Society for Institutional & Organizational Economics
Conference papers from 2016 (sessions were not tracked for this year)
Proposals to replace patents with rewards assume government funding, providing a significant potential benefit (reduction of deadweight loss) but also a seemingly intractable political obstacle, the need to raise governmental funds instead of relying on payments by eventual users of inventions. This Article describes a system of inventive contribution, an alternative to patents that, like rewards, makes inventors’ returns dependent on governmental assessments, but that, like patents, is funded by users. The system relies on two sets of intermediaries between producers of products and services and the inventors to whom they may owe contribution. First, producers would be required to pay contribution insurers to cover any money owed. Second, inventors would contract with contribution aggregators, who would buy compensation rights from them. A small percentage of insured products or services would be randomly selected, and a governmental agency would estimate (1) the proportion of gross consumer surplus provided by the product attributable to inventions generated by the contribution system, and (2) the relative contribution of various aggregators to this. Such estimates would determine insurers’ payments into a fund and the aggregators’ share of that fund.
How do non-practicing entities impact innovation and technological progress? The question has enormous importance to industrial policy, with virtually no direct evidence to inform it. This paper provides new evidence on the subject, both theoretically and empirically. In doing so we inform the debate that has portrayed NPEs alternatively as benign middlemen that help to reallocate IP to where it is most productive or stick-up artists that exploit the patent system to extract rents, thereby hurting innovation. We make use of unprecedented access to NPE-derived patent and financial data as well as a novel model that guides our data analysis. We find that NPEs target patents coming from small firms and those that are more litigation-prone, as well as ones that are not core to a company's business. When NPEs license patents, those that generate higher fees are closer to the licensee's business or more likely to be litigated. We also find that downstream innovation drops in fields where patents have been acquired by an NPE. This evidence provides some support for both views of NPEs and suggests that a more nuanced perspective on NPEs as well as additional empirical work is necessary before informed policy decisions can be made.
The decision to accept a plea bargain is one of the highest stakes decisions under uncertainty that an individual can make. It is also an extremely important source of unwarranted disparity in the criminal justice system. This paper undertakes the most detailed empirical study to date of the plea bargain decision. We use a dataset of over 300,000 observations from 15 years of court cases across North Carolina. In order to overcome omitted variables bias, we make use of an instrumental variables strategy. In North Carolina a defendant seeking to minimize likelihood of incarceration is generally better off rejecting a plea, while one who wishes to minimize expected sentence length will take the plea. But underlying these general findings we find that the decision to plea or not is complex and varies substantially by race, type of crime, jurisdiction, attorney type, and judge. These findings have important implications both for optimal decision-making by defendants and for structure of the criminal justice system.
Is there more political violence in geographic areas with more countries? This question was raised by classical and historical scholars but remains unanswered by the modern literature on violence and the state. To empirically address this question I compile a spatio-temporal data set on Africa between 1990 and 2015. I create a novel measure called ``geo-political concentration'', with a monopoly value at 1, by calculating a Herfindahl–Hirschman Index of country surface areas for a given geographic area. I find a non-linear relationship between armed political violence geo-political concentration in both a bi-variate non-parametric regression and multivariate OLS. As an area becomes geo-politically monopolized the reduction in violence is initially large, but plateaus, and eventually slightly reverses. Furthermore, I find that the type of violence changes as HHI increases and that a more pronounced U-shape is found when looking at larger geo-graphic regions.
Taking advantage of the surprise decision of the Swiss National Bank in early 2015 to let the Swiss franc appreciate, we examine how international economic relations and policy affect the political attitudes and behavior of voters. Because many households in several Central European countries, such as Poland, hold mortgages denominated in Swiss francs, the large franc appreciation significantly hurt these households financially. This paper investigates whether this policy change affected voters evaluations of the government. For this purpose, we use two sources of data: 1) survey data from a Polish public opinion poll fielded immediately after the SNB decision; and 3) an original survey experiments fielded immediately before the 25 October Polish elections. The experiment exploits variation in existing policy responses to exchange rate-rate shocks and the fact that different policy proposals about this issue have played an important role in the ongoing Polish election campaign.
We study the governance of firms under imperfect institutions. We present a model where firms operate in a territory governed by a powerful ruler, and we study conditions under which the ruler can simultaneously commit to punish defaults on intra-firm agreements, and not to expropriate the firm’s manager and worker, by entering a self-enforcing social contract with them. We show that if the manager and the worker are employees of the ruler (public firm), the ruler is less tempted to expropriate them compared to the case where the worker is an employee of the manager (private firm). At the same time, in a public firm, the ruler’s failure to pay the worker cannot be punished coercively, so defaulting on intra-firm contracts is more tempting than in a private firm. As a result, privatizing a public firm may undermine the credibility of the underlying social contract, and thus reduce the firm’s productivity and output, when institutions do not constrain the ruler’s power to expropriate, and when the ruler cannot easily verify defaults on intra-firm contracts. Importantly, we obtain these results after holding the production technology, parties’ preferences, and internal organization constant across the two firms’ types. By emphasizing institutions as a key determinant of the choice between public and private firms, our theory offers new testable implications for industrial policy and the timing of privatization in both developed and developing countries.
The Victualling Board of the British Navy ran between 1683--1832. Despite successfully meeting the food demands of the time it has often come under attack for corruption, incompetence, and weevils. Here, recent historical work is examined with an economic lens to reveal an organization that actually efficiently dealt with severe measurement costs, and which effectively changed with the emergence of the modern world. The aspects of the Victualling Board that seem odd and inefficient today --- excessive inventories, minimal accounting, in-house production, mutual surveillance, excessive punishments --- were ingenious second-best solutions to pre-modern measurement problems.
We present an overarching framework for institutional and organizational analysis, and the tools used to explain the evolution and effects of institutions. While institutional and organizational analysis can be used to examine the question of what leads to macroeconomic and political performance, it can also be used to examine questions related to the performance of smaller organizations. All human interaction is affected by the institutional structure in which it takes place, and one goal is to present the reader with a toolkit that can be applied in many settings. Moreover, the right institutional structure can facilitate increases in the scale and complexity of interactions that a given society can sustain. Rules, norms, and shared beliefs can explain behavior at the level of the family, the firm, or the national government. Our framework for institutional analysis weds the foundations of property rights and transaction costs (Part I) to the operation of the political system to create the formal rules of the game (Part II) and the dynamics of deep institutional change (Part III).
In this paper we examine the long-term development impact of legal versus illegal overseas trade in colonial Mexico. While there is ample evidence that commercial activity may lead to sustained economic benefits, it is unclear whether these effects are driven by commercial activity per se or by the accompanying state institutions that positively impact development (e.g. tax-collection and legal enforcement). Using historical sources on the presence of smuggling and piracy in Mexican coasts from the 16th to 18th century we find that the presence of trade, either in its legal or illegal form, leads to significantly better development outcomes compared to neighboring areas where such activities were absent. Results are robust to instrumenting trade with natural harbors and are not driven by a mechanical effect of carrying out trade in the present, by the length of colonial presence, or by substantial geographical differences. These findings suggest that the positive impact of illegal trade may have compensated for the damaging effects of a weaker state presence and the culture of illegality surrounding it.
Are well-functioning formal judicial institutions important for growth? Some argue that they are needed to ensure efficient contract enforcement, while others argue that informal contracting arrangements such as relational contracts, social norms or kinship networks can provide workable substitutes. One explanation for the continued lack of clarity is that most of the previous empirical work on this topic has taken place in a cross-country setting, in which it is difficult to find objective, comparable measures of judicial efficiency and endogeneity concerns are uppermost. In contrast, this paper studies the effect of court efficiency on economic growth in a within-country setting. The setting is that of district courts in India, a country with infamously slow courts on average and significant variation in court speed by state. The identification strategy is motivated by theory from the incomplete contracting literature, in which it is argued that transactions involving relationship-specific investments are more exposed to post-contractual opportunism and hence have greater need for efficient contract enforcement. Using state level variation in an objective measure of court speed and industry level variation in relationship-specificity from Nunn (2007), I show that the interaction between state level court efficiency and industry level relationship-specificity is highly predictive of future growth in the registered manufacturing sector. Focusing on the interaction and including state and industry fixed effects makes it more difficult to argue that the results are driven by omitted variables. Nevertheless, I conduct a number of robustness checks and placebo tests to systematically rule out other potential explanations and provide additional confidence in the hypothesized mechanism. For example, one such placebo test demonstrates that it is only the efficiency of civil courts, not criminal courts that is a significant predictor of future growth.
There are many studies revealing factors which influence the demand for financial services. However genetic features, determining the individual’s overall postnatal behaviour, have not been studied within this context. This paper extends the previous literature by studying to what extent individual biological endowment, proxied by prenatal testosterone (PT) (measured by the 2D:4D ratio), can determine personal demand for bank services and insurance. We use data from the Russian Longitudinal Monitoring Survey of 2011–2012. Our findings confirm the existence of the link between inherent biological variation and financial inclusion: PT affects the use of bank cards, intention to take out a loan, having a bank deposit and the consumption of insurance products.
We analyze the interaction between formal governance and relational contracts in two-sided collaborations. Our theoretical model shows that when embedded in a relational contract, a formal governance structure that incentivizes cooperation by party A also increases cooperation by party B, as it reduces the relational bonus B must pay to elicit A’s cooperation, and hence B’s overall temptation to break the relationship by reneging on both the bonus due to A and its own cooperative action. We test our prediction using data on franchisee-franchisor litigation outcomes, and we find that consistent with the model, the adoption of multiunit franchising not only reduces franchisees’ freeriding on the brand, but also encroachment and other abuses by the franchisor. We suggest implications of our results for inter-organizational relationships more generally, including buyer-supplier relations, alliances, and the like.
Over the last decade, federal corporate criminal enforcement policy has undergone a significant transformation. Firms that commit crimes are no longer simply required to pay fines. Instead, prosecutors and firms enter into pretrial diversion agreements (PDAs). Prosecutors regularly use PDAs to impose mandates on firms creating new duties that alter firms’ internal operations or governance structures. This Article evaluates PDA mandates to determine whether and when prosecutors can appropriately use them to deter corporate crime. We find that mandates can be justified. But, contrary to DOJ policy favoring mandates for any firm with a deficient compliance program at the time of the crime, we find that mandates should be imposed more selectively. Specifically, mandates are only appropriate if a firm is plagued by “policing agency costs”—in that the firm’s managers did not act to deter or report wrongdoing because they benefitted personally from tolerating wrongdoing or from deficient corporate policing. We show that this policing agency cost justification provides guidance on how to reform federal policy to make appropriate use of mandates, guidance which reveals that many mandates are inappropriate.
This paper traces to Coase (1960) the theoretical roots of the difficulties faced by most economic analyses of property rights in their attempts to enlighten policymaking in the property area. In his pioneer analysis of externalities, Coase relied on a simplified conception of property that has been suitable for successfully analyzing many important issues. However, its implicit assumption that exchange in property rights does not affect future transaction costs provided an inadequate basis for understanding property institutions. From a market perspective, the central problem of property lies in the interaction among multiple transactions, which causes exchange-related and non-contractible externalities. To contain them, additional mandatory rules and a wider scope of impartiality are necessary. Their absence is felt in three attitudes closely linked to the application, out of context, of the original Coasean simplification of property: emphasizing the initial allocation of property rights, paying scant attention to legal rights, and overestimating the power of private ordering. These have been obscuring key policy choices in the areas of land titling, business formalization, administrative simplification and organized financial exchanges.
We analyze the sequential exchange problem in which traders have incomplete information on whether their current transaction is in conflict with some previous transaction. We show that if property rights over the assets being traded are strictly enforced against subsequent buyers, potentially efficient trades may fail even if information on all other attributes of the current transaction is complete. We also show that first best trade may be implemented through mechanisms providing public evidence on previous transactions, and we provide sufficient conditions for implementing such mechanisms. We discuss implications of our model for the conceptualization and optimal design of property rights, market institutions, and the theory of the firm.
Market power (the short-term ability to raise price above marginal cost) and bargaining power (how much value one can potentially capture from a transaction) are central constructs in competitive strategy research. Positioning theory focuses on attempts to build, protect, and exercise market power and bargaining power. However, absent transaction costs, parties made worse off by the exercise of market and bargaining power may be able to exercise countervailing power by forming coalitions, negotiating, and otherwise contracting around the focal firm’s attempts to appropriate monopoly profits. We use cooperative game theory to show how the effectiveness of countervailing power depends on particular kinds of transaction costs.
The issue of the relative efficiency of the public and private sectors for public service delivery is still open to debate. In this paper, we argue that both sectors are heterogeneous in terms of civicness and that this difference is culturally determined. In a model explaining the relationship between the difference of civicness and the relative efficiency of the public and private sectors, productivity is higher in one sector relative to the other because its expected civicness acts as a self-selection mechanism. If workers have imperfect information about the civicness of workers with whom they match and matches take place within sectors, then high-civic workers will choose to work in the expected -- culturally determined -- high-civic sector. We test this model in two ways. First, using the Swiss language border between French and German areas -- which are characterized by systematic differences in the level of confidence in public administration and private companies -- as a spatial regression discontinuity design, we highlight the causal effect of culture on government contracting choices for their services. 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. Second, we use panel data on privatization choices in OECD countries over 1994-2011. We find that the (inherited) difference of trust between the public and private sectors has a negative impact on privatization, while this does not work for a range of other measures of trust. We document that this impact is not mediated by ideological but by efficiency considerations.
The drivers of improvements in efficiency that public private partnerships (PPPs) can contribute to the delivery of public services have been largely highlighted by the theoretical literature, but empirical evidence is still scant and prone to identification issues. In this paper, we present an indirect way of assessing their relative efficiency by estimating whether more fiscal accountable governments, that have a hardened budget constraint and hence higher incentives to look for efficiency gains, resort more to PPPs. Our identification is based on subnational governments, for which fiscal accountability varies across and within countries. We use panel data on the number of PPPs and subnational fiscal accountability in 30 OECD countries over the 1994-2011 period. Our results show a significant, robust and important positive impact of an increase in subnational authorities' accountability on the number of PPPs developed at the local level. Our results also highlight that this effect varies with institution-specific design. We use data on the value and mean value of PPPs to confirm that it is efficiency considerations that drive more accountable subnational governments to resort more to PPPs.
In liability insurance, the duty to defend is broader than the duty to cover. It is possible that an insurer which breaches its duty to defend may not have an actual duty to cover the policyholder's losses. However, if the penalty for a breach of the duty to defend is limited to actual legal costs spent by the defendant, the insurer may have an incentive to refuse to defend, even when the duty to defend is clear. This occurs because the insurer will not internalize the consequences of an inadequate defense when it ultimately can avoid covering the claim. If the penalty for a breach of the duty to defend also includes a forfeiture of the right to contest coverage of the claim, the insurer will never refuse to defend when the duty to defend is clear, but such a penalty may induce an insurer to defend even when it has a good legal argument against the duty to defend. We argue that tying a forfeiture of the right to assert any defense of coverage to a bad faith refusal to defend can improve incentives.
The conventional wisdom holds that, ceteris paribus, democracies are better at promoting population health than autocracies. Under democracies politicians are more accountable to voters and therefore redistribute more public goods and of higher quality. However, the empirical evidence is mixed and results are not robust to different country-level confounders. In this light Russia presents a unique opportunity to put this theory to a new test given its tremendous sub-national variation in both democracy level and health outcomes (e.g., life expectancy ranges from 61.8 to 78.8). Our findings are twofold. First, sub-national democracies significantly impact health outcomes. Second, the effect of democracy is more subtle than previosuly thought and acts through income level: in poor regions, high level of democracy is associated with worse health outcomes, while in rich regions democracy has a positive impact on health. Due to infancy and institutional imperfections, subnational democracies fail to redistribute healthcare goods in an optimal way, which is compensated either by rising incomes or high mobilizational efforts under non-democratic sub-national regimes.
The paper aims to introduce the family law as a determinant of the family business population density, longevity and performance. Starting from the different contents on the traditional family law and the liberal family law, we develop a family law index to measure the degree of freedom left to individuals in their legal relation with the members of their family. This index associated to the corporate law determine the family business governance choice and then the family business longevity, performance and population density. The paper makes contributions in the family business field and in the corporate governance field.
An entrepreneur borrows money from the credit market, then repeatedly motivates her employees to work hard. If output is not contractible, then the entrepreneur faces commitment problems with both creditors and workers. The principal's financial obligations constrain her promises to workers and so determine productivity. In a profit-maximizing equilibrium, output starts low, increases as the principal repays the creditor, and may continue increasing after the debt has been repaid. Productivity eventually converges to a steady state that is independent of the initial loan. We apply this framework to show how internal agency relationships shape investment dynamics, liquidation, and debt forgiveness.
Married women wish to have genetically high fitting children, as well as husbands’ support. There is tension between the two objectives since, as a rule, husbands are not best fitting among accessible males. Wives, then, would gain from affairs with men better fitting than their husbands. We hypothesize that the cause of marriage, and husbands (implicit) commitment to support their wives and children, is husbands’ ability to control their wives to ascertain their fatherhood over the children wives bear. Consistent with the hypothesis, it is observed that in much of history wives have been constrained in such a way so as to reduce their opportunities for affairs even at the cost of lowered productivity. Moreover, wives’ constrains have been extended via social means. By the model here, the (low) level of specialization and limited scale economies within the household, rather than being the cause for marriage as the literature asserts, are the result of husbands’ control, where wives are tied to the homestead. The other explanations for marriage offer no reason for imposing costly restrictions on their wives’ behavior. As husbands’ control is never perfect, however, some wives are still expected to have affairs and bear better fitting children. The gain from affairs is not the same for all wives. Five implications of the disparity and related factors are: 1. The lower is a wife’s standing, the greater her gain from, and thus the greater the expectation of her having an affair. 2. As the ratio of men to women in a society falls, more infidelity is expected. 3. Societies are expected to form norms and enact laws to reduce infidelity. 4. A disproportionate fraction of sport stars and musicians are the children of single mothers. 5. With time, for a given legal environment, the rate of adultery-based divorce should decline. Thus far, however, the implications have not been tested.
Interest in innovative health care delivery models has surged in recent years, partly owing to measures such as the Affordable Care Act which have expanded insurance coverage and spotlighted the need to contain health care costs. The goal of these innovations is to increase physician capacity without sacrificing quality of care. One innovation that has been proposed as a low-cost alternative to traditional office and phone visits is “e-visits,” or secure messaging between patients and physicians via patient portals. Using a panel dataset from a large primary care provider in the United States, we impact of patient adoption of e-visits on their subsequent frequency of office and phone visits, and also their subsequent health statuses. We study the 2008 to 2013 time period for our system which covers the first adoption of e-visits and their following promotion. The data enable a variety of difference-in-differences, matching, and instrumental variable analyses due to the variation in timing of both patient and physician adoption of e-visits, which allow us to carefully consider both observable and unobservable factors that drive patient e-visit adoption. Our study is the first to document strong evidence that contrary to current beliefs, e-visits serve to “trigger” additional office and phone visits without consistently measured improvements in patient health as measured by levels of blood cholesterol and blood glucose. The instrumental variable analysis provides suggestive evidence that patients on a healthy trajectory may be adopting e-visits at higher rates.
Using unique firm-level data across 48 developing countries and 36 manufacturing industries we gauge the importance of international banks’ presence for promoting entrepreneurship, as measured by business formation. Our results suggest that greater foreign bank presence fosters greater business formation, especially in industries with higher needs for external finance. The effect is particularly strong when the foreign banks present are headquartered in other developing countries. We also investigate how an industry’s use of relatively standardized inputs affects the advantages it reaps from foreign bank entry. In developing countries, the effect on business formation of foreign bank presence is greater in industries with more standardized inputs, especially when the foreign banks present are from other developing countries. The effects of foreign bank presence on business formation are greater in economies with stronger legal enforcement, and foreign bank entrants from developed economies are especially dependent on stronger legal frameworks; banks entrants from developing countries have larger effects on business formation in developing countries where legal protections are relatively weak.
Anti-Semitism continues to be a widespread societal problem rooted deeply in history. Using novel city-level data from Germany for more than 2,000 cities and county-level data, we study the role of economic incentives in shaping the co-existence of Jews, Catholics and Protestants. The Catholic ban on usury gave Jews living in Catholic regions a specific advantage in the moneylending sector. Following the Protestant Reformation (1517), the Jews lost this advantage in regions that became Protestant but not in those regions that remained Catholic. We show that 1) the Protestant Reformation induced a change in the geography of anti-Semitism with persecutions of Jews and anti-Jewish publications becoming more common in Protestant areas relative to Catholic areas; 2) this change was more pronounced in cities where Jews had already established themselves as moneylenders; 3) the Reformation reduced the specialization of Jews in the financial sector in Protestant regions but not in Catholic regions. We interpret these findings as evidence that, following the Protestant Reformation, the Jews living in Protestant regions lost their comparative advantage in lending. This change exposed them to competition with the Christian majority leading, eventually, to an increase in anti-Semitism.
To understand how different rules, laws, and other institutions affect one another's performance, we propose a model of behavioral spillovers across institutions. Agents' initial reaction to an institution depends on their existing behavioral repertoires. We find that as spillovers increase in magnitude, path dependence becomes likely; however, when spillovers become large, the path becomes less important than the initial choice of institution. We use this model to characterize the optimal sequencing of institutions. We find that the best-performing sequences initially induce behavioral diversity and then build on existing productive behaviors to avoid inefficient spillovers. Counterintuitively, these sequences maximize potential for path dependence in order to avoid its realization. We also characterize conditions that make institutions less prone to interaction effects and find that optimal payoff structures rely on weak punishments.
American trademark law has long operated on the assumption that there exists an inexhaustible supply of possible trademarks. With respect to word marks in particular, conventional wisdom has assumed that we will always enjoy a surplus of preexisting words available for exploitation as trademarks, and that in any case, trademark adopters will always be able simply to coin new words, the supply of which is assumed to be effectively infinite. In this paper, we present empirical evidence that fundamentally challenges these assumptions. We use the U.S. PTO's recently released Trademark Case Files Dataset, consisting of information on some 7.4 million trademark applications filed at the PTO between 1870 and 2014, to show the surprisingly high proportion of English words already registered as trademarks in the U.S. and the limited availability of possible coinages not already identical or similar to registered word marks. We also demonstrate the growing complexity of registered trademarks, such as through longer word marks, more word marks consisting of multiple words, and more “fanciful” (i.e., coined) word marks. With respect to surnames in particular, we reveal the remarkable proportion of frequently used surnames that are already claimed as trademarks, as well as the proportion of common numbers and colors that are already claimed. Finally, using an original dataset consisting of all 1.7 million administrative Office Actions issued by the U.S. PTO from 2003 through 2014, we show the degree to which trademark depletion is driving the PTO’s increasing rates of refusal to approve trademark applications for publication and registration. The paper explores the implications for trademark law and policy of trademark congestion and depletion.
Lawyers are supposed to be experts at assessing legal risk. We analyze how well they can predict the decision of a court on a legal issue. In our model, legal uncertainty arises from random errors of judges and actors (or their advisers) in determining the applicable legal standard. This implies that lawyers will often produce widely dispersed probability estimates regarding the outcome of a case. Our theoretical model yields a number of testable implications. One of them is that probability estimates are strongly related to a lawyer’s own judgment of the case. In contrast to much of the previous literature, this “consensus effect” does not result from a cognitive bias but reflects limited knowledge regarding the applicable legal standard. An experiment with four different cases and 215 law students largely confirms the predictions of the model.
We analyse how sectoral innovation outcomes are affected by national legislations of worker participation to corporate governance. We develop a model of employee representation laws (ERL) and innovation in the presence of incomplete labour contracts and predict heterogeneous ERL effects across different systems of dismissal regulation. We then perform a panel regression analysis, exploiting panel data for five countries over the 1977-2005 period and 21 two-digit manufacturing sectors. We find that ERL effects on aggregate innovation output are positive, statistically significant and higher in magnitude where national labour laws impose significant firing costs to the firm with respect to institutional settings in which firing costs are low or absent. These results are robust to possible technology selection dynamics, endogeneity and institutional changes in the legal system of patent protection. We also estimate ERL effects on innovation conditional on firing costs at an industry level and show that the impact of ERL is relatively larger in those sectors where the human capital contribution to production is higher. Our results have relevant implications for the optimal design of employee representation legislations.
This study investigates the determinants of service outsourcing, and professional and business services in particular, an industry that accounts for half of the growth of the total service sector. Drawing on the insights of a model of the boundary of the firm based on adaptation costs and diminishing return to management, I argue that an increase in coordination complexity (i.e. more inputs in the production process) leads firms to outsource a higher share of their total costs and to focus on their core competences. Since country-specific service inputs are needed to export to a particular country (e.g. a specific advertisement campaign), I proxy coordination complexity with the number of export destination markets and I find support for the theory using an extensive dataset of French firms. Over time, firms that export to more countries increase the amount of purchased business services. The finding is quantitatively very significant and robust to firm size, export intensity, internal production, and many other determinants of outsourcing proposed in the literature. The firm-level evidence also contributes to opening the black box of fixed export costs and to establishing a new causal link between globalization and structural transformation exploiting exogenous demand shifters.
The paper studies the effects of competition on innovation in various technology groups of mature Russian manufacturing firms. The purpose of the research is to establish whether more intense competition is good or bad for innovation, and to learn how the response to competition varies between technology leaders, followers and laggards. We use the 2014 survey data, which includes 1920 firms from 19 two-digit sectors and size groups between 10 and 10,000 employees. We find that product innovation effort increases with competition at a modest level of competitive pressure, especially if foreign entry and import are considered. However, this result is mostly driven by technologically weak plants, which innovate less than leaders and followers at a low level of competition, but are encouraged to innovate more by a modest increase of competitive pressure, when theoretically predicted optimal behavior would be to refrain from innovation. When competition is strong, plants in all technology groups give up the innovation race. Competition is less influential in explaining process (as opposed to product) innovation, and our estimations demonstrate a clear inverted U-shaped link: laggards and leaders are more likely to upgrade process technologies when weak competition increases slightly, and are less likely to do so when strong competition becomes stronger.
We study the effect of birth order on personality traits among men using population-wide data on enlistment records and occupations for Sweden. Earlier born men are found to be more persistent, socially outgoing, willing to assume responsibility, and able to take initiative than later-borns. In addition, we find that birth order affects occupational sorting; first-born children are more likely to be managers, while later-born children are more likely to be self-employed. We also find that earlier born children are more likely to be in occupations that require leadership ability, social ability and the Big Five personality traits. Finally, we find a significant role of sex composition. Later-born boys suffer an additional penalty the larger the share of boys among the older siblings. When we investigate possible mechanisms, we find that the negative effects of birth order are driven by post-natal environmental factors. We also find evidence of lower parental human capital investments in later-born children.
Existing literature has found large negative effects of police patrolling on crime, typically using natural variation in the aftermath of terrorist attacks or experimental variation targeting hotspot areas. It is unclear, however, to what extent these effects extend to more general settings in terms of the day-to-day work of the police. In this paper, we estimate the effect of mobile police patrolling on crime in residential areas. To do this, we take advantage of a policy introduced by Essex police to ratchet up police presence in a 200 metre radius around the scene of a burglary, starting on the Thursday following the burglary and lasting for seven days. We find that this large and exogenous variation in police presence was not associated with a decrease in crime during the intervention week. We then use high-frequency police location data to study whether the presence of a police officer in an area has a contemporaneous negative effect on crime. We find that it does, but also that this deterrence effect is very short-lived.
When and how did European modes of political thought diverge from those which existed in other world regions, particularly Middle Eastern societies that shared significant institutional heritage with Europe? To address this question, we compare Muslim and Christian political advice texts from the medieval period using automated text analysis to identify four major themes and sixty granular themes common to both Muslim and Christian polities, and examine how emphasis on these topics evolves over time. While European mirrors, and Machiavelli's Prince in particular, have been extensively studied, there has been less scholarly examination of a parallel political advice literature emanating from the Islamic world. Our empirical findings identify a major inflection point in the political discourse for Muslim texts beginning in the 12th century, a juncture suggested by historians as an ideational turning point as a result of the influence of Turkic and, later, Mongol invaders. For Christian texts, we empirically identify a decline in the relevance of religious appeals from the Middle Ages to the Renaissance.
We analyze the duration of large economic declines and provide a theory of delayed recovery. We show theoretically that uncertain post-recovery incomes lead to a commitment problem which limits the possibility of cooperation in ethnically heterogeneous countries. Strong constraints on the executive solve this problem by reducing the uncertainty associated with cooperative behavior. We test the model using standard data on linguistic heterogeneity and detailed data on ethnic power configurations. Our findings support the key theoretical prediction: stronger constraints on the political executive shorten economic declines. The effect is large in ethnically heterogeneous countries but virtually non-existent in homogeneous societies. Our main results are robust to a variety of perturbations regarding the estimation method, measures of heterogeneity, measures of institutions and the estimation sample.
Governments throughout the world are turning to public-private partnerships (PPPs) as a means of providing new infrastructure. The decision to adopt a PPP over conventional government procurement is usually based on a value for money (VfM) appraisal, but this analysis is conducted differently in different countries. This paper describes the correct way to conduct VfM analysis to minimize the present value of the costs to the Treasury or to maximize social welfare. It then compares the documented methodologies of nine specialist PPP units. It identifies four ways in which those methodologies depart from the correct approach, and shows how in each case this departure favors the PPP option. Finally, we show how the approach used in one jurisdiction, the UK, might be augmented to determine the best value for money from society's perspective.
Legal institutions affect economic outcomes, but how much? This paper documents how costly supplier contract enforcement shapes firm boundaries, and quantifies the impact of this transaction cost on aggregate productivity and welfare. I embed a contracting game between a buyer and a supplier in a general-equilibrium closed-economy Eaton-Kortum-type model. Contract enforcement costs lead suppliers to underproduce. Thus, firms will perform more of the production process in-house instead of outsourcing it. On a macroeconomic scale, in countries with slow and costly courts, firms should buy relatively less inputs from sectors whose products are more specific to the buyer-seller relationship. I first present reduced-form evidence for this hypothesis using cross-country regressions. I use microdata on case law from the United States to construct a new measure of relationship-specificity by sector-pairs. This allows me to control for productivity differences across countries and sectors and to identify the effect of contracting frictions on industry structure. I then proceed to structurally estimate the key parameters of my macro-model. Using a set of counterfactual experiments, I investigate the role of contracting frictions in shaping productivity and income per capita across countries. Setting enforcement costs to US levels would increase real income by an average of 7.5 percent across all countries, and by an average of 15.3 percent across low-income countries. Hence, transaction costs and the determinants of firm boundaries are important for countries' aggregate level of development.
Federal real wages have increased substantially over the past quarter century. We examine this trend with a new dataset from the Office of Personnel Management that includes annual records for over three million federal workers from 1988-2011. We demonstrate that federal wage growth has outstripped private sector growth and is due primarily to individuals moving between grades. Further, federal wage gains have been distributed relatively evenly across the wage distribution. We show that increased wages have been associated with increased human capital levels, with federal employees becoming increasingly educated and experienced. Furthermore, federal work has shifted from clerical to administrative and professional jobs. Our results suggest that increased human capital and occupational changes account for about three-quarters of real wage growth during this period. Finally, we find limited evidence of the manipulation of job classifications to generate higher wages. These results have implications for policy regarding the costs of government.
How important is human capital for development? Typically, researchers try to answer this question by studying human capital accumulation. We propose another approach, focusing on loss of human capital due to emigration. We exploit exogenous variation in feasibility of emigration for inhabitants of the South-West Siberia arising from the repatriation program for people of German origin – the ethnic group widely believed to be hard working, thrifty and sober when compared to their Russian and other neighbors. Using municipality-level panel model approach, we show that districts with greater German presence in the census years (1989 and 2002) had lesser population growth during the ensuing period (1989-2002 and 2002-2010, respectively). We also demonstrate that share of Germans across raions is positively associated with potato and cereals output per ha. This implies that German emigration led to decrease in farming productivity. The effect cannot be explained by overall population dynamics, thus rendering agglomeration economies an implausible channel of influence. We propose human capital as the main mechanism that could explain our findings. Although norms and values of German community in Russia, i.e. components of social capital, could also matter. We further investigate both channels by using additional data on education and social capital.
We exploit contract-level data on approved and rejected small-business loans to assess the impact of a new credit registry in Bosnia and Herzegovina. Our findings are threefold. First, mandatory information sharing tightens lending at the extensive margin as loan officers reject more applications. These rejections are based increasingly on hard information—especially registry information on applicants’ outstanding debt—and less on soft information. Second, lending standards also tighten at the intensive margin: information sharing leads to smaller, shorter and more expensive loans for first-time borrowers. Yet, in line with lower switching costs, repeat borrowers gain from information sharing. Third, the tightening of lending standards results in fewer defaults, in particular among first-time borrowers, and higher returns on loans. This suggests that a reduction in adverse selection is an important channel through which information sharing affects loan quality.
We consider a multi-tier territorial organization with governments in charge of providing a bundle of public goods with different provision and access costs. A jurisdiction's provision costs depend on the types of public goods it provides and on the size of its administration. A citizen's access costs depend on the types of public goods and on her distance to the public facility that provides it. We compare the optimal territorial organization (the number of tiers and jurisdictions per tier, the size of their administration and the bundle of public goods provided at each level) under centralization and decentralization. Decentralization is modeled as a delegation game in which local decision-makers consider only the impact of their own decisions on the welfare of their constituents. We show that the effect of decentralization on the territorial organization depends on the attention given by citizens to the quality of public services: if it is large (low), the resulting territorial organization entails less (more) jurisdictions per tier, with reduced (increased) scopes, and a greater (smaller) number of tiers than under the centralized organization.
Two heterogeneous agents exert effort over time to complete a project and collectively decide its scope. A larger scope requires greater cumulative effort and delivers higher benefits upon completion. To study the scope under collective choice, we derive the agents’ preferences over scopes. The efficient agent prefers a smaller scope, and preferences are time-inconsistent: as the project progresses, the efficient agent’s preferred scope shrinks, whereas the inefficient agent’s preferred scope expands. In equilibrium without commitment, the efficient agent obtains his ideal project scope with either agent as dictator and under unanimity. In this sense, the efficient agent always has real authority.
In most developed countries the gender gap is nearly closing in the health and educational spheres while there is still sizeable gender inequality in the economic leadership and political dimensions. Why do women’s economic decision-making and political empowerment vary so widely? What are the main potential determinants of such variations? In this paper, over a cross-section of Italian provincial data, we focus on the association between two specific facets of women’s empowerment, the percentage of women holding office in local political bodies and the percentage of women in high-ranking jobs, and the religious and cultural conditions which facilitate or hinder women’s inclusion. Our hypothesis is that culture, in particular those values embodied by religious culture, plays a central role in shaping norms and beliefs about the role and involvement of women in society. Moreover we suggest that these cultural norms are inherited from the past and therefore have a high degree of inertia. Both OLS and IV results indicate that our measures of women’s empowerment are strongly associated with religious culture, as proxied by religious marriages. These results are robust and consistent across specifications.
Japan, whose remarkable development story prompted Robert E. Lucas to place it in a category of its own in his account of world economic growth since the Industrial Revolution, started its transformation from a poor backward to a modern industrial nation in the late 19th century by growing its cotton spinning industry—the same industry that had been the key to industrialization in England and elsewhere. In this paper we conduct an in-depth theoretical and empirical investigation of key factors influencing innovations, product upgrades, and product diversification in this industry. The literature on industrial organization and international trade has recognized the importance of heterogeneous firms’ choices of what products to produce, but this work has focused largely on supply-side determinants of this decision. We propose a novel approach focusing on embodied diffusion of knowledge not just about the supply side (production technologies) but also (and even more so) about the demand side (markets, reputation for quality and reliability, customers’ willingness to pay, etc.). We employ hand-constructed, detailed “nanoeconomic” data on cotton spinning in Meiji-era Japan, to investigate complementarities between demand- and supply-side management in both steady state product variety and product innovation. This leads to a richer notion of firms’ product variety choices and the factors behind interfirm productivity differentials. It also highlights the sources and relative importance of incumbent advantage, as opposed to simple “disruption” notion that innovators replace incumbents.
We develop a model and derive behavioral predictions for a multiproduct sales force subject to goals set based on past performance. We test these predictions using a field experiment in which 53 salespersons from a Chilean beverage company face exogenous variation in monthly sales goals. Confirming our predictions we found that 1) Absent strategic considerations (no goal ratcheting), salespersons increase sales in the product category for which the return to effort increases, 2) Including strategic considerations behavior reverses, salespersons that expect high goal ratcheting decrease sales in the category for which the return to effort increases, 3) Sales did not changed for the average salespersons, reflecting heterogeneity in the expectations of goal ratcheting rather than unresponsiveness to incentives, 4) The strategic effect was less important in salespersons with lowest tenure and no long term contract, suggesting that learning and the expectation of future interaction is important for strategic behavior.
Law affects behavior, in part, through judicial remedies. In common law jurisdictions such as the United Kingdom and the United States, some remedies were developed in courts of law and others were developed in courts of equity. Legal remedies are still distinguished from equitable remedies by many doctrines. This Article argues that the equitable remedies and remedy-related doctrines that presently exist in American law can be understood as a separate system, a kind of distinct legal institution. The components of the system fall into three categories: (1) the equitable remedies themselves, (2) equitable managerial devices, and (3) equitable constraints. These components interact subtly and pervasively. Together, they make the equitable remedies apt for compelling action (or inaction) by a defendant, especially when the action may be continuing or iterative and is not easily measured. The system of equitable remedies is a useful and integrated whole.
In this paper, we empirically examine the determinants of bureaucratic capacity in contemporary Africa. We connect the aid-governance literature with historical and anthropological work on African state formation. Our results show a positive and statistically significant impact of precolonial centralization on levels of bureaucratic quality in Africa, from the late-1990s onwards. Before the late-1990s, however, there is no such relationship. We also find that negative effects of aid dependence on changes in bureaucratic capacity weaken or even disappear, once we control for precolonial centralization. As the colonial interlude is becoming more distant, the influence of precolonial political institutions on modern bureaucratic capacity is reasserting itself. The role of aid turns out to be less important than suggested by either its critics or its supporters.
Established in 1865, the International Telecommunication Union (ITU) has been successful until the early 1990’s in regulating the global telecommunication infrastructure. However, it missed to a large extent the digital revolution. The “governance” of the Internet is in the hands of a wide network of state and non-state actors interacting in an on-going process of norms settlement. One organization is central there: the Internet Corporation for Assigned Names and Number (ICANN) that manages the addressing system of the Internet; a vector enabling to impose governance principles in the digital-sphere. While ICANN is not a US Governmental Agency, it is an established under the US law and it operates under a contract with the US Government. Despite claims by the ITU, supported by many Governments, and all kind of stakeholders to take control of the governance of the Internet, a coalition arround ICANN has been sucessful in keeping control of the Internet development. On the basis of an analysis of the historical archives of the ITU and of ICANN, this paper builds upon the recent work of Greif and Rubin (2013), which opens the ‘black box’ of endogenous political legitimacy. It claims that ICANN and the way it has been orchestrating a new principles of governance has been a way to legitimize the US Federal government oversight over the Internet. In the same time, it led the later to relinquish elements of sovereignty, initiating balances in the power system. This has been the condition for the formation of a coalition, both in term of political influence and competencies, which has been progressively establishing new principles of international governance.
This paper provides novel evidence on the consequences of legal contracting institutions and local financial development for household financial health. Using micro-level panel data on consumer credit, we show that growing up in areas with stronger contracting institutions and more robust financial markets significantly improves household financial well-being over the long run. To identify the effect of local financial development, we exploit externally imposed differences in court enforcement of debt contracts that led to significant, long-term differences in local financial institutions across Native American reservations in the United States. Young borrowers who grow up in a reservation region with stronger contract enforcement encounter better local credit markets, more quickly develop a credit history, and have persistently better household financial health thereafter. We also find that growing up without finance has persistent negative effects on financial health: Although credit scores improve significantly after individuals move away from reservation areas with weak credit markets, it takes at least a decade before their credit scores fully converge with similar borrowers who grew up in areas with better local financial markets.
The focus of this paper is the analysis of the creation of the ”rules of the game” in the legal development process within countries where we observe slow evolution of political institutions and simultaneously fast evolution of economic ones. The paper investigates a coordination game where the executive of the government is fully informed and committed to the rule of law enforcement, whereas a continuum of managers faces imperfect information and it is keen to strip assets against the law. A diffused information on the institutional quality of the country would create an incentive to reduce stripping. In fact the existence of good institutions is not a sufficient condition to conduce to the rule of law enforcement due to the need to spread the information about their strength. High institutional quality can increase the likelihood of rule of law enforcement only when there is diffused information among managers, whereas high uncertainty is conducive to poor rule of law enforce- ment. If good institutions and diffused information do not go hand-in-hand, there is scope for the co-existence of poor property rights protection notwithstanding fast market reforms implementation. This result is robust to the sequential or simul- tanous structure of the game and highlights the key importance of the information component. (JEL: D81, K42, P26)
We develop a positive theory of retirement plan design using a behavioral contract theory approach. We show that the labor market gives firms strong incentives to offer retirement plans that cater to and exploit workers' biases in order to offer contracts that workers perceive as providing greater total compensation. Employers offer matching contributions when present-biased workers overestimate their future savings. Employers adopt automatic enrollment when the savings-increasing effect on procrastinators is outweighed by the savings-decreasing effect on workers who interpret the defaults as implicit advice. Employers offer investment options with excessive fees when workers naively diversify. Our theory provides novel explanations for a range of facts about retirement plan design and calls into question the practice of depending on employers to design retirement plans to counteract the mistakes of their workers, as many behavioral economists have urged.
When creators and innovators take up a new task, they face a world of existing works, inventions, and ideas that are governed by intellectual property rights. This presents a choice: Should the creator pay to license those rights or innovate around them? This Article formulates the innovate/borrow decision as the fundamental feature of sequential creativity and innovation, and it maps the various factors that affect how creators are likely to make them. Importantly, creators will be influenced by more than just formal intellectual property rights. We identify three other sets of factors—Technological & Artistic, Market, and Behavioral—that can also affect the path of sequential innovation. Our approach offers a richer, but more complex, account of the nature of sequential innovation and, in so doing, yields insights into its efficient legal regulation.
The theory of enforcement of law is mainly based on two different choices: strict liability and fault-based (Polinsky and Shavell, 2007). Under strict liability the fine is paid whenever an individual is guilty independently of the personal benefit obtained for committing a harmful act. Conversely, in the case of fault-based liability the conviction depends on the defined fault standard. In this paper, we study the determinants of compliance with laws when moral norms (i.e. social preferences) affect behaviour, in addition to standard material or economic incentives. In this context, the moral cost is not simply a transfer of resources. In fact, it creates an additional trade-off not present in the literature. We claim that an optimal policy cannot be detached from this consideration. We show that a non-guiltiness standard --- the fault equal to the deterrence level --- is never optimal. This is in contrast with standard arguments about the superiority of fault-based under risk neutrality. In this scenario, we show that the choice of a policy depends in a complex way on the magnitude of the harm and the moral cost.
This paper examines the long-run consequences of Russian serfdom. We use novel data measuring the intensity of labor coercion at the district level in 1861. Our results show that a greater legacy of serfdom is associated with lower economic well-being today. We apply an IV strategy that exploits the transfer of serfs from monastic lands in 1764 to establish causality. Exploring mechanisms, we find a positive correlation between the earlier experience of serfdom and pre- Soviet urbanization and land inequality, with negative implications for human capital investment and agglomeration over the long-run.
The need to build scal capacity in the territories that gained independence from the Holy Roman Empire lead to the emergence of new politico-economic social contracts. The long term exposure to macroeconomic equilibria characterized by more inclusive institutions and more productive policies shaped the economic and political attitudes. To test this hypothesis, and explore the persistent legacy of these historical experiences, we reconstruct the political history of each location in Italy by building a yearly cell-level panel collecting information of all political dominations in the Italian territory over the period 1000-1800. In territories that belonged to self-governed political entities, characterized by more inclusive institutions, tax evasion is today signicantly lower. We detect overall weaker eects in the Maritime Republics, mainly driven by annexed locations.
This paper provides evidence on the effect of employee representation on working time flexibility in private-sector European establishments. The empirical analysis is based on repeated cross-section establishment-level data from the last three waves of the European Company Survey. Identification rests on quasi-experimental variation in employee representation driven by the transposition of a size-contingent EU directive granting information, consultation and representation rights to employees in four countries (Cyprus, Ireland, Poland, and UK) with no previous legislation on the subject. Difference-in-difference estimates suggest that the directive had a significantly positive effect on both employee representation and the utilisation of flexible working time for eligible establishments. The greater use of flexible working time is driven by establishments with a high proportion of female workers and in which no local wage-negotiations take place. Our results are consistent with the idea that employee representation provides an endogenous rule-enforcement mechanism in second-best scenarios in which incomplete contracting problems are pervasive and third-party arbitration is unfeasible. Quite paradoxically, the relaxation of shareholders' property rights and the imposed limits on managerial discretion, resulting from the operation of employee representative institutions, seem necessary to achieve certain valuable forms of organisational flexibility in market economies.
The paper intends to give a fresh perspective on the problem of per capita income distribution modeling in developing countries based on the example of Russia. The main purpose of the paper is to characterize the shape of the Russian personal income distribution. The paper provides an approach that combines traditional lognormal distribution function for common income values, which is used by Russian officials, and Pareto tail of distribution for high levels of income. The preliminary results demonstrate that the combined Pareto-Lognormal function better approximates Russian income distribution. This point makes the approach provided in the paper useful both for further theoretic research and for elaborating practical statistics approaches.
Political trust has been considered a necessary condition for good democratic and economic performance over time. The Great Recession that started in 2008 has deteriorated the level of political trust in several countries. Some authors have shown that those countries with an increasing level of unemployment experienced a sharp decline in political trust. In particular, the political distrust in Spain has suffered a high increase since the Great Recession. This paper tests the procyclicality of political trust in Spain through the analysis and modeling of the relationship between political trust and business cycle in Spain over the period 1996–2015. The cross correlation analysis, the Granger causality test, and the autoregressive distributed lag (ARDL) bounds testing approach coherently conclude the procyclicality of political trust in Spain. The unemployment rate shows a negative and statistically significant influence on political trust four quarters later.
The internal organization of political and economic institutions is often predicated on enhancing the flow and use of expert information. However, underlying existing models is a canonical representation of expertise that takes a very simple yet unrealistic form. Beginning with the famous model of Crawford and Sobel (1982), an expert is modeled as knowing a single one-dimensional piece of information that the non-expert doesn't. In this paper we construct a richer model of expertise, one in which the advantage of expertise is much greater. This representation applies the Brownian motion to model the mapping from actions to outcomes. In this setting an expert knows a continuum of correlated pieces of information that the non-expert doesn't. We characterize equilibrium policy advice in this setting and show that it takes varied and richer forms that resonate with practice and that avoid several undesirable features that flow from the traditional approach. We explore what this implies for how expertise relationships should be structured for optimal policy formation.
Using unique data from buyer-supplier relationships in the German automotive industry, we unveil a puzzle by which more trust in a relationship is associated with higher idiosyncratic R&D investments, but also more competition. We develop a theoretical model of repeated procurement with non-contractible, buyer-specific investments rationalizing both observations. Against the idea that competition erodes rents needed to build trust and sustain relationships, we infer that trust and competition tend to go hand in hand. We show in both theory and the data that trust and rents from reduced supplier competition are substitutes, rather than complements as typically assumed.
This paper presents the first estimates comparing the net benefits from two types of integration: deep (encompassing economic and political) and shallow (only economic). Our identification strategy utilises the 1995 Scandinavian enlargement of the European Union. Out of four countries, one (Norway) did not join the European Union (deep) but did join the European Economic Area (shallow integration). Using regional data for 1988-2000 and differences-in-differences and synthetic control methods, we estimate significant net benefits from deep integration. Had Norway in 1995 “gone deep,” instead of choosing to pursue shallow integration, productivity between 1995 and 2000 would have been 6% higher.
At the end of the 5th century BC, a massive shock to Athens’ political and economic structure brought a prosperous, imperial polis to the brink of collapse. Classical scholars have variously argued that, in the aftermath of the shock, Athens’ established the rule of law through a series of reforms to the polis’ legislative and judiciary institutions. Where did ‘the rule of law’ come from? This article explores the dynamics of institutional change in ancient Athens by analyzing how beliefs affected institutional change, and how institutional change shaped long-term political and economic outcomes. I argue that, during the late 5th century crisis, the Athenians articulated the notion of patrios politeia (i.e., the constitution of the fathers), as a commitment to the laws of the polis. The commitment to law was eventually weaved into the structure of a new, self-enforcing constitution. The constitution fostered political stability and economic recovery by enabling investments in institution building and infrastructure. Because the institutions enabling the provision of democracy and prosperity in Athens differed considerably from their modern counterparts, this study helps enrich the range of empirical evidence available to students of development. Because well-documented historical cases offer a window into the dynamics of institutional change, the emergence of the Athenian rule of law highlights the contextual nature of successful institutional design.
Scholars have examined the lawmakers’ choice between rules and standards for decades. This paper, however, explores the possibility of a new form of law that renders that choice unnecessary. Advances in technology (such as big data and artificial intelligence) will give rise to this new form – the micro-directive – which will provide the benefits of both rules and standards without the costs of either. Lawmakers will be able to use predictive and communication technologies to enact complex legislative goals that are translated by machines into a vast catalog of simple commands for all possible scenarios. When an individual citizen faces a legal choice, the machine will select from the catalog and communicate to that individual the precise context-specific command (the micro-directive) necessary for compliance. In this way, law will be able to adapt to a wide array of situations and direct precise citizen behavior without further legislative or judicial action. A micro-directive, like a rule, provides a clear instruction to a citizen on how to comply with the law. But, like a standard, a micro-directive is tailored to and adapts to each and every context. While predictive technologies such as big data have already introduced a trend toward personalized default rules, in this paper we suggest that this is only a small part of a larger trend toward context-specific laws that can adapt to any situation. As that trend continues, the fundamental cost trade-off between rules and standards will disappear, changing the way society structures and thinks about law.
We study the effect of improvements in peasants’ land tenure, launched by the Stolypin reform (1906), on agricultural productivity in the late imperial Russia. The reform allowed peasants to obtain land titles and consolidate separated land strips into single allotments. We find that consolidations increased land productivity. We argue that changes in peasant de facto land usage rights caused this effect. In contrast, the titling component of the reform was associated with a decrease in land productivity. We present evidence that this negative effect was driven by transaction costs to exit the commune and the outflow of labor from the countryside.
The paper is a contribution to both organizational economics and management science that analyzes the relations that exist between organizational atmosphere and firm productive efficiency. The concept of atmosphere can be basically defined as a satisfying exchange relation that exists in the boundaries of what Williamson calls the “internal organization” of the firm. Williamson’s Organizational atmosphere has not really been exploited in the economic literature. That’s why we propose to enrich and operationalize that concept in a knowledge economy through: (1) human capital development; (2) weak human capital control; (3) employees participation; (4) good social climate; (5) extrinsic and intrinsic motivations. The objective is then to analyze the empirical conditions under which organizational atmosphere foster firm productive efficiency. We analyze this features based an heckman model ran on a sample of 11378 French firms. Keywords. Human resource development, internal organization, non-calculative exchange, organizational atmosphere, productive efficiency, theory of the firm
Whether policies shift preferences is relevant to policy design. We exploit the random assignment of U.S. federal judges creating geographically local precedent and the fact that judges’ politics, religion, and race predict decision-making in abortion jurisprudence. Instrumenting for abortion jurisprudence with exogenous judicial characteristics, we estimate the impact of abortion jurisprudence on state laws, campaign donations, and abortion attitudes. We verify information transmission in that pro-life abortion jurisprudence caused restrictive state laws and increased campaign donations to pro-choice causes. Pro-choice abortion decisions shifted preferences against legalized abortion in the short-run, but in the longer-run, abortion views followed court decisions. Pro-choice decisions affected Republicans while pro-life decisions affected Democrats. Counterfactual exercises suggest that had abortion cases in the last half-century been decided the opposite way, the increase in pro-life attitudes among Republicans would have been steeper and Democrats would have been more pro-choice. Our estimates complement a historical narrative that turning to the courts to vindicate rights often led to resistance and subsequent acceptance and we present a model consistent with these facts.
This paper uses the U.S. Federal Courts to study the impact of government power of eminent domain on growth and inequality. Since the 1950s, Republican judges with prior experience advocating on behalf of the government were more likely to increase government powers of eminent domain while minority Democrat judges did the opposite. In the Circuit Courts, judges are randomly assigned and are responsible for the legal precedents that affect the lower courts within its geographic boundaries. Using a dataset we collected on all the court decisions, we compare the subsequent local government and economic response after the assignment of these different judges. We show that the assignment of the judge affects eminent domain precedent and subsequent government activity, economic growth, and inequality. Specifically, the societal effects are directly relevant to the preferences of the judges.
Recent advances in economic theory, largely motivated by ex- perimental findings, have led to the adoption of models of human behav- ior where a decision-maker not only takes into consideration her own payoff but also others’ payoffs and any potential consequences of these payoffs. In- vestigations of deontological motivations, where a decision-maker makes her choice not only based on the consequences of a decision but also the deci- sion per se have been rare. We propose an experimental method that can detect an individual’s deontological motivations by varying the probability of the decision-maker’s decision having consequences. It uses two states of the world, one where the decision has consequences and one where it has none. We show that a purely consequentialist decision-maker whose preferences sat- isfy first-order stochastic dominance will choose the decision that leads to the best consequences regardless of the probability of the consequential state. A purely deontological decision-maker is also invariant to the probability. How- ever, a mixed consequentialist-deontological decision-maker’s choice changes with the probability. The direction of change gives insight into the location of the optimand for one’s duty. We provide a formal interpretation of major moral philosophies and a revealed preference method to detect deontological motivations and discuss the relevance of the theory and method for economics and law.
In this paper we analyze the connection between bank malfeasance and bank run in the presence of an exogenous regulatory shock. We use a rare policy shock that triggered information-induced bank panic in Russia in 2004 when Central Bank unexpectedly closed one of the banks and announced plans to close down banks for involvement in suspicious offshore operations and money laundering activities. In particular, we analyze what kind of bank-level information is determining a run on a particular bank and by what type of depositors. We find that after the bank run other banks are likely to decrease dealings with suspicious banks: i.e. with banks doing a lot of offshore and/or cash-only operations. We do not find any evidence that such bank suspicious operations are visible to non-financial companies and individuals. We further explore heterogeneity with respect to deposit-owner banks’ characteristics and find that it is more transparent banks that are likely to stop doing business with (by withdrawing their deposits from) suspicious banks as a results of Central Bank announcement. Overall these results provide a rare glimpse in the anatomy of a bank run in the economy riddled with agency and regulatory compliance problems.
Cybercrime is typically profiled as a skill-intensive crime committed by educated, young criminals. This observation raises the controversial question of whether advanced knowledge and skills are a pull factor of cybercrime. In this paper, the linkage between e-skills and cybercrime is investigated using statistics from up to 28 European countries. Through the investigation, it is shown that electronic skills induce more cybercrime under weak institutions where the rules of law do not provide protection and incentives for productive entrepreneurial activities. This compound effect between e-skills and institutions suggests that institutional factors are crucial to allocating human capital between productive and criminal activities in cyberspace.
We explore a model of litigation where the party bringing the lawsuit, the plaintiff, can acquire a financial position in the target firm, the defendant. The plaintiff gains a strategic advantage by taking a short financial position in the defendant’s stock. First, the plaintiff can turn what would otherwise be a negative expected value claim (including a frivolous one) into a positive expected value one. Second, the short financial position raises the minimum amount the plaintiff is willing to accept in settlement, thereby increasing the settlement amount. Conversely, taking a long position in the defendant’s stock puts the plaintiff at a strategic disadvantage. When the capital market is initially unaware of the lawsuit, the plaintiff can profit both directly and indirectly from its financial position. When the defendant is privately informed of the merit of the case, the plaintiff balances the strategic benefits of short position against the costs of bargaining failure and trial. Short selling by the plaintiff can, under certain circumstances, benefit both the plaintiff and the defendant and also reduce the rate of litigation.
Religions go hand in hand with different attitudes toward economic issues, such as education, property right protection and attitude towards inventive activity. The Spanish medieval history presents a natural experiment to study how the long lasting presence of different religious denominations, i.e. Christians and Muslims, could have shaped economic outcomes, specifically the production of long-lasting patents. Moreover, the coexistence of such diverse religious doctrines could lead to complementarity or substitutability between religion-related inventive skills, leaving the final answer to an empirical exploration. We address this issue by means of a novel dataset containing detailed data on yearly cell-level (10X10 Km) information on Christian and Muslim presence and data on innovation/patents during the industrial revolution.
The patent system is commonly justified on grounds of promoting social welfare and, more specifically, scientific and technological progress. For years, however, there has been concern that patent litigation in the United States is undermining, rather than furthering, these goals. The time, cost, and complexity of patent suits provide openings for opportunistic assertions of patent infringement that can generate outcomes, possibly through settlement, that represent more a distortion than a fulfillment of patents’ purpose. Such opportunistic assertions can come from any form of patent holder but have been perceived as especially associated with patent-enforcement specialists commonly derided as “patent trolls.” This article proposes a means to address the information problems that facilitate opportunistic assertion—namely, the institution of an automatic process of substantive but non-binding administrative review of new patent-infringement lawsuits. Whether conducted by an independent Patent Litigation Review Board or a division of the U.S. Patent and Trademark Office, such review would (1) help discourage—or bring to an earlier and less costly end—relatively weak patent-infringement lawsuits; (2) strengthen the hands and likely fates of both patentees and accused infringers with especially robust cases; (3) flag weaknesses in litigation positions to the benefit of both private parties and the courts; and (4) provide policymakers with more readily aggregated information that facilitates evaluation of the patent system’s performance. Multiple economic models are used to indicate the likely benefits of such review. Nonetheless, consistent with the notion that an intended benefit of such review is improved information that can shape future policy, the article proposes that the review process be adopted only on a pilot basis, with the review’s status and shape to be reevaluated before the approval of any mandate for its continuance.
Theories of initial trust formation posit two distinct perspectives, an institutional and a cognitive account. In an effort to overcome this conceptual impasse, we investigate relevant sources of institutional and cognitive trust in an integrative model and empirically assess the relative importance of each view. We use the context of new venture’s initial investment ties with corporate venture capital as these initial inter-organizational relationships are particularly fraught with great risks of misappropriation for new venture’s technological resources, and thus, the trustworthiness of corporate investors is an important consideration for new ventures. We find that institutional trust has no direct effect on initial trust in this context; however, not only cognitive processes producing expectations of trust have direct effect on initial trust, but also they moderate the relationship between institutional trust and initial trust.
Organizations consist of agents with different skills or bargaining power, and may need to offer them contract terms that take such differences into account. Yet, differential contract terms may trigger social comparisons among agents, imposing a cost on the organization. First, agents with more unfavorable contract terms than their peers may feel frustrated, forcing the organization to compress their compensation upwards in order to retain them. Second, those agents may retaliate against the organization by shirking or boycotting production. In this paper, we develop a simple model to analyze how organizations optimally combine formal and informal contracts to minimize these “social comparison costs”. Our key assumption is that social comparison is more acute when differential contract terms are formalized, and hence more broadly known throughout the organization, than when they are kept informal. We show that as the organization becomes more relational—for instance, because its parties’ time horizon expands—observable (formal) contract terms should become more homogeneous and observable (formal) compensation levels should decrease. We discuss applications to the employment relationship as well as to inter-firm organizations such as distribution networks and supply chains.
In the United States it is rare for youths and criminals to buy their guns from licensed dealers, in large part because they would not pass the background check that dealers are required to make. Typically these dangerous people obtain their guns through informal transactions with family, acquaintances, and “street” sources. One result is that the “law of one price” does not apply even within any one jurisdiction – some well-connected criminals find it easy to obtain guns, while other criminals find it difficult and expensive. Transactions costs create a profitable niche for underground brokers and traffickers, although due to legal pressure they tend to be small operators who typically transact with personal connections and sell at low markups. One important implication is that the prevalence of legal ownership influences the likelihood that a criminal will have ready access to a gun (so that the gun percentage in robbery and other violent crimes is closely tied to legal ownership rates). Another implication is that observed transaction prices provide a weak indicator of gun availability in a jurisdiction because a large fraction of potential transactions do not occur due to scarce information. This paper provides relevant evidence on these topics from surveys of offenders, ethnographic research, and administrative data.
What is the long run impact on development from differences in subsistence strategies during preindustrial times? Whereas this question has been explored from the point of view of agriculture, remarkably little attention has been paid to the complementary strategy of relying on marine resources. As a step towards closing this gap, we construct an index-- the Bounty of the Sea index -- which captures the potential abundance of exploitable marine fish that individual countries have had access to, and proceed to explore its correlation with economic development. Our analysis reveals that a greater Bounty of the Sea stimulated pre-industrial development, and that countries inhabited by people with ancestry in regions with abundant marine resources are richer today. Probing possible underlying reasons, we find that populations with ancestry in regions rich in marine resources differ from societies with a purely agrarian legacy in terms of institutions, cultural values and average personality traits.
France experienced the demographic transition before richer and more educated countries. This paper offers a novel explanation for this puzzle that emphasizes the diffusion of culture and information through internal migration. It tests how migration affected fertility by building a decennial bilateral migration matrix between French regions for 1861-1911. The identification strategy uses exogenous variation in transportation costs resulting from the construction of railways. The results suggest the convergence towards low birth rates can be explained by the diffusion of low-fertility norms by migrants, especially by migrants to and from Paris.
Headquarters and their specialized component suppliers have a vital interest in establishing long-term collaborations. When formal contracts are not enforceable, such efficiency-enhancing cooperations can be established via informal agreements, but relational contracts have been largely ignored in the literature on the international organization of value chains. In this paper, we develop a dynamic property rights model of global sourcing. A domestic headquarter collaborates with a foreign input supplier and makes two decisions in every period: i) whether to engage in a costly search for a better partner, and ii) whether to make a non-binding offer to overcome hold-up problems. Our key result is that the possibility to switch partners crucially affects the contractual nature of buyer-supplier relationships. In particular, some patient firms do not immediately establish a relational contract, but only when they decide to stop searching and thus launch a long-term collaboration with their supplier. From our model, we develop an instrumental variable estimation strategy that we apply using transaction-level data of fresh Chinese exporters to the US. We obtain empirical evidence in line with the theoretical prediction of a positive causal effect of match durations on relational contracting.
Foreign Direct Investment (FDI) that was mainly flowing to developing countries before the Second World War, became increasingly concentrated among developed economies since the aftermath of the war. A similar increase in the concentration of other capital flows and trade followed suit during the many decades in which the liberal post-war international order was far from being global. In the late 20th century, increased international willingness to expand global markets was matched by changes in the economic policy of developing countries, originating a process that started to reshape economic geography and reorient FDI flows and other economic flows. Eventually, in the wake of the 2008 global financial crisis, developing countries would again receive the bulk of global FDI flows. This paper argues that the primary reason for the new distribution of FDI is the way that institutional change at the global level interacted with institutional change within countries. As such, this interaction will also define the endurance of this reorientation. To sustain this point, the paper takes the cases of China and Brazil and demonstrates that the change in the incentive structure provided by the international environment around the end of the Cold War and the creation of the WTO, was accompanied by major institutional transformations in Brazil and in China along which greater integration with the global economy was pursued. FDI that was always present in Brazil gained a new relevance, while in China it would emerge during the reform era in a way that is responsible for a large part of the unprecedented growth experienced by the country. This study also shows that well defined policies are critically important to harness FDI to further induce higher goals of development at large.
This paper investigates how consumers fare when predictive algorithms are not (only) working for, but (also) against them: when they predict not only which product a consumer is interested in, but also how much he or she is willing to pay for it. Do consumers anticipate that this can happen and do they take into account that such an algorithm might even outsmart them? Will people make use of costly privacy protective alternatives in such markets and can their behavior be explained by the limited strategic sophistication model of level-k thinking?
In this paper, we focus on how litigants adapt their strategies to the composition of the elected courts they face. We investigate the case of French labor courts which are composed of equal elected members from both employees' unions and employers' federations. Using data from the French Justice Ministry between 1998 and 2012, we investigate whether union membership of these lay judges influences judicial outcomes (settlement, decisions in court, intervention of a professional judge when no majority is found among the lay judges). Our methodology relies on probit and ordered probit estimations, with controls for endogeneity. We also run a double sample selection model to control for case selection. We find that courts with elected judges from the most confrontational unions lead to more settlement and more intervention of a professional judge (caused by a selection effect). However, we detect no impact on the decision (rejection or acceptation of the claim), nor on the volume of litigation
The article debunks the consensus that in concerted action, concurrent causes and alternative liability situations, the actual causation requirement is missing. While courts and scholars insist that in these cases tort law holds liable parties who clearly did not cause the victim’s harm, this article offers a novel approach. Using a simple model and applying it to leading decisions, it shows that a party who did not and could not even potentially injure the victim could nevertheless be a but-for reason for the harm. The article also challenges claims that causation theories like concerted action, substantial factor and alternative liability are fair to the victim or that they are designed to deter actors from engaging in “antisocial” activities. In deviation from the prior literature, this article reveals that these causation theories reduce the parties’ incentives to take care and result in more, rather than fewer, accidents. This article further shows that, despite lip service to the contrary, tort law promotes harmful activities that judges declare immoral, antisocial and illegal. The article argues, however, that in many cases this result can be justified on efficiency grounds. The article concludes that the but-for test should have a larger role in causation analysis, and it provides a number of policy recommendations to courts and lawmakers.
This paper explores how the autocratic rulers shape the tax revenue composition to please certain groups of population and so create biases in redistribution policy. We argue that an autocrat who cares about both rent seeking and survival faces a trade-off between the elite’s loyalty and general public support. So the autocrat behaves strategically in imposing tax burdens on different groups of population and use redistribution policy to trade political influence for revenue. Using a new detailed dataset on government finances in 81 autocracies in 1946-2006, we find that despotic autocrats, who concentrate all decision-making power on themselves, are likely to collect lower personal income tax revenues as they aim to reduce the revolutionary threat, but raise higher land and property tax revenues as they try to limit the political power of the elite. Our results confirm that the composition of tax revenues is a policy outcome of a strategic game between an autocrat and other groups of interest, in particular the elite and the masses.
We explore how political participation is affected by pro-poor policy choices. We argue that social transfer programs may affect political attitudes and behaviour, especially if these programs substantially increase the citizens' living standards. Using the Afrobarometer data for Ghana and Mali in 2001 and 2008 it can be shown that political participation decreases only in regions where social transfer programs have been implemented. Applying a difference-in-differences design allows capturing such a strategic effect of pro-poor policy. Hence, pro-poor policies - even if primarily aimed at health care and education improvement - may have additional impacts on the citizens' political behaviour, in particular on their political participation. Social transfers may hence act as a tool to please the voters and buy public support.
We use a novel theoretical framework to synthesize ostensibly disparate streams of non-market strategy research. We argue that faced with weak institutions, firms can create and appropriate value by either adapting to, augmenting, or transforming the existing institutional environment, and can do so either independently or in collaboration with others. We use the resulting typology of six distinct non-market strategies to provide an integrative review of non-market strategy research. We then extend this framework to examine the choice between non-market strategies, arguing that this choice depends upon whether the existing institutional environment is incomplete or captured, and discussing other drivers of non-market strategy choice, the relationship between these strategies, and their social impact, so as to provide an agenda for future research.
How do autocratic elites respond to threats of unrest by excluded groups? We explore the relationship between collective action and representation with data from Imperial Russia on peasant disturbances and representation in institutions of local self-governance. To correct for measurement error in the unrest data and other sources of endogeneity, we employ an instrumental-variables strategy that exploits regional variation in the historical incidence of serfdom and religious polarization. Consistent with the Acemoglu-Robinson model of political transitions, and inconsistent with many other theories of institutional change, we find that peasants were granted less representation in districts that experienced more frequent unrest in preceding years. Yet we also observe patterns of unrest and redistribution in subsequent years that are inconsistent with the commitment mechanism central to the Acemoglu-Robinson model. Further exploring causal mechanisms through close analysis of particular cases, we discuss possible directions for future theoretical work.
Laws – be they common law, statutes or the constitution itself – evolve continuously. People make use of them, and discovering ambiguities or disagreeing on their proper application, ask courts through- out the nation to re-interpret them. What are the political drivers of this process? This paper analyzes a dataset of over 10000 U.S. environmental court cases, reconstructing the network of citations to legal precedent for a period of forty years. This dynamic network provides full information about the use of precedent over time and whether precedent is affirmed or undermined by written opinions. The network is thus a reflection of the evolution of the legal rules of environmental governance in the United States. The paper introduces multiple statistics that capture dynamic features of this network. These statistics are designed to capture significant changes in the content of the law. Using these measures, the analysis tests whether legal change is affected by changes in the preferences of pivotal legislators. Overall, the dynamic properties of this network reveal that laws evolve largely independently from shifts in legislative power.
Can successful collective experiences that prime patriotic sentiments reduce inter-ethnic tensions and conflict in sub-Saharan Africa? We examine this question by studying the case of football. Combining survey data for over 35,000 respondents in 20 countries with information on over 70 official games by African national football teams between 2000 and 2015, we document that individuals interviewed in the days following a victory of their country’s national team are 3 to 4% less likely to report a strong sense of ethnic identity than those interviewed in the days before the match. The estimated effect is sizable (i.e. a 20% decrease in the average probability of ethnic self-identification), and robust to controlling for country-year, language group, and match fixed effects. National team’s victories are also associated with an increase in trust in others, especially in people of different ethnicity, but have no impact on trust in the government or support for the incumbent. We also find that social unrest (i.e, riots, strikes, protests, and repression) significantly decreases in the two weeks following a victory in the Africa Cup of Nations or the FIFA World Cup finals. Finally, using exogenous variation from close qualification to the CAN tournament, we find that countries whose teams (barely) qualified experience significantly less conflict events in the six months following the qualification than countries whose teams (barely) did not. Our findings suggest that, even in regions where ethnic tensions have deep historical roots, transitory patriotic shocks can reinforce national identity, reduce inter-ethnic mistrust and have a tangible impact on conflict intensity.
We investigate the impact of the diffusion of high-speed Internet on different forms of political participation, using municipal data from Italy from 2001 to 2013. Our empirical strategy exploits the fact that the cost of providing ADSL-based broadband services in a given municipality depends on its relative position in the pre-existing voice telecommunications infrastructure. We first show that broadband Internet had a substantial negative effect on turnout in parliamentary elections up to 2008. However, it was positively associated with other forms of political participation, both online and offline such as the emergence of local online grassroots protest movements, and turnout in national referenda (largely opposed by mainstream parties). The negative effect of Internet on turnout in parliamentary elections is essentially reversed after 2008, when the local grassroots movements coalesce into the Five-Star Movement (M5S) electoral list. Our findings support the view that: i) the effect of Internet varies across different forms of political participation; ii) it also changes over time, as new political actors emerge who can take advantage of the new technology to attract disenchanted or demobilized voters; and iii) these new forms of mobilization eventually feed back into the mainstream electoral process, converting “exit” back into “voice”.
Alexis de Tocqueville and Robert Putnam are but two of the many admirers of the countless private associations that lie at the core of civil society. This article seeks to advance understanding of the law-like activities of these associations. Residential community associations and sports leagues, for example, make rules and levy fines on members who violate them. The New York Diamond Dealers Club and the Writers Guild of America, like many other associations, have established internal arbitral panels for the resolution of member disputes. Courts are highly likely to defer to the outcomes of these arbitrations. The article’s central positive thesis, hedged with qualifications, is that a private association tends to engage in social control when it is the most cost-effective institution for addressing the issue at hand. This thesis is used to illuminate some otherwise puzzling associational practices, such as the efforts of the National Football League and other professional sports leagues to control players’ domestic violence off the field of play.
Empirical studies have found positive effects of current institutional factors such as institutional enforcement quality and the quality of credit information infrastructure on financial system development (FSD). Studies on Africa, however, focus more on financial system depth (FSDT) measures of FSD and less on financial system breadth (FSB) measures. Moreover, the World Bank Doing Business Project recommends that improving the enforcing contracts, registering property, and resolving insolvency indicators may positively affect FSD. To our knowledge, however, there have not been empirical investigations into the link among these current institutional factors from the Doing Business Project and FSD within Africa. In addition, few studies on Africa have investigated the effects of within-country changes to these current institutional factors on FSD. Using a sample of 50 African countries and FSDT and FSB measures from 2004 to 2011, we find that few current institutional factors matter and these few that matter affect FSDT and FSB differently. Furthermore, we find that within-country changes to these current institutional factors have no statistically significant effect on FSD. The findings here support and qualify some claims of the law and finance theory and have implications for work on institutional reforms to increase FSD in regions with weak institutional structures.
We examine the optimal concession contract for an infrastructure that generates both user fee revenue and ancillary commercial revenue. For example, airports charge user fees to passengers and airlines (aviation revenue) and collect revenue from shops, restaurants, parking lots and hotels (non-aviation revenue). While passenger flow and the demand for the infrastructure are exogenous, the demand for ancillary services depends both on exogenous passenger flow and on the concessionaire’s effort and diligence. We show that the optimal principalagent contract separates exogenous and endogenous risks. On the one hand, the term of the concession is longer when passenger flow is low, so that the concessionaire bears no exogenous demand risk. On the other hand, the concessionaire bears part or all of ancillary risk, which fosters effort. The optimal contract can be implemented with a standard Present-Valueof- Revenue (PVR) auction in which bidders bid on the present value of aviation revenue only. The concession ends when the bid is collected.
The corporate finance literature documents that managers tend to overinvest into physical assets. A number of theoretical contributions have aimed to explain this stylized fact, most of them focussing on a fundamental agency problem between shareholders and managers. The present paper shows that overinvestments are not necessarily the (negative) consequence of agency problems between shareholders and managers, but instead might be a second-best optimal response if the scope of court-enforceable contracts is limited. In such an environment a firm has to rely on relational contracts in order to manage the agency relationship with its workforce. The paper shows that investments into physical productive assets enhance the enforceability of relational contracts and hence investments optimally are "too high".
Do new communication technologies, such as social media, reduce collective action problem? This paper provides evidence that penetration of VK, the dominant Russian online social network, affected protest activity during a wave of protests in Russia in 2011. As a source of exogenous variation in network penetration, we use information on the city of origin of the students who studied together with the founder of VK, controlling for the city of origin of the students who studied at the same university several years earlier or later. We find that a 10% increase in VK penetration increased the probability of a protest by 4.6%, and the number of protesters by 19%. Additional results suggest that social media has affected protest activity by reducing the costs of coordination, rather than by spreading information critical of the government. In particular, VK penetration increased pro-governmental support and reduced the number of people who were ready to participate in protests right before the protests took place. Also, cities with higher fractionalization of network users between VK and Facebook experienced fewer protests. Finally, we provide suggestive evidence that municipalities with higher VK penetration received smaller transfers from the central government after the occurrence of protests.
We leverage on the particular structure of a dataset of observed cases of cross-border graft, where a firm headquartered in a country bribes public officials in another country, to provide cross-country evidence on the determinants of corruption of public officials by foreign firms. We focus in particular on the “relational aspects” of corrupt relationships, which come to the fore when focusing on bribing where the parties involved reside in different countries. We find that cross-border acts of corruption decay with distance, more so than does trade. Poor rule of law increases corruption, as does a higher degree of political stability. Cultural traits matter, in a nuanced way, which depends both on which aspect of culture is considered, and on the cultural proximity of countries.
Despite the growing relevance of knowledge-intensive industries, there is not a comprehensive study explaining firms' decisions to contract in and out service providers when the knowledge is the key input in the production process. The fundamental trade-off I propose to study firm's decisions is as follows: Outsourcing brings high levels of knowledge to the firm at the cost of transmitting industry-specific knowledge. On the other hand, by hiring someone internally, the agents save these communication costs, with the downside of incurring learning costs. Given this trade-off, firms hire someone in-house to deal with the most frequent problems they face, and they hire an external provider to solve the less common problems. Using data on Federal lobbying reports in the US, I find support for these and other predictions of the theory. Concretely, I find that the probability of integration is increasing in the frequency of the transactions, the industry-specific knowledge and the easiness of the tasks. Using exogenous variation in the difficulty of lobbying activities provided by the BP oil spill case of 2010, I find causal evidence of the main predictions of my model.
Going against the well-established tipping norm in the United States, a growing number of restaurant owners are moving to ban tipping, and instead raise prices, in their restaurants. They argue that existing law precludes them from sharing tips with “back-of-the-house” employees (like chefs and dishwashers), and thus makes it hard to compensate those employees fairly. We argue that the movement against tipping is ill-advised. Tipping is a valuable social institution that allows customers to monitor service where management cannot. The better answer is to remove legal restrictions on tip-pooling. Pooling tips among a broad swath of employees (other than ownership-level employees) is in keeping with the cooperative effort that underlies the provision of service in settings like restaurants. Managers thus can deploy tip-pooling to allow the compensation scheme to promote cooperation among workers in the joint endeavor of service provision.
We investigate the impact of restructuring policies before sale and resulting private ownership structures on privatisation sales prices. We use a new dataset of companies privatised in Brazil between 1991 and 2004, covering 118 transactions observed in the period. Our results show that, after controlling for endogeneity, replacing the CEO is associated with an increase in privatisation net prices. Efficiency measures aimed at improving operating performance of the firms and voluntary labour downsizing schemes fail to improve premiums. On the other hand, restructuring measures such as debt absorption and compulsory labour downsizing schemes have a significant negative impact on net prices. We also find that prices are very sensitive to the level of competition in the auction and that the longer it takes to put the company on the block the lower the premium obtained. Finally, prices are shown to depend upon the resulting ownership structures. The more concentrated private ownership is, the higher prices are. Identity of owners on concentration is also shown to matter as domestic institutions and local corporations are associated with higher prices, while employee ownership concentration has a negative impact on premiums. This case suggests conflicts of interest.
Empirical studies have long shown that humans -as well as some animal species- often respect ownership even in the absence of the rule of law. The emergence of property rights has been described by theoretical biologists (Smith, 1982) as a successful evolutionary strategy -the bourgeois strategy- that minimizes the expected losses in a contest for scarce resources described by the well known Hawk and Dove (H&D) game. However, from the theoretical point of view the anti- bourgeois strategy is as good as the bourgeois one and therefore the predominance of respect for property observed in many societies still lacks a clearcut game theoretical explanation. In this paper we study by mean of a controlled laboratory experiment based on an H&D game whether some established rules of property acquisition trigger the emergence of the bourgeois strategy. We manipulate the way this initial claim to the amount is established. In the first treatment (Manna) the initial claim is assigned ranomly as manna-from-heaven. In the second treatment (Treasure) it is the result of a treasure hunt that mimics the rule of first possession/treasure trove. In the third treatment (Effort) it is the result of a payment for having worked in a standard effort task. We also have a fourth treatment where subjects in a couple are randomly assigned the color red or blue at the beginning of each period (No Property), hence introducing an uncorrelated asymmetry that is not related to property. In the three treatments in which property rights are assigned we observe a majority of subjects coor- dinating over a bourgeois strategy. While the level of efficiency achieved during the thirty periods of the experiment are similar across the four treatments, nonetheless the assignment of property rights greatly reduces the inequality among the experimental subjects compared to No Property treatment.
The relationship between risk and incentives in franchise contracting is still an unsolved issue in the literature. According to the standard principal-agent model, a trade-off emerges between the franchisee's protection against risk and incentive motivation. Based on previous literature and new theoretical results we show that, contrary to this traditional view, the relationship between risk and incentives can be positive. In franchise contracting, this implies that the royalty rate decreases with risk. Using a unique panel dataset combining French franchise and financial data, we address this issue empirically and analyze the impact of a risk- and incentive-adjusted royalty rate on performance. The data support the hypothesis of a negative relationship between risk and the royalty rate, which contradicts the standard prediction of the agency theory. Furthermore, the estimation of random effect models provides evidence that chain performance increases with a risk- and incentive-adjusted royalty rate.
This paper analyzes the interaction between a firm's optimal capital structure and the type of contracts it uses to deal with its suppliers. We first develop a theoretical model where a firm needs an intermediate good from a supplier, and this intermediate good can be of high or low quality. Court-enforceable contracts can be used to enforce high quality, however their use is costly. If these costs are too high, relational contracts - self-enforcing informal arrangements that can be sustained in long-term relationships - are needed. Relational contracts, though, can only be sustained if debt is not too high. The reason is that a firm's commitment in relational contracts is determined by its future profits in the cooperative relationship, and the need to repay debt reduces future profits. We therefore derive the prediction that higher costs of enforcing formal contracts should be associated with firms having less leverage on average. We test this prediction with the help of two datasets, the Microdatabase Directinvestment (MiDi) provided by Deutsche Bundesbank, which gives balance sheet information on the universe of German foreign affiliates including detailed information on external debt, internal debt and equity capital, and the World Bank's Doing Business Database, which contains information on the average costs of enforcing (formal) contracts between a firm and a supplier of an intermediate good. Using a panel data model for fractional response variables, we can show that an increase in the costs of enforcing contracts in a country makes firms use substantially more equity financing.
Humans reciprocate. We want to return favors we have received, but also respond appropriately to behavior that we regard as unfair against us. Whereas previous research has typically tried to isolate the most prominent explanations for reciprocal behavior - inherent preferences for reciprocity and repeated interaction - the present paper addresses the question if and how those interact. Developing a theoretical model of a long-term employment relationship, we first show that reciprocal preferences are more important when an employee is close to retirement. At earlier stages, repeated interaction is more important because more future rents (which increase players' commitment in this case) can be used to provide incentives. Preferences for reciprocity still affect the structure of an employment relationship early on, though, because of two reasons. First, preferences for reciprocity effectively reduce the employee's effort costs. Second, they allow to relax the enforceability constraint that determines the principal's commitment in the repeated interaction. We test our main predictions using data from the German Socio-Economic Panel (G-SOEP) and find cross-sectional evidence for a stronger positive effect of positive reciprocity on effort and wages for older workers.
While there is broad agreement that the “rule of law” – a stable and predictable process by which laws are implemented, enforced, and changed – is important to economic growth, the nature of the circumstances under which a rule of law arises, and why some states are able to achieve an effective rule of law while others are not, remain open questions. In this paper, we develop a model in which the nature of the wealth creation process determines the benefits to and costs from committing to a rule of law, and apply the model to what may be the earliest example of a rule of law state, ancient Athens. The Athenians engineered a rule of law in the 4th century BCE after operating without one (indeed, dismantling checks to impede one) in the 5th century BCE. Our analysis illustrates three things: 1) the benefits of the rule of law do not always exceed the costs; 2) institutions can be successfully redesigned to promote the rule of law; and 3) whether an institution is “good” or “bad” depends on the nature of society’s most important activities.
We study the shareholder-manager relationship when a fraudulent strategy is available. In a canonical agency setting, we introduce privately known CEO's morality, modeled as a cost of breaking the law. We derive the optimal compensation offered by the firm and examine how it affects the CEO's action. In the optimal contract, there are two regimes, depending on the quality of law enforcement: providing incentives and preventing fraud can be either complements or substitutes. As a consequence, either the variable or the fixed part of remuneration helps preventing fraud. We also point out that, given the agency problem, the level of corporate fines cannot be a substitute for low levels of detection. Finally, the comparative statics of our model shed light on contradictory empirical evidence in the literature.
A monitor is hired by a principal to oversee an agent's activity and to report on the agent's result. The monitor first collects information about the agent so as to develop an expertise in the agent's activity. This expertise makes her more likely to learn the result's value in the future. The agent observes the level of expertise of the monitor and makes a productive effort. Once the result is realized, the monitor decides whether to report its value to the principal (if she knows it). The principal uses the report to form an expectation of the result's value and subsequently rewards or punishes both the monitor and the agent as a function of his expectation. The monitor then is accountable for the result in the sense that she is punished if the agent's result is bad. In this model, the monitor faces a commitment issue, which undermines incentive provision. Ex ante, she would like to disclose the result's value any time she observes it so that her oversight disciplines the agent. Ex post however, she wants to inflate the principal's expectation and therefore hides bad results. This paper studies the monitor's incentives and asks whether incentive provision benefits from the principal observing the expertise level of the monitor (transparency). We show that the answer involves a trade-off between making expertise valuable to the monitor and making expertise deterrent for the agent.
This paper studies the welfare effects of a partial banking union in which cross-country financial transfers that could be used towards bailouts are decided at the supranational level, but policymakers in member countries hold decision power over the distribution of funds. This allows the policymakers, who are partially self-interested, to extract rents in the bailout process. In equilibrium, such a banking union lowers the welfare of citizens in the country receiving transfers. Supranational fiscal rules are ineffective at reversing this result, but a Pareto improvement may be achieved if fiscal rules are combined with domestic reforms that reduce political rents.
We analyze changes in the organizational forms of agricultural production and distribution in regions where the levels of violence have substantially decreased in the past eight years. As expected in a previous study, we find that the propensity of rural production units to form organizational hybrids has decreased on the way to a post-conflict situation. Subjective perceptions of economic insecurity as well as victimization of the respondents are directly related to the formation of hybrids. Changes in the relationship between objective violence indexes and individual perceptions of insecurity are also observed. The research is based on surveys made in 2007 and 2015, respectively with 742 and 750 persons in charge of rural production units. The surveys were applied in five regions with a long history of violence and conflict. While formal peace agreements with the largest illegal groups have not yet been signed, the reduction in violence indexes and the trends observed in the comparison between these two surveys allow anticipating the contextual antecedents of economic and organizational choices of rural producers in a post-conflict situation.
The goal of this paper is to explore the ways that the ancient Greeks conceptualized the Rule of Law (RoL) and to determine in what ways it is similar or different from modern conceptions of the RoL. Although the meaning of the RoL is notoriously difficult to pin down, I will begin by identifying some key components of modern theories of the rule of law, including the concepts of Legal Supremacy, Legal Equality and Legal Certainty (see Dworkin 1986, Hutchinson and Monahan 1987, Tamanaha 2004, Maxeiner 2007, Bingham 2010 and Nardulli et al., 2013). My thesis is that the Greeks ascribed to a notion of the ROL that captures some aspects of all three parts of modern concept of the rule of law. I shall argue that the Greek, and especially classical Athenian, concept of the ROL maps almost perfectly onto the ideal of Legal Equality, and that, although the Athenians recognized the principles of Legal Supremacy and Legal Certainty, nevertheless the impact of these latter principles was somewhat dampened by several other firmly held ideals. In particular, the Greeks adhered to a concept of justice that embraced not just the written laws, but also a notion of equity or fairness in the specific circumstances of a case. The practice of contextualized justice undermined Legal Certainty, one of the three aspects of most modern concepts of the rule of law. Nevertheless, I shall conclude by noting that modern ROL theory has moved away from notions of ROL as strictly based on rule application and has argued that substantive concerns based on notions such as freedom, equality and fairness are compatible with ROL (Tamanaha 2004, 110-113). While there is certainly a fine line between upholding Legal Certainty and allowing for some flexibility in the application of laws according to context, it seems that both modern and ancient Greek legal thought recognize both the tension and the need for compromise between these ideals.
It is commonplace to argue that persistent inefficiency in the healthcare system is due to the presence of health insurance. In this paper, we consider another source of inefficiency: the failure of health insurers and other payers to write efficient cost-sharing contracts with providers. The absence of such contracts is widely believed to inhibit investments in integrated care and so to contribute to inefficient organizational fragmentation. Important public policy initiatives, such as Medicare’s Accountable Care Organizations (ACOs), aim to induce efficient contracting between insurers and providers, but the underlying market failure justifying intervention has not been well articulated or analyzed. This paper argues that common-agency problems may impede efficient contracting between insurers and providers. We find that common agency can lead to a coordination failure when incentive contracts aim to elicit organizational innovations involving lumpy investments or fixed costs. This coordination failure leads to an inefficient equilibrium in which contracts offer no incentives at all. Although these results apply to many common-agency problems, they have specific implications for healthcare policy. Interventions such as Medicare’s ACOs ameliorate the common-agency market failure in two ways: but subsidizing investments by agents and by jumpstarting more efficient contracting by private payers. Subsidies crowd out private incentives either partially or fully. Jumpstarting can do better, but only if the market is stuck in an inefficient equilibrium and only if the contracts ACOs offer are sufficiently high-powered and aggressive. Weak ACO contracts are likely to have no effect at all.
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.
Widespread dissatisfaction with corporate participation in elections persists despite strict regulations. Exploiting within firm-cycle cross-candidate variation and across firm-cycle variation, we demonstrate that corporate spending around US elections greatly exceeds that disclosed formally as campaign contributions to the Federal Election Commission. Firms constrained by existing statutory contribution ceilings spend an additional $549,000 on lobbying per election cycle, an amount more than 100 times the prevailing limit. Moreover, constrained firms' chief executives personally contribute more to the same candidates and associated corporate foundations make larger targeted outlays on the margin. These legally permitted alternative forms of political expenditures--which are hidden in plain sight--may be interpreted by the public as disguised contributions the Supreme Court warned may corrupt politics in its landmark Buckley v. Valeo decision affirming limits and the importance of transparency.
Middle managers remain the backbone of most large organizations. Little if anything is known about the role they play, and in particular, to what extent they engage in leadership activities for the benefit of firms. We conduct a large-scale field experiment in a retail chain in a country of the former soviet Union. As in many other transition economies, the company was suffering from high personnel turnover. We introduced an RCT in which the shop managers were empowered to take the actions they believed necessary to tackle the problem of personnel turnover. Employee turnover decreased by 25%, and the decrease in turnover has been persistent over 7 months. Our paper shows the large impact that middle managers have on the behaviour of their workers. In a subsequent phone survey among all treated and untreated middle managers, we find that in shops in which turnover was reduced, managers increased communication efforts und interacted more intensively with their workers.We find it particularly noteworthy that empowerment of middle managers was possible without any formal change in the organization, and in an existing command-and-control culture.
Many scholars have examined the determinants of vote buying, but far fewer have studied another common mobilization strategy: electoral intimidation by employers. We use survey experiments and crowd-sourced electoral violation reports from the 2011-12 election cycle in Russia to explore this understudied phenomenon. We develop a simple argument about the conditions under which voter intimidation by employers is likely to occur. Consistent with arguments about the decline of vote buying in middle-income countries, we find little evidence that vote buying was practiced on a large scale in this election. Voter intimidation by employers, however, was widespread, especially among employed voters and in Russia’s many single company towns where employers have considerable leverage over employees. In single company towns, the consequences of job loss are so grave that employer intimidation may often be sufficient to induce compliance even without direct monitoring of voter behavior. Outside of company towns where employers have less leverage, active forms of monitoring may supplement intimidation in order to encourage compliance. These results suggest that employers can be reliable vote brokers; that voter intimidation can persist in a middle-income country; and that, under some conditions intimidation may be employed without active monitoring. We also make reference to similar surveys that we have conducted in Indonesia, Turkey, and Venezuela.
This paper empirically explores a troubling phenomenon: the persistence of unenforceable and misleading terms in consumer contracts. Taking the residential rental market as a test-case, the study systematically analyzes a hand-collected sample of 70 residential leases from Massachusetts in light of the mandatory rules governing the relations between landlords and tenants. The paper’s findings are striking: landlords frequently use legally dubious—as well as clearly invalid—provisions in their contracts. Building on insights from economic and psychological theories, the paper suggests that unenforceable and misleading clauses persist in residential leases because they benefit landlords. When a rental problem arises, tenants are likely to rely on their lease agreement. While mistakenly perceiving their lease provisions as enforceable and binding, they may forgo rights that cannot be overridden by contract, bearing costs that the law deliberately imposes on landlords. The paper proceeds to offer preliminary evidence in support of this theoretical account through a survey-based study of 279 tenants, conducted on Amazon Mechanical Turk. Lastly, in light of the social costs associated with the use of unenforceable and misleading clauses, the paper offers preliminary policy prescriptions, ranging from disclosure obligations to statutory form leases, and estimates their effectiveness and desirability.
Successful innovation processes involve knowledge transfer, cross-pollination of ideas and other aspects of cumulative innovations. As a consequence, successful innovative environments incorporate a degree of openness in disclosure and possibility of reuse of the new knowledge. The degree of openness might range from only final disclosure (as in patent systems) to the immediate full disclosure of all intermediate results (as in open-source software). Empirical evidence suggests that the degree of openness affects tradeoffs in incentives vs follow-on reuse and in wide exploration vs directed focus search of solution approaches. The paper suggests a theoretical framework incorporating endogenous determination of the degree of openness by firm's decisions on their “information-flow proximity” to their competitors. As a result, the best of both worlds can be achieved: Directed focus search in innovative activities in clusters with intermediate disclosure is complemented with wide exploration of other approaches by more distant firms (or different clusters of firms).
While theoretically important, the relationship between crime and employment is difficult to measure empirically. This paper addresses major identification challenges by exploiting high frequency data of daily online postings on job openings and closings at the county level, merged with individual-level administrative data about all inmates released from French prisons. We find that people who are released when jobs are being created are less likely to recidivate; conversely, people who are released when jobs are being cut are more likely to recidivate. We further show that news on job creation matters, over and beyond actual employment opportunities, suggesting implications for crime-control policies. From a methodological standpoint, this paper demonstrates how using media and online information on jobs can generate higher-frequency variation than administrative employment data, and help to overcome identification challenges to capture effects of variations in job market opportunities, especially when combined with other administrative sources.
Past exposure, or exposure in other domains, to strong legal enforcement, can affect current behavior in a given field. We conduct a laboratory experiment to study these spillovers in time and space, their persistence and the mechanisms underlying them. We show that being exposed to enforcement in the recent past has a strong positive effect on future cooperation. This is mostly due to an indirect behavioral spillover effect: facing penalties in the past increase past cooperation which in turn positively affects current behavior. However, for interactions that occur early on, we find a negative effect of past enforcement, which is mainly driven by learning.
Creative Commons (CC) licenses are increasingly used and the number of works under these licenses is growing. However, for each successful project there are many others that fail because they are unable to attract user contributions. Soliciting the contributions of users is a challenge for the management of a CC project. The aim of this paper is to shed light on the factors that contribute to the success of a CC project. To do that we develop an agent-based model that simulates the hidden dynamics of the production of CC works. This model is able to replicate stylized facts of CC production. Moreover, the model shows that characteristics of the CC project, such as the effort necessary to complete the project, the prestige of the producer, and its legal status are fundamental to its success.
China’s One Child Policy ('OCP') imposed an exogenous fertility constraint and changed the family size. What are the consequences of this policy on education investment and gender inequality? I use difference-in-difference- in-difference(DDD) strategy to compare the education outcomes between boys and girls with different types of household registration status (Hukou) during the pre- and post-OCP periods. The results show that children born during the post-OCP period, on average, stay in school longer and are more likely to continue their education beyond the compulsory education. Moreover, this effect was stronger for girls, whose resources were usually taken by their brothers during the pre-OCP period. My results imply that with smaller families, gender gap in education narrowed. Furthermore, I also show that the singletons generations, as a product of the OCP, now by themselves, prefer fewer children, compared to the contemporary non-singletons. Possible reasons include singletons' less gender preference and tighter income constraint. Overall, this study reveals the social benefits of family planning policy in terms of improving female education achievement and reducing gender inequality.
In the airline industry, ex-post adaptation of flight schedules is necessary in the presence of bad weather conditions. When major carriers contract with independent regionals, conflicts over these adaptation decisions typically arise. Moreover, the celerity of needed adjustments requires that adaptation be informal, and hence enforced relationally. In this paper, we theoretically analyze, and empirically test for, the importance of relational adaptation in the airline industry. Our model shows that for relational contracts to be self-enforcing, the long-term value of the relationship between a major and a regional airline must be at least as large as the regional’s cost of adapting flight schedules across joint routes. Thus, when facing a shock that forces it to terminate some routes, the major is more likely to preserve routes outsourced to regional airlines that have higher adaptation costs, as the value of the major’s relationship with those regionals is larger. We analyze the evolution of U.S. airline networks around the 2008 financial crisis, and we find that consistent with our theoretical predictions, regional routes belonging to networks with worse average weather, and hence higher adaptation costs, were more likely to survive after the shock.
Any political leader, even an autocrat, must be judged by her supporters and by the citizens. Autocratic regimes control the diffusion of information through the country so that the effects of some policies are more opaque thus difficult to be evaluated. This paper looks at the effect of multidimensional policies on the functioning of autocracies. Our main objective in this paper is to study the effects of these differences in public perception on the dictator's accountability towards the selectorate and the citizens. First, we generalize the available results on accountability in autocratic polities, showing that the region of the selectorate's de facto power such that reciprocal accountability works shrinks as opacity increases. Second, we show that both the probability of full efficient and full inefficient policies decrease as opacity increases. Third, we find the dictator and the selectorate might have a conflict on the optimal amount of transparency. Finally, we find that the size of the parameters’ regions where a dictator implements efficient policies change non-monotonically with respect to opacity.
The appropriate division of authority between a company’s board and its shareholders is the central issue in the corporate governance debate. In the US, a target board can prevent shareholders from responding to a hostile bid. Whether this is efficient cannot be answered empirically because the econometrician can observe bids but cannot observe deterred bids. Whether defensive tactics maximize target shareholder is difficult to answer because of defensive tactics are hard to compare. This paper uses a search equilibrium model of the market for corporate control, which it solves by simulating parameters for the variables of interest, including the number of ex ante efficient acquisitions. We have two results: (i) Strong defensive tactics reduce market efficiency--the ratio of made matches to efficient matches--significantly (ii) The defensive tactics level that maximizes target shareholder welfare is materially higher than the level that maximizes social welfare. Because simulations such as ours are rough approximations, our stronger claim is that equilibrium analyses can illuminate how the corporate control market performs.
We analyze optimal labor contracts when workers are inequity averse towards the employer. Welfare is maximized for an equal sharing rule of surplus between the worker and the firm. That is, profit sharing is optimal even if effort is contractible. If the firm can make a take-it-or-leave-it offer, the optimal contract is also dependent on output but always involves a dead-weight loss of inequity aversion. When the parties bargain over the contract, the optimal division of surplus is more equitable compared to the purely self-regarding case. Moreover, the agreement approaches the welfare-optimal contract as the parties' bargaining power converges. Our findings imply that raising the bargaining power of the less powerful party may increase welfare.
Venture capital is a private equity capital. It is a financial intermediary and its role is to take investors’ capital and invest in private companies. Venture capitalists (VCs) usually invest in young high-technology companies with the potential to quickly grow large. Investors usually look for growing region and countries with GDP growth for a VC investment. It has been observed by many experts in the area that emerging markets countries have been trying to undertake domestic reforms to support sustainable economic growth as well as creating an ideal environment for the development of entrepreneurship. However, venture capital industry is still under development in emerging markets. The institutional framework in regards to regulatory, legal, and venture capital culture has to be well established in order to support venture capital in emerging market countries. Unfortunately, there is still lack of institutional framework in these countries. Aim of this research is to examine the tri-angle relationship between venture capital, economic growth, and legal framework. Therefore, this research is divided into groups based on the factors that affect venture capital in emerging markets to examine behavior of venture capitalists in emerging markets. As a conclusion, based on the findings, this research is concluded by determining how legal framework affects behavior of venture capitalists, and in return how behavior of venture capitalist helps economic growth in emerging markets.
Despite the important role that institutions play in explaining economic growth, there exist few objective quantitative measures of institutional quality. We propose a new quantitative index that allows comparing the strength of property rights across the member states of the Council of Europe. To construct the index, we analyzed all judgments of the European Court of Human Rights (ECtHR) related to property rights for all member states and identified whether the ECtHR had found a violation of property rights in the domestic courts’ decisions. The resulting data were used to calculate the likelihood of finding violation in the judgments of national courts. Assuming that the ECtHR is impartial and unbiased, higher probability of overruling the judgments of local courts from a given country implies that the level of property rights protection is low. Our constructed measure is highly correlated with a number of indices of property rights protection used in the literature and serves as a strong objective foundation for these indices. Furthermore, we found that the ECtHR had received more applications from countries with higher likelihood of national court judgments violating property rights.
This paper accounts for the effects of the master lever (ML), aka the straight-ticket voting option, on the positions of US senators from 1960 till 2010. The master lever is an option offered in ballots in some US states allowing voters to vote for a specific party for all offices listed, by selecting a box at the top, as opposed to filling out each one individually. Introducing a master lever leads to more people voting by the party affiliation of the senatorial candidate as opposed to her position. This shifts the groups of voters targeted by the parties and thus the positions of elected senators. We build a theory of multidimensional pre-election competition to understand these incentives. Empirically, we use a triple difference estimator to account for selection into the three treatment groups (ML always, ML never, ML then no ML) and compare the results to the theoretical predictions. We find that the presence of the master lever is a significant determinant of senatorial positions. It leads to more moderate or more extreme senators depending on the partisanship of the state, the preferred policy positions of the average voter and the correlation between the two in the state.
Discrimination has been documented against women in Muslim-majority countries. Constitutions differ among Muslim-majority countries. By using women’s rights indicators and exploiting cross-country variation, we find that discrimination against women is more pronounced in countries where Islam is the source of legislation. Constitutions changed in only four Muslim-majority countries since 1980. We discuss anecdotal evidence to what extent women’s rights changed as a consequence of new constitutions. Empirical studies should thus distinguish between types of Muslim-majority countries
This study investigates the long-term relationship between slavery and violence in USA. Although considerable qualitative evidence suggests that slavery has been a key factor behind the prevalence of violence, especially in Southern USA, there has been no large-N study supporting this claim so far. Using county-level data for the USA, we find that the proportion of slaves in the population in 1860 is associated with an increase in the rate of violent crimes in all census years for the period 1970-2000. This relationship is robust to including state fixed effects, controlling for various historical and contemporary factors, as well as to instrumenting for slavery using environmental conditions. We explore two potential channels of transmission: (1) slavery leading to higher levels of inequality, which could increase violent crime, and (2) slavery contributing to an ingrained culture of Southern violence. Our results show that only the proportion of slaves living on large slave holdings, as opposed to small slave holdings, is related to contemporary violent crime, supporting inequality as a channel of transmission. We find some tentative evidence supporting culture of violence between the white and black population as a second channel of transmission.
We study the impact on visa restrictions of institutions and social norms in a sending country. To this purpose, we unbundle institutions into “institutions-services”, which complement productive activities and serve as public production inputs, and “institutions-rules”, which strengthen the rule of law and constrain unproductive behavior. We propose a theoretical model which incorporates spillover effects of domestic institutional changes and shows that while stronger institutions-services reduce visa barriers, stronger institutions-rules have the opposite effect. Furthermore, visa barriers are affected by norms and values, which complement formal institutions as factors of visa regimes. We use various empirical models to test and confirm the above conjectures.
We exploit an historical natural experiment set during Italy's Fascism to assess persistence vs. dynamics in social capital and culture. We do so in the paradigmatic critical area of Southern Italy, whose current economic backwardness is often associated to its low social capital endowment, a feature usually taken to be quite persistent locally and hence traced back to cultural and institutional heritage. In the experiment, an exogenous shift of a border in a territory entirely internal to that heritage provides us with an instrument to identify variation in culture and social capital levels in the 20th century in this doubly depressed region. A discontinuity exercise at the border shows that, starting from previous homogeneity, there is evidence of relatively recent adverse cultural dynamics in Southern territories. We emphasize the instructive potential of natural experiments of this kind for understanding mechanisms of social capital evolution, possibly guiding policy interventions aimed at fostering endowment in currently depressed regions.
Why are some governments popular with their citizens while others get low ratings? International surveys show enormous variation. In what we believe to be the first systematic, global, comparative study of political approval, we examine a panel of government ratings from up to 128 countries, spanning all continents, and including both democracies and authoritarian states, over the years 2006-2014. We find that economic performance is robustly correlated with higher approval in both democracies and non-democracies. War, the leader’s time in office, the electoral cycle, and certain other factors are also important. We find evidence that wider internet access reduces government approval in non-democracies, but that in such countries censorship of the internet and the press is associated with higher ratings. We did not find any clear relationship with repression, suggesting that if fear inflates ratings in non-democracies, this may be offset by the dissatisfaction with government that repression also causes.
Human societies are awash with rules, with normative moralization attaching to almost everything we do: how we eat, talk, dress, work, uses resource, treat others and so on. Most analysis of the normative world seeks first-order functional explanations for norms. Evolutionary analysis proposes that specific norms survive because they promote fitness. Economic analysis has generally understood norms as value-enhancing solutions to coordination or cooperation games. While there is no doubt that many norms are functional, many are also inherently spurious, with no direct impact on material well-being. The pervasiveness of spurious norms suggests there is a deeper puzzle to solve in explaining the phenomenon of normativity in human societies than only accounting for the content of specific norms. In this paper we identify an important role for the extension of normativity to actions that have little or no directimpact on welfare. We do this by modeling an individual’s choice about whether to join a particular community with a known set of rules as a multi-armed bandit problem. Using both analytical and computational methods, we show that a community with pervasive spurious normativity–lots of silly rules–generates higher payoffs for a potential member than a community that restricts normativity to actions with direct benefits for the agent–a few important rules. In addition to providing an account of the pervasive spurious normativity that characterizes many non-legal settings, our analytical approach, by providing a framework for evaluating normative systems with arbitrary content, also contributes to the development of the microfoundational account of law introduced by Hadfield and Weingast [2012].
The idea that law is fundamentally about government is pervasive in both theoretical and pragmatic work on the rule of law. We have challenged that idea in a series of papers beginning with Hadfield and Weingast (2012). In the original what-is-law paper, we propose that legal orders are characterized by centralized classification of behaviors but not necessarily by centralized enforcement by a comprehensive coercive authority. We show in that work that the distinctive attributes of legality and the rule of law generally articulated by legal philosophers--such as generality, common knowledge, neutrality, and stability--are equilibrium characteristics generated in an environment in which enforcement relies entirely on coordinating and incentivizing ordinary individuals to participate in decentralized punishment. In this paper we explore the corollary: will a regime that relies exclusively on centralized enforcement display legal attributes in equilibrium? We argue that, relieved of the necessity of incentivizing and coordinating decentralized punishment--a form of private ordering--a regime will not reliably achieve an equilibrium legal order characterized by legal attributes.
The theoretical literature presents conflicting expectations about the effect of globalization on national governance. One view expects globalization to enhance democracy, a second argues that globalization obstructs democracy; a third argues that it does not necessarily affect democracy. We consider the threshold effect approach to reconcile these different results and problems related to specification and testing procedure. We study the role of demography in the determination of the relationship between globalization and democracy. Based on a panel of 100 countries for the period 1993-2013, our model identifies two demographic regimes and shows that the relationship between globalization and democracy is regime specific. We identify two demographic regimes, conditional on the population’s median age. In the Mature population regime (median age>16.95), countries overlooked Malthusian constraints and with early and fast demographic transitions, they invested in human capital and enhanced the efficiency of resource allocation. In the Youth population regime (median age<16.95), countries with late demographic transitions or suffering yet of Malthusian constraints (famines and chronic under-nutrition) are unable to invest in children quality and human capital and then have inefficient resource allocation. Then, trade openness, as a measure of globalization, will influence differently the speed of development, it fasters growth in the former countries and retards growth in later ones which may have lost because of their low competitiveness and then impacts countries modernization process.
We examine a setup where two agents allocate a fixed budget of aid between two equally needy areas. The agents may be biased to one area which is their private information. Direct communication between the agents in uninformative and the resulting allocation of aid is inefficient. We show that a mediator who filters the information communicated by the agents and reveals the collected information only partially can improve aid coordination.
How does transparency, a key feature of central bank design, affect monetary policymakers’ deliberations? We answer this question with a natural experiment in the Federal Open Market Committee in 1993 and computational linguistics algorithms. Theory predicts a positive discipline effect and negative conformity effect. We first find large behavioural responses to transparency. We then propose a difference-in-differences approach inspired by the career concerns literature, and find evidence for both effects. Finally, we use an influence measure that suggests the positive effect dominates.
We examine what an applicant’s vita signals to potential employers about her willingness to cooperate in teams. Intensive social engagement may credibly reveal that an applicant cares about the well being of others and therefore is less likely to free‐ride in teamwork situations. We find that contributions in a public goods game strongly increase in a subject’s degree of social engagement as indicated on her résumé (and rated by an independent third party). Engagement in other domains, such as student or sports associations, is not positively correlated with contributions. In a prediction experiment with human resource managers from various industries, we find that managers use résumé content effectively to predict relative differences in subjects’ willingness to cooperate. Thus, young professionals signal important behavioral characteristics to potential employers through the choice of their extracurricular activities.
Incentive-systems theory proposes generally that piece-rate compensation should yield higher quantity of output and, assuming that quality cannot be perfectly monitored, lower quality of output than time-rate compensation. But recent advances in psychology and behavioral economics suggest that such incentive compensation will elicit particularly poor quality results for non-routine tasks for which creative problem-solving is required. Using a unique database from the energy-related home services industry, we explore differences in quantity and quality outcomes between employee technicians who are paid a daily rate and contractor technicians who are paid by the job. Of particular interest, different job types require different levels of creative problem-solving, and calls are assigned to technicians independently of their compensation-scheme status. We find significant evidence that piece-rate workers indeed work faster and complete more jobs, with this advantage especially pronounced for routine jobs. We find mixed evidence regarding quality: piece-rate workers yield comparable quality for routine, low-creativity tasks, while their quality is significantly lower for high-creativity tasks. This study thus helps to reconcile prior results from conflicting theories.
Members of groups and organizations often have to decide on rules that regulate their contributions to common tasks. They typically differ in their propensity to contribute and often care about the image they project, in particular want to be perceived by other group members as being high contributors. In such environments we study the interaction between the way members vote on rules and their subsequent contribution decisions. We show that multiple norms can emerge. We draw surprising policy implications, on the effect of group size, of supermajority rules and of the observability of actions including votes.
Is growth always efficient? We examine the effects of transaction costs on accumulation-based and efficiency-driven growth regime building on the novel augmented neoclassical growth model with non-zero transaction costs. Higher transaction costs always lead to sub-optimum resource allocation discouraging efficiency improvements. The persistence of high-cost equilibrium tends to foster the departure from the productivity frontier. Constructing a large dataset encompassing 139 countries in the period 2003-2014, we tackle the contribution of transaction costs to the efficiency- and accumulation-based growth paths by developing a novel series on total factor productivity paths over time. Using latent variable methods, three internally consistent components of costs are identified: (i) cross-border, (ii) procedural, and (iii) administrative. The evidence suggests lower administrative costs encourage stationary TFP performance while lower procedural and cross-border costs exhibit a strong positive impact on TFP growth. Both effects are robust to the measurement error across multiple subsamples, and are not susceptible to time-invariant heterogeneity bias and unobserved technology shocks. Employing country-specific stationarity tests, we examine the break points in TFP performance for each individual country and use the variation in transaction costs to explain (i) efficient growth accelerations and disaster episodes and (ii) establish the conditional probability of entry to and exit from both types of growth regimes. Lower administrative transaction costs tend to produce unsustainable accumulation-driven growth episodes that eventually fizzle out while lower procedural and cross-border costs are significantly more likely to create sustained growth accelerations. The variation in transaction costs accounts for a substantial fraction of cross-country differences in TFP.
The Determinants of Managerial Productivity around the World
We investigate whether CEOs of private firms differ from other people with regard to strategic decision making. Such differences are interesting since CEOs often make important economic decisions and play a role in creating values and norms in society. We invited 200 CEOs and 200 control group members to participate in three different incentivized strategic games (Prisoner’s Dilemma, Chicken, Battle-of-the-Sexes). We report robust evidence that CEOs’ strategic choices—and their beliefs about others’ behavior—are closer to the social optimal strategy profile in all games. Their beliefs about others are also on average more accurate than those of the control group.
Financial markets expose individuals to the risks and returns of the broader economy. Can they also lead to a reevaluation of the costs and benefits of conflict and peace initiatives? Can this happen even in the context of persistent ethnic conflict, and even affect voting decisions? Prior to the 2015 Israeli elections, we randomly assigned financial assets to likely voters and gave them incentives to actively trade for up to seven weeks. The assets included stocks of Israeli and Palestinian companies. We also randomly assigned their initial amounts and divestment dates. We find that the exposure to stocks caused systematic shifts in voting behavior and increased support for peace initiatives. These shifts appear to reflect two main channels. First, financial market exposure leads individuals to follow financial markets over time and to positively reevaluate the effects of potential peace initiatives on the national economy. Second, exposure to Palestinian stocks increases out-group empathy, reflected in higher support for inter-ethnic social integration. The effects of financial market exposure are larger for the risk averse and for inexperienced investors, who become more like experienced investors in favoring concessions for peace.
This paper examines firms’ decisions of using internal functions (“make” or insourcing), contracting with external professionals (“buy” or outsourcing), or doing both (“make and buy” or plural sourcing) to carry out political lobbying. Two common theories to explain the sourcing of economic transactions based on economic efficiency—the transaction cost economics and the firm capabilities view—face innate limitations when applied in the context of corporate political lobbying. Overcoming this limitation requires going beyond the dyadic transactional relations between the firm and the external lobbyist, to consider how the “receiving” end of lobbying—the political audience (e.g., voters, politicians)—evaluates different forms of lobbying based on sociopolitical considerations, which is inherent in the context of political lobbying but may or may not be relevant to economic goods. I argue that these sociopolitical factors not only directly affect sourcing decisions, but constitute boundary conditions for the known relationships between transaction hazards and/or firm capabilities and sourcing decisions. Moreover, complementarities in plural sourcing helps to resolve the tension in certain cases when sociopolitical and economic efficiency considerations call for different forms of sourcing.
Advocates of the law merchant theory have put a great deal of weight on the role of reputation in regulating market transactions in premodern commerce. Reputation no doubt had an important place in the networked communities of merchants. But was it the only or the most important mechanism regulating commercial transactions? This talk explores the problems inherent in reputational information in the premodern period: it was easily manipulated, often inaccurate, and apparently not strong enough to prevent widespread fraud.
During the Age of Mass Migration, 30 million Europeans immigrated to the United States. We study the long-term political effects of this large-scale migration episode on origin communities using detailed historical data from Sweden, a major sending country in the period. To instrument for emigration cumulated over several decades, we exploit severe local frost shocks that sparked an initial wave of emigration, interacted with within-country travel costs. Because Swedish emigration was highly path dependent, the initial shocks strongly predict total emigration over 50 years. Our estimates show that emigration substantially increased membership in local labor organizations, the strongest political opposition groups at the time. Furthermore, emigration caused greater strike participation, and mobilized voter turnout and support for left-wing parties in national elections. We interpret these findings as an increase in citizens' bargaining power and demand for political change. Emigration also had effects on the supply of political change. Municipalities with more emigration exhibit higher welfare expenditures per capita, both before and after the introduction of democracy. In addition, local governments become more likely to adopt inclusive political institutions. Together, our findings indicate that large-scale emigration can achieve significant and long-lasting effects on the political equilibrium in origin communities.
We examine the question of how collective action is best organized. Adopting a comparative institutional approach, we contend that the organization of collective action will incur transaction costs of discovery, bounding, adoption, enforcement, and probity, and discuss the antecedents of these costs. We then consider the relative efficacy of alternate institutional arrangements in minimizing these costs, arguing that discovery costs are lowest under for-profits, probity costs under non-profits, adoption costs under collectives, and bounding and enforcement costs under the state. These arguments are used to develop a theoretical framework defining the optimal governance arrangement for a given collective action situation. Our study thus extends institutional economics theory to the governance of collective action, and has implications for both social welfare and the non-market strategies of firms.
The conventional view is to characterize fiduciary relationships, including trusts, as contractual and fiduciary duties as implicit contract terms. One might suppose, then, the optimal remedy for fiduciary breach would be the same as the remedy for contract breach: compensatory damages. Applying optimal deterrence theory, this Article analyzes private trusts and concludes the optimal remedy for fiduciary breach is a plaintiff’s election of either damages (a legal remedy) or disgorgement (an equitable remedy). This election eliminates a trustee’s incentive to breach: if the harm to beneficiaries exceeds a trustee’s gain, damages deter; conversely, if a trustee’s gain exceeds the harm to beneficiaries, disgorgement deters. Thus, while contract law, by relying on damages, allows efficient breach (at least if non-opportunistic), trust law, by allowing disgorgement, presumes efficient fiduciary breach is undesirable. Yet damages or disgorgement deter fiduciary breach only if detection and enforcement is perfect. In trust law, given asymmetric information, it can be difficult for beneficiaries to detect a trustee’s breach and courts to enforce fiduciary duties. This low probability of detection suggests the need for punitive damages. A punitive multiplier, set equal to the inverse of the probability of detection, forces a fiduciary to internalize the expected harm (Polinsky & Shavell 1998). Punitive damages may be necessary to deter fiduciary breach if detection is imperfect, especially if non-legal sanctions, via market competition, reputation, and social norms, are ineffective. Similarly, if an election is optimal, there is a justification for punitive disgorgement. Under this novel remedy, a court not only would strip a fiduciary’s ill-gotten gains but also use a punitive multiplier to ensure full disgorgement of the expected benefit.
Using data for a representative sample of the Dutch population with information about participants’ religious background, we study the link between religion and moral behavior and attitudes. Religious people are less accepting of unethical behavior and report more volunteering. They report lower preference for redistribution. Religious people are equally likely as non-religious people to betray trust in an anonymous experimental game. These effects are consistent across different domains of religiosity. Controlling for Christian denominations, we find that Catholics betray less than non-religious people, while Protestants betray more than Catholics and are indistinguishable from the non-religious. We also explore the causality of these results.
We analyze the effect of recent consolidations of water utilities in Central and Eastern Europe on cost. Unlike a large part of the existing literature we distinguish economies of scale from real consolidation effects. While related, the empirical analysis shows that the former does not guarantee cost savings through consolidations. On the contrary, consolidations appear to have increased unit costs on average. While part of the findings may be explained by technological reasons such as dis-economies of scale for large utilities, we discuss how fragmented ownership and reduced political accountability may be responsible why gains from economies of scale do not materialize.
Using a cross-country dataset on e-government systems, we analyze whether e-filing of taxes and e-procurement adoption improves the capacity of governments to raise and spend resources through the lowering of tax compliance costs, improvement of public procurement competitiveness, and reduction of corruption. We find that information and communications technology can help improve government capacity, but the impact of e-government varies by type of government activity and is stronger in more developed countries. Implementation of e-filing systems reduces tax compliance costs as measured by the number of tax payments; time required to prepare and pay taxes; likelihood and frequency of firms being visited by a tax official; the perception of tax administration as an obstacle; and the incidence of bribery. The effects of e-procurement are weaker, with the number of firms securing or attempting to secure a government contract increasing with e-procurement implementation only in countries with higher levels of development and better quality institutions. We find no systematic relationship between e-procurement and bureaucratic corruption.
This research addresses the concept of state failure. In this paper different types of state failure are identified. Since a state is an organization, it has its own shareholders, stakeholders, and 3d parties. Therefore, state failure might be examined in three different contexts. The first defines failure from the point of view of the organization itself and its shareholders, i.e. the elites. The second treats failure from the viewpoint of a state’s stakeholders, represented by the population. The third approach considers failure as perceived by third parties, i.e. experts and international organizations. A state may be deemed successful according to one view and failed according to another. Hence the failure can be complete (where all of the views assert the failure), quasi (where the state is considered failed only by one or two of the measures), and alleged (failure identified only by experts). The result is that some states identified as failed by renown indices are in fact only allegedly failed, while remaining legitimate in the eyes of their citizens. The point of view of the population is the principal focus of this research. Social contract is understood as a basis for the state’s sustainability in the eyes of its population. The “exit and voice” concept is used. It is based on the idea that in states failing to fulfill the social contract, unsatisfied citizens are trying to exit it by migration, by moving its activities to the shadow economy and/or openly express their discontent. Using the exit-voice approach we create an index of state failure for years 1999-2005. Pooled OLS and Probit estimates are used to test the hypotheses of the institutional roots of state failure from the citizens’ perspective. The results are the following: limited access institutions and diverse population increase the probability of state failure. Probit-model shows the significance of resource dependency, and OLS highlights that state experience helps to avoid failure.
We present novel evidence on the use and impact of relational contracting between owners and managers of entrepreneurial firms. Our empirical observations support the intuition that relational contracts are particularly important for foreign entrepreneurs because of the heightened obstacles that these entrepreneurs face in directly observing managers’ efforts and/or in accessing the courts to enforce formal contracts. Our results are also consistent with theoretical arguments that relational contracts are most effective when owners and managers place a high value on future dealings (e.g., when expected profits and/or growth are high), and short-run gains from opportunistic action are limited (e.g., because return volatility is low). Finally, our empirical setting allows us to isolate the impact of changes to agents’ outside options on the effectiveness of relational employment contracts. The study thus adds to our understanding of foreign entrepreneurship and the salience of contracting concerns in entrepreneurs’ governance decisions, and also contributes to ongoing efforts aimed at redressing the imbalance between empirical and theoretical work in the field of relational contracting.
In this paper, we analyze how political competition affects the design of public law enforcement policies. The article arrives at two main conclusions (assuming that the cost of enforcement is linear, criminal typology is uniformly distributed, and the society is wealthy enough): 1) electoral competition entails no loss of efficiency at equilibrium for both minor and major offenses (e.g. minor offenses are not enforced, while major ones are fully deterred); 2) distortions arises at equilibrium only in the range of intermediate offenses: enforcement expenditure for minor offenses is lower than at optimal level, such that the issue of under -deterrence is exacerbated; in contrast, for more serious offenses, enforcement measures are higher, and there is more (possibly, over) deterrence as compared to what efficiency requires. We show that these results also generalize under more general assumptions, except that full deterrence of major offenses is not achievable (a less wealthy society), or enforcement expenditure is bounded above (under convex enforcement costs).
The Article addresses simple yet surprisingly overlooked questions—could numerical caps on legal rights be a valuable regulatory mechanism? In which circumstances should we employ them? This Article is the first to discuss numerical caps—quotas—as a distinct legal instrument, and the lessons it provides are pertinent to a plethora of regulatory settings. The Article first sets out the theoretical framework for using quotas. It does so by synthesizing real-world examples and fleshing out the reasons for choosing quotas, especially non-tradable, over other regulatory alternatives, such as prices. Armed with these theoretical insights, the Article suggests practical implications, focusing on civil procedure. Quotas can be valuable in balancing some of the perennial conflicts that the American legal system faces. They restrict over-use of courts and push litigants to carefully use their rights, and simultaneously guarantee a wide access to courts without imposing fees. Accordingly, the Article analyzes several procedural contexts—such as interlocutory appeals and pleading standards—in which policymakers can benefit from quotas.
Asymmetric information is widely considered a major obstacle to settlements. In this paper, we argue that litigants facing asymmetric information can use a simple add-on to the settlement o¤er to alleviate the information barriers to settlements. In particular, we show that informed parties can promise to pay an additional sum should they lose at trial (if the settlement proposal is rejected and trial occurs). We refer to the general class of these provisions as Judgment-Contingent Clauses (JCC). We show that JCCs enable informed parties to signal their type to the uninformed party costlessly, and accordingly decrease litigation rate and at the limit eliminate it altogether. JCCs manage to reduce litigation because they are costly to a party who misrepresents herself, but they can be costless to a party who presents herself truthfully through the settlement o¤er. We discuss possible limitations to such settlements clauses including wealth-constraints; loser-pays rules; and endogenous litigation costs.
We analyze the economic determinants and long-run effects of prior appropriation surface water rights from 1852 to 2013 and show how formal property rights developed to generate the discovery of new information and serve as coordinating institutions for investment under uncertainty. Prior appropriation replaced common-law riparian water rights in an immense area of 1,808,584 mi2 on the U.S. western frontier within 40 years, suggesting large economic benefits. We develop a model to demonstrate that when information about resources is costly, prior appropriation facilitates socially valuable search, coordination, and investment by reducing uncertainty about resource conditions and the threat of new entry. We derive testable hypotheses about the behavior of claimants under these conditions and test our hypotheses using a novel data set that includes the location, date, and size of water claims along with measures of infrastructure investment, irrigated acreage, crops, topography, stream flow, soil quality, precipitation, and drought in eastern Colorado, where prior appropriation first became extensive. We find that search effort lowered claiming costs for subsequent claimants. Secure property rights to water and controls on new entry doubled average infrastructure investment and raised total irrigated acreage and value of agricultural output by approximately 134% in our sample years. The economic returns to prior appropriation were lower in Hispanic areas of Colorado where informal sharing norms were in place. In cohesive, small communities a formal property rights system was not required to coordinate investment and resource management. Our analysis extends the literatures on institutional change, property rights, and first possession and informs the debate over the efficiency of prior appropriation and the costs of proposed water rights reforms.
What determines the degree to which firms decentralize strategic decision-making? While the existing theoretical and empirical literature has mainly considered factors that form economic costs and benefits of decentralization for a given firm in a given environment, in this paper we focus on the role of the CEO’s personal motives (preferences) in shaping the organization of decision-making at the firm. The empirical analysis of the paper is based on the data of extensive firms’ survey “European Firms in a Global Economy”, which was conducted in 2010 in 7 European countries: Austria, France, Germany, Hungary, Italy, Spain and United Kingdom. We exploit information about CEOs’ gender and relation to owners to proxy for CEOs’ preferences: men and CEOs-owners are likely to receive higher ‘amenity value’ from keeping more strategic decisions under their personal responsibility. We find that firms run by men are less likely to be decentralized. Firms managed by owners or members of their families have substantially lower chances to decentralize decision-making. The latter effect is observed in all countries covered by the data, and in some countries is extraordinarily strong. Given the importance of decentralization for firm growth and development, these results can have important implications for economics of the firm.
Gift exchanging during ceremonies or visits is a well-known social norm in almost all Asian countries and has been well studied by anthropologists and sociologists. With a newly available national representative survey on Chinese families, we are the first to conduct quantitative analysis on this phenomenon. In this paper, we first provide statistical descriptions of the size of gift exchanging and the direction of gifts etc. In only one survey year, 87% of families had more than one time of gift exchanging, and the average gift value (including both cash and in-kind) was as high as 2013.35 CNY, or 11.72% of that year’s China’s per capita income. Besides the surprisingly large amount of gift exchanging, the more striking fact is that on average the gifts are flowing from the poor to the rich as an informal regressive tax. We also empirically prove that more gifts expenditure is associated with benefits in terms of job seeking, school quality, hospital quality and loans etc., and we also estimate the inefficiency loss in human capital allocation and other scarce resources allocation due to this kind of benefits.
Democratic elections and transparency are believed to contribute to better governance by increasing citizens' ability to hold public decision makers accountable. However, elections and transparency could affect governance outcomes also through other mechanisms: By influencing the motives of the decision makers, by changing the norms and expectations by which citizens evaluate them, and by shaping citizens' willingness to enforce such norms. Through an experimental study with 472 groups of citizens in Burkina Faso, this paper tests whether elections can reduce the embezzlement of public resources, even if citizens' ability to sanction public decision makers remains unchanged. I find evidence that elections facilitate the selection of public-spirited decision makers and lower citizens' tolerance for embezzlement. However, elections also bias citizens' expectations, causing them to underestimate rent extraction and to trust decision makers more than they should. Transparency might enhance the effect of elections by eliminating such perceptive biases.
How does the possibility of embezzlement affect cooperation in public goods dilemmas? Through lab-in-the-field experiments with village residents in Tanzania, I show that voluntary contributions to a public good decrease when a group member is able to capture such contributions for private gain. Yet, cooperation does not break down. A plausible explanation is that among village residents, the collective expectation exists that others will exert voluntary restraint when dealing with their co-villagers contributions to a public good. Consistent with this hypothesis, a second, simultaneous experiment reveals that contributed group resources are embezzled to a lesser extent than windfall resources that are provided by the experimenter.
We study a widely used ordering process (“Early Bird Discounts”) whereby a profit-maximizing manufacturer permits his dealers to place advance orders at a discount before they set retail prices. We show that such discounts may be used to shift just enough channel profits to dealers to enable them to cover their fixed costs and stay in business. If the manufacturer instead simply cut his wholesale price in order to generate gross margins for his dealers, these margins would soon dissipate as price competition among dealers selling the same product forced retail prices back down to the per-unit cost. We show that when dealer fixed costs are low, the manufacturer offers an Early Bird Discount to his multiple dealers that induces all but two of them to exit; when fixed costs are high, the manufacturer offers no preorder discount (i.e. switches to linear pricing) and induces all but one dealer to exit. Although uniform slotting allowances could also be used to reward dealers, a sales-based alternative like an Early Bird Discount sometimes has a key advantage when the manufacturer has dealers in cities of different sizes. If the same Early Bird Discount is offered, dealers in markets with more consumers, who typically have larger fixed costs, will preorder larger amounts and will automatically receive higher gross margins. To duplicate such payments with slotting allowances, non-uniform allowances would have to be offered to firms in different markets, which is divisive and possibly illegal.
This paper analyzes how the governance structure of firms and quality standards interact in order to influence quality performance. Focusing on the wine industry, it first examines how typical agency problems related to the lack of specialization within the co-operative form of governance (versus investor-owned firms) may hinder the delivery of high-quality products. Second, the paper examines how the effectiveness of the quality standards promoted by Geographical Indications (GIs) is contingent on the governance structure of agri-food firms. The results show that although co-operative structures significantly lower the final quality of wine, this disadvantage is significantly reduced when producers are certified under the most stringent GIs (i.e., Qualified Designations of Origin, QDO). In contrast, the stricter norms and requirements of the QDO do not influence quality performance within the investor-owned firms. Thus, the paybacks of the quality standards promoted by the GIs depend ultimately on the specific form of governance adopted by the producers.
This project aims to analyze the political determinants of regulation. We have collected data for more than a century of Swiss cantonal regulation and study the impact of the staggered abolishment of the mandatory legislative referendum in Swiss cantons. We find that the mandatory legislative referendum reduces regulatory activity, measured as the number of statutes (or number of pages) that were newly enacted, amended or abolished. We use this finding as a first stage in an IV approach to analyze the impact of the change in regulatory activity on economic outcomes and the interaction with fiscal policy. We find that an increase in regulatory activity has a negative effect on per capital income and per capita government expenditures. The first result might be interpreted as evidence for the existence of economic costs due to a higher degree of regulatory activity which reduces legal certainty and increases transaction costs. The second result provides evidence in line with the interpretation that regulatory and fiscal policy are substitutes in terms of policy instruments.
When contracts are incomplete, contractual parties can substitute the market with either repeated transactions or with integration. This paper compares vertical integration and relational contracts between coffee mills and exporters in Costa Rica. Detailed data on transactions between and within firms reveal that integrated trade is shielded from demand uncertainty, a key force shaping market transactions. Relational contracts between firms display trading patterns qualitatively similar to those within integrated chains but do not achieve the same degree of market assurance. Integration, however, comes at the cost of worse market access and relationships with independent sup-pliers. The evidence strongly supports models in which firms boundaries alter temptations to renege on relational contracts and, through this channels, alter the allocation of resources. Policy implications for export-oriented agricultural chains in developing countries are discussed.
Using a novel and global database, this paper undertakes a systematic analysis of the approaches and determinants of firms’ corporate political activities. The empirical results suggest that large firms are more likely to utilize formal channels (i.e., lobbying), whereas small firms are more likely to utilize informal channels (i.e., bribes) for seeking policymaking influence. These nonmarket approaches are conditioned, however, by the extent of competition in the market environment and the consistency and predictability of procedures in the regulatory environment in which firms operate in. Nonmarket strategy implications that follow from this refined understanding are developed and discussed.
We introduce a general Principal-Agent model with subjective evaluation and malfeasance characterized by two-sided asymmetric information on performance that allows for an arbitrary information structure. Two generic contract forms are studied. An authority contract has the Principal reveal his information before the Agent responds with her information. Under such a contract, the Agent's compensation varies only with the Principal's information, while her information is used to punish untruthful behavior by the Principal. Conversely, a sales contract has the Agent reveal her information first. In this case, the Agent's performance incentives are affected by the information revealed by both parties. Because the Agent's information affects her compensation, the information revelation constraints are more complex under a sales contract, and provide a way to integrate Williamson's (1975) notion of guile into agency theory. We find that designing sales contracts for expert agents, such as physicians and financial advisors, are significantly more complex than designing optimal authority contracts.
How do resource booms affect politicians' decisions to use violence to contest elections? Using a unique dataset on local government elections in Peru, we examine the impact of an exogenous increase in mining rents on electoral violence. While the relationship between natural resources and civil conflict in weak institutional environments has been largely explored, little is known about how natural resources affect politicians' choices of violeny means to affect election results. We find that electoral violence increases as resource rents increase, but only up to a certain threshold. When rents become very high, electoral conflict is negatively associated with mining royalties. This non-monotonic relationship fits with the North, Wallis, Weingast (2009) model of a limited access society. As rents increase, dominant elites have greater incentives and more capacity to monopolize the means of violence in order to strengthen their control over rents. Their large and growing rents enable them to buy electoral support, buy off opponents, and discourage violent challenges.
A principal may delegate the choice of a project to a better informed agent. The preferences of the agent and the principal about which project should be undertaken can be discordant. Moreover, the agent benefits from being granted more discretion in the project choice and may be motivated by reciprocity. We find that the impact of the agent's reciprocity on the discretion he receives crucially depends on the conflict of interest with the principal. When the agent's and the principal's preferences are very discordant, the principal is more likely to retain authority about the choice of the project when the agent is more reciprocal. Hence, reciprocity exacerbates a severe conflict of interest. In contrast, when the principal's and the agent's preferences are more congruent, discretion is broader when the agent is more reciprocal. Thus, reciprocity mitigates a mild conflict of interest. In addition, we find that the possibility of being able to offer monetary payments to the agent can make the principal worse off when the agent reciprocates. We also test empirically the predictions of our model using the German Socio-Economic Panel finding some support for our theoretical results.
Regulatory and legal approaches that make the collection and use of data more expensive along certain dimensions must, at least marginally, induce some companies to alter their behavior to avoid those costs and, consequently, to eschew potentially more beneficial business arrangements in favor of ones that correlate with lower regulatory risk, lower regulatory cost, and/or greater regulatory predictability. “However, regulation often influences behavior in ways that differ from the initially stated rationale.” By disrupting organizational structures designed to work with data, firms will respond to these regulations not only by altering their data collection and use practices, but also the organizational structures that complement them. Such consequences are often unobserved and unintended. The hypothesis presented here is that the actions of over-eager regulatory agencies will have a host of unintended effects not just on data use directly, but on how firms are organized, how business is done, and on corporate governance more broadly. The goal of this project is to discover and elucidate as much of this unseen ground as possible, and to determine the extent to which particular information regulation rules affect these outcomes.
We document a very large increase in agricultural productivity, peasants’ living standards, and industrial development in late 19th century Imperial Russia as a result of the abolition of serfdom in 1861. A counterfactual exercise shows that if serfs were freed in 1820, by 1913 Russia would have been more than one-and-a-half times richer, compared to what it actually was. We construct a novel province-level panel dataset of development outcomes, and conduct a difference-in-differences analysis of the effects of the abolition of serfdom, relying on cross-sectional variation in the shares of serfs and the timing of the different stages of reform, controlling for unobserved variation across provinces and over time, as well as province-specific development trends. We disentangle the two stages of the abolition of serfdom: the emancipation of serfs and the subsequent land reform. We show that, in contrast to the large positive effect of emancipation, land reform negatively affected agricultural productivity. We provide evidence that a shift to more marketable crops from traditional non-marketable crops is the main mechanism behind the positive effect of emancipation, and the increase in the power of re-partition peasant communes is the main mechanism behind the negative effect of land reform.
We examine how variation in institutional quality—specifically tax evasion—influences individuals’ support for redistributive policies. While much is known about preferences for social policy, there is less research examining how institutions condition these preferences. To address this, we conduct laboratory experiments in the USA at the University of Colorado and in Russia at the Higher School of Economics. In our experiment, individuals vote on a tax rate which contributes to a common pot, complete a clerical task (or are randomly assigned to be unemployed), and then receive payment based on how well they complete the task and their portion of the common pot which is distributed equally. Participants play 3 rounds and vote on their preferred tax rate at the beginning of each round after being updated with information about their own productivity relative to the average and, when relevant, how prevalent underreporting is. In one version, participants are not allowed to cheat by underreporting their earnings. In the other versions, participants may underreport their earnings with either the same low risk of audit across individuals or a variable risk of audit across individuals. Contrary to conventional expectations, we find that highly productive individuals prefer more redistribution when they can easily avoid pay some or all of their taxes.
Work on the political economy of investment emphasizes the importance of credible commitments between firms and the state for development. How can credible commitment be generated in environments characterized by pervasive state-led violence, expropriation, and weak institutions? This paper explores this question through the lens of public-private partnerships in vocational education in Russia’s regions. Research on the OECD emphasizes a strong civil society – unions and employers’ associations – along with free-markets and good state institutions as crucial for cooperative co-investment in vocational education. Yet in many Russian regions, cooperative vocational education reforms have emerged despite weak civil society, poorly functioning markets, and pervasive state predation. In this paper, I argue that absent strong formal institutions, personal ties between state officials and the business community can generate credible commitments and co-investment. Pervasive connections allow firms to acquire information about potential partners within the state and punish low-level officials for misbehavior, mitigating fears of expropriation. The state in turn can insure that firms cannot free-ride on cooperative institutions, creating credibility between firms. To test this theory I take advantage of an original dataset of all public-private partnership contracts between Russian firms and public vocational education institutions for 2013. This work has important implications for research on business-state relations and investment in violent, weakly institutionalized settings.
Firms with low compliance costs confront a tradeoff regarding self-regulation. They can blend in with the rest of the industry, and take few self-regulatory steps. This reduces the risk of regulation somewhat, and preserves their ability to obtain regulatory flexibility should regulation be imposed. Alternatively, they can step up with substantial self-regulation. This better mitigates the risk of regulation, but at the risk of signaling low costs and becoming a target for stringent enforcement should regulation pass.
Medicare’s prospective payment system (PPS) for long term-care hospitals (LTCHs) gives providers modest per-diem reimbursements for short stays before jumping discontinuously to a large lump-sum payment after a patient stays a specified number of days. Using Medicare claims data, we show that LTCHs strategically discharge patients after they exceed the large-payment threshold, with identification coming from variation in the length of thresholds across diagnoses and from changes in thresholds within diagnoses over time. We further show that for-profit LTCHs and those within acute-care hospitals are more likely to strategically discharge patients. Using a dynamic structural model, we then evaluate counterfactual payment policies.
The model initially developed by Baker-Gibbons-Murphy (2002; 2008) on relational contracts has recently been refined and empirically implemented and tested. This paper builds on these developments with a particular attention to non-contractibilities and the resulting temptation to renege. After a short reminder of the basic model (section 2), the paper explores specific factors that are non-contractible in a complex contract linking Air France-KLM, Delta, and Alitalia. This alliance, which is embedded within a broader alliance (the Sky Team Alliance), has been submitted to severe shocks coming from changes in the economic environment, reactions of other partners in the alliance, and substantial changes in the boundaries of the firms involved (section 3). These shocks fed powerful temptations to renege that challenged the sustainability of the arrangement, a challenge so far overcome thanks to the complex and efficient governance adopted by the partners (section 4). The paper shows that motivations for this arrangement go beyond a strategy to go around restrictive regulations and correspond to advantages coming out of the implementation of ‘hybrids within hybrids’ (section 5). Lessons are drawn regarding the complexity of hybrid arrangements in market economies and the institutional problems these arrangements raise, particularly with respect to competition authorities (section 6).
Long neglected or even discarded as irrelevant, the diversity of the governance landscape beyond “markets” and “hierarchies” is increasingly acknowledged in economics. Among this underestimated variety of arrangements are the numerous modes with multiple ‘parents’ develop joint governance to manage segments of their activities while remaining independents. The empirical significance of such hybrid organizations in many different sectors is striking from cooperatives in the agrifood sector, franchisees-owned franchised chains in the retail sector, joint-ventures in high tech sectors, housing cooperatives or condominiums in the housing market. Despite their empirical significance, there is only very limited knowledge concerning the mechanisms of governance implemented in “multilateral hybrid organizations” like the ones described before. In particular, how are the preferences of the various owners aggregated? We rely on a case study of a complex venture involving 35 French millers to look at the details of the decision-making process. We exhibit two critical features of the control process regulating the venture: first, the governance structure creates and allocates new decision rights not only over newly created assets but also over existing ones; second, the existence of different decision making processes according to the type of decisions at stake, within the same arrangement. Both the size of the committee of decision-makers and the majority required depend on the type of decision. We analyze this match between the decision-making rules and the nature of the decision as an alignment made to economize on the costs of collective decision-making. We consider these aspects relevant for all ownership/equity-based governance structures including in particular the traditional firm. This suggests that works in the political science/public choice literature might be fruitfully applied to collective decision-making in private organizations.
This paper studies the impact of democratic transitions on institutional outcomes in a panel of 135 countries over the period 1984-2012, using an event study method. Our estimates suggest that the bulk of the improvement occurs during the three years following the transition. We can find no anticipation effect in average institutional outcomes. The results are robust to using alternative transition definitions and alternative codings of pre- and post-transition years, to changing the set of control variables, to excluding former socialist countries from the sample, and to dealing with endogeneity with IV regressions. When distinguishing full and partial democratic transitions, we find that both improve institutional outcomes. We find that the effect of democratic transitions is conditional on GDP per capita, education, and the regularity of the transition. When looking at specific components of institutional quality, we find that law and order, internal conflict, government stability, and ethnic tensions follow the general trend, while corruption, military in politics, bureaucratic quality, and investment profile indices are insensitive to democratic transitions.
Using two surveys, we study how respondents process visual cues to identify the political orientation (left- vs. right-wing) of French deputies, based on their official photographs only, to test the type of heuristic that they use. We first confirm that respondents outperform random guesses. Second, we find that their categorizations correlate with observable characteristics (gender, color of the tie, jewelry) and subjective assessments of deputies’ personality traits (attractiveness, competence, trustworthiness). Third, the cues that respondents use are consistent with the actual characteristics of left- and right-wing deputies. Fourth, the magnitude of the marginal impact of a characteristic on the probability that a respondent categorizes a photograph as left- or right-wing increases strictly with the representativeness of that characteristic. Finally, we find evidence that some characteristics correlate with categorization errors. Those findings are at odds with Bayesian inference but consistent with the representativeness heuristics suggested by Kahneman and Tversky (1972) and recently modelled by Bordalo, Gennaioli, and Shleifer (2014).
The drafting of a new constitution has special importance after conflicts or during transitions. One of the main conflicts in constitution-making is between the drafters and the citizens with regard to the level of future government constraints. The use of referendums for ratification has been proposed as a tool to constrain drafters and increase the inclusiveness of constitution-making. The model presented here highlights that referendums for ratification can successfully constrain drafters, but do fail in exactly those situations characterized by uncertainty when they are most needed. To support this theoretical result, domestic conflict indicator as a proxy for uncertainty is regressed on constitutional referendum results . The empirical results give some indicative support for the predictions of the model, especially when looking more closely at the failed referendums.
The internet presents a complex challenge for quality provisioning. A large part of the complication comes from its highly decentralized architecture, which contrasts with the more centralized delivery models of other network industries such as water, electricity, large-scale mass transport, and traditional telecommunications. This decentralized architecture implies highly dispersed responsibility for quality provisioning. As shown by Cremer, Rey and Tirole (2000), an end user’s quality experience depends not only on their direct providers but also on an ecosystem of network players engaged in various degrees of competition and cooperation. In this paper, we hypothesize that country-level internet service quality varies positively with the extent to which local network players are able to cooperate through participation in local internet exchange points (IXPs). We assembled a panel dataset of country-level internet service quality metrics (i.e. download speed and latency), IXP numbers, membership and traffic levels as well as various control variables including state of broadband development, level of economic development, measures of institutional quality, and political freedom. We find that for countries with the same level of economic development and status of broadband uptake, growth in IXP membership and traffic levels is a good predictor of lower latency but not download speed. Cooperation matters for some but not all dimensions of internet service quality.
Internet Exchange Points (IXPs) are vital infrastructures which allow networks on the internet to easily interconnect. Case studies have shown that IXPs enhance the quality of internet access, however there is no scholarly literature explaining the conditions that give rise to active IXPs. In this paper, we examine the role played by size asymmetry between leading national internet service providers in the formation and growth of these IXPs. While network externalities and demand for end-to-end internet connectivity give networks the incentives to interconnect, there is also countervailing temptation for larger networks to degrade interconnection quality in their quest to gain a competitive edge. We report on a preliminary large-N analysis of a novel cross-sectional dataset which includes information on network size asymmetry, IXP characteristics, state of broadband development and levels of economic development. We complement the large-N analysis with a narrative case study of the Philippines. We find network asymmetry among national internet service providers to be negatively predictive of IXP development. The policy implication is that market liberalizing efforts that reduce the size advantages of dominant networks will greatly aid the spread and growth of local IXPs.
Can aid delivered by NGOs exacerbate inequality? I show that when nongovernmental organizations deliver aid, beneficiaries have incentives to reduce electoral support for state-led redistribution. Developing a model of vote over public finances, I show that NGOs can crowd out governmental spending, turning private aid into a negative externality for the poor that do not directly benefit from foreign assistance. In the model, a representative NGO trades-off between the intensive and the extensive margin of its project. I characterize the conditions under which this trade-off affects the size of the externality and overall welfare.
This paper investigates how diversified firms allocate non scale-free resources across their business units (BUs). In particular, we exploit exogenous variations in the intensity of competition in the product-market of one of the BUs of the firm to proxy for changes in the opportunity cost of using non scale-free resources. Consistent with the hypotheses, we find that an increase in competition experienced by one of the BUs of the firm triggers a redistribution of resources in favor of the BU affected by it. Further, we find evidence that the relative resource management ability of the BU experiencing the increase in competition is a positive factor moderating the relationship. Instead, the relative size of the BU in comparison with the total size of the firm moderates the relationship negatively by affecting the ability of the firm to release non scale-free resources. Finally, we also examine how the fungibility of scale-free resources across the product-markets of a diversified firm influences resource reallocation. While in our initial analysis we obtain only partial evidence supporting the idea that scale-free resource relatedness is a negative moderator of the relationship between competition and resource reallocation, additional tests included in the paper suggest that the relationship might depend on the effect of competition on the value of the scale-free resource under consideration.
This study aims to provide a formal haggling theory of firm boundaries. In the face of unforeseen disturbances in trade circumstances, trading parties engage in ex post contract renegotiation, which ends with agreement, disagreement, or third-party intervention. Given that third-party intervention under integration (i.e., fiat) is more efficient than that under non-integration (i.e., court ordering), we show that integration can economize bargaining costs but that it suffers from too much intervention. This tradeoff provides a formal explanation of why selective intervention fails.
This paper examines the effect of heterogenous prior beliefs regarding learnability on incentives for human capital acquisition. To do so, I consider a repeated moral hazard problem in which a principal hires an agent for two periods, who then implements an identical project in each period and he obtains the opportunity to develop his ability. They openly disagree and have differing prior beliefs on the success probability of the ability development. The agent’s belief regarding learnability have two effects: (i) it increases his incentive to work and develop his ability after failure; but (ii) in the first period, it countervails the incentive to avoid failure. The principal’s belief regrading learnability determines the optimal level of learnability confidence. If the principal has low learnability confidence, then the latter effect dominates the former effect, and hence the principal prefers the agent with low learnability confidence. My results predict that why some organizations focus on the human resource development.
The choice of infrastructure delivery through public versus private provision is driven by investment and operational efficiency, and cost of capital differentials. While the first two factors are measurable---albeit with mixed results---the appropriate discount rate instigates methodological discussions. Efficient market hypothesis supporters propose a single discount rate, independently of the source of financing; welfare economists advocate for a lower discount rate for public-sector cash flows. I revisit this discussion with attention to the terminal value subject to adaptable discretionary actions of the regulator. I also provide an empirical test of lower price volatility for government-sponsored enterprises. Finally, I propose an integrated approach with a dual discount rate treat: a common discount rate for predictable cash flows and divorced discount rates for terminal cash flows.
Recognizing that climate change represents an urgent and potentially irreversible threat to human societies and the planet, the United Nations Framework Convention on Climate Change (UNFCCC) parties adopted an agreement at their 21st meeting in Paris in December 2015. A total of 10,000 delegates from 195 countries, plus the EU, declared their ambition to hold global temperature rises well below 2 °C above those of pre-industrial times, pursue efforts to limit the temperature increase to 1.5 °C, and make the global economy carbon neutral in the second half of the 21st century. At a macro-level, it appears that the scientific, business, and political communities have reached an organizational and collective outcome aimed at reducing CO2 emissions to a sustainable level. This macro-level outcome is an extraordinary achievement that, nonetheless, obscures a long and agonizing micro-foundational journey, which involved several setbacks, resilience, and innumerable interactions. The aim of this study is to look at the Paris Agreement on climate change and illuminate the multifaceted behavioural, relational, and organizational micro-foundations that were conducive to its achievement. The study examines the Paris Agreement on climate change in its real-life context to identify the behavioural, relational, and organizational micro-foundations that were conducive to this outcome.
I contribute new evidence on the impacts of private prison contracting by exploiting the entry and exit of private prisons in Mississippi between 1996 and 2004. I find that private prison inmates serve an additional 4 to 7 percent of their sentences, which equals 60 to 90 days for the average inmate. The mechanism for this delayed release appears linked to the widespread use of conduct violations in private prisons: these inmates are 15 percent more likely to receive one, and receive twice as many. Despite the additional time served, I find no evidence that private prison inmates recidivate less.
We study the impact of violent conflict on social capital, in connection with local ethnic diversity. Social capital is measured by citizen participation in four kinds of community groups: governance, social service, infrastructure development and risk-sharing. Combining household panel data from Indonesia with conflict event information, we find an overall decrease in participation in districts affected by group violence in the post-Suharto transition period. However, participation is found to be little affected by violence in communities with a high degree of ethnic polarization, and is even stimulated for local governance and risk-sharing activities. Moreover, individual engagement appears to depend on the involvement of other members from the same ethnic group, which points toward the emergence of intra-ethnic social networks in the presence of violence. Finally, we find large observed and unobserved individual heterogeneities of the effect of violence on participation. Once heterogeneity is controlled for, the ethnic and social configuration of society is revealed as a core factor in understanding citizen participation as a response to violence, perhaps because subjacent ethnic group strategies are at work.
Political knowledge is crucial to the functioning of democratic political systems, and therefore represents an important topic of study for political scientists. Attempts to measure determinants of political knowledge, however, have long relied on self-reports of key causal variables (such as media exposure) and often must contend with concerns regarding endogeneity. To address both these issues simultaneously, we conduct a panel survey that spans the 2015 UK election to measure changes in political knowledge and rely on a non-self-reported measure of media exposure. More specifically, we analyze respondents Twitter feeds to objectively measure exposure to political information, including the source of that information. We show that information from media accounts tends to increase knowledge of factual questions, and that information from politicians tends to increase knowledge of party platforms. We also examine issues specifically relevant to the 2015 UK election, and find that information from incumbent parties improves estimates of the state of the economy while tweets by opposition parties diminish them, and that information from UKIP about immigration tends to inflate beliefs about the number of immigrants to the UK.
This paper develops a new theory of the production of corporate law in Delaware and the roots of that state’s preeminence in the market for corporate law. The conventional account supposes that Delaware behaves in ways that maximize its chartering revenue, and Delaware lawyers are cast as a powerful interest group that diverts rents to itself in the form of litigation revenue. This paper argues that the conventional account is backwards: it is in fact the Delaware bar that is responsible for the production and maintenance of Delaware’s corporate law. Legislators and other state bureaucrats have minimal incentives to invest in improving the state’s corporate law, and indeed the strongest incentive for legislators would be to seek political capital by expropriating wealth from Delaware-incorporated firms. The corporate bar, by contrast, has an incentive to make costly investments in drafting legislation and designing governance innovations, so long as those changes generate enough paying legal work. This theory of Delaware’s corporate law-making can explain a number of peculiar and underappreciated features of Delaware practice: the wholesale deference to the corporate bar in drafting legislative change, the secretive way the bar develops proposed amendments, the difficulty of uncovering judicial guidance on cutting-edge topics, and the sharp limitations on the privilege of practicing the Court of Chancery. Moreover, if this account of Delaware’s lawmaking is correct, it implies that some amount of corporate litigation in Delaware is socially desirable because it allows the Delaware bar to profit from its investment in producing corporate law.
We analyze the effect of socio-political and economic institutions on the development of non-cognitive skills of people. We exploit the breakdown of the Soviet Union as a quasi-natural experiment, and apply a difference-in-difference strategy. We focus on two post-Soviet countries, Armenia and Georgia, and compare personality traits of individuals that were born much before the collapse of the Soviet Union with those that were born shortly before or later, relative to individuals from other developing countries that had not gone through the same institutional changes. After controlling for various individual characteristics and year of birth fixed effects, we find significantly lower scores of extraversion, openness, stability, and grit, and higher scores of hostility of people that lived considerable amount of time under the communist regime. Our findings suggest that institutions can shape the non-cognitive skills of individuals, and thus highlight a channel, through which institutions impact economic development.
While the connection between government funding and the success of government programs has received close study in many fields, there is a dearth of study as to the extent to which funding for the United States Environmental Protection Agency affects environmental quality. The issue is of growing importance as leaner economic times have led to substantial reductions in EPA funding. We offer some theoretical reasons both to expect, and not expect, a correlation between funding and environmental quality. After an empirical analysis in facts yields no statistically significant connection, we discuss the effects that budget cuts are likely to have on EPA operations, and in turn environmental quality.
Although archaic/classical-era Sparta shared many features in common with other Greek city-states, Sparta was atypical in certain ways. Among features of Spartan society regarded as striking by historians, ancient and modern, were the stability of the constitutional system, which seemed impervious to the regime changes that affected many other Greek states; the strict caste system, whereby some native residents were hereditary serfs, whereas other natives lived entirely by the fruits of the serfs’ labors; the systematic use of violence against serfs by their masters, justified by an annual declaration of war; norms of austerity and equality in respect to public consumption, along with substantial and growing inequality in wealth, among the ruling class; sudden collapse from leading state to minor regional state standing. These various features are related and can explained by a positive theory of political economy.
In recent years, the Federal Trade Commission has requested that courts refuse to enforce so-called “reverse payment settlements”, or settlements in which the patent holder pays the competition to settle and exit the market, on the grounds that they are “anticompetitive”. We show that when potential entrants and patent holders possess private information concerning patent strength, it is possible for the existence of reverse payment settlements to increase competition. While such settlements do decrease competition conditional on entry, they also incentivize entry by increasing the range of possible patent validity under which a competitor can expect a positive payout. We define conditions on the ex-ante distribution of patent strength such that each effect dominates.
What is a mechanism through which innovation opportunities are pursued efficiently and innovation process becomes self-enhancing process? What are roles of spinoffs and mergers in such a mechanism? In this paper, I empirically investigate how organizational separation and consolidation affect a rate of innovation in an industry and a course of industry growth. Innovation can be seen as cumulative process in that one innovation becomes a foundation for next innovations (Aghion et al., 2008). If one innovation fails to be materialized for some reason, then subsequent innovations may not come to existence. Since creative destruction plays an important role in the evolution of an industry (Klette and Kortum, 2004), a course of industry growth can be crucially influenced by the pursuit and realization of a particular innovation opportunity. Innovation can be also regarded as experiment because a very few business ventures succeed and many business ventures fail (Kerr et al., 2014). From this viewpoint of innovation, we may argue that the larger the number innovation opportunities pursued at the same time, the higher the speed and the longer the periods of industry growth. The standard model (e.g., Klette and Kortum, 2004) assumes that every innovation opportunity is pursued and realized without frictions, but several pieces of anecdotal evidence suggest that spinoffs/spinouts pursued innovation opportunities their parent firms had decided to pass on (Klepper, 2015). This paper tries to shed light on a relationship between frictions in the pursuit of innovation opportunities and industry growth by using data from Basic Survey of Japanese Business Structures and Activities.
We measure the behavior of over 1,100 CEOs in six countries (Brazil, France, Ger- many, India, UK and US) using a new methodology that combines (i) a survey that records each activity the CEOs undertake in a random work-week and (ii) a machine learning algorithm that projects these high dimensional data onto one CEO behavior index. A simple firm-CEO matching model yields the null hypothesis that, in absence of matching frictions, CEO behavior is uncorrelated with firm performance. Combining the CEO behavior index with firm level accounting data we reject this null. We find a large and significant correlation between CEO behavior and firm performance, which appears gradually over time after the CEO is appointed and is stronger in poorer regions. Structural estimates of the share of mismatched firm-CEO pairs reveal that eliminating matching frictions would have a large effect on productivity.
Governments of different countries try to lower the entry cost in public procurement in order to decrease pubic spending. The purpose of this paper is to examine how the entry cost influences procurement prices in the corrupt environment. We adapt the model of selective entry and find that lower entry cost always reduces the contract price paid by the non-corrupt procurer, but at the same time may make favoritism more stable. Thus the entry cost may not affect the contract price paid by the corrupt procurer or even increase it by making corrupt deals more profitable. We illustrate this result using case study on gasoline procurement in Russia where the entry cost of companies was decreased by e-procurement reform. This allows us to examine how changes in entry costs influence competition of companies and procurement prices in auctions.
Today’s economists increasingly agree that an economy’s performance importantly depends on its institutions (though in not always well-defined meaning). If this is the case, the knowledge of this dependence is doubly important for the policy analysis that seeks a remedy for an underperforming economy: the institutions may contain the causes of the underperformance, which the analysis needs to identify; and institutional change may be a necessary ingredient of the remedy, the effects of which the analysis needs to assess. This paper has two main objectives, indicated by its title: (1) to show that this is indeed the case, and that policy analysis therefore needs help from certain parts of Institutional Economics (IE); (2) that IE, to effectively help and not mislead policy analysis, needs to be extended by certain parts of certain “heterodox” fields, divided into Behavioral-Informational economics, and Evolutionary-Developmental economics. The paper interconnects all the needed parts into a consistent conceptual model, able to help policy analysis deal more reliably with a broader range of important policy issue, and avoid proving optimal in theory policies that grossly fail in practice. Its usefulness is illustrated by new contributions to four old policy issues: the economic sustainability of socialism; the social efficiency of selective industrial policies; the social efficiency of large, transaction-costs saving firms; and the regulations of the financial sector, including the financial transaction tax.
An important decision for the members of a cooperative is the annual decision regarding the retained earnings percentage. This paper studies from a relational contracting perspective whether the members of the cooperative or the professional management holds the decision right about the distribution of profit. The decision needs to balance the member interest on the one hand, and the cooperative enterprise development on the other hand. Our findings show that the allocation of decision right to distribute cooperative profit affects parties’ reneging temptations and thus the stability of the relational contract between the members and the management. The set of feasible relational contracts shrinks when farmers’ outside options increase, when the value added at the downstream stage decreases, and when the discount rate rises. The cooperative retained earnings percentage is lower when the variability of farmers’ outside options decreases, for example, when market price for farm produce is generally increasing. Finally, our results show that the set of feasible relational contracts between the cooperative management and membership is the largest when the variability of prices is high.
An exogenous shock in the informational level of a subset of consumers may affect the market structure, equilibrium and welfare. Information aggregators (e.g., Yelp) provide detailed information about experience goods, such as restaurants and hotels. Their appearance implied the creation of two groups of consumers: the informed and the uninformed. This study fosters our understanding of how information aggregators impacted competition, profits and welfare. Using a spokes model of horizontal competition, I show that aggregators may enhance total welfare mainly by making valuable information available to consumers. The effect on welfare goes through different channels: 1) realised transactions are more valuable for the match between producers and consumers is more accurate; 2) the customer base broadens, since more agents find a suitable product; 3) the equilibrium price weakly decreases, as competition amongst firms is more intense. Nonetheless, firms face a prisoner dilemma: some firms’ best strategy is release the information through the aggregator, so as to enlarge market shares; however, all firms’ medium-run profit decreases.
I investigate the role of national institutions on persistence of cultural norms and traditions. Why does the harmful tradition of female genital mutilation (FGM) still persist in certain African countries, while in others it has been successfully eradicated? This paper contributes to understanding of the stability and decay of social and tribal norms, institutions and practices, by exploring the conditions under which female circumcision is abolished. People are more willing to abandon their institutions and traditions if they are sure that the government is durable enough to set up replacements for them in the long term. If the regime is weak, people revert to their traditional cultural norms in order to reduce uncertainty and minimise the risks of interaction between people. I exploit the fact that ethnic groups in Africa were artificially partitioned by countries' national borders and show using country-ethnicity panel dataset that in general, one standard deviation in political regime durability explains a 12.5% of standard deviation of share of circumcised women. I confirm that the results are unlikely to be spurious by using a number of identification strategies and showing that results are robust to an array of control variables and robustness checks.
Civil conflicts push a significant number of people out of their home countries, as the recent refugee crisis has shown. But what if emigration itself worked as a pacifying force and, by opening their borders, developed countries could alleviate conflict back home? Using a theory-driven instrumental variable approach and country level panel data of 117 developing countries for the period 1985-2010, I find that emigration to developed countries decreases civil conflict incidence in the countries of origin. The identification strategy relies on comparing conflict likelihood in countries in years after proximate developed countries become more attractive to conflict likelihood in years after these countries are less attractive. In terms of mechanisms at play, I find no evidence for the indirect effect of emigration on civil conflict through remittances. In addition, emigration of men reduces the conflict likelihood, while emigration of women has the opposite effect. Finally, I document that home political regimes do not worsen following emigration, which points to the fact that emigration is rather welfare improving. In terms of policy implications, these findings point that, by opening their borders, developed countries could contribute to saving the lives of the migrants as well as of those left home.
This paper contributes to an emerging literature on the relationship between free exchange of land use rights and risk-coping motives in developing countries. We argue that in-depth empirical analysis of the nature of land arrangements is crucial to understand risk-coping motives in land tenure. Using mixed quantitative and qualitative data collected in Thailand, the paper proposes an innovative framework which looks at transfers of use rights in a continuum from pure market to free exchange. Land transfers are categorized along three dimensions: the nature of the relationship between the parties involved, the nature of the payment made, and how explicit the payment is in the contractual terms. The economic motivations in each of the consequent categories of land arrangement are then analyzed with a multinomial probit. Our main results suggest that while free loans of land are allegedly common practice in Thailand, only a small number of those transfers are really free. Most appear to be a `disguised form of rental contract' set by households who rely heavily on their risk-sharing network for risk-coping, and hold property rights vulnerable to family claims despite the presence of formal titles. Our preliminary results also confirm what the literature has previously shown: when confronted with local social norms and the economic rationales created by multimarket failures, a sound formal property rights system proves non-sufficient to establish de facto formal property rights.
We present the first attempt to construct a long-run historical measure of subjective wellbeing using implied sentiment (known as valence) from language corpora derived from millions of digitized books. While existing measures of subjective wellbeing go back to at most the 1970s, we can go back at least 200 years further using our methods. We analyse data for six countries (the USA, UK, Germany, France, Italy and Spain). First we show that our measure is significantly positively related with existing measures of subjective wellbeing. We do this by noting the strong positive correlation through conventional regression analysis as well as non-parametrically through the use of a p-value histogram which confirms that words that are prominently associated with periods of high life satisfaction are also the same words that have high valence. We then compare our estimated measure with the two longest running (to the best of our knowledge) existing indices of welfare: GDP and Life Expectancy; we find that life expectancy has a robust and significant impact on our measure of subjective wellbeing across all specifications and models. This is robust to the introduction of conflicts, world wars and infant mortality. This last variable correlates negatively with our estimated wellbeing measures and independently from the effect of life expectancy. The correlation with GDP is weakly positive in some specifications, but becomes insignificant after applying filtering measures appropriate for data of this sort. Our new measure can then be used to estimate the impact on subjective wellbeing of major events such as natural disasters, world wars, recessions and booms and epidemics and may be able to play a similar role to long-run historical GDP series in informing policy-makers and inspiring future research.
In this paper we study competition in markets as diverse as search engines, maps, and self-driving cars. We identify the common characteristic of these - and many other - markets: they are driven by big data. Specifically, the cost of quality production in these markets is decreasing in the amount of machine-generated data about user behavior, which is a natural, inseparable byproduct of using services offered in such markets, thereby giving rise to indirect network effects. We construct a dynamic model of R&D competition and show that such markets tip under very mild conditions, moving towards monopoly. We also show how a dominant firm in one market can leverage its position to another data-driven market, thereby initiating a domino effect. We apply the model to contemporary cases, offer a welfare analysis, and propose a regulatory measure how to mitigate the negative effects of indirect network effects on innovation, consumer surplus, and total welfare.
This paper conducts a causality test of the relation between ownership concentration of firms and their innovation, measured by patents and citations. Exploiting the introduction of a new takeover law in Switzerland in 1998 as an instrument for a reduction in firm ownership concentration, we find an increase of innovation for those firms targeted by the reform. Using a sample that contains annual data about the ownership structures of about 150 Swiss companies over the 1990-2010 period, we report an average increase of both patents’ applications and citations per patent of about, respectively, 10% and 12%. Our results are consistent with the view that dispersed ownership increase incentives to innovate.
This paper examines the role of Chinese social media in three areas: organizing collective action, surveillance of government officials, and propaganda. Our study is based on a data set of 13.2 billion blog posts published on Sina Weibo -- the most prominent Chinese microblogging platform -- during the 2009-2013 period. We find millions of posts discussing explicit corruption allegations and collective action events, such as, protests, strikes, and demonstrations. More intensive use of Sina Weibo is significantly associated with higher incidence of protests and large-scale conflicts. We also find that social media are effective tools for surveillance: Sina Weibo content predicts collective action events one day before their occurrence and corruption charges one year in advance. Finally, we estimate that our data contain 600,000 government-affiliated accounts which contribute 4% of all posts about political and economical issues on Sina Weibo. The share of government accounts is larger in areas with a higher level of internet censorship and where newspapers have a stronger pro-government bias. Overall, our findings suggest that the Chinese government regulates social media to balance threats to regime stability against the benefits of utilizing bottom-up information.
Undeniable similarities in chronological power evolution can be observed in the past two centuries when we study three countries in the Middle East: Egypt, Iran and Turkey. These resemblances would be even more significant if we put the analysis in a longer historical perspective. Old civilizations, long in power monarchies and some forms of transition to non- monarchy state are parts of these common timelines. One major factor in the political equilibrium in these countries has been the religion, Islam. There is a well-established literature on political Islam and its definition and functions. What is somehow obvious for scholars, is the different trajectories of political Islam in mobilization the sociopolitical forces in the Middle East (eg. Zubaida, 2000). Also the structure and evolution of constitutions in these three countries have meaningful variety. The current paper employs a quantitative method, content analysis, for a comprehensive study of constitutions in Egypt, Iran and Turkey with focus on importance of religion. Basically this is an attempt to shed some lights on understanding the differences between Iranian, Turkish and Egyptian Political Islam through lenses of constitutions.
Clientelism is common in the developing world, but little scholarship examines its effectiveness. In this paper, we investigate the effectiveness of various clientelist strategies. In particular, we compare the relative effectiveness of various clientelist brokers—party activists, employers, and local officials—as well as the effectiveness of different types of selective inducements. Using a framing experiment placed on a survey of 4200 Russian citizens in October 2014, we find that respondents are most likely to respond to appeals from employers. Employers have significant levers of influence over their employees, are able to monitor voter behavior, and are engaged in repeated interactions with voters. This makes them effective vote brokers in Russia. We also find that negative inducements (e.g. threats and intimidation) outperform positive inducements (e.g. gifts and rewards).
A central aspect of institutional development in less developed economies is building tax systems capable of raising revenues from broad tax bases, i.e., fiscal capacity. While it is recognized in the literature that fiscal capacity is pivotal for state building and economic development, it is less clear what its origins are and what explains its cross-country differences. We focus on political institutions, seen as stronger systems of checks and balances on the executive. Exploiting a recent database on public sector performance in developing economies, we provide a systematic empirical analysis, identifying their long-run impact, and we ‘unpack’ the concept of fiscal capacity, distinguishing between the accountability and transparency of a tax system (impartiality) and its effectiveness in extracting revenues. We find that stronger constraints on the executive foster the impartiality of tax systems. However, there is no robust evidence that they also improve its effectiveness. The impact of political institutions on the impartiality dimension works through the rule of law and the performance of the bureaucracy.
Both academic and popular representations of the diamond industry describe trust-based relations that sustain trade and support the industry’s private arbitration system. In recent years, however, trust among merchants has eroded, and merchants have correspondingly lost confidence in the industry’s arbitration. This article describes the events that have led to the breakdown of cooperative trust in the industry and derives lessons regarding the nature and limits of stateless reputation-based exchange in the modern economy.
Demand response is a cornerstone problem in electricity markets under climate change constraint. Most liberalized electricity markets have a poor track record at encouraging the deployment of smart meters and the development of demand response. In Europe, different models are considered for demand response, from a development under a regulated regime to a development under competitive perspectives. In this paper, focusing on demand response and smart metering for mid-size and small consumers, we investigate which types of market signals should be sent to demand managers to see demand response emerge as a competitive activity. Using data from the French power system over the last 8 years, we compare the possible market design options to allow demand response to develop. Our simulations demonstrate that with the current market rules, demand response is not a profitable activity in the French electricity industry. Introducing a reserve and/or capacity remuneration could bring additional revenues to demand response providers and improve incentives to put in place demand response programs in a market environment.
Does violent pressure on business influence the decision of firms to stay in the informal economy? Using evidence from Russian regions, this papers finds that the result depends on the type of violence. Physical violence in a given region is positively correlated with the number of people working outside the corporate sector, but negatively with the degree of competition from the informal sector. On the other hand, insecure property rights for entrepreneurs and investors increase the amount of competition from the informal economy. These findings are consistent with a theory where firms seek the protection of the formal economy against different types of physical violence in regions with decentralized predation, but hide in the informal economy against predatory state officials and corporate raiders in regions where predation is centralized.
This paper analyzes a private ordering solution to multiforum shareholder litigation: exclusive forum provisions. Using hand-collected data on the 746 U.S. public corporations that have adopted the provision, we find by 2014, nearly all Delaware IPOs have the provision, and the transition from zero to near-universal adoption is driven by law firms. For post-IPO adoptions, we find there are either no significant differences or that adopters have higher quality governance than non-adopters, which is inconsistent with managerial opportunism and there are no significant differences in governance and ownership structures across firms adopting by board or by shareholders, suggesting that the adoption method should not be a matter of concern for investors.
This paper investigates the long-term impact of mass refugee inflow on human capital development of host regions. After the Greco-Turkish war of 1919-1922, more than a million Greek refugees arrived in Greece — a country with less than five million inhabitants at the time. We build a novel data set that combines detailed historical census data in 1928 with education data from the 1971 and 1981 censuses. Exploiting variation across localities and across cohorts, difference-in-differences estimates suggest a positive effect of the inflow of refugees on human capital formation of the native population. Relative to unexposed cohorts, exposed cohorts that were young enough to have been in school during or after the arrival of refugees, are more likely to be literate and to complete primary school in provinces that hosted a greater number of refugees. This increase in schooling coincides with childhood exposure to the population shock and is not driven by pre-existing trends. The construction of new schools between 1920—27 and the arrival of refugee teachers are important mechanisms through which the inflow of refugees increased schooling. Overall, our results suggest that early investment in education as a part of refugee settlement efforts can have a positive impact on regional development in the long-run.
The paper uses recently created datasets measuring legal change over time in a sample of 28 developed and emerging economies to test whether the strengthening of shareholder rights in the course of the mid-1990s and 2000s promoted stock market development in those countries. It finds only weak and equivocal evidence of a positive effect of shareholder protection on market capitalisation, the value of stock trading, and the turnover ratio, and a negative impact on the number of listed companies. There is stronger evidence of reverse causality, in the sense of stock market development at country level generating changes in shareholder protection law. We conclude, firstly, that legal reforms were at least in part an endogenous response to stock market devel-opment and not simply a reaction to the generation of global standards; but, secondly, that the laws passed in response to the demand for shareholder empowerment did not consistently have the expected impact on financial markets, and may have had some negative and perverse results
Experts claim that half of the world’s wetlands have disappeared since 1900. This increasing erosion of natural capital and biodiversity can be explained by two phenomena: the importance of degradation and the lack of investment in green infrastructures. However, institutional devices are emerging to encourage investment in biodiversity, at international level (e.g. Convention on Biological Diversity) and national levels (e.g. mitigation banking legislation in the USA). To explain this lack of investment, scientists endeavor to bring up evidence of the ecological efficacy of biodiversity restoration or try to raise the question of cost and benefits of restoration projects. We think that organizational and institutional constraints can also prevent investment in biodiversity restoration. In order to study this assumption we conducted four field studies of restoration projects in France and an analysis of the emergence of the market for wetland mitigation in the US. These analyses allowed us to study different governance devices to frame transactions involving investment in aquatic ecosystem. We insist here on the problem of specificity of biodiversity and the problem of uncertainty associated to biodiversity management. Firstly, because the design of restoration projects has to take into account the great complexity and diversity of ecosystems. Secondly, because the uncertainty is high when partners try to anticipate the outcomes of ecosystem restoration. We show that biodiversity restoration projects are usually governed by hybrid forms that offer coordination devices more adapted than markets or hierarchies and that the elements associated to the ecological performance of projects are linked to the organizational efficiency of the system by transaction cost issues. In this way we show that there is a tension between an objective of high environmental expectation for conservation and an objective of increasing incentives to invest in biodiversity restoration.
Do relationship banks help firms in financial distress? Combining a new survey-based measure of relationship lending with unique credit registry data, I examine the effect of relationship lending on ex-post loan performance. I find that the same firm is more likely to become temporary delinquent on a relationship-based loan relative to a transaction-based loan. Higher delinquencies do not, however, result in more defaults or losses for relationship banks when loans mature. Consistent with theory, relationship banks tolerate temporary bad results, yet extract rents in the long run, that is, they forgive but do not forget. When firms are in distress, relationship banks adjust contract terms and allow drawdowns on credit lines and overdrafts but do not inefficiently roll over loans. Overall, the paper uncovers how relationship banks help distressed firms to bridge liquidity shortages.
Whether punishment promotes or deters future criminal activity by the convicted offender is a key public policy concern. Longer prison sentences further isolate offenders from the legitimate labor force and may promote the formation of criminal networks in prison. On the other hand, greater initial punishment may have a deterrence effect on the individual being punished, sometimes called “specific deterrence,” through learning or the rehabilitative effect of prison. We test the effect of prison sentence length on recidivism by exploiting a unique quasi-experimental design from adult sentences within a courthouse in Seattle, Washington. Offenders who plead guilty are randomly assigned to a sentencing judge, which leads to random differences in prison sentence length depending on the sentencing judge’s proclivities. We find that one-month extra prison sentence reduces the rate of recidivism by about one percentage point, with possibly larger effects for those with limited criminal histories. However, the reduction in recidivism comes almost entirely in the first year of release, which we interpret as consistent with prison’s rehabilitative role.
We experimentally investigate whether and how people understand the incidence of policy. People’s understanding of markets likely influences the political viability of different regulations, taxes, subsidies, mandates and standards in policy applications ranging from innovation, technology, environmental protection to public finance. One application is the acceptance of potentially risky new technologies. Whether a new technology (e.g. autonomous cars or GMOs) will be allowed is likely to depend on the public perception of its benefits. For example, a naïve public might think that technologies that lower production costs benefit only “big business” neglecting to anticipate that in competitive equilibrium they might get the lion’s share of the cost reduction via lower prices. This could lead the public to reject technologies from whose adoption it would benefit. Another application is the continuing popularity of environmental command-and-control regulations (e.g. emissions standards) over directly targeting emissions (e.g. a carbon tax). Economic theory and empirical evidence both suggest that the latter can achieve a multiple of the reductions of emissions at the same cost. To gain insight into whether people understand markets, and if not what the nature of their misunderstanding is, and under what circumstances it arises we have designed a lab experiment. Our incentivized market and "voting" experiments are complemented by survey questions about subjects’ understanding of real-world markets, and their preferences regarding different new technologies as well as their beliefs about the distributional impact of environmental taxes and regulations.
For the Russian market for personal deposits, which is regionally segmented with virtually no federal-level competition, it is extremely important to consider the regional-level sources of depositors’ confidence, undermining the market discipline. We focus on the banks’ regional ties as factor making depositors less sensitive to banks’ riskiness. Using the 2001-2010 bank-level and region-level data, we show that the regional ties provide a signal of reliability for the retail depositors during the financial crisis of 2008-2009: riskier banks, which are regionally-tied, suffer much less from the reduction of the deposit growth. The regional ties undermine the market discipline even more significantly in the regions with higher degree of regionalism. Reliance on the regional authorities, in contrast, is not a source of implicit guaranties and does not undermine disciplining.
We examine how state ownership of banks may have contributed to the ascent to power of Vladimir Putin during the Russian presidential elections of March 2000. We demonstrate that the regional variation in the surge of Putin’s popularity between December 1999 and March 2000 is correlated to the regional variation in the increase of Sberbank lending to firms in the period right before. Also the regional variation in the increase of voter turnout over the same period is explained by the regional variation in higher Sberbank lending to firms. The found effects are more pronounced in regions with governors connected to the FSB or the military. All results are controlled for structural determinants of Putin’s popularity, the regional variation in lending by other banks and the regional variation in lending by Sberbank to households. Our results support the view that Sberbank loans granted to firms before the presidential elections of March 2000 incentivised managers of privatised firms to urge their workers to turn up and vote for Vladimir Putin, especially in regions where the governor was connected to security interests.
This paper utilizes a data set of over 208,000 U.S. patents applied for between 1975 and 2010 to study development of strategic patenting over time and across industries. With received citations as a measure of patent social value, we use data envelopment analysis to estimate firm-level relative importance of strategic versus protective patenting. Our novel identification strategy reveals there was an almost universal drop in patent social value in the second half of the 1990s, signaling a shift towards the strategic use of patents. But the development of patenting strategies continued even after 2000 with semiconductor companies increasing their focus on patent value relative to companies from other industries. On average, aerospace and software companies preferred the production of valuable patents, but patenting strategies can differ vastly even among companies operating within one industry. The results confirm our expectations regarding the focus of aerospace companies on socially valuable patents.
How does labor scarcity impact institutional development? We examine the long-term institutional impacts of Mexico's 16th-century demographic collapse, which reduced the indigenous population by between 70 and 90 percent. We show that the collapse facilitated land concentration by the elite and the rise of a landowner class that dominated Mexican political economy for centuries. Though land institutions were transformed after the Revolution of 1910, the 20th-century agrarian reform was concentrated in areas experiencing a steeper population decline between 1570 and 1650. Disease-impacted areas now have more land in common-property institutions with limited property rights. The collapse thus had a persistent impact on the political economy of the country, but the nature of this impact has changed radically over time. Our identification strategy exploits climatic shocks associated with an epidemic in the 1570s that roughly halved the indigenous population. We discuss the implications of our findings for the study of the institutional impacts of population scarcity and historical persistence and change.
Whether democracy causes economic growth has been a matter of theoretical and empirical debate. We argue that looking at the average effect of democracy on long run growth ignores the heterogeneity of growth experiences among authoritarian regimes relative to democratic regimes. Furthermore, the emphasis on long-run growth is not compatible with the stylised facts of economic growth in developing countries, which is characterized by frequent shifts in growth between decelerations and accelerations. We examine the political determinants of the magnitude of growth in accelerations and deceleration episodes for 125 countries for 1950-2010. We find that the effect of the political regime on growth is asymmetric across accelerations and decelerations and that democracies do not necessarily outperform autocracies in a growth acceleration episode, though they are likely to prevent large growth collapses. We also highlight the importance of the type of autocracy in understanding the effects of regime type on growth.
We analyze the strategic interactions between a state that decides whether to repress a group of activists and the general public that decides whether to protest following repression. Strategic complementarities between the strategies of the public and the state generate multiple equilibria, suggesting a role for social norms. These results shed light on conflicting empirical findings regarding the determinants of repression. We investigate the effects of exogenous restrictions on repression, imposed by international institutions, showing that weak restrictions can paradoxically increase repression. This result provides a rationale for the puzzling empirical finding that international pressure can increase repression. Finally, we study the effects of endogenous restrictions, imposed by domestic institutions set up by the state to restrict its own subsequent repression. We characterize when the state can benefit from introducing such institutions, offering an explanation for the presence of partially independent judiciaries in authoritarian regimes.
The United Nations Human Rights Committee, the monitoring treaty body of the International Covenant on Civil and Political Rights, is the closest international tribunal to a world court of human rights. This article seeks to explore if geopolitical and cultural considerations influence the votes of Committee Members in decisions on individual communications. This article introduces an original data set on the votes and backgrounds of Committee Members, hand coded by the author. The method used in the article is empirical-quantitative analyses of the Committee Members’ votes. The article finds that certain geographical and political voting patterns do exist in votes of Committee Members. Evidence for cultural voting patterns is more limited. However, the article finds that usually voting patterns of individual Committee Members do not influence the final decision of the Committee, and the decisions of the Committee should be generally regarded as unbiased.
This paper argues that the law should allow target boards to signal their beliefs against an unsolicited bid to takeover their corporations. Target boards may signal by committing, if the bid fails, to purchase, and hold for a specified time, a certain amount of at-the-bid price target’s stock. Courts that perceive the signal credible should give it a substantial weight when deciding whether to allow boards to use defensive tactics, including a “poison pill”, to fend off hostile takeovers. When courts do not allow defensive tactics, shareholders may still be persuaded by the signal and be authorized to fend off the bid. I construct a game theoretical model to show that the suggested mechanism separates loyal managers from disloyal and credibly transmits valuable private information from boards to courts and shareholders. I further show that the proposed signaling mechanism will improve managerial ex-ante incentives to maximize firm value and to reduce their agency costs. Finally, I suggest a framework for a legal reform in Delaware to implement my suggested mechanism.
The aim of this paper is to introduce the models of financing public goods via lotteries free from disadvantages of the existing ones. The John Morgan’s model (2000) implies that the welfare function of each member of population is widely known. According to his model, the social optimum of providing public good is unreachable and that fixed-prize lotteries completely crowd out voluntary donations. In this paper the assumption of the publicly available information about welfare functions is eliminated. Moreover, the survey conducted rejects the idea of crowding out voluntary donations by lotteries, whereupon the concept of moral utility (altruism) is implemented into the model. The idea of socially optimal level of providing public goods is also reinterpreted, which leads to its’ attainability. The model of Franke and Leininger (2013) presumes that it is possible to set individual ticket prices for each member of society, which is quite improbable. In this paper it is also shown that advertisement of lotteries has positive effect on providing public goods, while lottery taxation has a negative one. Therewith the model of additional issue of lottery tickets with buyback, which may help to reach the social optimum in its classical meaning, is introduced. Keywords: lottery, public goods, free-rider problem, social optimum, moral utility, lottery taxation Jel: C72, D61, D64.
Why does prison social order vary around the world? While many of the basic characteristics of prisons are similar globally, the extent and form of informal inmate organization varies substantially. This paper develops a governance theory of prison social order. Inmates create extralegal governance institutions when official governance is insufficient. The size and demographics of the prison population explain why inmates produce extralegal governance institutions in either decentralized ways, such as ostracism, or through more centralized forms, such as gangs. Comparative analysis of Brazil, Bolivia, England, Scandinavia, and men’s and women’s prisons in California provide empirical support.
Whether and to what extent we should desire the fusion of law and equity depends on the function it serves. This paper draws on systems theory to show how equity is a second-order check on the workings of the law, when complex problems such as party opportunism call for such targeted intervention. Seen from this standpoint, the substantive distinctiveness of equity is potentially valuable even if it is administered in a unified court system. Because this function has not been sufficiently recognized, fusion has been carried too far, especially in the United States. Symptoms of an undertheorized excessive fusion of law and equity include multi-factor balancing tests, a polarization of formalism and contextualism, and a flattening of the law’s approach to remedies.
This paper exploits the variation in the timing of electoral law enforcement across nine Latin American countries to examine the contribution of de jure and de facto political institutions to long-run development. The set of novel measures of electoral law enforcement is constructed focusing on de jure vs. de facto suffrage extension, abolition of wealth- and literacy-based voting restrictions, electoral fraud and oppression drawing on the extensive and largely unexploited Latin American historical bibliography. A simple difference-in-differences model of de jure and de facto institutional development is built to account for the effect of electoral law enforcement on institutional development, and used as a source of variation in long-run development paths. The evidence suggests the timing of enforcing electoral laws largely accounts for the contrasting paths of de jure and de facto institutional development in post-independence Latin America. The institutional changes toward suffrage extension, removal of voting restrictions and level-playing field with more inclusive de jure and de facto institutional setup are associated with large-scale improvements in long-run development paths. The effects of de jure and de facto institutions on long-run development do not depend on sample selection, specification bias or unobserved heterogeneity. The counterfactual scenario suggests having de jure and de facto political institutions on a similar level to the Western Offshoots or Western Europe since independence would yield massive economic gains by narrowing Latin America’s gap behind the U.S by a fifth. The counterfactual based on the institutional parallels of the U.S, Australia or United Kingdom in appears to speak in favor of large-scale gains in long-run development compared to the much smaller gains from the institutional design based on French, Spanish or Portuguese institutional benchmark.
Why some countries fail to reform their pension systems in spite of the rapid population ageing? This paper sets to examine the effects of political institutions on the probability of introducing pension reforms. A new dataset is constructed which tracks the systematic development of pension legislation in 34 countries for the period 1970-2013 by focusing on mandatory PAYGO pension system reforms and supplementary pension reforms stimulating the transition from unfunded to funded pension schemes. The evidence highlights the fundamental importance of political institutions in shaping the probability of introducing pension reforms when the potentially confounding effects of demographic structure, life expectancy and macroeconomic fundamentals are controlled for. Countries with stronger constraints on the chief executive, greater political competition and fiscal federalism are significantly more likely to reform the old-age PAYGO law and initiate the transition to funded pension scheme while the effects of de jure electoral rules are weak. The beneficial effects of executive constraints, political competition and interjurisdictional federalism on pension reforms are robust across multiple sub-samples when the potential reform outliers are excluded from the core sample, and are not susceptible to country-level heterogeneity bias.
Recent work has empirically identified the importance of covenants not to compete (noncompetes) and their enforceability for entrepreneurship (Samila and Sorenson 2011, Garmaise 2011), firm innovation and performance (Conti 2013, Starr et al. 2015), as well as employee outcomes including mobility, wages, and training (Marx et al. 2009, Marx et al. 2015, Starr 2015, Starr et al. 2016). A prominent feature of this literature is that noncompetes are differentially enforceable across states; for example, they are virtually banned in California and North Dakota but in Florida they can be enforced without taking into consideration the harm done to the employee. In this paper, we utilize new survey evidence to consider what employees and potential entrepreneurs believe about the enforceability of their noncompetes, whether such beliefs align with the actual laws, and how such beliefs affect mobility and entrepreneurship decisions. We then randomly provide individuals with information on the actual noncompete laws of their state and subsequently examine how potential entrepreneurship and mobility decisions change as a result. Preliminary results show that employees are vastly uninformed regarding their state’s noncompete laws, especially in states where they are not enforceable. Providing individuals with accurate information on the nonenforceability of their noncompetes dramatically increases their willingness to move or form a competing venture. These results suggest that studies of noncompete enforceability, which constitute the vast majority of this literature, may dramatically underestimate the actual impact of noncompetes because noncompetes have effects in states where they are not enforceable since individuals believe them to be enforceable. Furthermore, our results suggest that the passage of laws which void noncompetes will be ineffectual if such bans are not communicated with the relevant population.
Insufficient wastewater collection and treatment prejudices both water bodies and public health in Brazil, where wastewater infrastructure has been severely underinvested for decades. This study analyzes the politico-economic context of urban wastewater infrastructure in Brazil, motivated by the dictum that “sewage does not win you an election”. The evidence is based on 50+ interviews with government officials, development banks, utility providers, private companies, environmental agencies and academia, conducted in Brasília, São Paulo, Rio de Janeiro, Belo Horizonte, Recife, and Salvador between October and December 2015. The results suggest that politicians prioritize other infrastructure investments and that voters do not express a strong preference for basic sanitation. On the one hand, the degree and intensity to which the population is exposed to the negative externalities caused by lacking basic sanitation varies greatly. On the other hand, other basic needs are not yet satisfied, particularly for poor people – those who suffer directly and most strongly from the lack of basic sanitation.
We investigate to what degree segregation and nationalism have economic causes. We suggest a mechanism through which a decline in the relative price of staple goods, a common feature of economic development, causes producers to switch to the production of more capital-intensive goods. To finance this production switch, producers pool capital in local clubs, such as cooperatives. In the presence of communication costs, the segregation of clubs between ethnic groups can become attractive. Additionally, majority ethnicities may have an incentive to use nationalism as a barrier to club membership by the minority ethnicity. This incentive is stronger if ethnic heterogeneity coincides with economic inequality. We show how this pattern offers a historically plausible explanation for the rise of grassroots nationalism and segregation in Europe before the First World War. This theory is econometrically supported by evidence on ethnic segregation and national conflict in Prussian Poland. The results explain why economic development may lead to ethnicity becoming more important.
We assume that economic agents in the economies with strong economic institutions have higher incentives to implement energy conservation measures than those in the countries with weaker institutional environment. To test this, we, first, specify a Cournot type model of a production sector with explicit presentation of energy factor and model energy price shocks under different levels of transaction costs We show that inadequate institutional environment resulting in a high probability for a firm to be faced with adverse external conditions resulting in the high transaction cost brings about the lack of incentives to invest into energy saving. Further we present an econometric model for energy intensity coefficients based on cross country panel data. This model along with the climate and real energy price variables includes an interaction term being a combination of an energy price variable and an index of institutional strength. This method makes it possible to present energy price elasticities as functions of institutional quality indices. Analysis is based on 2002-2009 statistical data involving a large country sample. We apply OLS, IVLS, fixed effect panel, and dynamic panel estimators and show that interaction term we used is highly significant in all the models and at the same time elasticity coefficients specified for the CIS group is almost five times lower than those for the OECD economies.
We introduce the theoretical framework of evolutionary advantage through the lens of contracting strategy. It differs from static competitive advantage in that the evidence of evolutionary advantage transpires over time when the economic context has evolved. Using game theory, we examine across a mutually exclusive yet collectively exhaustive spectrum of economic contexts how firm and environmental 1 characteristics entail different contracting strategies and, more important, different levels of performance. Our analyses lead to a theoretical framework that implies (a) Firms with evolutionary advantage can use simpler, less costly contracting alternatives in more diverse economic contexts. (b) Firms with evolutionary advantage can organize transactions more efficiently when forced into more complex contracting alternatives. (c) Firms with evolutionary advantage can deliver high levels of performance across diverse contexts, while firms without it perform just as well when the context is predictable but fails when it turns unpredictable. (d) Evolutionary advantage explains heterogeneity in performance of a single firm over time, when the economic context evolves, and among multiple firms, when the context is unpredictable. This paper establishes the mediating role between resources / dynamic capabilities and firm performance and addresses three perceived weaknesses in the extant literature of resource- and dynamic capability-based views.
We use quasi-random variation in the fraction of time served in the Italian “open-cell prison” of Bollate to estimate the effect of humane prison conditions on recidivism. We deal with the endogenous assignment of inmates to prison conditions by focusing on those sources of variability in the length of exposure to more humane conditions that are plausibly unrelated to recidivism. Our most stringent test re- stricts the analysis to inmates who are displaced to Bollate due to overcrowding in nearby prisons, controlling for measures of observed (based on a revealed preference argument) and unobserved potential selection. Spending one more year at the experimental prison (and one less year at an ordinary one) reduces recidivism by around 10 percentage points. For the group of displaced inmates, which is shown to be negatively selected in terms of recidivism, the effects of rehabilitation efforts on recidivism are larger (even in relative terms). While we find evidence that over time Bollate inmates become more likely to work outside the prison, more than a single mechanism underlies these effects.
Scholars and enforcement officials debate the merits and implications of “behavioral antitrust”—the application of empirical evidence showing how human behavior departs systematically and predictably from strict rationality (“bounded rationality”) to antitrust law. Notwithstanding their many disagreements, both sides in this debate recognize that consumers—as opposed to business firms and their managers—are boundedly rational. Indeed, behavioral and consumer research show that consumer choice is often constructed ad-hoc during the process of choice and shaped by context-specific influences. Yet if consumer choice and the resulting aggregate demand do not reflect consumers’ authentic, preexisting preferences—and thus do not maximize individual and aggregate welfare—is there an economic justification for antitrust law? The Article examines this challenge closely, determines its scope and offers a number of responses to it. Ultimately, the analysis shows that a more modest version of the standard economic justification for antitrust law largely weathers the challenge. The Article concludes by considering the implications of the analysis for antitrust doctrine and enforcement policy.
The theory of optimal deterrence suggests the substitution of mon- etary sanctions over non-monetary sanctions whenever this is possible because non-monetary sanctions are more socially costly. This pre- scription is based on the assumption that monetary and non-monetary sanctions are perfect substitutes: there exists a monetary equivalent of a non-monetary sanction that, if used as a fine, produces the same level of deterrence. We test this assumption with an experiment. In our stealing game potential thieves face the possibility of punishment. Our non-monetary sanction treatments mimic hard labour: we require convicted individuals to carry out a tedious real effort task. In the monetary treatments sanctions are instead fines, which are based on individuals’ wtp to avoid the effort task to ensure comparability to the non-monetary treatment. A second manipulation of our experiment concerns the balance of errors in the adjudication procedure (convic- tions of innocents and acquittal of guilty individuals). We find that stealing is reduced most effectively by a sanction regime that combines non-monetary sanctions with a procedure that errs on the side of con- viction. Our data is consistent with the notion that both monetary punishment and pro-defendant sanction regimes are less effective in communicating moral condemnation of an act.
While the distinction between public and private goods is essential in developing a normative theory of non-predatory states, the focus of this paper is on a positive theory of predatory states. Since the predatory relationship between the state and its subjects depends on the power of the state to grab or to appropriate coercively and the subject’s ability to escape or hide, the boundaries of the state are decided by the nature of the assets that can be taken more or less easily. Accordingly, I will introduce a new distinction between captive and fugitive assets that positively captures the frontiers of a state space. The US railroading in the nineteenth century provides an illustration regarding the explanatory power of an asset-appropriating perspective of the state compared to a public goods approach.
State capacity is optimized when public institutions are staffed by individuals with public-service motivation. However, when motivated agents value the collective reputation of their place of employment, steady-state equilibria with both high and low aggregate motivation (reputation) in the mission-oriented sector exist. Reforming a low-motivation institution requires a non-monotonic wage path: since the effect of higher wages on motivation is negative for a high-reputation institution, but positive for a low-reputation institution, a transition to a high-reputation steady state requires an initial wage increase to crowd motivated workers in, followed by a wage decrease to crowd non-motivated workers out.
Labour market rigidity is not only the result of legislative provisions, but it is determined by the institutional framework at large. We argue that courts’ delays in settling labour disputes affect the actual strictness of employment protection legislation by increasing the expected firing costs. We exploit the variation in the length of labour trial across Italian judicial districts and the fact that the Italian firing legislation prescribes different (firing) regimes for firms above the 15-employees threshold in order to provide evidence on the impact of courts’ delays on job reallocation and firms’ productivity. We show that in those judicial districts with longer trials, job turnover is significantly lower. This occurs through lower job destruction and, to a less extent, job creation. We also find a detrimental impact of courts’ delays on labour productivity of firms above the 15-employees threshold. Such effect is stronger in sectors with a higher flexibility requirement.
Using a panel of 6,725 Kenyan police officers 1955-1970, we show how ethnic politics encroached and changed the daily behavior of the members of the police force as soon as after Kenya’s first multiparty elections in 1961. We find a significant detoriation in discipline for Kikuyu officers after 1961, when the Kikuyu-dominated KANU party emerged as the most powerful political force. We investigate the channels of this detoriation in discipline. We find little evidence for selection: The quality of new recruits did not detoriate, nor did well-performing police officers disproportionately leave the force at independence. We also find little evidence that the reorganisation of police divisions caused the divergent trends. The effects appear to be driven by individual policemen changing their behaviour.
The use of social sanctions against behaviour which contradicts a set of informal rules is often an important element in the functioning of informal institutions in traditional societies. In the social sciences, sanctioning behaviour has often been explained in terms of the internalisation of norms that prescribe the sanctions (e.g. Parsons 1951) or the threat of new sanctions against those who do not follow sanctioning behaviour (e.g. Akerlof 1976). We present an alternative to these theories, that offers insights about the persistence of social norms and the manner in which they may evolve. Our underlying assumption is that people derive utility from ostracising those who they believe to have 'bad character' but there is uncertainty and learning about how the character of a person may be inferred. Using this framework, we can account for both social norms that persist for long periods and unravel suddenly and those that evolve gradually over time. We apply the model to explain the phenomenon of persistent low labour market participation of women in Bangladesh.
Based on a series of nationwide surveys of privately owned enterprises (POEs) in China, we explore the influence of the founder-owner’s political connections — specifically, former government cadre experience — on the ownership structure of Chinese POEs. Politically connected entrepreneurs have an incentive to retain control of their firms to exploit these connections, leading to more concentrated ownership structures. At the same time, Chinese officials and investors prefer more diffusely held, Western-style firms, meaning that less-concentrated ownership structures have greater legitimacy. We hypothesize a nonlinear relationship between the strength of the founder-owner’s prior political ties and ownership concentration by combining the efficiency and legitimacy effects, and present evidence consistent with this relationship.
Organizations are often forced to trade off between the twin goals of coordinating their decisions and adapting to changing circumstances. It is easy to coordinate, "everyone do 'A' no matter what'', and sometimes easy to be ready for all circumstances, "you do `A' no matter what, and I'll do `B' no matter what'', but attaining a balance between the two is difficult. In this paper, we build a model of organizational design with two agents who receive signals about an uncertain state of the world in which coordinating both agents actions to the state of the world is optimal, but imperfect coordination and adaptation can have value on their own. In this team-theoretic setting, the designer controls up to three factors of information policy: the quality of the agents' signals, whether they meet to disclose their signals, and how correlated their signals are, i.e., whether they have shared understandings of the state. Ceteris parabis, shared understandings are valuable when both goals are important, signals are sufficiently good, and meetings are costly. Investing in signal quality is valuable when both coordination and adaptation is important, but along the intensive margin, shared understandings and signal quality are substitutes. Finally, meetings are useful when shared understanding is limited and signals are of poor quality.
This paper considers the activity of professional organizations of advocates as a factor of transfer from limited access order to open access order, in terms of the theory of North, Wallis and Weingast (2009). Using the analysis of the experience of advocates’ collective action in developing countries, the paper proposes a model explaining the process of mobilization of the legal community for countering the violations of the law by the ruling elite. It shows that collective action of advocates plays a significant role in implementing the principles of rule of law. However, the efficiency of such collective action in a particular country depends on the institutional capacity of its legal association (in terms of Doner & Schneider (2000)) and on the position of the professional elite that is heading it. We use the results of a survey of 3317 advocates in 35 regions of Russia conducted in 2014 to try to find an answer to the question: which groups inside the advocates’ community presently demonstrate demand for collective action. Analysis shows that the regional elite (heads of bar associations, the board of a regional chamber) more often includes advocates who acknowledge the existence of problems in the law enforcement system and who are prepared to confront it. In other words, we cannot say that such advocates are loyal toward the authorities. We will then show that both the leadership experience and the fact of encountering violations of defendants’ rights lead to advocates’ increased demand for active bar associations.
Electoral rules translate votes into seats on different basis. Politicians respond differently to alternative electoral rules, and consequently, economic performance is expected to vary across rules. We offer a channel through which politicians may cater for narrow-interest groups at the expense of the general public in return for monetary contributions and indirectly votes from voters. Based on previous theories and evidence in the field, we hypothesize that this channel is more pronounced under majoritarian electoral rules than under proportional representation and mixed systems. We contribute to the existing literature on the economic aftermath of electoral rules by using industrial growth rate as our dependent variable. Applying panel data techniques to an extensive dataset covering 61 manufacturing industries from 59 democracies over 1990-2010, we find that industry size --measured by the number of workers to total population-- grinds industry economic growth. However, we find a very robust evidence on that large industries grow less slowly under majoritarian rules than under proportional representation and mixed systems. This empirical result is consistent with the political multilateral relationship we propose.
The Dodd Frank Wall Street Reform Act allowed the Securities & Exchange Commission to bring almost any claim that it can file in federal court to its own Administrative Law Judges. The agency has since taken up this power against a panoply of alleged insider traders and other perpetrators of securities fraud. Many targets of SEC ALJ enforcement actions have sued on equal protection, due process, and separation of powers grounds, seeking to require the agency to sue them in court, if at all. This paper evaluates the SEC’s new ALJ policy both qualitatively and quantitatively, offering an in-depth perspective on how formal adjudication – the term for the sort of adjudication over which ALJs preside – works today. It examines five years of Initial Decisions by the ALJs. Those decisions do not suggest that some ALJs are particularly likely to rule for the agency compared to their peers, and do suggest that the best way to reduce the agency’s chance of success is to obtain representation. The paper shows that defendants can rarely escape liability before ALJs, but can reduce their damages, relative to the amount sought by the agency’s Enforcement Division. It also documents the routine nature of much of what ALJs do; defaulting defendants who fail to respond to complaints, imposing sanctions on brokers and investment advisers who have already been adjudged to commit securities fraud in federal court, and so on. Finally, the paper makes a preliminary comparison of the sorts of enforcement actions taken against financial institutions by the SEC with those taken by other regulators of those institutions, such as the Federal Reserve Board.