Society for Institutional & Organizational Economics
With its decentralized peer-to-peer structure, application of the blockchain technology underpinning Bitcoin holds the promise of making impersonal exchange possible for all types of old and new transactions in all types of markets. Such theoretical promise is examined here by identifying what value blockchain adds to the contractual process, exploring its contractual potential and analyzing the main difficulties it is facing. The article argues that blockchain applications will evolve towards dual structures separating causal and formal transactions. Contrary to naive conceptions that proclaim the end of intermediaries and state involvement, such applications will rely on a variety of interface and enforcement specialists, including standard public interventions, especially for property transactions. Without these interventions, blockchain will at most work as an in personam—instead of as an in rem—system, therefore facilitating mere personal instead of impersonal transactions.
We investigate the effect of a vertical merger on downstream firms' ability to collude in a repeated game framework. We show that a vertical merger has two main effects. On the one hand, it increases the total collusive profits, increasing the stakes of collusion. On the other hand, it creates an asymmetry between the integrated firm and the unintegrated competitors. The integrated firm, accessing the input at marginal cost, faces higher profits in the deviation phase and in the non cooperative equilibrium, which potentially harms collusion. As we show, the optimal collusive profit-sharing agreement takes care of the increased incentive to deviate of the integrated firm, while optimal punishment erases the difficulty related to the asymmetries in the non cooperative state. As a result, vertical integration generally favors collusion.
A firm builds its reputation not only by investing in the quality of its products, but also by controlling the information consumers observe. I consider a model in which a firm invests in both product quality and a costly signaling technology in order to build its reputation, defined as the market's belief that its quality is high. The signaling technology influences the rate at which consumers’ receive information about quality: the firm can either promote, which increases the arrival rate of signals when quality is high, or censor, which decreases the arrival rate of signals when quality is low. I study how the firm's incentives to build quality and to signal depend on its reputation and current quality. Whether the firm promotes or censors plays a key role in the structure of equilibria. Promotion and investment in quality are complements: the firm has a stronger incentive to build quality when the promotion level is high. Costly promotion can, however, reduce the firm's incentive to build quality as higher quality will lead to higher promotion expenses; this effect persists even as the cost of building quality approaches zero. Censorship and investment in quality are substitutes. The ability to censor can destroy a firm's incentives to invest in quality, because instead of building quality a firm may simply opt to reduce information about low quality products.
I look at the choices made by the ex-Communist left parties following the collapse of the Communist system in the Vyshegard-4 countries. By focusing on the cases of Hungary and Czech Republic I show that where the the left parties chose to move to the center of the economic scale (to become more of a typical western Social democratic party), as in Hungary, the left party discredited itself in the eyes of its traditional constituency (workers, lower middle class), a constituency which was ultimately incorporated by the far right parties. Hence in such countries the far right parties are strong. In the countries where the ex-Communist party preserved their more traditional radical left agenda, as in Czech Republic, it was partly able to retain its traditional workers constituency and in such countries the far right is weak. I prove my argument on the series of experimental and regular surveys within the two countries. On the cross-countries level I show that the far right tends to become more electorally successful in countries where it is able to embrace the economic redistributionist agenda due to the absence of a strong far left competitor. My argument contributes to the understanding of the dynamics of political systems, and the rise of the right populist parties in Europe.
The paper develops a theory of the origin of money that is consistent with the historical and anthropological fact that money usually replaced fairly sophisticated credit arrangements and did seldom grew out of barter, contrary to the usual explanation in economics (e.g. Smith, 1776; Menger, 1892). Our theory compares money as an anonymous payment instrument with credit as a record keeping technology that records transactions and names of debtors. We show that the introduction of money can be explained by the fact that governments may be able to better tax agents if trade is conducted through money instead of credit even if credit trade is more efficient than the monetary trade. In this economy money circulate because by implementing a higher taxation rate on people holding no cash, the ruler is effectively incentivizing traders to constantly trade in order to acquire cash and hence reduce the chance to pay the higher tax rate associated with having no cash. The net effect of the introduction of money in this economy in terms of welfare depends on whether the credit system is both encompassing and cheap. We present evidence that this theory can go a long way in explaining why during the antiquity money, was introduced when a ruler was in need for more taxes, for example because of war, and that its introduction was not necessarily associated with an increase in prosperity.
We test the relevance of the selection theory of litigation in a contemporary, civil law setting, using Chinese judicial data that span 25 years regarding lawsuits against government agencies. Civil law systems may be characterized by lower costs of litigation and lower rates of settlement than the U.S. legal system, and therefore the presence of selection effects cannot be assumed. We show that selection effects are indeed manifest in Chinese administrative litigation, and suggest that this may be explained by hidden or intangible litigation costs. Our test for selection effects builds on the approach of previous U.S. studies and potentially allows the identification of selection effects to help improve inferences from decided cases. Finally, we examine patterns of settlement and plaintiff wins in pre-litigation administrative appeals in China, and do not find sufficient evidence for selection effects in this process. This could potentially be explained if most appellants pursuing administrative appeals do not intend to litigate.
Homeownership is believed to cause higher unemployment. This is because homeowners face higher mobility costs -- limiting their job search to local labor markets. Empirical tests of this prediction have yielded mixed results so far. However, since homeownership in these studies is not randomly assigned, their interpretation is unclear. This paper documents that privatization of public dwellings in Central and Eastern Europe resulted in a quasi-experimental assignment of homeownership to individual households. This facilitates a new test of the effects of homeownership on mobility and unemployment. Using a 2010 micro data on privatizers and renters, we find only weak evidence that homeowners are less willing to move and no evidence of higher unemployment risks relative to renters.
The last decade has witnessed a renewed interest in the relationship between the structure of the R&D function and the resulting innovative outcomes. Research has demonstrated that distinct formal organizational forms are associated with different patterns of innovation. This question is particularly important in light of mounting evidence that that the rate and direction of innovation is influenced by the structure of social networks, through the patterns of informal communication among a firm’s inventors. However, very little work has explored how changes in structure affect these correlations. To address this gap, we study the effect of changes in formal R&D organization structure on both informal organization and innovative outcomes, and explore the degree to which informal networks moderate the relationship between change in formal structure and in innovation. Using information on changes in formal R&D organizational structure undertaken by several firms, we examine the effects of these changes on traditional patent-based measures of innovative search and innovative impact. After documenting the shift in innovation that follows changes to organization structure, we then explore the mechanisms underlying this shift by examining the relationship between changes in formal organization structure and changes in the informal inventor network of relationships within these firms. We find that formal changes that centralize R&D budgetary control have a quick, significant, and persistent impact on the patterns of inventor co-authorship: Inventor networks become more centralized and denser. Conversely, these changes have either no impact or the opposite impact on inventor citation networks. We discuss future work that can exploit these network measures to tease out the relationship between organizational structure and innovation.
Although a firm’s political environment impacts strategy and performance, existing research has given little consideration to how changes in the political environment impact firms. We argue that following a political shock – or an unexpected and significant change in the political environment – the operational performance of the firm declines. Responding to the shock can be managerially costly; firms divert significant managerial resources from routine operations to responding to the political challenge. As finite managerial resources are spread over a greater number of novel and challenging political activities, rather than core productive activities, firm performance on operational parameters suffers. Further, if there is a decline in managerial resources devoted to oversight of assets that are centrally managed but utilized across multiple locations, we expect to observe the negative effect on operational parameters in all locations that share common assets, even if those locations are not directly affected by the political shock. Using a natural experiment and a difference-in-differences approach, we find support for our arguments in the context of telecommunications firms in India.
This paper empirically investigates whether changes in product market competition affect firm boundaries. Exploiting regulation-induced shocks to entry barriers and differences in regulation enforcement across cities to obtain exogenous variation in competition, we establish a negative causal effect of competition (through reduced entry barriers and a larger number of rival firms) on vertical integration in the setting of the Spanish local television industry between 1995 and 2002.
I investigate the causal effect of exporting on working conditions and firm performance in Myanmar. This analysis draws on a new survey of manufacturing firms from 2013 to 2015. I use the rapid opening of Myanmar to foreign trade after 2011 alongside identification strategies that exploit product, geographic, and industry variations to obtain the causal estimates of the impact of trade. Exporting has large positive impacts on working conditions in terms of fire safety, healthcare management, freedom of negotiation, and wages. It also increases firm sales, employment, and management practices as well as the likelihood of receiving a labor audit.
Law and finance theory has been one of the most influential theories in institutional economics in recent times and links legal rules and regulations to financial outcomes. This paper tests this theory in nascent institutional contexts such as those in Africa by taking advantage of a panel dataset of Nigerian firms that combines data from subnational measures of the efficiency of the legal property and judicial system from the World Bank Doing Business Report and firm-level access to finance data from the World Bank Enterprise surveys. We investigated the effects of changes (reforms) to subnational institutional variables on firm-level access to finance. Based on firm fixed effects panel analysis of a sample of Nigerian firms that exploits changes in the subnational institutional variables between the years 2007 and 2014, we find that two statistically significant measures of the efficiency of the legal property system went contrary to the predictions of the law and finance theory, while the only statistically significant measure of the judicial system efficiency gave mixed findings for the law and finance theory. We discuss theoretical and policy implications of our findings. JEL codes: G20, K20, O55 Keywords: law and finance theory; legal property system efficiency; judicial system efficiency; access to finance; Africa; Nigeria
Why firms use contracts in a lawless world? Recent empirical findings point at the actual use of explicit (but imperfectly enforceable) formal contracts by businesses alongside substantial informal elements. In this paper we formally show the supporting role that formal contracts play for relational contracts. Even entirely disregarding contract enforcement through a Court or arbitrator, we formally show that contractual documents (even when known by the parties as not meant to be enforced) may have an important and positive influence on reputational or reciprocity-based sanctions upon their suppliers to sustain cooperation. We demonstrate that setting compliance with certain tasks in a formal contract reduces the cost of reputational punishments that firms may need to inflict in order to ensure the right incentives to provide effort. We also show that formal contracts impact the way in which reputational punishments will be structured: Formal contracts optimally induce a more eschewed pattern of sanctioning, compared to a benchmark case in which no formal contract has been agreed. Thus, when dealing with its counterparties a firm will be, when the relational contract comes together with a formal contract, less forgiving with those counterparties who have not performed the formal contract, and more forgiving with those other ones who have not infringed the provisions of the formal document.
Recent efforts of behavioral law and economics scholars have been directed toward challenging a number of state laws that regulate retailers’ use of surcharge fees for consumer credit card payments. In 2016 the issue reached the Supreme Court. The case, which centers on a decades-old New York state law that prohibits merchants from imposing surcharge fees for credit card purchases, represents the first major effort to ground constitutional law (here, First Amendment law) in the claims of behavioral economics. In this article, we examine the merits of that effort. The Petitioners in the case and their amici (scholars of both behavioral law and economics and First Amendment law) argue that New York’s ban on surcharge fees but not discounts for cash payments violates the free speech clause of the First Amendment. The argument relies on a claim derived from behavioral economics: that a surcharge and a discount are mathematically equivalent, but that, because of behavioral biases, a price adjustment framed as a surcharge is more effective than one framed as a discount in inducing customers to pay with cash in lieu of credit. Because, Petitioners and amici claim, the only difference between the two is how they are labeled, the prohibition on surcharging is an impermissible restriction on commercial speech. Assessing the merits of the underlying economic arguments, we conclude that neither the behavioral economic theory, nor the evidence adduced to support it, justifies the Petitioners’ claims. The indeterminacy of the behavioral economics underlying the claims makes for a behavioral law and economics “just-so story” that happens to lack any empirical support. In fact, the evidence strongly suggests that consumer welfare would be harmed by such fees, as they expose consumers to potential opportunistic holdup and rent extraction.
We ask whether a “hyper-competitive election” (i.e. winning against competitors by very small margin of votes) can be a credible threat on incumbent politicians to lessen the extent of their corrupt activities. A politician may extract funds from public finances to offset or earn more than the incurred costs in election at the expense of less public goods supplied. We hypothesize that the decision to extract money from public finances depends on how the politician weighs the future consequences of getting caught, the credibility of these threat/consequence, the sensitivity of the voters to the supply of public goods, or the viability of an alternative candidate. We created measures of corruption using the audit reports from the Commission on Audit (independent constitutional commission responsible in auditing government finances). We used the Regression Discontinuity Design (RDD) and Difference-in-Difference (DID) as identifying strategies to pin down the causal effect of election competition on corruption. Using the election year as the cut-off, we compared corruption measures between re-electionists who won by very small margin (i.e. under “hyper-competitive” election) versus those who won by large margin.
Many empirical studies have analyzed the factors that influence local government decisions regarding the management of public services. In those studies, ideological motives are often found to be not, or at least very slightly, significant. This absence of ideological impact is often interpreted as a proof that local governments are more guided by pragmatic rather than ideological motivations, notably because contracting out has become less controversial. Nevertheless, ideological factors are almost always estimated by the percentage of left-wing (or right-wing) votes in the last local election and this measure of ideological motives ignores the fact that management of public services might be pathdependent, i.e. strongly connected to choices made by previous officials. In this paper, we show that the configuration of public services procurement at the local level can be explained by ideological motives when ideology is properly measured, that is over a longterm past period. We also find that the influence of ideology is all the more important when services are considered as highly sensitive by local voters.
Regulatory outcomes of firms vary within and across countries. We identify this variation with Enterprise Survey data using sets of indicators for regulation of entry and trade across borders. First, we do variance decomposition and simultaneous analysis of variances to uncover how much of firm level variation institutions and firm characteristics do explain. Second, guided by existing research on institutions and political economy, we apply random coefficient estimation to isolate the contextual effects of institutions with sectors, regions and firm size for the same set of dependent variables. Third, we test how between and within country heterogeneity of regulatory outcomes interfere with performance of firms and discuss how well heterogeneity in regulatory outcomes predict corruption, governance and economic development. Our results show that formal and informal institutions do not explain the same set of regulations, and that there are significant differences in firm size, corruption and economic development for regulation of entry but not for regulation of trade across borders. We use instrumental variable estimation, sample correction, split samples and alternative datasets to address concerns over endogeneity and selection bias.
We examine public bureaucracy by studying the evolution of state wildlife agencies, from their inception in colonial game laws to their manifestation as modern hierarchical environmental agencies. We develop a model of bureaucracy that considers the problem of managing a large scale environmental asset that spans small private landholdings. We explain how the agency solves the land coordination problem necessary for conserving the asset but requires organizational incentives in order to generate positive rents from the asset. We explain some of the difficult contracting and incentive problems of public wildlife management and describe how autonomous and hierarchical agencies address these problems. The empirical analysis examines the evolution of agencies from laws and employs a panel of the fifty state wildlife agencies to assess the model’s implications. Empirical estimates show that agency budgets rise with increases in private landowner contracting costs as measured by decreases in the size of privately owned parcels in a state. Evidence also shows there are positive relationships between hierarchical organization and the proportion of budgets spent on non-game. Estimates using panel data from 1950-2008 also shows evidence that the specific form of hierarchical organization has systematically relates to agency size.
We identify local lending shocks for competing mortgage providers by uncovering discontinuities in mortgage acceptance models. Shocks to standard measures of the concentration of its competitors do not explain a bank’s future lending patterns. Instead it is the expansion of a bank’s most aggressive competitor that leads to reduced lending, particularly at the very local level. A stronger shock to this competitor also leads a bank to charge higher interest rates, which are partially explained by the observable worsening of its borrower pool. Competition also has a negative effect on unobservable risk; it leads to worse mortgage performance.
Using evidence from Russia, we explore the effect of deposit insurance on bank behavior and performance. Drawing on cross-sectional, bank-level variation in the ratio of deposits held by insured households and uninsured firms, both before and after the introduction of explicit deposit insurance, we demonstrate that banks at which the decline in market discipline was relatively large were more likely to experience a greater subsequent increase in traditional measures of bank risk and a greater subsequent rate of failure. These results are robust to the inclusion of time-varying bank-specific controls, alterations to the time horizon for assessing bank risk, the exclusion of observations from after the global financial crisis and bank-level fixed effects. Moreover, they hold in a difference-in-difference setting in which state and foreign-owned banks, whose deposit insurance regime has not changed over our period of analysis, serve as a control.
This paper explores how a broad range of contract-enforcement institutions are combined in interfirm relationships under a developed legal system. We analyse managerial survey data to identify ideal-types of governance strategies that rely on distinct combinations of institutions. We find three ideal-types: (1) bilateral governance, using morality and self-enforcement; (2) third-party governance, leaning on a mix of courts, reputation and community norms; and (3) comprehensive governance, relying heavily on all institutions. Thus, the crucial governance choice is not between formal/informal but bilateral and third-party (both formal and informal) institutions. The two sets can be substitutes but are more often complements. Governance choice is primarily related to transaction characteristics rather than the firm’s environment.
Little is known about what motivates primary Chinese securities regulators, viz., the China Securities Regulatory Commission, the Shanghai Stock Exchange, and the Shenzhen Stock Exchange. This research draws on a unique, hand-collected dataset on all disclosed securities enforcement actions, both formal and informal, taken against securities violations by the Chinese securities regulators during the period from 1998 through 2016. It offers a rare glimpse into the intensity of enforcement actions, both market-level and firm-level, in China. It shows, among other things, that on average 5.28 enforcement actions have been taken during the period under investigation against a firm that has been targeted, and that 14.26% of the sample firms have been targeted once, 16.62% targeted twice, and 69.13% targeted three times or more. When it comes to the determinants of Chinese securities enforcement practices, this research shows empirically that (a) less enforcement actions and more lenient enforcement actions are likely to be taken against firms of larger size, firms that are controlled by the state, and firms that demonstrate a higher level of political embeddedness; and (b) a greater degree of cooperation with the securities regulators and a closer personal bond with the securities regulators are likely to reduce the severity of enforcement actions, but are unlikely to minimize the likelihood of being targeted in the first place. This research has been supported by a General Research Fund (CUHK-452913) from the Hong Kong SAR Research Grants Council.
A firm employs workers to obtain costly unverifiable information -- for example, categorizing the content of images. Workers are monitored by comparing their messages. The optimal contract under limited liability exhibits three key features: (i) the monitoring technology depends crucially on the commitment power of the firm -- virtual monitoring, or monitoring with arbitrarily small probability, is optimal when the firm can commit to truthfully reveal messages from other workers, while monitoring with strictly positive probability is optimal when the firm can hide messages (partial commitment), (ii) bundling multiple tasks reduces worker rents and monitoring inefficiencies; and (iii) the optimal contract is approximately efficient under full but not partial commitment. We conclude with an application to crowdsourcing platforms, and characterize the optimal contract for tasks found on these platforms.
We examine the relationship between product market competition and innovation in an agency model where risk-neutral, wealth-constrained, effort exerting managers a) are heterogeneous in talent, and b) can choose the industry in which to work. We show that when managerial talent information is known to employers but effort is not contractible, innovation increases with competition, as more talented managers self-select into more competitive industries, where their ability to extract rents is highest. In contrast, when talent information is not available to employers, talented managers may try and signal their type by selecting moderately competitive industries to avoid "imitation" by less talented managers.
We study how inter-firm social comparison can alter the choice of two competing manufacturers between vertical integration and vertical separation to independent, status-concerned retailers. Status is determined by the difference in retailers’ market shares. The novelty of our paper is that in line with empirical evidence, the intensity of social comparison (i) depends on the distance between retail outlets, and (ii) can be influenced by the manufacturer by adjusting the outlet’s location. In contrast to the commonly studied case of a distance-independent intensity of status concern, social comparison with a distance-dependent intensity of status concern predicts different optimal firm boundaries.
What determines whether or not multinational firms transplant the mode of organisation to other countries? We embed the theory of knowledge hierarchies in an industry equilibrium model of monopolistic competition to examine how the economic environment may affect the decision of multinational firms about transplanting the business organisation to other countries. We test the theory with original and matched parent and affiliate data on the internal organisation of 660 Austrian and German multinational firms and 2200 of their affiliate firms in Eastern Europe. We find that three factors stand out in promoting the multinational firm’s decision to transplant the business model to the affiliate firm in the host country: a competitive host market, the corporate culture of the multinational firm, and when an innovative technology is transferred to the host country. These factors increase the respective probabilities of organisational transfer by 9 percentage points, 18, and 27 percentage points.
When government seeks to induce a behavior among the population it governs, it may use either incentive policies to reward those that comply with the desired behavior or disincentive policies to punish those who do not comply. We ask which type of policy a majority of the population will prefer, and how it compares to the policy a social planner would choose. If the costs of administering a policy increase in the share of the population receiving the reward or punishment, then raising the size of a reward, which increases compliance, increases administrative costs. Raising the size of a punishment, which decreases noncompliance, lowers administrative costs. As such, using punishments (rather than rewards) is complementary to higher levels of compliance, with a majority tending to prefer larger punishments (and smaller rewards) than the social planner. We ground the results in a variety of policy-relevant examples, particularly questions in food policy.
This paper is the first one to present a “general equilibrium” model of primaries with endogenous party affiliations. I show that closed primaries (where only affiliated party members can vote) result in more charismatic candidates than in open primaries. That occurs because, in equilibrium, closed-primary voters care more about winning and therefore they are more willing to trade off their ideologically preferred candidate for one who is more likely to win, i.e., a more charismatic one. I also show that under open primaries, the party leaders have higher incentives to choose more extreme platforms. As a consequence, and in line with the most recent empirical evidence, open-primary nominees are more likely to be extremists than closed-primary ones. Finally, I show that, if instead of organizing primaries, party leaders were to handpick the nominees, the candidates would be even more moderate and more charismatic.
The objective this paper is to explain the motivations of the French NF voters and to analyze how their political beliefs and attitudes spread out throughout the electoral body. Its methodological approach relies on two key theoretical framework: the first comes from the development of behavioral political economy, namely the theory of expressive voting (Hillman 2010), the second is driven by the theory of cognitive rationality (Boudon, 2003;2010) and the concept of justification costs (Facchini, 2016). We show that the growing support for the NF ideas among the French voters occurs because of a fall of the justification costs of their political beliefs. The latter results from two complement phenomenon. First, the number of people who share their views increases, and second because some facts may enhance the development of cognitively biased inference-making between immigration, unemployment and lack of security. Such erroneous causal relationship are widespread among the NF voters. Nonetheless, the NF views and ideas are costly to justify, essentially because social sciences and French moral authorities vigorously and frequently condemn specific arguments made by the party and its leaders.
This paper exploits a randomized audit program to document how information about a corrupt politician causes electoral spillovers on his party. I focus on two types of spillovers: spillovers across types of elections (cross-electoral spillovers) and spillovers across jurisdiction borders (cross-border spillovers). Using detailed data on radio antenna location and coverage, I identify neighboring areas in the same media market. Moreover, via machine learning and text-analysis tools, I take a data-driven approach to create an index that ranks municipalities according to their corruption level. I uncover how information about corruption shapes voting decisions through the structure and geography of the media market. I show that voters hold the party of the incumbent politician accountable in four distinct ways. In municipalities where corruption occurs, voters punish parties in (1) local and (2) national elections. Most importantly, I show that news of a politician's corruption affects his party in neighboring municipalities that share the same media market, and these spillovers affect both (3) local and (4) national elections. Ruling out other potential mechanisms, I show that these findings are consistent with electoral accountability.
Large firms have paid a significantly higher wage for more than a century, but over the last thirty years this large firm premium has started to disappear. We show about half of this is due to changes in industry composition - firms in the shrinking manufacturing sector pay an earnings premium while those in the growing services sector do not. The other half is because large firms have stopped paying a salary premium in the Abowd et al. (1999) sense, particularly for lower paid and lower skilled workers. Thus, one reason for increasing overall inequality may be the disappearance of well-paid jobs for lower skilled workers in large firms.
Wage inequality in the United States has risen dramatically over the past few decades, prompting scholars to develop a number of theoretical accounts for the upward trend. This study argues that large firms have been a prominent labor-market institution that mitigates inequality. By compensating their low- and middle-wage employees with a greater premium than their higher-wage counterparts, large U.S. firms reduced overall wage dispersion. Yet, broader changes to employment relations associated with the demise of internal labor markets and the emergence of alternative employment arrangements have undermined large firms’ role as an equalizing institution. Using data from the Current Population Survey and the Survey of Income and Program Participation, we find that in 1989, although all private-sector workers benefited from a firm-size wage premium, the premium was significantly higher for individuals at the lower end and middle of the wage distribution compared to those at the higher end. Between 1989 and 2014, the average firm-size wage premium declined markedly. The decline, however, was exclusive to those at the lower end and middle of the wage distribution, while there was no change for those at the higher end. As such, the uneven declines in the premium across the wage spectrum could account for about 20 percent of rising wage inequality during this period, suggesting that firms are of great importance to the study of rising inequality.
How do firm boundaries affect the link between market competition and pay inequality? Using division managers as a pool of similar workers and the Canada-US Free Trade Agreement, we find that greater competition increases overall pay inequality among managers within industries, but not within firms themselves. The same pattern holds for productivity differentials between managers. Moreover, even for firms in which the differential productivity does in fact widen, we find no associated widening in pay. Internal pay equality between managers is related to higher stock returns: firms in our sample with the most equal pay outperform the market by 6-11% annually, while the most unequal firms do not. Altogether, our results suggest that, while competition leads to higher pay inequality as a whole, principals aim to maintain equality within firms and that this choice is associated with better firm performance.
This paper documents important shifts in the occupational composition of industries following high merger and acquisition (M&A) activity as well as accompanying increases in mean wages and wage inequality. We propose mergers and acquisitions act as a catalyst for skill-biased and routine-biased technological change. We argue that due to an increase in scale, improved efficiency or lower financial constraints, M&As facilitate technology adoption and automation, disproportionately increasing the productivity of high-skill workers and enabling the displacement of occupations involved in routine-tasks, typically mid-income occupations. An increase in M&A intensity of 1% is associated with a 2.8% (2.9%) reduction in industry (industry-local labor market) routine share intensity and an one (six) percentage point increase in the share of high skill workers. These results have important implications on wage inequality: An increase in M&A activity is associated with higher hourly wages and an increase in wage polarization in an industry (industry-local labor market). Our results are robust to several robustness tests which further support the notion that firm reorganizations through M&As are a first-order driving force of job polarization and inequality.
In most elections, voters care about several issues, but candidates may have to choose only a few on which to build their campaign. The information that voters will get about the politician depends on this choice, and it is therefore a strategic one. In this paper, I study a model of elections where voters care about the candidates' competences (or positions) over two issues, e.g., the economy and foreign policy, but each candidate may only credibly signal his competence or announce his position on at most one issue. Voters are assumed to get (weakly) better information if the candidates campaign on the same issue rather than on different ones. I show that the first mover will, in equilibrium, set the agenda for both himself and the opponent if campaigning on a different issue is uninformative, but otherwise the other candidate may actually be more likely to choose the other issue. The social (voters') welfare is a non-monotone function of the informativeness of different-issue campaigns, but in any case the voters are better off if candidates are free to pick an issue rather than if an issue is set by exogenous events or by voters. If the first mover is able to reconsider his choice when the follower picks a different issue, then politicians who are very competent on both issues will switch. If voters have superior information on a politician's credentials on one of the issues, that politician is more likely to campaign on another issue. If voters care about one issue more than the other, the politicians are more likely to campaign on the more important issue. If politicians are able to advertise on both issues, at a cost, then the most competent and well-rounded ones will do so. This possibility makes voters better informed and better off, but has an ambiguous effect on politicians' utility. The model and the results may help understand endogenous selection of issues in political campaigns and the dynamics of these decisions.
We apply the difference-in-discontinuities design to disentangle the fiscal effects of the governance system conditional on electoral systems. We take advantage of a natural experiment, which involves two institutional reforms at the local level in Poland. The first reform introduced two electoral rules, which change along an exogenous population threshold: smaller municipalities use majoritarian elections, larger municipalities use proportional elections. The second reform changed the governance system in Polish municipalities from “parliamentary” to “presidential”. Our results indicate that a change from parliamentary to presidential form led to lower vertical fiscal imbalance predominantly in the jurisdictions with majoritarian elections and to a lesser extent in municipalities governed by proportional elections. This therefore confirms an interaction effect between the forms of government and electoral rules.
It is widely argued that oil exporters could use their natural resources as a weapon to punish adversaries and reward allies. Yet empirical analysis of these claims has been elusive due to lack of data. Using a novel dataset on Russian companies’ oil exports over 1999–2011, we show that a decline in relations between Russia and another country, measured by divergence in their United Nations General Assembly (UNGA) voting patterns, considerably reduces the value of Russian oil exports to that country. The effect is more pronounced for state-owned companies. A deterioration in political relations and associated decrease in oil exports are costly for Russian companies. They experience a decline in profitability following a breakdown in political relations between Russia and those companies’ main export destination countries. Finally, we show that a deterioration in political relations with Russia is costly for the countries importing oil from Russia as their total oil imports decline, suggesting that, at least in the short run, it is costly for these countries to find close substitute for Russian oil. Notably, such adverse effect of political relations on oil importers is pretty recent phenomenon observed over 2000-2011, which coincide with the rise of Vladimir Putin to power, such patterns are absent in the earlier 1992-1999 period.
Do Russian voters, as it is widely claimed, care more about politicians' faces than about policies of the parties they lead? In this paper, I analyze the extent to which Russian voters respond to policy cues from leaders versus the same policy cues from political parties, and how important party association versus executive position is to the cueing capacity of the incumbent country leaders. Implemented as an endorsement survey experiment, this approach allows removing endogeneity that hampered previous attempts to compare support that people lend to parties and leaders. In addition to providing a reliable estimate of personalization of politics in Russia (both for the incumbent and the opposition), I show how Vladimir Putin is able to use the weakness of the party he leads strategically, to claim victories without taking responsibility for the failures. This paper lays the groundwork for a wider project that will use similar survey experimental tools to compare the degree of personalization across countries and political systems – a vital sign that was always considered important for developing countries but is rapidly becoming relevant in many established democracies as well.
Governments across Latin America have decentralized their health systems in an effort to improve services for poor, rural populations. Despite tremendous enthusiasm on the part of policymakers and donors, relatively little rigorous evidence exists on whether reformed system produce better services or how contextual factors influence effectiveness. In this paper we investigate the conditional effects of decentralized governance on local health services using a difference-in-differences research design and original quantitative and qualitative data from Honduras. We expect that local conditions will moderate the performance of health sector decentralization, namely that decentralization will perform better in localities with more political competition, greater participation, and larger existing resources. Our preliminary analysis supports these expectations, showing that decentralization increases production-based health services, especially preventive care for women, and that these effects are largest in more favorable local contexts. The results of this analysis help inform policymakers in terms of how they target decentralization reforms locally and the types of support that may be needed so that localities with less favorable conditions also experience improvements in their services.
This paper sets up a model for estimating the extent to which judicial voting behavior is the result of a norm of consensus when there is heterogeneity in the cost of dissenting across different areas of law. We derive a two-stage model to test this hypothesis on data from the Judicial Committee of the Privy Council (JCPC) in the period 1998-2011. The first-stage estimates political ideology from sincere voting and from there a proxy for dissent suppression (propensity towards consensus) is constructed. The second-stage uses a hierarchical model of voting to test for heterogeneity in the cost of dissenting across different areas of law (i.e., devolution, domestic and Commonwealth appeals). We find that the intensity to suppress dissent is stronger in devolution cases, which are those with a higher political content.
This paper provides a quantitative analysis of the effects of economics on moral decision-making and legal thought using the universe of opinions in U.S. Circuit Courts from 1891 and 1 million District Court criminal sentencing decisions linked to judge identity. We use attendance in a controversial economics training program that 40% of federal judges attended by 1990, a policy change giving judges more sentencing discretion, random assignment of judges to control for court- and case-level factors, an exogenous seating network from random panel composition to trace the spread and impact of new ways of moral reasoning, and ordering of cases within Circuit to identify memetic phrases that move across legal topics. We find that judges who use law and economics language vote for and author conservative verdicts in economics cases and are more opposed to government regulation and criminal appeals. After attending Henry Manne's economics training program, judges use economics language and render conservative verdicts in economics cases and reject criminal appeals. Manne economics training is more predictive of these decisions than political party. Manne judges render 20% harsher criminal sentences after U.S. v. Booker allowed more sentencing discretion. They also impact criminal appeals verdicts when not authoring the opinion. Judges exposed to Manne peers increase their use of economics language in subsequent opinions. “Deterrence”, “capital”, and “law and economics” move across legal topics.
Conventional wisdom on English development confers iconic status on the Act of Settlement, emphasizing the clause mandating secure tenure for judges. But the Act's effect on tenure was partial, affording the opportunity to empirically identify the effect of tenure on judicial decisions. The empirics uses two new databases, one on the biographies of judges, the other recording all citations to earlier cases made in the English Reports. The paper estimates the effect of tenure on citations, a measure of judicial quality. Several strategies aid identification. Explanatory variables capture both judges' human capital and the amount of litigation reaching specific courts at specific times. The court-year panel makes difference-in-differences possible. Two different sets of instrumental-variable estimates are generated. Tenure has a strong, significant, and deleterious effect on the quality of the decisions of associate judges. Tenure has no effect on the quality of the decisions of chief judges. Perhaps England would have developed earlier had it not been for one of the monuments of English constitutional law.
We study how polarization affects procedural choice in deliberative bodies. Using a multi-stage Romer-Rosenthal bargaining framework, we analyze how a group chooses a procedure (specifying membersproposal rights) to bargain over a one-dimensional policy. When members bargain over procedures, they do not know whether their interest will be fully aligned across party lines (high-polarization issues) or somewhat heterogeneous (low-polarization issue), and they cannot commit not to revoke them after learning the issue. Our notion of policy polarization captures both the likelihood of a high-polarization issue and the degree of intraparty heterogeneity under a low-polarization issue. We establish that in equilibrium proposal rights will be (i) concentrated in the hands of a few non-moderate members, and (ii) systematically biased in favor of the majority party. As policy polarization increases, so does the partisan bias in equilibrium procedures.
This paper explores the origins of bureaucratic complexity in public policy. In a model of incremental policymaking where entanglements between policy elements complicate attempts to undo existing policy, policymakers are biased towards increasing policy complexity -- especially when policy is already complex. Policy evolution is thus path-dependent: simple policies remain simple, whereas complex policies become more complex. Complexity emerges and persists under political conflict between ideologically-extreme policymakers, and when legislative frictions impede policymaking. Patience is not a virtue: farsighted policymakers deliberately engage in obstructionism, introducing complex policies to shackle future opponents.
Final good production often requires a firm’s headquarter services and a foreign supplier’s manufacturing input. With incomplete contracts, firms that decide whether to source this input from an integrated or an outsourced supplier do not only have to consider the ex ante production incentives that influence the own and the supplier’s underinvestment problem. Instead, firms also have to take into account the ex post risk that the supplier absorbs the producer’s knowledge to become a competitor for the final good, both under outsourcing and integration. In line with the outcome of the knowledge protection approach, with an exogenous probability of such ex post inefficiencies associated with one particular organizational form, this organizational form becomes less likely. However, considering the supplier’s incentives to become a competitor, integrated suppliers are more likely to become a competitor than outsourced suppliers such that outsourcing becomes per se more likely. As a competitor lowers the producer’s profit, the producer might have an incentive to deter the supplier from becoming a competitor. More precisely, the producer has this incentive whenever the supplier’s manufacturing input is not too important for the production.
That social capital matters in corporate lending relations is uncontested. While the literature has largely focused on the quality of dyadic firm-bank ties in explaining corporate credit access, we suggest a supply side perspective of lending networks surrounding individual corporations. Our theory predicts that corporations benefit from network closure in their lending networks, but less so, if institutional conditions surrounding the firm guarantee the predictable enforcement of credit contracts. We use a panel of 515 corporations listed on China’s Stock Exchanges holding a total of 7009 major bank loans granted by 183 distinct banks during the period from 2007 to 2012 to test our theoretical framework. Our findings support the hypothesized positive effect of closure. Our findings also robustly confirm that closure offers fewer advantages if the institutional environment provides credible mechanisms helping to produce institutionalized trust between contract partners. These findings are robust to various specifications. More generally our findings contribute to the relational lending literature as well as an emerging literature highlighting how the interplay between network structures and formal institutions shapes individual and corporate strategies.
Gender balance law was adopted in 2005 and went into effect in January 2006 with a two year deadline for compliance in Norway. It has compelled all public limited firms to ensure gender balance at their boards, otherwise face liquidation. While many public companies have made changes in their boards, a considerable number of them, have tried to circumvent the regulation by changing their organization form. The ones that complied with this new regulation have changed their board compositions by including more women. In this work, we investigate the implications of this restructuring. We examine how including more women directors affects the company fundamentals. We look at two distinct dimensions. First, we see impact of their monitoring role at the boards, and whether their inclusion correspond with any corporate finance policy changes or firm fundamentals. Second, we comparatively scrutinize what has become different for companies that have managed to bypass the gender balance legislation. We utilize a unique database we constructed from the Norwegian Administrative database, which comprises financial information of public and private firms, as well as board and top-level executive variables from 2002 to 2012. In terms of value, we find higher female share in the boards to be correlated with higher Tobin's Q values, even when we control for firm and year specific effects. Further empirical results show that women are instrumental in curbing the executive compensation, and in protecting shareholder interests by improving the payout to shareholders.
This study examines the antecedents and consequences of integrating corporate social responsibility (CSR) criteria in executive compensation, a relatively recent practice in corporate governance. Using a novel database of CSR contracting, we find that CSR contracting is more prevalent in emission-intensive industries and has become more prevalent over time. We further find that the adoption of CSR contracting leads to i) a reduction in short-termism; ii) an increase in firm value; iii) an increase in social and environmental performance; iv) a reduction in emissions; and v) an increase in green innovations. These findings are consistent with our theoretical arguments highlighting a new form of agency conflict--the misalignment between shareholders' and managers' preferences for stakeholder engagement--and suggest that CSR contracting can enhance corporate governance.
This article develops a methodology to identify corrupt couples of public servants and firms in public procurement. In some countries procurers must set a reserve price and make it public. The procurer can manipulate the reserve price in order to conclude the contract with the preferred supplier at a certain contract price. We estimate the reserve price exploiting within procurer variation and then we analyze the residuals for each pair of procurer and seller. In case of competition the identity of the seller should not affect the reserve price because it is determined before the actual implementation of the auction. Using Russian public procurement data of gasoline we are able to report the number of corrupt couples at national and regional level. Furthermore we find that corruption has a significant impact on the contract price but competition is effective in reducing this effect. Electronic auctions with sufficient competition can even offset the effect of corruption and lower procurement costs.
We study the impact of fiscal windfalls on public finances. We use quasi-experimental variations in fiscal revenues (windfalls) to analyze their impact on local public finances. First, we take advantage of CHF 130 millions of extraordinary municipal tax revenues in the town of Rüschlikon (~5500 inhabitants) in 2013. These revenues stem from the personal income taxes of one single individual through the going public of Glencore. The extraordinary revenue was distributed to all other municipalities through the fiscal equalization scheme. Secondly, we use extraordinary variation in local fiscal revenues from the taxation of real estate transactions between 1990 and 2015. We compare the realized local allocation decisions to state-dependent “optimal” policy reactions defined ex ante, given the state of local public finances. We aim to understand the determinants of differences between optimal and realized policy and analyze the impact of local institutions as well as other politico-economic variables.
This paper examines the empirical relationship between economic freedom and corruption. We use a principal-agent-client model to identify the potential causal linkages between corruption and the components of economic freedom. We then estimate a two-equation system where freedom depends upon corruption and vice versa. Using a series of panel GMM estimators, we find that corruption lowers economic freedom, but that freedom does not significantly impact corruption. The result that corruption lowers freedom supports the “grabbing hand” theory of corruption, where a non-benevolent government creates inefficient regulation and barriers of entry barriers to generate economic rents.
In this paper, we revisit the relationship between economic freedom and growth using the sub-national variation in fiscal and economic institutions across 407 German districts (Kreise) for the period 2000-2010. To this end, we build ten indicators of economic freedom for each district and classify them into three latent categories: (i) taxes and government spending, (ii) business regulation, and (iii) size of the public sector. Exploiting the variation in the constructed indices of economic freedom, the evidence suggests less indebted districts with less stringent business regulation, lower share of taxes and relatively smaller public sectors achieve consistently higher productivity growth. The beneficial effect of economic freedom on growth is robust to the variety to exclusion restrictions and to numerous specification checks. The evidence unveils persistent distributional effects of economic freedom on growth and highlights a U-shaped pattern. Economic freedom is most beneficial for growth in the districts with the lowest per capita income, the effects fades away at the median of district-level income distribution, and tends to increase above the median. The evidence does not advocate lower level of economic freedom in former East German districts or greater economic freedom in West German districts. However, the evidence unveils a persistent North-South institutional gap which possibly accounts for per capita income gaps within Germany. In the counterfactual scenario, moving the level of economic freedom to the 90th percentile is associated with large-scale gains in district-level per capita income and growth rates
This paper analyzes the effect of land ownership on technology adoption and structural transformation. During a historically large-scale land reform in post-war Japan, the ownership of farm plots was redistributed from landlords to tenants who had cultivated the land and many tenant farmers became landowning farmers. I find that agricultural technology which became available after the reform tended to spread more quickly into municipalities that had the high share of owner farmers. Moreover, I find that the adoption of the labor-saving technology alleviated mobility constraints, and led to out-migration of young population from rural areas to urban areas when urban sectors required more low-cost labor. Finally, simulation results show that land reform and technology adoption had a large effect on economic growth by fostering the growth of urban sectors through labor reallocation and by increasing agricultural productivity through capital-labor substitution, although the most of the effect is explained by the urban development.
We examine the contrasting paths of deindustrialization across and within countries in a transitional dynamics framework. Our argument emphasizes that equilibrium income increases lead to the relative strengthening of transaction-cost reducing institutions. We specifically distinguish between three evolutionary equilibria: benchmark deindustrialization, premature deindustrialization and extended industrialization. Rising income from sources other than manufacturing below the TFP frontier tends to suppress transaction costs, encourage service-intensive specialization, and lead to premature deindustrialization. Our framework predicts the level of industrialization drives the choice of institutional framework. In more tangible-asset environment, property-rights strengthening institutions arise as the agents in such environment disproportionately favor secure long-term investments. Our identification strategy is to use industry-level panel data to identify the transition paths towards industrialization equilibria using the variation in transaction costs and property rights to identify the structural shifts between benchmark deindustrialization, premature deindustrialization and extended industrialization.We show that countries with the most rapidly decreasing transaction costs at the low levels of industrialization are more prone to deindustrialize prematurely compared to the countries with greater advantage in secure property rights and with relatively higher transaction costs.
I am a participant in Lisa Bernstein’s panel, “Ethnic-Based Trade Revisited: A Roundtable.” I will be discussing chapter 5 of my new book, Economic Success of Chinese Merchants in Southeast Asia: Identity, Ethnic Cooperation and Conflict: Integrating the Social Sciences with Evolutionary Biology. (Landa, December 2016). My book’s central theoretical chapter (chapter 5) provides an original theory of the economic success of Chinese merchants in Southeast Asia, analyzed from a law-and-economics/New Institutional Economics perspective: The ethnically homogeneous middleman group (EHMG) is an informal, low-cost organization for the provision of club goods--e.g. contract enforcement--lowering transaction costs, hence contributing to Chinese merchant success. I will also discuss extensions of my theory of the EHMG, drawing not only from the law-and-economics/NIE literature, but also from the other social sciences, and beyond to evolutionary biology. Empirical material from my fieldwork forms the basis for my theory of the EHMG, with important policy implications for understanding ethnic cooperation and conflict in multiethnic societies where minority groups dominate merchant roles.
"Lessons from Statelessness: Economic History, Ethnic Networks, and Development Policy" Chapter 6 in Stateless Commerce (2017)
The economics literature has long emphasized that order in society arises frequently through a spontaneous process. In this literature, any order arising outside the state is spontaneous. One of the most important examples of such processes is the emergence of norms of ownership. The canonical examples include norms of first possession, such as along the English coast or among miners during the Gold Rush. One of the most interesting features of these processes is that they arise without any organizational structure. This paper argues that in many instances, organizations are an important part of the story of spontaneous order. It uses examples from the American frontier and contemporary Afghanistan to illustrate the argument. In the context of the United States, claim clubs replaced informal norms of first possession early on in each of the major frontier sectors. In Afghanistan, most norms of ownership derive significance within the context of customary governance organizations that perform most of the functions normally associated with the state. As we show, attention to these underlying mechanisms will help scholars gain a greater understanding of the diversity of paths towards political order.
Ransoming hostages is an extremely tricky economic transaction plagued with trust and enforcement problems. Yet, the large majority of kidnaps is peacefully resolved on a commercial basis suggesting that the trade in hostages is “governed”. This paper explores the role of Mafias in governing the hostage trade in Colombia’s great kidnapping boom from 1993-2010. The FARC, ELN and various drug cartels were infamous for kidnapping. But the usual Mafia business model is to extort “protection” money – what explains the abductions? We analyse more than 35,000 kidnappings over 18 years of civil conflict collected at the municipality level. We show that kidnapping is extremely rare in municipalities controlled outright by drug cartels or insurgents. Instead, kidnapping is associated with territorial disputes and sudden surges in investment and economic activity. Mafias only kidnapped when there were multiple competing “protectors” and to extract payments from (foreign) firms unable to buy protection from “terrorists”. Hostage stakeholders paid premium ransoms to insurgents, because they developed reputations for long detentions and smooth commercial resolutions. This created a secondary market for hostages: high profile victims were sold from disputed territories to insurgents. We argue that the FARC and ELN’s predominance in the kidnap statistics arose not because they were kidnappers but because they were ransoming specialists.
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 article 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.
Many argue that property rights are rooted in the relative bargaining power of rightholders and rulers (North 1981; Levi 1988; Bates 1989; Goldstein and Udry 2008). However, because bargaining power both influences and is influenced by property rights it is difficult to identify how a change in one affects a change in the other. I explore a plausibly exogenous shift in bargaining power in Russia induced by the surprisingly poor showing of the ruling United Russia party in parliamentary elections of December 2011 to explore how changes in bargaining power shape perceptions of property rights. Using data from a survey of 922 firms conducted across Russia in November and December 2011, I find that a negative shock to the bargaining power of the ruling party helped to level the playing field for some groups of firms. Firms with immobile assets, fewer workers, and some state ownership viewed their property rights as more secure after the elections than before. More specifically, they saw their firm as less likely to be the victim of a hostile (often in the literal sense of the term) takeover after the elections. This suggests that exogenous changes in bargaining power can influence perceptions of property rights; it also reveals that even Russia’s highly imperfect elections shape expectations about property rights.
How does uncertainty over property rights shape the investment decisions of firms in poor institutional environments? Existing works largely focus on the dangers firms face from the state. In canonical models, the state is unitary, implying that property rights can be secured by imposing strong institutional constraints on the state’s authority. Less well studied, however, are cases in which the state consists of myriad groups facing different degrees of constraint. Here, firms are threatened by less constrained elements of the state and by rival firms, who find state partners for predatory behavior. In this paper, we examine a concrete example: raiding “Russian style”. In Russia’s regions, firms often collude with law enforcement turning the weapons of the state against competitors and exposing them to hostile (often violent) take-overs. Drawing on existing work, we argue that in a regional environment where state-abetted raiding attacks on firms by other firms, firms should feel less secure in their property rights and less willing to invest. We also argue that this effect should be weaker for firms that are able to hide their assets and activities from others, thus making them less attractive targets. To test these arguments, we exploit regional level variation in the quality of institutions and in the extent of raiding. Specifically, we combine micro-level data from a survey of 1950 manufacturing firms in 60 Russian regions with a unique dataset of corporate raiding attacks across the Russian federation compiled by the NGO “Business Against Corruption”. Our main finding is that firms in regions in which raiding activity is higher are less likely to invest. We also show that certain types of firms – those willing to report their ownership structure, those with mobile assets, and those belonging to a business association – in regions with high levels of raiding are more likely to invest than other firms in the same regions.
How and when are governments able to convince firms to engage in costly co-investments in the absence of strong institutional constraints on the state? This paper draws on evidence from a particularly costly form of public-private co-investment: the use of public private partnerships (PPP) to create institutionally complex, costly forms of vocational education designed to promote a high skill labor market and alleviate skill shortages. In much of the literature on professional education, credible commitment is the key to co-investment between different firms, between capital and labor, and between the broader business community and the state. This is generally achieved through the joint efforts of civil society – employers’ associations and labor unions – and the state within a democratic context, resulting in institutionally complex, cooperative forms of Vocational Education and Training (VET). Russia’s regions present a paradox for this literature, however. On the one hand, many regions are characterized by institutionally complex, costly forms of PPP that require close cooperation between firms and schools, as well as significant investments of time and money by firms. On the other hand, civil society is weak in Russia, the state generally poorly constrained, and political competition heavily circumscribed, making co-investment more risky for firms. This paper tests two theories that might explain the emergence of costly forms of PPP in Russia’s regions – state capacity and political accountability (both via elections and the integration of firms into the dominant party). We test these theories using unique data on all PPP in VET undertaken by over 1,654 secondary vocational education schools across Russia’s regions and find support for both. These results complement existing work on investment in settings with weak institutions and have important implications for work on the political economy of investment, bureaucracies, and vocational education.
This paper investigates the issue of optimal delegation in the presence of multiple agents. Specifically, we analyze the design of decision rules by a principal who relies on two biased agents to inform her decision. Each agent’s type/information is private information. The principal would like to implement an action that matches the state of nature, where the state of nature is the sum of the agents’ types/information. The principal is unable to use monetary transfers, and the information the agents possess is complementary and non-overlapping. The principal is able to commit to a decision rule that maps the agents’ unverifiable reports into a single dimensional decision. The solution concept used is that of ex post implementation. We show the optimal robust mechanism can be implemented via a sequential delegation rule. According to the rule, the principal allows the first agent (chosen at random) to either choose an action from a delegation set or delegate the decision to the second agent, who in turn chooses an action from a delegation set.
Consider an agent who can costlessly add mean-preserving noise to his output. Then, the principal can do no better than offer weakly concave incentives to deter risk-taking. If the agent is risk-neutral and protected by limited liability, optimal incentives are strikingly simple: linear contracts maximize profit. If the agent is risk averse, we characterize the unique optimal contract and provide conditions under which it takes an intuitive form. We extend our model to analyze costly risk-taking, and we show that the model can be reinterpreted as a dynamic setting in which the agent can manipulate the timing of output.
This paper examines the effects of copyrights on science, through copyrights’ impact on the price of knowledge. In 1942, the American Book Republication Program (BRP) allowed US publishers to reprint exact copies of German-owned science books, leading to a 25-percent decline in the price of BRP books. Two alternative identification strategies indicate that this decline in price raised the number of new scientific articles and books that build on BRP books. A comparison across fields indicates that benefits of lower access costs were particularly strong for mathematics, a field in which knowledge production is more intensive in human than in physical capital. Library data also show that the BRP enabled more and poorer libraries to buy BRP books and make them available to a broader set of scientists across the American West, Midwest, and South. Citations data also reveal a disproportionate increase in citations for locations that are near libraries with BRP books. Two alternative measures of scientific output – changes in the number of new PhDs theses in mathematics and changes in the number of US patents that use BRP knowledge – confirm the main results.
This paper documents the extent of online copyright infringement. We build a unique dataset combining all the online content produced by the universe of news media (newspaper, television, radio, pure online media, and a news agency) in France during year 2013 with new micro audience data. We develop a topic detection algorithm that identifies each news event, trace the timeline of each story and study news propagation. We show that one fourth of the news stories are reproduced online in less than 4 minutes. High reactivity comes with verbatim copying and media hardly name the outlets they copy. We find that only 32.6% of the online content is original, but that original content represents between 46 and 57.8% of total news consumption. The negative impact of copyright violations on newsgathering incentives might indeed be counterbalanced by reputation effects. Using article-level variations (with story and media fixed effects), we show that a 50 percentage point increase in the originality rate of an article leads to a 35% increase in the number of times it is shared on Facebook.
Governments routinely invest in large-scale, scientific projects that provide basic knowledge about natural phenomena and yet the economic-value of these initiatives remains unexamined. To make progress on this topic, this study estimates the impact of Landsat, a NASA satellite-mapping program, on shaping the discovery of new deposits in the gold exploration industry. Exploiting idiosyncratic timing variation in mapping coverage, I find that information from Landsat nearly doubled the rate of significant gold discoveries, especially from junior firms and in regions with strong local institutions. The public provision of basic knowledge seems to be an important determinant of local industry performance.
This paper examines how a firm’s political connections in a location influence the firm’s choice of the location to establish new subsidiaries. First, using political connections incurs a cost in that politicians can demand connected firms to engage in economically-inefficient but politically-desirable tasks such as hiring superfluous labor. As a result, the firm is least likely to choose a politically connected location that also faces the economic conditions, such as higher unemployment or higher fiscal deficits, that commonly propel politicians to make such demands. Second, more “outside options” of obtaining the economic benefits conferred by political connections, such as from more developed product and factor markets, lowers the importance of choosing a politically connected location. Therefore, how firms utilize their political connections is highly context-dependent.
We argue that the use of Corporate Social Responsibility (CSR) as a source of competitive advantage implies the exclusion of at least some potential beneficiaries from the private provision of public goods. While such exclusion may be welfare-enhancing if private provision is transient and leads to greater state or non-profit provision once the demand for the public good has been established, it may also be welfare-destroying in so far as private provision crowds out state provision, leaving those who are excluded worse off than they were before. In such cases, CSR may be a source of political polarization, with the interests of those who are served by CSR increasingly diverging from the interests of those whose concerns are of no interest to profit-maximizing firms.
Using a database on social movement boycotts of corporations, we examine how firms alter their political activities in the wake of a reputational threat. We show that boycotts lead to significant reductions in the amount of targets’ political action committee campaign contributions and simultaneous increases in targets’ CEOs’ personal campaign contributions, as well as targets’ lobbying expenditures. We argue that these patterns represent a shift toward more covert forms of political engagement that present new problems for activists and shareholders seeking to monitor corporate political activity.
This article aims to understand the role of policy stability perception in the dynamic of network infrastructures regulation. We contribute to the literature by developing an abstract description in which the regulatory institutions in some countries have virtuous relation with network industries, while other countries enter in a vicious cycle. The asset specificities inherent to network industries mean high transaction costs, which in turn raises the hold-up risk. We depart from the idea that regulation (as tariffs structures) is a kind of contract between government and private companies. As explained by Williamson (1976) and Goldberg (1976), it is a special kind of arrangement in the presence of incomplete contract that is able to protect players from holding up themselves. However, regulation can actual play a positive or a negative role in the network infrastructure development. We depart from the contract theory proposed by Salant and Woroch (1992), who model the governments’ incentives to behave opportunistically according to investors’ investment profiles. We show that their analysis, which is based on the incentive compatibility principles, explains behaviour differences if the investment profile of the industry is heterogeneous. However, it is no able to explain why industries with similar investment profile in different countries have completely different dynamics. Stein et al. (2008) underlined the importance of policy stability to understanding the Latin America success (or failure) in implementing policies. We include the variable policy stability perception as a significant element in the understanding of the government’s incentives to behave opportunistically. We check our model with the case study of natural gas network in Argentina. This analysis contributes to understand the role network industries regulation to deal with hold-up problem and how the institutional environment in which regulatory agencies are embedded matters.
This study analyzes the relationship between debt and outside equity investments in early stage firms. The existing evidence on this relationship is scarce and inconclusive, mostly due to the pervasive opaqueness of new ventures. We argue that debt and its usage can be valuable signals for outside investors facing severe information asymmetries. In addition, we examine how personal and business debt could signal different information to outside investors. Using panel data on new ventures in the US from the Kauffman Firm Survey, we find evidence consistent with our arguments. We reveal that debt, and particularly business debt, is positively related to outside equity investments, especially in times of economic distress. We posit that start-ups with higher levels of business debt can send more credible signals to capital markets, and identify cash holdings and the firm-bank relationship as possible information channels for outside investors.
This article explores how the possibility of collusion affects relational contracts. Responsibility for a contract is delegated to a supervisor who cares about both production and kickbacks paid by the agents, neither of which are contractible. We characterize the optimal supervisor-agent relational contract and show that the relationship between joint surplus and production is nonmonotonic. Delegation may benefit the principal when relational contracting is difficult by easing the time inconsistency problem of paying incentive payments. For the principal, the optimal supervisor has incentives that are partially, but not completely, aligned with her own.
Established in the late 1990s, China's rural land rental market is now revolutionizing agriculture by upgrading smallholder production to factory farming. However, there is little empirical evidence on recent developments in this market, in particular on the design of rental contracts, which profoundly affects participants' welfare and agricultural production. I study rental contracts as outcomes of bargains over two contractual terms: contractual flexibility and rental payment. The theory I present shows which equations should be estimated in an empirical test of the bargaining process. The empirical structure indicated by my theory is markedly different from that in existing empirical contributions, which helps to explain why those contributions obtain seemingly inconsistent results. I conducted a survey in 2014 capturing current developments in the market. Applying the survey data to the theoretically justified empirical model, I draw two empirical conclusions in addition to providing support for my characterization of the bargaining mechanism. First, the renting-in agents' ownership of enterprises and their social proximity to the renting-out partners decrease contractual flexibility and increase rental payment, indicating that entrepreneurship within a village social network promotes agricultural development and village prosperity. Second, the rental payment offered to the renting-out agents with long-term non-agricultural employment is higher than that offered to the renting-out agents with short-term or temporary employment, suggesting a potential increase in income inequality within the village.
Community participation in providing public services has the potential to improve access to services, but how different types of participation improve access, for whom, and under what conditions is not well understood. This experiment demonstrates how access to safe drinking water changes when the beneficiaries have the authority to make decisions that influence access compared to the implementing agency having the authority to make the same decisions. The project installs sources of safe drinking water in villages in Bangladesh. We allocate villages randomly to a top-down approach and two different delegated approaches. In one delegated approach, the community organizes itself to make decisions (community participation). The second seeks to limit elite control by requiring that the community make all decisions in a meeting, which is subject to participation requirements, and that all decisions be unanimous (regulated community participation). The proportion of households who use safe drinking water increases under all three approaches, but delegating decisions improves access relative to the top-down approach only when the approach limits the influence of elites. The regulated community approach increases the use of safe water about 70% to 80% more than do the other two approaches. The top-down approach uses local information less effectivelyectively, and installs fewer sources than do the two participatory approaches. Under the community approach, elites restrict access to safe water sources. The regulated community approach expands participation in decision-making, and it results in bargaining that limits the influence of elites. The relative benefits of the three approaches depend on the context.
We conduct an experimental test of the long-standing conjecture that autonomy increases motivation and job performance. Subjects face a menu consisting of two projects: one risky and one safe. The probability that the risky project succeeds depends on the subject's effort. In one treatment, subjects choose a project from the menu; in the other treatment, they are assigned a project from the menu. Using a difference-in-difference approach that controls for various forms of selection, we show that autonomy (the right to choose a project) has a significant pure motivation effect on effort. The effect is consistent with aversion to anticipated regret (but not with standard expected-utility maximization): if the agent chooses the risky project and fails, he will regret not having chosen the safe project, and this motivates him to work hard to avoid a failure. Regret theory makes further predictions that are also supported by the data. First, that the pure motivation effect is greater if the menu of feasible projects is diverse, generating a more meaningful choice among projects. Second, that the effort on the risky project is greater, the greater is the return to the safe project, because this (foregone) return determines the amount of regret. Finally, we find a significant negative relationship between the strength of the pure motivation effect and the subjects' expected earnings.
The recent US presidential election had the lowest turnout of the last 20 years. Most established democracies have experienced a steady decline of participation since the 1970s. As voting costs are usually small, low participation is often taken as an indication of indifference or apathy about the democratic process. In this study we present evidence that individuals value their voting right and the democratic process, even when they have no intention of voting. We conducted a field experiment at the election for the student parliament of the University of Münster, Germany. In this election only 20 percent of the eligible students submit a vote. However, when we offered compensation for voting costs, 95% of the students participated in the election. The random price mechanism we used for offering the compensation allowed us to identify the students who would not have voted without being paid. After the election we presented the subjects with an incentivized surprise quiz. Our results show that the students significantly increased their knowledge about the election in order to submit an informed vote. The result holds also for the students who would not have voted without the payment. The improvement of the subjects is highly correlated with the valuation subjects indicated to have for their voting right before the election. Our findings show that abstinence should not be translated into indifference. Lowering voting cots like voter registrations in the US may be an effective instrument for policy makers to increase participation with better informed voters.
It is widely argued that international extension of the patent system hinders innovation in developing countries by restricting access to technological inputs. I re-examine the connection between patents and innovation by assessing the extent to which the U.S. patent regime supports R&D by firms in emerging market countries. Based on USPTO data covering all utility patents issued to U.S. and foreign inventors during 1965-2015, and supplemented by additional data, I argue that the U.S. patent system has supported innovation in a cluster of foreign countries that have developed dramatically since the 1980s. Three smaller and late-developing countries are now (together with Japan) the most intensive foreign users of the U.S. patent system on a per-capita and per-GDP basis: Israel, South Korea and Taiwan. Based on entity type, industry type and other characteristics of the leading “first-named” assignees of USPTO patents in Israel and Taiwan during 2000-2015, and supplemented by other evidence relating to these countries’ innovation capacities and performance, I argue that these countries use USPTO patents to extract value from R&D investments by supplying product or process inputs to the global value chains that execute innovation and commercialization functions on the pathway to target consumption markets. While prior work has shown that patents sometimes promote entry into technology markets by upstream R&D firms that lack downstream production and distribution capacities, this paper extends that rationale and presents evidence that patents can promote entry into technology markets by economies that are rich in intellectual capital but have small domestic markets in which to extract returns on that capital.
Delegation of decision-making discretion has long been a strategy for responding to concerns about information costs and contingency in human institutions and organizations. Such concerns tend to be particularly high in the context of intellectual property, whose focus, promoting creativity and innovation, naturally entails problems of uncertainty and incommensurability. In the United States, current disputes over patent damages provide a striking example of these issues. Courts struggle to assess how much compensation is appropriate for violating a patentee’s “right to exclude,” particularly when the patent in question covers only a facially small portion of an overall product or process. In addressing key questions relating to such assessments, including the admissibility and sufficiency of evidence as well as the extent of any enhanced damages, trial judges wield great discretion. More generally, by providing only relatively bare statutory instructions on monetary remedies, Congress has effectively given the judiciary as a whole great discretion in administering these awards. With reference to principles of legal design likely to be useful in situations characterized by uncertainty, context specificity, and information scarcity, this Article contends that, at least if the purposes of patent law’s main monetary remedies have been rightly understood, generous allotments of discretion to the judiciary as a whole and to district court judges in particular make substantial sense. On the other hand, appellate courts and, in some instances, Congress itself can do more to guide and, at least on the margins, confine these exercises of discretion, and this Article suggests ways in which such guidance and confinement might proceed.
This paper addresses recent failures in the market for know-how with regards to the development of complicated, integrated network technologies. The market failure is manifested in attempts to manipulate the market for patent rights, to extract higher royalties for the transfer of "must-have" technology. The observed manipulation is not the problem however, but a symptom of a system that is unable to provide the central planning and coordination required for technology integration. We argue that technology platforms in which the development and exchange of technology is centrally planned and governed by liability rules is a superior alternative.
Nascent firms have long relied on networks, clusters, and alliances to exploit knowledge spillovers (Bruderl & Preisendorfer, 1998; McEvily & Marcus, 2005; Zheng, Singh & Mitchell, 2015). Much of the recent empirical literature on networks focuses on innovative, high-technology companies, showing how a firm’s network position affects its innovative activities (McDermott, Corredoira & Kruse, 2009). What about less innovative products and markets? We look at emergent winery clusters in non-traditional US wine-producing areas such as Michigan, Missouri, New York, and Vermont. These firms generally produce lower-quality, less expensive products that are consumed locally, rather than high-quality products for export. Consistent with previous research, we find that a firm’s ties to other actors affect its performance (Elfring & Hulsink, 2003; Li, Zubielqui & O’Connor, 2015; Rowley, Baum, Shipilov, Greve & Rao, 2004). Unlike previous work, however, we find that the main determinant of firm performance is the firm’s relationship with an industry association, which performs the critical role of network anchor.
Does the geographic scope of the ruling local party affect local government outcomes? This is an important question given that, in many developing countries, sub-national parties have emerged as dominant forces in local elections. Using a regression discontinuity design and rich data from Peruvian municipalities, we find that party geographic scope has no effect on policy outcomes, both locally and in neighboring jurisdictions. We explore several explanations for these results and show that party types differ in politician selection, but are no different in terms of accountability and face similar electoral incentives. Overall, our results challenge the view that sub-national parties are detrimental to local governance.
Collective action to remedy the losses of open access to common-pool resources often is late and incomplete, extending rent dissipation. Examples include persistent over-exploitation of oil fields and ocean fisheries, despite general agreement that production constraints are needed. Transaction costs encountered in assigning property rights are an explanation, but analysis of their role is limited by a lack of systematic data. We examine governance institutions in California’s 445 groundwater basins using a new dataset to identify factors that influence the adoption of extraction controls. In 309 basins, institutions allow unconstrained pumping, while an additional 105 basins have weak management plans. Twenty of these basins are severely overdrafted. Meanwhile, users in 31 basins have defined groundwater property rights, the most complete solution. We document the critical role of transaction costs in explaining this variation in responses. This research adds to the literatures on open access, transaction costs, bargaining, and property rights.
When do central governments centralize control over their regions? We develop a theory of the transition from indirect to direct rule, focusing on the contentious relationship between a ruler and local potentates, who provide civil order at the expense of a share of local revenue. A rapid fall in the local population reduces the threat of rebellion, as well as the willingness and ability of potentates to resist the ruler’s efforts to centralize power. A demographic collapse thus enables the ruler to replace the potentates with direct agents of the state and invest in a fiscal bureaucracy, with important implications for the development of state capacity. We evaluate the theory using subnational panel data from 16th- and 17th-century Mexico around the time of one of the most dramatic demographic collapses in history. To identify the effect of the collapse on the centralization of fiscal authority, we employ a difference-in-differences empirical strategy and an instrumental-variables approach based on the climatic conditions associated with a series of epidemics that decimated the population during this period. Our results show that the centralization of power occurred faster in areas that experienced a more dramatic loss in population.
We exploit the geographic discontinuity in the integration into the Spanish colonial empire as a source of variation in human capital formation and long-run development across 527 departments in Argentina. A unique legal institution – the Audiencia Real – that ended more than 2 centuries ago might be very important in explaining Argentinian regional development down to the present day. To this end, we measure the department-level distance from the seat of colonial audiencia in Upper Peru that used to be source of law and colonial institutions for the areas of Rio de la Plata until its split from the Viceroyalty of Peru in 1776. Our identification strategy exploits georeferenced spatial boundary splits with local quasi-randomization between the former areas integrated in the Audiencia jurisdiction and the control areas as a source of variation in development levels. Our results show that the effect of pre-1776 colonial law and institutions imposed from the Colonial Audiencia in Upper Peru on the set of human capital and development outcomes is both strong and remarkably persistent. The evidence suggests departments outside the former Audiencia jurisdiction have lower rates of illiteracy, more computer-literate population, better physical and digital infrastructure and more widespread ownership of computers and cell phones. The established effects do not seem to be driven by outliers, and remain robust to the battery of specification checks, placebo tests and pass a number of falsification checks.
Using data on a large sample of EU establishments, I analyze the relationship between discharge regulation and industrial actions. I introduce a simple theoretical framework allowing for both positive and negative effects of dismissal constraints on the occurence of labor disputes, and empirically answer the question as whether stricter dismissal laws make EU establishments experience more frequent and intense industrial actions (work-to-rule, strikes and occupation). I find that a change from employment at-will to a regime with very strict dismissal contraints is associated with an increase in the likelihood of observing an industrial action at the establishment-level ranging between 10.5 and 14.8 percentage points, and that this effect reduces to around 6.7 percentage ponits when only company-specific industrial actions are considered. This result is shown to be robust to possible endogeneity. Discharge constraints effects on industrial actions are then confirmed through a difference-in-differences analysis, by exploiting quasi-experimental variations in national dismissal regulations. My findings show that weaker discharge regulations moderate labor conflicts in EU establishments, by disciplining workers and restraining unions' activism.
Large corporate entities that dominate the business world often make it difficult for their relatively smaller and local counterparts to compete. In this scenario, if the smaller player (operating independently) shuts down business and opts to work or produce under contract for the larger firm, it is the reduced profitability of the smaller firm that will constitute the benchmark against which the contract is designed. This benchmark - that is, the reservation utility, is typically taken as exogenously given in economic theory and it is the possibility of reservation utility being endogenous that this paper formally explores. This is done by allowing the larger firm to undertake investments that not only reduce its own costs but also induce lower profitability for the smaller player. The analysis specifically highlights the labor market channel through which economic power of large corporations is manifested and also the corresponding ramifications for antitrust law.
This paper proposes and tests a theory of vertical integration with knowledge workers. Outsourcing allows firms to solve hard problems at the cost of transmitting firm-specific knowledge. By hiring someone internally, firms save on these communication costs, with the downside of incurring costs of acquiring knowledge. Exploiting the increasing returns to the use of knowledge implies conducting easy and frequent activities in-house and harder and less frequent tasks in the external market. The economy saves communication costs when firms with large firm-specific knowledge conduct activities in-house. I confirm the empirical validity of this theory using data from a knowledge-intensive industry: US Federal Lobbying. First, using information at both the industry and bill levels, I validate the main theoretical predictions using client fixed-effects estimations. Second, I exploit the 2010 BP oil spill as an exogenous increase in the difficulty of the lobbying activities for the oil and gas extracting industry, and I show it led to a disproportionate increase in the use of external lobbyists for the affected industry. Lastly, I argue that the 2007 Open Government Act modified both the distribution of problems that firms faced and the technology to acquire knowledge. Estimating the underlying parameters of the integration decision, I explain how these two changes modified the integration patterns of the industry.
I study a much discussed and highly policy relevant question: what, if anything, should the government do about informal production? In a simple capital accumulation model of informal firm growth and potential formalization, I show analytically that optimal penalties depend on the productivity level: the least productive firms should be left alone, the more productive ones should always face positive penalties, which increase in the productivity level. This holds for two different government objectives, i.e. maximizing formal sector tax revenue, and speeding up formalization, respectively, where the latter objective results in higher average penalties. This theoretical result provides a direct policy advice in an area where some countries may have followed such a policy, without a rigorous foundation, whereas other countries have simply let all informal firms be, independent of productivity or size. The result is in line with an emerging consensus about distinct types of informal entrepreneurs.
Between 1880 and 1940, US post offices alleviated the isolation of the Southern countryside by posting information about jobs in the growing industrial sector. Hence, post offices enhanced the outside options of employees in a time employers in the farming sector used sharecropping - a contract where employers paid employees with a share of the harvested crop - to avoid labor turnover costs. This paper finds that a new post office in a county decreased sharecropping, which is evidence that sharecropping mostly resulted from the lack of outside options for employees. This is an innovative result in the share contract literature, usually more concerned about sector-level reasons such as labor turnover than about outside options. Furthermore, new light is shed on the current use of sharecropping and other share contracts such as franchising. Since sharecropping and franchising are a form of entrepreneurship, this paper suggests a reason for the negative relation between GDP per capita and entrepreneurship.
We identify an institution in three Western states, Oregon, Idaho, and Washington State that allows us to quantify several transaction costs associated with monitoring, negotiating, accessing, and deriving value from property rights. We analyze the winning bid price of an auction to harvest timber on state-owned land. We use the type of ownership bordering the harvest area—federal, private and state—as a measure of transaction costs, and test the effect of the transaction costs on the winning bid price. Consistent with our hypothesis, our paper shows that higher transactions costs associated with deriving value from property rights decrease bid prices. Moreover, the transactions costs vary by the type of owner adjacent to the harvest area, and are highest when the adjacent owner is the federal government. Additionally, we identify a change in a legal regime that allows us to analyze how transactions costs affect bid prices.
We provide a model linking limits to the observability of soil quality to state rulers’ ability to tax agricultural output, which leads to a higher political fragmentation. We introduce a spatial measure to quantify state planners’ observability in an agricultural society. The model is applied to spatial variation in the 1378 Holy Roman Empire, the area with the highest political fragmentation in European history. We find that differences in the observability of agricultural output explain the size and capacity of states as well as the emergence and longevity of city states. Grid cells with higher observability of agricultural output intersect with a significantly lower number of territories within them. Our results highlight the role of agriculture and geography, for size, political, and economic organization of states. This sheds light on early, though persistent, determinants of industrial development within Germany, and also within Central Europe.
In this study, we develop and empirically test the theory that new industry entrants hold advantages over incumbents in the shift from unidirectional to multi-directional revenue streams. Using a Cobb-Douglas production function, modified to isolate returns to innovation, we examine data from three separate contexts: steamships on western U.S. rivers (1810-1860), satellite-based Internet services (1962–2010), and food waste recycling (1995-2015). The results reveal that while incumbents often attempt to stretch existing technologies to fit emerging circumstances, entrepreneurial innovators achieve greater success by approaching multi-directional value creation as a distinct challenge, one requiring new technologies, organizational forms and business models. While existing theories have primarily attributed incumbent inertia to a firm’s inability perceive and pursue radical innovations, our results also suggest that existing firms are simply unwilling to pursue innovations that are likely to erode the marginal profitability of their respective business models. Ironically, rather than protecting incumbents’ financial interests, we find that “marginal reasoning” can lead to diminished performance and even extinction. Our proposed framework and empirical findings have implications for a diverse array of multi-directional frontiers, including: social networking, commercial space travel, distance education, and medical treatments using nanoscale technologies.
This article develops a new conceptual approach to assessing the social impact created by social purpose organisations. Such assessments are subject to (1) the measurement problem, i.e. the challenge of translating social impact into measurable components; (2) the attribution problem, i.e. confounding within complex social reality. All three current conceptual approaches to social impact, at least in part, fail to address the two problems: (1) Cost-benefit Analysis, (2) Life-satisfaction approaches, and (3) the Capability Approach. There is another way of measuring social impact though: Social purpose organisations produce a variety of capitals that enable final social outcomes. Assessing these capital forms can serve as an alternative unit of measurement. The article deals with various capital forms but focuses on social, political and cultural capital and shows how the ‘capital based approach’ to social impact can be operationalised by drawing on an investigation of social capital in living facilities for senior citizens. It outlines how the approach can solve both assessment problems.
This paper studies how a manager can elicit employees' information by designing a hierarchical communication network. The manager decides who communicates with whom, and in which order, where communication takes the form of “cheap talk” (Crawford and Sobel, 1982). I show that the optimal network is shaped by two competing forces: an intermediation force that calls for grouping employees together and an uncertainty force that favours separating them. The manager optimally divides employees into groups of similar bias. Under simple conditions, the optimal network features a single intermediary who communicates directly to the manager.
This paper analyzes insufficiencies in UN negotiations and identifies a set of characteristics that would make a complementary institutional design efficient. A coalition among nations with high climate ambitions is suggested. Such a coalition should introduce measures that leaders can control and be accountable for—measures that are short-term and few-dimensional, and that incentivize efficient reductions, prevent leakages to outside nations, and sanction non-compliance. A coalition should also provide incentives to outside emitters and encourage new members. A Climate Coalition that harmonizes minimum national carbon prices (i.e. carbon taxes), introduces a common carbon tariff, and welcomes new members would meet the criteria and have the potential to emerge at a global level.
The Perspective Partnership vehicle allows for comparing widely different organizations that are all transformations of a partnership. It also characterizes these organizations by the degree in which they focus on businesslike economic values and resources, on cooperative or emotional human values and resources, or on imperial mentality public values and resources. The observation that any organization contains a composition or an amalgamation of these identities makes it hard to govern such a hybrid organization. This hybridity of the partners’ perspectives and identities, can be resolved by making a partner accountable in her appropriate behavioral domain. For that purpose the fiscal regimes related to profit and non-profit enterprises have performed satisfactorily for some time. But there is more. The Partnership Perspective modeling vehicle allows also for the expansion and evolution of the partnerships, by identifying and analyzing specialized partnerships, that are internally ordered according to the level of influence: public, social, and private, or according to cross-sector influence: the cross-sector partnerships. An input-output table of values and services is constructed, resulting in a well-being or ‘relational growth spiral’ in the evolving societal partnership. These partnerships together form the hierarchical societal partnership.
We study multitasking problems a la Holmstrom and Milgrom (1991) where an agent engages in both a contractible and a non-contractible tasks which are substitutes. In our model, there are two agents and there is asymmetric information about the value of the non-contractible task between the agents. The agents play a signaling game: after observing an informed agent's action (called a leader), an uninformed agent (called a follower) can choose their own action. In contrast to the previous literature, we show that a principal may provide the leader with a higher incentive to the contractible task in order for the agents to work more in the non-contractible task. Intuitively, the leader's action works akin to the literature on leading by example a la Hermalin (1998) in that the leader's higher effort in the non-contractible task enhances the credibility of the signal about the value of this task. In this case, the higher incentive for the leader to the contractible task makes it easier for the leader to send a credible signal. We provide the conditions for this result and discuss its economic implications.
We consider a relational contracting model in which the parties choose whether to allocate authority either to the principal (centralization) or to the agent (delegation). The party who has authority chooses a project, and the agent exert effort to successfully execute the project. Under delegation, although the agent’s effort is motivated by his authority, the project selected by the agent may be inefficiently biased toward the agent’s favourite one to deter the agent’s deviation to his most favourite project. Consequently, delegation (centralization) is inclined to be optimal for the parties with low (high) discount factors.
I study a decision process of an organization that faces a problem of choosing between the status quo project (``no change'') and the new project (``change''). The organization consists of a decision maker and an implementer. The implementer first chooses a costly effort to develop a new project (``idea generation'' or ``initiation''). If it is developed, the implementer chooses either to disclose or conceal the evidence to the decision maker. If the implementer discloses the evidence, the decision maker formally selects either the status quo project or the new project. Otherwise, only the status quo project is available. The implementer then chooses an implementation effort to execute the selected project (``idea implementation''). While both the decision maker and the implementer prefer the success of the implemented project to its failure, they have intrinsic and possibly divergent preferences over two projects. I show that the principal of the organization, who is unbiased, optimally chooses a pro-changer as a decision maker even though the implementer is also a pro-changer, and it is feasible to counter-balance the implementer's bias by hiring an anti-changer or to choose an unbiased decision maker who shares the same preferences as the principal.
We consider a moral hazard problem where the agent's effort induces monetary costs, and limits on the agent's resource restrict his capability to exert effort. The optimal contract is, in some cases, a sharing contract and the principal provides the agent with an up-front financial transfer. Moreover, whereas incentives and transfer to the agent are substitutes in the case where he has sufficient wealth, they are complements when his wealth is limited. Also, if the agent can consume some of his wealth at the outset of the contractual arrangement, he can get all the surplus of the relationship.
We compare responses from private for-profit organizations and private not-for-profit organizations to the changing risk of service liability using hospital medical expenditures, state medical malpractice awards, and state tort reform data in the United States from 1997–2006. We find that not-for-profit hospitals responded more aggressively than for-profit hospitals. The difference can be partly explained by not-for-profit hospitals being more sensitive to the potential reputational damage of medical malpractice liability. These findings highlight not-for-profit as a unique governance form and its influence on strategy.
While research has shown that good stakeholder relations increase the value of a firm, less is known about how specific types of stakeholder governance affect firm value. We examine the value of one such governance mechanism—community benefits agreements (CBAs) signed by firms and local communities—intended to minimize social conflict that disrupts access to valuable resources. We argue that shareholders evaluate more positively CBAs with local communities with strong property rights and histories of institutional action and extra-institutional mobilization because these communities are more likely to cause costly disruptions and delays for a firm. We evaluate these arguments by analyzing the cumulative abnormal returns associated with the unexpected announcement of 148 CBAs signed between mining companies and local indigenous communities in Canada.
We construct a measure of corporate purpose within a sample of US companies based on approximately 500,000 survey responses of worker perceptions about their employers. We find that this measure of purpose is not related to financial performance. However, high purpose firms come in two forms: firms characterized by high camaraderie between workers and firms characterized by high clarity from management. We document that firms exhibiting both high purpose and clarity have systematically higher future accounting and stock market performance, even after controlling for current performance, and that this relation is driven by the perceptions of middle management and professional staff rather than senior executives, hourly or commissioned workers. Taken together, these results suggest that firms with mid-level employees with strong beliefs in the purpose of their organization experience better performance.
We study the use of corporate philanthropy as a form of reputation insurance, developing a formal model of such insurance in a market with clean and dirty firms and examining how the equilibrium conditions change depending on how active and informed social stakeholders are, how altruistic firms are, and how much control they have over the probability of accidents. We then test the predictions from this model in the US Petroleum industry, and find that philanthropic donations offer insurance-like benefits but are also positively associated with subsequent oil spills—firms that give more, spill more. These results are consistent with an adverse selection / moral hazard equilibrium and suggest that the use of philanthropy as reputation insurance may benefit firms at the cost of society.
State oil and gas regulators may be susceptible to capture by developing firms, especially during booms of resource development. Using data from state regulation to prevent waste in North Dakota, I provide empirical evidence that regulators serve well-organized interests in preference to diffuse general interests. The empirical analysis provides novel evidence of the mechanisms for regulatory capture by showing differences in regulatory responses across firms and locations.
Market-based mechanisms for allocating resources are known to have efficiency benefits relative to command-and-control based allocation rules. However, government allocation of resources may be preferable in contexts where there are significant economies to scale or significant external costs. I study this trade-off for the government allocation of coal to India’s power plants for the sample period 2008-2015. I show that, relative to state-owned power plants, privately owned power plants: 1) import a higher percentage of their input coal, 2) are more likely to run out of coal to burn, and 3) are more likely to curtail their electricity generation due to these coal shortages. I present empirical evidence that this inefficient allocation of coal results in higher total fuel consumption for the same level of electricity generation, higher electricity market prices and lower system-wide reliability. This suggests that the government-based allocation of coal increases the system-wide costs of generating electricity without reducing the electricity prices paid by consumers or improving the reliability of electricity supply.
This paper examines the evolution of electric power systems from their earliest days in the 1880s through World War II and the barriers to achieving a large-scale integrated system. In the very earliest days of electricity, there were no gains to interconnection into large-scale integrated systems. Beginning some time around World War I, large-scale integrated systems would have offered lower cost and higher reliability. Coordination costs and the transactions costs created by the adoption of state public utility commissions acted as barriers to achieving this. World War I generated electricity demand far outstripping supply in some locations such as Buffalo and Pittsburgh. The problems associated with excess demand led the military to intervene. Military engineers worked with electricity companies to rationalize generation, interconnect transmission networks, and plan new investment so that war-related production could be maximized. Military intervention temporarily lowered the coordination costs and transaction costs associated with state public utility commissions and allowed regional interconnection in selected areas. Although some further interconnection did occur in the 1920s and 1930s, often through regional holding companies, state regulation and the financial excesses of the holding companies proved to be a barrier to large-scale regional integration. Transactions costs fell again in the lead up to World War II, when mounting war-related demand for electricity and a southern drought led to creation of a seventeen state power pool. The tension between regulation-induced transaction costs and coordination costs and the benefits of interconnection persists to this day.
Texas oil and gas law protects mineral owners with well-spacing regulations that prohibit drilling wells near property boundaries. However, the state can grant a well-spacing exception to a producer that is unable to negotiate a lease with a mineral owner for any reason, which allows the producer to drill close enough to the unleased property boundary to capture oil and gas under the property. A simple model of lease negotiations shows that well-spacing exceptions cause mineral rights owners to accept lower royalty rates from producers, since producers could drain oil and gas from the land without compensation if lease negotiations are unsuccessful. I estimate the effect of well spacing exceptions on royalties using an instrumental variables model, instrumenting for well spacing exceptions with distance from the proposed well to Austin, Texas, where mineral rights owners must travel to protest a spacing exception. I find that small-tract mineral owners accept lower royalty rates after well-spacing exceptions are granted nearby.
I study the determinants of civil conflict in Myanmar. As governments in weak states often face several armed groups, they have to allocate resources to fight a subset of them strategically. I use a simple model to embed heterogeneity among rebel groups stemming from their network of alliances and enmities. The key insight is that, by attacking a group, the Myanmar army weakens its allies. Therefore, the model predicts that the Myanmar army strategically targets armed groups who are central in the network of alliances. To test the model's predictions, I collect a new data set on rebel groups' locations, alliances, and enmities for the period 1989-2015. Using geo-referenced information on armed groups attacked by the Myanmar army, the empirical evidence strongly supports the predictions of the model. A one standard deviation increase in a group's centrality increases the likelihood of conflict with the Myanmar's army by 1.2% (over a baseline yearly conflict probability of 6.4%), thus identifying a new determinant of conflict. This result is robust to variables measuring the opportunity cost of conflict such as rainfall and commodity price shocks. Since past (and expected) conflicts might affect alliances and enmities between armed groups, I pursue an instrumental variable strategy to provide evidence that the mechanism proposed is indeed causal.
Politicians may use social policy and pro-poor spending for self-interest and strategic manipulation. In this paper, we focus on the politics of the design of social assistance programs in developing countries. In particular, we explore how rent seeking may affect the choice of targeting mechanisms used to determine the beneficiary base of transfers in different political regimes. Using the new NSTP dataset (2016) we are able to contrast more than 180 programs with categorical, community-based, means-tested, proxy means-tested and other types of targeting. The key attribute is whether an intermediary or any third part is involved in the process of transfer eligibility. We argue that in view of subjectivity of decisions and more chances for manipulation such targeting schemes are more often adopted in societies with higher rent seeking. Applying an IV approach based on the neighbours’ average rent seeking levels we find that indeed community-based and means-tested programs that involve the assessment of beneficiaries’ eligibility by an intermediary such as a social worker or community chief are more chosen in regimes with higher political corruption or non-democracies with lower checks and balances. On the contrary, proxy means-tested programs that are based on ex ante evaluation of the poverty level and objective information on potential beneficiaries are significantly less prevalent in high corruptible environments and in non-democracies with low checks and balances. This might be explained as they are less prone to be used for strategic manipulation. Our findings contribute to a better understanding of pro-poor versus political targeting across regime types.
Is democracy good or bad for growth? This paper shows that democracy can be quite good for growth if it is a strong democracy, otherwise the effect on growth is not much better than that of autocracy. In the baseline results, the annual growth rates of GDP per capita are increased by about 1.2% on average after democratization in countries where democracy functions well enough. The results are robust to various change of data sets, control variables, or criteria that categorize a democracy into strong or weak. Strong democracies have better economic development in the beginning, and their overall institutional quality is also better.
Individual transferrable quotas (ITQs) have encountered considerable political opposition despite documented improvements in harvesting efficiency and fishery health. This paper analyzes opposition for two different groups- vessel owners and community members. I provide empirical evidence that opposition is higher for political participants that do not own a vessel than vessel owners. Amongst vessel owners, opposition is higher among fishers with the smallest expected gains under ITQ management. I construct novel dataset linking a commenter stated opinion on ITQs, given at a public forum, to occupation information, catch history and expected quota allocation. Results show that fishermen who receive less quota relative to their counterfactual non-ITQ catch are more likely to oppose. For instance, a fisherman who missed one of the grandfathering years is around 20% more likely to oppose ITQs.
More and more economic transactions leave a "digital footprint", a trend that will improve the precision with which key economic indicators, such as GDP, inflation, or unemployment, can be estimated. We analyze the consequences of this trend for economic policy and performance in a political-agency model that includes fundamental uncertainty about the optimal design of growth-promoting reforms. We demonstrate that more precise economic statistics can inhibit--rather than stimulate--reform attempts. By improving the assessment of ongoing reform processes, better statistics more clearly expose reform designs that do not work and need realignment. For the incumbent government, this implies a higher risk of losing power in an upcoming election: when confronted with negative news on the economy, voters are less likely to give the government the benefit of the doubt. As a result, the government may prefer to play it safe and adhere to the less risky status quo. A basic implication of our model is that the effect of better statistics on economic performance is not unambiguously beneficial but depends on institutional factors, such as the degree to which politicians are held accountable to the voters.
This paper studies how the method by which mayors gain their positions impacts the provision of local public goods and, most specifically, policing. Our identification strategy exploits a natural experiment provided by the introduction in 2005 of direct election to mayorship in only one region of Belgium, Wallonia; while mayors from elsewhere are still appointed by the locally elected City Councils. Particularly, we compare crime incidence under mayors that are directly elected by voters and those that are appointed by an elected body. Conducting a difference-in-difference analysis with a rich dataset registering locally-reported crimes from 2000 to 2012, our results show a post-reform decrease in overall crime from 5% to 8%, depending on the specification. We provide evidence that the reallocation of efforts towards fighting specific types of crimes by directly-elected mayors drives this effect, rather than a general increase in police efficiency. Moreover, the “increased accountability” effect for each directly-elected mayor di- lutes when the management of local police has to be coordinated with other neighboring peers.
Who does a better job of managing money: Republicans or Democrats? Under rational agent hypothesis, financial industry practitioners should not be affected by political discourse, and investors cannot realize abnormal returns on publicly available information. Rare events, however, may silence rationality and potentiate cognitive dissonance on a spectrum of agents. We assembled a comprehensive dataset of equity hedge funds performance and matched the managers' political affiliation by their partisan contributions. We document higher returns of funds managed by Democrats for 10 subsequent months---from December 2008 to September 2009. This result is unique and robust to placebo time windows and random partisan affiliation shuffling. We conjecture that the conjunction of the financial crisis, Obama's election, and politically polarized interpretation of the US central bank policy during that period had an asymmetric impact on hedge fund managers' perception. In other periods, when the political discourse did not involve central bank policy, there was no statistically significant difference in fund managers’ performance depending on their political beliefs.
We develop a model of American legislative politics, and we use this model to explain the shape of new public spending programs. In the model, the distribution of federal funds across regions of the country is the outcome of a bargaining game in which the President acts as the agenda-setter and Congress bargains over the final shape of the spending bill. The model highlights the importance of the American president being independently elected, which leads to a more balanced spending outcome than if proposal power was allocated to some member of Congress. In addition, we use our model to demonstrate the importance of the institutional rules within Congress, in particular its bicameral structure and the sequentiality of the legislative process. We then apply the model to the New Deal; in this context the model suggests, among other things, that both economic and political concerns were behind the shape of the New Deal spending, and that a less politically minded President would have been less constrained by Congress.
A committee of physicians sets prices for physician services in Medicare. We study the operation of this committee, examining the theoretical tradeoff between bias and communication in delegating to a committee with a potential conflict of interest. We find that the committee grants higher prices to more affiliated physician specialties: increasing affiliation by one standard deviation increases prices by 10%. Eliminating this effect would reallocate roughly $1.9 billion in annual Medicare spending across services. Proposers less affiliated with the committee produce more hard information, measured as better survey data. Finally, we find that specialties form coalitions to increase proposal affiliations with the committee, and that more affiliated proposals result in prices that are more closely followed by private insurers.
Many environmental/natural resource problems persist despite consensus that aggregate benefits exceed costs so that action should be taken. Nevertheless, responses are often delayed with final policies that do not correspond to ideal types. Distributional conflicts impede collective action. Bigeye tuna in the Western Central Pacific are an example. They are an economically and ecologically critical species that is overfished. Standard regulatory solutions have been unsuccessful. Overfishing of bigeye stems from accidental catch of juvenile bigeye in the skipjack tuna fishery. Our estimate of the benefits of reduced bigeye juvenile harvest are less than the costs imposed on the skipjack fleets from adjustments in fishing technologies. If the constraints, however, are directed only to hotspots where incidental harvests are largest, then benefits exceed costs. We identify fleets involved and construct a payment scheme to fleet owners so that conservation of bigeye does not make them worse off. Enforcement is feasible because fishing largely takes place within the economic zones of small island states. Who should pay? Long-line fleet owners who directly harvest bigeye tuna are an option, but there are high transaction costs. Consumers in Japan who value bigeye in the sashimi market are another option. The tuna distribution market in Japan is highly-concentrated and Japanese consumers have been willing to pay a premium for sustainably-caught fish. This concentration reduces the transaction costs of collecting a sustainability tax and distributing compensating payments to parties that must adjust behavior. This is a unique example of large-scale use of “beneficiary pays” rules. Coasean bargaining offers a breakthrough in achieving agreement on reducing the incidental harvest of bigeye tuna that thus far has eluded action. It provides a template for other problems where “polluter pays” rules via regulation or taxes have failed.
While product differentiation is generally benign, it can be employed to discriminate against customer groups, either to enhance profitability by appealing to discriminatory customers or in unprofitable ways that indulge owners’ tastes for discrimination. We explore discriminatory product differentiation by international airlines through their depictions of Israel on online route maps and whether their online inflight menus include kosher meal options. We first show that several airlines omit Israel from their online route maps. Three of these airlines are members of major international airline alliances. With data on over 100 airlines, we then document that online route map “denial” of Israel’s existence is more likely for airlines with likely customers from countries exhibiting greater anti-Semitism. Likely owner tastes also matter: denial is more likely for state-owned airlines in countries that do not recognize Israel. Availability of kosher meal options follows similar patterns, suggesting anti-Semitic rather than anti-Zionist motivations. Neither online route map treatment nor ownership by states not recognizing Israel affects the likelihood of alliance membership with alliance leaders having few airline alternatives to choose from in the Middle East.
Firms in technology and industrial domains are increasingly seeking licensing agreements to profit from the sale of intellectual property (IP) that they create. The marketing of such intellectual property, however, is fraught with two fundamental problems – how to demonstrate the value of the technology/knowledge to the buying party (the value realization problem) and how to protect the knowledge that is being shared from being appropriated away by opportunistic partners. In this research, we draw on governance theories and use data from international licensing agreements between foreign licensor firms and Korean licensee firms to show how firms modulate the three most prominent provisions of technology licensing agreements (TLAs) – the payment format, the extent to which the licensor cedes control rights for the technology to the licensee and the provision of Human Capital – to mitigate the contractual problems in value realization and value appropriation. In addition, we also study the interdependence between these contractual provisions. We finally draw implications for theory and practice.
This paper develops an analytic framework combining agency costs, auction design and shareholder voting to study how best to measure “fair value” for dissenting shareholders in post-merger appraisal proceedings. Our inquiry spotlights an approach recently embraced by some courts benchmarking fair value against the merger price itself. We show that as a general matter, the “Merger Price” (MP) rule tends to depress both acquisition prices and target shareholders’ expected welfare relative to both the optimal appraisal policy and several other plausible alternatives. In fact, we demonstrate that the MP rule is strategically equivalent to nullifying appraisal rights altogether. Although the MP rule may be warranted in certain circumstances, our analysis suggests that such conditions are unlikely to be widespread and, consequently, the rule should be employed with caution. Our results are robust to settings where courts commit errors in applying conventional valuation metrics (such as discounted cash flow analysis), and the analysis helps explain why conventional approaches generate outcomes that skew well above the deal price—an equilibrium phenomenon that is an artifact of strategic behavior (and not an institutional deficiency, as some assert). Finally, our analysis facilitates a better understanding of the efficiency implications of recent reforms allowing “medium-form” mergers, as well as an assortment of (colorfully named) contractual terms, such as blow provisions, drag-alongs, and “naked no-vote” fees.
This paper argues for a general principle that should guide application of claims for direct damages for breach of contract—the contract is an asset and the problem is one of valuation of the change in value of that asset at the time of the breach. It begins with the breach of a simple sales contract and then moves on to consider the anticipatory repudiation of complex long-term agreements and damage claims in international arbitrations..
We study reward crowdfunding, the fastest growing segment of the crowdfunding market, where, instead of a debt or equity contract, fund providers are promised some good or service in the future in exchange for their contribution to the funding of the investment project under a contract that does not penalise the creator’s failure to deliver. The existing economic and legal literature is puzzled by the platforms use of this seemingly inefficient contract where a standard pre-sale contract would appear to work better. Counter intuitively, we prove that the no-penalty contract is the optimal contract between creators of unknown talent and early adopters of their products. We show that far from being an inefficiency, the no-penalty contract is a contractual innovation specially designed for talent discovery. Traditional pre-sale contracts penalise the creators in case of non delivery, which reduces the risk of strategic non-delivery and facilitates funding. However, we show that penalties distort the signal on the creator’s ability that the market can infer from a successful crowdfunding campaign in a way that reduces the potential for talent discovery and therefore are sub-optimal in this context. Interestingly, neither intangibles nor demand uncertainty -which are considered key aspects of reward crowdfunding- are driving this result. Nevertheless, their presence facilitates funding under the no-penalty contract. Our analysis has important policy implications on how backers should be protected. Standard measures of consumer or investor protection may be counterproductive.
The contemporary literature on organizational law focuses with singular intensity on managerial agency costs. We offer a systematic perspective on the mechanisms that have been employed to limit those costs. We identify, describe, and analyze the four such mechanisms most heavily employed, in both commercial and non-commercial organizations, since the Renaissance. Two of our four mechanisms -- the right to withdraw from the firm, and the right to participate in its management – are, respectively, analogous to the late Albert Hirschman’s famous concepts of “exit” and “voice.” In contrast to Hirschman, however, we find that these two mechanisms are typically complements rather than substitutes. And the same is true of our third mechanism, which is the right to bring suit against managers for breach of fiduciary dutiy. It is only in our fourth mechanism – constraining the scope of delegation to managers – that we find substantial substitutability with the other three. This strong complementarity, we suggest, results from another fundamental agency problem in organizational design, which is the exploitation of non-controlling owners (or beneficiaries) by controlling owners. Though exit, voice, and liability can help assure that an organization’s managers serve its owners well as a class, these mechanisms can also be used to redistribute value among the owners themselves. This conflict of interest among owners commonly overshadows managerial agency costs. Indeed, the managerial agency problem seems generally a second-order concern in organizational design.
Over the course of the fifth to the second-century BCE, hundreds of individuals contracted loans from the Temple of Apollo on the Aegean island of Delos. The terms of these agreements included the amount of principal and interest, the property that was placed as security, loan guarantors in case of default, and a list of witnesses. Commentators have used these loans in an attempt to reconstruct the bureaucratic operation of the temple, the amount of money the temple handled, and to analyze the geographical extent of its lending activities. Despite the amount of information these loan documents provide, two central questions have not been answered in either the primary or secondary literature concerning their operation: How does one explain the sheer number of debtors to the temple? And, also, why does the temple continue to lend money in the face of increasing numbers of debtors? I argue that the large number of debtors was a product of the Temple of Apollo’s aggressive growth strategy. When the temple’s larger financial operations of property and land rentals, tax collection, and loans are viewed together, it is clear the temple wanted to maximize its revenue through the use of loans. It embraced loans as its preferred means of rapid growth and manipulated its contractual incentives in order to encourage borrowing in the expectation of future interest revenue. The most important of these incentives was the lack of penalties in case of late payment or default. The results of such aggressive tactics succeeded in luring borrowers away from traditional lending sources, but it resulted in hundreds of defaults and the limited ability to enforce repayment. This was an acceptable risk for the temple, as it did not change its lending practices during the entire time during which it loaned money. I propose that the temple relied upon religious obligation as a culturally self-enforcing mechanism in order to transfer the burden of enforcement onto the borrower.
Institutional reform in developing countries often involves an element of copying institutions from developed countries. However, such institutional copying is likely to fail if formal institutions alone are copied without the informal institutions on which they rest in the originating country. How can informal norms successfully be copied from one country to another? This paper investigates how informal traditions of the British civil service were copied into British Africa after independence. I argue that this was achieved by the physical presence of former British colonial officers who remained in the services of the newly independent states. During the period of decolonization in Africa 1957-1968, British African territories imported the same British institution safeguarding the political impartiality and the integrity of civil servants. While the necessary formal rules and legal entities were integrated into the legal bodies of all former colonies, they are practiced only in those colonies where British officers maintained a substantial share in the civil services for an extended period of time. I use a series of qualitative interviews with retired officers to explore the mechanisms behind this effect. A natural experiment around compensation payments for the loss of career at independence serves to explain the variation in British officers remaining in service after independence. The findings contribute to a deeper understanding of institutional copying, in particular the transfer of informal institutions.
We augment work on Transaction Cost Economics (TCE) and contract violations with insights from psychological work on conflict management to examine the causes and consequences of contract violations in repeat exchange relationships. We argue that contract violations occur not only because of bounded rationality or self-interest seeking behavior with guile (opportunism), but also from simple self-interest seeking behavior without guile, and that this distinction is important in understanding how future contracts are written in response to violations. Furthermore, we propose that following contract violations, effective governance in repeat exchange relationships depends on the non-violating party’s beliefs about 1) whether expectations were aligned between the exchange partners and 2) the violating party’s intent. We develop propositions on the underlying causes of different types of violations, concerns raised by each violation, as well as the mechanisms by which exchange partners can improve the design of subsequent contracts to reduce the likelihood of future conflict(s). In doing so, we add to the extant literature on the micro-foundations of strategy by providing a comprehensive picture of the different types of contract violations as well as the future governance changes required to maintain exchange relationships.
In the P2P economy (or ‘sharing economy’, or ‘collaborative economy’), platforms generally use reputation systems to actively perform a ‘regulatory’ role, in particular by exercising the power to exclude from access to the platform users whose online rating/reputation falls below a given threshold. The paper aims to analyse through a theoretical model the effect of the design of this specific type of online rating system on users/providers’ incentives to ensure a high level of service quality. We propose that users/providers’ incentives to provide service quality can be analysed as an optimal choice problem with a two arguments utility function, where reputation can be considered as an independent variable in the list of arguments of users/providers’ utility function. We find that current P2P reputation mechanisms are not incentive compatible because of the joint existence of two features: (1) they involve price/earnings insensitive to performance; and (2) reputation is not portable across platforms, so that users/providers can switch continuously among different platforms. In presence of these two conditions, the structure of users/providers’ inter-temporal preferences may create incentives to deplete their reputation according to their rate of substitution between income and reputation, as long as they can relatively easily switch to a different platform. Indeed, users/providers may choose a dissipative (so-called ‘bang-bang’) strategy involving the depletion of reputation and the jump to a different platform. This suggests that the design of P2P reputation systems may be improved either by making earnings dependent on performance or, alternatively, by making reputation portable across platforms.
Why does a worker become more efficient when given freedom at work? Under incomplete contracts, a worker faces a ratchet effect of innovating when he is closely monitored: if the worker uncovers a more efficient production method, the firm, being aware of it, raises the future performance requirement; anticipating this, the worker never tries to innovate. When given freedom at work instead, the worker accrues private information about his innovation. The resulting information asymmetry generates information rent which feeds back as the worker’s incentive to innovate and improve efficiency. This paper studies how a firm’s strategic ignorance influences its incentive structure which has to simultaneously induce effort from the worker and endogenously generate asymmetric information against the firm. The resulting mechanism provides a novel rationale to why relationships are sometimes characterized by weak incentives and low-scale production at the early stages.
This paper examines the performance of piece-rate incentive scheme relative to the fully optimal contract in a principal-agent problem under moral hazard and adverse selection. A firm compensates heterogeneous workers based on uncertain outcomes of the worker's skill (private information) and effort. Firstly, the paper considers the question of the shape of the fully optimal compensation scheme when workers are heterogeneous in terms of skills. I provide a version of the taxation principle that converts the full optimal contract as a direct revelation mechanism into a nonlinear wage schedule as an indirect mechanism. The theorem also establishes a necessary and sufficient condition for the optimality of piece-wise linear compensation scheme, and it is shown that any incentive scheme involving a linear part never optimal. Secondly, I argue the performance of the optimal piece-rate incentive scheme. I employ the incremental gain relative to the optimal fixed wage. I provide two primary observations. Firstly, a possibility of bunching influences the performance of piece-rate incentive scheme drastically. The optimal piece-rate incentive scheme can secure "more than" three-fourths (75 percent) of the maximized expected profit under the fully optimal contract if there is no bunching in the fully optimal contract. On the other hand, if there is a bunching and private information is distributed uniformly, the piece-rate incentive scheme can secure "at most" 75 percent of the profit secured by the fully optimal contract. Under a non-uniform distribution, the performance of the optimal piece-rate incentive scheme can secure substantially "more than" 75 percent of the expected profit secured by the fully optimal contract. The sufficient condition for that is fully characterized by the first-order stochastic dominance shift parameter.
We present evidence to reconcile two seemingly contradictory observations: on the one hand, minorities often choose middleman occupations, such as traders and moneylenders, to avoid competition with the majority and, as a consequence, avoid conflict; on the other hand, middleman minorities at times do become the primary target of persecution. Using panel data on anti-Jewish pogroms in Eastern Europe between 1800 and 1927, we document that ethnic violence breaks out when crop failures coincide a sharp increase in uncertainty about the future. In contrast, in times of relative political stability, negative economic shocks do not instigate violence against middleman minorities. This suggests that violence against middleman minorities breaks out when discounted value of future services of middlemen for majority falls due to an increase in discount rates. We show that pogroms primarily affected localities where Jews dominated the credit sector as opposed to any other intermediary profession, including trade in agricultural goods, suggesting that it is not the middlemen nature of the Jewish occupations per se that pogroms during the intersection of economic and political crises, but the long-term character of the lending transactions such that resolution of uncertainly takes place in the interim of a transaction.
Empirical evidence on the causes and effects of inequality suggests the existence of a vicious circle of mutually reinforcing inequality, corruption, and weak institutions. Despite the broad empirical evidence, there are only a few formal theoretical models on these dynamics. Relying on a game-theoretic approach, we show how inequality and corruption/institutional quality are interconnected via a crime channel. According to our model, collusion between law enforcement agencies and criminal organizations is more likely in societies characterized by high inequality and/or weak security forces. If those actors collude and, thus, eliminate public security, the citizens are exploited to the greatest possible extent and inequality is perpetuated. At the same time, those societies feature high levels of corruption and criminal activity. Surprisingly, our results allow for the interpretation that policies of lowering inequality or increasing the effectiveness of local police forces may be ineffective countermeasures. We instead suggest that those societies should intervene with non-local law enforcement agencies in order to (re-)establish the rule of law. That measure had been successfully utilized in the Colombian "War on Drugs" and, to a lesser extent, in order to contain the influence of the American Mafia in the 1960th.
This paper discusses discrimination as an agency problem in hierarchical organizations and provides contractual and regulatory solutions to ameliorate the situation using mechanism design theory. Existing research (e.g., Becker (1957), Coate and Loury (1993)) studies a situation in which an individual person practices discrimination. In contrast, this paper considers a hierarchical organization in which a manager (the agent) may or may not have a discriminatory taste toward his subordinates, whereas an owner (the principal) is unbiased and only cares about profit. In this environment, I study a direct mechanism and characterize an optimal contract. Additionally, I compare the allocation implemented by the optimal direct mechanism to the first-best (full information) allocation and discuss the effectiveness of current regulations (e.g., affirmative action, taxation on the minority promotion ratio): I find that a regulator (such as the U.S. Equal Employment Opportunity Commission) can improve compliance with non-discriminatory conduct, despite the fact that the person on whom the regulation is directly incident---the principal---is not intrinsically biased. I also show that the regulation can be counter-productive if it attempts to enforce perfect fairness (the first-best allocation) when that allocation is not incentive feasible. Finally, I review the U.S. law of discrimination and analyze statutory and jurisprudential issues regarding the optimal mechanism.
Do electoral institutions have an effect on income inequality? Does political inequal ity play a role in the potential aftermath of electoral rules on income inequality? This paper provides a Downsian model of political competition in which electoral systems represent differently the individuals’ preferences of income inequality. Empirically, I employ a panel data of 118 democracies during 1960-2015, and find that proportional systems might improve income inequality through its interaction with political equality. Unpacking this mechanism and understanding how it works is of crucial importance to the design of pro-equality electoral systems, and democratic institutions at large.
How an empire that seemed cohesive for hundreds of years could easily fragment in a decade? I present a simple computational model of Spain’s political economy and do some simulations that could help explain the rationale behind such system. I also provide an analytical narrative in which I stress the importance of the Spanish Empire’s fiscal sociology, one in which certain political enterprises (Miners, Merchants, Crown) played key roles. I maintain that the empire had an implicit political arrangement; one in which the Crown maximized tax revenue through its power in managing the transatlantic trade. It did so by coopting a small set of local American elites (In Lima and Mexico City), which gained rents from their privileged trade position. It was a stable setting while Spain had sea supremacy. The advent of the British Navy in the late 18th century disrupted everything. Thereafter, the Crown attempted to decentralize its oceanic trade through new routes, and by trying to coopt a larger set of regional elites within the empire. This tactic backfired: it only gave major power to new local elites and created incentives for political fragmentation.
A growing literature studies the working of democratic institutions and their emergence. Little is known on preferences over political institutions in the population at large and on their historical drivers. We investigate the empirical determinants of the votes in the Referendum over Monarchy vs. Republic held, for the first time in universal franchise, at the end of WWI in 1946 in Italy. We construct a large disaggregate database to study the determinants of the votes for about 8100 municipalities in Italy. A main variable of interest is the exposure to the rule of more or less republican and monarchic sovereign polities in medieval times. We track the emergence, evolution and territorial disappearance of the sovereign polities in pre-industrial times. We build a time varying political score for the Italian peninsula that offers a proxy of the actual exposure to the rule of republics and monarchies in each location and each year over the period 1000-1861. The data allows a first measurement of past exposure to different political institutions and an exploration of their (cultural) legacy for preferences over Republic and Monarchy during the transition to democracy. The empirical analysis also accounts for economic conflicts of interests (in terms of historical land inequality), socio-economic conditions and for the role of short term contingencies (like fascist-nazi massacres and occupations along the nazi defensive lines during WWII).
Despite the huge evidence on the adverse impact of extractive policies, we still lack a framework that identifies their determinants. Here, we lay out a two-region, two-social class model for thinking about this issue, and we exploit its implications to identify the causes of the opening of the present-day divide between North and South of Italy. Differently from the extant literature, we document that it arose because of the region-specific policies selected between 1861 and 1911 by the elite of the Kingdom of Sardinia, which annexed the rest of Italy in 1861. While indeed pre-unitary land property tax revenues and railway diffusion were shaped by each region's farming productivity but not by its political relevance for the Piedmontese elite, the opposite was true for the post-unitary ones. Moreover, post-unitary tax distortions and the severity of the remaining extractive policies---captured by the region's taxation capacity and political relevance---determined the North-South gaps in culture, literacy, and development but not that in the manufacturing industry value added. Consequently, extraction neither eased the formation of an unitary market nor favored industrialization. Our results remain robust to considering fixed region and time effects and the structural conditions differentiating the two blocks in 1861, i.e., pre-unitary inclusiveness of political institutions, land ownership fragmentation, and inputs. Crucially, our framework clarifies the incentives of dominating groups in other unions, e.g., post-Civil War USA and EU.
In 1498 Portuguese explorers discovered the sea route to Asia and for nearly 100 years no other nation managed to follow suit. This monopoly allowed Portugal to establish a vast maritime empire that positioned it to dominate the intercontinental trade in spices and other valuable goods between Asia and Europe, until then the domain of caravans through the Levant. But the Portuguese failed to exploit their lead. Even before the British and Dutch finally managed to navigate to Asia, a century later, the Portuguese enterprise in Asia was already in decline. We argue that the failure of the Portuguese enterprise must be understood in the context of the transition of a medieval society into the modern era, where new opportunities made possible by new technologies and circumstances put a strain on prevailing beliefs and institutions. These new opportunities required changes in culture and institutions to be fully taken advantage of, in particular the embrace of commerce as opposed to violence as the key organizing principle. The Portuguese made some moves towards those changes, yet the transition was slow, imperfect and incomplete. In contrast, the British and Dutch reached Asia with a culture that was more suited to commerce, and institutions (e.g. joint-stock companies) that allowed them to very quickly usurp Portugal’s hegemony in the region.
In countries with weak institutions, oligarchs often hide enterprise ownership behind related individuals, holding companies, and other entities to protect assets from competitors and the state. Connections among such entities represent a network that characterizes the nature of oligarch control. We argue that the optimal choice of network resolves a tradeoff between opacity and loyalty—more distant and diffuse ownership reduces the transparency of oligarch ownership, at the cost of increased risk of betrayal. We explore this idea in the setting of contemporary Ukraine. Exploiting data from business journalists, firm registries, and records of joint stock companies, we characterize the ownership networks of Ukrainian oligarchs. Seeking to explain variation in the character of such networks, we explore the role of enterprise and oligarch characteristics that affect the tradeoff between opacity and loyalty.
The environmental federalism literature describes local regulatory control as a double-edged sword. It empowers jurisdictions to solve their local problems, but to discount spillover impacts on neighboring jurisdictions. We study this tradeoff in the context of a regional ‘frac sand’ mining boom in Wisconsin, which began around 2010 and was induced by the hydraulic fracturing surge across the U.S. We exploit a 2012 state Supreme Court ruling, permitting township-level mining ordinances, to study the effects of local regulation on mining activity, resident exposure to disamenities, and property values. Consistent with complaints of heightened traffic congestion and roadway risks, we find large effects of mine openings on accidents involving industrial trucks ranging from 9 to 13% per mine but also positive effects of mine openings on township property values, ranging from 6 to 17% per mine. Township ordinances significantly reduce the own-township accident effects of mine openings, and enhance individual property values within the regulated townships. Mine openings under ordinances increase truck accidents and decrease property values in neighboring jurisdictions, however. The results, although preliminary, suggest the net value of local regulatory authority may be negative once spillover impacts are considered.
Why did the most prosperous colonies in the British Empire mount a rebellion? Even more puzzling, why didn't the British agree to have American representation in Parliament and quickly settle the dispute peacefully? At first glance, it would appear that a deal could have been reached to share the costs of the global public goods provided by the Empire in exchange for more political autonomy and/or formal representation for the colonies. (At least, this was the view of men of the time such as Lord Chapman, Thomas Pownall and Adam Smith.) We argue, however, that the incumbent government in Great Britain, controlled by the landed gentry, feared that giving political concessions to the colonies would undermine the position of the dominant coalition, strengthen the incipient democratic movement, and intensify social pressures for the reform of a political system based on land ownership. In particular, allowing Americans to be represented in Parliament was problematic because American elites could not credibly commit to refuse to form a coalition with the British opposition. Consequently, the only realistic options were to maintain the original colonial status or fight a full-scale war of independence.
Residential segregation is among the most durable and salient features of American urban life. It is widely recognized that governments at all levels have played at least some role in promoting and sustaining residential segregation. At the federal level, for example, urban renewal projects, federally-financed highway construction, and lending practices promulgated by New Deal agencies are often invoked as explanatory factors in the rise of segregation. Similarly, at the local level, zoning laws and ordinances are often thought to have helped create racial disparities in access to housing. In this paper, we ask: how and why did residential segregation in American cities come to enjoy state sponsorship? We present a simple model that suggests two processes drove demand for state-sponsored segregation: increased housing demand among African Americans; and a reduced ability among white communities to enforce informal norms through private vigilante activity. Formal econometric tests are consistent with these predictions.
With increasingly complex workplaces agents face a multitude of different tasks. Standard contract theory predicts similar complex contracts, however, actual contracts are simpler. In order to explain this puzzle I propose a model in which agents' limited attention leads to an instinctive focus on tasks with high outcome variation. This focus of attention leads to a countervailing effect, where despite optimal incentives for a rational agent, the focusing agent chooses the wrong allocation of effort. This provides a mechanism of findings in field studies. In order to prevent the agent from focusing too much on some tasks over others, the principal needs to assimilate the incentives. Thus even if all outcomes can be measured, the principal will not condition the optimal contract on all available information.
We present a multitask principal-agent model with economic and non-economic tasks to analyze top management hiring decisions in family firms. Our model shows that ability differences between family and nonfamily managers, the interdependence of economic and non-economic tasks, and difficulties in the measurement of non-economic tasks explain why either family or nonfamily managers are hired. We find that non-family managers are more likely hired when the managers' abilities don't differ strongly because the non-family manager is better at the economic task which can be more efficiently incentivized. If the economic and non-economic tasks are strong substitutes, a non-family manager will be hired at the cost of negligence of non-economic goals. However, hiring a family manager becomes optimal when the non-economic task can be measured better, the tasks become more complementary, and the family manager cares more strongly for the family firm. Our results contribute to the literature on top management hiring decisions in family firms which so far has not accounted for multitask settings, measurement problems and the interdependence between economic and non-economic tasks.
We analyze relational contracts between a principal and a set of risk neutral agents whose outputs are correlated. We first consider the case where individual outputs are non-observable, but where the agents' aggregate output can be observed. In this case, a team incentive scheme is optimal, where each agent is paid a bonus for aggregate output above a threshold. We show that if the team members' outputs are negatively correlated, more agents in the team can improve efficiency since the performance measure becomes more precise. We then consider the case where individual outputs are observable. A tournament scheme with a threshold is then optimal, where the threshold depends on an agent's relative performance. Finally, we compare the two cases and show that the principal may deliberately choose to organize production as a team where only aggregate output is observable. The team alternative is more likely to be superior under negatively correlated outputs.
This paper provides a rationale for why holding responsible fewer rather than more members of a team increases team success. Team members can freely coordinate on who should do what. The outside world cannot observe what happened within the team but only whether the team was successful or not. In case of failure, one or several members of the team may be sanctioned; their reputation or image may suffer or they may lose their yearly bonus. Sanctioning, however, cannot be arbitrary. A team member can appeal against unfair sanctions; sanctions are repelled if this team member did not violate any norm (or if this violation is unlikely). If the organization places little emphasis on protecting the right of "innocent" team members and team cohesion is low, holding the whole team formally responsible is optimal. Otherwise, assigning responsibility to one member is optimal.
Advocacy Non Governmental Organizations (NGOs) mostly influence social outcomes by providing stakeholders with information. We develop a theory of communication about corporate social behavior between a NGO and an imperfectly informed stakeholder. We focus on one communication dimension: whether the NGO reveals socially-beneficial activities (good news) or socially detrimental ones (bad news). The model provides two main insights: 1) In a given situation, the NGO falls into the extremes, emitting either good news only or bad news only; 2) the more severe the communication constraint (limited resources, airtime, or stakeholder attention), the more likely the NGO emits bad news. We then provide evidence supporting our theory in an extensive panel data set of news published by 634 NGOs between 2002 and 2014.
Traditional models of organizational choice focus on the distinction between the for-profit and non-profit forms. These models ignore a critical distinction between organizations that transfer subsidies on behalf of donors to beneficiaries, and social enterprises, such as microfinance institutions and fair trade firms, that commit to transacting with different classes of disadvantaged groups. I present a model where entrepreneurs receive subsidies and have a choice between (1) giving to the beneficiaries, and (2) forming a social enterprise that transacts with them, as well as choose to incorporate as a for-profit or a non-profit. I show that social enterprises have financial and reputational incentives to measure their beneficiaries' abilities and tailor subsidies to their particular needs. Their effectiveness in utilizing subsidies explains why such enterprises have been particularly effective in addressing social missions, such as increasing access to capital or improving employment opportunities. Entrepreneurs choose to form social enterprises when the variance in beneficiaries' abilities is higher, and therefore the benefits of measurement are greater. Moreover, when the variance in abilities is very high, entrepreneurs will choose to form a for-profit social enterprise, because when the incentives to measure are sufficiently strong, the non-profit form as a commitment device to use subsidies effectively is redundant. The analysis further considers the effects of different tax policies and reform proposals for regulating social enterprises.
‘Social capital’ denotes the number and strength of bonds between people. Systems of elderly care try to create environments that are similar to people’s original living environment. Community oriented housing is a new model. It creates family or friend-like structures between people and thus incentivises ‘informal’ support. Despite the strong thematic connection between care and social capital, there have been no studies systematically comparing these new forms to more standard models such as ‘assisted living.’ This article compares the social capital and other sorts of capital in a population of people aged 60 and above living in either of the two alternative models in Germany. It studies various components of social capital, among them the social networks, mutual support, participation in activities of the facility etc., but also cultural capital (trust) or engagement/activism (political capital). The article compares the mean levels of capitals occurring in the models in a matched cohort design. It finds that community oriented models, create higher levels of capital, almost consistently across all measured variables. Results will inform housing providers and policy makers of the social effects of alternative living models and might contribute to transforming living facilities for the elderly.
Just like lawyers in practice at one law firm sometimes “lateral” to another law firm, so too do judges in one judicial system (either the federal judiciary or a state judicial system) “lateral” to another judicial system (either a state judiciary or the federal judiciary). This paper examines the practice of “judicial lateraling.” It develops, and seeks to validate, five hypotheses. First, all else equal, judges will be more likely to move from a state judicial position to a position in the federal judiciary than vice versa. Second, judges who move from the federal judiciary to a state judiciary will be more likely to move to a position in the judicial hierarchy higher than the one they left (e.g., from a position as a federal trial judge to a position as a state appellate judge). Third, a judge who will be more likely to gain a “step up” in the judicial hierarchy when moving from the federal judiciary to a state judiciary than the other way. Fourth, the greater the professionalism of the state judiciary, the less likely it will be for a state judge to accept a step down in the judicial hierarchy when moving to the federal judicial system. Fifth, the greater the professionalism of the state judiciary, the less likely it will be for a state judge to lateral to the federal judiciary.
This essay advances a new reform of judicial decision-making. It challenges the seemingly unquestionable use of voting rules by panels of judges or jurors. Instead, it proposes mathematical aggregation rules for the prevalent probability-based legal decisions, such as burden of proof decisions, and demonstrate their superiority on normative, empirical, analytical, and intuitive grounds. Judges and jurors make many dichotomous legal decisions, dictated by legal thresholds. Several legal thresholds are quantitative. Burden of proof standards–i.e., beyond reasonable doubt, preponderance of the evidence standards–set probability thresholds that dictate a binary legal decision. This essay reconsiders the “proper” way to aggregate legal opinions in judicial panels of judges or jurors in probabilistic legal threshold cases. It suggests a theory of opinion aggregation as an information pooling problem. It explains why we should doubt the efficacy of existing voting-based rules, and then proposes and justifies a new set of mathematical aggregation rules for the judiciary. The essay offers both a theoretical framework and empirical results that assist in reevaluating judicial aggregation rules. Building on this framework, it demonstrates the superiority of mathematical aggregation rules over existing voting rules in reaching correct legal decisions by judicial panels. The basic insight is that voting-based aggregation rules miss out on valuable (quantitative) information, whereas mathematical aggregation rules can fully utilize the information produced by panel members, and accordingly produce more accurate legal decisions. More subtly, the essay points to a neglected trade-off between information aggregation and strategic behavior in panels. Mathematical rules are superior in aggregating information, and voting-based rules can be justified only by a strategic and insincere(!) account of judges’ behavior.
We develop a double-sided moral hazard model to tackle organizational issues in judicial institutions. Modelling production of justice with a double-sided moral hazard model corresponds well with the idea that court services are achieved by combining two inputs: jurisdictional tasks and administrative tasks. Jurisdictional tasks are typically performed by magistrates. Administrative tasks are expected to be conducted by the government through the provision of judicial assistants or information technology. In reality, magistrates also perform administrative tasks. Our model contributes to existing literature on double-sided moral hazard by studying a case where the agent (here a representative magistrate) may substitute his own effort for that of the principal (the government) to undertake some of the tasks a priori allocated to the principal (administrative tasks). Our main finding is that two sources of inefficiency in the production of justice are possible according to the relative unit cost of administrative tasks for the two co-providers. The first source of inefficiency is due to sharing the incentives to make each co-provider exert an effort, and the second corresponds to a misallocation of administrative tasks when the representative magistrate takes in charge the whole production of judicial services.
We consider reputation-building by a decision maker (e.g., politician) with horizontal reputational concerns, i.e., whose payoff is highest when he reaches a bliss reputation corresponding to some intermediate positioning (e.g., when perceived as congruent with the median voter). Reputational concerns give rise to multiple equilibria characterized by repositioning towards the bliss reputation. In one equilibrium, this repositioning is moderate, which benefits the market, but it is extreme in the other: the attempt to cater to the market's preferences involves overreacting (e.g., picking too extreme policies). This overreaction sometimes lowers welfare as compared to the no-reputation case. In the presence of multiple audiences, the inefficiency of the extreme equilibrium is exacerbated by the endogenous selection of inefficiently narrow and congruent audiences.
We adress the question of remunicipalization of water services in France. Gathering information on the 1998-2015 period concerning the way more than 1 200 French municipalities are organizing their water services at contract renewal time, we identified nearly 130 remunicipalization cases. Using an endogenous switching regression model in a two-stage probit estimation we found that the choice of municipalities is driven by expectations concerning price and leak: efficiency consideration are thus important drivers. However we also find evidence of mimetic behaviors suggesting that municipalities that are uniformed or not skilled enough to anticipate the consequence of their choice on efficiency might rely on observed decisions coming from municipalities from the neighborhood. (JEL: H0, H7, K00, L33)
In this paper, I explore the potential for developing markets for regulation as a means of producing regulatory methods and technologies that are better adapted to the characteristics of a complex, digital, and global economy. This model expands the new governance concept of outcomes-based regulation, in which government monitors the achievement of established targets (such as an accident rate or release of toxins) but does not prescribe the means of achieving those targets. In standard outcomes-based regulation, regulated entities design their own approach to achieving regulatory targets. In the model I propose, private regulators compete to provide regulatory services to regulated entities; these private regulators, however, must be authorized (approved) by government, evaluated on the basis of their efficacy with which they achieve the regulatory targets. In this model, government becomes a regulator of regulators: superregulation. In this preliminary paper, I explore the possibilities and limits for such a model.
We evaluate the effects of a central French reform that made the conditions for firm-level union recognition more democratic after 2008. The law gave equal chances to all unions to be recognized for bargaining, putting an end to the quasi-monopoly given to five historical unions until then. The law also introduced votes and minimal electoral requirements for union recognition. These new regulations only became effective at the first firms' work councils elections following the promulgation of the law. Those elections occur within each firm according to a pre-defined frequency, so that election dates only depend on former election dates, and can be considered as quasi-random with respect to the new law, at least in firms that are old enough. The identification thus relies on a regression discontinuity design in which the running variable is the firms' work councils election date: we compare in 2011 firms that had those elections just before or just after the law was passed. We find that the democratic rules introduced in 2008 improved both employers' and workers' satisfaction and trust towards unions are increased. Union coverage and membership are also increased. Finally, light conflicts increased but workers exited less.
Civil conflicts spill over to neighboring countries. This paper proposes a theory of the contagion of civil wars, emphasizing two main channels of diffusion of a conflict. First, weak territorial control facilitates the emergence of a regional market for war inputs in the "porous frontier." Second, refugees fleeing a conflict zone may unwittingly destabilize their host country. In both cases, the contagion effect is nonlinear and creates multiple equilibrium situations of regional complexes of civil conflicts. This helps explain observed patterns of regional clustering of conflict and state capacity, and raises identification issues in the measurement of the contagion effect. We also derive a positive spillover of civil wars: governments are sometimes in a position to avoid contagion by improving their institutions. Finally, we explore policy implications for military intervention, military and institutional cooperation, and the international coordination of refugee policy.
Autocracies vary widely in transparency of information disclosure to political elites. To account for the variations, I present a model of internal information disclosure that emphasizes an autocrat's political survival problem. To persuade the elites to support her rule, the autocrat strategically designs an internal information system. The bureaucratic structure of the internal information gathering system implements a desirable form of information disclosure. A higher quality bureaucracy implements a more transparent information disclosure. I characterize the optimal information disclosure in autocracies with coherent elite groups and that in autocracies where the elite splits into factions. I show that whether an autocracy with elite division has a higher bureaucratic quality and hence a more transparent information disclosure depends on aspects of the intra-elite division. When the autocrat's faction (the ruling faction) faces intense competition from the opposition faction, she is more likely to adopt an information system with a high bureaucratic quality and a high level of transparency. Meanwhile, when the ruling faction's political entrenchment depends on the survival of the incumbent, she is less likely to adopt an information system with a high bureaucratic quality and a high level of transparency. Further, there is a non-monotonic relationship between the degree of the inter-factional conflict and bureaucratic quality (transparency). As conflict increases, bureaucratic capacity (transparency) increases up to a threshold. Beyond this threshold, increased conflict is associated with reduced bureaucratic capacity (transparency).
Governments can have large effects on investment by raising policy risks and uncertainty. This paper estimates their effects by studying the famous English East India Company. It had diffcult relations with some English governments and positive relations with others. This translated into either hostile or friendly policies. New time-series data on the Company's shipping and port capacity are used to analyze the effects of English governments and government changes on investment. Econometric results show that investment rates were lower in years with a new monarch and when elections changed the majority party in the House of Commons. Investment also differed depending on which monarch or majority party governed. This paper shows the relevance of policy risk and uncertainty over a long time-span, especially for companies involved in prominent public partnerships. It also illustrates the value of studying evolving policy risks in historical settings.
This paper studies the role of council size on government corruption in Brazil. We leverage on the discontinuous relationship between the population size of municipalities and council size dictated by the law to implement a regression discontinuity design. We document a substantial positive causal effect of the number of city councilors on the incidence of corruption detected during federal audits. Results also show that having an extra councilor does not affect the size of the public budget, but influences its composition. It increases expenditures related to public housing and recreation, which we interpret as items related to clientelistic policies. Finally, we find a negative relationship between council size and its productivity: namely, the numbers of legislative bills proposed by councilor and approved are both lower in municipalities with larger councils.
Recent research suggests that public contracts can be expensive and inefficient compared to pure private contracts (Moszoro and Spiller 2014). This research studies empirically the intrinsic difference between public contracts and private contracts in the U.S. electric utility sector. Prior to the deregulation in 1996, the energy power market was dominated by vertically integrated utilities that perform three functions, i.e. electric generation, power transmission, and power distribution. After the deregulation, power generator and sales industries are being untangled from transmission and distribution services, with the presence of a high number of independent power producer (IPP). While de-integrated utilities might be necessary to foster competition and avoid monopolies, however, it may undermine the economies of coordination among vertical stages of electricity production. When utilities have to buy power from IPPs, they may face higher transaction costs due to the contractual relationships. This research assesses how the deregulation affects the economic performance of the investor-owned utilities (IOUs) and the publicly owned utilities (POUs) differently through the effect of transaction costs, i.e. the costs of doing a transaction with IPPs. This research will employ a two-stage empirical strategy. The first stage is to use data envelopment analysis (DEA) techniques to measure the output-oriented technical efficiency of the utilities. The second stage is to use difference-in-differences (DD) regression estimation to measure the differences in the economic performance of divesting IOUs and non-generator POUs compared to the vertically integrated IOUs and POUs. The difference will represent the treatment effect, in this case, the difference in transaction costs that the POUs and IOUs faced due to the deregulation.
The representation of merchant interests in parliaments played a crucial role in constraining monarchs’ power and expanding the protection of property rights. We study the process that led to the inclusion of merchant representatives in the English Parliament, using a novel comprehensive dataset for the universe of more than 600 English towns (boroughs). Our data comprise information on medieval transport infrastructure, economic importance, self-governance, representation in Parliament, and the voting behavior of local MPs. Our analysis begins with the Norman Conquest in 1066 – an event of enormous political change that resulted in homogenous formal institutions across England. From this starting point, we document a two-step process: First, monitoring issues led to inefficiencies in the king’s tax collection, especially with the onset of the Commercial Revolution in the 12th century. This gave rise to mutually beneficial agreements (Charters of Liberties), whereby medieval merchant towns obtained the right of self-administered tax collection. Second, we show that these charters were stepping stones towards representation in the English Parliament after its creation in 1295: local autonomy meant that subsequently, extra-ordinary taxation (e.g., to finance wars) could not be easily imposed by the king, but instead had to be negotiated – and the efficient institution to do so was Parliament. We show that royal boroughs with trade-favoring geography were much more likely to be represented in Parliament, and that this relationship worked through Charters of Liberties. We also show that medieval self-governance had important long-term consequences and interacted with nationwide institutional changes. Boroughs with medieval charters had inclusive local elections of public officials and MPs, and they tended to support the Great Reform Act of 1832, which enfranchised newly industrialized boroughs and thereby expanded the pro-trade coalition in Parliament.
What are the origins and consequences of the state as a provider of public goods? We study institutional changes that increased state capacity and public goods provision in German cities during the 1500s, including the establishment of mass public education. We document that cities that institutionalized public goods provision in the 1500s subsequently began to differentially produce and attract upper tail human capital and grew to be significantly larger in the long-run. Institutional change occurred where ideological competition introduced by the Protestant Reformation interacted with local politics. We study plague outbreaks that shifted local politics in a narrow time period as a source of exogenous variation in institutions, and find support for a causal interpretation of the relationship between institutional change, human capital, and growth.
Instantaneous communication via the Internet and efficient shipping of goods across the globe are widely believed to have caused today’s global fragmentation of production processes. Introducing the concept of codifiability of product specifications, our model predicts reductions in communication times (shipping times) to increase imports of intermediate inputs by more (less) than final goods. We test this hypothesis by examining the global cotton textile industry during the 19th century. This allows us to exploit exogenous variation in the roll-out of the global telegraph network due to the ruggedness of the sea-bed and the opening of the Suez Canal in 1869 to estimate causal effects. Consistent with our model, improvements in communication time disproportionately increase imports of the more codifiable intermediate inputs, while improvements in shipping time disproportionately increase imports of the less codifiable final goods.
A defining feature of public sector employment is the regular change in elected leadership. Yet, we know little about how elections influence public sector careers. We describe how elections alter policy outputs and disrupt the influence of civil servants over agency decisions. These changes shape the career choices of employees motivated by policy, influence, and wages. Using new Office of Personnel Management data on the careers of millions of federal employees between 1988 and 2011, we evaluate how elections influence employee turnover decisions. We find that presidential elections increase departure rates of senior employees, particularly in agencies with divergent views relative to the new president and at the start of presidential terms. We also find suggestive evidence that vacancies in high-level positions after elections may induce lower-level executives to stay longer in hopes of advancing. We conclude with implications of our findings for public policy, presidential politics, and public management.
We examine how the U.S. Federal Government selects governance structures for R&D contracts with private-sector firms. The government chooses between two contractual forms – grants and cooperative agreements – where the latter provides the government with substantially greater discretion over, and monitoring of, project progress. Using novel data both on R&D contracts and on the technical expertise available in specific government bureau locations, we test implications from the organizational economics and capabilities literature. We find that cooperative agreements are more likely to be used for early-stage projects and when the local government bureau personnel have relevant technical expertise; in turn, cooperative agreements yield greater innovative output as measured by patents and citations, controlling for the endogeneity of contract form. The results are consistent with multi-task agency and transaction cost approaches that emphasize decision rights and monitoring.
Postings are often used by bureaucracies, especially in emerging economies, in an attempt to reward or punish their staff. Yet we know little about whether, and how, this type of mechanism can help incentivize performance. Using postings to induce performance is challenging, as heterogeneity in preferences over which postings are desirable non-trivially impacts the effectiveness of such schemes. We propose and examine the properties of a mechanism, which we term a performance-ranked serial dictatorship, in which individuals sequentially choose their desired location, with their rank in the sequence based on their performance. We then evaluate the effectiveness of this mechanism using a two-year field experiment with over 500 property tax inspectors in Punjab, Pakistan. We first show that the mechanism is effective: being randomized into the performance-ranked serial dictatorship leads inspectors to increase the growth rate of tax revenue by between 44 and 80 percent. We then use our model, combined with preferences collected at baseline from all tax inspectors, to characterize which inspectors face the highest marginal incentives under the scheme. We find empirically that these inspectors do in fact increase performance more under this mechanism. We estimate the cost from disruption caused by transfers to be small, but show that applying the scheme too frequently can reduce performance. On net the results suggest that bureaucracies have tremendous potential to improve performance by periodically using postings as an incentive, particularly when preferences over locations have a substantial common component.
Court delays are a frequent concern, yet what explains court case duration remains incompletely understood. We study the time to court case resolution by drawing on a detailed case-level dataset of civil suits filed at a major Belgian court. We utilize the competing risks regression framework to address the typically neglected heterogeneity in the modes of court case resolution and examine the role of a wide range of both time-invariant and time-varying covariates. Controlling for judge fixed effects, we find substantial disparities in the effect of party and case characteristics on the time to settlement versus trial judgment. Exploiting the de facto random assignment of cases to serving judges within the court's chambers, we further find that judge characteristics matter for time to trial judgment, but not for time to settlement. Modeling heterogeneity in the modes of court case resolution is therefore central to understanding of court case durations.
The national treatment principle, a centerpiece of many trade-related international treaties, mandates nondiscriminatory application of treaty provisions to nationals and foreigners. In international patent law treaties, the principle prevents countries from free-riding on foreign technologies, thereby preserving incentives for global innovations. Concerns about violation of the principle at the Chinese patent office have been voiced in business and policy circles, but there is little empirical evidence backing this claim. Using data on about half a million patent applications filed in China we find no, or only weak, evidence of anti-foreign bias in the issuance of patents overall. However, foreign applications in technology fields that are of strategic importance to China are four to seven percentage points less likely to be approved than local applications, all else equal. Given the importance of industrial policy in China and the country's strong focus on indigenous innovation and intellectual property, the empirical results provide a case of technology protectionism by means of the patent system.
The literature contains ambiguous findings as to whether statistical discrimination, e.g. in the form of racial profiling, causes a reduction in deterrence. These analyses, however, assume that enforcers' incentives are exogenously fixed. This article demonstrates that when the costs and benefits faced by officers in enforcing the law are endogenously determined, statistical discrimination as well as taste-based discrimination lead to an increase in criminal activity. Moreover, the negative effects of statistical discrimination on deterrence are more persistent than similar effects due to taste-based discrimination. This suggests, contrary to the impression created by the existing literature, that statistical discrimination is not only harmful, but, may be even more detrimental than taste-based discrimination. Thus, for purposes of maximizing deterrence, the recent focus in empirical research on identifying taste-based discrimination as opposed to statistical discrimination may be misplaced. A superior approach may be to identify whether any type of racial discrimination takes place in the enforcement of laws, and to provide enforcers with incentives to minimize the impact of their discriminatory behavior.
We study how variations in land fertility affect civil conflicts. We first present a model with heterogeneous land in which variations in input prices (fertilizers) affect appropriable rents and the opportunity costs of fighting. The theory predicts that spikes in input prices increase the likelihood of conflicts, and that this effect is magnified when soil fertility is heterogeneous. We test these predictions using data on conflict events covering all Sub-Saharan African countries at a spatial resolution of 0.5° x 0.5° over the period 1997-2014. We combine information on soil characteristics and worldwide variations in fertilizer prices to identify local changes in input prices. We find that exogenous variations in fertilizer prices trigger more conflicts, especially in cells where soil quality is more heterogeneous. Our paper therefore suggests that land fertility is a signicant determinant of violence.
We explore drivers and impediments to inter-ethnic cultural convergence in Estonia, where nearly 30% of population are native Russian speakers, mostly ethnic Russians. We present evidence drawn from six consecutive rounds of the European Social Survey covering the period from 2004 through 2014. We demonstrate that ethnicity persists as a significant factor of values and attitudes, especially with regard to the perception of the Estonian, society, placement on the autonomy to paternalism scale, and attitudes to state and political institutions, and that the passage of time dose not weaken the salience of ethnicity as a factor of culture. Treating Soviet-time settlement of ethnic Russians in Estonia as a "natural experiment", we show that day-to-day contact of ethnic Russians with ethnic Estonians has a consistently strong impact on the ethnic gap, noticeably reducing the full marginal effect of ethnicity on values and attitudes.
Empirical and theoretical studies have illustrated the close relationship there is between social capital and the formation of collective action. (i. e. Adger, 2003; Ostrom, Gardner and Walker, 1994; Pinto-Ramos, 2006), and have contributed to build a behavioral theory of collective action. Local conditions as well as individual differences affect this relationship (Ostrom, 1994). We extend this view by exploring whether in violent contexts, personal, communal and economic insecurities intervene in the formation of social capital and in developing the ability of communities to solve collective action problems. In the paper we present research carried out in 56 municipalities in 2015, in Colombian regions where the rates of violence have been consistently higher than average in the preceding decade. The effects of three components of social capital (relational, trust and reciprocity, and institutional) on collective action were analyzed. We chose to analyze these three components separately because different studies have questioned the empirical and theoretical validity of conflating them (Glaeser, 1999; Pinto-Ramos, 2006). We find that insecurity consistently affects collective action. There is a very clear negative relationship between personal, communal and economic insecurity and collective action. We also find that the components of social capital have distinct effects on collective action. While we find that there is no significant relationship between relational capital and collective action, both trust and institutional capital have a highly significant positive effect on collective action.
Large companies and debt collectors frequently file unmeritorious claims against consumers. Recent high-profile actions brought by the Consumer Financial Protection Bureau (CFPB) against JP Morgan, Citibank, and large debt collectors illustrate the breadth and importance of this phenomenon. Due to the limited financial power of individuals, consumers often do not defend against such baseless claims, which results in the entry of millions of default judgments every year. To combat this problem, policymakers and scholars have explored a variety of solutions that would make it easier for consumers to defend in court, but these prove ineffectual. To solve the problem of unmeritorious claiming, this Article proposes a budget-neutral solution called “Adminization.” This novel approach uses an administrative agency, the CFPB, as a gatekeeper to civil litigation which screens out baseless claims. The main task of the agency is to select a sample of cases, audit them, and—where needed—issue fines. The sampling of cases for audit could rely on machine-learning algorithms—the same ones used by credit card companies to monitor fraud today—to effectively focus the agency’s attention. The audit will use agency investigators to gather and corroborate information relevant to the debt claim, and where wrongdoing is found, the agency will use its powers to fine abusive plaintiffs. Under this system, every plaintiff is subject to the risk of thorough investigation and large fines, thus undercutting the financial incentive to engage in wrongful behavior. The importance of this contribution lies in its cost-effectiveness, practicality, and political feasibility relative to “participation-based” approaches that dominate the discussion today.
The emergence of the private prison system in the U.S. in the mid-1980s was followed by an unprecedented increase in incarceration rates. In this paper, we investigate to what extent the latter was caused by the former. Combining a novel geo-located panel-set of private prisons with circuit-court panel data on sentencing behavior, we ask whether the construction of a new private prison (or the privatization of a public one) changes the sentencing behavior of neighboring courts. We use rich auxiliary cross-sectional variation in how judges are appointed or elected and time-series variation in judges’ electoral and appointment cycles to pin down likely mechanisms by which the private prison industry influences sentencing behavior.
Current academic and policy debates focus on the impact of tort reforms on physicians’ behavior and medical costs. This paper examines whether these reforms also affect incentives to develop new technologies. We find that, on average, laws that limit the liability exposure of healthcare providers are associated with a significant reduction in medical device patenting and that the effect is predominantly driven by innovators located in the states passing the reforms. Tort reforms have the strongest impact in medical fields in which the probability of facing a malpractice claim is the largest, and they do not seem to affect the amount of new technologies of the highest and lowest quality. Our results underscore the importance of considering dynamic effects in the economic analysis of tort laws.
In this paper, we estimate the costs associated with a suite of labor regulations in India whose components have gone largely unstudied in developing countries. We take advantage of the fact that these regulations only apply to firms above a size threshold. Using distortions in the firm size distribution at the threshold together with a structural model of firm size choice, we estimate that the regulations increase firms’ unit labor costs by 35%. We document a robust positive association between regulatory costs and exposure to corruption, which may explain why regulations appear to be so costly in developing countries.
Tax compliance has costs and benefits which may depend on the institutional environment in which firms operate. The relationship between tax evasion and productivity is not always unambiguous and firm size can be a crucial issue whenever firms are constrained by the institutional framework in a measure that depends on their size. We argue that firms may respond to string employment protection legislation through accrued informality thus (partially) offsetting the negative effect of tax evasion on productivity. We exploit the Italian dismissal legislation imposing higher firing costs for firms with more than 15 workers and show that tax evasion reduces job turnover for firms above the 15 workers threshold; furthermore, while the overall effect of tax evasion on firms' productivity is negative, the differential effect for firms above the threshold as compared to smaller firms is positive and significant.
Recent years have seen a rapid expansion of unemployment insurance (UI) programs to mid-income and developing countries with large informal labor markets. Using the universe of formal labor contracts in Brazil and an unexpected UI reform, this paper examines how UI affects workers' incentives in the presence of informal labor markets. Exploiting a sharp discontinuity in the reform's effect, we find that eligibility for UI benefits increases formal unemployment inflow by nine percent. This effect is mainly driven by workers in labor markets with a high degree of informality. Collusion between workers and their employers accounts for at least 16-17 percent of strategic unemployment; firms hire workers informally while they are eligible for UI benefits and rehire them formally when benefits are exhausted. Additionally, making it easier to qualify for UI benefits leads to a shift in labor supply from informal to formal labor markets and a decrease in wages for formal relative to informal jobs within the same local industry.
Scoring rule auctions (SRAs) can be a powerful mechanism to procure complex works or services, when quality matters. However, given the buyer's discretion in the design of SRAs, favouritism - with its potential positive (i.e. repeated cost-saving interactions) or negative (i.e. corruption) effects on social welfare - can arise. In this paper we empirically document potential favouritism in an original dataset of 196 SRAs for the procurement of canteen services in Italy over the period 2009-2013. We then sketch a simple model highlighting how an SRA with multidimensional quality can be distorted to favour the incumbent bidder winning the competition. Finally, we design and run a new empirical test to verify our theoretical result. We find that SRAs can be distorted to favour the incumbent bidder, and that the victory of the incumbent is associated with less competition and higher prices; and no effect by quality weight in the scoring function on the winning rebate.
Abstract—Variable Resource Renewable Energy (VRRE) pen- etration has grown rapidly in recent years, creating a need for additional reserve power supplies. Distributed Energy Resources (DERs) have also been identified as reserve power providers, if market rules are favorably modified for these new units. This paper aims to show that the ability of DERs to provide reserve power is dependent on the market design considered, by focusing on primary frequency control and unidirectional Electric Vehicles (EVs). A simulation model is built for an EV fleet taking account of user behaviors. Simulations are conducted considering two market designs: symmetrical (where upward and downward reserves are procured jointly) and asymmetrical (where they are procured separately). In the asymmetrical configuration, the EV fleet performance is also compared on the basis of 1h and 4h market clearing periods. Results show that the EV fleet provides on average nine times as much power under an asymmetrical framework as under a symmetrical one. Similarly, reducing the product duration from 4h to 1h enables the EV fleet to provide more than two times as much reserve power. System operators could implement these favorable market rules for DERs, as it could maximize the provision of reserve power supplies by DERs.
Substantial infrastructure deficits are a major challenge for countries around the world and PPPs continue to play an important role in addressing the challenge of delivering critical infrastructure. PPPs, however, are often characterised by lengthy tendering periods, defined as the difference between contract notice and financial close. Tendering periods are important because they account for a significant proportion of overall project delivery time. Slow tendering deters bidders and thus reduces competition for contracts. We source data on 1,295 PPP projects in eight countries and use a duration analysis model to empirically examine the factors that impact tendering period duration. Our findings show that there is significant variation across countries and sectors. When we control for other variables we find that Ireland and the United Kingdom stand out as the countries with the longest tendering periods. In sectoral terms the longest tendering periods were found in the health, housing, and defence sectors. However, PPPs in the defence sector are not associated with significantly longer tendering periods once the UK is excluded.
Avner Greif’s study of trade among the Maghribi Jewish merchants across the Islamic Mediterranean in the Eleventh Centaury is a seminal work in the literature on Private Ordering. Yet in recent years his study has come under attack from other historians of the Geniza who point to facts that they view as undermining his theory of coalition-based reputation-governed trade. This essay suggests that the work-a-day actions of merchants captured by the formal multilateral governance forces at work in Greif’s model can also be understood through the lens of social network analysis. Viewing the Maghribi coalition as a bridge and cluster network, and incorporating insights from relational contract theory, suggests that the facts identified by Greif’s critics do not undermine his central insight, namely that a reputation-based community enforcement system played a core role in supporting trade. More broadly, the network perspective provided here enriches Grief’s model by highlighting a somewhat relaxed set of preconditions that can also effectively support multilateral reputation-based trade. Identifying these preconditions may be helpful to scholars and policy makers interested in drawing on Greif’s work and other case studies of private contractual ordering to better understand the promise of private rules, norms, and institutions to support trade in developing or transition economies as well as in countries with well-functioning legal systems.
This paper studies the mechanisms by which a community enforces contracts absent a formal legal authority. While many studies of self-ordering and extralegal contracting focus on rule selection, there has been less focus on rule enforcement. Various mechanisms have been proposed, but there has been little quantitative analysis of whether these mechanisms are actually active and what this implies about the robustness of the community. Drawing on a unique dataset of anonymous and unsecured online peer-to-peer loans, this paper shows that forward-looking economic self-interest is primarily responsible for facilitating repayment. Social ties play an important but replaceable role as a costly signal and do little to directly motivate repayment. The results show that the combination of repeat play, a reliable information transmission mechanism, and costly entry is sufficient for effective extralegal enforcement.
Classification institutions - such as social norms, cultural traditions, laws, or regulations - assign a normative label, acceptable or wrongful, to human behavior. Thereby they shape the expectations about other people’s behavior, reduce uncertainty, and create trust in other’s actions. What if two classification institutions do not conform, for instance, because a country with established norms is colonized and new laws are imposed? We construct a dynamic model where social norms clash with legal order. We show when and how norms decay gradually, where more and more players first stop enforcing and then stop complying with the norm as time proceeds. We also show that the existence of legal order can undermine norms, even if legal order cannot enforce its own laws very effectively. In such a case, players may rationally ignore the classification of both norms and laws and engage in novel behavior, implying the breakdown of both governance mechanisms.
What is the optimal form of firm organization during “bad times”? Using two large micro datasets on firm decentralization from US administrative data and 10 OECD countries, we find that firms that decentralized power from the Central Headquarters to local plant managers prior to the Great Recession out-performed their centralized counterparts in sectors that were hardest hit by the subsequent crisis. We present a model where higher turbulence benefits decentralized firms because the value of local information and urgent action increases. Since turbulence rises in severe downturns, decentralized firms do relatively better. We show that the data support our model over alternative explanations such as recession-induced reduction in agency costs (due to managerial fears of bankruptcy) and changing coordination costs. Countries with more decentralized firms (like the US) weathered the 2008-09 Great Recession better: these organizational di↵erences could account for about 16% of international di↵erences in post-crisis GDP growth.
Using quarterly job-by-establishment data from the National Compensation Survey between 2004 and 2014, we document substantial heterogeneity among performance pay and fixed wage jobs over the business cycle. We find that employment growth in performance pay jobs (fixed wage jobs) is either acyclical or countercyclical (procyclical), whereas compensation per employee growth is procyclical (countercyclical) in performance pay jobs (fixed wage workers). Our estimates are identified off the response of similar skilled jobs to metropolitan shocks, controlling for local demographics and establishment fixed effects. We provide suggestive evidence that these results are driven by the procyclicality (countercyclicality) of effort in performance pay (fixed wage) jobs. We subsequently examine the implications for three ongoing sources of debate in macroeconomics: (i) the vanishing procyclicality of labor productivity, (ii) generating sufficient unemployment volatility in search models, and (iii) explaining variation in the labor wedge.
Complementarity between different management practices has been argued to be one potential explanation for persistent performance differences across firms. Using detailed data on internal organization for a nationally representative sample of firms, we empirically test for the existence of complementary joint adoption of performance pay incentives and decentralization of decision-making authority for tasks. To address endogeneity concerns, we exploit regional variation in income tax progressivity as an instrument for the adoption of performance pay. We find systematic evidence of complementarity between performance pay and decentralization of decision-making from principals to employees. However, adopting performance pay also leads to centralization of decision-making authority from non-managerial to managerial employees. The findings suggest that performance pay adoption leads to a concentration of decision-making control at the managerial employee level, as opposed to a general movement towards more decentralization throughout the organization.
This paper exploits the variation in how U.S. state supreme court judges are appointed and retained to measure the effect of these changes upon performance using a panel of all judicial opinions written between 1947 and 1994. We find evidence of both incentive and selection effects due to electoral procedures. Election-year politics reduces the output of judges in non-partisan elections, but not in partisan elections or uncontested elections. Moving from non-partisan elections to uncontested elections causes incumbent judges to improve work quality, while moving from partisan to uncontested elections has no effect on this choice. Judges selected by technocratic merit commissions produce higher-quality work than either partisan-elected judges or non-partisan-elected judges. These results are consistent with the view that technocratic merit commissions have better information about judge quality than voters, and that political bias can reduce the quality of officials selected.
This paper analyzes the impact of the introduction of a performance pay scheme rewarding Spanish judges. The Spanish top judicial authority established modules of production for every task judges undertake and then calculated production benchmarks. Since 2004, judges were awarded a 5% bonus if production exceeded the benchmark by 20%. We find that the introduction of this scheme increased the number of judges exceeding this threshold, and also increased average production. Nevertheless, we also observe that, consistent with a potential deterioration of intrinsic motivation, top performing judges significantly reduced their production.
We estimate the benefits of specialization for judges. We use the random allocation of cases to judges to estimate the causal effect of specialization on the hazard of closing a case and the probability of appeal. We estimate that there are considerable gains from specialization. More specialized judges have higher hazard of closing a case at any point in time. We then estimate whether or not specialization may reduce quality of decisions, and provide evidence that specialization does not increase appeal rates reducing quality. Our evidence is compatible with a model of judicial specialization and productivity and suggests that there are large gains from specialization in judicial decisions.
We examine the correlates of war by studying a large and newly compiled dataset on warfare in the ancient world (600 to 30 BCE). Our data allow us to test two main explanations for international peace: hegemony and democracy. First, we seek empirical support for the democratic peace outside of the modern period and find that the democratic peace is not an empirical regularity among Ancient Greek city-states. Second, we explore the relationship between relative state-sizes and war and find mixed results, both inside Greece and outside.
The city-states of ancient Greece experienced high rates of both economic growth and what the Greeks called stasis—commonly translated as civil war. These two empirical findings confront ancient historians with an intriguing question: how are we to reconcile extraordinary rates of both political violence and economic growth? In this paper, I argue, against existing scholarship, that the historically distinctive dynamics of stasis—in particular, its high frequency and low intensity—made it a crucial contributor to, rather than an inhibitor of, economic growth. Relative to analogous forms of conflict in other pre-modern societies, stasis was more frequent but less intense. In many cases, the losing faction would flee into exile without suffering even a single casualty. The high frequency and low intensity of stasis forced ancient Greek elites to grapple with the likelihood that they would be forced into exile at some point in their lifetimes, and this expectation drove them to engage in risk mitigation strategies—e.g., investing in shipping, loans, and other asset classes that could not be easily expropriated by political opponents—that were growth-promoting, relative to the pre-modern norm of investing primarily in agriculture.
Is civil war bad for economic development? Empirical assessments of the impact of civil war on growth in the modern world suggest that civil war is bad for growth (Alesina et al., 1996; Collier, 1999; Kang and Meernik, 2005; Miguel and Satyanath, 2011). Comparative evidence from the ancient world suggests instead that civil war did not always hinder growth: in Athens (5th/4th century BCE) in Syracuse (5th-4th centuries BCE), and in Rome (2nd century BCE – 1st century AD) economic growth seems to have occurred under conditions of severe and protracted civil conflict. This paper employs a simple theoretical model to study the impact of civil war on political and economic structures (Collier, 1999) in order to identify the conditions that led to this unexpected result. The paper also raises some methodological questions germane to the study of the impact of civil war on ancient political and economic structures in a comparative perspective.
Firms frequently engage in repeated trade despite the availability of alternative business partners. A large literature shows how such relationships affect market outcomes, but less is known about how changes in market structure affect these relationships. We study a market for an intermediate input--ice--in which customers--fishermen--are regularly loyal to retailers, who prioritize loyal customers for deliveries when supply is scarce from the monopolistic manufacturer. When entry of additional manufacturers reduces supply risk, retailers can no longer extract loyalty as a rent to abate the risk and switching between customers and retailers becomes more common. Retailers respond by expanding trade credit to customers, particularly previously loyal ones. We interpret this as evidence that supply risk and demand volatility can contribute to loyalty in relationships, particularly in developing countries. Further, we show that entry into ice manufacturing leads to substantial improvements in fishermen's productivity and reductions in the consumer price of fish, indicating that increased competition in low income economies can lead to improvements in productivity and welfare.
We estimate the effects of a REDD+ pilot project offering a mix of incentives including Payments for Environmental Services to reduce deforestation by smallholders in the Brazilian Amazon. We collected original data from 181 individual farmers. We use DID-matching and find evidence that supports the parallel trend assumption. We estimate that an average of 4 ha of forest have been saved on each participating farm in 2014, and that this conservation came at the expense of pastures rather than croplands. This amounts to a decrease in the deforestation rate of about 50 percent. We find no evidence of within-community spillovers. Finally, we use this estimate and the Social Cost of Carbon (SCC) to perform a cost-benefit analysis of the project.
We assume that a growth of energy prices could create additional incentives for firms to conceal their incomes that results in the higher size of the shadow economy in a country. To verify this hypothesis we apply a formal analysis of the model where a representative firm attempts to ‘op-timize’ its concealed income in the context of a non-rigid outside control. We show that institu-tional improvements would allow the lower SE share in GDP. To test this hypothesis empirically, we construct regressions of the shares of the shadow economy in GDP over 2003-2008 using the estimations both available in the publications and ours calculated by Currency Demand Approach which we modified and applied, unlike the previous modifications, to cross-sectional data. A specific interaction variable used in our regression equations, being a combination of both tax burden variable and institutional quality indicator, allows considering an important fact that the high level of taxes assumes the shadow economy bigger in size in the counties with poor in-stitutional environment and vice versa – in those with sound environment due to a high supply of public goods and services. To calibrate the model, we applied the algorithm which allows con-sidering the fact that foreign currency (US dollars in our case) along with domestic one is in-cluded in the shadow economy’s transactions. Finally, the hypothesis suggested by us concerning the impact of relative energy prices on the size of the shadow economy in a country was verified on the basis of large samples of both cross-sectional and panel data. The estimations of the regression parameters which we obtained can demonstrate a stable character of their values de-spite the methods we applied to in our analysis.
This paper studies organizational design as the allocation of decision rights, primarily focusing on its interplay with agents’ career motives. I identify a new tradeoff between delegation and centralization, which arises solely from career concerns: When delegated, an agent takes inefficient actions at the cost of a principal but also works harder ex post to implement his project, in order to manipulate the market expectations of his ability. Compared to the existing literature, the contribution of the paper is two-fold. First, it endogenizes the agent’s bias as a result of career concerns. Second, more importantly, it uncovers a new link between organizational design and the implementation of a decision. Both of these features are in sharp contrast to the vast majority of the existing studies, which takes the agent’s bias as given and abstracts away from the implementation stage of a decision process. Specifically, delegation can be strictly optimal in the present framework even if the agent has no information advantage over the principal. As an application, I extend the baseline model to a multi-task setting, and find an interaction effect between organizational design and job design. Specifically, delegation to a specialized agent can be optimal even when neither delegation without specialization nor specialization without delegation is beneficial.
We study optimal incentive contracts with multiple agents when performance eval- uation is delegated to a reviewer. The reviewer may be biased in favor of the agents, but the degree of the bias is unknown to the principal. We show that a contest, which is a contract in which the principal determines a set of prizes to be allocated to the agents, is optimal. By using a contest, the principal can commit to sustaining incentives despite the reviewer’s potential leniency bias. The optimal effort profile can be uniquely implemented by a modified all-pay auction, and it can also be implemented by a nested Tullock contest. Our analysis has implications for applications as diverse as the design of worker compensation, the awarding of research grants, and the allocation of foreign aid.
This study examines the interaction between information feedback and learning in a principal-agent model. The agent implements a project, and its success probability depends on the agent’s ability level which is uncertain. While the principal cannot offer any monetary incentive, she has superior information about the agent’s ability level and can provide feedback. The key feature of the model is that the agent may develop his ability level after receiving feedback, but before the project’s implementation. If the principal observes bad news and tells it truthfully, then (i) it hurts the agent’s incentive to implement the project, but (ii) it induces the agent to develop his ability. I derive the condition under which the principal tells the bad news truthfully.
We ask how division of labor is enhanced in multi-business firms. What human capital do the workers acquire, how are their jobs designed, and under what kinds of contracts do they work? To answer the questions in a way that is consistent with the existence of multi-business firms, we develop a simple model with endogenous human capital acquisition, job design, labor contracts, and firm size. We find conditions under which several different sets of human capital and job designs will be observed and characterize the mechanisms in which each is traded. The mechanisms used in equilibria include markets of different sizes, employment in single- and multi-business firms, and bilateral non-employment relationships. When they exist, multi-business firms allow workers to acquire human capital in, and work on, a narrow set of services, and they can therefore use dedicated employees to perform services that smaller firms buy in the market or get from employees with broader job descriptions. The theory of multi-business firms extends to factors of production other than labor and implies that firms diversify to leverage excess capacity of inputs that, because of sub-additive transactions-costs, cannot be traded in fractions or rented for short periods. As a test of this, we look at a sample of acquisitions and show that acquirers change the behavior of their targets to more closely resemble themselves.
In this paper, we theoretically analyze, and empirically test for, the importance of relational adaptation in outsourcing relationships using the airline industry as case study. In the airline industry, adaptation of flight schedules is necessary in the presence of bad weather conditions. When major carriers outsource to independent regionals, conflicts over these adaptation decisions typically arise. Moreover, the urgency of needed adjustments requires that adaptation be informal and hence enforced relationally. Our model shows that for relational adaptation 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 airline’s cost of adapting flight schedules across joint routes. Thus, when facing a negative economic shock, the major is more likely to preserve routes outsourced to regional airlines that have higher adaptation costs, and hence higher relationship value. We analyze the evolution of U.S. airline networks around the 2008 financial crisis, and we find that consistent with our predictions, routes outsourced to regional networks with worse average weather, and hence higher adaptation costs, were more likely to survive the shock.
Emphasizing the strategic interaction between a multi-national manufacturer and its supplier, we investigate the effect of asymmetric per-unit pollution tax rates in two countries on a manufacturer's location decision. We find that an increase in the pollution tax in one country does not necessarily decrease the total profit of a multinational manufacturer. Accounting for supply side effects, we show that a commitment to co-locate in an environ- mentally stringent region might be optimal for the manufacturer. Additionally, we illustrate that neglecting supply side interactions when determining emission tax rates might result in unintended consequences on environmental damage and social welfare.
Recently, the link between the traditional Tobin’s Q theory and research and development (R&D) investment has been explored by several studies. In a way to contribute to this emerging literature, our paper focuses on two issues in applying Tobin’s Q theory: the assumption of perfect market competition and the measure of Tobin’s Q. We argue that the former might not be hold, as it overlooks the relationship between market power and innovation that dates back to Schumpeter (1942). With respect to the latter, we propose using the difference in the lagged value of Tobin’s Q, instead of its level in order to capture the expectations of the firm managers about future growth opportunities. Utilizing the generalized method of moments (GMM) estimation on a dataset of 3,985 manufacturing firms from 15 OECD countries over the 2005-2013 period, we report several findings. First, we show that the difference in lagged value of Tobin’s Q has significant and positive effect on firm R&D investment. Second, we report that the relationship between R&D investment and product-market competition is non-linear: R&D investment increases as competition increases from a low level and then decreases as competition exceeds a critical threshold. These findings suggest that Tobin’s Q is a significant predictor of R&D investment but does not reflect all information that the firm takes into account in its investment decisions. Therefore, we call for an augmented Tobin’s Q model, in which market power is considered as a source of rents not captured in the stock-market valuation of the firm.
Theoretical predictions regarding the market shares of cooperatives seem to be at odds with empirical evidence. It appears that cooperative market shares are higher in sectors where large value is added at the downstream level and in countries with strong contracting institutions. We test a number of theoretical predictions regarding the degree of forward vertical integration by using the data on agricultural sectors in the countries in the European Union. Conclusions from the empirical analysis are formulated in terms of cooperative market shares and variables measuring sector-level asset specificity, uncertainty, degree of product diversification, and country-level quality of contracting institutions.
Observing the characteristics of a good is at the root of any transaction. As pointed out by Barzel (1982) in his paper about measurement costs, the problem of measuring the attributes of a commodity is much more central to the economic problem than the widespread assumption of zero transaction costs would lead to believe. Measurement is always costly, and some resources will be dissipated, and possibly, mutually beneficial trade will be forgone in the absence of measurement information. In this paper, we develop a model in which a seller has a batch of goods of varying quality. Pricing each good individually is prohibitively expensive, so they are all sold at the same price. In the absence of trust between buyer and seller, the former doesn’t trust the latter with the selection of units, because the seller would gain by giving him the worst units in order to improve the remaining distribution. So the buyer will spend some resources “picking and choosing”, that is, inspecting items until finding an acceptable one. This inspection is costly and will result in trade below the optimal levels. We prove several results: 1., in such circumstances the good will be necessarily sold at a price above the average value, with buyers still participating in the market if they can inspect until they find items from the top of the distribution. 2. the distribution will decay over time, and the seller will be forced to lower the price. 3. The greater the dispersion in the quality of the goods, the larger the difference between average value and initial price, and the larger the dissipation associated with the lack of trust. 4., when there are different types of buyers, the ones with lower cost of inspecting (and with lower willingness to pay) will drive out the ones with higher inspection cost and higher ability to pay. When this problem is serious enough, the market for the commodity may not exist. Empirical tests for the implications of this model are still under development.
We apply contracts as reference points (Hart and Moore (2008) and Hart (2009)) in venture capital. We find that the venture capitalist, VC, chooses to leave some surplus for the entrepreneur, E, even when he has all ex ante bargaining power to guarantee a smoother ex post relationship. However, renegotiation can occur in equilibrium leading to souring of the relationship and deadweight losses. Therefore not all efficient projects will be funded. Contractual clauses such as vesting arrangements and noncompete clauses enable VC to lower the equity offer to E. Furthermore, VC benefits from costlier renegotiation as E will accept a lower equity share without triggering renegotiation.
Law employs modular structures to manage the complexity among legal actors. Property, torts, contracts, intellectual property, and doctrines in other areas of the law reduce information costs in similar ways by chopping up the world of interactions between parties into manageable chunks—modules—that are semi-autonomous. These modules employ boundaries—whether “real” boundaries as in real property law or “abstract” boundaries as in intellectual property, torts, and contracts—to hide information so as to make law less context-dependent and, hence, more modular. Previous explications of modularity in law have been qualitative. Here, borrowing from numerical measures of modularity in network theory, we offer the beginnings of a quantitative model of legal modularity. We posit that our “network science” approach to jurisprudential issues can be adapted to quantify many other important aspects of legal systems.
Research on the governance of joint ventures has pointed out the difficulties associated with anticipating behaviors and contingencies at the outset of a collaboration. When initial contracts are inherently incomplete, renegotiation represents a strategic opportunity for enhancing contractual safeguards or coordination guidelines. Costs and risks entailed by renegotiating joint venture arrangements are far from trivial however. In accordance with our theoretical arguments, analysis of survey data shows that partners’ decision to renegotiate incomplete joint venture contracts is moderated by their reliance on alternative relational and formal governance solutions. More particularly, results reveal that prior ties between partners (i.e., relational governance) obviate the need for enhancing safeguards ex post. By contrast, such ex post adjustment is facilitated by an involved board of directors (i.e., formal governance). Our findings highlight the multidimensional nature of joint venture governance, and the interrelations between governance elements in the execution and dynamics of joint ventures.
The objective of this study is to explain the franchisor’s choice of using call option rights as a contractual clause in franchise relationships by applying transaction cost and real options theory. The call option clause gives the franchisor the contractual right, but not the obligation, to acquire franchisee outlets after contract termination. We argue that the franchisors more likely use a real option clause in franchise contracts under the following conditions: high environmental uncertainty, high behavioral uncertainty, high franchisors’ transaction-specific investments relative to franchisees’, and long contract duration. The results of the regression analysis based on 111 German and Swiss franchise systems provide some support to these hypotheses. This is the first study that applies real option and transaction cost reasoning to explain the explicit call options in franchise contracting.
We estimate the effect of competition on the adoption of a cost-reducing technology in the cement industry, using data that span 1953-2013. The new technology, the precalciner kiln, reduces fuel usage and hence fuel costs. We find adoption is more likely if the fuel cost savings are large, and less likely if there are many nearby competitors. We also find that competition damps the positive effect of cost savings. The results are consistent with a dynamic theoretical model in which competition can deprive firms of the scale necessary to recoup sunk adoption costs.
This paper develops the construct of cross-understanding in interorganizational relationships to further our understanding of how firms create value and solve the problem of clarity in relational contracting. Whereas much interorganizational research considers the problem of credibility – how the parties to a relationship can convince each other that they will honor the relational contract–, we examine the problem of clarity – how the parties can reach a joint understanding of their relational contract. We argue that cross-understanding, the accuracy with which the parties’ understand each other’s mental models, helps the parties to solve the problem of clarity. We test our hypotheses on a sample of 214 relationships between small and medium-sized manufacturing firms and their suppliers. This study is one of few studies that examine the effects of relational contracting, measured using subjective survey scales, on firm-level profitability measured objectively about one year later than the initial survey. We validate the cross-understanding measure using data from both sides of the dyad. We find that both the effect of cross-understanding on firm profitability and it’s complementarity with relational contracting increases with product complexity and technological uncertainty. Relational contracting can have negative performance effects if the parties fail to match product complexity and technological uncertainty with appropriate levels of cross-understanding.
FIFA, football's (or soccer's, as it is known in some countries) world governing body, has long been associated with the World Cup and, lately, the corruption scandal. Less known is FIFA's success in building a legal order that competes with public orders. This study explains how and why this private legal order has succeeded in governing the behavior of the involved actors by keeping them away from regular courts. We argue that the ability of the order to offer what other governance modes could not is the key: FIFA, as a transnational private authority, offers harmonized institutions that apply across national borders and in many cases are better accustomed to the needs of the involved parties than their state-made alternatives, which often are based on one-size-fits-all approach and lack certainty of application. FIFA's rules increase the gains of clubs and prominent footballers. And while the interests of some other involved parties, less known players in particular, might have been better served by the application of formal state laws, the established equilibrium discourages deviation. The results contribute to the better understanding of alternative modes of supplying institutional design, particularly by illustrating how private orders function in the environment where reputation plays limited role.
I attempt to disentangle a problem of causality between institutional quality and interpersonal trust using evidence from a natural experiment: mid-2000s institutional reforms in the post-Soviet nation of Georgia. The reforms following the 2003 Rose Revolution were swift and extensive, aiming mostly at combating corruption and organized crime, improving law enforcement and economic liberalization. At the same time, the neighboring nations of Armenia and Azerbaijan, both former Soviet republics with cultural and economic background similar to the Georgian one, experienced no such change, thus becoming credible counterfactuals to Georgia. To reduce unobservable heterogeneity between Georgia as a treatment group, and Armenia and Azerbaijan as a control group, I exploit the fact that republics borders during the Soviet era did not always reflected the settlement patterns of ethnic groups, thus creating a number of minorities separated from their ethnic kins by arbitrary borders that were internal within the USSR but have become international after the independence. In this particular case, Georgia has several districts with predominantly Armenian and Azeri population spanning along its border with Armenia and Azerbaijan. Comparing people of the same ethnic group on both sides of the border allows concentrating on differences in governance and formal institutions and to diminish possible confounding effect of culture-related heterogeneity. Applying regression discontinuity design to the data from Life in Transition and Caucasian Barometer surveys, I find that Armenian and Azeri residents of Georgia have greater level of interpersonal trust than their counterparts in Armenia and Azerbaijan. Perceptions of corruption and rule of law are likely channels of influence.
The aim of this paper is take a step towards further developing our understanding of how culture affects economic development, as suggested by Manski (2001). Attempting to follow his two propositions, (1) I have restricted my concern to a very specific question, namely the analysis of the possible interaction of individual values and sticky formal institutions in development; and (2) I have used “better” data, i.e. data based on a priori theorizing rather than on ad hoc survey questions. I have relied on the theoretical framework of institutional stickiness (Boettke et al. 2008) which suggests that individual values are embodied and crystallized in the stickiest formal institutions of a society, leading to a “stuck-together” phenomenon, acting as an additional factor in development. The empirical investigations have provided details as regards the interaction of values and institutions. More specifically, besides establishing that both values and sticky formal institutions are strong determinants of long-run income, I have found that the interaction of values and institutions in the long run reinforces the impact of values on development in the good-institution countries. Furthermore, better formal institutions increase the marginal income-increasing effect of those individual values that are favorable to development. These findings suggest that values have a genuinely unique role in development. The results seem to be very robust.
This paper contributes to the recent debate about the relationship between human capital, governance and economic growth. In particular, we try to analyze whether the growth effects of human capital depend upon the level of governance. We employ a large panel data set of 135 developed and emerging economies over the period 1996-2014. Using an innovative threshold model and system-GMM approach, we find that there is a threshold effect in human capital- growth nexus. Our findings show that the relationship between human capital and economic growth is non-existent up to a certain threshold level of governance, however, the relationship becomes positive and significant once the threshold level has been achieved. Therefore, better governance is complementary to make a productive use of human capital in achieving higher growth. Our results show that human capital – growth nexus is contingent on the level of governance, thus accumulation of human capital stock is effective in achieving higher economic growth and economic development.
In the aftermath of elections or ballots, the legitimacy of the result is regularly debated if voter turnout was considered to be low. Hence, discussions about legal reforms to increase turnout are common in most democracies. We analyze the impact of a very small change in voting costs on voter turnout. Some municipalities in the Swiss Canton of Bern reduced voting costs by paying the postage of the return envelope (CHF 0.85). Paying the postage is associated with a statistically significant 1.8 percentage point increase in voter turnout. Overall, this amounts to 4 percent more voters participating in the ballots. Moreover, we estimate the influence of this increase in turnout on party support in popular ballots. We find that social democrats and environmentalists see their relative support decline.
What are the factors affecting the gap between preference for income redistribution and policy? There is a mismatch between public preferences and policy in this field in some countries. That is, in some countries the public shows high demand for redistribution, but the government's social spending is low or vice versa. This study is a comparative study which uses panel data from 24 OECD countries, from different years (1990-2012). Public preferences were measured by value surveys and policy was measured by social expenditure and GINI index. The study has 2 phases: 1. measuring the gap between public preference and actual policy. 2. Regressions assessing the factors affecting this gap. The proposed sources for the gap are: social capital, ethnic heterogeneity, low level of perceived government effectiveness and high level of corruption. We calculated 2 kinds of gaps: 1. between preference and policy intentions (measured by social spending). 2. between preference and policy outcomes (measured by the level of income inequality). Results showed that most countries have small gap between public preferences and policy. A few countries (like Greece, Israel, Portugal and Spain) showed negative gap, where social spending is lower than the public preference. Other countries (like Sweden, Denmark and Luxemburg) showed positive gap, where public spending is higher than the public preference. Government effectiveness and corruption were found as the main factors affecting the gap, but in some regressions social capital also had an effect on the gap. The effect of government effectiveness on the gap may mean that the public does not demand redistribution, because they don't believe in the government's ability to perform. Another interesting finding is that a "positive gap" was found in countries considered to have high government effectiveness and low corruption. This could mean the people believe there is too much redistribution in the country.
There is strong empirical evidence that the likelihood of sovereign debt default and rescheduling in democratic developing countries is reduced when the government is composed of more than one political party. A major tenet of coalition formation theory is the minimal-winning coalition; however, the relative frequency of surplus coalitions in both developing and developed countries seems to run counter to this theory. This paper links sovereign default empirical evidence with coalition formation theory. It provides a formal theoretical explanation for the coalition effect in the probability of default, and for the formation of surplus coalitions. In a stochastic endowment economy, two parties rotate in power. They have the option to invite a third party, which represents that part of society which is more directly interested in retaining access to international borrowing markets, to form a coalition government. The presence of the smaller party in the coalition decreases the likelihood of default (coalition buys commitment), and hence, bond prices are higher. When the effect of higher bond prices dominates the redistributive effect of one more party in government, bigger political parties have an incentive to form a coalition, even when this is not necessary to guarantee majority support in the legislative body. The positive effect of coalitions on bond prices is strongest for a combination of GDP much below potential with a low level of borrowing.
Why do countries create new sub-national units of government? Recent studies have argued that deconcentration is the product of local and national elites jointly pursuing new districts for patronage and electoral gain. Yet this perspective leaves unresolved why patterns of contestation over deconcentration fail to map onto dominant cleavages such as partisanship or ethnicity, and how such conflicts get resolved. I argue that rulers instead pursue deconcentration to manipulate political coalitions such as factions or parties. I study a model of non-cooperative coalition formation, finding that elite preferences over deconcentration can be induced by expectations about coalitional alignments under alternative player sets. A central implication of the theory is that changes to existing sets of elites can precipitate deconcentration by making alternative coalition structures more attractive. I test this prediction using new data on deconcentration worldwide from 1960 through 2010. I find that exogenous variation in player sets --- sudden leadership deaths --- leads to a significant increase in the probability of deconcentration.
In negotiating complex business transactions, parties decide whether, when and how to invite legal enforcement of the rules that govern their relationships, particularly in their use of intermediate agreements that reflect some agreement on a number of provisions but contemplate further negotiation (variously labelled memorandum of understanding, agreement in principle, letter of intent, term sheet). Under the common law of most U.S. jurisdictions, the parties have an intermediate option between enforcement and no-enforcement of such intermediate agreements: a duty to bargain or negotiate in good faith or with best efforts. Law firms warn their clients about the risk of inadvertently bringing on this type of enforcement but with care, this risk is small. Rather, the parties are often unclear about the freedom they prefer for themselves or their counterparties to deviate from the terms of their intermediate agreements. They expect these terms to be sticky to some degree, but do not think through how much and by what means to achieve this. Judges and commentators identify the protection of specific investments as the principal goal of the commitment to bargain or negotiate. We suggest, however, that the benefit of the flexible standard of good faith or best efforts comes more broadly from mid-stream regulation of the negotiation process. The parties need flexibility in optimizing their deal, while also efficiently constraining value-claiming behavior and allocating exogenous risks during their negotiations. Building on our earlier work on strategic ambiguity, we also show that concerns about the uncertainty of such flexible standards can be addressed.
When does a deal begin? Does it begin when parties sign a non-binding term sheet? Or only when parties sign a formal contract? This Article uses mergers and acquisitions (M&A) deals to examine why and how parties use non-binding preliminary agreements. It provides the first modern, comprehensive account of how parties use these common, but rarely publicly disclosed, bargaining tools to build deal momentum and carry a deal forward. In M&A deals, sophisticated parties enter into non-binding preliminary agreements. Once parties sign non-binding agreements, however, parties behave as though bound—they almost always follow up with a formal contract that closely tracks the early non-binding terms. Scholars and courts have long treated preliminary agreements as contract-like tools that need to be enforced. This Article develops an alternative theory of “deal momentum” to explain why parties use non-binding agreements. Non-binding agreements are not minor contracts—rather, they are signposts for when enough momentum has accumulated that a deal has become “sticky” and is likely to go forward. Although non-binding agreements are not contracts, they play an important role in facilitating complex contracting through their signaling, organizational, and formal functions. By focusing exclusively on non-binding agreements’ contract-like qualities (their substantive functions), scholars have overlooked their formal functions. Non-binding preliminary agreements can nudge parties toward collaboration and signal seriousness, for example. Reframing preliminary agreements as signposts for deal momentum, rather than as minor contracts, has significant implications for contract theory, contract enforcement, and deal design. It suggests that the theoretical boundaries of the deal do not begin with preliminary agreements, that courts ought not to enforce those agreements, and that parties ought to use them—but as organizational tools, not as contracts.
Many contracts, such as the merger agreements studied here, are complex combinations of customized and standardized terms, and thereby achieve economies of both scale and scope. Such contracts are “mass customized,” to borrow a term from engineering research. This Article introduces a theoretical framework and methodological toolkit for studying such complex agreements. With respect to theory, it adds to recent scholarship that applies modularity theory to the design of complex agreements by introducing an alternative approach to harnessing contractual complexity—flexible specialization. Whereas modularity attempts to manage systemic complexity by isolating discrete subsystems from one another and ensuring their interoperability through a set of static interface rules, flexible specialization allows for tightly coupled connections between subsystems, and interoperability is achieved through a suite of explicit and tacit organizational routines that reduce the design team’s communication and learning costs, allowing them to quickly process adjustments across the interlocking sub-systems. Using hand-collected data from samples of public company merger agreements and of the teams of deal lawyers that designed them, this Article presents the results of a preliminary empirical study testing whether the architecture of mass customized contracts reflects either modularity theory or the logic of flexible specialization. Methods developed in systems engineering, organizational theory, and network analysis are used to map the structural topology of the sampled agreements and deal teams. Results of the merger agreement analysis suggest that the contracts are integrated to a material extent, rather than being purely modular systems. Similarly, analysis of the internal organization of the corporate law firms designing those agreements suggests thickly interwoven organizational structures, consistent with flexible specialization’s rich information-sharing routines.
In this paper I analyze how the use of boilerplate language in securities disclosure has evolved in light of the SEC’s attempts at regulating it, and argue that the of use algorithmic language processing and machine learning methods that drive the country’s most innovative companies could also vastly improve the SEC’s disclosure regime. In particular, topic modeling can be used to understand the revealed preferences of market participants with respect to certain kinds of boilerplate disclosure, and enable to SEC to offer a menu of disclosure options for issuing companies. The analysis in this paper suggests that the SEC has had limited success regulating boilerplate because it treats such language in a one-size-fits-all manner. However, as the analysis shows, different boilerplate language performs different functions: some truly is meaningless, and most likely the product of over-conservative drafting, other language is used for efficiency, and still other language is used by issuers to be strategically vague. Natural language processing can be leveraged to identify which boilerplate is useful and which is not, to allow for more nuanced, targeted regulation. In particular, the empirical analysis in the paper does three things: First, it documents and analyzes the mixed results of the SEC’s past efforts to control boilerplate in IPO disclosure. Second, it provides evidence that the use of boilerplate impacts investors, and draws conclusions about the usefulness of various kinds of boilerplate language. Third, it demonstrates how a more targeted approach to boilerplate could make for more successful regulation, as well as more comprehensible disclosure for investors.
In 1862 the U.S. federal government passed the first of several transcontinental railroad land grant acts and the Homestead Act. Each gave away massive amounts of federal lands, created incentives for early railroad construction and early settlement, and dissipated some of the value of the lands given away. Here it is argued that the state used the private incentives created by these legislative acts to coordinate the actions of private railroads and settlers in order to establish meaningful de facto ownership over the entire frontier through occupation. That is, first possession of land was used to align the incentives of the railroads and settlers with the desire of the state. This paper examines the tenuous U.S. sovereignty in the West, the institutional details of the railroad land grants, and --- using new digitized homesteading patent records --- the relationship between railroads, homesteads, and cash sales in three states (Kansas, Nebraska, and South Dakota), to test the theory that ``giving away an empire'' was a second-best strategy to gain control over the West.
We examine oil and gas drilling on federal, state, and private lands in the Wyoming checkerboard by comparing permitting delays and price responsiveness. These lands were alternatively allocated to private owners at the square-mile section via the Pacific Railroad Acts between 1862 and 1871, and two of every 36 sections, numbers 16 and 36, to state governments under the General Land Ordinance of 1785. Prior to 1970, we find all three types of lands see similar delays in the time from permit submission to first drilling. However, from 1970 onwards, and especially as a result of the shale boom after 2003, well drilling on federal and to a lesser extent state land is delayed relative to wells on private land. The results suggest that bureaucratic delay has a significant effect on whether a well is drilled: post-2003 around 37% of federal wells that receive permits are never drilled versus only 17% for private wells. To test how this delay affects production, we examine the price elasticity of drilling, finding evidence that drilling on private land is more price-responsive: average drilling elasticities for gas wells in the checkerboard are around 0.78, but when separated by land type, drilling on private land is more responsive to price.
For empirical research on the effects of institutions, an important question is whether a given institutional type will generate different outcomes depending on the circumstances in which it arises. In this paper, we examine a unique historical episode in which a specific type of institution – rule by a tyrant – arose in a similar set of states, yet in differing circumstances, with the impetus for establishment coming from local support in some cases and through external influence in others. Over the course of the sixth century BCE, a substantial subset of Greek poleis (city-states) experienced a period of tyranny. In some cases, the tyrant came to power with the support of local elites, yet in other cases, the tyrant was imposed by a conquering power, Persia. Although it is likely that the tyrants’ proponents – whether local elites or Persian rulers – sought to increase stability and maintain policies necessary for wealth creation, the long run effects of tyranny differed: In poleis where the rise of a tyrant would have depended on local support, a record of tyranny predicts a greater propensity for subsequent development of democracy. By contrast, in poleis where the rise of a tyrant would have depended on Persian support, a record of tyranny has a weak (and perhaps negative) association with subsequent development of democracy. These findings illustrate both the importance of the institutional path and the difficulty in transplanting institutions.
In this paper we study the Black Death persecutions (1347-1352) against Jews in order to shed light on the factors determining when a minority group will face persecution. We develop a theoretical framework which predicts that negative shocks increase the likelihood that minorities are scapegoated and persecuted. By contrast, as the shocks become more severe, persecution probability may actually decrease if there are eco- nomic complementarities between the majority and minority groups. We compile city- level data on Black Death mortality and Jewish persecution. At an aggregate level we find that scapegoating led to an increase in the baseline probability of a persecution. However, at the city-level, locations which experienced higher plague mortality rates were less likely to engage in persecutions. Furthermore, persecutions were more likely in cities with a history of antisemitism (consistent with scapegoating) and less likely in cities where Jews played an important economic role (consistent with inter-group complementarities).
We show theoretically and empirically that executives are paid less for their own firm’s performance and more for their rivals’ performance if an industry’s firms are more commonly owned by the same set of investors. Higher common ownership also leads to higher unconditional total pay. We exploit quasi-exogenous variation in common ownership from a mutual fund trading scandal to support a causal interpretation. These findings challenge conventional assumptions in the corporate finance literature about the objective function of the firm.
It is well understood that when firms get favorable treatment from the government primarily because of their political connections, they may operate inefficiently while enjoying market advantages over their unconnected peers. However, how firms respond to a sustained removal of their political connections has not been clearly studied. This paper evaluates an unanticipated reform in China that removed government officials from independent directorships in listed companies. Our evidence indicates that privately owned firms that employed government officials as independent directors pre-treatment became more productive, more innovative and more transparent, and invested more efficiently post-treatment.
This paper examines partial privatisation and share allocation. We consider two types of private investors, institutional and retail, who differ in their ability to exercise control. We show that for a politician primarily interested in proceeds, institutional participation is optimal as it promotes monitoring with a positive impact on proceeds. If the politician is interested in both control and proceeds, institutional and retail participation is optimal as it generates substantial proceeds at a minimum cost to control. Finally, for a politician primarily interested in control, it is optimal to allocate a minority stake to retail investors.
This article examines strategic public shaming, a novel form of regulatory tactic employed by the National Development and Reform Commission (NDRC) during its enforcement of the Anti-Monopoly Law. Based on analysis of media coverage and interview findings, the study finds that the way the NDRC disclosed its investigation is highly strategic depending on the firm’s co-operative attitude toward the investigation. Event studies further show that the NDRC’s proactive disclosure resulted in significantly negative abnormal returns of the stock prices of firms subject to the disclosure. For instance, Biostime, an infant-formula manufacturer investigated in 2013, experienced -22% cumulative abnormal return in a three-day event window, resulting in a loss of market capitalization that is 27 times the ultimate antitrust fine it received. The NDRC’s strategic public shaming could therefore result in severe market sanction that deters firms from defying the agency.
This paper provides evidence on how high-skill work performance changes in response to biological aging, and in response to mandatory retirement policies. Our data set is constructed from the work product of all state supreme court judges for the years 1947 through 1994. Older judges have the same work output as younger judges but write lower-quality opinions. Older judges use a different writing style, with shorter words but longer sentences. Conditional on current age, judges who retire later in life write write higher-quality opinions than judges who retire earlier in life. Mandatory retirement policies have a demotivating effect on judge work output, but not on work quality.
People differ from one another in their daily sleep and wake regimes. Various social norms, regulations and other institutional factors imply on the behaviour and equality of treatment of individuals with different morningness-eveningness patterns. We provide some insight on the existence of morningness-eveningness pay gap. We present fully observed recursive structural equation estimates as well as ordered probit regression estimates of the drivers of salary levels, based on data from our original repeated survey of Estonian creative R&D employees on a sample of 149 individuals from eleven entities. Employees of evening type appear to have a lower probability of getting higher levels of salary, compared to employees with no distinct morningness-eveningness profile. Simultaneously, we find support to a strong gender pay gap, with female employees having an average 13-15% lower probability of earning the higher levels of salary. Age is another strong determinant of the salary level.
One prevalent theme that runs through the management literature on compensation is the problem of reducing organizational conflict. However, theoretical research in economics emphasizes that while it is desirable to reduce destructive conflicts, there are situations in which functional conflicts are needed to ensure efficiency. MacLeod (2003) proposes a version of the principal-agent model in which output is not perfectly observable and the principal and agent receive noisy and private performance signals which are imperfectly correlated and can lead to disagreements. In this model, high effort equilibria require conflicts on the equilibrium path. Bonus payments can only be based on the principal’s private signal. Since the signals are only imperfectly correlated, there will be situations in which the agent does not get a bonus although he observes a good signal. In those cases, it is crucial that the agent initiates conflict which is costly for the principal to ensure that the principal is motivated to pay the bonus when she observes a good signal. To study the role of functional conflicts we implement MacLeod’s environment in an experiment. In one treatment we allow for conflicts while in another treatment we rule out conflicts. We observe that subjects fail to coordinate on the predicted high-effort equilibrium under conflict. Agents initiate too many conflicts which are not functional. These conflict patterns distort the incentives of the principal to pay the bonus as a function of his private signal. Thus, agents are not incentivized to choose high effort. Our results indicate that efficiency enhancing equilibria based on strategically initiated conflicts are hard to obtain. We plan to design instruments to institutionalise conflict. In particular, we intend to study a formal reporting system in which agents can file official complaints. We hope that behavioural forces such as lying aversion will help to better align behaviour by making conflict formal.
One of the solutions to the moral hazard in team production is to divide the firm into more than two teams and make them compete. We extend this relative evaluation scheme for teams so that we can pin down the optimal incentive power explicitly. We find that the firm should provide a higher-powered incentive when the firm's size grows and the degree of complementarity of each team's output increases, and this explains why large companies tend to have a more skewed remuneration menu. We further extend the model to the cases where workers have to deal with two kinds of multi-tasks: the first is to help their coworkers and the second is they face a general and team-specific jobs. We find that, in the former case, given a higher-powered incentive, a worker tends to put more effort into help, and in the latter case, he/she tends to put more effort into the team-specific job and less into the general job. This result implies that the firm sometimes would be better off by providing a lower-powered incentive.
What are the origins and characteristics of corruption in European countries and how does it affect per capita GDP and income distribution? This research attempts to answer these questions using a panel of 28 European countries between 1995-2015 and a system of 3 simultaneous equations. Results imply that in the sample as a whole, corruption depresses economic output and increases income inequalities. We split the sample into groups according to their GDP level and we find that for poor countries corruption appears to have an efficiency enhancing mechanism, suggesting that corruption might be a stage in the development process through which all countries pass. Additionally, we explore the sub-sample of former communist countries to assess whether their corruption is distinctive.
The discovery of nanoparticles has already revolutionized progress of civilization by impacting many aspects of human life. Nanotechnology, or controlled production and creation of atomic and molecular structures in nanoscopic scale, creates unimaginable opportunities in many disciplines including medicine, defense systems or as well as clothing and food industries. Aside from the many benefits that growth of nanotechnology exposes our civilization to an increasing number of new risks, creating hazards that are currently difficult to foresee. Existence of threats opens up space for the functioning of insurance. However, this leads to questions whether nanotechnology-related risk is an insurable risk and whether it is technically feasible at this time to draft such an insurance offer. The present publication attempts to answer these questions. The publication consists of four parts. Part one describes nanotechnology as a branch of science. Part two presents options of implementing nanotechnology-based methods in the industry. Part three discusses the hazards that nanotechnology poses for human health and the environment, and evaluates the insurability of risks connected to this production methods. In part four, authors advocate for applying mutual insurance specifics to risk management in conditions calling for nanotechnological use. The essence of mutual insurance creates opportunities for dealing with nanotechnology risk even in situations when no verified actuarial models enabling credible insurance contribution calculations exist. The publication is based on authors’ own research and analyses of literature pertaining to nanotechnology risk management, including studies of reinsurers and insurance companies as well as the study: The Insurability of Nanomaterial Production Risk, Nature Nanotechnology 8, p.222–224 (2013), whose authors discuss the possibilities of and auxiliary conditions for transfer nanotechnology risk to the insurance sector.
Russia’s FSIN (Federal Correctional Service) - direct successor of notorious GULAG - is one of the biggest prison systems in the world, with about 1000 penal institutions. While exchange of goods between inmates is prohibited, there is a flourishing market for goods and services with counterparties inside and outside penitentiaries. We tested hypothesis that (1) prices of goods and services can significantly deviate within closed system than at outside market, in both legal and semi-legal trading (2) lack of formal property rights significantly distorts behavior of economic agents and (3) opportunistic behavior of prison stuff shapes market structure and outcomes. All three were confirmed. Market for mobile phones was the most interesting. While mobile telephones are banned within prisons and their ownership is punished by stricter regime and withdrawal of privileges, they are highly valued. Unlike free world, model of the telephone does not impact price, which is 5-10 times higher than outside. Size (easiness to hide) and quality of cameras were material factors. Interestingly common ownership of telephones is rare – as it is both status symbol and due to lack of property rights. Payments within prisons are still done in cigarettes or loose tea, and price scale exists for most goods and services. However, mobile payments became common these days for deals with outsiders. Agents serve as intermediaries with relatively high fees that cover semi-legal nature of transactions.
In this paper, we study the dynamics of income and spending behaviors using panel data spreading 10 years (2006-2016) and containing 3,5 million clients from the belgian market of a large european bank. For this representative sample of the belgian population, we collect every transactions statement at the individual level, as well as a wide range of individual characteristics (e.g. loan debt, age, postal code, marital status, etc.). First, we identify distinct clusters based on income and spending behavior using a selected set of individual characteristics data. We then study the evolution of each cluster over time. Furthermore, we characterise transfer flows of individuals from one cluster to another. When an individual moves from one cluster to another, we study other changes that subsequently take place in aspects of the economic behavior of the individual that is not part of the clustering method. Doing so, we are able to study economic and social mobility at a large and representative scale of the country population showing clear cases of intra-generational mobility upwards and downwards as well as the effects of mobility on other dimensions of individual’s economic life. This work offers a map of a country’s population relative economic dynamics, which factors come into play, and what second order effects may in turn occur. The results are relevant to discussions of government policy intended to identify and promote upwards trends for the welfare of its population.