairpersons and prosecutors on the repressive implementation of criminal justice in a civil-law judiciary with prosecutorial bias. We use criminal law statistics of Russian regional courts for 2006-2010 and determine the alignment between chairpersons and prosecutors by measuring the length of their mutual career paths. We study fraud convictions and find that judiciaries with longer alignment are more effective in implementing the prosecutor’s preference for court repressivity. This preference depends on federal incentives shaping the career prospects of prosecutors. If prosecutors expect benefits from higher court repressivity aligned courts will sentence more defendants to prison, whereas, if incentives are absent alignment leads to less court repressivity.
From a transaction cost perspective, the role of the intermediary during economic exchange is to mitigate risks by reducing uncertainty and information asymmetries between parties. The particular institutional arrangement and corresponding form of intermediation is influenced by uncertainty, complexity and the degree of relationship specific assets involved in the exchange (Klein, 2010). However, while intermediaries can reduce risk, certain forms of intermediation may actually increase uncertainty and information asymmetries for structural reasons, to wit, a structural hole is created when principals are represented by independent brokers. Moreover, the form of intermediation may not adjust in a cost economizing way as inertia within the intermediary network locks in systems of sub-optimal exchange. This paper analyses 10,687 commercial real estate transactions that occurred in London and New York City from Q1, 2001 to Q4, 2011 in order to measure asset, investor and market factors most significantly affecting transaction costs. These costs vary according to the intermediary network form and whether no broker (dyad), one broker (triad), or two brokers (tri-dyad) are involved in the deal. When intermediation is present, brokers and agents typically represent the largest non-tax transaction cost to investors of real estate in London and New York City. Among intermediated network forms, the tri-dyad imposes the highest costs to the transaction and is a defining feature of the London commercial real estate investment market. The tri-dyad form is found to be most significantly associated with informal market institutions and investor characteristics rather than attributes of the assets exchanged. Further, and unique among network forms, the tri-dyad creates a structural hole, or measurement gap, through which intermediaries mediate information flow affecting transparency, potentially increasing uncertainty, while limiting transaction cost economization.
Since the Global Financial Crisis that started in 2008, the term “ordoliberalism” has experienced a marked revival. Academics and politicians of all couleurs have recently referred to ordoliberalism as a possible way forward. Others have held ordoliberalism responsible for Germany’s intransigent stance in the Euro rescue. This renewed interest in a theory that was developed some 80 years ago is remarkable. This paper attempts to clarify the essence of the ordoliberal position in order to revisit current references to this theory. We present its main elements and discuss similarities and differences with other institutional, liberal and conceptual approaches. We then analyse the causes of the Financial Crisis from an ordoliberal perspective and assess its relevance in the current context and its implications for regulatory reform.
Scholars have argued that the New Institutional Economics (NIE) has not yet provided causal explanations on how long institutions persist or why and how they suffer dramatic changes. Others have stated that evidence is still inconclusive to define a theoretical justification on how changes and development occur. In light of these claimed criticisms, this paper focuses on the institutions of the electricity sector in Brazil, aiming to heighten the body of empirical research in NIE and produce satisfactory explanations that motivate theory refinement. Based on a qualitative approach, we find that the drivers of the first institutional change in Brazil’s electricity sector were related to initiatives of market protection and domestic industrial support. For the second institutional change, economic recession (country at stage of bankruptcy, debt crisis, and high inflation rates) and reliability of utility services were the driving factors. We hope this study consistently systematizes historical facts and helps create grounds for our understanding of institutional evolution and economic growth.
This paper discusses how the economic structure and asset ownership shape political and institutional outcomes. Using a simple structural model of the productive sector, I provide a theoretical framework in which a commodity price shock, substitutability between productive assets, and inequalities increase the stakes of political competition, and therefore the intensity of the conflict over political power. These results provide a theoretical explanation for the frequent conflicts associated with abundant mineral resources. They are valid in a democratic setting, where this competition is electoral, but also in any other setting, where competition may be of a more violent nature. I then extend this analysis to show that a commodity price shock and substitutability between productive assets negatively influence the willingness of elite groups to invest in property rights institutions, thus providing an economic explanation for why some countries have endogenously developed a context more favorable to business than others.
We study fiscal spending by supranational unions, where participation is voluntary and countries bargain over contributions to and the allocation of a central budget. We establish and explore the link between the budget's allocation and nations' contributions that occurs since bargaining power is endogenous, and a country's outside option during budget negotiations is to withdraw its contribution and consume its full income. Generically, it follows that unstructured bargaining gives an inefficient result in the presence of income asymmetry between member nations. Interestingly, redistribution arises endogenously, despite nations being purely self-interested. However, there exists a trade-off between increasing equality and decreasing efficiency, which becomes more severe as the centralized budget increases. We also analyze partial ex-ante commitment through alternative decision-making institutions: Both majority rule and exogenous tax rules can improve efficiency.
What is the role of attitudes in corruption? This study focuses on one aspect of this question, by investigating the capacity of attitudes to exist, persist, and vary independently of institutions. To isolate attitudes from institutions, I compare individuals who share an institutional environment, but whose ancestors may have originated in different countries. The analysis shows that a proxy measure of past overall attitudes toward corruption in the country of ancestry explains substantial variation in attitudes toward corruption across the individuals in the sample, furnishing strong evidence of intergenerational transmission. The findings are not driven by discrimination of certain ancestry groups, selection of ancestries into economic activities, local corruption, or inherited human capital, and they hold for two separate measures of attitudes from different data sources.
How do prisoners create order in the inmate social system? Inmates must devise their own self-governance mechanisms to define and enforce property rights to personal and common property. They cannot rely on formal governance mechanisms to enforce agreements in contraband markets. Officials will not provide many of the public goods that inmates demand, such as assaulting those deemed undesirable, including sex offenders, former police, and informants. Inmates provide these self-governance mechanisms in a polycentric system organized around race, ethnicity, and geographic origin. The core features of this system coincide with the lessons that Elinor Ostrom has identified as characterizing sustainable governance regimes. The high volume of contraband activity demonstrates the effectiveness of these mechanisms. The prison setting provides a difficult case for extralegal and polycentric governance regimes because it houses people of a biased agent type. In contrast to conventional wisdom among economists, this paper shows that a large group of heterogeneous people with high discount rates, few resources, and a willingness to violate the law can produce order and engage in a flourishing marketplace outside the law.
This paper examines the coordination of inputs to the development and use of technology as a problem in the theory of property. Recent misunderstanding of property, in terms of both the substance of its rights and the implications of its remedies, have presented property as an obstacle to – rather than as a platform for – rapidly evolving technology. This paper will first present a framework for property that captures its role in organizations, intellectual property, as well as property law itself. An information-cost theory of property stresses modularity, standardization, and hybrid systems of private and common rights, which allow for separation of functions and specialization. Modularity and separation in property allows for specialization but also give rise to the potential for strategic behavior. Each specialist may only maximize locally, which can lead to social losses. To counteract this strategic behavior, a combination of boundary placement and interface rules can be used, as is commonly seen in common property systems and their variants. The paper then applies this framework to Standard Setting Organizations and shows that separation of the standardization function is yet another type of property separation and specialization. As with other dimensions of separation, strategic behavior becomes possible. But contrary to some widespread views, the tools of property do not simply cause the problem of opportunistic hold up in SSOs; property also provides some solutions, in this case through doctrines of equity that are aimed at counteracting opportunism in general.
Common-pool resources as common property are no longer assumed to be destined to fail, but success is not inevitable. Trust and social capital have been identified as important factors in fostering cooperation, as they substitute for costly formal monitoring and enforcement of rules. This has been confirmed by both theory and empirics. However, the empirical research often is limited to cross-sectional analysis, using heterogeneity as proxies for trust, while theory emphasizes the repeated interactions of individuals. Additionally, given the myriad of variables identified in social-ecological systems to impact outcomes, the extant cross-sectional analysis likely suffers from significant omitted variable bias (OVB). I address both issues by focusing on trust as developed through repeated interactions while correcting for a large portion of the OVB problem. I construct panel data of 51 communal irrigation systems (acequias) over a 25 year period (1984-2008) located in Taos Valley, New Mexico. Having survived in the region for 150-250 years, the acequias have recently faced a new disturbance, undergoing a significant amount of turnover in the user group. This provides variation in trust developed through direct repeated interaction. Combining satellite imagery data, providing a measure of average agricultural production for each acequia each year, with user group characteristics constructed from New Mexico water right records, I use econometrics to explore the impact of new users. The use of panel data allows the inclusion of fixed effects, controlling for a number of unobserved variables which may be related to both turnover and agriculture. The results indicate that the systems are robust to the disturbance of new users, though smaller user groups struggle when they are subject to a large shock. The results also confirm the presence of OVB, as cross-sectional analysis here overstates the magnitude of the impact.
We assemble a large database for public works in Italy and use a regression dis- continuity design to document the causal effect of decreasing discretion over auction format choice. Works with a value above the threshold must be allocated through an open auction that leaves little discretion to the buyer in terms of who will bid and win. Works below the threshold can more easily be allocated through a restricted auction, where the buyer has some discretion in terms of who (not) to invite to bid. We find that works with lower discretion have a lower probability that an incum- bent firm wins again.We also find non-conclusive evidence about longer delay and lower number incorporated firm. Number of bidders, winning rebate and probabil- ity that the contract is awarded to non-local firms are not affected. When we try to disentangle the relationship between delay and firm characteristics (using fixed effect, propensity score matching e propensity score reweighting) we find that large, incumbent firms deliver with shorter delay, particularly below the threshold.
Using a natural voting experiment in Switzerland that encompasses a 160-year period (1848–2009), we investigate whether a higher level of complexity leads to increased reliance on expert knowledge. We find that when more referenda are held on the same day, constituents are more likely to refer to parliamentary recommendations in making their decisions. This finding holds true even when we narrow our focus to referenda with a relatively lower voter turnout on days on which more than one referendum was held. We also show that when constituents face a higher level of complexity, they listen to parliament rather than interest groups.
Economies have markedly different firm size distributions. At the same time, firms of different size grow differently after identical financial and product-market liberalization reforms. Thus, identical reforms can produce different growth outcomes across countries. This result is reached after exploring firm-level data on sales and sales per worker across 135 developing and post-transition economies. It helps explain the remarkable variation in the vast development literature studying the effects of various market-oriented reforms across countries and over time.
Policymakers in the US have noted that individuals and businesses have become alarmingly adept at using the letter of the law to obtain unintended benefits and advantages. This deception and pretense can be found in a wide variety of legal contexts, and includes activites and plans that are labeled “sham marriages,” “sham retirements,” “sham leases,” “sham litigation,” and so forth. Government lawyers note that these and other similar types of transactions have the appearance of law-abiding behavior, but are in fact nothing more than fraud. The problem for government litigators, however, is that many sham activities are entirely consistent with statutory and administrative law and thus are particularly difficult to challenge in court. In this essay, we focus on alleged corporate tax shams and the American judiciary’s response to these transactions when they are litigated in the high court. In doing so, we aim to identify the factors that convince judges that certain behavior crosses the line from legal acceptability to abusive activity. We hope that our study provides transparency to judicial decision making in the context of corporate tax shams, but also into other legal contexts in which courts characterize ostensibly legal behavior as abusive and fraudulent.
Using data covering all the public procurement transactions in Paraguay from 2004 to 2011 and the political connections of the 700 largest public providers, the paper documents how the amount of contracts received by firms of different colors evolved during and after a landmark political change that occurred in 2008, when an opposition coalition defeated the Colorado party, in power for 61 years, including 35 years of the longest standing dictatorship in South America (1954-1989). It then shows that there were efficiency gains in the process, mostly in the forms of institutions using bigger and more competitive contracts, but that this evolution was constrained by the lack of entrepreneurs able to step in to replace firms connected to the previous regime.
Behavioral economics is mainstream and timely. The economic crisis raised important issues of market failure, weak regulation, moral hazard, and our lack of understanding about how many markets actually operate. As behavioral economics (with its more realistic assumptions of human behavior) goes mainstream in academia and the business world, one expects lawyers and economists to bring the current economic thinking to the competition agencies and courts. How should the courts and competition agencies respond? This paper examines how courts and competition authorities can consider the implications of behavioral economics on four levels: first as a gap filler, i.e., to help explain “real world” evidence that neoclassical economic theory cannot explain; second to assess critically the assumptions of specific antitrust policies, such as merger review and cartel prosecutions; third to revisit three fundamental antitrust questions, namely what is competition, what are the goals of competition law, and what should be the legal standards to promote those goals; and fourth, to assess how behavioral economics will affect the degree of convergence/divergence of competition law among the over 100 jurisdictions with competition laws today.
Behavioral antitrust—the application to antitrust analysis of empirical evidence of robust behavioral deviations from strict rationality—is increasingly popular and hotly debated by legal scholars and the enforcement agencies alike. This Article shows, however, that both proponents and opponents of behavioral antitrust frequently and fundamentally misconstrue its methodology, treating concrete empirical phenomena as if they were broad hypothetical assumptions. Because of this fundamental methodological error, scholars often make three classes of mistakes in behavioral antitrust analyses: First, they fail to appreciate the variability and heterogeneity of behavioral phenomena; second, they disregard the concrete ways in which markets, firms, and other institutions both facilitate and inhibit rational behavior by antitrust actors; and, third, they erroneously equate all deviations from standard rationality with harm to competition. After establishing the central role of rationality assumptions in present-day antitrust and reviewing illustrative behavioral analyses across the field—from horizontal and vertical restraints, through monopolization, to merger enforcement practices—the Article examines the three classes of mistakes, their manifestation, and their consequences in antitrust scholarship. It concludes by offering two sets of essential lessons that the behavioral approach already can offer to make antitrust law and policy more realistic and effective in protecting competition: One concerning the value of case-specific evidence in antitrust adjudication and enforcement, the other showing how antitrust law can and should account for systematic and predictable boundedly rational behavior.
As a lubricant for mutually beneficial exchange, social trust is essential to the functioning of societies and helps overcome numerous collective action problems that would otherwise ail society. One of the most striking manifestations of cross-cultural variability, then, is the huge variation in social (dis)trust that can be observed across societies, specifically geopolitical units. So far, however, social scientists lack understanding of the deep roots of social distrust as one and perhaps the most important feature of human cultures. We test two theories on biogeographical factors explaining why some societies are so much more trusting than others, one identifying bio-climatic endowments and associated subsistence strategies and the other identifying pathogen stress and associated behavioural immune defences as fundamental determinants of social trust. A direct test with evidence for up to 94 geopolitical units consistently indicates that historical prevalence of infectious diseases is a more powerful predictor of social trust than are features related to subsistence strategies, including the availability of domesticable plants and animals, although both appear important. The timing of the Neolithic revolution, on the other hand, has little influence. Most importantly, distance to the equator trumps other influences, though not because it affects cultural diversity within geopolitical units.
Is Islam compatible with democracy? Huntington (1993) finds the answer is no: the dearth of democracy in the Muslim world is rooted in Islamic civilization itself. Other authors argue that the Muslim lack of democracy is attributable to factors other than Islam. Recent developments in Northern Africa and the Middle East add new urgency to this question. As in most young democracies, the real challenge in Muslim societies, however, is not whether democracy is considered desirable in itself, but whether it delivers the freedom and welfare gains that are expected from it. If it fails to do that, the risk is that democracy loses legitimacy, which may cause new openings in the political system to strengthen anti-democratic political forces. This paper examines whether democracy delivers the same freedom, income, and well-being in- and outside the Muslim world. We estimate inter-societal differences in the gains in happiness, freedom and income caused by democratic institutions. If we find that democracy has a weaker positive effect on these variables in Muslim societies, we interpret this as an indication that democracy delivers less in Muslim societies, making disappointment with the functioning of democracy and a resulting loss of legitimacy more likely. Focusing not on professed desirability of democracy, but on ex-post appreciation of democratic changes, we take the debate about Islam and democracy in a new direction. Based on our results, we conclude that Huntington was partially right: in Muslim societies, cultural and institutional constraints imply that democracy delivers less freedom than elsewhere. On the other hand, were democracy to bring them the same levels of perceived individual freedom and welfare as it does in the rest of the world, people in Muslim societies appreciate democracy just as much. In this sense, no clash of civilizations exists; Muslims do not like democratic freedoms less but equally much as non-Muslims do.
In an autocracy, does political competition always improve the provision of public goods? Do different mechanisms for selecting governors affect the amount provided? For 2004-2009, we use panel data for 74 Russian regions to study how the intensity of local political competition affects the amount of public goods that the governors provide. For each region, we measure political competition by the share of seats the national ruling party holds in the regional legislature and by the Herfindahl-Hirschman Index. For regions with substantial competition in their local legislatures, we find that governors appointed by the national government provide more public goods than do governors who are chosen locally. The latter appear to allocate more funds for themselves. But for regions in which one party has a near monopoly of political power, governors chosen by the region provide more public goods than governors appointed by the national government. Moreover, we find evidence of a non-monotonic (inverted U) relationship between the intensity of political competition, the efficiency of accountability mechanisms, and some measures of public goods (primarily education and health care).
Using individual policies and claims data from the Croatian mandatory motor insurance we test the theoretical proposition that under moral hazard, experience rated pricing scheme should generate the negative state dependence in claims, i.e. that drivers should drive more safely after they had an accident. The empirical challenge in these tests is to disentangle the state dependence from unobserved heterogeneity. We propose a simple approach based on the explicit reliance on the cost of future accidents function which is used to filter out the pure incentives effect, whereas the bonus-malus scale is used to control for pure heterogeneity. Our results confirm the existence of negative dependence in claims indicating the presence of significant moral hazard effect.
When contracting is difficult, there is the risk of opportunistic behavior by the contractor. Strong incentives for cost savings, for example, can also induce strong incentives to look for loopholes. One well-known solution is to bring the activities in house and provide them with employees facing relatively weak incentives. In this paper, I investigate an alternative approach, outsourcing to nonprofits, that maintains some of the advantages of outsourcing but provides dulled incentives for both good and bad efforts. I find the conditions under which contracting with non-profit is preferable to a similarly-situated for-profit. With exogenously incomplete contracts, the non-profit becomes more attractive as the harm of opportunistic behavior increases, as the degree of incompleteness increases, and (in a repeated game), as the parties become less patient. When the buyer can choose the level of contractual completeness, however, things change. Nonprofits are more attractive as the cost of contractual completeness increases, the scope for cost-reducing effort decreases, and (surprisingly) for intermediate levels of patience and intermediate harms from opportunistic behavior. The intuition for this monotonicity is that when the risks are severe the buyer will choose to write very complete contracts, which, in turn, make for-profit contractors attractive.
I distinguish the Transaction Cost Economics Concept, which was originated by Ronald Coase (1937, 1960, 1988), from the Transaction Cost Economics Project, which Coase generously ascribes to me (1972, 1975). The latter, on my reckoning, took shape as the product of a series of events where “one confounded thing led to another.” Good luck and antennae – to include education, teaching, work experience, and research – conspired to make TCE an obvious project upon which to work as TCE took on a life of its own. What are the lessons? Thomas Jefferson’s views on luck are apropos.
The United Nations' Convention on Biological Diversity raised expectations of high benefits in genetic resource trade. As a reaction the megadiverse countries of the Andean Community (CAN) passed strict community access legislation. Against this background the main objective is to investigate whether public eco-regional biodiversity cartels of megadiverse countries on the genetic resource market can increase the appropriable benefits from biodiversity. We analyse how cartel design affects cartel benefits and discuss the benefit distribution among cartel members. The CAN biodiversity collusion serves as a case study. Our main finding is that cartels--contrary to their negative connotation--are potentially able to stimulate genetic resource trade and increase the appropriable benefits from biodiversity. This depends largely on the cartel design and the ability to attract bioprospecting agents. A member's benefit share rises in the member's relative biodiversity richness and even more in the quality of the institutional environment. The CAN collusion nullifies its market power by a deterringly overly strict access regulation and a lack of internal cooperation.
This paper studies a principal-agent model where a risk-neutral principal delegates to a risk-neutral agent the decision of whether to pursue a risky project or a safe one. The return from the risky project is unknown and the agent can acquire costly unobservable information about it before taking the decision. The problem has features of moral hazard and hidden information since the acquisition of information and its content are unobservable to the principal. The optimal contract suggests that the principal should only reward the agent for outcomes that are significantly better than the safe return. It is also optimal to distort the project choice in favor of the risky one as a mechanism to induce the direct revelation of the uncertain state. In a managerial context, the findings explain why options and profit sharing compensation induce better decision making from CEOs, as well as why excessive risk taking might be optimal.
This paper examines whether family firms are better performers during the global financial crisis. Using a dataset covering firms from S&P 500 (US), FTSE100 (UK), DAX 30 (Germany), CAC 40 (France), and FTSE MIB 40 (Italy) during the period of 2006-2010, we find that broadly defined family firms do not outperform non-family firms during the crisis. However, family firms with founder presence (as CEO, a board member or a significant blockholder) outperform non-family firms by 18 percent in Operating Return on Assets (OROA). Tobin’s Q and risk-adjusted Alpha of founder firms, by contrast, do not exhibit any difference. We interpret the attenuation of the market value premium of founder firms as the result of high volatility of stock prices and investors’ overreaction during the crisis (Veronesi, 1999; Glode et al., 2010). Further research shows that during the global financial crisis, founder firms invest less and enjoy better access to the credit market than non-family firms. Our analysis suggests that the superior performance of founder firms is largely caused by less incentive to invest in risky projects with a high likelihood of failure in order to boost earnings during the crisis. Furthermore, our results reveal that founder firms bear the least agency costs, and that Tobin’s Q and Alpha may not be the most appropriate measures of corporate performance during the financial crisis.
In first-hand data from Cameroon, we observe that household members often make collective decisions about public goods, while at the same time hiding income to each other. The theoretical literature on intra-household decision does not give any prediction of why this should happen. To fill this gap, we study how intra-household allocations are affected when we relax the hypothesis of symmetric information among spouses: we assume that the spouses do not completely observe the income realization of their partner, allowing the possibility of hiding part of one’s income. When both spouses contribute to the public good and can make transfers to each other, a partition equilibrium arises: they reveal partially their income realization, such as to make their preferred contribution incentive compatible. However, hiding occurs in order to be able to reduce the amount of free-riding of the other spouse.