Society for Institutional & Organizational Economics
Conference papers from 2015 (sessions were not tracked for this year)
Presidents have been selectively reviewing regulatory proposals from executive branch agencies since the Clinton administration. For scholars of the regulatory process, one result of this program is a pattern of "audit rates," or the proportion of an agency's regulatory agenda that is reviewed by the White House. What inferences can be drawn from these audit rates? To shed light on this question, I start with a behavioral model of strategic auditing between a president and a regulatory agency. The model clarifies conditions under which audit rates may reflect policy disagreement between presidents and regulatory agencies. Intuitively, proposals from "adversaries" are audited more frequently than proposals from "allies." Using insights from the model, I statistically estimate the auditing bias presidents have toward individual agencies using data from all executive branch rule-making agencies (regulators) that were active during the Clinton and Bush II administrations. I estimate a partisan bias that changes with the party of the president, as well as a shared bias exhibited by presidents of both parties. I use the estimates of partisan bias to show that the dimension of partisan conflict in regulatory policy-making is shaped by a Republican bias toward auditing health, safety and environmental agencies and a Democratic bias toward auditing agencies with close ties to industry. I also compare my estimates of partisan bias to existing measures of agency ideology and find positive, albeit modest, correlations.
How do political institutions shape the incentives to go to war? I contribute by providing a theoretical model and empirically investigating the monumental political transition of recorded history - the Roman transition from Republic to Empire. My hypothesis is that political institutions determine the type of conflict but not the level. By increasing the breadth of the ruling political coalition, more people share private goods but more people benefit from public goods. These forces are opposed and predict an ambiguous amount of total military activity. To test this idea, I compile a uniquely large and disaggregated spatio-temporal data set on ancient Roman battles and human settlement around the Mediterranean. The raw data and the regression analysis show that dictators engage in battles that are less desirable for citizens of the state.
For over a century the longbow reigned as undisputed king of medieval European missile weapons. Its superiority over the crossbow enabled small armies of archers and dismounted men-at-arms to consistently defeat larger armies of mounted knights and infantry. Yet only one nation used the longbow as a mainstay in its military arsenal: England. Despite suffering repeated defeats by the longbow, France and Scotland clung to the technologically inferior crossbow and complementary tactics. This “longbow puzzle” has perplexed historians for decades. Our paper resolves it by developing a theory of institutionally constrained military technology adoption. Unlike the crossbow, the longbow was cheap and easy to make, potentially enabling usurping nobles to organize rebellions against their rulers. Medieval rulers choosing between missile technologies thus confronted a tradeoff with respect to internal and external security. England alone in late-medieval Europe was sufficiently politically stable to allow its rulers the option of the first-best technology. In contrast, in France and Scotland political instability prevailed, constraining rulers in these nations to the crossbow. Historical evidence on political stability, missile-weapon reliance, and relative wealth across countries and over time supports our theory.
This paper contributes to the analysis of the impact of contractual design on the performance in public procurement. It focuses on the case of railway regional transport in France, where the regions were given the prerogatives of a transport organising authority in 2002. One specificity of the sector is that the twenty regional transport authorities have to delegate the operation to the regional branches of a state owned monopoly. This case gives the opportunity to study public procurement in a non-contestable market. Using a stochastic cost frontier we analyse the technical efficiency of the regional branches of the monopoly using an original panel dataset on the twenty contracts covering the period between 2009 and 2012. The empirical results suggest that the market structure alters the incentive properties of the contract. Also we find a decreasing trend in efficiency throughout the processing of the contract despite provisions that should stimulate efficiency.
Using data from 2002 to 2009 inpatient discharge records on deliveries in the Italian region of Piedmont, we assess the impact of an increase in malpractice pressure on obstetric practices, as identi fied by the introduction of experience-rated malpractice liability insurance. Our identifi cation strategy exploits the exogenous location of public hospitals in court districts with and without schedules for noneconomic damages. We perform di fference-in-di fferences analysis on the entire sample and on a subsample which only considers the nearest hospitals in the neighborhood of court district boundaries. We fi nd that the increase in medical malpractice pressure is associated with a decrease in the probability of performing a C-section from 2.3 to 3.7 percentage points (7% to 11.6% at the mean value of C-section) with no consequences for a broadly defi ned measure of complications or neonatal outcomes. We show that these results are robust to the di fferent methodologies and can be explained by a reduction in the discretion of obstetric decision making rather than by patient cream skimming.
A combined treatment of public finance and political governance is herein proposed. We study the link between the choice of rule-based public contracts and political hazards using the municipal bond market. While general obligation bonds are serviced from all municipal revenue streams and o ffer elected officials financial flexibility, revenue bonds limit the discretion that political agents have in repaying debt as well as the use of revenues from the projects financed by the debt. Using a theoretical framework proposed in Moszoro and Spiller (2012), we predict that public officials choose revenue bonds when elections are very contested to signal trustworthiness and transparency in contracting to the voter. We test this hypothesis on municipal finance data that includes 6,500 bond issuances nationwide as well as election data on over 400 cities over 20 years. We provide evidence that in politically contested cities, mayors are more likely to issue revenue bonds. The correlation is economically signi cant: a close victory margin of winning candidates and more partisan swings increases the probability of debt being issued as a revenue bond by 3-15% and the probability of issuing bonds through competitive bids by 7%. We test a few additional hypotheses that strengthen the argument that the choice of revenue bonds is a political risk adaptation of public agents so as to signal commitment and lower the likelihood of successful political challenges of misuse of funds.
How do poor and weak countries escape the poverty trap? Which comes first in development—economic growth or good institutions? My forthcoming book, How China Escaped the Poverty Trap (Cornell University Press), examines these enduring questions through China’s stunning transformation from a socialist backwater to a global powerhouse in the reform era. Experts have long debated whether it is good institutions that cause growth or growth that enables strong states. Challenging the linear causal logics that underlie existing debates, I propose, instead, a coevolutionary approach to the study of development. This chapter introduces an analytic template for mapping coevolutionary paths and then applies it to analyze the coevolution of markets and bureaucratic structures in divergent localities across China. My analysis reveals that market-building institutions vary in function (what they do) and in form (what they look like) from market-preserving institutions found in developed economies. More precisely, I find that it was actually the “wrong” type of bureaucracy—seemingly corrupt and in clear violation of Weberian precepts of specialization and impartiality—that stimulated early growth. Subsequently, it was the emergence of markets through such unconventional means that then triggered the rise of conventionally good institutions like professional bureaucracies and formal property rights. In short, market-preserving institutions are necessary for growth only after markets have already been established. It takes a drastically different set of institutions to build markets. A summary of my forthcoming book is attached.
In “The Problem of Social Cost,” Coase (1960) used a simplified conception of property rights as the outcome of mere contracting in independent exchanges. This conception has been suitable for successfully analyzing many important issues, including that of externalities related to the use of assets and public goods. However, its implicit assumption that exchange in property rights does not affect future transaction costs provides an inadequate basis for understanding property institutions and has caused confusion on the efficacy of private ordering and the role of the state and legal institutions. It has thus limited the scope of most of the economics of so-called property rights to analyses of political interactions and contract rights in personal exchanges. In the real world, property is defined by interaction between multiple exchanges which cause exchange-related non-contractible externalities among market participants. When such exchange-related externalities are considered, property appears to be inherently linked to public and legal interventions, which are indispensable to reach true property—that is, in rem—enforcement and truly impersonal—asset-based—exchange.
This paper provides a theoretical and empirical analysis of how judicial election systems affect performance via both selection of different types of judges and by imposing incentive effects of retention elections. We use panel data on state supreme courts between 1947 and 1994 and exploit variation in the procedures for selection and retention of judges over time, as well as the staggered judicial electoral cycle. When judges are up for election in competitive systems, performance falls -- but not in systems with weak electoral incentives. Our results are consistent with the view that competitive electoral systems tend to reduce judge performance, and that nonpartisan judicial elections are more competitive than partisan elections. Moving from a competitive election system to a less competitive election system increases judge performance, and vice versa. Moving from electoral selection by voters to merit selection by an expert commission results in the selection of higher-performing judges.
We examine the consequences of a legal reform in Israel that extended the right to publicly provided legal counsel to suspects in arrest proceedings. Using the staggered regional rollout of the reform, we fi nd that the reform reduced arrest duration and the likelihood of arrests leading to charges being led. We also find that the reform reduced the number of arrests made by the police. Lastly, we find that the reform increased crime. These findings indicate that the right to counsel improves suspects' situation, but discourages the police from making arrests, which could result in higher crime.
What determines the share of public employment, at a given size of the State, in countries of similar levels of economic development? While the theoretical and empirical literature on this issue has mostly considered technical dimensions (efficiency and political considerations), this paper emphasizes the role of culture and quantifies it. We build a representative database for contracting choices of municipalities in Switzerland and exploit the discontinuity at the Swiss language border at identical actual set of policies and institutions to analyze the causal effect of culture on the choice of how public services are provided. We find that French-speaking border municipalities are 50% less likely to contract with the private sector than their German-speaking adjacent municipalities. Technical dimensions are much smaller by comparison. This result points out that culture is a source of a potential bias that distorts the optimal choice for public service delivery. Systematic differences in the level of confidence in public administration and private companies potentially explain this discrepancy in private sector participation in public services provision.
Public private partnership (PPP) contracts are increasingly popular worldwide to provide public services. However, contrary to the majority of contractual relationships, reputation and sanction mechanisms are impossible for PPPs. This implies that trust, which can be considered as a measure of the belief that the other party will cooperate, is most needed to support cooperation in PPPs. We argue that the difference of trust towards public officials and private firms is the keystone for the development of PPPs. This paper aims at uncovering its causal effect, based on Algan and Cahuc (2010)'s inherited trust method, using panel data on PPPs in 18 OECD countries over 1994-2011. Potential channels are also investigated. Our results highlight that the difference of trust towards public officials and private firms turns out to explain a significant share of the differences in the development of PPPs, in terms of number as well as in terms of value: the higher the level of public trust relative to business trust, the smaller the propensity of countries to resort to PPPs. We show that this is not explained by an ideological bias towards “more” state, but by a self-selection story, where countries with higher level of public trust relative to business trust attract better public agents.
With the purpose of reducing the consequences of corruption in public procurement, many governments have introduced debarment of suppliers found guilty in corruption and some other forms of crime. This paper explores the effect of debarment on public procurement. Debarment is found to deter corruption in markets with limited competition as long as there is a certain risk of being detected in corruption and firms value public procurement contracts in the future. As a side-effect, however, debarment (when it occurs) facilitates collusion as it decreases the number of future potential suppliers, while it cannot be expected to improve integrity on the side of governments. Excluding all suppliers involved in collusion is not a practical option, and thus, debarment of firms guilty of bid rigging is an inefficient strategy against collusion. Debarment of notorious bribers and fraudulent suppliers will always be warranted. If the practice is considered an anticorruption strategy, however, it may overshadow the need for more effective initiatives - including enforcement of competition rules and strategies to reduce corruption in government.
Contrary to what Meltzer and Richard (1981) assume, and due to inefficient in-kind transfers, the administrative costs of enforcement and redistribution, the tax payers cost of compli- ance and non-compliance, what tax payers paid for income redistribution is never completely redistributed. Extending their model, we study the relationship between inequality and redistribution when there are endogenously determined inefficiencies (leakage) in re-distributive institutions. The level of leakage is decided on in a constitutional period by a designing voter that ranks higher than median. By increasing the cost of redistribution, the leakage reduces future medianís demand for equilibrium redistribution; it also increases the incentives to work and the future income. In societies with high (low) levels of initial inequality, the designing voter sets inefficient (efficient) redistributive institutions. Since the past inequality reduces the demand for redistribution (through leakage) and current inequality increases the demand for redistribution, the net effect of inequality on redistribution is not clear. This provides an explanation for the weak correlation between income inequality and equilibrium redistribution obtained in many cross-country regressions.
The paper explores various measures of institutional quality on Russian regions, and compares those measures to each other. Such analysis leads to the conclusion that Russian regional institutions are essentially multidimensional, and therefore comparisons of Russian regions in terms of their overall institutional quality could be problematic. New institutional indexes are derived from Russian enterprise surveys held under the BEEPS project of the European Bank of Reconstruction and Development. Such indexes yield a typology of Russian regions in terms of efficacy of regional administrations’ control over economy and bureaucracy in their regions. Dynamics of regional institutional indexes is investigated against the backdrop of Russia-wide institutional trends.
Scholarly and popular commentary often asserts that markets characterized by intensive patent issuance and enforcement suffer from “patent thickets” that suppress innovation. This assertion is difficult to reconcile with continuous robust levels of research and development (R&D) investment, coupled with declining prices, in technology markets that have operated under intensive patent issuance and enforcement for several decades. Using network visualization software, I show that information and communication technology (ICT) markets rely on patent pools and other cross-licensing structures to mitigate or avoid patent thickets and associated inefficiencies. Based on the composition, structure, terms, and pricing of selected leading patent pools in the ICT market, I argue that those pools are best understood as mechanisms by which vertically integrated firms mitigate transactional frictions and reduce the cost of accessing technology inputs. Appropriately structured patent pools can yield cost savings for intermediate users, which may translate into reduced prices for end users, but at the risk of undercompensating R&D suppliers.
It is well known that large technology firms spawn startups founded by departing employees. Based on a unique dataset consisting of almost 700 startup acquisitions between 2006 and 2011, we present evidence on a previously unobserved phenomenon: large technology firms sometimes acquire start-ups founded by their former employees. Those transactions conform to an implicit two-step “release-and-catch” strategy that exploits the high-powered incentives of a small firm’s entrepreneurial environment and the scale economies of a large firm’s commercialization infrastructure, but at the risk of forfeiting the large firm’s R&D and human capital investment. In step one, a firm declines to develop a promising but unproven innovation proposed by an employee, thereby pushing the employee into an entrepreneurial environment that enhances the employee’s motivations, shifts risk to outside investors, and generates a market test of the innovation’s commercial value. In step two, if the startup elicits positive market interest, the parent firm can potentially exploit its informational advantage over other bidders to acquire the startup and earn a return on its investment through the commercialization process. The model, and the underlying tradeoff between entrepreneurial flexibility, scale economies and forfeiture risk, is extended to account for controlled forms of release-and-catch structures executed by leading technology firms.
How should a firm set policies--public decision plans that determine the roles of its employees, divisions, and suppliers--to strengthen its relationships? We explore whether and how a principal might bias the decisions she makes to foster relational contracts with her agents. To this end, we examine a flexible dynamic game between a principal and several agents with unrestricted vertical transfers and symmetric information. We show that if relationships are bilateral--each agent observes only his own output and pay--then the principal may optimally make decisions in a systematically backward-looking, history-dependent way in order to credibly reward agents who performed well in the past. We first show that these backward-looking policies are prevalent in a broad class of settings. Then we show by example how such policies might affect firm performance: for example, hiring might lag increases in demand or investment might be awarded in a biased tournament. In contrast to the game with bilateral relationships, we show that if monitoring is public, optimal policies never involve biased decisions.
Is competition perceived as a fair mechanism? We report data from laboratory experiments where a powerful buyer can trade with one of several sellers. Sellers who feel shortchanged can engage in counterproductive behavior to punish the buyer. We find that the same unfavorable terms of trade trigger significantly less counterproductive behavior if the buyer uses a competitive auction to determine the terms of trade than if he uses his price setting power to dictate the same terms directly. Our results demonstrate the importance of understanding not only the allocative properties of mechanisms that are used to coordinate economic activity but also the behavioral reactions to the resulting outcomes in order to understand their overall efficiency.
In this paper I hypothesize that under individual maximization, the costs of transacting (primarily due to the costliness of measuring wives’ and husbands’ input, output, and consumption) may explain why throughout most of history, husbands have been the primary household decision-makers and wives subordinate decision-makers; why have husbands been in control of family resources and having the ability to penalize their wives, and why bride price went to her parents and not to her. Competition between husband and wife over marital income is dissipating. To minimize the dissipation they may choose between husband dominance and sharing.. Sharing gives wives bargaining power and enhances their rights. The parties switch from husband dominance toward sharing when: 1. Productivity differential between the two declines. 2. Cost of monitoring falls. 3. Markets for their outputs and services emerge, as they lower the cost of evaluating contributions and consumption and open outside options for the wife. Competition in the marriage market, partly through dowries and bride price, equalize the contributions of the two to what they receive. Through norms and legal institutions, society imposes constraints on the marriage partners to increase the number of surviving children as well as to enhance household income, especially in making dissipation-reducing commitments easier to enforce.
All creativity and innovation build on existing ideas. Authors and inventors adapt, improve, interpret, and refine the ideas that have come before them. The central task of intellectual property (IP) law is regulating this sequential innovation to ensure that initial creators and subsequent creators receive the appropriate sets of incentives. Somewhat surprisingly, patent and copyright law provide different solutions to this task: While copyright law assigns property rights over original and subsequent creativity to the original author, patent law splits property rights over inventions and their improvement between the original and subsequent inventors. Although many scholars have applied the tools of economic analysis to consider whether IP law is successful in encouraging cumulative innovation, that work has rested on a set of untested assumptions about creators’ behavior. This Article reports three novel creativity experiments that begin to test those assumptions. In particular, we study how creators decide whether to borrow from existing ideas or to innovate around them.
The role of historical institutions in the development of countries and regions has raised interest in the last few decades. Following studies such as Dell (2010) and Acemoglu et al. (2001); we contribute to this literature by examining the hypothesis of persistent effects of Pre Inca settlements in North-East Peru. Specifically, we use variation in the territorial delineation of Pre Inca cultures to identify possible effects of the establishment of first cities and institutions on the following indicators of living standards: present day household consumption and education attainment. We use Peruvian National Household Surveys from 2007 to 2011 and a regression discontinuity design (RDD) under a multidimensional approach to identify the persistent effects of institutions. Our results indicate that households living in areas where these cultures' cities settled present 10% lower household consumption than households living marginally outside these areas. Also, education attainment of mothers is 0.4 years less than those of mothers marginally outside, on average. These results suggest that given the initial geographic characteristics and the importance of these cities, colonizers selected these areas to conquer and impose oppressive institutions related to the exploitation of minerals. The institutions imposed would have neglected the improvement of welfare in these areas, leading to lower household productive capacity and lower human capital accumulation, among other effects. We examine the possibility of differentiated effects between urban and rural households, and the possibility of bias due to the presence of capital cities. Results are robust to a number of different specifications of the RD polynomial and subsamples.
Fair use is one of the law’s most fascinating and troubling doctrines— amorphous, vague, and notoriously difficult to apply, but vitally important and perhaps the most frequently raised and litigated issue in the law of intellectual property. This article offers a novel theory of fair use that provides both a better understanding of the underlying principles and better tools for applying the doctrine. Rejecting the dominant understanding of fair use as addressing market failure, the article proposes viewing fair use as a doctrine for sorting intellectual property rights based on expected incentives for authors and utility for users. The article’s theory thus accords with recent Supreme Court cases by conceptualizing fair use not as an exception for costly transactions, but rather as a central feature of the copyright system that ensures productive efficiency. The article views copyright law as granting not one, but two large blocs of legal protections: fair uses to the public and exclusive rights to authors. The grant of exclusive rights to authors (such the right to copy) is intended to give authors the ability to profit enough from their expressions to make it worthwhile for them to create. The grant of fair uses to the public, by contrast, is intended to allocate to the public the privilege of utilizing creative expressions in a manner that engenders follow-on utility for non-users (such as scholarship and political speech). Thus, fair use is not simply an allocation of rights for minor uses or those accompanied by high transaction costs between user and author. Fair use is, rather, the dividing line establishing the limits of rights granted to the author. It is a grant of privileges as fundamentally important as the grant of rights to the author, albeit in service of a different aim. The only limit to fair use, in this article’s conception, is a grant of privileges to the public that is so large as to threaten to eliminate the author’s incentives to create.
Using a detailed, hand-coded, 5% random sample of U.S. Circuit Court cases from 1925 to 2002, we show that dissents, voting, and setting precedent along partisan lines, all double, and reversal rates of District Court decisions increase by 20% just before presidential elections. The changes in behavior are not attributable to shifts over the electoral cycle in case or litigant characteristics nor to shifts in characteristics of judges authoring or sitting on cases. Career concerns, getting-out-the-vote, and reputational capital are unlikely to explain these patterns. We propose a formal model of priming and find evidence consistent with the priming of political ideology. Behavioral changes are concentrated among judges sitting in electorally pivotal states and in media markets where campaign advertisements are greatest. Dissents by judges coincide with the monthly increase of campaign advertisements in their states of residence and with the closeness of their state’s popular vote when that state has more electoral votes. Ideologically polarized environments and inexperience magnify the effect of proximity to presidential elections, while wartime has a unifying effect, especially in polarized environments and among inexperienced judges. Dissents increase more on the topics of campaign advertisements and cite procedural rather than substantive reasons for dissent twice as often. Administrative case calendar data suggests that the decision to dissent occurs very late just before publication. Dissents peak three months before the presidential election during the presidential primaries when parties cater to more extreme ideologies, especially for states elevated in importance during the primary season. These electoral cycles replicate in a machine-coded universe from 1950 to 2007, impact Supreme Court caseload and development of law, and are larger than previously-documented electoral cycles among elected judges running for re-election.
The profitability of China's state owned enterprises (SOEs) sharply increased following the enactment of reforms in the mid-1990s. Rapid growth in profitability could indicate that SOEs restructured; however, it might also indicate that the state used its standard tools including product market protections, input subsidies and financial bailouts for its SOEs that in fact enable SOEs to avoid restructuring (Kornai, 1990; and 1992, Part III). This paper shows that SOE profitability grew for two reasons. First, the elasticity of substitution between capital and labor in 136 3-digit Chinese manufacturing sectors is generally estimated at above unity: thus, as the cost of capital for SOEs fell, the capital-intensity and profitability of SOEs dramatically increased. Second, our estimates show that over time SOEs were under less political pressure to hire excess labor. While the productivity of SOEs improved due to the policy of "grasping" the big ones and "letting go" of the small ones, it still lagged foreign and private firms. Overall, our results indicate that SOE restructuring was limited.
Abstract The master agreements that nominally govern the transactions between Mid-Western Original Equipment Manufacturers and their suppliers are not, for the most part, designed to create legal obligations. Rather they play a role in these transactions that is akin to the role played by firm boundaries in the Coase Williamson theory of the firm--they create a space that is largely free of legal governance in which private order can flourish. This Article explores the ways that contract provisions, contract administration mechanisms, and other formal structures created by these firms interact with forces created by repeat dealing as well as relational social capital and the positions of buyers and suppliers in the network of relevant firms (structural social capital) to support the creation and maintenance of long-term cooperative contractual relationships. It then considers the implications of its findings for the make-versus-buy decision.
While an important strand of the literature argues that decentralization might enhance allocative efficiency, standard theory of fiscal federalism also suggests negative redistributive effects. For this reason, centralized redistribution is proposed. The assignment of these two public sector functions, i.e. resource allocation at the local level and income redistribution at the upper level of government, is thus well established. Based on the joint direct taxation system in force in Switzerland – the separation of the decision to set the rate of progression at the cantonal level from the decision to set the ‘level’ of taxation at the municipal level – we investigate the influence of varying degrees of decentralization on the general ‘level’ as well as the degree of redistribution in the cantonal income tax schedules. Our empirical results indicate that more decentralized jurisdictions feature generally lower income taxes and impose higher rates of progression.
In sharp contrast with the Anglo-American tradition, bankruptcy in Civil law countries has always been both voluntary (initiated by the debtor) and involuntary (initiated by one or several creditors). 19th century French judicial statistics show however that the balance between the two varied substantially across regions and over time: the share of voluntary cases fell from 65% in the early 1840s to less than 40% in the 1870s. We try to identify the determinants of this trend, using panel data over 92 départements and 35 years (1838-1874), a period marked by little institutional changes. We test for the specific impact of two possible drivers of the increasing strength of creditors. One is change in the banking sector, namely the gradual shift from the early-modern model of the local merchant-cum-banker, to modern large-scale networks. A more modern or impersonal banking technology may have been instrumental in the observed evolution of the credit relationship. A second possible factor is urbanisation. A large literature (Glaeser 2008) has now explored how the many potential benefits of agglomeration, like more competitive markets or complementarity of assets. We hypothesise that cities may be also an environment where information on debtors is shared more broadly, to the ultimate benefit of creditors. Rather than being a feature of an Old Regime economic model, reputation-based credit would have thus gained a second lease of life thanks to increased urbanisation.
By now, nine out of ten countries have included emergency provisions into their constitutions. These provisions remain poorly understood. This paper therefore aims at providing first answers to three questions: 1) which particular provisions are most often included in emergency constitutions; 2) how much additional discretionary power do emergency constitutions allow and which political actors are given the additional power; and 3) which political and economic factors cause the inclusion of particular emergency provisions into constitutions. We discuss three theoretical motives possibly leading to the creation of such provisions, namely (1) a pragmatic, (2) a power-maximizing and (3) a commitment motive. We test our theoretical conjectures and find that emergency constitutions in countries with stronger veto institutions, higher average income, and which recently experienced a coup allow more discretionary power while countries that are prone to natural disasters and countries far from the equator allow less power. Our findings are mostly in line with theoretical options 2) and 3).
The theoretical predictions of how employment protection affects firm productivity are ambiguous. In this paper I study the effect of employment protection rules on labor productivity using micro data on Swedish firms. A reform of the employment protection rules in 2001 made it possible for small firms with less than eleven employees to exempt two workers from the seniority rules. I exploit the reform as a natural experiment. My results indicate that increased labor market flexibility increases labor productivity. The increase is not explained by capital intensity or the educational level of workers.
This paper investigates how the success of a management practice depends on nature of the long-term relationship between the firm and its employees. A large US transportation company is in the process of fitting its trucks with an electronic on-board recorder (EOBR), which provide drivers with information on their driving performance. In this setting, a natural question is whether the optimal managerial practice consists of: (1) Letting each driver know his or her individual performance only; or (2) Also providing drivers with information about their ranking with respect to other drivers. The company is also in the first phase of a multi-year "lean-management journey". This phase focuses exclusively on changing employee values, mainly toward a greater emphasis on teamwork and empowerment. The main result of our randomized experiment is that (2) leads to better performance than (1) in a particular site if and only if the site has not yet received the values intervention, and worse performance if it has. The result is consistent with the presence of a conflict between competition-based managerial practices and a cooperation-based relational contract. More broadly, it highlights the role of intangible relational factors: the optimal set of managerial practices depends on the long-term relationship the company chooses to have with its workers.
Does generalized trust in society influence individual preferences over target groups for government redistribution? Existing research shows that trust affects government redistribution. In this paper we demonstrate that trust is important not only for demand for redistribution in general, but also for the preferred design of redistribution policy. Using a set of surveys of about 34,000 individuals across 68 Russian regions that were conducted in 2007, 2009 and 2011 we show that in high trust environment people demonstrate higher levels of support in favour of those who have performed services on behalf of the society, or can’t work because of health problems or age; lower support is found for people in difficult life situations who are still able to work. To explain the observed relation we propose two possible mechanisms: substitution hypothesis, when people may expect help from others that substitutes support from the government, and civicness hypothesis, when people want to reward those who have done something noticeable for their country or to help those who are in great trouble and need special assistance which could be provided by the government. A novel instrumentation strategy is used to account for endogeneity. The results are robust to alternative calculations of the redistribution index, trust levels derived from 2007 and 2009 survey waves, and inclusion and exclusion of a rich set of control variables.
This study examines how changes in political incentives impact state firms' decisions. We measure changes in political incentives using the timing of elections, since prior scholarly work has emphasized the incentive of elected officials to increase the supply of public goods and decrease taxes right before elections. We examine 503 municipal electric utilities in United States, during the years 1990 through 2013, that operate under the authority of a mayor and a council. We find that the price of electricity charged by municipal utilities is 1% higher two years before mayoral elections than in election years. Harberger's formula is used to compute the loss from this cyclicality in prices as 0.0001% of electricity revenues. Thus our measure of the deadweight losses of politics in public service provision are very close to zero, with a confidence interval that rules out effects greater than 0.0002% of electricity revenues. Our results can be explained by the fact that voters hold mayors accountable for electricity prices. We find that a 10% increase in the municipal utility electricity price reduces the number of votes to the incumbent mayor by 1-2% points, when state electricity prices are held constant. Further, voters seem to be able to distinguish competence from luck: a 10% increase in the municipal utility electricity prices concurrent with a 10% increase in state electricity votes has no effect on the number of votes obtained by the incumbent.
This paper estimates the elasticity of the supply of offenses with respect to the gains from crime. People steal copper and other nonferrous metals to sell them to a scrap yard. Simultaneously, the prices at scrap yards are set at the world market. We argue, that shocks in metal prices represent a quasi-experimental variation in gains from crime. This allows us to estimate behavioral parameters of supply of offenses and test the economic theory of criminal behavior. Our estimates suggest that the long-run elasticity of supply of metal thefts with respect to the re-sale value of stolen metal is between unity and 1.5. Moreover, the system tends to equilibriate quickly — between 30 and 60 percent of a disequilibrium is corrected the following month and the monthly price elasticity estimates are between 0.9 and unity.
Why various governance levels operate at the same time and do the same thing? This paper aims at proposing an efficiency-based explanation for the duplication of governance provision by various layers of a governance system. Multilevel governance helps mitigating the costs of centralization (resp. decentralization) because there are complementarities among levels in the provision of economic governance. The paper relies on an analysis of the cost function of the provision of order to highlight why efficiency gains can be obtained by combining levels of provision. Three sources of complementarities are identified: the arbitrage between economies of scale and adaptation to specific coordination needs, the efficient use of (bounded) cognitive capabilities, the control of the risk of capture. Empirical illustrations are relied upon to highlight how these elements play in practice.
The primary motivation for retirement savings policy is the view that many of us, if left to our own devices, will not save enough for retirement. Special tax subsidies for employer-sponsored retirement plans—a principal component of the federal policy scheme—have made such plans the predominant vehicle for private savings for retirement. A large body of evidence shows that the details of plan design can have large effects on savings outcomes. The design of the “choice architecture” of these plans, however, is delegated to employers. We analyze the incentives for employer plan design produced by the labor market. Employers offer retirement plans to attract workers. If those workers make systematic mistakes in their retirement savings decisions, then the labor market will produce incentives for plan designs that generally fail to effectively address the problems. Indeed, the presence of workers who undersave due to myopia results in equilibrium employer plan designs that exploit the myopic by lowering their total compensation. Our analytic framework provides novel explanations for a range of features of plan design, including the high prevalence of matching contributions, the use of low default contribution rates in automatic enrollment plans, the shift away from annuities toward lump sum distributions, and the offering of investment options with excessive fees. The regulation of these plans should be reformed to address the problems with employer incentives that we identify. More fundamentally, our analysis calls for a rethinking of the current scheme’s special subsidies for employer-sponsored plans.
Recent business scholarship has demonstrated a renewed interest in state enterprises. We contribute to this emerging field of research by examining the effects of state ownership on the transparency of foreign direct investment (FDI). Using the global petroleum industry as a laboratory, we develop theory and examine empirically the effects of state ownership on disclosures regarding outward and inward FDI. We find that state ownership reduces FDI transparency; that SOEs’ disclosures are less sensitive to host-country political risk than private firms; that investments by SOEs from more democratic countries tend to be more transparent; and that inward FDI is more opaque in the presence of a host-country SOE.
This paper develops a positive model of informal contracting in which rewards and punishments are not determined by an ex ante optimal plan but instead express the ex post moral sentiments of the arbitrating party. We consider a subjective performance evaluation problem in which a principal can privately assess the contribution of an agent to the welfare of a broader group. In the absence of formal contingent contracts, the principal chooses ex post transfers that maximize her social preferences. We characterize the incentives induced by the principal's preferences, contrast them with ex ante optimal contracts, and derive novel testable predictions about the way externalities are internalized in informal settings.
Whether policies shift preferences is important in policy design. A historical narrative suggests turning to the courts to vindicate rights often led to mobilization and subsequent acceptance. We build and test a model where policies backfire in the short-run but then change social norms. We exploit the random assignment of U.S. Federal judges creating geographically local precedent and the the fact that, for over 30 years, judges’ politics, religion, and race predict decision-making in abortion jurisprudence. Instrumenting for abortion jurisprudence with plausibly exogenous judicial characteristics, we find that pro-choice abortion jurisprudence increased violence against abortion providers, campaign donations to pro-life causes, and shifted preferences against legalized abortion in the immediate aftermath, but abortion views followed courts in the long-run. We verify that newspapers report on local abortion jurisprudence and that hearing about abortion decisions shifts preferences against what the law intends, consistent with a mechanism where information mobilizes individuals. Our estimated impacts on abortion attitudes arises exclusively with abortion jurisprudence, and varies neither with jurisprudence in a closely related area nor jurisprudence in advance of the decisions.
We present and test a model of the impact of mandatory disclosure on disclosed activity. The effects of disclosure laws on what is being disclosed are typically unknown since data on disclosed activity rarely exist in the absence of disclosure laws. We exploit data from legal settlements disclosing $316 million in payments to 316,622 physicians across the U.S. from 2009-2011. Multiple regression analysis of differences-in-differences and LASSO double-selection models were used. States were classified as having strong, weak, or no disclosure based on whether the data was reported only to state authorities (weak) or were publicly available (strong). One state, Massachusetts, began releasing payment data online during our sample period, allowing separate analysis of physician payments while the cost of disclosing data remained fixed for pharmaceutical companies. Strong disclosure law reduced payments among doctors accepting less than $100 and increased payments among doctors accepting greater than $100. Weak disclosure states were indistinguishable from no disclosure states. Cross-sectional and longitudinal variation yield similar estimates, which is consistent with a mechanism where mandatory disclosure decreases willingness by physicians to accept payments, and suggests the imposition of significant administrative costs on industry is not the primary mechanism for the behavioral response to mandatory disclosure.
This paper examines how market-based sanctions facilitate commitment to quality and how such sanctions affect organizational choice. An entrepreneur can organize either a for-profit or a non-profit firm in selling product or service. While the entrepreneur can distribute all the profits from a for-profit firm to herself, she faces a non-distribution constraint with respect to a non-profit firm and has to convert its profits into private benefits (such as perquisites), which entails a deadweight loss. Because realized quality is not verifiable and is subject to error, customers impose relational sanctions against the firm when low quality product or service is delivered. With relational sanctions, both types of firm provide the same (expected) quality, but the size of the relational sanctions and the entrepreneur’s organizational preferences differ. When converting profit into private benefits becomes more difficult at the margin, because temptation to shirk from investing in quality gets weaker, a non-profit firm is subject to shorter relational sanctions and, this, in turn, can make a non-profit status more attractive for the entrepreneur. The entrepreneur is more likely to organize a non-profit (1) as quality becomes a noisier signal of investment; (2) as the non-distribution constraint gets stronger at the margin; (3) when a for-profit firm is levied profit tax or a non-profit firm receives production subsidy; or (4) as the profit margin shrinks due, for instance, to a stronger competition in the market. The paper also shows how properly tailored profit tax can improve welfare and how ex ante identical entrepreneurs can choose different organizational forms when legal enforcement of non-distribution constraint gets weaker as the number of non-profit firms in the market increases.
Economic scholarship on property scholarship has studied common law property rights in river water as a test case. In the mainline interpretation, rights in river water evolved from a commons, in the riparian eastern U.S., to property rights, in the prior-appropriation or Colorado doctrine, prevalent in the western U.S. This transition seems to confirm Demsetz's evolutionary theory of property. This mainline portrait misses the role played by policies and high-level legal principles that regulate “accession,” or the legal question how property law identifies the legal “things” that have property rights. In legal terms, the shift from riparianism to the Colorado doctrine consists not of shifts between common and private property, but instead between two different bundles of private property rights. To respond to river water's low value in the east, property law makes that water not a commons but a legal accessory to ownership of riparian land. In the arid west, river water ceases to be an accessory and becomes a separate object of property--and rights in land are correspondingly limited by ditch easements. Accession and thing-delineation don’t refute Demsetz’s theory of property. But they do show that Demsetzian evolution can proceed through a second process, every bit as important as the move from a common pool to private property. This article identifies the strengths and limitations of scholarship on water rights by Gary Libecap, Terry Anderson, Carol Rose, and Dean Lueck, and also recent scholarship on accession by Thomas Merrill.
Using electric vehicles (EV) as TSO reserve providing units has been demonstrated as being both a feasible and a profitable solution. However, the surveys leading to these conclusions are always conducted either without considering the TSO market rules, or using the local TSO existing ones. We find that TSO rules potentially have a great impact on the expected revenues, and are likely to change within the next few years. Thus, this paper aims at assessing the impacts of the implemented TSO rules on the ability for EVs to provide TSO reserves and on their expected remuneration by doing so. First, we draw a list of the most important TSO rules for this use case. Then, we develop a simulation model in order to evaluate the expected revenues for the EVs. Finally, we compute these expected revenues considering various combinations of TSO rules. By doing so, we identify a missing money issue for EVs due to the use of non-optimal rules towards ancillary services remuneration. Considering the French case, according to our simulation results, this missing money per EV and per year ranges from 193e to 593e.
Prior empirical studies suggest repeated exchange develops increasing value in buyer-supplier relationships. A first order implication of this finding is that buyers will focus exchange to generate maximum value in relationships. However, buyers are equally concerned with value capture. By distributing rather than focusing exchange, buyers may position themselves to capture more of the value created, leaving buyers potentially conflicted concerning the choice. We label this dynamic the second paradox of embeddedness, distinguishing it from Uzzi’s (1997) paradox driven by technological uncertainty. By examining the procurement activities of a large, diversified manufacturing company, we then test for supplier and buyer behavior consistent with the conditions that enable and behaviors that result from this second paradox.
We study the impact of organized crime on electoral results analyzing in detail the national parliamentary elections in Sicily for the period 1946-92. We document the significant support given by the Sicilian mafia to the Christian Democratic Party when the electoral competition by the Communist party strengthened. We also provide suggestive evidence that, in exchange for its electoral support, the mafia obtained economic advantages in the construction sector.
This paper highlights the interaction between social capital, pooling and quality premiums and their influence on cooperative members’ decisions regarding their product quality. A necessary condition for adopting the cooperative equitable principle of complete pooling is that there exists a high level of social capital in the cooperative. When the level of social capital is high, the social motivation in the cooperative can guarantee high product quality while economic incentives are weak. When the level of social capital declines, an income rights structure with stronger quality incentives must be adopted by the cooperative to maintain product quality. The cooperative is uniquely efficient when the farmers are risk averse and product quality is uncertain. When the level of social capital in cooperatives is higher than a threshold, which is decreasing in members’ subjective risk towards production uncertainty, cooperatives are able to achieve higher product quality than IOFs.
Recent technological progress has led to the rise of big data. The availability of new datasets and search technologies enables sellers to approximate perfect price discrimination, charging every consumer individualized prices. Many consumers feel overwhelmed by the threats to their privacy and its economic consequences and face cognitive constraints when deciding about consumption and the disclosure of their personal data. We construct a model where consumers face the trade-off between using a sales channel that quickly leads them to their preferred product but collects and uses all personal data, leaving them no surplus from consumption. Alternatively, they can search anonymously, for a cost. Consumers do not fully anticipate a seller's strategic response to increase the price on the anonymous channel, which leads to some consumers ending up with negative, others with positive surplus, thereby endogenizing preferences for privacy. We demonstrate that the anonymous channel breaks down if consumers are too sophisticated and discuss different interpretations and resulting policy measures.
In this Article we examine and provide evidence of the self-enforcing potential of unenforced laws that assign passive rights. We conducted a novel experiment in a bar that operated a separate room where smoking was sometimes prohibited and allowed at other times. Because the smoking prohibition was never enforced in the separate room, non-smokers were at all times subjected to second-hand smoke there: the only difference was that sometimes smoking violated the smoking ban, while at other times it was permitted. As we manipulated the applicable smoking regime, an interesting finding emerged: although non-smokers in the room did not mind the second-hand-smoke, they reacted adversely to smoking only when a prohibition was in effect. Even though smoke concentrations were lower when smoking was prohibited, non-smoking customers left the bar earlier, consumed less and left smaller tips when the unenforced smoking ban was in effect compared to when smoking was allowed. Our findings illustrate the subtle but significant shifts in social dynamics that occur in the presence of unenforced laws. We show that, even in the absence of expressive effects, passive rights create a sense of ownership that induces a preference for compliance. In this process, citizens adversely experience infringements of rights regardless of the consequences of the infringing behavior itself. The findings challenge the conventional wisdom that effective laws require that there is wide public support for the policy objectives or, alternatively, that laws must be backed by public deterrence and enforcement.
Preferential trade agreements (PTAs) have mushroomed over the last two decades, with recent plans across the Atlantic and the Pacific adding to the momentum. However, despite their popularity in numbers, PTAs have always been met with the concern that their proliferation might come at the expense of overall trade liberalization because of undermining multilateral governance. This paper starts from the fact that international treaties are notoriously difficult to enforce, and so is compliance with trade agreements. By focusing on the political economy of how cooperation in trade liberalization is ultimately sustained via the threat of retaliation as institutionalized within the World Trade Organization (WTO), the paper illuminates a novel and completely different channel between PTA membership and trade liberalization. Tapping new data on PTAs and trade disputes within the WTO and exploring their interaction with respect to trade freedom, we provide empirical evidence that PTA membership actually improves on the working of institutional arrangements that are supposed to ensure coop- eration in trade liberalization, thus effectively catering to more open trade.
Do cultural differences deter or facilitate accounting-manipulation practices propagated across countries? While firms attempt to operate in countries that offer the best opportunities to maximize returns on their investments, their managers’ acquaintance with different practices at foreign subsidiaries generates contagion effects that eventually influence the firms’ opportunistic accounting decisions to move toward the common practices in those countries. This effect can cause financial reporting practices to converge; however cultural differences may prevent the direct transfer of opportunistic accounting choices between countries. This article proposes and empirically verifies that cultural differences, mainly in power distance and uncertainty avoidance, constrain the contagion effects while differences in masculinity facilitate the spread of earnings management across borders.
In economic models of crime individuals respond to changes in the potential value of criminal opportunities. We analyse this issue by estimating crime-price elasticities from detailed data on criminal incidents in London between 2002 and 2012. The unique data feature we exploit is a detailed classification of what goods were stolen in reported theft, robbery and burglary incidents. We first consider a panel of consumer goods covering the majority of market goods stolen in the crime incidents and find evidence of significant positive price elasticities. We then study a particular group of crimes that have risen sharply recently as world prices for them have risen, namely commodity related goods (jewellery, fuel and metal crimes), finding sizable elasticities when we instrument local UK prices by exogenous shifts in global commodity prices. Finally, we show that changes in the prices of loot from crime have played a role in explaining recent crime trends.
This paper uses an analytic narrative approach to demonstrate that lending contracts create dual-sided problems of opportunism and that familiar institutional arrangements provide protection to both borrowers and lenders. This insight allows a reinterpretation of key elements of the historical evolution of the English common law, as well as an exploration of the ways that politics and status influence dispute resolution in a variety of institutional arrangements. It also suggests that reputation is a less reliable way of managing these types of disputes—even in small communities—than much of the existing political economy literature has tended to suggest. These conclusions have implications for our understanding of the history of institutional development, for common policy prescriptions for institutional reform in contemporary emerging markets, and for our interpretation of current trends in dispute resolution, including firms’ increasing preference for addressing disputes with international arbitration rather than in domestic courts of law.
All over the world market-dominant minorities are victims of ethno-religious hatred and violence. Focusing on pogroms, i.e., episodes of anti-Jewish violence, in the Pale of Settlement, where Jews were confined to live in within the Russian Empire, between 1800 and 1939, this paper aims to test the “scapegoat theory,” according to which Jews were blamed for all economic misfortunes of the majority and an alternative theory, according to which ethnic violence had pragmatic economic roots and ethnic violence is directly related to occupational segregation across ethnicities. In order to test these theories, we combine a novel panel data set on the professional and ethnic composition of the Russian Empire with data on pogroms and as well as historical weather and yield data. Using fixed-effects model, we document that occurrence of an extremely hot spring, i.e., growing season, leads to a fall in cereal yield. Then, we exploit weather shocks as an exogenous source of variation in income and and find that a negative income shock, i.e., hot spring, increase the likelihood of violence against Jews. More importantly, we find that the likelihood of anti-Jewish violence in the face of an income shock is higher in localities with a greater Jewish concentration in market intermediary professions, in particular, as money lenders. This impact is larger in rural areas and in localities where Jews are the second largest ethnic group. Our findings show that the occurrence of violent acts against a minority group is associated with the economic activities in which the minority group members are engaged and suggest that local farmers who got credit from Jews for their agricultural production might have chosen to organize an anti-Jewish pogrom in the face of debt repayment in the contingencies, when yields were low and it was harder than usual to repay.
Suppose an intermediary provides a benefit to buyers when they purchase from sellers using the intermediary's technology. We develop a model to show that the intermediary would want to restrict sellers from charging buyers more for transactions it intermediates. With this restriction an intermediary can profitably raise demand for its services by eliminating any extra price buyers face for purchasing through the intermediary. We show that this leads to inflated retail prices, excessive adoption of the intermediaries' services, over-investment in benefits to buyers, and a reduction in consumer surplus and sometimes welfare. Competition among intermediaries intensifies these problems by increasing the magnitude of their effects and broadening the circumstances in which they arise. We discuss applications to payment card systems, travel reservation systems, rebate services, and various other intermediaries.
There is growing recognition that institutions formed through local collective action can mitigate common-pool losses. Rigorous quantitative analysis of how this is accomplished and how results depend critically on natural system characteristics is missing in the literature. I fill this gap by exploring how the physical properties of an aquifer affect the land values of pumpers in Kansas after the formation of local groundwater management districts. I use an economic-hydrologic model to predict how aquifer characteristics create heterogeneity in the benefits of management. Expected land value increases motivate collective action to reduce groundwater over extraction. I test predictions that users overlying portions of the aquifer that are held more in common (greater hydraulic conductivity) and those that receive less groundwater recharge see greater benefits from management. Using spatial hydrologic data, land values are shown to change with the implementation of management in a manner consistent with the model. Relative to other treated counties, landowners in a county with hydraulic conductivity one standard deviation higher see increased land values of about 6-8% after management is implemented. Further, landowners in a county with one standard deviation lower recharge see increases in land values under management of about 12%. This is the first study to incorporate groundwater system characteristics to explain the drivers of local mitigation efforts. The results present a generalizable example of how local or targeted solutions based on attributes of the physical system can be successful. Accordingly, local management regimes will benefit from making rules aligned with natural system characteristics.
Recent years have brought remarkable growth in hybrid organizations that combine profit-seeking and social missions. Despite popular enthusiasm for such organizations, legal reforms to facilitate their formation and growth – including, in particular, legal forms for hybrid firms – have largely been ineffective. This shortcoming stems in large part from the lack of a theory that identifies the structural and functional elements that make some types of hybrid organizations more effective than others. In pursuit of such a theory, this article focuses on a large class of hybrid organizations that has been effective in addressing development problems, such as increasing access to capital and improving employment opportunities. These organizations, which are commonly referred to as “social enterprises,” include microfinance institutions, firms that sell fair trade products, work integration firms, and low-cost sellers of essential goods and services such as eyeglasses, bed-nets and healthcare. The common characteristic of social enterprises is that they have a transactional relationship with their beneficiaries, who are either purchasers of the firms’ goods or services or suppliers of input (including labor) to the firm. The essence of the theory is that through these transactions, social enterprises gather information on their patron-beneficiaries’ ability to transact with commercial firms (e.g., workers’ skills, borrowers’ creditworthiness and consumers’ ability to pay). That information permits social enterprises to tailor the form and amount of subsidies to the specific needs of individual beneficiaries. This “measurement” function makes social enterprises relatively efficient vehicles for allocating subsidies as compared with more traditional donative organizations and with other forms of hybrid organization, in particular firms that pursue corporate social responsibility policies.
The paper explores the role of the courts and of the law in the economic theory of incomplete contracts. In the last decades, economists have made significant progress in analyzing incomplete contracts and their implications for institutional choice. At the same time, substantial disagreement remains over whether and why contracts are, or can be, “incomplete”. The dominant paradigm has been to assume that the contractual exchange depends on the ex post realization of an important variable. While the parties can “observe” the realization, the courts cannot “verify” it and therefore cannot enforce a contract that conditions on it. Critics have challenged the observable-but-not-verifiable assumption. They point out that the contract can specify sophisticated implementation mechanisms that force the parties to disclose the true realization ex post. Hence, it is argued, there is no reason why a contract should remain incomplete. The paper relates the economic debate to the role of the courts in contractual disputes. At first blush, it is tempting to equate the courts to an implementation mechanism. This seems to coincide with a notion of courts as “gap fillers” in incomplete contracts. Yet litigation bears little similarity to the mechanisms contemplated in the economic literature. Courts have other, less reliable means of eliciting information and of “verifying” the realization of the relevant variable. Another major difference is that litigation is time consuming: Even if courts can – to some extent – verify the true realization, it is often too late to carry out the efficient trade that should have taken place. But because verification is uncertain, remedies other than specific performance often fail to align the parties’ incentives for efficient trade. The paper thus seeks to show how contractual incompleteness arises in spite of courts with some limited ability to verify the state of nature.
We analyze how agents' present-bias affects optimal contracting in an infinite horizon employment setting absent moral hazard. Sophisticated agents, exactly aware of their present-bias, and fully rational time-consistent agents are optimally offered the same contracts. In contrast, naive and partially naive agents can be exploited by the principal to the same degree. These naive agents are offered a menu of contracts, consisting of a virtual contract - which they intend to choose in the future - and a real contract which they end up choosing. The results are robust to imposing limited-liability constraints. Moreover, under limited-liability implemented effort can be inefficiently high from a social planner perspective and inefficient employment relationships may not be terminated. The findings are also robust to learning or adverse selection and persist in a finite time horizon set-up.
Downsizing can be associated with substantial implicit costs for a firm. In particular layoffs often seem to indicate “unfair” behavior towards employees who subsequently lose trust in the firm's promises. We show that these implicit downsizing or layoff costs can foster a firm's commitment in relational contracts formed with its employees. If a firm's optimal employment level is its private information, it might be tempted to wrongly claim that this level is low. This would decrease output, but also reduce payments that have to be paid to agents to reward them for their effort. To induce truth-telling, layoffs generally have to be accompanied by endogenous costs. These costs manifest in distortions that reduce output by more than what would be efficient. However, the distortions implied by downsizing are only temporary, hence the relational contract is not stationary: If the firm's prospects remain bad, output goes up again, and the distortions either completely disappear or at least are substantially reduced.
Abstract The institution of property is void without legal and social enforcement against theft. While theft is the oldest and simplest of social dilemmas (it increases the welfare of thieves but it is harmful for society as a whole) societies have long developed strategies that encompass -inter alia- behavioral traits, social norms and legal institutions to promote the respect and enforcement of property rights. Ethologists have also uncovered a growing body of evidence suggesting the existence of an innate and hardwired sense of property in many animal species. Why do people respect property? Because of an intrinsic respect or because of fear of legal and social enforcement? In this paper we show that people indeed respect property itself. Yet the origin of the property affects how strongly this respect is. To address our research questions we devise an experimental protocol that puts Plato's Ring of Gyges thought experiment to an empirical test. As the ring granted Gyges invisibility allowing him to steal property without any risk of detection and punishment, our study presented participants with an opportunity to steal while granting strict anonymity to participants in a double blind procedure. We implement a free-form dictator game (List, 2007) in which people can both give lottery tickets to a passive counterpart or take them from him. We manipulate the origin of the tickets property. In one treatment we asked subjects to buy these tickets with their own money and bring them to the laboratory (capital treatments). In a second treatment we gave participants the opportunity to earn their ticket in the lab by completing an effort task (labour treatments). Even though we implemented an extreme Gyges-like anonymous environment we find evidence that people respect property. Our results also show that property earned in the effort task was more likely to be respected than the property subject's had brought from outside the lab, that did not reveal how it was earned.
This study examines whether corporate social responsibility (CSR) influences the allocation of procurement contracts. To obtain exogenous variation in companies' social engagement, I exploit a quasi-natural experiment provided by the enactment of state-level constituency statutes, which allow directors to consider stakeholders' interests when making business decisions. Using constituency statutes as instrumental variable (IV) for CSR, I find that companies with higher CSR receive more procurement contracts. The effect is stronger for more complex contracts and in the early years of the government-company relationship, suggesting that CSR helps mitigate information asymmetries by signaling non-opportunistic behavior and trustworthiness. In addition, I find that the effect is stronger in competitive industries, indicating that CSR can serve as a differentiation strategy to compete against other bidders.
Pigovian (or "corrective") taxes have been proposed or enacted on dozens of harmful products and activities: carbon, gasoline, fat, sugar, guns, cigarettes, alcohol, traffic, zoning, executive pay, and financial transactions, among others. Academics of all political stripes are mystified by the public’s inability to see the merits of using Pigovian taxes more frequently to address serious social harms, some even calling for the creation of a “Pigovian state.” This academic enthusiasm for Pigovian taxes should be tempered. A Pigovian tax is easy to design—as a uniform excise tax—if one assumes that each individual causes the same amount of harm with each incremental increase in activity on the margin. This assumption of uniform marginal social cost pairs well with the limited information and enforcement capacity of government institutions. But when marginal social cost varies significantly, a Pigovian tax may not lead to an optimal allocation of economic resources. Focusing on carbon emissions, where the assumption of uniform marginal social cost happens to be reasonable, obscures this common design flaw. Broadly speaking, Pigovian taxes are likely to be the optimal regulatory instrument only when (1) the harm is (or is properly analogized to) global pollution, and where the harm does not vary significantly based on the source, or (2) the variation in marginal social cost is easily observed and categorized, as with traffic congestion charges. This straightforward insight has broad implications for how we design any targeted tax or subsidy. It explains why a carbon tax would work well, but some other environmental taxes would not. It explains why many food taxes would be ineffective in improving public health. It explains why most sin taxes raise revenue but do not change behavior. Pigovian taxes are, under certain conditions, a useful instrument of regulatory policy, but we should resist the temptation of a Pigovian state.
Following a bankruptcy, how should we distribute the available assets among the eligible creditors? Most people would accept a proportional distribution—for each claimant, calculate her percentage of the sum of all claims and assign her that same percentage of total assets. However, this is not the only reasonable approach. For example, if every claim is at least as large as total assets, assigning an equal share to every creditor is a sensible solution. A set of three numerical bankruptcy examples for three claimants, discussed 2,000 years ago in the Talmud, coincide with the above two approaches, but the third case remained a puzzle until recently when modern game theory (Aumann and Maschler 1985) was enlisted to demystify all cases. This paper explains the unifying principle, the Contested-Claim Consistency principle (CCC), behind the Talmudic examples. Importantly, it uses different means to better understand the logic behind the CCC bankruptcy allocations and points out the subtle yet important properties behind them. This clarifies the meaning of fairness underlying the CCC allocation, and may better convey the meaning of the Pari Passu provision that appears in many existing International Sovereign Debt Instruments.
Campaign contributions are typically seen as a strategic investment for firms; recent empirical evidence, however, has shown few connections between firms’ political investments and regulatory or performance improvements, prompting researchers to explore agency-based explanations for corporate politics. By studying intra-firm campaign contributions of CEOs and political action committees (PACs), we investigate these two hypotheses surrounding public politics and demonstrate that strategic and agency-based motivations may hold simultaneously. Exploiting transaction-level data, with over 6.8 million observations, we show that (i) when PACs give to specific candidates, executives give to the same candidates, especially those who are strategically important to the firm; and (ii) when executives give to candidates who are not strategically important, PACs give to the same candidates potentially due to agency problems within the firm.
We examine how firms strategically manage opposition from organized stakeholders in regulatory processes. As stakeholder opposition in regulatory arenas increases, we argue that firms invest more in developing support from politicians who oversee regulators. We find support for our predictions in an analysis of electric utilities’ campaign contributions to politicians in response to expected stakeholder contestation of mergers and acquisitions subject to regulatory approval. Using a two-way fixed effects model, we estimate firms made 27% larger contributions when the count of stakeholders who contested the firm in prior regulatory hearings was one standard deviation greater than the mean. Our findings contribute to non-market strategy research by providing evidence that firms seek to offset the impact of stakeholder opposition on regulator decisions by cultivating political support.
We examine the incentives for firms to vertically integrate through acquisitions and production. We develop a new firm-specific measure of vertical relatedness and integration using 10-K product text. We find that firms in high R&D industries are less likely to become targets in vertical acquisitions or to vertically integrate. These findings are consistent with the idea that firms with unrealized innovation avoid integration to maintain incentives to invest in intangible assets and to keep residual rights of control as in Grossman and Hart (1986). In contrast, firms in high patenting industries with mature product markets are more likely to vertically integrate, consistent with control rights being obtained by firms to facilitate commercialization of already realized innovation.
Corporate law has long relied on pre-emptive rights to prevent a controlling shareholder from engaging in “cheap-stock” tunneling: selling itself cheap stock at the expense of minority shareholders. The underlying theory is simple and appealing: a controlling shareholder should not be able to expropriate value from minority shareholders via an equity issuance if minority shareholders can participate pro rata, thereby getting the same deal as the controlling shareholder. Unfortunately, I show, the theory is wrong. Pre-emptive rights cannot prevent cheap-stock tunneling, as long as any other tunneling channels remain open to the controlling shareholder. I also offer two simple proposals for improving the functioning of pre-emptive right arrangements. However, even if these proposals were adopted, pre-emptive rights would still need to be supplemented by additional measures to control cheap-stock tunneling.
When liability insurance carries a limit that is smaller than the potential claim of a third party plaintiff, the insurer and the insured can have a conflict of interest as to settlement. The majority of jurisdictions in the United States impose upon insurers a duty to ignore liability limits when considering a settlement offer, and do not place limits on an insurer's liability when the duty is violated. In this paper I take an incomplete contract approach and derive the optimal duty to settle. I propose limiting the insurer's liability for an excess judgment to the Value of a Statistical Judgment (VSJ), which is derived from the amount a policy holder is willing to pay to avoid a risk of a large excess judgment. Setting damages for bad faith refusal to settle to the Value of Statistical Judgment causes the insurer to efficiently internalize the harm to the insured from an excess judgment. Although calculating the exact VSJ and corresponding duty to settle requires knowledge of the utility function of the insured, I show that courts can use a revealed preference approach to closely approximate the VSJ as a linear function of the liability limit and the vulnerable assets of the insured. The rule I propose applies excess liability which is a small multiple of the sum of the liability limit and the policy holder's wealth. In addition to being nearly optimal rule from the ex-ante perspective for the insured, the proposed VSJ rule is attractive from a broader social welfare perspective; it discourages nuisance settlements, and directs more compensation towards victims with legitimate claims.
The royalty stacking hypothesis states that each standard essential patent (SEP) holder will charge excessive royalties to downstream manufacturers. Royalty stacking creates a Cournot-complement problem, hurts innovation and raises prices paid by consumers. With an equilibrium royalty stacking model with entry we also find that, as the number of SEP holders increases and becomes large: (i) downstream sales fall; (ii) downstream concentration increases; (iii) each SEP holder prices less aggressively and her margin falls; (iv) the equilibrium aggregate royalty rate increases almost dollar by dollar if manufacturing unit costs fall in one dollar or quality improvements increase consumers' willingness to pay in one dollar; (v) eventually, the downstream industry may be priced out of existence. We look for evidence of royalty stacking in the world mobile wireless industry, where the number of SEP holders protractedly grew from 2 in 1994 to 130 in 2013. Contrary to the predictions of royalty stacking theory, between 1994 and 2013: (i) the (non-quality adjusted) average selling price of a device fell 8,1% per year on average; (ii) the number of devices sold each year rose 62 times or 20,1% per year on average; (iii) the number of device manufacturers grew from one in 1994 to 43 in 2013; (iv) since 2001 concentration fell and the number of equivalent manufacturers rose from six to nine; (v) the average gross margin of SEP holders shows no trend.
We investigate experimentally how the amount of information on an opponent’s ‘toughness’ affects the chances that a conflict over scarce resources between two individuals results into a ‘fight’. The design aims at capturing situations, such as those found in prisons, in which there are no enforceable rules of allocation and in which ‘might is right’, and to find out how much order vs violent conflict emerges. We measure toughness by asking subjects to do a wall-sit for as long as they can resist. We ask them to do the exercise twice, once ‘veiled’, when they do not know that a contest will follow and once ‘unveiled’, when they do know. The information on how long they resisted in both exercises is then revealed to the opponent who decides whether to challenge or ignore. If he challenges the other player may yield or resist. If he resists a fight ensues and yields a winner and a loser. We conjecture that when information on fighting prowess grows fighting decreases, exploitation does not increase, and fighting does not decrease among equally ‘tough’ subjects. Some (prison) policy implications are drawn.
Conventional wisdom regards the combination of a staggered board with a dual-class capital structure as superfluous. However, the incidence of this combination in U.S. firms, identified in this Paper, is not trivial. This Paper considers a few possible motivations for this practice and reports the results of empirical studies conducted on dual-class firms with staggered boards. Significantly, even in the universe of dual-class capital structures, effective staggered boards are associated with lower firm value. These findings suggest that entrenchment may not fully explain the correlation between lower value and staggered boards in single-class firms.
One of the central themes in political economy is how power struggle among ruling elites shapes policy outcomes. This paper argues that under weak legal systems, the need to preserve power balance within local leadership might cause inefficient targeted redistribution towards bureaucratic interest groups, consequently government oversizing, and use this to explain the rapid growing government size in China despite the repeated streamlining programmes initiated by the central government. We empirically examine the relationship between the power structure within provincial leadership and the size of senior cadres during 1992—2011. The results show that weaker secretaries are associated with the increasing senior cadres. However, the secretary’s exogenous political status significantly mitigates this influence. Furthermore, we suggest that after 2002 the accelerated turnover probability among secretaries leads to the increasingly weaker secretaries as well as the expansion of senior positions, indicating a declining control of center over local elites. These results are robust against a variety of specifications and estimation strategies. To account for these, we develop a simple bargaining model to study the logrolling within the SC. We also rule out alternative explanation of our empirical results, and discuss the impact of information and career concerns of secretaries on government oversizing.
This study examines how corporate governance altered the relationship between vertical integration and performance in the mortgage banking industry during the period leading to the 2007 housing crisis. Prior research has argued that the vertical integration of mortgage origination and securitization aligned divisional incentives and thus improved loan performance. We show that, consistent with theory in both organizational economics and strategy, vertical integration only improved loan performance in those banks with strong corporate governance. Detailed analysis of governance characteristics suggests that this effect is primarily explained by external monitoring by institutional investors. We interpret these findings as suggesting that the additional control afforded by vertical integration can, in the hands of poorly monitored managers, offset gains from aligned divisional incentives. These findings support the view that the effect of vertical integration depends on the specific characteristics and capabilities of firms.
A right is accompanied by rules that specify choices a right-holder must make in order to exercise it. The right to claim compensation of land acquisition has rules, which specify two methods of claim – consent method and arbitration method. Does a choice between these affect the benefit stream and if yes, then what factors influence this choice? In this paper, we answer this question using a binary response model on a primary dataset of displaced farmers from Upper Krishna Irrigation Project, India. We validate ‘access based’ hypotheses in choice of compensation and test whether in addition to allocated property rights, benefits actually depend on ‘access’ to those rights. Results suggest that the choice is governed by access to political bargaining power and information. Therefore, farmers lacking these fail to get resettled despite the presence of a policy framework aimed at their rehabilitation.
This paper investigates the impact of institutional quality on the performance of thermal power plants in India. We estimate a translog stochastic frontier model using index of state-level regulation as one of the determinants of inefficiency. The dataset comprises a panel of 77 coal-based thermal power plants during the period 1994-95 to 2010-11 covering over 70 per cent of installed electricity generation capacity. The mean technical efficiency of 76.7 per cent indicates there is wide scope for efficiency improvement in the sector. Results are robust to various model specifications and confirm that regulation at the state-level has positively impacted plant performance. While technical efficiency is highly sensitive to unbundling of state utilities, it is not impacted significantly by the experience of regulators. The policy implication is that regulatory capacity and experience need to be enhanced for the desired sectoral performance.
This study examines the impact and effectiveness of U.S. independent directors on the board of cross-listed foreign firms. About 53% of foreign firms appoint U.S. independent directors before they come to U.S. market and we find that these firms with U.S. directors are able to gain higher increase in value through cross-listing than firms without. The impact of U.S. directors on value is strongest for firms from weak investor protection countries, consistent with the idea that U.S. directors are effective monitors. We also find that foreign firms with U.S. directors are better acquirers in both domestic and cross-border M&As and are less likely to receive class action lawsuits.
The objective is to identify main factors contributing to the emergence of the public-private partnership (P3) model and the modification of governance structure in transportation agencies in the United States. Surface transportation in the U.S. is experiencing a gradual transition as new sets of expectations, needs, alternatives, and constraints have emerged in the last two decades. In the meantime, the P3s, as a procurement model, gained recognition and popularity since 1995. After 20 years of experience in P3s, it is time to reflect on the past experience in order to build good foundations for the next generation of transportation. This is an exploratory research examining the institutional implication of a shift in surface transportation infrastructure from focusing only on the delivery of the physical infrastructure to the provision of services including information technology system, operations and maintenance. We conduct a case study of the experience in the State of Virginia, United States, which has been at the forefront of adopting the new provision of services in surface transportation. This makes it an ideal case for an exploratory research. We collect data on historical changes from a series of interviews with transportation practitioners in both public and private sector with over 10 years of experience in Virginia. For the analysis, we compare our findings with predictions of Transaction Cost Economics to conceptualize public authorities’ management of publicly owned assets in the face of uncertainty, opportunism, asset specificity, and information asymmetries. The finding of this paper is expected to provide insights for policymakers, regarding the possible implications of the governance practices in Virginia on how to improve the institutional framework to respond to the expanding scope of transportation services that we experience today.
Segregation in public accommodation was an important feature of African-American life prior to the civil rights movement and among other things adversely affected minority access to business and culture. In this paper we study so-called Negro movie theaters in the post-war era, documenting the effects of racial discrimination and other forces on theater location. The predicted effects of racial bias on entry by theaters is ambiguous. It reduces entry of black-owned theaters by limiting the access to key inputs, while at the same time driving black customers away from white theaters and toward African-American theaters. We find that the effects of racial bias appear to be nonlinear. For much of the country, a greater degree of racial bias is associated with more African-American theaters, though the region with the strongest negative racial attitudes saw far fewer theaters. While Southern states both score higher on quantitative measures of racial bias and had a greater concentration of theaters, our structural estimates of firm entry suggest that the greater number of African-American theaters in the region is due to lower fixed costs in Southern states. Further evidence comes from the effect of competition from white theaters. In general, the presence of white theaters has little impact on African-American theater entry, however as a county’s education rises, the presence of white theaters crowds out African-American theaters. This suggests that white theaters are a closer substitute in more racially tolerant areas. From these results, we draw implications for the effect of discrimination and segregation on business enterprise and minority consumption of differentiated products.
This paper empirically documents the causes and consequences of mergers and acquisitions in the US video game industry. For this purpose, we use a widely used data set from NPD on video game monthly sales from October 2000 to October 2007 that we complement with hand-collected information on the identity of video game developers for all games in the sample and the timing of all mergers and acquisitions during that period. During this period of time, we observe that 57 out of roughly 600 upstream game developers were acquired by downstream publishers. Using Whinston (2003) as point of departure, we build up a toy model of vertical integration in the presence of non-contractible specific investments and derive testable implications that we take to our data. Then, we extend the model to a dynamic setting where developers and publishers learn about the quality of the match between them. Our preliminary findings show that (1) a developer is more likely to get acquired after releasing a hit game, (2) publishers and developers are likely to underperform after an acquisition takes place, (3) the acquiring party may not need to have contracted in the past with the acquired party, and (4) the impact of developer and publisher location and game portfolio on acquisition decisions play an important role to determine the goodness of the match between developer and publisher. While we argue that these findings are difficult to reconcile with Transaction Cost Economics theories, theories of integration that focus on the relevance of non-contractible investments, learning and employment relations do not seem to do much better.
As documented by Macauley (1963) and others, informal contracts are pervasive in modern economies. Yet, systematic empirical evidence on them is still limited. In this paper, we provide a framework to investigate the determinants and consequences of informal contracts. First, we present a model that organizes key predictions from the theoretical literature. Next, we discuss selected empirical works that shed light on the model’s empirical relevance. Finally, we discuss strategies for testing theoretical predictions for which conclusive evidence is still missing, as well as unexplored research opportunities offered by available studies and data.
The idea that law should generally be understood or designed to minimize redundancy informs much legal reasoning and design. Courts invoke forms of anti-redundancy in constitutional law, patent law, statutory interpretation, and the reading of contracts. But despite frequent invocation of anti-redundancy principles, redundancy seems continually to appear, whether in the form of apparently superfluous language in a legal document or in the form of at least partial overlaps in the domains of different doctrines, institutions, or procedures. In some areas, especially with respect to certain procedural and institutional arrangements, redundancy appears to have been actively embraced. But at least in terms of conventional legal rhetoric, anti-redundancy seems more commonly to hold sway. This article examines the general phenomena of redundancy and anti-redundancy and gives particular attention to their deployment in patent law. The article suggests that anti-redundancy should commonly be no more than a factor, as opposed to a source of presumption, in the interpretation of legal documents. Further, the article concludes that, where law looks to mediate between competing social interests, anti-redundancy can have merit as a principle for doctrinal design. Even in such situations, however, concerns underlying anti-redundancy can commonly be satisfied through doctrinal design that secures two-way interests in predictability and accuracy while reserving a place for redundancy.
The paper examines how the ability to monitor and punish corruption affects the demand for political office. I use exogenous cross-country variation in the ability of different colonial governments of the Spanish Empire to monitor and punish corruption to identify the effect of greater oversight on the willingness to serve in the government. Using the prices at which the Spanish Crown auctioned-off provincial government positions throughout the Spanish Empire, I show that above average prices --a measure of demand for office-- are differentially higher in countries where the Crown was less able to oversee the performance of its provincial officials. The paper shows that the effect of monitoring and oversight changes the incentives of those who seek office in the first place.
We develop an informational theory of dictatorship. Dictators survive not because of their use of force or ideology but because they convince the public‐‐rightly or wrongly‐‐that they are competent. Citizens do not observe the dictator's type but infer it from signals inherent in their living standards, state propaganda, and messages sent by an informed elite via independent media. If citizens conclude the dictator is incompetent, they overthrow him in a revolution. The dictator can invest in making convincing state propaganda, censoring independent media, co‐opting the elite, or equipping police to repress attempted uprisings ‐ ‐ but he must finance such spending with taxes that depress the public's living standards. We show that incompetent dictators can survive as long as economic shocks are not too large. Moreover, their reputations for competence may grow over time. Censorship and cooptation of the elite are substitutes, but both are complements of propaganda. Repression of protests is a substitute for all the other techniques. In some equilibria the ruler uses propaganda and co‐opts the elite; in others, propaganda is combined with censorship. The multiplicity of equilibria emerges due to coordination failure among members of the elite. We show that repression is used against ordinary citizens only as a last resort when the opportunities to survive through co‐optation, censorship, and propaganda are exhausted. In the equilibrium with censorship, difficult economic times prompt higher relative spending on censorship and propaganda. The results illuminate tradeoffs faced by various recent dictatorships.
This paper does three things: (1) Based on a limited number of theoretically established dimensions, it proposes a new indicator for the rule of law. (2) This indicator is used to shed new light on the relationship between the rule of law and the political system of a country. Six clusters with typical combinations of levels of the rule of law and levels of democracy are identified. Presidential governments tend to score significantly worse on the rule of law indicator than parliamentary ones. Many presidential democracies are even outperformed by dictatorships. (3) The paper finally inquires into the roots of the rule of law. It turns out that a number of causes of long-term development are also linked to the rule of law. Particularly geographic factors and the share of European descendants in today’s population are significantly correlated with the rule of law.
Why do individual patent holders assign their patents to “trolls” rather than license their technologies directly to manufacturers or assert them through litigation? We explore the hypothesis that an asymmetry in financial resources between individual patent holders and manufacturers prevents individuals from making a credible threat to litigate against infringement. First, individuals may not be able to cover the upfront costs associated with litigation. Second, unsuccessful litigation can result in legal fees so large as to bankrupt the individual. Therefore, a primary reason why individual patent holders sell to PAEs is that they offer insurance and liquidity. We test this hypothesis by experimentally manipulating these financial constraints on a representative sample of inventors and entrepreneurs affiliated with academic institutions that are particularly known for their innovative activity: Stanford University and the University of California, Berkeley. We find that in the absence of these constraints, subjects were significantly less likely to sell their patent to a PAE in a hypothetical scenario. Furthermore, treatment effects were significant only for subjects who were hypothesized to be most sensitive to these constraints.
We analyze optimal ownership of public goods in a repeated game. Our focus is on common ownership where an owner’s access to the public good cannot be restricted by other owners. We find that common ownership is optimal when investments are inelastic to surplus share as common ownership maximizes the punishment from deviation. When investments are elastic, the optimal ownership structure minimizes the gain from deviation. Then either joint ownership or single ownership is optimal.
Parties often regulate their relationships through “continuing” contracts that are neither long-term nor short-term but usually roll over. We study the trade-off between long-term, short-term, and continuing contracts in a two period model where gains from trade exist in the first period, and may or may not exist in the second period. A long-term contract that mandates trade in both periods is disadvantageous since renegotiation is required if there are no gains from trade in the second period. A short-term contract is disadvantageous since a new contract must be negotiated if gains from trade exist in the second period. A continuing contract can be better. In a continuing contract there is no obligation to trade in the second period but if there are gains from trade the parties will bargain “in good faith” using the first period contract as a reference point. This can reduce the cost of negotiating the next contract. Continuing contracts are not a panacea, however, since good faith bargaining may preclude the use of outside options in the bargaining process and as a result parties will sometimes fail to trade when this is efficient.
Empirical tests of the Grossman, Hart, and Moore property rights theory (PRT) generally link measures intended to capture the relative importance of non-contractible investment to predicted differences in ownership regimes. By contrast, in this paper we explore how an exogenous change in ownership regime affects a proxy for non-contractible investment, exploiting a unique dataset. As a result, we can test PRT from a different tack than that taken by earlier studies. During the famous Hollywood studio era of the 1930s and 1940s, actors worked for movie production companies under de facto lifetime contracts, receiving fixed salaries in return for granting studios control rights and residual claims associated with subsequent films made. Two exogenous shocks (in the form of court decisions) shifted those rights and claims to actors. We develop a model to analyze the impact of that change on investment in talent discovery. We find that actors under studio contract were cast in substantially more film roles (our proxy measure of non-contractible investment in talent discovery), ceteris paribus, as our model predicts. We find some evidence that actor own-investment was weaker during the studio era. We also discuss how contracts changed, and how talent agencies (representing actors) attempted to reconstitute the studio system in the 1950s and 1960s, until stopped by antitrust authorities. This paper’s results thus demonstrate the importance of residual rights to non-contractible investment, as PRT predicts.
Over the past 35 years, markets developed rapidly in China, creating new business opportunities, increasing competition, and heightening uncertainty. But the political system remained autocratic and became decentralized, which gave local officials authority over local businesses and increased their dependence on business to meet official growth targets. We argue that as market development proceeded, politically embedded firms (those with ties to state authorities) bore lower regulatory burdens and had easier access to state-controlled resources, faced less uncertainty, and could more easily grasp new opportunities; therefore, they performed better than politically unembedded firms. Political embeddedness was especially important in more competitive markets because there was more uncertainty there, and for smaller firms because they were not well-positioned to handle increased competition. We investigate two causal mechanisms: access to bank loans and protection from pressures to make loans to business-group members. Analysis of panel data from 1992 to 2007 on all listed firms supports our arguments about firm performance and both causal mechanisms. These results indicate that connections between economic and state actors have highly contingent effects – strong in some contexts, for some firms – and that they operate through flows of funds into and out of firms.
For the procurement of complex goods the early exchange of information is important to avoid costly renegotiation ex post. We show that this is achieved by bilateral negotiations but not by auctions. Negotiations strictly outperforms auctions if sellers are likely to have superior information about possible design improvements, if renegotiation is costly, and if the buyer's bargaining position is sufficiently strong. Moreover, we show that negotiations provide stronger incentives for sellers to investigate possible design improvements than auctions. This provides an explanation for the widespread use of negotiations as a procurement mechanism in private industry.
We study a decision process of a two-agent organization that consists of a decision-maker who selects a project and an implementer who implements and executes the selected project. Each of the decision-maker and the implementer has intrinsic and possibly divergent preferences over projects. Key features of the model are that (i) there is the separation of decision and implementation, and the implementer may choose to execute no project if the cost of implementation is high; and (ii) the implementer engages in both acquiring additional information and implementing the project. We show that the implementer's incentives to gather information and to implement the selected project interact with each other in a non-trivial way. We in particular show how this interaction affects the optimality of diversity of preferences in organizations as well as the implementer's strategic communication.
This paper summarizes results from a panel/tracer study that empirically measures the impact that operating with municipal license has on different outcome variables related to the performance of micro firms in downtown Lima. The baseline (first round) is composed of firms operating without license. The second, third and fourth follow-up surveys were implemented six, 18, and 30 months after the baseline survey, respectively. Between the baseline and the first follow-up survey an encouragement approach, by which a random sub-sample of firms from the baseline were offered a monetary incentive to get the license, was implemented. This experiment generates exogenous variability in the final assignment of firms operating with license and without license. Two different estimators were implemented: a difference in difference estimator and an instrumental variables estimator (using as instrument for the operating license the incentive offer). Results show that operating with a municipal license has no statistically significant effect on a range of firms´ performance indicators. Neither output variables such as sales, sales per worker, profits, profits per worker, nor intermediate outcome variables, such as number of employees, access to credit, investment in infrastructure and machinery (inputs) are statistically affected by the firm operating with a municipal license. For two variables (profits per worker and number of workers) we obtain significant coefficients, but these are not robust to alternative methods. Keywords: informality, firm behavior, instrumental variables. JEL codes: O17, O12, D21, L25
A rather monochromatic conception of court enforcement—where a tribunal’s role is understood as executing the straightforward if costly task of interpreting, or verifying, performance—is a central device in the contract design and theory of the firm literatures. Recent legal scholarship has added color to courts’ enforcement function by arguing that parties use certain types of contract terms to shift costs between ex ante drafting and ex post enforcement. This paper continues in that vein, introducing a new dimension by which parties economize on ex post enforcement costs. Focus centers upon the unique dispute resolution systems often employed in contemporary strategic alliance agreements, which bifurcate and even trifurcate the adjudication of disputes between different tribunals. Those contracts manage verification costs through a modular logic, whereby disputes arising from certain types of exchange hazards are cabined and allocated to the most appropriate institutions. Modularity not only reduces verification costs through specialization but also protects the integrity of a broader relational contract by isolating disputes, and allows for enforcement infrastructure to be recombined with greater ease from deal to deal. Because verification is more complex than a simple interpretation function of a single tribunal, normative debates over formalist vs. contextualist intervention in relational contracts partially miss the mark, and positive theories of contract design and firm boundaries are incomplete.
We examine how a firm’s market-oriented capabilities (in areas such as R&D or marketing) and consumer focus (business-to-business or business-to-consumer) foster its effectiveness in pursuing corporate political activities. We then explore the sustainability of any advantage that firms may gain from their political activities. We develop a conceptual framework to propose that a firm’s political capabilities to implement different political tactics, such as information provision and constituency building, are a product of how related these tactics are to different market-oriented capabilities and to the skills needed to serve different types of customers. Finally, we propose that the integration of market strategies and political strategies provides new insight into the sustainability of the advantages that a firm might gain through political activities.
A growing body of research suggests that authoritarian regimes are responsive to societal actors, but our understanding of the sources of authoritarian responsiveness remains limited because of the challenges of measurement and causal identification. By conducting an online field experiment among 2,103 Chinese counties, we examine factors that affect officials’ incentives to respond to citizens in an authoritarian context. At baseline, we find that approximately one third of county governments respond to citizen demands expressed online. Threats of collective action and threats of tattling to upper levels of government cause county governments to be considerably more responsive, while identifying as loyal, long-standing members of the Chinese Communist Party does not increase responsiveness. Moreover, we find that threats of collective action make local officials more publicly responsive. Together these results demonstrate that top-down mechanisms of oversight as well as bottom-up societal pressures are possible sources of authoritarian responsiveness.
To assess the effects of Dodd-Frank Act compliance costs on the private fund industry and evaluate drivers of compliance cost, I collect and code compliance cost estimates from private fund advisers (N=94) after the registration effective date for private fund advisers under Title IV of the Dodd-Frank Act. I show with two independent datasets that the number of funds managed by private fund advisers is associated with Dodd-Frank Act compliance cost. However, the size of registered private fund advisers as measured by assets under management (AUM) is not associated with the per-unit cost of Title IV compliance and other independent variables as proxies for cost. These findings are consistent with the hypothesis that the cost of financial regulation under the Dodd- Frank Act predominantly affects smaller private fund advisers. Private fund advisers’ use of single versus multiple investment strategies does not have an effect on Title IV compliance costs.
Do discriminating contract structures imply systematic diff erences in performance? While causal mechanisms that explain the type of contract chosen are now well detailed, however, considerably less is known about the performance implications of these choices. To answer this question, I investigate the performance e ffects of coal procurement behavior over two decades by electric utilities in the US. I fi nd prices to be lower under fi xed price contracts, by between 7% to 20% of the total transaction price . Renegotiations are less likely under escalator contracts, but cannot be interpreted as opportunistic under any contract structure. Supplier productivity appears to increase substantially under fixed price contracts. Contract choices appear consistent with a trade-o ff between establishing incentives ex-ante and lowering negotiation costs ex-post, with relationship specifi c investments making such a trade-o ff compelling.
As water becomes increasingly scarce relative to demand, it becomes increasingly urgent to maximize the value that we derive from it. For years, economists have been advocating increased reliance on water markets as a means of rationalizing water use, the objective being to facilitate the allocation of water to its highest-value uses. Yet in many parts of the arid West, water markets have been surprisingly slow to take hold. Economists have pointed to various sources of transaction costs, especially associated with state law and also the administration of the state’s permit system and rules established by government entities, especially state and federal agencies. I suggest here another possibility, which is that there may be behavioral factors that influence the willingness of sellers to engage in water transfers, including loss aversion and an endowment effect. I offer some tentative corroborative evidence from three separate sources: the literatures of rural sociology and the political economy of agricultural policy, and a database of groundwater management plans developed by special agencies in California.
The paper subscribes to the literature stream that attempts to answer the question regarding whether history matters. However, in the paper a more specific question is asked concerning whether history matters for fiscal outcomes. In the context of the Polish municipalities the answer is positive. To confirm it, this chapter exploits a natural experiment, which was provided by Poland’s partition. After Poland lost its independence in 1795, its territory was divided between three empires (Prussia, Russia, and Austria-Hungary), was governed by foreign institutions, and was influenced by the culture and norms of these countries for more than 120 years. By means of spatial RD, it is shown that municipalities from the former Prussian empire impose contemporarily higher property tax rates as compared to municipalities that were exposed to the Russian ruling. Higher property tax rates lead to larger own revenue and higher fiscal autonomy. As a consequence of it, there is a smaller VFI in the municipalities belonging to the former Prussian partition than in the municipalities from the former Russian part. A discontinuity in the property tax rates is not observed at the Austria-Russia border. The paper offers potential explanations for the occurrence of the discontinuity at the Prussia-Russia border and the lack thereof at the Austria-Russia border.
Standard legislative bargaining models assume that an agreed-upon allocation is final, whereas in practice, there exist mechanisms for challenging passed legislation when there is lack of sufficient consensus. Such mechanisms include popular vote requirements following insufficient majorities in the legislation. This paper analyzes a legislative bargaining game whose outcome can be challenged through a referendum. I study the effects of this institution on the bills passed in the legislature and analyze the incentives they provide for reaching grand bargains. The proposer party's trade-off between an expensive partner and a threatening opponent in the referendum summarizes the bargaining problem. The results indicate that it is possible to observe surplus coalitions formed in equilibrium even though smaller coalitions are sufficient for the passage of a bill and that measures of post-bargaining power do not necessarily translate into higher equilibrium payoffs. Moreover, disparities in campaigning resources incentivize challenge procedures. These results carry policy implications for various forms of post-bargaining power, such as caps on campaign contributions.
We study the use of incomplete agreements in a deterministic environment. We show that, if preferences are context dependent, the negotiating players may negotiate in stages: first signing an incomplete agreement and then finalizing the outcome of the negotiation. Furthermore, if preferences are context dependent because of the focusing effect, incomplete agreements are used to eliminate extreme, off-equilibrium outcomes from the possible bargaining solutions. Our framework also justifies the existence of a number of pre-bargaining actions. For example, a seller may enter the negotiation over the sale of a good having already announced a maximum price. Similarly, a seller may prefer to produce a good and later bargain over the price of the good (i.e. may prefer to be held up), rather than simultaneously bargain over price and quality.
A firm's organizational structure imposes constraints on its ability to use promotion-based incentive systems. The main contribution of this paper is to develop a framework for identifying these constraints and exploring their consequences. We show that firms manage workers' careers by putting in place personnel policies that optimally resemble an internal labor market. Firms may adopt forced-turnover policies in order to keep lines of advancement open. In addition, they may alter their organizational structures in order to relax these constraints. This gives rise to a trade-off between incentive provision at the worker level and productive efficiency at the firm level. Our framework generates novel testable implications that connect firm-level characteristics with workers' careers in ways that are consistent with a rich set of empirical findings.
Economic analysis of fiduciary law suggests that the law tends to impose fiduciary duties in situations that involve a principal-agent problem. Yet many legal relationships entail agency costs but are not treated as “fiduciary” in nature. Moreover, while some relationships are fiduciary as a categorical matter (rules), others require courts to determine fiduciary status on an ad hoc basis (standards). Utilizing a framework based on rules versus standards, this Article explores why the law employs a bifurcated approach—both rules and standards—in classifying relationships as fiduciary or non-fiduciary. It then investigates what factors courts employ in making ad hoc fiduciary determinations. These factors are useful for analyzing why the law classifies certain agency relationships, but not others, as “fiduciary” and whether the existing legal framework is socially desirable. The analysis has implications for fiduciary theory and emerging areas of fiduciary law.
This paper will explore particular institutional and organizational differences among agencies, commissions, and courts that oversee the fields of intellectual property, antitrust, and finance. During the life of a patent, for example, a patent can pass from its birth at the PTO, to review at the PTO, DoJ, FTC, ITC, District Court, or Federal Circuit, and on to enforcement at the ITC, District Court, or Federal Circuit. Similarly, investor protection and capital formation in the U.S are shaped in various ways as SEC rules pass through the stages of drafting, promulgation, administration, and enforcement. There is, of course, no single way to structure a government body; and different government bodies behave differently because of different institutional characteristics and decision-making dynamics. This paper will elucidate some key variations in the internal structures and dynamics that determine how decisions are made at agencies, commissions, and courts. In so doing, it will focus on responsiveness to various inputs, such as established views of economic science, the factual record, and governing law, as well as prevailing political and social currents. Our goal is to offer insight into how regulation and adjudication work in practice with policy implications for how to structure government bodies with rule-making and adjudicatory roles.
Based on the assumptions of opportunism, bounded rationality, and transaction properties, new institutional economics aims to explain the modes of governance in industrial organization. Yet, we can frequently observe co-existing modes within industries. Governance may also align to economic behavior. We test whether variations in behavior can explain variations and co-existence in governance when transaction properties of a given industry are homogenous. Specifically, we elicit time preference and price expectations and conduct trust experiments between different value chain partners in the Swiss wood sector. We find that all three behavioral dimensions influence value chain choice. Thus, the integration of behavioral economics approaches in institutional economics can add explanatory power to understand the alignment of governance in a given industry.
Collaboration between public and private organizations creates a density of interactions. The interests are numerous: at the partnership level as well as for each partner. The prevailing view is that these interests are clear and unambiguous. However, in this exploratory paper, we discuss how a multitude of underlying private actor interests may interact and shape the way a firm behaves in public sector engagements. Contrary to the existing literature, which emphasizes the return-maximizing objectives and opportunistic behavior of a private actor, we disentangle the complexity of firm incentives and behavior in public-private arrangements. By embracing a multitude of interests embedded in the “firm as nexus of contracts” approach, we focus on four sets of dimensions likely to impact considerably the distribution of interests and incentives guiding the private action and social value orientation, specifically: 1) organizational architecture, 2) multiple principals and the divergent preferences stemming from firm’s governance, 3) executive interests and 4) third-party or social forces. Far from being homogeneous, private actor interests are shown to exhibit important discrepancies and interactions between various internal goals and different claimholders to a firm.
In January 2011, President Obama signed into law the “America COMPETES Reauthorization Act of 2010”, whose goal was to restore US competitiveness through investment in R&D. This act reflects the belief (and corresponding economic theory) that technological progress drives economic growth. However coarse comparison between R&D and GDP growth over the past forty years indicates that scientific labor has increased 2.5 times, while GDP growth has at best remained stagnant. The leading theory to explain the disconnect holds that R&D has gotten harder. I develop and test an alternative view that firms have become worse at it. Using a novel measure, RQ, I show a 65% decline in R&D productivity. Moreover I show that much of the decline stems from increased outsourcing of R&D, which is unproductive for the funding firm. I find no evidence that R&D has gotten harder—the productivity of internal R&D is essentially unchanged. This offers hope R&D productivity and growth may be fairly easily restored by bringing outsourced R&D back inhouse. http://ssrn.com/abstract=2575977
How do state-business relationships shape competition? Using plant-level Indonesian manufacturing census data, in which firms with political connections to President Suharto are identified, we documents a pro-competitive effect of Suharto’s fall on Indonesian manufacturing sector. We find that greater crony presence during the Suharto era, at the five-digit industry, is associated with greater entry and exit, faster employment growth and more re-allocation during the post Suharto period. Despite higher dynamism, however, we do not find significant decrease in markups and concentration ratios, and increase in output growth. This implies that although the regime change has led to the reduction of entry and exit barriers, it has not translated immediately to the improvement of efficiency. Our results are robust to controlling for potential confounding explanations, including pre-crisis credit conditions, deregulation policies and industry-specific shocks.
How does decentralization impact service delivery for rural, agriculture-dependent households? Decentralization is becoming increasingly common, but its impacts have been most heavily studied in urban settings characterized by a high potential for Tiebout sorting and in countries with robust political competition. Using a spatial regression discontinuity design, we examine the impacts of fiscal and administrative decentralization in a predominantly poor, agrarian, and autocratic country: Ethiopia. This reform devolved responsibilities to the district level in half of the country's regions but not in the other half. Comparing individuals and households in rural villages along the border between regions that were and were not decentralized, we find that decentralization strongly improves public services of paramount priority to the federal government---namely agricultural extension (farmer training) and agricultural input supply. The impact on service provision in a sector that is lower priority to the central government--drinking water provision--is more mixed. Two key interpretations emerge: First, that decentralization improves public services even in the absence of conditions assumed in Tiebout-sorting and political competition models supports the information asymmetry model of decentralization. Second, in the absence of institutions providing for downward accountability to citizens, decentralization most improves services of greatest concern to the central government.
Researchers have long been interested in the role of top managers in organizations. The existing research, however, has largely focused on the individual characteristics of managers and paid less attention to the social aspects of the relationships between managers and owners. In this paper, we focus one such social aspect—the asymmetry of trust between an owner and a manager. We argue that managers who are under-trusted relative to their own levels of trust will feel frustrated and disappointed, leading to low performance of their firms, whereas over-trust would not necessarily have a negative impact on performance. We demonstrate that under-trusted managers are indeed associated with lower firm performance. The negative correlation is particularly strong when communication between an owner and a manager is expected to be more difficult and when the owners and managers come from similar cultures. Conversely, equal trust and over-trust have no negative association with the performance of firms with hired managers.
We show that property rights can have negative consequences for its beneficiaries if affected elites control alternate institutions to counter property rights. Districts in colonial India which provided widows with rights to inherit joint-family property of their deceased husband had significantly higher widow burnings than districts which did not. Native elites (Brahmins) burnt disproportionately more widows and widow burnings were higher in regions with a higher density of native elites. Our interpretation is that egalitarianism requires egalitarians — elite patriarchal norms can mediate the effects of property rights and lead to negative consequences.
We propose a new measure of cross-national corruption, the Public Administration Corruption Index (PACI), based on the geographic distribution of public officials involved in cross-border corruption cases. We consider to what extent differences between the PACI and perception based measures are driven by systematic factors, and conclude that they are not. As more data on cases of cross-border bribes become available, the PACI will provide an increasingly valid cross-national measure of corruption.
There is growing concern, but still little systematic evidence, about the incidence and drivers of lobbying efforts made by the U.S. banking industry. This paper analyzes the relationship between bank lobbying and supervisory decisions of regulators, and documents its moral hazard implications. From a large sample of commercial and savings banks, I find that lobbying banks are less likely to be subject to a severe enforcement action, suggesting that banks engage in lobbying to gain preferential treatment. These findings are robust to controlling for supervisory ratings and account for endogeneity concerns by employing instrumental variables strategies. I also show a decrease in performance and an increase in default and credit risk at lobbying banks. Overall, these results appear rather inconsistent with an information-based explanation of bank lobbying, but consistent with the theory of regulatory capture.
Recent research in contract theory suggests that public-private and private-private agreements are inherently different. This paper studies empirically the intrinsic differences between these two types of contracting. We focus in particular on the different impact local elections have on the execution of public-private and of private-private agreements. In order to do so, we investigate the occurrence of renegotiations of each type of contract prior to local elections. We believe that, as public-private contracts belong to the public sphere, their renegotiations should be affected by the electoral calendar, while renegotiations of private-private contracts should not. To test this, we use an original dataset comprising every renegotiation of the exhaustive set of public-private and private-private contracts signed by the French car park leader between 1968 and 2008. We use a difference-in-difference methodology to show that, compared with private-private contract renegotiations, public-private renegotiations significantly increase before local elections. In particular, renegotiations aiming at modifying the tariffs or the financial side of the contract (i.e. the remuneration of one of the parties) increase before an election, whereas all other types of renegotiation do not. Possible explanations for these results are considered.
Land contains multiple natural resources that are efficiently managed at different spatial scales, either concurrently or over time. We model the use of two such resources under common land ownership, individually owned parcels, and hybrid regimes. The model shows how enclosing the commons for one resource can create anticommons problems for another. We provide empirical tests in the context of American Indian reservations, which are mosaics of private, tribal, and fragmented ownership interests due to U.S. government allotment policies during the late 19th and early 20th centuries. Using spatial data of historical and modern resource endowments, we show how the policies intentionally enclosed commons to agricultural land but inadvertently fragmented land interests over oil and gas shale deposits that are efficiently extracted by horizontal drilling spanning two miles. Based on a detailed case study of Fort Berthold reservation – which sits atop the highly productive Bakken oil field – we find evidence that deposits under parcels surrounded by neighboring tribal lands are more fully exploited than are deposits under parcels surrounded by neighboring allotted and privatized parcels. The results show how subdividing land can inadvertently raise the transaction costs of spatially coordinated resource use and impair resource utilization.
We analyze the economics of a first-possession property right to a large heterogeneous resource under incomplete information and competitive claiming by homogeneous agents. Our focus is on prior-appropriation surface water rights used in 18 western US states, with specific attention to Colorado. Prior appropriation was an institutional innovation. It was efficient and fair relative to feasible alternatives; it granted ownership by time of discovery and placing water into beneficial use; it encouraged valuable search and narrowed the information required to establish ownership to that describing the immediate water diversion, reducing bounding and enforcement costs. There was a tradeoff between claiming or waiting. At any time, water rights claimants were equal in their lack of knowledge of the best water diversion locations. Subsequent claiming, revealed new information, but quantities of high-quality sites were reduced. A hierarchy of rights emerged of different value. Individual claims were based on observable resource characteristics. So long as search revealed these characteristics, they were stable, and individual claims were recognized, there was no basis for rent dissipation, even in a rush to claim. In this regard we differ from the literature on first possession. Once in place, prior appropriation became the basis for water trade, investment in dams and canals, and expansion of irrigated agriculture and other activities. One key resource characteristic was neither stable, nor observable initially, stream flow variability due to drought. Stream flows were overestimated and excessive diversion claims and infrastructure investments were made, relative to a full information setting. Prior appropriation rights endure, affecting the distribution of water ownership and exchange. Assessment of its welfare effects requires accounting for its role in generating property rights, investment, production, and the transaction costs of exchange.
We analyze the economics of first-possession property rights to a large heterogeneous resource allocated under incomplete information and competitive claiming by agents. Our focus is on prior-appropriation surface water rights used in 18 western US states and generally in at least 3 western Canadian provinces, with specific attention to Colorado, 1852-2013. Prior appropriation was an institutional innovation, replacing common-law riparian rights, in a setting where water supplies were scarce, unevenly distributed, and remote from production sites where water was a key input. Prior appropriation encouraged valuable search and narrowed the information required to establish ownership to that described in immediate water diversion rather than an entire river basin. At the time of claiming water there was little information about water source characteristics, and the process of claiming revealed such information. Hence, there was a tradeoff between claiming at a particular time and waiting. At any time, water rights claimants were equal in their lack of knowledge of the best water diversion locations. Each round of claiming revealed new information, but the quantities of remaining high-quality diversion sites were reduced. Individual claims were based on observable resource characteristics, such as current stream flow or quantity, distance to stream head, terrain topography, and proximate soil quality. Prior appropriation water rights became the basis for water trade, investment in dams and canals, and expansion of irrigated agriculture and other activities critical for economic development. Prior appropriation rights endure, affecting the distribution of water ownership and exchange. Assessment of the prior appropriation’s welfare effects requires accounting for its role in generating property rights to water, investment, production, and the transaction costs of water exchange.
The paper investigates discontinuity in political outcomes at the former Habsburg-Ottoman border in contemporary Romania. Historically Romania consisted of three provinces which were divided between the Habsburg and Ottoman Empires. The country united in the beginning of the 20th century and was turned into a national unitary state with a highly centralized economy. We posit that the striking institutional differences between two parts of the country in the 18th and 19th centuries could persist and influence political attitudes of people nowadays despite the fact that there was convergence in economic development across its regions and it has homogeneous institutions today. We test this hypothesis by merging data on historical borders between Habsburg and Ottoman Empires with data on voting in elections in Romania at the municipality level in the 1990s and 2000s. We find that on average within Romania the former Habsburg affiliation is associated with an increase in the percentage of votes for the major “right” parties by 3.5% and a decrease in the percentage of votes for the major “left” party by 4.5%. This is a remarkable effect taking into account that we identify these differences in political attitudes around the former border in a country which united a century ago and where during the Communist period the authorities tried to eliminate any regional differences. We do not find evidence that these differences might be explained by past ethnic diversity or geographical isolation.
Numerous "arrangements," such as - hybrids, alliances, joint ventures, are formed with the goal of creating a new product, such as a new drug or software application. Arrangements commonly require parties to make sunk-cost investments that the arrangement partner cannot observe, to disclose private information, and to make financing commitments. The requirements of efficient contracting - individual rationality, incentive compatibility, and budget balance - are difficult to satisfy in arrangement contexts, so that, as the literature suggests, parties' best response is to form firms. We show, by contrast, that flexible and efficient contracting is possible for arrangements. With the arrival of new information, each party is asked to "pay-to-play" which requires the firms to agree to future terms of exchange that are mutually beneficial. When properly negotiated, these payments to play support the efficient multistage joint development of the new product, with hybrid relationships that are governed by conventional control rights and legal enforcement.
In empirical corporate finance, firm size is commonly used as an important, fundamental firm characteristic. However, no paper comprehensively assesses the sensitivity of empirical results in corporate finance to different measures of firm size. This paper fills this hole by providing empirical evidence for “measurement effect” in “size effect”. In particular, this paper studies the influences of employing different proxies (total assets, total sales, and market capitalization) of firm size in 20 prominent areas in empirical corporate finance research. We highlight several empirical implications. First, in most areas of corporate finance, the coefficients of firm size measures are robust in sign and statistical significance. However, when studying firm performance and capital structure, researchers should pay extra attention because firm size proxies (e.g., market cap) can be mechanically correlated. Second, the coefficients on regressors other than firm size often change sign and significance when we use different size measures. We observe this phenomenon in almost all areas except dividend policy and executive compensation. Unfortunately, this may suggest that some previous studies are not robust to different firm size proxies. Researchers should either check robustness with all the important firm size measures or provide a rationale of using any specific measure. Third, the goodness of fit measured by R-squared also varies with different size measures, suggesting some measures are more relevant than others in different situations. Fourth, different proxies capture different aspects of “firm size” and thus have different implications in corporate finance. Therefore, the choice of size measures needs both theoretical and empirical justification. Our empirical assessment provides guidance to empirical corporate finance researchers who must use firm size measures in their work.
The phenomenon of logrolling among vertical bureaucratic systems has been prevalent in China but its consequence has been under researched. This paper develops a formal model to study the effect of logrolling on policy making. We find that policies under logrolling tend to be overreaching, but policies excluded from logrolling tend to fall short of input. We provide empirical evidences by studying the logrolling between Ministry of Civil Affairs (MCA) and Ministry of Health (MOH) in China. MCA supports MOH by paying insurance premium for poor households in rural areas; in exchange, MOH supports MCA by allowing "Dibao" recipients to be automatically eligible to access healthcare services undermedical assistance. The consequences of the logrolling are: 1) the benefit tied to "Dibao" becomes too high such that it even crowds out unemployment insurance enrollment; 2) too many people enrolled in rural health insurance but too few really use the health service; 3) the supply of mental health care service is insufficient, because mental health care, which is not the priority issue for neither MOH nor MCA, is excluded from the logrolling.
Who should make hiring decisions? Many firms rely on hiring managers to evaluate applications and make job offers. These hiring managers may be informed about a worker's quality, but their efficacy may be undermined by biases or bad judgement. The use of quantitative metrics such as job testing enables firms to limit these concerns, but potentially at the cost of ignoring valuable information. This paper examines whether firms should rely on hard metrics or grant managers discretion in making hiring decisions. We evaluate the staggered introduction of a job test across 131 locations of 15 firms employing low-skill service sector workers. We show that testing improves the match quality of hired workers, as measured by their completed tenure, by about 15\%. Further, when faced with similar applicant pools, we find that managers who exercise more discretion (as measured by their likelihood of overruling the test recommendations) systematically end up with worse hires. This result suggests that managers make exceptions to test recommendations because they are biased, not because they are better informed. In this setting, we find that firms can improve productivity by limiting managerial discretion.
Successor's dilemma is a common problem for authoritarian leaders. Predecessors appoint successors in the hope that they will take over their power after their death and carry on their legacy. However, impatient and powerful successors can become predecessors biggest threat. In this paper, we answer the following questions both theoretically and empirically. Theoretically we show that successors will only be appointed when predecessors are able to remove them. After being appointed, aggressive behaviors of the successors reduce the chance of coming into oce as they will be removed by the predecessor. Our sample covers 169 long-serving dictators from 102 authoritarians regimes over the period of 1945-2011. The empirical results support out theoretical predictions.
This paper investigates the development of accountability and fiduciary loyalty as an institutional response to information asymmetries in agency relations, especially in firm-like settings. Lord Eldon identified the crucial role of information asymmetries in opportunistic behaviour during the formative era of fiduciary loyalty in early nineteenth century, but its roots are much older. A thirteenth century trend toward direct farming of English manors and the transformation of feudal accounting after the Domesday Book and early Exchequer period engendered profound developments. The manor emerged as (possibly the first) profit-maximising firm, complete with separation of ownership and control and a hierarchy of professional managers. This primordial firm relied on primordial fiduciary loyalty - an accountability regime that was uniquely tailored for addressing information asymmetries in agency relations. Courts have gradually expanded this regime, which in due course enabled Equity to develop the modern duty of loyalty. These insights suggest implications for contemporary fiduciary loyalty.
Using a new Colombian data set (1830-2000), we analyze how changes in the electoral legislation with regard to the characteristics of voters (in terms of education and income levels) has affected fiscal policy in electoral times. In line with economic theory, we show that after the law was reformed in 1936 the composition of the expenditure shifted towards social spending (like education, health, and welfare benefits) but there was decreased spending on infrastructure and investment projects (like roads). Consistent with the literature, we also find: 1.The timing and the size of the political budget cycles changed after 1936 and 2.After 1936 there was a shift in the funding mechanisms from indirect tax revenues to more debt.
This paper outlines the extent to which local governments in China influenced corporate performance during its period of administrative restructuring. In light of endogenous problems concerning local governments’ favoritism against enterprises of different ownerships, we adopt the DID method and treat an exogenous administrative restructuring, which is the “Annexation of suburban counties by cities,” as a natural experiment. Applying 140294 panels of corporate data from the Chinese Industrial Enterprises Database for the period 1999 to 2009, we find that compared to the enterprises located in the control group, the enterprises within the counties and cities that are involved in administrative restructuring show lower levels of performance. Meanwhile, the negative impact is stronger when administrative restructuring is actively applied by prefectural-level cities for bettering local economies than when it is designed based on provincial interests. Additionally, we identify the causal mechanism between worse-off corporate performance and change in governmental favoritism: there is reduced inter-governmental transfer after the “Annexation of suburban counties by cities” Reforms reduced governmental favoritism, thereby decreasing local infrastructure investment, which also reduced subsidies and increasing taxation for enterprises. In conclusion, because of their institutional dependence on local governments, enterprises suffer the most when local administrative structures are changed, which implies an inherent problem to governmental favoritism. Keywords: Corporate Performance; Governmental favoritism; Annexation of suburban counties by cities; Administrative Restructuring
In this study we examine the effect of a constraint on land configurations using two different property rights regimes- checkerboard and non-checkerboard lands- on private land markets. The checkerboard land ownership pattern refers to an alternating section pattern of public and private lands created by the land grants of the late nineteenth century. Given the rectangular survey (RS) grid of the United States, each 640 acres (1 square mile) section of private land inside the checkerboard is surrounded by public land on all four sides. We develop an economic framework for conducting comparative analysis of private lands inside and outside the checkerboard. We develop five measures of “checkerboardedness” to account for depth and extent of the checkerboard. The empirical analysis focuses on Douglas County, Oregon where private lands are present in and outside the checkerboard. The empirical estimates indicate that checkerboard lands have lower land values per acre and lower private roads density compared to non-checkerboard lands, all else equal.
We exploit a detailed transaction level dataset of contracts between coffee mills and exporters in Costa Rica to provide evidence on how market and supply assurance considerations shape market structure as well as the costs and benefits of vertical integration. We begin by documenting a demand for market assurance: within relationships prices for coffee are i) inverted-U shaped during a harvest season and ii) lower for mills that have large amounts of unsold coffee at a given point in time. Vertical integration insulates from market forces: trade within vertically integrated structures does not features the two facts above and generally occurs with much shorter lead time. We then exploit unanticipated changes in world coffee prices to study how vertical integration affects contract renegotiation. When international coffee prices at the time of delivery largely exceed expectations at the time of contracting sellers have an incentive to renege on the contracts. Contracts between integrated buyers and non-integrated sellers are more likely to be renegotiated. The opposite is true for contracts between integrated sellers and non-integrated buyers. Additional evidence distinguishes between insurance considerations and endogenous costs of vertical integration in sustaining relational trade in the market.
Naxalites are an armed, extralegal Marxist-Maoist group that operates in a significant portion of India along the easter corridor, mostly in tribal areas and the jungles. Although much maligned by mainstream media and the state, the Naxalites are political entrepreneurs, who provide valuable public goods, including governance services in areas where the formal state does not operate, and in turn levy taxes on businesses and civilians (the government terms this extortion). There is unmet demand for governance services, and the Naxalites supply the services. A major part of the services they provide includes the protection of property rights (and in some cases, a system of liability rules) and settling disputes involving negative externalities (trespass, etc). My field-based interviews with a wide variety of actors in the Naxalite landscape, including the Naxalites in rebel camps, indicate a surprising feature - while they self-define as a Marxist organization, the kind of decisions that they make are designed to promote economic efficiency in much the same way that mainstream neoclassical economists would promote. I argue that the "Marxist" or "Maoist" labels are mere iconic devices to bring political entrepreneurs together and that one of the organization's main goals is to protect private property and increase economic efficiency in transactions.
Based on an original large-N dataset of individual Ukrainian oligarchs and qualitative evidence, this article questions orthodox wisdom on the political power of big capital. We find, surprisingly, that neither the assumption of direct power by the oligarchs, nor the mobility of oligarchic assets, help tycoons protect their fortunes against shocks. Instead, the support of political parties and media ownership significantly enhance business wealth. We theorize our findings as the logic of flexibility: oligarchs in unconsolidated democracies benefit from political adaptability and deniability. Our theory challenges the established "law lobby" and "state capture" paradigms. Empirically, we fundamentally revise the ideal type of the postcommunist oligarchs by examining the political and economic activities of 177 oligarchs from 2006 to 2012. Theoretically, we contribute to the literatures on instrumental and structural power of capital, and on the ramifications of extreme wealth stratification for democratization and institution-building.
Do countries specialize institutionally? A burgeoning literature investigates links between economic specialization and institutions, arguing that countries possess institutional comparative advantages (Treffler-Nunn 2013). This work builds on theory arguing that institutions provide the incentive structure for economic activities (North 1990), distribute economic resources (Acemoglu-Robinson 2005), or determine business opportunities (Hall-Soskice 2001). In these arguments, institutions do not only shape economic activity; economic and institutional environment coevolve in a symbiotic relationship. Institutions influence which activities are developed, while emergence of specialized organizations, technology, and concentration of economic power feeds back in to the institutional setting, adapting it to prevailing patterns of economic activity. Thus, institutions evolve to support existing economic specialization. While the channel from institutions to specialization has been studied extensively, this latter part of the symbiotic relationship remains understudied. More importantly, the empirical literature does not reflect the theoretical notion that differences in economic structure may relate to different types of institutions. This paper shows that sectoral specialization induces institutional specialization. Economies invest in combating those types of bribery that are comparatively harmful to their dominant economic activities. Empirical support comes from cross-country variation in the distribution of bribery over various branches of the public sector. By decomposing sectoral structure in its sources (tangible vs. intangible investment), which are affected differently by various forms of bribery, we link bribery types to different economic activities. Using historical variation in factor endowments as instrument for sectoral specialization, we show that the direction of causality runs (partly) from sectoral specialization to institutional specialization.
In analyses, debates and policies to address global ecological and socio-economic effects of economic development the term "sustainable development" is increasingly used. In that context the role of markets and the role of public and private policies aimed to shape sustainable markets, i.e. markets that are instrumental in advancing sustainable development has been focused in a large number of policy initiatives. However, a policy needs to be translated into changes in market practice towards sustainability to have any effect. To understand this process an interdisciplinary approach is suggested that integrates knowledge and frameworks from research on business networks, institutional economics,institutional organization and sense-making in market practice studies.In such a process contracting in business networks is a crucial phenomenon that requiers more research.
The New Institutional Economics, in particular the Transaction Costs approach, has been applied to Brazilian agribusiness systems analysis. Nevertheless, there are as yet few studies concerning transactions between raw material suppliers and processors. This study tests the alignment of theoretical prediction and empirical findings on the matching of governance modes and transaction dimensions in the natural rubber cluster in the State of Sao Paulo. This cluster has more than 5,000 producers (or rubber tree farmers) and 16 rubber processors, who are an international productivity benchmark in farm rubber production per hectare and produce more than 50% of Brazilian natural rubber output. Our approach features a qualitative research survey and statistical tests using ordered logistic regressions (Ologit). In addition, we test the hypothesis that governance attributes and asset specificity are endogenously determined. The results suggest that the quantity of rubber transacted is positively correlated with highly coordinated modes of governance, and that transaction frequency is associated with relational contracts. The endogeneity hypothesis is rejected.
The New Institutional Economics, in particular the Transaction Costs approach, has been applied to Brazilian agribusiness systems analysis. Nevertheless, there are as yet few studies concerning transactions between raw material suppliers and processors. This study tests the alignment of theoretical prediction and empirical findings on the matching of governance modes and transaction dimensions in the natural rubber cluster in the State of Sao Paulo. This cluster has more than 5,000 producers (or rubber tree farmers) and 16 rubber processors, who are an international productivity benchmark in farm rubber production per hectare and produce more than 50% of Brazilian natural rubber output. Our approach features a qualitative research survey and statistical tests using ordered logistic regressions (Ologit). In addition, we test the hypothesis that governance attributes and asset specificity are endogenously determined. The results suggest that the quantity of rubber transacted is positively correlated with highly coordinated modes of governance, and that transaction frequency is associated with relational contracts. The endogeneity hypothesis is rejected. Key words: Natural Rubber Agribusiness System, New Institutional Economics, Modes of Governance, Transaction Costs Economics, Contracts, Asset Specificity, Informational Asymmetry, Incentives.
Tunisia is the country where the “Arabic Spring” started and likely remains the only one in which some of the expectations it created are still alive. However, Tunisia continues to face major difficulties in its effort to access to a more open society. This paper takes this country as illustrative of the obstacles to transition from a limited access society to an open access one (North et al., 2009). We identify two series of factors that contribute to explain these difficulties. One prominent obstacle is rooted in the rules and devices embedded in the institutions that shaped limited access and that persist long after formal changes, creating formidable barriers to entry. These rules defined what we identify as ‘meso-institutions’: custom rules, procedures to do business, regulation of the media, all deeply embedded in and implemented through specific devices created under the limited access regime. The second obstacle comes from the clannish structure that developed under the authoritarian regime that shaped limited access, creating a rent-seeking system that continues long after the fall of this regime. We argue that the combination of these two factors, the ‘meso-institutions’ built under the limited access regime and the clannish structure that developed under this umbrella, explains the challenge that transition faces in Tunisia. Our analysis is based on in depth interviews (on average between 2 and 3 hours) with 35 economic leaders from different sectors and different regions of Tunisia and on data collected from The World Bank, the International Organization of Labor and the Tunisian Institut National de la Statistique.
Climate Change presents one of the most pressing policy problems facing the global political community. One of the challenges associated with formulating effective climate policy is the gap between the consensus view of climate scientists and public opinion. We use experimental surveys to investigate the relationship between institutional source and the perceived trustworthiness of climate science information. The surveys contrast information provided through an expert intergovernmental body with information provided by way of a climate prediction market.
This paper examines evidence on the role different types of governance plays in the adoption of relational or formal contracts. We conduct our empirical analysis using a unique data set on contracts for groundwater irrigation in Bangladesh. In this market, households seeking to secure groundwater irrigation can either exploit high-quality inside information to design contracts or rely on low-quality but third-party verifiable information. A distinguishing feature of this market is the existence of a variety of different village-level institutions for the enforcement of contracts. This allows us to examine both the determinants of contract choice under a specific governance regime and how differences in governance affect contract choice. We adapt existing models of relational contracts to integrate stylized observations from the field and derive empirical tests based on comparative static predictions. We find that households adopt formal contracts when the quality of third-party verifiable information is good and when the punishment for contract violation is severe. We also find that in villages which provide no third-party enforcement the issue of who retains ex post discretion is particularly important. Contracting parties attempt to balance counter party risk by using bargaining power to force adoption of contracts in which they retain ex post discretion.
The fiduciary relationship is one of the most fundamental legal relationships, and its importance for both public and private law is increasingly recognized. Fiduciary mandates typically involve one person – the fiduciary – administering the affairs or property of other persons – an individual beneficiary, or group of beneficiaries. Yet, as we will demonstrate, this is not the only way fiduciary relationships are structured. Most accounts of fiduciary law oversimplify the law because they exclude a categorically different form of fiduciary relationship. A significant set of fiduciary relationships feature governance mandates in which the fiduciary is charged with pursuing abstract purposes rather than the interests of persons. Indeed, many public and private fiduciary institutions are best understood as being administered on the basis of governance mandates, rendering moot longstanding debates over specification of beneficiaries and requirements of loyalty. The resulting account provides important new insights for core issues in corporate law, administrative law, and constitutional law, among other fields.
We explore the determinates and structure of the organization of non-market strategy. Firms either integrate non-market strategy activities throughout the firm or create stand-alone business units that specialize in non-market strategy activities. We find that the advantage of integration over specialization is U-shaped in the importance of non-market strategy to the firm's market strategy. We also develop a typology of non-market strategy organization and qualitatively analyze some of the companies currently listed in the Dow Jones Sustainability Index.
The experimental evidence in psychology has confirmed the importance of people’s mindset about their ability since the seminal paper by Dweck and Leggett (1988). This paper examines the incentive effect of an agent’s mindset in organizations. I consider a model in which a principal hires an agent to undertake projects for two periods. At the beginning of the second period, the agent has an opportunity to increase his ability level by exerting the developing effort and has a growth mindset if he overestimates its effect on his ability. I show that the agent with a growth mindset exerts higher effort upon failure owing to the overestimation of the developing effort. However, this positive incentive effect is counterproductive to the first-period effort incentive; the agent with a growth mindset obtains more benefit from failure and thus has less effort incentive to avoid failure in the first period. My results may help to understand firm-level hiring decisions.
We assembled a large panel of project-level technical and financial data as well as country-level economic, institutional, political, and governance variables to assess the determinants of private financing of infrastructure in emerging markets and developing economies. Controlling for economic characteristics, we find that overall private participation of infrastructure financing increases with freedom from corruption, rule of law, quality of regulations, and decreases with court disputes. We provide plausible explanations of deviations from this pattern when data are disaggregated at the sectoral level. We also found that legal systems---types of democracy or dictatorship---do not play a role in whether the private sector invests in infrastructure, but it increases with third-party government oversight, namely opposition party activity. Our results do not vary when controlling for income inequality and across quartiles of experience, country wealth, and per capita income. The study shows that upstream "enabling" institutions, policies, and regulations and sector economics need to be addressed simultaneously to facilitate private infrastructure investment financing.
In the opening address to the Annual Conference of International Society of New Institutional Economics in Washington, DC in 1999, the Ronald Coase observed that economists fail to answer one fundamental question: “what determines what goods and services are traded on markets and therefore priced? What determines the flow of real goods and services and therefore the standard of living?” (Coase, 1999). These questions are relevant because goods and services that are necessary for individual actors need to solve their problems are not available in a single, concentrated form; and they are certainly not available only within an isolated dyad between a buyer and seller itself. Instead, the goods and services that an actor needs are widely dispersed among many actors within networks of business relationships. A particular deal that actors would need is not a fixed entity but rather the outcome of long and time-consuming interactions that affect further interactions. I consider the questions of what determines the trade and thus the flow of goods and services by taking a network perspective on contracting. By taking a network perspective, I elaborate on three forces: 1) infinite connectivity, 2) constitutional pluralism and 3) ongoing consent and illustrate the applicability of these forces through real-life cases in the context of business-to-business networks.
This paper examines the emergent process through which institutions arise in the process of development by focusing on the evolution of the shared beliefs that guide a society’s choice of institutions. Beliefs are anaylzed using fitness landscapes where evolution is treated as a search algorithm for fit design. While the persistence of sub-optimal institutions is primarily due to vested interests that impede the changes and reforms that would induce growth and prosperity, the difficulty of revising and updating misguided beliefs is additionally responsible for the surprisingly small number of countries that have transitioned from underdevelopment to sustained growth in history.
Recent decades have experienced a marked acceleration in the process of globalization. This remarkable proliferation of the globalization phenomenon has been associated with significant consequences felt in economic, social and political well-being around the globe. This paper analyzes the role of economic globalization in improving different governance issues that are of particularly important in the context of developing nations. We contribute to this literature by exploring how does economic globalization comprising of different aspects of internationalization like trade openness, FDI inflows, and portfolio investments affect different dimensions of governance? Further, while a large part of globalization implies greater trade and FDI inflows, it also implies integration of culture, ideas and vision. In this context, we delve into the role of a different aspect of globalization where emergence of neo transnational capital played a pivotal role in changing different and varied social mindsets across the world into a more cosmopolitan one (social globalization). In particular we analyze if social globalization acts as a moderator in the relationship between economic globalization and governance. Our contributions in the paper are twofold. First our results show that economic globalization enhances most indicators of governance like rule of law, government effectiveness, reducing corruption, regulatory quality and voice and accountability. Second, our results importantly show that indeed social globalization acts as a moderator. The estimated marginal impacts show that countries with low levels of social globalization, fail to benefit from economic globalization. Yet, this impact is enhanced for countries with higher levels of social globalization.
Criminal convictions result in expected losses due to stigmatization. The magnitude of these losses depend on, among other things, the convict's future expected earnings. People who face larger wage reductions due to convictions suffer more from stigmatization. This leads to under- and over-deterrence problems, because people at different occupations face different expected sanctions associated with the commission of a crime. One of these problems, namely over-deterrence, can be mitigated or eliminated by offering convicts a costly opportunity to seal their criminal records. To demonstrate this, I construct a Beckerian model of law enforcement that incorporates stigma a la Rasmusen (1996) and where criminals have the option of expunging their criminal records at a cost chosen by the government. I use this model to identify relationships between equilibrium crime rates, expungement rates, formal sanctions, and the average pay of occupations. I argue that record sealing is also likely to perform a screening function to sort out people with low criminal tendencies (who have either been erroneously convicted or who have impulsively and in exceptional circumstances committed a crime) from people who have high criminal tendencies. Finally, I consider various legal reforms in light of my findings.
Recently, some literature on incomplete contracts studies the cases where renegotiations take place inefficiently. We extend the incomplete contract model in Hart (2009) by assuming that one party chooses an action which affects renegotiation costs. In our model, renegotiation costs are determined endogenously. We characterize the condition that she can get higher payoff by manipulating renegotiation costs than when she cannot manipulate renegotiation costs and renegotiations take place efficiently. Whereas she chooses positive renegotiation costs, renegotiations never occur on the equilibrium paths. They work just as ``credible threat". Her equilibrium share ratio of the ex ante bargaining surplus is higher than her bargaining power. As an application, we discuss underinvestment problem by using a variant of our basic model. We show that the agents mitigate underinvestment problem by setting some positive renegotiation costs and increasing a high skilled agent's share ratio of the ex ante bargaining surplus to give her larger incentive of investment.
International offset certificates trade at lower prices than European Union Allowances (EUAs), although they are substitutes within the EU Emissions Trading System (EU ETS) for CO2. Firms therefore had a strong incentive to use the cheaper certificates up to the maximum quantity fixed by the regulator. However, a considerable number of firms did not use their offset credit entitlement and, by doing so, seemingly forwent profits. While most of the literature on emission trading evaluates the efficiency of regulation in a frictionless world, firms in reality incur managerial costs when complying with regulation. This study examines the use of international offset credits in the EU ETS, in order to assess the relevance of such managerial and information-related transaction costs. It establishes a model of firm decision under fixed entry costs and estimates the size of transaction costs rationalizing firm behavior using semi-parametric binary quantile regression methods. These costs appear to be sizable, as they prevent a fifth of all firms, especially small emitters, from using offset certificates. It appears that for most firms the bulk of these transaction costs stems from participation in the EU ETS in general, rather than additional participation in the offset trade.
U.S. magistrate judges contribute much to the handling of federal litigation, yet they remain largely unstudied. This paper examines the deployment of magistrate judge resources by federal district judges. It begins by arguing that district courts select magistrate judges based on merit, and not ideology. The paper then uses a game-theoretic model to investigate the benefit district judges are likely to gain from referring to magistrate judges in civil cases (a) discovery and pretrial matters, (b) dispositive motions in comparatively non-ideological cases, and (c) dispositive motions in comparatively ideological cases. The model predicts that referring (i) discovery and pretrial matters and (ii) dispositive motions in comparatively non-ideological cases will always provide benefits to district judges. In comparison, the referral of dispositive motions in comparatively ideological cases will provide a benefit only where there is uncertainty as to whether the court of appeals’ and district judge’s ideological preferences will align. We should see more of the first two kinds of referrals. Also, ideology of the district judge should affect the frequency with which dispositive motions are referred in ideological cases.
The movement of jobs overseas, known as offshoring, is one of the most politicized aspects of globalization in the United States. Concerns about the loss of jobs to foreign workers are central to debates about further economic integration. Because trade liberalization reduces the costs of offshoring, it has negative welfare consequences for workers in offshorable jobs in both manufacturing and services. I argue that vulnerability to offshoring introduces a new dimension of protectionist sentiment distinct from skill or industry cleavages. I hypothesize that legislators are more likely to oppose trade liberalization when a larger share of their constituents are vulnerable to offshoring. Looking at debates and roll call votes on free trade agreements (FTAs) in the U.S. House of Representatives between 2003 and 2004, I find that legislators are more likely to discuss the costs of trade for workers and vote against FTAs when constituency vulnerability to offshoring is greater.
In a society composed of citizens and a dictator, what are the conditions for a successful citizens’ revolt? What kind of strategies do governments follow to prevent such revolts? In this article, we argue that the concept of networks is a very powerful tool to understand these issues, as shown, for example, by the prominent role of social networks during the recent revolts in the Arab world. More specifically, we model these types of societies as a game played between a leader, who has to decide the distribution of the aggregate income, and a group of citizens who have the opportunity to revolt if they are unhappy with the distribution (or if they dislike the regime). Coordinated action by citizens is possible because they form nodes in a communication network. However, communication through the network is distorted, which could preclude the emergence of collective action among citizens. The network structure and the distortion level are determinants of the political equilibrium and wealth distribution. The model explains how the dictator could use propaganda, cooptation, and repression to increase his expected utility. We also use our framework to provide a formal proof of Wintrobe’s Dictator’s Dilemma. Finally, the model is illustrated by applying it to cases in Nigeria, Zaire/Congo, and Libya.
This paper develops a model of political regime change and media censorship. An authoritarian regime can be overthrown if enough citizens join a coup. The citizens don't know the realized quality of the regime but receive correlated signals about it from media outlets. They also use social media to learn about the tactics to be used in an uprising. The regime can engage in censorship activities to reduce the probability of a coup. It might choose to censor media outlets which transmit to the citizens a signal about its quality (content censorship). This will make the regime seem to be of higher quality than it actually is. Alternatively, the regime might close down the channel through which the citizens learn about the protest tactic (coordination censorship). This will make the citizens' coordination harder to sustain. Finally, the regime might adapt both types of censorship, i.e., content censorship and coordination censorship. We characterize equilibrium of this coordination game and provide equilibrium comparative statics. Our results suggest that there is an inverse U-shaped relationship between the regime's type and the adopted censorship type. The more competent the regime, the more likely it will imply either type of censorship up to some point. Then, the less likely it will censor. Moreover, a regime applying coordination censorship is likely to be less competent than a regime applying content censorship.
How does information about politicians affects their political donations? Existing theoretical research suggest that political donations can be driven by information about candidates, and with political donations being a signal of good quality candidates. Alternatively, political donations might be a way of lobbying for certain perks. With both information and political donations being potentially endogenous to locations, candidates, and characteristics of the campaign, it is difficult to identify the role of political information for campaign contributions. In this paper, we collected data on 2000+ accounts of politicians who started their twitter accounts between 2009 and 2013. We show that there is a positive kink in the amount of contributions associated with opening a Twitter microblog. We use data on Twitter penetration to ensure that our results survive in a difference-in-difference framework. We combine regression analysis with content analysis of the Twitter posts, to check that indeed the vast majority of these posts are not campaign-related. Our results suggest that politicians’ Twitter sharply increase information about them for certain groups of voters, and social media presence indeed helps to raise individual political donations.
The relationship between farmers’ heterogeneity and the pattern of emergence of a cooperative is studied in a non-cooperative game where farmers choose to become active, or stay passive, in the formation of a cooperative. Our results show that when heterogeneity is limited, a cooperative emerges bottom-up by all farmers taking an initiative. With moderate heterogeneity, one of the farmers takes a lead in the emergence of a cooperative. With high heterogeneity, no cooperative emerges. Next, we identify a role for a third party by considering a selfish outsider, such as the “dragonheads” in China, and a benevolent outsider, such as NGOs. When the value of a selfish outsider is high (intermediate, low), then a cooperative emerges top-down (top-down or does not emerge, bottom-up with one active farmer or does not emerge). When the value of a benevolent outsider is sufficiently high, he is more effective at eliminating the coordination and hold-up problems among the farmers than a selfish outsider. Farmers become most active when the type of the outsider is benevolent with high value.
Nonprofit firms active in the production of public goods – mission-driven organizations – face higher labor turnover than firms producing private goods for a profit. Simultaneously, they pay lower wages and often use low-powered incentive schemes, which has been explained by binding financial constraints and the threat to attract wrong worker types if wages are increased. We construct a model that reproduces these stylized facts, explains the high labor turnover of mission-driven organizations, and suggests a way out of the nonprofit’s dilemma. Firms that attract intrinsically-motivated workers by exaggerative advertisements about their true social impact create disappointment once the workers learn the truth on the job. Some of these workers leave the firm, some even leave the nonprofit sector, but others costly manipulate their own recollection of the facts and keep believing in making a difference. We construct testable empirical hypotheses and offer managerial and policy implications.
In China, the state controls the right to develop rural land, which results in two consequences: first, millions of farmers cannot develop their rural land and bear the cost of preserving agricultural land without any compensation; second, the government allocates rights to develop rural land arbitrarily in China’s urbanization process. This research argues that a market for Transferable Development Rights (“TDRs”) would not only enable Chinese farmers to tap into the development value of their land without actual development, but also make the rezoning of rural land to urban land a more predictable and fair process in China. Intra-City Villages (chengzhongcun) used to be located on the outskirts of the city, but with the expansion of the city, farmlands formerly cultivated by the villages were expropriated and turned into urban land by the government whereas the villages themselves were preserved due to the high social and economic costs to compensate the villagers for their lost dwellings. Many of these intra-city villages are now surrounded by skyscrapers. In Beijing, there are 227 intra-city villages, totaling 753 kilometers of land; in Shenzhen, there are 320 intra-city villages, totaling 330 kilometers of land; Guangzhou, 138 intra-city villages, totaling 86.6 square kilometers of land. In the past decade, Chinese cities have tried to redevelop these intra-city villages for both beautification of the city and economic purposes. But it is often subject to black-box bargaining between developers, local governments, and farmers that which intra-city village should have the right to develop and how much floor area ratio of a particular plot should be, resulting in extremely unequal distribution of wealth between members of different villages. Creating a TDRs market in such cities would enable farmers in the intra-city villages to benefit equally from the economic development.
Nuclear reactors entail massive non-transferrable site-specific investments. The resulting appropriable quasi-rents offer the mob the ideal target. In exchange for large fees, it can either promise to "protect" the utility (and silence the reactor's local opponents) or "extort" from it (and desist from inciting local opponents). Using municipality-level (1742 cities, towns, villages) and prefecture-level (47) Japanese panel data covering the years from 1980 to 2010, I find exactly this phenomenon: when a utility announces plans to build a reactor, the level of extortion climbs. Reactors have broad-ranging effects on social capital as well. In general, the perceived health costs to nuclear power are highest for young families. As a result, if a utility announces plans for a new reactor, these families disappear. Yet these are the men and women who invest most heavily in the social capital that keeps communities intact. When they disappear, reliance on government subsidies increases, and divorce rates rise. Firms stay away, and unemployment climbs.
A requirements contract is a form of exclusive dealing in which the buyer promises to buy only from one seller if he buys at all. This paper models a most common-sense motivation for such contracts: that the buyer wants to ensure a reliable supply at a pre-arranged price without any need for renegotiation or efficient breach. This requires that the buyer be unsure of his future demand, that a seller invest in capacity specific to the buyer, and that the transaction costs of revising or enforcing contracts be high. Transaction costs are key, because without them a better outcome can be obtained with a fixed-quantity contract. The fixed-quantity contract, however, requires breach and damages. If transaction costs make this too costly, an option contract does better. A requirements contract has the further advantage that it evens out the profits of the seller across states of the world and thus allows for an average price closer to marginal cost.
This article suggests a shift in how we think about agency. The essential function of agency law lies not in enabling the delegation of authority, as is widely suggested, but more significantly in its effect on creditors’ rights through asset partitioning. Most of what agency law does in commerce could be accomplished through standard-form contracts, providing default terms for the relationships among firms, their managers, and third parties. Even agency’s much-vaunted fiduciary duties are easily altered or waived by contract. This article identifies the role agency law plays that parties could not contractually replicate. This role is asset partitioning: Just as limited liability and organizational law partition off the assets of a firm’s owners from the assets of the firm itself, agency law partitions off the assets and liabilities of a firm’s managers from the firm’s own assets. Asset partitioning shows that whether owners or managers should be liable for a firm’s unpaid contracts is not a win-lose distributional question, but can be socially efficient. Through simplifying and specializing asset pools, asset partitioning lowers the cost of monitoring the firm’s assets and thus the cost of credit. More generally, legal personality enables the parties that control a firm (its owners and managers) to contribute financial and human capital to the firm, while maintaining a separation between their assets and liabilities and the assets and liabilities of the firm itself.
Procurement of PPP projects is often characterised by lengthy tendering periods (between contract notice and financial close). This has implications for the efficiency of investment under PPP by deterring bidders and reducing competition for contracts. This paper examines tendering periods in the case of PPP procurement in the United Kingdom. We adopt a Duration Analysis model and use data on 667 PPP projects to identify the factors that have a significant effect on the length of the tendering periods. Our results show that there is significant variation across sectors and regions. Interestingly, we find that when we control for other variables, project size (measured by capital value of PPP projects) is associated with longer tendering periods especially when capital value exceeds £16.9 million. We examine the impact of the introduction of the competitive dialogue approach to procurement and fail to find evidence of shorter tendering periods (on average) since this form of procurement was introduced. There has however been a significant reduction in the duration of the period between appointment of preferred bidder and financial close. This finding is in line with expectations and indicates that the competitive dialogue has proved effective in reducing the scope for negotiations by preferred bidders that hold bilateral-monopoly advantages.
Both China and Russia combine centralized personnel selection with substantial administrative autonomy for regional officials, but differ substantially with respect to the economic outcomes produced by their respective bureaucratic systems. To investigate why this is the case, we gather and analyse a comprehensive original dataset measuring the performance, career paths and incentives of regional officials in China and Russia during the last 15 years. We find that in contrast to China, regional leaders in Russia are unlikely to be promoted for economic or social performance, have a lower turnover, are almost never transferred from one region to another, have less experience in executive positions, are more likely to come from the region they govern than their Chinese counterparts, and are not encouraged to show initiative in economic affairs and engage in economic policy experimentation.
Recent studies show that several governance structures can coexist to frame the same type of transaction. This situation is particularly true in the Agrifood sector where a wide variety of corporate structures and value chains coexist. The coexistence of several vertical coordination modes within the same production sector is intriguing since it calls into question the issue of the most performing coordination mode. What are the factors that explain the use of several vertical coordination modes within a same value chain? Are these factors mainly strategic, economic, technological, institutional or historical? The objective of this paper is to dig into these questions by providing a comprehensive historical analysis of the drivers behind the evolution of hog supply chains structures and coordination in Quebec over a 50 year-period. The paper develops an historical analysis based on in-depth interviews with experts that are or were active in the Quebec hog industry, combined with insights from organizational economics. Our analysis reveals that over the period 1960-2010, hog chain structures in Québec were mainly modelled by factors that changed over time, especially uncertainty and risks, the institutional and economic environment, and commercial considerations.
In Buchanan’s Constitutional Political Economy, a two-stage social contract is envisaged: a constitutional contract that defines a structure of rights, and a second stage where contractual negotiations become possible (post constitutional contracts). One must then recognize the necessity of an enforcing agent for the protection of individual rights, including the making of valid contracts. The Constitution must ex ante commit the State to punish any ex post transgression of rights. But then we face the problem of the abuse of authority: no formal commitment can prevent the State from abusing such a power. If we model the pre-agreement state of nature as a Prisoners’ Dilemma, we may explain why the social contract is necessary, but for the same reason we entail that the agreement is not stable, since non-compliance is the only equilibrium. Also the agent in the position of an authority will hence defect, by abusing his power. How does it happen, then, that we observe citizens acting against the abuse of authority by those who hold political power, even if this behavior is not in their own material interest? In this paper we provide a game theoretical model of the interplay between the State and the citizens in terms of a repeated Trust Game with psychological Nash equilibria (Geanakoplos, Pearce and Stacchetti, 1989; Rabin, 1993) and according to the theory of conformist preferences (Grimalda and Sacconi, 2005, Faillo, Ottone and Sacconi 2015). We argue that a Rawlsian Social Contract (Rawls, 1971) is able not only to solve the normative equilibrium selection problem under the veil of ignorance (Binmore 2005), but it can also solve the problem of the ex post stability and equilibrium refinement of the Constitution through the formation of endogenous motivations - similar to Rawls’s sense of justice - suggesting an illuminating explanation of why (sometimes) some of us comply with just institutions even if we have some direct material incentive not to do so.
In this study I use a large sample of quarterly changes in equity holding by institutional investors and find strong evidence that the functions of institutional investors which were missing in India (Khanna and Palepu, 2000) are taking shape as external controllers of corporate governance. I provide a robust proof that foreign financial institutions (FIIs) have a positive influence on firm performance. For the first time I disintegrate domestic institutions into different categories and find that mutual funds’ influence on firm performance is divergent as compared to banks, financial institutions (FIs) and insurance companies. While the effect of mutual fund holdings on firm performance was inconclusive; equity holding by banks, FIs and insurance companies showed a negative impact. Empirical proof from this study also adds to the existing literature on the monitoring role of institutional investors in India. It is evident that FIIs are better monitors of corporate managers. The other groups of institutions are either poor monitors or do not monitor as changes in their shareholding does not have an influence on firm performance.
In the Japanese coal mining industry, firms originally used the dormitory system, an indirect organization of labor. Firms delegated all kinds of tasks of managing miners to dormitory heads. However, between the 1890s and 1930s, the introduction of machinery coincided with a gradual transformation to a direct organization of labor. We study a coal mine during the organization transitional period. Using job applications and attendance records, we observe miners’ recruitment paths and working statuses, and the organization structures to which they belonged. In other words, these records enable us to determine the links between the labor market and the organization of labor for individual workers. Thus, we consider how coal mining firms managed and monitored workers when traditional manual skills were still dominant, prior to the introduction of mining machinery. Our regression analysis shows that skilled miners tended to belong to conventional dormitories. However, the heads of these dormitories tended not to monitor these miners very well. In contrast, miners in a dormitory which was under stronger controlled than conventional one were monitored well. In addition, we find that firms began managing smaller units under dormitory heads.
We introduce a novel classification of strategies employed by autocrats to combat hostile activity on the web and in social media in particular. Our classification looks at these options from the point of view of the end internet user and distinguishes both online from offline response and exerting control from engaging in opinion formation. For each of the three options -- offline action, infrastructure regulation and online engagement -- we provide a detailed account for the evolution of Russian government strategy since 2000. In addition, for online engagement option we construct the tools for detecting such activity on Twitter and test them on a large dataset of politically relevant Twitter data from Russia, gathered over the period of nine month in 2014. We make preliminary conclusions about the factors of internet policy choice in non-democracies.
Using longitudinal data on labour law for 63 countries over the period 1991–2013, the present study estimates the impact of labour regulation on unemployment. The dynamic panel data analysis distinguishes between the short-run and long-run effects of regulatory change. It is observed that worker-protective labour laws in general have no unfavourable effect on both total and youth unemployment.
Using longitudinal data on labour law for 63 countries over the period 1991–2013, the present study estimates the impact of labour regulation on unemployment. The dynamic panel data analysis distinguishes between the short-run and long-run effects of regulatory change. It is observed that worker-protective labour laws in general have no unfavourable effect on both total and youth unemployment.
The new European directives voted early 2014 (Directives 2014/23/UE, 2014/24/UE, 2014/25/UE) are pushing for awarding contracts based, in part, on social criteria. Because of the huge amount at stake – in Europe public procurement represents on average 17% of GDP’s countries (OECD 2013) – the goal of traditional procurement, cost-effectiveness (or value-for money), is expanded in the case of social procurement to account for factors like social inclusion or subcontracting goals. The economic theory generally does not support the premise that exercising buyer power is a more efficient mechanism than (adequate) regulation when it comes to the pursuit of social (or any other) regulatory goals (Saussier and Tirole 2015). This is because of competitive distortions and the higher costs of procurement based on non-economic considerations. Imposing regulatory requirements through the backdoor of public procurement decisions significantly muddles the efficiency of the market, raising transaction costs. In this paper we shed light on those issues. We investigate the cost of a social procurement policy using a unique data set of more than 700 public procurement contracts signed by the city of Paris between 2011 and 2013. We found that including social objectives in their public procurement contracts, the city of Paris raised its procurement cost by 2 to 7% on average. This increase is relatively low. The process put in place by the city in order to minimize this price premium explains this.
This paper presents a comparative historical study of the economic growth in four Mandate territories, Lebanon, Palestine, Syria and Trans-Jordan. In all four areas, the ruling Western powers, Britain and France, attempted to introduce inclusive economic institutions with a strong emphasis on private property. In all four areas, the inclusive institutions advanced economic growth, but there were differences in the growth rates. For example, Palestine had the best growth even though the British were more successful in instituting inclusive institutions in Trans-Jordan than they were in Palestine since in Palestine there was also a huge increase in the proximate causes of growth which did not occur in Trans-Jordan. The paper suggests a refined formulation of the relationship between inclusive institutions, proximate causes of growth and economic growth. Inclusive institutions will cause economic growth but at a slow pace. If a country is able to enhance its proximate causes of growth through investment, then the joint effect of the proximate causes of growth with inclusive institutions will lead to much quicker growth.
We reframe an important debate between Pigou and Knight about the need for government intervention in allocating congestible resources like roads. Knight showed that private toll-setting would achieve an efficient allocation if some motorists commuted to work on an alternative route that was uncongestible. Government intervention was unnecessary. Others have shown that Knight's laissez-faire solution fails if the other road was also congestible but marred their demonstration by excluding private toll-setting on that road as well. We consider a game with simultaneous toll-setting on every congestible road. When we discover that the laissez-faire allocation is inefficient, we consider how the government can improve the private allocation by providing motorists an actual or potential alternative to the privately-priced, congestible resources. Our results apply to a wide range of allocation problems involving congestion: simultaneous tuition setting in private (or charter) schools when students can instead attend a public-school or simultaneous prize-setting in contests to cure diseases when researchers can instead work at NIH.
Empirical research (Grajzl and Dimitrova-Grajzl 2009, Berkowitz et al. 2003) indicates that imported law lacks effectiveness unless it is successfully adapted to local legal norms. The need for institutional adaptation has been discussed from a theoretical point of view in institutional economics (Boettke et al. 2008, North 1994). Bureaucrats are believed to be central in adapting foreign institutions as intermediaries but their impact on institutional quality has never been fully explained. This paper investigates the extent to which bureaucratic capacity contributes to the success of institutional transplants. It exploits the fact that during decolonization a large number of former British colonies intensively imported European institutions. There is a certain degree of variation of institutional quality among these states today, but there is no robust theory that explains it. The authors use data of former British colonial officers which were collected at the Institute for Advanced Study in 2014. We offer a human capital theory of governance transplants by using the proportion of expatriates (former colonial officers) among civil servants at the time of independence as a proxy for bureaucratic quality and adaptation.
We examine the role of incentive contracts in directing sorting of workers into firms and in impacting the investment decisions by firms. We find, in our setting, that imperfect competition for workers leads higher-powered incentives to attract better workers but reduces investments in productive resources, leading, in equilibrium, higher ability workers to lower investment firms. We then show that the pattern of incentive contract choice of entrants matches the predictions of our model. A novel and detailed employer-employee panel with 13,000 firms covering an entire industry within a bounded region allows us to separately estimate the worker, firm, and equilibrium predictions. Our work bridges theories of personnel and organizational economics with important findings on the role of incentives and worker sorting and the interaction of labor market competition on organizational form and investment decisions by firms.
Kidnap for ransom (KfR) is a growing global business. Ransoming is a one-off trade between a criminal organisation and a (random) victim’s representatives. Yet prices are often predictable and transactions appear well governed. Who provides the governance? Coase predicted that when there are significant externalities and high transactions costs, the most efficient market structure is a single firm. This firm internalises the externalities and orders the market. We apply this insight to the market for KfR insurance. Quick payment of premium ransoms generates ransom inflation and new market entry by kidnappers. This in turn raises uncertainty and costs across the sector, but contracting against “botched” negotiations would untenably compromise client confidentiality. We find that the vast majority of KfR insurance is indeed underwritten by and reinsured through Lloyds of London. Through reinsuring the monopolist acquires all contracts which confer externalities on each other. Within Lloyds several syndicates compete for business, but follow the same protocol for KfR resolution and exchange information to order and stabilise the market. We observe price wars when new entrants cut corners on KfR resolution. The expected externalities from botched negotiations lead KfR insurers to offer attractive contracts to corporates which might otherwise self-insure, as well as pro bono advice to uninsured parties. We conclude with policy implications regarding government involvement in KfR.
I develop a simple hold-up model of political risk, which can be used to explore firms' strategic options when their investments are subject to the threat of government expropriation. In the model, a firm decides whether to invest and then the government decides whether to expropriate the firm's investment or to simply collect normal taxes on its profits. The government is motivated by revenue and a wide range of non-pecuniary factors: its reputation, electoral pressures, patronage opportunities, and pressure from external actors. In the model, the likelihood of expropriation depends on the firm's profits and the amount of taxes it pays, as well as the government's political incentives. Effective management of political risk requires an integrated strategy, consisting not only of public and government relations efforts, but also financial, value chain, and human resources strategies designed to reduce the government's incentives for expropriation.
The prudent investor rule, enacted in every state over the last 30 years, is the centerpiece of fiduciary investment law. Repudiating the prior law’s emphasis on avoiding risk, the rule reorients fiduciary investment toward risk management in accordance with modern portfolio theory. The rule directs trustees to implement an overall investment strategy having risk and return objectives reasonably suited to the trust. Using data from reports of bank trust holdings and fiduciary income tax returns, we examine trustee management of market risk before and after the reform. First, we find that the reform increased stock holdings only among banks with average trust account sizes above the 25th percentile. This result is consistent with sensitivity in asset allocation to beneficiary risk tolerance as proxied by account size. Second, we find that, although stockholdings increased after the reform, trust corpus did not become more correlated with the market. We explain this result in part with evidence of increased portfolio rebalancing after the reform. We conclude that the rule’s command to align market risk with beneficiary risk tolerance, and to manage market risk exposure on an ongoing basis, has largely been followed.
This paper documents how financial institutions alter their firm boundaries to overcome credit market frictions and relax financial constraints. Specifically, I examine the construction of new grain silos by a large agribusiness lender that provides credit to small farmers in Brazil, a market characterized by weak legal institutions. I exploit the staggered nature of the silo construction and employ a difference-in-differences research design to examine how this change in organizational design affects lending. I find that ownership of a silo allows the lender to significantly increase lending to both existing and new borrowers, with the effects being more pronounced for financially constrained borrowers and those exposed to more weather risk. Furthermore, it enables the lender to offer a new contract that provides a price hedge, an innovation that is particularly useful for periods with high commodity price volatility. Most importantly, the effects are stronger in municipalities with weak courts, by so emphasizing the contract enforcement channel. Thus, the paper uncovers an alternative enforcement mechanism, designed by the lender, to overcome weak creditor rights.
When evaluating claims involving the duty of loyalty in a business organization, modern judges in the United States do something routinely that would have seemed improper to judges a century ago, something that still astonishes judges and commentators in other countries. In deciding whether business managers or other fiduciaries have breached the duty of loyalty, modern judges in the U.S. evaluate the substantive fairness of challenged transactions, and if the transactions are deemed to be fair, the fiduciaries are not liable. Substantive fairness review offers an alternative path to transactional validity not available in most countries, reflecting a fundamental policy in the U.S. of promoting action, sometimes even at the expense of vulnerable parties. The preferred path to transactional validity for conflict transactions involves ex ante disclosure of relevant conflicts and approvals by disinterested decisionmakers, either co-fiduciaries or the beneficiaries of fiduciary duties. Outside the U.S., ex ante disclosure and approval is not only the preferred path to transactional validity for conflict transactions, but generally the exclusive path. Most commentators on substantive fairness review do not recognize U.S. exceptionalism in this area, and those who do generally describe this development as an erosion of the fiduciary principle. I take a contrary position, arguing that the content of fiduciary law in the U.S. balances the desire to protect vulnerable parties with a fundamental policy of promoting entrepreneurial action. Substantive fairness review of conflict transactions is part of the institutional configuration that facilitates entrepreneurial action.
Spain today presents a geographically concentrated distribution of societal traits that are related to political participation. This paper examines the historical origins of those regional patterns. The thesis here is that, before the unification processes of the 18th and 19th centuries, regions followed substantially distinctive political paths leading to the current disparities. The characterization of the political trajectories draws on the regional legal histories, with specific focus on the experiences of municipal autonomy in the High Middle Ages and the levels of constraints on the executive in the Modern Age. The regions that historically experienced more inclusive political systems exhibit currently higher levels of political culture of participation. The empirical evidence for this thesis is found at regional and individual level.
We experimentally investigate the determinants of judicial decisions in a setting resembling real-world judicial decision-making. Real judges spend 55 minutes judging an appeals case in a legal system that is accessible but unknown to them. The case is a real case from an international tribunal, with minor modifications to accommodate the experimental manipulations. The fictitious briefs focus on only one easily understandable issue of law. We cross-randomize several features of the case, and track the steps the judges take in reaching a decision.
This paper presents an attempt to quantify institutional changes and examine the respective effects of institutions on the path of long-run economic growth and development for a large panel of countries in the period 1810-2000. Using principal component analysis, latent indices of de jure and de facto political institutions are constructed by exploiting several existing institutional datasets. The empirical evidence consistently suggests that societies with more extractive political institutions in Latin America, South Asia, Middle East and Eastern Europe have achieved systematically slower long-run economic growth and failed to catch-up with the West. The evidence confirms the primacy of de facto institutional differences over de iure institutions and human capital in causing differential growth and development outcomes over time. It also explains why highly concentrated political power and extractive political regimes inhibited the path of economic growth by setting persistent barriers to the engagement in collective action. In the long run, institutional differences account for up to 90 percent of within-country development path and up to 70 percent of cross-country income differences.
Apologies are used frequently in everyday interactions the world over to mitigate and resolve conflict situations. The pervasiveness of apology finds expression in many cultures, both highly developed modern ones and rather primitive ancient ones. In order to evaluate the usefulness and efficacy of apologies, it is illustrative to consider a counter-factual: A world in which everyone can choose their action with certainty. In this world, the legal system and other social governance mechanisms like standard grim trigger strategies and ostracism are very effective. In fact, they are so effective in deterring defection that this world does not need any ‘glue’ as nothing ever ‘breaks’. On the contrary, a world where players face uncertainty in choosing actions, undesirable outcomes cannot be avoided. Accidental defections caused by such uncertainty that does not depend on the level of care, require a mechanism to reconcile the players; to glue together what might be broken. This world, in so far as it more closely resembles the world we live in, requires an apology. This paper posits the existence of a ‘sorry equilibrium’ that relies on a costly apology for self-identification of accidental defection in a social dilemma. The outcomes of such an equilibrium are compared to those from other bilateral social governance mechanisms and formal legal systems. It is argued that with the possibility of accidental defections other social mechanisms are inadequate, while formal legal systems can generate perverse incentives.
U.S. News & World Report (USN&WR) publishes annual rankings of ABA approved law schools. The popularity of these rankings raises the question of whether they influence the behavior of law teachers, lawyers and judges, law school applicants, employers, or law school administrators. This study explores some indicia of USN&WR influence. Using data purchased from USN&WR, we attempt to determine whether USN&WR might have influenced 1) law faculty members who respond to the USN&WR survey of law school quality, 2) lawyers who respond to USN&WR surveys, 3) law school applicants choosing a school, 4) employers who hire law school graduates, and 5) administrators who set tuition. We find significant effects on the first three groups, particularly with respect to lower rank schools. That is, there may be “echo effects” of USN&WR rankings that are folded back into subsequent rankings and tend to stabilize them. We also find that rankings may exert some influence on tuition at law schools outside the top 40. We do not find evidence that employers hiring law graduates respond to changes in USN&WR rankings, either in median salaries paid or in employment percentages reported by law schools.
As a result of limited empirical evidence and controversial anecdotes, speculation over the ubiquity and importance of covenants not to compete in the U.S. labor market is rampant. In this paper, we present a simple equilibrium framework to account for the existence and incidence of noncompetition agreements. We then populate this framework using data from a new survey. The data show that noncompetes are a perhaps surprisingly common feature of the labor market. As a lower bound, we estimate that one in four employees have ever signed a noncompete, and 12.3% are currently working under one. Of those with college education or above, one in five are currently subject to a noncompete agreement. The occupations in which noncompetes appear most frequently are engineering (30%) and computer and mathematical occupations (28%), though they are prevalent in typically lower-skilled occupations as well: installation and repair (11%), production occupations (11%), and personal services (12%). We conclude that the observed heterogeneity in the incidence of noncompetes provides evidence that firms use noncompetes to prevent employees holding key resources from joining competitors. We then examine explicitly whether or not noncompetes are associated with the expected effects of the theory. We find that noncompetes are associated with increases in tenure, increases in the reservation wage for competitors, and increased training. We also show that noncompetes are associated with little negotiating, no wage premium at signing but greater wage growth. We discuss how these results affect our understanding of competitive advantage, the labor market, and the debate over noncompete enforcement.
The paper presents evidence that inflationary targeting is beneficial to economies, as they receive additional institutional support from International Monetary Fund (IMF). Contents analysis of IMF Article IV reports in the years 2001-2013 supports a claim that IMF strengthens institutional framework of inflationary targeters disproportionally to other economies, by providing more accountability, oversight and policy advisory. The acclaimed macroeconomic performance of inflationary targeting economies is not only achieved through technical superiority of the monetary regime itself, but also benefits from their advantaged position in the international community.
A promisee’s reliance on a promise makes him vulnerable to promise breaking. In the absence of legal sanctions for promise breaking, this vulnerability has no effect on a self-interested promisor’s willingness to keep her promise: she will keep it only if it is in her self-interest to do so. But if a promisor cares about the promisee, then she may feel guilty for breaking her promise, and this guilt may be intensified by the promisee’s reliance on the promise, giving the promisee a strategic reason to overrely—that is, choose a reliance level in excess of the level that would be efficient if the promisor kept her promise—in order to psychologically lock in the promisor by giving her more reasons to keep her promise. This suggests that a legal regime that enforces relied-upon promises may have the unexpected benefit of reducing overreliance: the promisee can lock in the promisor using the legal regime rather than the promisor’s guilt. We test these hypotheses by experimentally investigating person’s attitudes towards promisees’ reliance decisions and their behavioral responses to promissory estoppel regimes in the laboratory. We find evidence supporting the existence of a psychological lock-in effect: promisors are more willing to cooperate the greater was the promisee’s reliance, and promisees anticipate this effect, overinvesting apparently in order to encourage promisors’ to keep their promises. We also find that the introduction of a legal regime improves cooperation rates, and that when the remedy is expectation damages, the legal regime generates unambiguously better decisions by reducing overinvestment. Finally, we find that the introduction of a promissory estoppel regime crowds out cooperation when promisees don’t rely on a promise.
We analyze the impact of exogenous changes in competition within one side of a two-sided market on the optimal pricing of both sides. We take into account both its impact through indirect network externalities and its impact through higher competition in the marketplace. We find that within-platform competition increases the price charged to the other side, while its impact on the same side price is ambiguous. We test our hypotheses in the U.S. airport industry, exploiting an increase in within airport competition driven by a change in regulation. As hypothesized, we estimate that an increase of airline competition within an airport increases commercial revenues per passenger, only in airports that adopt a platform business model. We also investigate the impact of passenger type and airport pricing approach on the airport response to this exogenous change.
This paper investigates the persistent effect of cultural identity on the political equilibrium in the European Union (`EU'). We do so by examining the relationship between the 1992 referendum on accession into the EU and cultural identity across French regions. We show that regions in which citizens self-identified with their local communities, as opposed to identifying with `France', were also much more likely to vote to join the EU. We use data from the 1789 Cahiers de Doleances as well as a survey of French language usage in 1864 to confirm that the regions voting for accession to the EU in 1992 had a deep historical tendency to affiliate with local institutions. We conclude that the regions that voted yes in 1992 likely did so because they saw the EU as an alternate source of support for their local interests. This undermines the argument of `functionalists' who see the EU as a catalyst for integration.
This paper investigates the impact of liberalization policies on innovation. In particular, we measure the impact of two liberalization policies (legalization of medicinal marijuana and legalization of same-sex civil unions and domestic partnerships) and one anti-liberalization policy (passage of abortion restrictions) on patenting rate. Our empirical strategy exploits the staggered timing of legalization policies across different states in the United States. Our findings show that after controlling for state-level R&D and education-specific expenditures, liberalization policies increased patenting by 10% to 16% at the state level. In contrast, we find that the passage of an extra abortion restriction decrease patenting by 2%. In our exploration of the underlying mechanisms, we find a positive association between the enactment of liberalization policies and the inter-state migration of talent. Even after excluding mobile inventors, we still find that liberalization policies are associated with an increase in the patenting rate of existing residents. Our results suggest that liberalization policies increase regional innovation by potentially attracting creative types from other regions as well as facilitating higher levels of innovation among the existing residents. We discuss implications for regional and organizational policies.
Using the transaction as originally formulated by John R. Commons as the unit of analysis (Oliver Williamson recognizes that Commons’ notion of transaction is the basic unit of analysis of transaction cost economics), in this paper I illustrate three results: (i) how specific investments can be a safeguard from, rather than the cause of, opportunistic behaviors, (ii) if and when residual control rights can reduce, rather than increase, incentives to invest, and (iii) why the standard definition of residual control right as right in personam is too narrow.
The development of renewable technologies for power generation is a relatively recent trend. Some of these technologies, as solar photovoltaic power generation, have different organizational features with respect to traditional generation technologies. The potential of the new technologies to be actually placed in the market does not depend just on technological changes but also in the institutional evolution. Technologies impact on the choice of the coordination mechanism. The coordination mechanism is in turn not neutral regarding technological choices. The current Brazilian institutional framework to coordinate the electricity industry was explained by the dominant role of hydropower in the generation portfolio. The need to coordinate large investments which were interconnected by the river flow justified the choice of a centralized institutional framework to plan, to finance and to choose new technologies. As a consequence, we observe that the development of decentralized forms of power generation, as solar photovoltaic, have been completely overlooked in Brazil. We propose a coevolutionary analysis of the Brazilian case, to analyze long-term dynamics. We show that power sectors evolve within a path defined by a tight interrelation between the institutional setting and the technological environment. One of the most important features of our characterization is the existence of intertwined technological and institutional pathdependence. Therefore, implementing new technologies efficiently will require the adoption of policies that alleviate situations in which the generation portfolio is locked in to incumbent technologies.
Local content policy has been widely used by countries rich in natural resources as a mechanism to promote national industries. Nonetheless, the design of the institutional arrangements required to put in place this kind of policy is often controversial. To shed light on this topic, we study the case of the Brazilian oil sector. In it, the mechanism that decides which firm has the right to explore a region (block) is a scoring auction. Such auction combines bids in several dimensions besides a price bid according to a pre-defined rule to define the winner. One of those dimensions is the amount of local content that they are willing to implement. In that context, we study the question: is the auction the best mechanism to decide on local content programs? Literature on scoring auctions have proved that they perform better than other mechanisms when all criteria are measurable and contractable upon. However, local content programs are subject to significant uncertainty and complexity. In the case contract clauses are not fulfilled, penalties or renegotiation create significant mal-adaptation costs. We develop and empirical study to analyze both the bids and the ex-post mal-adaptation problems associated with the local content clause that have been already observed. As predicted by the theory, we observe high transaction costs associated with rigid long-term contracts in presence of uncertainty and complexity. The results of the Brazilian local content case are in agreement with public procurement literature. They also point at some of the key challenges to define efficient arrangements to implement local content policies.
Violence may elicit heterogeneous responses among people due to subjective differences in the way they experience such situations. Specifically, individuals experiencing similar conditions of violence in their environment may develop different perceptions of insecurity. Although the literature contains studies on subjective perceptions of insecurity as a variable that could affect different aspects of well-being and associativity, the influence of subjective insecurity on pro-social preferences has not been examined. Recent studies have explored a direct relationship between exposure to violent acts and pro-social behaviors, yet conclusions are divergent. We argue that subjective insecurity is a key determinant of cooperative behavior. We investigated how individual perceptions of insecurity affect cooperation using public good field experiments with 320 farmers in rural Colombian municipalities exposed to different levels of violence over recent years. To do this, we developed a cognitive-affective measure of subjective insecurity. We found that subjective insecurity has a negative effect on cooperation. This result persisted when we controlled for objective violence level and community effects. In fact, we found that objective violence level is positively associated to participation. These research findings pose new challenges for social interventions aimed at recovering individual agency and fostering community cooperation to overcome collective action problems. Our results suggest that when violence is relatively low, the potential of a community to engage in collective action still depends on subjective insecurity. Consequently, peace and crime reduction programs should consider an eventual lag between actual violence reduction and effective decrease of subjective insecurity, and implement policies ensuring that perceptions of threats to security and safety, both present and future, are reduced.
While much is known about how firms design their contracts, we know less about how they change and amend those contracts during execution of the transaction. This is important since a decision to modify an existing contract is likely to have a significant impact on the performance of the exchange. We examine when firms decide to change their contracts and analyze the drivers of that choice. Drawing on work on contracts and learning, we develop and empirically test the role of initial contract detail and prior ties between the parties on the amount, content and direction of changes to the contract. Specifically, we show that when firms take the time to add more initial details, then the need to change the contract will decrease. On the other hand, the more frequently firms have worked together in the past, the more likely they are to make changes to the contract, in part because the cost of making such changes decreases as the parties learn to work together. Finally, more prior ties also affect the content of change by leading to a preference for changes to the enforcement provisions in the contract more so than to the coordination provisions in the contract; while contract detail influences the direction of change by driving towards less removing or weakening existed provisions in the initial contract. We test our ideas using a sample of 128 international joint ventures (involving Chinese and foreign firms) and find support for all the hypotheses
This paper analyzes the phenomenon of repeated procurements made by public sector customers from the same supplier. The previous surveys of “relational contracts” gave different explanations for the possible implications of such repeated procurements, but those surveys dealt mostly with goods and services, with quality difficult to verify at the point of delivery. This paper studies the impact of repeated procurements on the price of a simple homogeneous product. We presume that the downward price shift of such a product during repeated procurements can be the consequence of transaction costs reduction in the framework of the bona fide behavior of a customer and supplier. An upward shift in the prices as compared to the market average can, on the contrary, be interpreted as an indirect indication of corrupt collusion between them. Using a huge dataset on procurements of AI-92 gasoline in Russia in 2011, we show that the price difference between repeated and one-time contracts can be explained by the type of procurement procedures providing different opportunities for corrupt behavior. Less transparent procedures (single-sourcing and requests for quotations) are more suitable for corrupt collusion. This might explain why the prices of repeat contracts in this case were higher. On the contrary, the prices of repeat contracts were lower compared to one-time procurement in the case of more transparent e-auctions.
Does higher inequality in wealth distribution imply worse property rights protection in non-democratic regimes? We construct a model of asymmetric rent-seeking contest with endogenous institutional quality, which predicts that more unequal societies indeed are more likely to end up in conflict equilibrium (with poor property rights and rent-seeking behavior). However, when the economy rests in conflict, higher wealth share of the elite improves institutions, while lower size of the elite worsens them (both situations correspond to higher inequality). Moreover, the intensity of conflict is negatively related to wealth inequality between the ruling elite and the masses. Therefore, in countries with very narrow ruling class lower inequality does not correspond to better institutions and only exacerbates conflict. In countries with wider access to power strong institutions may appear either under very high or very low wealth share of the elite, while intermediate cases correspond to worse property rights protection. We also provide some preliminary evidence that support our results, which are then used to interpret several cases of institutional change in historical perspective and nowadays. Keywords: institutions, property rights, inequality, rent-seeking, wealth distribution, conflict JEL Classification: D31, D72, D74, O17, P26
Embedding transactions in informal social relationships is broadly expected to increase trustworthy behavior, especially in environments with weak formal institutions. This paper proposes that theories linking social capital to trustworthy behavior are incomplete because they fail to address the opportunity space for malfeasance created by the assumed trust in fellow group members. The analysis compares the role of coethnicity first in a principal’s selection of an agent in an impersonal market and second in a corrupt agent’s selection of victims in an intermediate fraud. The empirical setting is the ethnically diverse and contentious population of investors in Kenya’s emerging stock market. Analysis of investor-level data confirms that investors prefer coethnic stockbrokers and avoid brokers from rival ethnic groups, especially in areas with higher inter-ethnic conflict. However, the corrupt broker is also more likely to victimize coethnic clients, especially in the same conflict areas where investors increasingly rely on social capital for protection. Findings are robust to alternative modeling strategies and selection specifications. My findings expand research on the “dark side” of social capital, which to date have focused largely on efficiency issues, by examining the opportunity space for malfeasance created by the trust assumed in social relations.
We combine international trade data from the U.S. Census Bureau with Toxics Release Inventory data from the Environmental Protection Agency to investigate the relationship between U.S. firms’ imports from low-wage countries (LWCs) and toxic emissions by their domestic plants. We find that plants release less toxic emissions on American soil and spend less on pollution abatement when their parent firms import more from LWCs. According to our estimates, when a plant’s parent firm increases its share of imports from LWCs by 10 percentage points, the plant’s toxic emissions on American soil decreases by 4.0%, and the plant spends 3.8% less on pollution abatement expenditures. These effects are stronger for plants located in dirtier U.S. counties, where benefits from pollution reduction are expected to be larger. Moreover, goods imported from LWCs are more pollution-intensive than goods imported from the rest of the world. These results provide the first large-sample empirical evidence that U.S. firms offshore both production and pollution to the developing world.
How can the economics of organization evolve to be useful as an approach to business history? The answer depends on its capacity to handle the diversity, origin, and evolution of particular institutional arrangements observed in particular industries. The ad hoc and purely descriptive approach to the behavior and evolution of specific enterprises, industries, and business practices runs the risk of tautological explanations, which is the main reason to choose some theoretical support for the analysis. This is what motivates this work: first, to contribute to smooth the interface between the vaguely-defined field of business history and the yet-to-be-consolidated field of economics of organization; and second, to contribute to the discussion of the micro-dimensionality of firms from a historical perspective, with a focus on uncertainty.