Society for Institutional & Organizational Economics
The legal doctrine of adverse possession limits the security of property rights by transferring formal land titles from absentee owners who leave their land idle to adverse possessors that use the land. This paper exploits historical changes in adverse possession legislation in U.S. states between 1840-1920 to investigate the causal effects of the security of land titles. I find that a reduction in the security of titles increased agricultural output. The main channel is incentivizing higher land utilization. A reduction in the security of land right is also associated with an increase of investment in farms and improved access to capital markets, as well as with an increase in the share of owner-cultivated farms and mid-size farms. These findings suggest that the effect of property rights on economic development is not monotonic, and that property rights may be over secure.
For centuries following the spread of Islam, the Middle East was far ahead of Europe. Yet, the modern economy was born in Europe. Why was it not born in the Middle East? This book examines the role that Islam played in this reversal of fortunes. It argues that the religion itself is not to blame; the importance of religious legitimacy in Middle Eastern politics was the primary culprit. Muslim religious authorities were given an important seat at the political bargaining table, which they used to block important advancements such as the printing press and lending at interest. In Europe, however, the Church played a weaker role in legitimating rule, especially where Protestantism spread (indeed, the Reformation was successful due to the spread of printing, which was blocked in the Middle East). It was precisely in those Protestant nations, especially England and the Dutch Republic, where the modern economy was born. In both of those nations, the Church was replaced with the economic elite in parliaments at the political bargaining table. These elites had interests more aligned with laws and policies that portend economic success, and long-run economic growth resulted. Such changes did not occur in Spain or the Ottoman Empire, and they suffered economic stagnation that persisted for centuries as a result.
Hostility towards a population, whether on religious, ethnic, cultural or socioeconomic grounds, confronts rulers with a trade-off between taking advantage of population members' eagerness to maintain their identity and inducing them to "comply" (conversion, quit, exodus or any other way of pleasing the hostile rulers). This paper first analyzes the rulers' optimal mix of discriminatory and non-discriminatory taxation, both in a static and an evolving environment. It thereby derives a set of unconventional predictions. The paper then tests the theory in the context of Egypt's conversion to Islam after 641 using novel data sources. The evidence is broadly consistent with the theoretical predictions.
Judges decide cases. Do they also try to influence which cases they decide? Clearly plaintiffs “shop” for the most attractive forum, but do judges try to attract cases by “selling” their courts? Some American judges actively try to enlarge their influence by making their courts attractive to plaintiffs, a phenomenon known as “forum selling.” This article shows that forum selling occurs outside the U.S. as well and focuses on Germany, a country that is often held up as the paragon of the civil law approach to adjudication. As in the U.S., German courts attract cases primarily through the pro-plaintiff manipulation of procedure, including the routine issuance of ex parte injunctions in press cases and refusal to stay patent infringement proceedings when the patent’s validity is challenged in another forum. A critical difference between forum selling in Germany and the U.S. is that court administrators are more actively involved in Germany. As state officials, German court administrators have the incentive to consider the effect of caseloads on government revenue and the local economy, and they use their power to allocate judges to particular kinds of cases in order to make their courts attractive. They also use their power over promotion, case allocation, and resources to reward judges who succeed in attracting cases. Based on an extensive set of interviews with attorneys, judges and court officials, this article describes evidence of forum selling in German patent, press, and antitrust law. It also analyzes how German courts compete internationally with courts from other countries.
This paper investigates the how companies use—and do not use—forum selection bylaws in advance of anticipated litigation. In particular, it focuses on the moment when a public company announces that it has entered into a merger agreement. It is now common practice—though by no means universal—that a board of directors announces its adoption of a forum selection bylaw at the same time it announces the merger. This paper investigates two research questions. First, which firms adopt forum selection bylaws on the eve of a merger announcement? Second, how do firms invoke or waive their forum selection bylaws?
Why do some venues evolve into litigation havens while others do not? Venues might compete for litigation for various reasons, such as enhancing their judges’ prestige and increasing local bar revenues. This competition is framed by the party that chooses the venue. Whether plaintiffs or defendants primarily choose venue is crucial because, we argue, the two scenarios are not symmetrical. The Supreme Court’s recent decision in TC Heartland v. Kraft Foods illustrates this dynamic. There, the Court effectively shifted venue choice in many patent infringement cases from plaintiffs to corporate defendants. We use TC Heartland to empirically analyze this shift using an event study, which measures how the stock market reacted to the decision. We find that likely targets of “patent trolls”— entities that own and assert patented inventions but do not otherwise use them—saw their company valuations increase the most due to TC Heartland. This effect is particularly pronounced for Delaware-incorporated firms. Our results are consistent with litigation trends since TC Heartland, as new cases have dramatically shifted to the District of Delaware from the Eastern District of Texas, previously the most popular venue for infringement actions. Why do investors believe Delaware will do better than Texas in curbing patent troll litigation? Unlike Texas, Delaware’s economy depends on attracting large businesses that pay high incorporation fees; it is thus less likely to encourage disruptive litigation and jeopardize its privileged position in corporate law. More broadly, we explain why giving defendants more control over venue can counterbalance judges’ incentives to increase their influence by encouraging excessive litigation. Drawing on Delaware’s approach to corporate litigation and bankruptcy proceedings, we argue that Delaware will compete for patent litigation through an expert judiciary and well-developed case law that balances both patentee and defendant interests.
Severe information asymmetries are thought to make contracting particularly difficult within (and across) firms in developing countries. Standard principal-agent theory predicts that a new monitoring technology provided at zero cost should be widely adopted and un- ambiguously raise workers’ effort. I test this classical prediction using a field experiment with trucking companies in Liberia. The treatment offered to install GPS tracking devices on randomly selected trucks at no cost. Treatment-on-the-treated estimates reveal that the tracking devices increased monitored drivers’ average speeds by 58 percent, without leading to higher accident rates or maintenance costs. Despite this, managers declined to install the devices on 35 percent of the trucks selected for treatment. Using a model of intrinsic motiva- tion, I show that it may be optimal not to monitor workers who are intrinsically motivated to work hard. While monitoring technologies increase agents’ extrinsic incentives to provide effort, they also do not allow worker to show that he or she does not need these incentives to work hard, which can crowd out effort. I provide three pieces of evidence in support of this explanation. First, Liberian trucking company managers choose to install tracking devices only on the trucks of drivers who perform less well at baseline. Second, the treatment effect on speed for monitored drivers is greater the lower the performance of the driver at baseline. Finally, I show that for drivers who performed well at baseline, the treatment has a negative effect on the relation between the manager and the driver, and on the driver’s propensity to follow the rules of the business. Overall, this paper demonstrates that, while new monitoring technologies can dramatically raise some workers’ productivity in settings where employment contracts are difficult to enforce, their use may lower the productivity of some workers - those who are intrinsically motivated to work hard.
Supervisors occupy central roles in production and performance monitoring. We study how heterogeneity in performance evaluations across supervisors affects employee and supervisor careers and firm outcomes using data on the performance system of a Scandinavian service sector firm. We show that supervisors vary widely in how they rate subordinates of similar quality. To understand the nature of this heterogeneity, we propose a principal-agent model according to which supervisors can differ in their ability to elicit output from subordinates or in their taste for leniency when rating subordinates. The model also allows for variation in how informed firms are about this heterogeneity. Within the context of this model, we can discern the nature of the heterogeneity across supervisors and how informed firms are about this heterogeneity by relating observed supervisor heterogeneity in ratings to worker, supervisor, and firm outcomes. We find that subordinates are paid significantly more, and their pay is more closely aligned with performance, when they are matched to a high-rating supervisor. We also find that higher raters themselves are paid more and that the teams managed by higher raters perform better on objective performance measures. This evidence suggests that supervisor heterogeneity stems, at least in part, from real differences in managerial ability and that firms are at least partially informed about these differences. We conclude by quantifying how important heterogeneity in supervisor type is for workers' careers. For a typical worker, matching to a high rater (90th percentile) relative to a low rater (10th percentile) for just one year results in an increase in the present discounted value of earnings equivalent to 7-14% of an annual salary.
Trying out a market often allows new buyers to learn about the distribution of products or services available. We study how hiring varies with employer experience in an online labor market platform where employers contract with remote workers. Experience affects employer selection into posting further jobs, increases the perceived value of using the market, and alters how employers evaluate individual workers. These changes in demand for workers are consistent with experience reducing employer uncertainty about the distribution of applicants. Job applicants respond with higher wage bids to new employers. We evaluate policies that encourage employer learning about individual market fit.
We develop and estimate a model of learning that explains the observed correlation between income and democracy as well as the clustering of democratization events. In our model, countries' own and neighbors' past experiences shape elites' beliefs about the effects of democracy on economic growth and their likelihood of retaining power. These beliefs influence the choice to transition into or out of democracy. We show that learning from past experiences is crucial to explaining observed transitions since the mid-twentieth century. Moreover, our model predicts reversals to authoritarianism if the world experienced a growth shock the size of the Great Depression.
It has long been suggested that when trying to implement an unpopular policy, the politicians should delegate the task to an external agency to shift the blame to them. Such blame-shifting practices are widely observed in the political sphere and have recently been shown to be effective in the lab. However, field evidence of the effect is still missing. In this study, using data from China's one-child policy (OCP), we investigate people's mistrust in the government when the unpopular task was delegated to the citizens and when it was conducted by the government itself. Our main empirical strategy exploits the exogeneity of the gender of a couple’s first child. Due to the widely-shared ``at least one son" preference, Chinese couples whose first child is a girl were more likely to violate the One Child Policy than their counterparts. We find that when the enforcement of the policy was delegated to the citizens, by encouraging and incentivizing them to report their neighbors' violations of the policy and join the local enforcement institutions, the blame is shifted from the government to its citizens. In particular, the results show that people who were exposed more severely to OCP exhibit significantly lower trust towards their neighbors today. However, the exposure to the policy does not significantly undermine their trust in the local governments. The results are reversed when the policy was solely implemented by the government officials in an earlier phase. We find that people who experienced this period's OCP blamed the local government but not their neighbors.
Capital mobility is a channel of either positive or negative institutional spillovers between countries. This article emphasizes the importance of the distribution of capital in deciding which type of spillovers will play out. Widely distributed capital ownership disciplines a rent seeking elite, and favors political inclusiveness. Conversely, when capital is concentrated, the elite take advantage of the existence of an alternative jurisdiction to increase rent extraction and cement their rule. This highlights a potentially dysfunctional role played by a neighbor with good institutions, and suggests an endogenous path for the emergence of tax havens.
While much research has gone into determining the broader effects of judicial transparency, the literature is silent in investigating its effects on judicial behavior. This article explores a unique aspect of the Brazilian Supreme Court (STF); that its deliberations have been broadcast live on television since 2002, to investigate the behavioral effects of an increase in judicial transparency. I construct a novel database consisting of abstract constitutional review cases judged by the STF between 1988 and 2015 and employ a research design seldom used in the judicial behavior literature – Differences-in-Differences – to test empirically the effects of television on judicial behavior. The main result is that STF justices behave as politicians: when given free television time, they act to maximize their individual exposure. They achieve that by writing longer votes and by engaging in more discussions with their peers.
The dominant view in the political science, economics, and legal literature is that ideology drives judicial decision-making. Yet another school of thought argues that this scholarship ignores the important role that judicial collegiality plays in judicial decision-making. The divide over collegiality extends to debate over which courts (or types of courts) are likely to be more collegial. Some argue that features of the Supreme Court make it more likely to function collegially than the courts of appeals. Others argue that features of the courts of appeals make those courts more likely to function collegially than the Supreme Court. A third area of contestation over collegiality is how exactly to measure collegiality. Some emphasize unanimity as the key manifestation of collegiality. However, judges may vote against their ideological preferences—and, specifically, choose to form majority blocs or to issue unanimous opinions—for reasons other than collegiality. Other commentators offer competing measures, but also lament that the concept of collegiality is “difficult to measure or model.” This Paper accepts the challenges of measuring the concept of collegiality. Returning to the emphasis of some commentators on “respect,” the measure asks whether dissenting judges treat the judges in the majority (and their opinions) with respect. The Paper uses this measure of collegiality to begin to shed light on the “comparative collegiality” of courts.
We consider an incomplete contracting model with a principal and an agent, in which the decision process consists of project choice and execution effort, and investigate the optimal allocation of authority for project choice. Each party has an imperfectly informative private signal on which project is promising, and the project is successfully executed if and only if the promising project is chosen and the agent exerts effort to execute the project. Since the principal chooses the project based on her private signal when she has the authority (centralization), the agent's confidence on the promising project has more uncertainty than the agent has the authority (delegation). Consequently, it might be optimal to allocate authority to the party who has less precise information on the promising project. Furthermore, we demonstrate that whether contractible delegation and empowerment could have a nonnegligible gap even though the parties have no conflict on the desired project.
We investigate the effects of member heterogeneity on communication and decision making in partnerships. We show that member heterogeneity makes communication noisy in a partnership and this in turn alters the optimal allocation of decision rights in the partnership. In addition, the effect of heterogeneity also depends on the market in which the partnership operates. Finally, it is shown that repeated interactions alleviates the communication problem resulting from heterogeneity.
There is evidence that bidders fall prey to the winner's curse because they fail to extract information from hypothetical events - like winning an auction. This paper investigates experimentally whether bidders in a common value auction perform better when the requirements for this cognitive issue - also denoted by contingent reasoning - are relaxed, leaving all other parameters unchanged. The overall pattern of the data suggests that the problem of irrational over- and underbidding can be weakened by giving the subjects ex ante feedback about their bid, but unlike related studies I also find negative effects of additional information.
Managerial practices vary not just across different organizational forms but also within. I present a model where some firms optimally choose the same organizational form, yet different managerial practices. Firms choose their organizational and managerial practices in response to a given task distribution. These distributions contain some relatively simple and some complex tasks. Some firms face distributions with low variance and low uncertainty about the tasks at hand, while other firms face distributions with high task uncertainty. I show that 'team' is the optimal organizational form for firms facing complex tasks, even if there is no uncertainty, and for firms facing high task uncertainty, even for relatively simple tasks. But optimal managerial practices depend on the distribution of tasks, the variance in pay-offs, and the likelihood that a particular worker's effort is needed for the firm to succeed - and therefore complexity and uncertainty-driven teams choose different managerial practices. The results shed light on anecdotal variability of team management practices and suggest that empirical studies of team production take the underlying task distribution into account.
We consider a relational contracting model in which the project is selected by the party with authority before the agent exerts effort to execute the project. In order to induce the agent to exert effort, the principal controls the agent's confidence, defined as the belief on the project to be promising, through allocation of authority as well as pays discretionary bonuses. In contrast to the case where the agent has authority, allocating authority to the principal makes the agent's confidence uncertain that hinders effort for patient parties, but fosters effort for impatient parties. Consequently, authority is not necessarily allocated to the party with superior information.
When firms use relative performance pay in which they rank employees, an employee’s behaviour may respond to the rank they get. What is the relative importance of rank effects compared to monetary incentives? What is the direction of rank effects? Arguably, a bad rank may generate desire to catch up, or it may discourage further effort. In this paper we address these questions by analysing store managers in a large firm where the bonus is determined through a high powered tournament. We study managers’ response to feedback about their rank. In this tournament, the bonus is a step function of rank, and so marginal incentives and rank have a non-monotonic relationship, allowing us to separate the impact of incentives from that of rank on behaviour of managers. First, we find that managers ignore marginal incentives, but respond to rank. Second, their response suggests desire to catch up: when managers get a bad rank on either profit or service, they respond by improving performance. This response is monotonic in rank. Importantly, we show that managers achieve these improvements by making corresponding changes to labour and production, the key input variables directly under their control.
This paper studies the welfare consequences of vertical integration, focusing on the following two aspects, which have been relatively neglected in the literature, but are considered practically important: (i) vertical integration may facilitate inter-firm coordinated pricing, and (ii) it may not be as successful as expected or even harmful to the integrated entity, due to intra-firm causes such as organizational failure. For this purpose, I use and examine data of two vertical mergers (PepsiCo and Coca-Cola) from the U.S. carbonated soft drink industry to propose an empirical framework to consider these two issues as well as well-known elimination of double marginalization and foreclosure. I first conduct a difference-in-differences (DID) analysis of the price effects of vertical integration, and the estimation results suggest these two causes. I then estimate a structural model of upstream and downstream wholesale bargaining and downward price competition in consideration of common-distributor channels. My analysis suggests that only PepsiCos supply chain bene ted after the merger wave: the other two chains (Coca-Cola and Dr Pepper) lost their pro ts by more than 15%, and consumer welfare also lowered by 3%.
This paper examines the impacts of vertical integration on pricing, screening, run length and demand in motion picture industry using movie-theater-day level data from China. Our results indicate that integrated theaters charge higher prices, allocate more screens to and run longer lengths for their own movies than movies distributed by distributors owning another theater chain, which are the evidence of vertical foreclosure. Although the higher prices reduce demand, integrated theaters promote the demand of their own movies by allocating more screens to them and other measures. Finally, we find that the foreclosure is more prevalent when the own movies of integrated theaters have lower quality and faces competition from movies in the same genre, the integrated theaters have higher quality, face a stronger competition from other theaters and is owned by the central government.
We study the relationship between exporters' organizational structure and output quality. If only input quantity is easily observable, theory predicts that vertical integration may be necessary to incentivize suppliers to take input quality-increasing actions. Using direct measures, from the Peruvian fishmeal manufacturing industry, of (i) suppliers' behavior, (ii) suppliers' ownership, (iii) all within- and across-firm supply transactions, (iv) manufacturers' output by quality grade, and (v) all export transactions, we show the following. After integrating with the plant being supplied (before and after integration) and losing access to alternative pay-per-kilo buyers, suppliers take more quality-increasing and less quantity-increasing actions (and vice versa for de-integrations). Integration consequently causally increases output quality, as we show using exogenous variation in firms' access to suppliers they currently own relative to independent suppliers. Finally, we demonstrate that meeting the demand for high quality output is one of firms' motivations for integrating suppliers, while meeting low quality demand is not. We do so both by interacting (instrumented) changes in the relative price of high quality grades with firms' prior location on the quality ladder, and by interacting changes in relative demand from destinations that import high quality grades with firms' prior export destinations.
This paper studies variation in firm boundaries in the US hotel industry. For most hotel brands, the properties with the lowest and highest room occupancy rates are managed at arm's length by franchisees---a form of outsourcing. Properties with intermediate levels of occupancy tend to be managed by company employees, meaning that hotel management is vertically integrated. We propose a model of organizational form choice that can explain these patterns as the result of trade offs between relative fixed costs, control right assignment, and the option to include state-contingent performance incentives in contracts. Hotel brands prefer to manage properties at intermediate levels of productivity because retaining control increases the brand's relationship-specific investment. Low occupancy properties are outsourced because of lower fixed costs. High occupancy properties are outsourced under rent sharing agreements with the franchisee that complement the franchisee's incentives to invest in the relationship arising from control rights. We show that the complementarity between these incentive mechanisms outweighs the brand's concerns about hold up for high occupancy properties in all but the highest quality brands and in all locations other than where performance incentives are costly due to high local taxes.
While property rights scholarship recognizes that economic development can be stymied when rights are not well-defined, displaying this phenomenon empirically poses several challenges. Identifying appropriate comparative contexts where economic activity is sufficiently sensitive to comparable property rights structures, as compared to other forces determining economic outcomes, is no easy task. Similarly, measuring economic outcomes with a sufficient level of granularity poses data requirements that are often insurmountable. Our analysis follows in the lengthy tradition of considering property rights and economic development along frontiers. In the context of the US West, economic historians have long argued that the economic benefits of the railroads outweighed the costs of incentivizing development with federal land grants and loans. However, the way these land grants were awarded was not uniform in process or timing; we argue that uncertainty surrounding the development of the Northern Pacific in Montana created the right historical context within which to examine the effects of uncertainty to title on one costly economic activity along the frontier, irrigation development. Montana’s irrigation development generally lagged that of Colorado and we create a spatially granular data set of land patents and water rights for PLSS sections that yields a variety of evidence that uncertainty surrounding railroad land grants in Montana specifically contributed to delaying and stunting settlement and irrigation development in the state.
Revenue sharing arrangements are increasingly common in natural resource abundant countries where the majority of government tax revenue comes from resource exports. The determinants of the distribution of tax revenue among constituents under these arrangements in resource rich settings remain relatively understudied in the literature. Additionally, the relationship between revenue allocation from these arrangements and local public service provision is an important empirical question. This paper seeks to answer these questions by modeling revenue sharing arrangements and public service provision as outcomes of bargaining between federal government and subnational agents. It then uses a novel dataset of revenue allocations, expenditures and local public service provision from military Nigeria, with available data over 1979 to 1999, to test the implications of the simple framework. Results show that subnational agents with higher measured bargaining power, or greater ability to mobilize to demand access to natural resource revenues, have higher revenue allocation and expenditure, though outcomes for public service provision are more ambiguous. The results are robust to extensive controls and an instrumental variables strategy. I explore the implications of these results for attitudes towards tax compliance.The results provide important insights into framing optimal fiscal policy aimed at promoting economic development.
This paper seeks to answer the following question: how persistent are the effects of colonial and precolonial historical institutional determinants of financial system development in African former European colonies from their independence to present day? The colonial factors analyzed are legal origins and disease endowment while the precolonial factors investigated are slave trade and political centralization. Based on empirical analysis of financial system development data from 1960 to 2015, I find that only slave trade, a precolonial historical institutional factor that is a determinant of mistrust and ethnic fractionalization in Africa, had a statistically significant effect and in the hypothesized direction in some decades out of the almost six decades studied. The other variables did not have robust effects over the 55 years under study. I discuss theoretical and policy implications of these findings.
The present paper analyzes the causal link between litigation costs and economic growth. Costly litigation decreases the probability of economic transactions’ judicial enforcement, thus favoring post-contractual opportunistic behavior. As a consequence, this translates in less investments, credit shortage and higher interest rates. We exploit the variation in the prohibition of pactum quota litis, litigation fee concentration and the timing of WTO membership and GATT agreement, as plausibly exogenous sources of variation in litigation costs and use it to estimate the long-run growth and development in a cross-section of 140 countries for the period 2003-2015.
This paper studies markets for advertising and other “rhetorical services.” A monopolist prices a service that a sender can purchase and which changes the distribution over signals observed by a decision-maker. We show that the decision-maker's beliefs about purchase behavior influence the value of these services. This feedback from beliefs to demand determines pricing and can lead to unusual market features, including upward-sloping equilibrium demand. We discuss welfare and regulation in this market and characterize the monopolist's optimal product design. To serve as a foundation for this analysis, we develop a parsimonious model of rhetorical ability.
In many labor situations third parties cannot verify whether workers and firms adhered to their pre-trade promises. In such situations, long-term self-enforcing contracts may emerge endogenously to allow for an efficiency-improving solution to the agency problem. We implement such a situation in the lab by allowing workers and firms to interact repeatedly in a market without third-party enforcement. In this setting, persistently different human resource policies emerge endogenously: we find (long-term) relationships characterized by generous surplus sharing and spot-interactions with little to no rent for the workers. Efficiency, i.e. exerted effort, is comparable across the different policies. Hence, spot-interactions are at least as profitable for firms engaging in such practices. Analyzing individual level data, we document that firm and worker behavior is individually rational and that both firms and workers are “lured” by the possibility of entering a relationship and that individual histories play a significant role in explaining the observed behavior. In control treatments, we show that neither limited firm commitment nor structural unemployment alone are sufficient to generate the above described patterns.
We develop a model where firms compete on a product market and employ workers whose effort increases revenue, but where no formal contracts can be used to provide incentives for the workers. Firms and workers are matched on a labor market and wages are determined by a bargaining process. Both parties incur costs to find a new match, and these costs depend on competition in the labor market. In particular, more labor market competition (i.e., more available workers) reduces firms' replacement costs. We show that such a reduction decreases workers' wages, industry-wide production effciency, and consumer surplus. It also makes collusion between firms easier to sustain because the incentive to deviate from a collusive agreement is lower. By contrast, lowering workers' costs in the labor market increases workers' wages, production effciency, and consumer surplus - highlighting that there is a sharp asymmetry between reducing labor-market costs for firms and for workers. The mechansim we derive has interesting implications on a number of policy issues. For example, a higher minimum and a more stringent employment protection can increase effort and consequently production efficiency. Furthermore, more generous unemployment benefits have no adverse effects on a worker's effort.
We develop a model in which a firm makes a sequence of production decisions and has to motivate each of its employees to exert effort. The firm motivates its employees through incentive pay and promotion opportunities, which may differ across different cohorts of workers. We show that the firm benefits from reallocating promotion opportunities across cohorts, resulting in an optimal personnel policy that is seniority-based. Our main contribution is to highlight a novel time-inconsistent motive for firm growth: when the firm adopts an optimal personnel policy, it may pursue future growth precisely to create promotion opportunities for existing employees.
Why might a clandestine or militant organization not take advantage of an upswell of potential recruits who would increase group strength and resilience? I argue that when resource constrained organizations grow quickly, their leaders face the choice of balancing short-term organizational survival with long-term mission focus. This leads to an under-theorized mechanism through which an organization's grassroots create internal constituencies that pressure leaders to incorporate their preferences for strategy and operations. I develop this mechanism through a simple formal model, and illustrate the logic and outcome via the example of al-Qaeda in Yemen (AQAP) before and after the introduction of the American War on Terror. I look for evidence of mission drift in AQAP through a multi-pronged empirical strategy the uses text analysis of AQAP communiques and messages on the one hand as well as machine learning classification of reports of local conflict events.
While street gangs are prevalent in many urban areas, their impact on social order has been under-theorized and rarely subject to systematic analysis. Building upon political economic theories of organized violence, this paper highlights the role of fragmentation in gang markets and organizations in driving patterns of predatory violence. When gangs have consolidated control of local markets, they are more likely to promote social order in order to reap the long-term benefits of more robust illicit markets. In contrast, by increasing the potential for competition and hampering the ability to solve principal-agent problems, market and organizational fragmentation make gang members less likely to invest in social order and more likely to prey on residents. Analyzing this theory using fine-grain data from Chicago, the paper finds the fragmentation of gang territory and shocks to the organization of local illicit markets to be associated with higher levels of predatory violence like robbery.
Despite the myth of the “Wild West,” state-organized legal institutions were in actuality quite pervasive in many areas in the mid-nineteenth century U.S. frontier. At the same time, these frontier areas — marked by high levels of physical mobility, social ambiguity, and institutional change — were the the scene for the construction of some of the first large-scale organized criminal efforts in American history. This paper shows how an interconnected confederation known as the “Banditti” active in the midwest in the 1830s and early 1840s exploited the local nature of frontier courts, advances in physical mobility, and the creation of a national market, to establish an extensive trade in counterfeit bank notes and stolen horses. By providing scarce resources to other settlers and exploiting the anonymity of frontier life, members of the Banditti were able to forge powerful alliances with political notables, and were frequently protected by a court system in which local standards of jurisprudence trumped abstract law. Contra arguments that banditry often substitutes for a weak state, in other words, this paper contends that, in unsettled contexts, highly local forms of state-building and legal development can actually reinforce the growth of organized predation.
How does prison social order vary across time and place? This paper examines the informal institutions that exist in two different types of confinement. First, in California, women prisoners often form fictive kinships to organize their social and economic interactions. So-called “prison families” are a source of intimacy, friendship, mutual support, and protection. However, unlike other informal prisoner institutions, membership in prison families is not permanent, mutually exclusive, or highly restrictive. Based on a review of research dating back to the 1950s, it also appears that this type of informal institutions has always existed. This stands in contrast to substantial changes in the operation of prisons, the informal changes in men’s prisons, and broader cultural change. Second, this paper compares women’s prisons to life in the Gay and Transgender prison in the Los Angeles County Jail for men.
Politicians who change their mind on a policy issue are often confronted with the accusation of being flip-floppers. However, a changing environment sometimes makes policy revisions necessary. The present analysis suggests that flip-flopping on a policy issue is detrimental to a politician’s reputation because it sends a bad signal on the accuracy of his information. As a result, electorally concerned politicians can have the incentive to stick to their initial policy choice, despite it being inefficient, in order to avoid the stigma of flip-flopping. This distorted behaviour is not only damaging in terms of policy welfare, but also in terms of a worse selection of competent politicians through elections. I also discuss benefits and costs of several possible ways to address the unwillingness of politicians to respond to information: these include a single-term limit rule, the effect of media varying the transparency of actions and consequences as well as delegation of one of the actions to an independent agent.
We provide evidence that German public energy providers, over which municipality-level politicians hold substantial sway, systematically adjust the pricing of electric energy in response to local electoral cycles. In the run-up to elections, electricity prices set by these public utilities systematically decrease compared to the prices set by privatized utilities which are unconnected to local politicians. In the three years after an election, public utilities set relatively higher prices than private energy providers. This pattern is in line with both, an artificial reduction in prices before an election that needs to be countermanded by future price increases, and an artificial postponement of market-driven price increases until after the election is over. To establish these results, we make use of a unique and novel dataset that covers the universe of German electricity prices between 2003 and 2013. Identification of the electoral cycle in electricity prices is facilitated by the rich variation in municipal elections dates and the existence of a comparable group of non-public utilities. Our results suggest that government-controlled firms may represent a viable alternative to - often unavailable - standard public-finance instruments for local politicians to influence their popularity before elections.
In this paper we attempt to demonstrate that „security‟ of political tenure leads to lower efforts exerted by deputies and, hence, weaker political performance. We draw on arguments of standard labor market theories asserting that provision of employment protection deteriorates employees‟ performance. The novel approach of this paper lies in the fact that we approximate the security of political tenure by both inter - and intra - party electoral advantage. Whereas the former aspect captures the strength of a deputy‟s party vis - à - vis other parties in a district, the intra - party component measures the advantage of a deputy vis - à - vis deputies from the same party list (co - partisans) . This conceptualization of the security of political tenure is particularly valid in an open - list proportional representation (PR) system, where a p a rty wins s eats based on the collective vo t e s earned by its list and w here seats are distributed within a party list based on the number of votes cast for specific candidates. Based on the data from the lower chamber of parliament in Poland collected for the period 2005 - 2017, w e provide evidence that intra - party electoral advantage seem s to be the most crucial in determining the effort and political perf ormance of deputies. Large advantage of a deputy vis - à - vis his or her co - partisans leads to a decrease in the number of parliamentary speeches, interpellations and statements. The intra - party advantage is also negatively associated with voting presence . It seems therefore that the deputies whose political survival is less uncertain work less hard than the deputies with un secured political „employment‟.
We study the impact of political contestability on the choice of rule-based contracts through the municipal bond market. We provide evidence that when the probability of losing office is high, mayors are more likely to issue revenue bonds over general obligation bonds, and to choose competitive bidding over negotiated sales. This effect is stronger for elected mayors than for city managers, and as elections approach. We utilize two referenda---one failed and one succeeded---regarding the required supermajority to issue general obligation bonds in California to assess the causal relationship between political hazards and the choice of security type.
Recent research has explored the effect of shifts in formal R&D structure on the evolution of inventor networks within the firm, which consequently affects the nature of innovation generated by the firm. Yet prior research demonstrates that the formal organization of R&D affects both internal production of innovation and external sourcing of innovation. In this study, we advance the literature by exploring the interaction between changes in within-firm inventor networks and changes in across-firm inventor networks after a shift in formal R&D structure, and by exploring the effect of this interaction on innovation.
From the late 1930s through the 1970s, the U.S. innovation economy operated under a weak property rights regime. Courts and regulators were largely unsympathetic toward patents and expansively interpreted antitrust constraints on patent licensing. This patent-skeptical climate was illustrated by a sequence of antitrust enforcement actions that resulted in the compulsory licensing of patent portfolios held by some of the largest U.S. firms. Concurrently, the federal government instituted an implicit compulsory licensing regime through the infusion of R&D funding into the private sector, accompanied by legal constraints on firms’ control over technology developed using those funds. The postwar period exhibited robust innovation for a substantial but limited period, followed by a noticeable slowdown commencing in the mid-1960s. R&D investment was concentrated among a small group of large firms that received extensive government funding, market concentration did not decline, and incumbents targeted by compulsory licensing orders mostly maintained their market positions. The postwar weak-IP regime may have skewed organizational structures for undertaking innovation and commercialization activities, necessitated substantial supplemental public funding, and does not provide a generalizable model of a self-sustaining innovation system.
Private foundation funding of academic research has grown substantially over the past decade reaching $4.3B in 2010. The majority of foundation funding is allocated to research in the life sciences. Given a focus on the immediate needs of a specific patient population and the concomitant emphasis on translational advances, an emerging subset of foundation funders are acting as institutional entrepreneurs and promoting the adoption of a different model for sponsored research, that of venture philanthropy. The venture philanthropy model emphasizes the active management of the commercialization process, with the goal of accelerating scientific progress to material outcomes. This study investigates how these relatively new players are influencing the substance, practice and structure of academic research by examining contractual terms in sponsored research agreements. We explore two specific questions: (1) How do the terms in research agreements vary across funder types? And (2) what are the performance implications of the adoption of these contractual innovations?
In this study, we empirically examine the approaches firms take when recombining knowledge to develop new technologies. Conceiving of recombination as the matching of problems to solutions, we develop a typology of four recombination strategies based on whether the firm is familiar with the problem and / or the solution. We then examine the prevalence of these four strategies, both in general and when pursuing potentially radical inventions. Citation-level analyses for the population of patents granted to for-profit firms by the US patent office between 1981 and 2004 show that while firms are most likely to recombine knowledge across domains with which they are already familiar, a surprisingly high proportion of recombinations occur across domains that are both new to the firm. More interestingly, when recombining existing and new knowledge, firms are substantially more likely to seek unfamiliar solutions to familiar problems than to apply familiar solutions to unfamiliar problems, with this pattern being more pronounced when pursuing potentially radical technologies. Supplementary analyses suggest that this ‘preference for problems’ is not driven by access to complementary assets or the superior effectiveness of such a strategy, but seems to reflect a cognitive focus on problems when evaluating technological opportunities.
A thousand favelas dot the sprawling urban landscape of Rio de Janeiro. In these communities, gangs have replaced state authority with governance forms of their own. Some gangs implement responsive systems of law and justice, allow for democratic practices, and maintain a high degree of social order while others develop more coercive and unresponsive governing institutions. What accounts for this variation? This dissertation's central argument is that local security environments determine these governance outcomes as gangs can face two primary threats to their territorial control: competition from rivals and enforcement by the state. On one hand, rivals that seek to invade and conquer favela territory for their own represents an existential threat and forces gangs to engage in more coercive governance practices as they seek to ensure their territorial control and resident compliance. On the other, high levels of police enforcement, a non-existential form of threat, incentivize gangs to develop closer and more responsive forms of governance to the local population. Based on nearly three years of fieldwork in Rio de Janeiro, this project employs a thoroughly mixed-method design, which includes both qualitative and quantitative methodologies and data collection. I conducted 18 months of ethnographic fieldwork in three different gang territories, which included participant observation, archival research, and 175 semi-structured interviews with current and former gang members, NGO workers, local politicians, and long-term residents. In addition, a dataset of geo-processed anonymous hotline denunciations of gang members from Disque Denúncia, a Rio de Janeiro non-governmental organization, provides a further test of the theory and a glimpse into how residents respond to gang governance strategies.
Efforts to establish an effective system of “rule by the people” have had mixed results. Some polities have developed into stable democracies (e.g., ancient Athens, the modern United States), while others have produced merely transitory democracies, with periodic reversions to oligarchy or autocracy (e.g., ancient Syracuse, modern Venezuela). To provide new insight into the reasons why some democracies are stable while others are not, we study the world’s first great democratic expansion, that of ancient Greece. Building on recent work by classicists, we develop a data set of government types for nearly 200 Greek poleis (city-states) spanning several centuries. We find evidence that ancient Greek democracies, whether stable or unstable, are associated with coastal locations (a proxy for commercial potential), while stable regimes, whether democratic or non-democratic, are associated with historical records of less civil strife. We also find evidence that stable democracies were wealthier than unstable democracies. These findings support a simple theoretical model, in which decisions to democratize – and the subsequent stability of newly democratized regimes – depend on exogenous changes in economic conditions, notably changes that influence expectations regarding the prospects for economic growth.
Quarter of a century after market reforms, countries of the former Eastern Bloc exhibit vastly different economic and political institutions — from successful market democracies to autocracies with oligarchy-dominated economies. We trace these differences in institutional quality to the political environments at the time of reforms. Insulation of reformers from the society was considered instrumental to expediting unpopular transformations and protecting the reforms from populist backlash. However, the representation vacuum at the critical juncture of post-communist transition was filled by narrow interests, which established extractive institutions serving the elites, instead of inclusive institutions, which are in broad societal interests. Choices made at critical junctures were pivotal for subsequent institutional trajectories, and extractive and inclusive regimes sustained themselves over long periods of time. We use the number of political veto players in the early 1990s as a measure of plurality of post-communist transition, and show that it is a consistently strong predictor of the institutional quality over the next twenty-five years period. We also demonstrate that the same transition plurality measure explains cross-country differences in economic inequality across the post-communist world, and uneven social support of market and democracy, indicating ongoing “institutional learning”. In a placebo test where post-communist countries are replaced by the sample of Latin American and Caribbean nations, we find that the number of veto players in the early 1990s was either statistically insignificant, or, for some institutional indexes, negatively correlated with subsequent institutional performance.
The paper studies stability and change of authoritarian/weak institutions. In contract to strong institutions, weak ones do not allow binding agreements to be made among players---especially, between the ruler and the ruled---under them. For over a decade, there has been such a vast literature telling us their profound implications for the survival of dictatorships and the making of inefficient economic policies. For example, Acemoglu et al. (2004) explains how a weakly institutionalized environment allows kleptocrats to use a divide-and-rule strategy to exacerbate the collective action problem among potential opposition groups and stay in power. This literature, however, hasn't told us much so far about how and why weak institutions can remain stable or are subject to change. The chief theoretical advance this paper makes to the formal literature on nondemocratic politics is that I characterize the authoritarian/weak institutions as noisy signaling of the information about regime strength. This then allows us to base our new modeling approach on a theoretical finding that an actor's higher-order belief in a global game about others' participation decisions could become non-Laplacian. Owing to the self-enforcing nature of weak institutions, their change and stability clearly depend on whether, collectively, the elite are able to pose credible rebellion threats to the dictator. An important implication following this result is that the variance of one's belief will be increased and, instead of giving all aggregate actions an equal probability, individuals give weights only to the extreme outcomes and therefore are less likely to reach coordination with others to push back the dictator's attempts to change authoritarian institutions.
Profit-maximizing firms should fill job positions at the lowest possible cost. Because employees may have preferences over the attributes of their jobs, we can view this problem as one of finding the optimal way to sell job attributes to potential employees. In this paper, we characterize the optimal mechanism by which a firm can sell jobs with desirable attributes. This mechanism is implemented by offering employees a long-term employment contract in which firms create a number of low-quality job positions and offer them to young employees, while only a subset of these employees are promoted to a desirable job. In contrast to the traditional compensating differentials framework, job desirability and wages are positively related in the optimal contract. Our analysis provides a novel framework for thinking about a number of phenomena, such as the span of control, inequality within and between generations, and the effect of competition on employment and wages.
Why does labor share vary for married women across religion and caste in India? The gaps in employment shares across groups are not trivial, ranging from 17% for Hindu Brahmins to 32% for Christians in 2011. I estimate a static female labor supply model that incorporates variations in individual demographic characteristics from the Indian Human Development Survey and two sets of parameters characterizing the labor behavior of specific groups. Religion and caste enters the model through a preference component and an "institutional" component embedded as a fixed cost for women entering the labor force. Given model specification and estimates, I document group labor supply behavior in the intensive and extensive margin and quantify the relative importance of each model component in generating behavioral differences. In a counterfactual exercise without group heterogeneity---every group faces the same preferences and fixed-labor costs---the variance of participation across groups reduces by 0.75 relative to patterns seen in data. This suggest that inequality in terms of demographic characteristics, such as education, non-labor income, and children, alone does not generate large participation gaps. When group differences enter the model through preferences, the variance of participation does not change significantly. Only when heterogeneity in labor costs is introduced, the variance of participation gaps starts to increase. I further investigate possible sources of variations in labor cost and study how groups react to policy changes in terms of wages and a subsidy to non-labor income.
A vast literature examines the interactions between law, institutions and economic development, but it only occasionally examines how actual markets in emerging economies have developed and transitioned to relying on legal institutions. This paper addresses that question by examining the growth of the formal home mortgage market (HMM) in India from the mid 1990s onwards. Long delays in foreclosing on property, along with other factors, led to a trivial HMM. However, from about 1994 to 2003, and before any mortgage law changes took effect, the HMM in India grew impressively. This paper examines what led to this and finds that, amongst other things, banks in India relied on “dysfunctions” in the criminal justice system to help overcome dysfunctions in the civil justice system for enforcing mortgages. In particular, in house departments at banks relied on a provision that criminalized “bounced” checks along with the predictability of extortion by the police to enhance their ability to obtain payments for mortgages and other kinds of debts. Although this aided the HMM’s growth, it also resulted in substantial negative collateral effects by enhancing corruption and worsening adjudicative delays. Indeed, the “bounced” check strategy (BCS) came to represent one of the largest areas of litigation in India. However, once the mortgage market started growing banks pushed for law changes around 2003 that facilitated the continued expansion of the market, but reduced the need to rely on the increasingly costly BCS. The HMM’s development not only tracks the incentives faced by the players and highlights the improvisational aspects of this market’s growth, but also has implications for a number of areas of research. This includes insights on the interactions between law, institutions and economic development; how institutional change or transition might arise in some contexts; and the role of private ordering, and key players like in-house lawyers, in market development.
How do workers cope with the adjustment costs from trade liberalization? Governments’ ability to deal with the distributional consequences of lifting trade barriers has become one of the key challenges facing developed democracies. Recent findings have shown how among workers harmed by liberalization, some turn to dedicated government training programs, while others fall back on disability payments and early retirement. These choices largely determine the odds of an individual returning to work, so what explains the variation? We demonstrate how in the US, the politically fraught nature of Trade Adjustment Assistance (TAA), combined with its administrative complexity, means that individuals are prone to elite framing effects. We use roll-call votes and legislators’ floor speeches on TAA to measure their attitudes towards trade adjustment, and proxy for the demand for trade adjustment by using economic shocks from Chinese import competition. When legislators hold negative views of the program, individuals in their districts become less likely to petition for, and receive, trade adjustment benefits. This, in turn, appears to render them more likely to fall back on alternative transfers, such as disability payments, which are less likely to get individuals back to work.
This paper is based on a research project carried out for the European Commission. That project had an empirical component, involving interviews of SDO leaders and a survey of SDO stakeholders. The SDOs in our sample are based in Europe, the United States and elsewhere, and the set of stakeholders is global. Some SDOs follow a more traditional model (broad-based, long established), others are narrower and driven by specific needs. This paper takes as a backdrop the debates surrounding IPR policies which have affected a number of SDOs in recent years. IPR policies govern the use of intellectual property (essentially patents) in standards development; they typically include requirements as to disclosure and licensing. Existing literature on SDOs is mostly concerned with standardization activities and the substantive rules concerning standardization. More recently, the applications of IPR policies has drawn much academic and practical attention, in the context of disputes surrounding FRAND commitments. Few articles and papers have ventured into the governance of SDOs as such. In this paper, we make a comparative investigation of SDO governance, and we attempt to link features of SDO governance with the outcomes observed as regards the IPR policies of the SDOs under study. We summarize the legal and other external constraints on governance. We describe and analyse the various options chosen by SDOs and observed in our sample for key elements of governance, such as membership, management, decision-making processes and dispute resolution. We also examine how SDOs implement basic governance principles such as transparency, openness and representativeness. We put forward a set of empirically and theoretically grounded explanations for why IPR policy evolves in a given direction at a given SDO.
Creation and innovation are crucial to economic growth. They can be stimulated variously by informal and formally legal means. The legal system must support the institutions through which innovators legitimately seek reward for their efforts, whilst avoiding these institutions turning into rent-seeking structures impeding follow-on innovation. Some institutions, such as the first mover advantage or 'lead time,' or black listing and community sanctions against free riders, are informal and not directly legal. Secrets and intellectual property rights (IP) are legal institutions supported in order to stimulate innovation. IP looks like a straightforward application of the ‘property rights’ paradigm. To manage scarcity and focus management skills and creative talent, create property rights whose incentive effects will do the job. But the story is more complicated since, unlike physical goods, information, the object of IP, is not inherently scarce; indeed, as information and communication technologies expand, the information is becoming ever cheaper to create and distribute, and is, in many circumstances, abundant, so that selection is of the essence ('on the internet, point of view is everything'). This would argue for free accessibility (public goods argument). But attracting creative talent often seems to require legally supported reward, which is what IP intends to provide. Yet if IP rights on information extend too far, their monopolising effect may hamper follow-on innovation. As internet use expands, this appears to be a major challenge of our time. The paper investigates the underlying structure of informal protections as well as formal IP rights and surveys what we know empirically about industries that flourish without formal IP (including the fashion industry) as well as about the incentive effects of formal IP rights. stimulating innovation.
About 20 years ago, the Law and Finance movement was launched with a series of influential papers by La Porta, Lopez-de-Silanes, Shleifer & Vishny (LLSV). A central thesis of the movement is that “law matters”, that is regulation influences the level of investor protection, corporate ownership structures and, more generally, the development of financial markets. An additional wrinkle to this story is that enforcement matters. Indeed, even if the laws on the books are excellent, an ineffective enforcement regime will prevent the rules from attaining their outcome. In Canada, enforcement in securities regulation has generated much debate in policy and academic settings. A first debate relates to the role and place of public and private enforcement mechanisms. A second debate pertains to the efficacy of the decentralized (multi-enforcer) model of enforcement vis-à-vis the centralized (or consolidated) enforcement model. These debates have been fuelled by the perception that enforcement is suboptimal in Canada, prompting proposals to establish a national securities regulator. Recently, the proposed Cooperative Capital Markets Regulatory System and the Supreme Court decision in Theratechnologies have put these debates squarely at the forefront of the agenda in Canada. Taking into account the legal and institutional features of the Canadian securities regulation landscape, the paper surveys the theoretical and empirical literature regarding enforcement in securities regulation. It critically analyzes the decentralized and consolidated enforcement models in order to assess their efficacy in the Canadian setting.
We measure the behavior of 1,114 CEOs in six countries parsing granular CEO diary data through an unsupervised machine learning algorithm. The algorithm uncovers two distinct behavioral types: “leaders” and “managers”. Leaders focus on multi-function, high-level meetings, while managers focus on one-to-one meetings with core functions. Firms with leader CEOs are on average more productive, and this di↵erence arises only after the CEO is hired. The data is consistent with horizontal di↵erentiation of CEO behavioral types, and firm-CEO matching frictions. We estimate that 17% of sample CEOs are mismatched, and that mismatches are associated with significant productivity losses.
We use machine-learning methods to study the features and origins of the ideas of Francis Bacon, a key figure who provided the intellectual roots for a cultural paradigm that spurred modern economic development. We estimate a structural topic model, a state-of-the-art methodology for analysis of text corpora. The estimates uncover sixteen topics prominent in Bacon's opus. Two are key elements of the ideas usually associated with Bacon—inductive epistemology and factseeking. We provide the first quantitative evidence that the genesis of Bacon's epistemology lies in his common-law jurisprudence, a conclusion that has not been prominent in the conventional text-analysis literature. Fact-seeking is more isolated from Bacon's other intellectual pursuits. The utilitarian promise of science and the centralized organization of the scientific quest, embraced by Bacon's followers, were not emphasized by him. Bacon's use of different topics varies notably with intended audience and chosen medium. Our results have direct implications for the interpretation of the determinants of political and economic development in 17th-century England.
Under Canadian employment law, when an employee is terminated without cause, they are entitled to a reasonable notice period from their employer – or payment in lieu of this notice period. What is “reasonable” for any given worker is, however, determined on a case-by-case basis. Employers and lawyers currently tend to rely heavily on length of service when seeking to predict how a court might decide reasonable notice cases. These rules of thumb are very weak predictors. The average prediction error generated by these simple heuristics is large. Machine learning techniques vastly outperform these simple heuristics in terms of predicting the outcome of reasonable notice cases. I use machine learning algorithms that have been developed for the purpose of prediction. Familiar estimation techniques, such as ordinary least squares, do (of course) offer simple ways to generate predictions. But they do not offer the best means of predicting out-of-sample. I explore the power of boosted decision trees, random forests, and neural net regression to predict how a court will decide cases not included in my training data. Boosted decision trees, tuned by depth, offer the best means of predicting court outcomes in my sample. In terms of explanatory power, boosted decision trees outperform the linear prediction model by as much as 12% and reduce the prediction error by as much as 15%. Random forest algorithms also outperform the linear prediction model, but the performance is weaker than with boosted decision trees. Neural net regression algorithms do not outperform the linear model, which is not surprising, given the size of our dataset.
This paper uses two new datasets to study management and productivity in primary schools in India. We report four main sets of results. First, management quality in public schools is low on average, but there is meaningful variation across public schools that is correlated with both independent measures of teaching practice, as well as measures of student value added. Second, we find higher management scores in private schools, and this advantage is mainly driven by differences in people management (as opposed to operations management). Third, we find that the private school advantage over public schools in student value-added is largely accounted for by differences in people management practices. Fourth, we find that the private-school advantage in measures of people management is consistent with independent measures of personnel policy. Specifically, private school teacher pay is positively correlated with measures of teacher value-added, and private schools are more likely to retain teachers with higher value-addition and let go teachers with lower value-addition. Neither pattern is seen in public schools.
Can outsourcing improve public service delivery in fragile states? To answer this question, we present results from a field experiment in Liberia, where the government delegated management of 93 public schools — staffed by government teachers and run free of charge to students — to private providers. We randomly assigned treatment status at the school level and sampled students from pre-treatment enrollment records to identify the effectiveness of the treatment without confounding the effect of endogenous sorting of pupils into schools. After one academic year, students in outsourced schools scored .18 sd higher in English and mathematics than those in control schools. Private providers improved scores on an index of managerial practices and significantly reduced teacher absenteeism (“better management”), but also spent significantly more per student and employed more teachers than control schools (“extra resources”). Non-experimental mediation analysis suggests better management and extra resources played roughly equal roles in the observed learning gains. In line with program rules, we find no evidence that providers engaged in selective admissions. Our design allows us to study heterogeneity across providers: While the highest-performing providers increased learning by 0.26 sd, the lowest-performing had no impact. Providers also differed in behavior that may generate negative spillovers for the broader school system, including removing pupils to keep class sizes small, and reassigning underperforming teachers to other public schools. These results suggest that leveraging the private sector to improve service delivery in fragile states is promising, but also highlight the importance of procurement rules and contracting details in aligning public and private interests.
School management practices matter for student performance. But is the higher managerial autonomy enjoyed by public and autonomous government schools (AGS/charters) a substitute or a complement for better management practices. Using a survey by Bloom (2015) of the management practices of over 1000 secondary schools around the world, we demonstrate that the relationship between good management practices and good student performance is must stronger in private schools than it is in either traditional public or AGS schools. Specifically, a 1 standard deviation (s.d.) increase in general management practices is associated with a 0.18 s.d. increase in student performance among public schools, at 0.25 s.d. increase among charter AGS schools and with an 0.37 s.d. increase in student performance among private schools. These results are robust to controlling for other inputs and student characteristics, and are driven primarily by a differential response to operations and monitoring management. People management and targeting also matter for performance, but they seem to matter about the same across organizational forms.
Strong institutions attract talent to productive activities, whereas weak ones raise the appeal of redistribution and rent-seeking. We propose a theory that describes the impact of institutions on occupational choices and shows that more talented individuals are particularly sensitive in their career choices to the quality of institutions. To test these predictions empirically, we use a unique micro data set describing the choices of fields of studies by newly enrolled university students in Russian regions in 2011-2014. We show that the popularity of sciences and engineering among Russia’s youth with higher ability as measured by the Unified State Examination scores increases in the quality of regional investment climate, whereas for law and public administration this relationship is negative. This confirms that investments in human capital reflect the quality of institutions, pointing to a mechanism connecting institutions to economic outcomes.
The Theory of Share Tenancy by Steven Cheung, first published as a PhD thesis 50 years ago, was an important watershed study on the economics of contracts. It contained the first formal demonstration of the Coase Theorem, linked the concepts of property rights and transaction costs, laid early foundations for the future economics of contracts, and can even lay claim to originating the idea of a risk/incentive tradeoff in contract design. This essay examines Cheung's key contributions in Share Tenancy, and considers reasons for its somewhat limited legacy outside of China.
We use a natural experiment to examine the effects of land demarcation on farms’ values in nineteenth-century California. Land demarcation occurs in two dominant forms: metes and bounds (MB) and the rectangular system (RS). In MB, individuals specify land parcels. In RS, land is surveyed and demarcated prior to settlement and is organized in a uniform grid of square plots. We use farm-level data from the 1880 Agricultural Census for California to test predictions about farms’ shape and economic outcomes in nineteenth-century California. Our results indicate that MB farmers had more valuable, and productive farms, and spent a greater amount of money on wages.
This paper provides experimental support for the hypothesis that insurance can be a motive for religious donations by members of a Pentecostal church in Ghana. We randomize enrollment into a commercial funeral insurance policy, then church members allocate money between themselves and a set of religious goods in a series of dictator games with significant stakes. Members enrolled in insurance give significantly less money to their own church compared to members that only receive information about the insurance. Enrollment also reduces giving towards other spiritual goods. We set up a model exploring different channels of religiously based insurance. The implications of the model and the results from the dictator games suggest that adherents perceive the church as a source of insurance and that this insurance is derived from beliefs in an interventionist God. Survey results suggest that material insurance from the church community is also important and we hypothesize that these two insurance channels exist in parallel.
Via a randomized experiment paired with a novel index of inter-village communication net- works, we identify the impact of providing rural farmers with commodity price information delivered via text messages on their mobile phones. The intervention affected prices received by farmers in two ways: (1) a long-lasting increase of about 9% for treatment group farmers, and (2) substantial indirect benefits for certain control group farmers, which do not seem to be driven by classical informational spillovers. We discuss a novel mechanism of bargaining spillovers which can explain the rise of such positive externalities, even in the absence of information sharing between the treatment and control groups. Our results highlight the importance of accounting for longer-run spillovers. The direct return on investment of the service (over 200%) underscores the huge potential of ICT interventions in emerging markets.
Growing evidence in economist suggests the importance of culture and institutions in commons management. However, previous studies have examined the effect of these factors in isolation. This paper examines the effect of the interaction between culture and institutions for successful forest commons management and the mechanisms through which these effects unfold. The forest management outcome is measured as the number of young trees per hectare. Culture is measured as the propensity to cooperate provided others do the same in a public goods game. Institutions are measured as rules regulating the number of months in a year livestock are forbidden to graze inside the forest and on the same spot. It is considered particularly important as livestock browsing of young trees directly affects their survival. I find that groups perform best when they have both stronger propensity for cooperation and formal rules regulating livestock grazing, but not when either of these two factors is considered in isolation. Several falsification tests confirm these results by showing that the effect holds only for young trees and not mature trees. Moreover, among young trees, the effect is observed only for broadleaf trees and not coniferous trees that are unpalatable to livestock. Experimental and survey data show that this interdependence is due to two reasons. First, institutions allowing cooperators to target and punish free riders, which results in optimistic beliefs about the cooperation of others. Second, cooperators are willing to overcome the second order free rider problem associated with the enforcement of institutions by spending much more time monitoring their forest.
After three decades’ reform, SOEs remain as powerful but inefficient. The continual failure to adopt necessary reform leads to great disappointment amongst China watchers and requests an explanation. This paper offers a new political economic explanation to the logic of SOEs reform. It argues that the existing SOE literature is built on a conception which equates the Chinese Communist Party (the CCP) with the Chinese state. This commonly accepted conception leads to a belief that the potential economic gains to the Chinese state would be sufficient to induce the CCP to adopt necessary reform. However, this conception is deeply flawed and seriously misleading. The relation between the CCP and the Chinese state is far more complicated than it is commonly assumed and conflicts of interests arise in the case of SOEs reform. SOEs, in particular those in upstream industries are crucial to the CCP’s political survival. Economic gains to the Chinese state come at political costs to the CCP which therefore prevents the latter from adopting actions that benefit the former.
We present a novel theory regarding when Chinese politicians choose to make law, and test the theory using a unique dataset on statutes, formal regulations, and informal policy directives adopted by 31 provinces and 49 cities during the 2000-2014 period. Contrary to conventional assumptions, we argue that parliamentary bodies in China are not designed to exercise independent constraints on the executive, but are intended to coordinate with political leaders to enact policy, much in the way their counterparts in majority-controlled parliamentary democracies do. Because the Chinese government does not need to enact formal law to pursue policy, however, formal legislative or rulemaking procedures are followed only when rule permanence, interagency coordination, symbolism, and/or political dominance are desired. Further, the distinction between legislation and the (far less costly) adoption of formal regulations has mainly to do with public symbolism. In light of this theory, we present evidence that provincial politicians in China are more interested in legislative symbolism than city (and national) politicians, and highlight other empirical regularities in subnational lawmaking by analyzing both (a) the determinants of the frequency of the adoption of formal legal rules and (b) policy priorities in legislative or rulemaking activities.
Despite China's pro-market reforms in many areas, the rural land policy still features a very restrictive property right. While peasants have the right to farm their plots (which are allotted to them by village administrations), their rights to sell and/or rent the plots are severely restricted. These restrictions have been argued to entail enormous efficiency costs, adversely affecting the welfare of hundreds of millions of rural residents. However, the political incentives to remove the ownership restrictions have been lacking. In this paper, we present a political economy model of rural land policy taking into account some key characteristics of China's context. Our model features structural transformation under a political regime that caters predominantly to the interest of urban residents. We assume a government facing conflicting incentives on whether to remove restrictions on ownership of rural land. By providing further incentives for rural-urban migration, removing the restrictions releases labor to the urban sector, expands the modern sector and, as a result, increases the leader's rent base. On the other hand, the possibly large increase in labor supply following land reform increases the risk of urban unrest due to wage depression (or unemployment) in the urban sector. To take into account the two conflicting motives of the government, we consider a two-sector economy where the government's rent base depends on the size of the urban sector. Our analysis sheds light particularly on how the rapid transformation of China's economy toward more urbanization and higher productivity of the urban sector could affect the government's incentive toward the choice of rural land property right. The model shows that while a higher urbanization increases the government's incentive to remove the ownership restrictions, improvements in productivity of the urban sector have a counteracting effect.
The question of when a court should look to custom as a source of law is not a new one, and can arise in frontier contexts where a formal legal authority is being imposed for the first time. This article explores this dynamic, the role of custom in formalization of property rights, in the context of case law from the Supreme Court of Colorado (hereinafter the “Court”) from 1868-1895. The analysis suggests the Court played an important role in facilitating the transition from an informal property rights regime to a formal one. Initially, faithfulness to local decisionmaking involved custom as a source of law, but the role of custom diminished over time. Statutory and common law precedent emerged to fill the remaining gaps in the law, and by 1890, custom in mineral claim disputes disappeared almost entirely. This dynamic reflects the fact that an authority imposing formal control for the first time faces a choice about the extent of actual legal change its system of formalization will introduce. One way to manage the transaction costs associated with this formalization is to codify preexisting informal rules, provided they arose from a context where conflict over customs and rules was minimal. The cases the Supreme Court of Colorado treated governing mineral location claims suggest that recognition of custom can be a cost-minimizing form of legal gradualism.
To better identify the full costs and benefits of land demarcation policies, this paper models demarcation choices and distinguishes between physical and legal demarcation of land boundaries. In contrast with the influential “land administration” literature and World Bank’s policy, the analysis supports voluntary—instead of mandatory—demarcation as well as non-integrated services for land administration. Consistent with its theoretical argument, the paper empirically verifies that demarcation conflicts play a lesser role in title-, land- and property-related litigation, which seems to increase in all these areas after physical demarcation is made mandatory. It also observes that linking and merging tax cadastres and land registries does not correlate with lower transaction costs.
Economists generally agree that more complete property rights lead to higher incomes, but rights are often constrained by other political and social goals. American Indian reservations provide a powerful example. Reservation poverty is often attributed to poor quality land as a result of expropriation and transfers to non-Indians, but a more complete explanation requires understanding how efforts to prevent further transfers shaped reservation land tenure. Under the Dawes Act of 1887, reservation lands were allotted to individual Indians, but held in trust by the federal government until allottees were deemed “competent” to hold fee-simple title. In 1934 the Indian Reorganization Act locked into trusteeship those lands that had not been released. We assess whether incomplete property rights resulting from trusteeship have affected reservation incomes using new panel data on income, land quality, and tenure. Our data reveal a U-shape between per capita income and the share of prime agricultural land on reservations. This is because reservations with relatively poor land were less likely to be allotted and, hence, remain under tribal control while reservations with high quality land were more likely to become fully privatized. Reservations with mid-quality land were allotted, but were less likely to be released from trusteeship. We conclude that incomplete property rights have stunted income growth for Native Americans, relative to local control, whether communal or private.
We study how governance and firm boundaries affect an organization’s ability to adapt to unforeseen contingencies. To do so, we focus on the airline industry, where adaptation of flight schedules under bad weather is not formally contractible, and yet is essential for network performance. In our setting, major airlines may achieve adaptation through four different governance structures: (1) reshuffling flights operated through their own planes; (2) reshuffling flights operated by fully-owned regional partners; (3) reshuffling flights operated by independent regional partners; or (4) reshuffling flights operated by non-partners – competing domestic majors, international carriers, cargo aircrafts, or private planes. The major’s formal control over adaptation differs across governance structure, being maximum under (1), medium-high under (2), and low under (3) and (4). This creates a potential need for relational contracting to ensure timely adaptation both under integrated partnership (governance (2)) and under collaborative outsourcing (governance (3)), as argued by Baker, Gibbons and Murphy (2002). Using data from landing slot exchanges in the three airports of NYC during February 2016 under Ground Delay Programs called on by the Federal Aviation Administration, we examine differences in the nature, size and composition of slot exchanges across all four governance structures. Our results are consistent with a theoretical framework that compares vertical integration, relational contracting and arms’ length contracting as means of adaptation.
When contract enforcement is limited and markets are missing, trust becomes essential to economic exchange within large, complex, organizations. This paper explores the relationships between trust, organization and efficiency by focusing on coffee mills in Rwanda. We take advantage of three features of the context: [1] large number of large firms within an homogenous sector in a LDC; [2] simple technology allows for precise measurement of good management practices and unit costs differences and [3] a country in which, due to both long and recent history, significant variation in trust across narrowly defined communities is expected. We conduct a comprehensive firm survey of all mills, interviewing managers, owners, collectors, workers and farmers and match the data with a number of geo-spatial datasets. We obtain precise measures of trust by using canonical questions and play trust games among the respondents. We obtain information on specific managerial practices relevant to the industry and focus on the establishment of interlinked transactions between wet mills and farmers. Within narrowly defined locations we document significant dispersion in unit costs across mills. The dispersion is generated by variation in unit costs other than conversion ratios and coffee cherries input prices, i.e. from components of unit costs that are directly affected by management practices. We find that relationship-specific measures of trust positively correlate with both efficiency and managerial practices as predicted by theory. The importance of trust in an environment with missing markets overturns standard presumptions on the relationship between competition and efficiency. We show preliminary evidence that competition is associated with lower trust and higher unit costs. The evidence suggests that building trust is essential in successfully managing agricultural value chains and that the market is characterized by pecuniary externalities not mediated by prices.
This paper quantifies the value of importer-exporter relationships. We show that almost 80 percent of U.S. imports take place in pre-existing relationships, with sizable heterogeneity across countries, and show that traded quantities and survival increase as relationships age. We develop a two-country general equilibrium trade model with learning that is consistent with these facts. A model-based measure of relationship value explains survival during the 2008-09 crisis. Knowledge accumulated within long-term relationships is quantitatively important: wiping out all memory from previous interactions, on average, reduces consumption by 5 percent on impact and by 48 percent over the transition back to steady state.
This work takes a dynamic perspective on institution building and studies the interactions between the European Commission and the European Court of Justice in the construction of the European Union. We focus on how these two bodies attempt to strengthen their legitimacy by making decisions. The Commission is mandated to deepen the EU integration, while the Court is aimed at establishing the rule of law. To do so we focus on the decision of both bodies related to state aids; i.e. subsidies granted by national governments in favor economics players involved in the provision of services related infrastructures. Relying on an original database covering all state aids programs (6,000) between 2000 and 2015, we show that the Commission tends to reject programs originating from countries who are resistant to the EU integration. On the other hand, we show that when firms or national governments appeal the decision made by the Commission, the reversal of the Commission decision by the European Court of Justice is positively correlated with the transposition deficit. Since the Commission acts before the Court, we interpret these two results as evidences showing that the Commission is actually biased against countries with greater resistance to European integration, while the Court corrects the bias created by the Commission. Overall our analysis suggests that both institutions make their decision according to their different mandates.
We develop and empirically test a theory concerning host-society natives' beliefs about whether immigrants should culturally assimilate into the host society or preserve their own cultural norms. We argue that when national identity is a source of intrinsic utility, the longevity of national identity influences a national identity's perceived resilience to an ostensible immigrant threat and, thus, affects natives' beliefs about the need for immigrants' cultural assimilation. Empirical evidence based on data from countries of wider Europe supports our theory. An expert survey-based measure of the longevity of national identity, first, exhibits a robustly negative effect on the strength of natives' preferences in favor of immigrants' cultural assimilation and, second, is an important contextual moderating variable that shapes the effect of individual-level characteristics on their beliefs. Thus, host-society natives' beliefs about the necessity of immigrants' cultural assimilation versus accommodation of cultural diversity reflect a historically-rooted sense of national identity.
According to the Lisbon Treaty, the European Union has been founded on a set of shared liberal, cosmopolitan values. This image of European societies has been increasingly challenged by those that see a Christian tradition as the cornerstone of European identity, or those that deny that European nations have much in common at all. In this paper, we ask to what extent the European population supports the image of Europe that is portrayed in the Lisbon Treaty. Using WVS data from 26 European nations, we analyse the beliefs people hold on a selection of defining topics and first find that all people can be described based on three archetypes, each representing an ideal-typical configuration of values, attitudes and beliefs with which people more or less identify. While one of these archetypes (which we label ‘the post-modern liberal’) reflects the liberal, cosmopolitan set of values espoused in the Lisbon Treaty, the other two archetypes (religious conservative and leftist conservative) conjure up images of Europe that are decidedly less liberal. Each individual is a combination of these extremes, with most people tending towards the conservative types forming the majority of the European population. Secondly, we find that the fault lines between people run across member states rather than between them. People resembling each archetype can be observed in each and every member state individually, although they differ in their degree of prominence in different countries. We conclude that the vision of society underpinning the European project is not widely shared among the European population. What is more, the contestation of European identity takes place within rather than between member states, and occurs along similar lines in each of them. Inter-country differences are actually relatively small compared to intra-country heterogeneity. European societies are united in sharing the same diversity.
Using data from a major U.S. retailer, we find that black, white and Hispanic managers within the same store are 2-3% more likely to hire workers of their own race. This segregation may be caused by taste-based discrimination, whereby managers intrinsically prefer same-race applicants, or by screening discrimination, whereby managers have better information about same-race applicants. To separate between these hypotheses we use the productivity distributions of commission-based salespeople. We find workers are generally more productive when hired by a same-race manager, and that white and Hispanic workers also have lower productivity variance when hired by a same-race manager, suggesting that screening discrimination is more important than taste-based discrimination.
We analyze a new management survey for around 1,000 firms and 10,000 employees across two large provinces in China. The unique aspect of this survey is it collected management data from the CEO, a random sample of senior managers and workers. We document four main results. First, management scores, much like productivity, have a wide spread with a long left-tail of poorly managed firms. This distribution of management scores is similar for CEOs, senior managers and workers management, and appears broadly reasonably compared to US scores for similar questions. Moreover, for all groups these scores correlate with firm performance, suggesting all employees within the firm are (at least partly) aware of the their firms’ managerial abilities. Second, the scores across the groups are significantly cross-correlated, but far from completely. This suggests that while different levels of the firm have similar views on the firms management capabilities, they do not fully agree. Third, we find that the CEO’s management scores are the most predictive of firm performance, followed by the senior managers and then the workers. Hence, CEOs do appear to know best about their firms management strengths and weaknesses. Fourth, within-firm management score dispersion is negatively correlated with investment and R&D intensity, suggesting long-run planning is linked with greater consistency in management across levels in firms.
Wage rigidity creates real and financial frictions, though the real-world drivers of rigidities remain largely unstudied. We use staggered commission reductions at a sales firm to estimate effects on worker turnover and effort. In response to an 18\% decline in commissions, we find turnover increases for the most productive workers. We detect limited effort responses, and find no evidence of different effects based on workers' expectations of fairness or future promotion. The findings suggest that adjustment constraints stem primarily from adverse selection concerns on the extensive (turnover) margin as opposed to asymmetric effort responses on the intensive margin.
Virtually all theoretical work on elections and collective choice assumes that votes are either tallied perfectly, or that deviations from the truth stem from partisan fraud. However, in large electorates where votes are tallied by hand, as in most modern democracies, the accuracy of vote totals cannot be guaranteed even in the absence of fraud. We provide the first systematic evidence about the incidence, causes, and consequences of inaccuracies in poll-booth-level vote tallies. Using data for the universe of over seventy million voters in Mexico in five national elections, we exploit various procedural randomizations and rule-based discontinuities to show that the human capital of poll booth officials, tallying difficulty, and workload are major causal drivers of tallying inaccuracies. We find no evidence that tallying inaccuracies reflect partisan manipulation or fraud. Nevertheless, inaccuracies are strongly correlated with subsequent recounts, and in tight races they can change who wins. Even nonpartisan tallying inaccuracies, therefore, threaten public trust in election results and confidence in electoral institutions. Our findings highlight an unrecognized challenge to the practice of democracy and collective choice.
Where do cities emerge and evolve? We examine persistence and change in the distribution of Mexico's urban population from the colonial era to the present, with emphasis on the country's 20th-century transformation. We demonstrate that while early trade patterns and historical persistence were instrumental in sowing the seeds of Mexico's contemporary city system, both technological change and policy significantly altered the trajectory of urbanization. The relative importance of locational fundamentals decreases over time, while the influence of international trade access increases, highlighting that political and economic decision-making shape the importance of geography for development. The findings suggest that although geographic advantage plays an important role in initial city emergence, geography is not destiny in urbanization.
We analyze a model of reform and rebellion to explore Alexis de Tocqueville's conjecture that reform provokes political unrest. Our theory emphasizes the role of reform in determining expressive motivations to rebel through two forms of reference dependence: reform reduces grievances to the extent that its implementation improves on the status quo, but it also raises expectations that contribute to grievances when reform is implemented by local agents with a stake in the status quo. When reform is predominantly locally implemented and state capacity is weak, a more ambitious reform leads to greater concessions by local elites; nonetheless, the equilibrium probability of rebellion also increases. This tradeoff is robust to assuming that citizens are motivated by instrumental as well as expressive concerns and to the presence of strategic complementarities across localities. We illustrate our results with a discussion of Russia's Emancipation Reform of 1861.
We study the consequences of personalized medicine (defined as the use of personal genetic characteristics for medical purposes) in a context where some people are more precisely informed about their individual probability of developing a disease than others, and where individuals freely choose whether to reveal this more precise information to insurers or not (so-called “consent law” legislation). In our model, this information is helpful to tailor some prevention effort in order to decrease the probability of developing the disease (primary prevention). We study the equilibrium insurance contracts offered by a competitive fringe of insurers when the prevention effort is observable and contractible, and when an exogenous fraction of individuals has performed the genetic test. Our main objective is to understand the type of insurance contract offered at equilibrium (pooling or separating) as a function of the fraction of individuals who take a genetic test, and of the cost of the prevention effort. Our secondary objective is to study, in the case of separating contracts, whether the separation of types according to their risk is made by under-providing insurance to the low risks, and/or by forcing them to change their level of prevention effort.
We argue that the rationale for marriage is to provide paternity assurance so that men have an incentive to contribute to the upbringing of the children. Without the prospect of material support, women will simply seek the highest standing man they can reach to father their children. The society will then be similar to that of sea lions or chimpanzees. However, material support enhances the survival of children; an arrangement that creates incentives for males to provide support is likely to benefit the survival of the species. We propose that the institution of marriage, along with the constraints it imposes on women, serve the purpose of assuring paternity so that men are willing to spend resources on their offspring. We conduct two empirical tests for the hypothesis. The first one relates to the ease of determining paternity and the constraints on the wives. Our hypothesis predicts that the easier it is to determine paternity, the fewer the constraints. The emergence of genetic paternity tests offers an opportunity to test this implication. We show that states that accepted genetic testing as a legally valid way of establishing paternity early experienced an increase in women’s labor participation sooner than states that initially ignored the new technology. Our second test compares the relative achievement of children of intentional single mothers with that of children of unintentional single mothers. A clear implication of our hypothesis is that women who plan to be single mothers will seek men of higher standings than them, while women who plan to marry in order to obtain support will marry men of the same standings as them. And we expect that children of the two groups of women will perform differently. We show that the children of intentional single mothers outperform their mothers by a greater magnitude than do the children of unintentional single mothers, as predicted by our hypothesis.
Whether a history of transactions between buyer and supplier produces routinization benefits and/or adaptive benefits is a question of great relevance for understanding transaction performance, firm performance, and innovation. We theoretically delineate the differences between routinization and adaptation benefits of transaction history, and develop discriminating predictions that distinguish the two. We examine these predictions using an unusually detailed data set on transaction outcomes for a prominent producer in a historically significant industry. We find that repeat transactions produced overall efficiencies for the producer and its buyers, in the form of lower production costs and lower transaction costs. Our results also support the idea that repeat-transactions between buyer and supplier are adaptive, producing benefits not only for doing the same things again and again, but for doing new things. We discuss how the strategic capability of a firm depends on its history.
We study a simple economy where a seller may either deal with a private buyer or with the state. We show that to induce the seller to transact, the state’s ruler must establish different kinds of reputations in the two governance regimes. Under public contracting, the ruler must credibly commit to compensate the seller. Under private contracting, the ruler must commit not to expropriate the seller and to enforce the buyer’s promise to compensate her. Thus, it is comparatively harder (easier) for the ruler to establish the reputation necessary for private contracting when political constraints on expropriation, and judicial institutions supporting ruler’s enforcement, are weak (strong). This implies that in contrast with the conventional wisdom, contracting with the state creates, rather than destroying, value under weak institutions. Our model provides a theory of the costs and benefits of privatization, the optimal patterns of foreign direct investment, and more generally, the optimal allocation of contracting roles among public and private actors.
Although property rights and transaction costs are key, their determinants and interaction are still poorly understood. Within trade interactions, a rise in transaction costs has the marginal effect of inefficiently pushing some high-valuation potential buyers to expropriate the original owners' property and the infra-marginal one of decreasing the social gain from the transfers that are still consensual. Then, it must also reduce the protection of property rights, which gages the probability of unsuccessful expropriation. This pattern holds true regardless of whether transaction costs are driven by frictions outside the control of traders or determined by the mix of the dispersion in their valuation and either the original owners' market power or their privileged information. A similar conclusion applies to an upstream firm's property rights on an ex ante non contractible input necessary to a downstream firm to introduce a new technology. This time, transaction costs rise with the likelihood of a more productive technology. These implications survive if a group of traders/innovators has a larger political influence on institutional design and if the disincentive effect of weak property rights is considered. The model predictions are consistent with the negative effects of proxies for market frictions and failures on measures of the protection of personal, intellectual, and financial property that I document for a panel of 135 countries spanning the 2006-2015 period. This evidence suggests that the negative correlation between weak property rights and economic outcomes might be partly spurious.
Much of the literature contrasts the dynamics of free markets with the ‘political’ dynamics of governance. This dichotomy leaves us blind to the empirical observation central to institutional economics: that complex market systems and institutions of governance cannot be found apart. Even as an analytical distinction, binary market-hierarchy distinctions obscure the ways in which interaction among real-world economic agents is constitutive of the wider processes of formal and informal governance that shape the terms of competition in the first place. Institutional economics has explored the relationship between markets and firms, governance institutions and economic performance, and why societies choose inefficient institutions, among other crucial questions in political economy. Yet we have no theory of the precise relationship between market exchange and patterns of governance, nor of how the change in one is related to change in the other. Building on the seminal insights of Coase, this paper theorises how and why economic interactions generate institutions of governance in the first place. Extending the crucial insights of institutional economics, this paper demonstrates in theoretical terms how the interactive utility-maximising behaviour of economic agents generates both formal and informal institutions and processes of governance from regulation to dispute settlement. Conflict and competition in market interaction combined with transaction cost dynamics lead to mutually beneficial co-ordination mechanisms and the emergence of order essential to the continuity of market exchange. Thus the broader patterns of institutionalised co-ordination we characterise as governance are endogenous to the self-interested and rational utility-maximising behaviour of economic agents in a market setting.
Many markets rely on third-party punishment and reputation mechanisms to incentivize cooperation between buyers and sellers. This paper investigates when truthful communication on such platforms is incentive compatible. We find that communication incentives are difficult to support if each side has a myopic incentive to deviate, but easy to support if only one side has a myopic incentive to deviate. Accordingly, there are strong gains from structuring trade so that either one side moves first, or can use an enforcement intermediary to guarantee their cooperation.
Classification institutions - such as social norms, cultural or religious traditions, laws, or regulations - assign a normative label, acceptable or wrongful, to actions. This paper investigates how classifications determine and are determined by the degree of expected compliance and the available tools of enforcement. We construct a game theoretic model with N players of different types to illustrate and compare classifications emerging from social norms with those from a formal legal system. We illustrate how a given classification can lead to compliance and then check for the degree of compliance that it can achieve given the enforcement methods. We show that a trade-off inherent in any attempt at classification is that a strict classification might yield better outcomes when people comply but will make enforcement more difficult. The results illustrate how for a given degree of expected compliance, classifications used by social norms (don’t eat meat) with decentralized enforcement cannot be as strict as the one used by a police action based court system (don’t eat peacock meat). This implies that efficient design of classifications can be used as a policy lever to adjust expectations of compliance with given enforcement capability or to improve enforcement when expected compliance is fixed.
In this paper we model two important, we argue related, features of human normative systems: 1) that the enforcement of rules is routinely dependent on the voluntary enforcement actions of individual agents other than official enforcers; and 2) that human systems of rules frequently include rules with little or no discernible direct impact on welfare ("silly rules"). We show that agents in environments with dense normative structure (lots of silly rules) are able to more accurately and quickly determine whether important rules with consequences for welfare are effectively enforced by other agents. As a result, groups with dense normative structure are more robust to shocks to beliefs about enforcement and adapt more quickly to changes in the sustainability of enforcement. We argue that some norms, rather than directly impacting social welfare, may play a legibility function, assisting agents in their understanding of what are the active rules in a community.
We examine whether external institutional linkages can affect management quality and its relationship to productivity in manufacturing firms. We draw on novel empirical evidence from China's transition economy, where state control cements legitimacy for a subset of firms. Using measures of management quality in Chinese firms from the World Management Survey (WMS), we observe large variation in average management practice levels across ownership types, with low scores for domestic private firms and high scores for state-owned firms, after controlling for firm size, labor skill level, and industry. We match the WMS management measures with firm's value-added total factor productivity (TFP) estimated using data from China's Annual Industrial Survey, and show that the magnitude of the relationship between management quality and TFP is larger at statistically-significant levels for state-owned firms compared to both domestic and foreign private firms. We trace these differences to individual practices, and find the practices most strongly associated with productivity in state-owned firms suggest long decision-making horizons and diverse goals beyond profit. Our findings suggest state firms, with access and accountability to state authorities, may be playing a "long game" to overcome a historical productivity disadvantage, whereas private firms may be more focused on short-term gains, affecting investments in, and payoffs to, management practices.
In this paper, we examine whether comovement in the stock returns of pairs of Chinese firms connected to the same political network are systematically shaped by the prevailing coordination vs. competition incentives of the network’s politicians. We find strong evidence that stock price comovement is affected by the embeddedness of the firm-politician tie within the network. Among pairs of firms connected to a network through a common politician, we document an increase in stock return comovement. For those pairs of firms connected to a common network via separate politicians (rather than a common politician), we document a relative decrease in stock return comovement. This negative effect suggests that the politicians’ relationships within these political networks are generally adversarial rather than cooperative in nature. This interpretation is supported by evidence that stock price comovement becomes even more negative (positive) in settings which are expected to increase competition (coordination) between the separate politicians (by the common politician).
We examine the effect of political connections on market perceptions of firm risk, as measured by a firm’s (equity) beta, and provide causal evidence of an increase in risk when the government appoints directors to a firm’s board. To address endogeneity concerns we exploit a natural experiment in Argentina, where the nationalization of the country’s pension system gave the government the right to appoint directors to some firms’ boards. Our results are not driven by increases in financial leverage or changes in financial performance. We find evidence of a higher payout ratio in politically connected firms, which we suggest could result in increased risk of interference (or expropriation) in politically connected firms.
Performance reporting in sunshine regulation is subject to disclosure biases, because agents may game the regulation or encounter diculties in complying. These biases limit the appraisal of the impact of sunshine regulation on performance. We investigate the behavioral causes of such disclosure biases by focusing on transaction costs economizing and opportunism. We provide an original methodology to take into account information asymmetries in principal-agent relationships. We focus on water utilities management in France. Our dataset includes 795 observations covering water utilities and performance indicators characteristics. It allows for comparisons of revealed and observed performance and identies dierent types of disclosure biases. Findings indicate that opportunism is a signicant motivation for disclosure biases while, unexpectedly, transaction costs are not a direct trigger of disclosure biases.
Bureaucracies with field operations that cannot be easily supervised and monitored by managers are caught between two sources of dysfunction that may harm performance. The first source of dysfunction is straightforward: field workers may use operating slack and asymmetric information to their own advantage, thwarting an organization’s objectives. The second source of dysfunction is often overlooked: attempts to limit workers’ autonomy may have deleterious effects, curbing agents’ ability to respond efficaciously to the environment. I find that the parliaments and executive boards to whom International Development Organizations (IDOs) are accountable differentially constrain IDO organizational autonomy, which in turn affects management’s control of field agents. Tight management control of field agents has negative effects, particularly in more unpredictable environments. Attempts by politicians to constrain organizations in an effort to improve performance may sometimes be self-undermining, having net effects opposite those intended.
Administrative costs have been estimated to represent 25% to 31% of total health care expenditures in the United States, a proportion twice that found in Canada and significantly greater than in all other OECD member nations. Knowledge of how specific billing activities contribute to administrative costs can help inform policy solutions to reduce these expenses, but prior studies have analyzed billing costs in aggregate without attributing the costs to specific component activities. Moreover, these studies were conducted over a decade ago and before widespread adoption of certified electronic health record (EHR) systems, which were in part intended to simplify the billing process. This study uses a state-of-the-art accounting method, time-driven activity-based costing, to develop estimates of billing-related costs in a single, large academic health care system for 5 key types of patient encounters: primary care visits, discharged emergency department visits, general medicine inpatient stays, ambulatory surgical procedures, and inpatient surgical procedures. We find that costs for billing and insurance-related activities range from $20 for a primary care visit to $215 for an inpatient surgical procedure and represent up to 25.3% of professional revenue. These findings reveal that significant investments in health information technologies and electronic health records have not reduced already-high administrative costs in the US healthcare system.
We study the effect of increasing the statutory minimum wage on individual worker productivity. Within a workforce of base+commission salespeople from a large US retailer, and using a border-discontinuity research design, we document that a 65 cents (one standard deviation) increase in the minimum wage increases individual productivity (sales per hour) by 2%. With the help of a model, we seek evidence in favor of two distinct channels through which this productivity gain could arise: a demand increase, and an incentive effect due to the increase in compensation, part of which may be endogenous due the firm adjusting its compensation scheme. We find evidence only for the second, that is, the compensation scheme channel. Further, we find that the productivity gains are concentrated among low-productivity workers, and arise mostly during high-unemployment spells, which when read through the lens of our model suggests an efficiency-wage effect. We find some indication that the firm increases base pay in response to minimum wage increases, which is consistent with optimal contracting within our model, but the model suggests that the productivity gain is not fully mediated by this endogenous firm response
In a 13-month RCT covering all grocery store jobs at a European grocery chain, 238 stores were randomized to pay different levels of bonus for employees to make referrals; the bonus amount reached up to 40% of monthly take-home salaries. Larger bonuses provide a statistically significant, but economically small boost to the number of referrals made. Despite this, the referral bonus programs are highly profitable for the firm, as referred workers are substantially more likely to stay and also boost other workers' retention. Consistent with the profitability of the bonuses, after the RCT, the firm rolled out a referral program across the entire firm and increased bonuses. In the post-RCT roll out, referral rates remain low for grocery jobs, but are high for non-grocery jobs, which havea much better reputation than grocery jobs. Surveys support that referrals remain low for grocery jobs despite significant bonuses because of the reputation of grocery jobs as undesirable.
Serial entrepreneurs are talked about in the press, but little is known about the performance of their firms. Until better data becomes available on U.S. firms, we use panel data from Denmark on 216,524 newly founded firms for 2001-2013. Several key results are uncovered. First, when opening his first firm, the serial entrepreneur has higher sales and productivity than the novice, suggesting that the serial entrepreneur has better innate skills and other features, like better access to capital. Second, the serial entrepreneur opens his second firm with much higher productivity and sales than he had obtained when he closed his first firm. This evidence suggests that the serial entrepreneur is learning while running his first firm. His new knowledge – called intangible capital – is built into his second firm when it opens with higher sales. Young people learn the most from running their first firm. The young serial entrepreneurs are learning intangible things used when opening their second firm – such as developing marketing or customer networks – that the older serial entrepreneurs had learned before opening their first business.
I analyze whether reducing geographic distance to high-wage jobs increases access to those employment opportunities. I collect office locations and campus recruiting strategies for over 70 prestigious banking and consulting firms, from 2000 to 2013. Using an event-study framework, I find firms are 2 times more likely to recruit at local universities after opening a nearby office, and 6 times more likely outside industry clusters. New target campuses outside industry clusters are less academically selective. The results suggest place-based policies may improve access to high-wage firms, and also suggest the importance of a university's local labor market for post-graduation outcomes.
Little is known theoretically, and even less empirically, about the relationship between firm boundaries and the allocation of decision rights within firms. We develop a model in which firms choose which suppliers to integrate and whether to delegate decisions to integrated suppliers. We test the predictions of the model using a novel dataset that combines measures of vertical integration and delegation for a large set of firms from many countries and industries. In line with the model’s predictions, we obtain three main results: (i) integration and delegation co-vary positively; (ii) producers are more likely to integrate suppliers in input sectors with greater productivity variation (as the option value of integration is greater); and (iii) producers are more likely to integrate suppliers of more important inputs and to delegate decisions to them.
We examine the within- and across-firm shipment decisions of tens of thousands of goods-producing and distributing establishments. This allows us to quantify the normally unobservable forces that determine firm boundaries; which transactions are mediated by ownership control, as opposed to contracts or markets. We find firm boundaries to be an economically significant barrier to trade: having an additional vertically integrated establishment in a given destination zip code has the same effect on shipment volumes as a 40 percent reduction in distance. We then calibrate a multi- sector trade model to quantify the economy-wide implications of transacting across vs. within firm boundaries.
We empirically investigate the effect of recent horizontal mergers between major U.S. airlines on the vertical relationships that these airlines have with their regional airline partners. Regional airlines operate flights as subcontractors for major airlines under the major’s brand, while majors are responsible for pricing, marketing, and sales. We study whether the number and scope of the relationships between majors and regionals change after two majors merge with each other. We also investigate whether these changes lead to route entry and exit.
Roughly one out of every six dollars in the U.S. economy flows to the health care sector -- a sector that is currently grappling with the causes and consequences of greater consolidation both horizontally and vertically. Despite much of the academic literature focusing on the effects of hospital mergers or system-joiners (i.e., horizontal integration), vertically integrated hospital-physician systems have become increasingly common. For example, recent research shows that health system ownership of physician practices in the U.S. more than tripled from 2009 to 2015 and now affects roughly a quarter of all physician practices. Motivated by these empirical trends, our focus in this paper concerns the effects of increased vertical integration between physicians and hospitals on hospital pricing and quality of care. We assemble a unique combination of data to investigate the effect of contemporary (2009-2015) vertical integration between hospitals and physicians on hospital pricing and performance across the U.S. Our estimation relies on both panel data methods as well as instrumental variable approaches, which comport well with the most closely related literature. Across our different identification strategies, we find a robust 3-7 percentage-point increase in hospital prices following vertical integration with local physician practices. There is little indication that hospital quality is commensurately higher, and all supplementary analyses point to stronger bargaining positions for hospitals when negotiating payment rates with insurers. Coupled with the existing literature, our findings encourage greater scrutiny of this industry trend in vertical integration by antitrust authorities.
How do firms build relational contracting capability? Although there is a burgeoning literature on the benefits of relational contracts, most studies focus on the maintenance and performance of existing relational contracts. Yet there is growing recognition that development of relational contracting capability – that is, the ability to establish relational contracts that are both clear and credible – is difficult. In this qualitative study, we examine the first interfirm relationship established by Hewlett-Packard – its partnership with Canon to co-develop and commercialize the desktop laser printer. Based on interviews with participants in the HP-Canon relationship going back to the early 1980s, coupled with archival information, we document the steps taken to assess the conditions for a fruitful relationship, establish the parameters of a relational contract to support that relationship, and address unexpected events that put strain on the relational contract. These actions are informed by relational contracting theory, and also shed light on the agency problems that can exist in relational contracts when the incentives of managers in the alliance differ from the incentives of executives in the alliance.
We investigate whether manufacturing plants change the degree to which they outsource downstream value-chain activities in the wake of advances in information technology (IT). Using U.S. Census Bureau data for over 5,500 establishments over ten years, we observe whether production is destined for further transformation within the same firm or is sold to external value chain partners. We also directly observe how plants are using general-purpose IT for different types of coordination. Exploiting the technology shock of the commercial internet in the mid-1990s, we compare pre-internet transaction patterns to post-internet ones at a given plant as a function of changes in IT use. Controlling for time-varying plant and firm characteristics – including changes in the ownership of establishments throughout the firm - our results show that externally-focused coordination over the internet was associated with a significant increase in market-based exchange. Moreover, this comes at the expense of internal vertical transfers and is consistent with a causal relationship between IT use and firm re-organization over time. To the extent that firm boundaries depend on the volume and locus of economic activity – and not just the number of units a firm owns – this has profound implications for the organization and size of firms in the digital age.
To generate downstream sales, manufacturers often spend both effort and compensation when working with their dealers. Existing theories are inconclusive about the interdependent role of the two kinds of instruments in motivating dealer effort; that is, whether they are substitutes or complements. There is little empirical evidence to inform their relations either. We first examine the conditions that determine the interdependencies among monetary compensation – both formal and informal – and manufacturer effort in a game-theoretical framework. We show that monetary compensation and manufacturer effort are complementary instruments in motivating dealer effort if the manufacturer’s effort is primarily about monitoring. They become substitutes when the manufacturer’s effort is primarily productive and thus provides indirect compensation. We then empirically illustrate some of these novel predictions in the distribution channel of the leading manufacturer of a computer accessory and its sixty dealerships in China. In particular, evidence from company archival and survey data shows complementarity between informal compensation and manufacturer effort in motivating dealer effort. This result appears to hold only when the dealers are situated in highly relational contexts. Theoretical and managerial implications are drawn from our analyses.
Social network theory has been used to formalize social relationships and (using what is called “graph theory") to chart connections between actors and institutions. We use these techniques to map relations among educational, political, religious, and charitable institutions in the Muslim community in greater Raleigh. We then introduce an intervention—a series of community-wide meetings that facilitate new connections between institutions that previously were not in communication—and assess both the durability of those new relationships and the broader impact on the network of institutional relationships across the community.
In deals of many varieties, parties enter into “faux contracts”—documents that look like contracts, but that lack the legal bite of formal legal contracts. Parties use faux contracts to pair formal contracting with informal (or non-existent) enforcement, thereby adding value in contexts as wide-ranging as sexual abstinence pledges and mergers and acquisitions. Parties use faux contracts in a variety of contexts. Examples include surrogacy contracts in states where they are outlawed, employment non-competition provisions where they are unenforceable, and non-binding term sheets in mergers and acquisitions deals. Use of faux contracts is most puzzling when parties are sophisticated—that is, when parties have the financial means and technical sophistication to enter into binding legal contracts, but choose to use faux contracts instead. This Article makes two contributions to the literature. First, it provides an account of when and why faux contracts flourish. Parties use faux contracts to decouple ex ante contracting from ex post enforcement, and to create a bespoke blend of formal contracting and informal or non-existent sanctions to meet their needs. Parties thereby harness the benefits of formal contracting without subjecting themselves to formal enforcement for breach. Second, this Article contributes to robust literatures in formal and relational contracting. It illuminates a new type of contract that occupies a space between formal and relational contracts. Formal contracts attach formal legal consequences for breach, while relational (or informal) contracts rely on informal sanctions—such as damage to reputation—to deter breach. Faux contracts break apart well-understood conventional pairings of contracting and enforcement, and reconstitute them to form innovative and fascinating contractual tools. Understanding faux contracting has significant implications for contract theory and practice, and has wide-ranging effects on parties, the economy, and society.
A growing literature, focused particularly upon the sovereign debt market, has identified powerful network effects and agency problems that impede contractual innovation. However, similar conditions exist in the M&A market, where innovation proceeds at a regular, if incremental, cadence, presenting a challenging counterfactual to current theory. This Article argues that the key to understanding innovation in the M&A market is recognizing that some commercial contracts are produced by networks of designers, rather than single attorneys or even single law firms. Using a combination of hand-collected data of 15 years of investment bank and law firm deal relationships in the M&A market, supplemented with the results of dozens of interviews with M&A practitioners and jurists, the Article demonstrates that the collaborative approach to designing contracts in the M&A market ensures that diverse perspectives and expertise are brought to bear in the creation of a merger agreement, unsettles expectations, requires deal lawyers to interrogate their transactional designs, and spurs communication. Because the combination of law firms and attorneys changes from deal to deal, that diversity is continually replenished, preventing stasis from setting in. In short, the networked production of M&A agreements builds dynamism into the market. At the same time, as attorneys and their law firms participate in the deal network over time, they gain a common foundation of expertise, which allows members of the network to quickly assimilate new ideas and approaches when they encounter novelty in a new transactional situation. Thus, the deal network is simultaneously a source of change and continuity in the market. The paper then discusses implications of this study of the M&A market for broader contract law and policy, and argues that contextual contract interpretation may be a key ingredient in the efficient operation of a deal network such as the one found in M&A.
This paper presents individual and country-level studies of reactions to misconduct. With access to complete data, I am able to measure reactions to misconduct and study how misconduct alters the composition of markets in a way that impedes improvements in governance. The individual-level analysis studies investor reactions to a stockbrokerage fraud in Kenya's Nairobi Securities Exchange. Using the NSE's electronic databases, I know the complete universe of investors at risk of victimization, those victimized in the fraud, and all trades made by all investors before and after the fraud. Results show that victimized investors who are co-ethnic with the perpetrator are paradoxically more likely to reinvest in the market than victims who belong to rival ethnic groups. A key implication of this result is that fraud alters the composition of the market by retaining more socially homogeneous population that is less likely to demand improvements in governance. I next extend this result to the country level, where I study changes in global capital flows resulting from state-sponsored violence. Using complete data on monthly bilateral financial transfers provided by SWIFT, I find that non-African countries with natural resource trade relationships with African countries react similarly to Kenya's co-ethnic investors. The resulting pattern is similar to before, where a violent African country's foreign financial ties become more concentrated but do not reduce in overall value following state-led violence.
This paper studies the relationship between landownership concentration and state-sponsored education in late-nineteenth century England. Using newly compiled data on a wide range of education measures for 40 counties and 1,387 local School Boards, I show a negative association between land inequality and human capital. To establish causality, I exploit variation in soil texture and the redistribution of land after the Norman conquest. I doing so, I document a strong persistence in inequality over eight centuries. Next, I show that the estimated effects are stronger where landlords had political power and weaker for education demand, suggesting that landownership affects state education through the political process.
Can stronger political competition improve rural livelihoods in developing countries? We explore this question in rural Pakistan, showing that greater political competition in a Provincial Assembly constituency predicts significantly better access to publicly-provided infrastructure and amenities, but no changes in other public goods including perceived access to justice and security. Nonetheless, overall welfare effects appear to be positive: higher political competition predicts higher expenditures per capita, especially among land-poor households. It also predicts higher land values, greater land wealth, and lower land wealth inequality. Further, political competition increases land rental, possibly indicating improved functionality of land markets. Sensitivity analyses suggest that our estimates are unlikely to be substantially affected by omitted variable bias, and they are further similar to instrumental variables estimates. The findings are also robust to use of alternate measures of political competition. Greater provision of both public and private goods appears to explain welfare improvements.
Why do Chinese city governments take over private bus firms, which have successfully provided local transportation at low cost for more than thirty years? This is particularly puzzling considering how private bus services are considered more efficient, and how state provision of bus service aggravated the dire fiscal situation of Chinese local governments, going against the central government’s instruction for more private provision of public transportation. Drawing from in-depth interviews and a survival analysis on an original dataset of 233 cities, I provide a novel explanation for de-privatization in an authoritarian context. De-privatization of the bus sector is primarily a political measure whereby local officials remove resisting private bus firms when launching unsustainable projects in the sector. Subject to an ineffective cadre evaluation system, local officials seek other opportunities to signal capability to the upper level government. One popular strategy is to launch “high-visibility projects”—infrastructure projects that boast scale and looks that signal responsiveness to national development initiatives. To avoid blame for wasteful spending, local officials ask private firms to pay for these projects. Because these career-driven, often unsustainable projects cannot easily bring private firms returns, state-business relation deteriorates as a result, and sometimes ends up with de-privatization. This paper sheds light on the ongoing de-privatization of multiple other public service sectors across Chinese cities, including water, public infrastructure, and wastewater treatment.
How does context influence individual voting behavior “in the wild”? Experimental field studies have shown that social factors such as peer pressure or the prospect of shame powerfully influence voting behavior. But the degree to which typical citizens are exposed to such pressures in practice remains an open question, as people select the company they keep and the news they read. We use panel data for twelve million Mexican voters to study the effect of local context on individual voting behavior. We exploit observational variation in context induced by citizens who move from one locality to another between the 2012 and 2015 federal elections. We find that differences in average turnout between the origin and destination localities substantially influence the movers’ probability of turning out in the election subsequent to moving. We deploy a variety of empirical strategies to isolate causation, including stratification by locality or by city bloc of origin or destination. The effects persist in subgroup analysis by age, sex, region, voting history, and distance from home to voting booth. We also find spillover effects on household members who did not move.
Medical technology firms seek to operate at the frontiers of innovation and new product development. When functioning properly, innovative medical devices can prolong and improve lives; when malfunctioning, the same devices can cause harm to patients, lead to product recalls by regulators, and disrupt status-quo operations by manufacturers. Medical device firms’ innovation efforts are therefore likely to be affected by product failures. Using 13 years of firm-level FDA data, this paper explores the effects of product recalls on new product submissions. Recalls vary by source (firm or rival), proximity (product area) and severity (classification), while product submissions vary based on technological sophistication and novelty. Recurrent-event hazard models are used to examine how recalls affect the hazard of major and minor innovation. The empirical results are informative: first, own-firm recalls decelerate and rival-firm recalls accelerate the rate of innovative activity; second, same product area recalls slow innovative activity more than different product area recalls; and third, severe recalls decelerate innovative activity more than non-severe recalls. The results suggest that product failures significantly influence firms’ subsequent innovation efforts, but these relationships are highly nuanced. The strategic and public policy implications that obtain from these findings are highlighted and discussed.
We consider an upstream innovator and two downstream competitors; and examine the impact of product market competition on the innovator's R&D strategy, when she can license her innovations to either one downstream competitor (targeted licensing) or both (market-wide licensing). We show that downstream competition unambiguously increases the appeal of targeted licensing over market-wide licensing. Moreover, competition increases the innovator's incentives to innovate under targeted licensing, but decreases these incentives under market-wide licensing. Thus, a threshold level of competition may exist such that above (below) that threshold, targeted (market-wide) licensing is optimal and innovation is increasing (decreasing) in competition. Using U.S. data across all industries over the years 1976 - 2006, we find empirical evidence that downstream competition has an U-shaped impact on upstream innovation. Data on licensing deals provides further empirical support that upstream innovators' licensing strategy is the underlying economic mechanism. In particular, as downstream competition intensifies, targeted licensing strategy becomes more appealing to upstream innovators than market-wide licensing.
Innovation activities create substantial firm value, but they are difficult to manage owing to agency risks which are commonly thought to result in shirking hence underinvestment in innovation. However, agency risks can also create inefficient allocation of resources among innovation activities, on which the literature provided limited understanding. We examine an important type of agency risk-that agents pursue quantity of innovation at the expense of novelty, and how it is influenced by corporate and public governance. We theorize that improved corporate governance tools, including better alignment of agents' private incentives and stronger monitoring, and high-quality public governance reduce such agency risk in state-owned enterprises (SOEs). Furthermore, high-quality public governance enhances the functioning of corporate governance tools in further reducing this agency risk in innovation. We test our theory in the context of Chinese SOEs that responded to state's pro-innovation policies relying disproportionately on quantifiable outcomes (e.g., patent counts) for assessing innovation performance. Our difference-in-differences estimates provide overall support for the hypotheses. These findings provide new insights on how agency risk affects innovation by distinguishing the consequences on quantity and novelty of innovation and on how conventional corporate governance tools shaping innovation is dependent on public governance of institutional environment.
We draw on uniquely detailed micro-level data from a Belgian professional medical liability insurer to examine how different procedural and legal events that take place during the unfolding of a medical malpractice claim influence the timing of its settlement. Utilizing the competing risks regression framework, we find that settlement hazard is all else equal statistically significantly positively associated with the completion of those procedural and legal events that most effectively reveal factual information about the underlying medical malpractice case. Consistent with theory, settlement hazard is either unassociated or even negatively associated with the completion of other procedural and legal events. Our analysis therefore provides policy insights into which aspects of the resolution process could be emphasized, and which de-emphasized, in order to reduce the often excessive duration of medical malpractice claims and its adverse effects on the healthcare system.
Whistleblowing by employees plays a major role in uncovering corporate fraud. Recent laws and global policy recommendations aim at facilitating whistleblower protection to enhance the willingness to report and to increase deterrence. We study these issues in a theory-guided lab experiment. Whistleblower protection indeed leads to more reporting of misbehavior. However, our experimental findings suggest that non-meritorious claims are an issue, as they reduce prosecutors' incentive to investigate, which hampers the intended improvement of deterrence.
It is no secret that litigation can harm a defendant’s reputation. Less well understood is that plaintiffs—and especially sophisticated business plaintiffs—use litigation to enhance their reputations. This Article examines how and why litigants use courts of law to influence the court of public opinion. In doing so, this Article makes three contributions to the literature. Descriptively, it improves our ability to understand litigants’ incentives. For decades, legal scholars have asked: why do plaintiffs file lawsuits they know they cannot win? This question has divided scholars: Law and economics scholars argue it is because of wealth extraction through settlements, while law and social movements scholars attribute it to social mobilization and heightened public awareness. This Article synthesizes the insight from these academic camps to provide a more complete and nuanced understanding of litigants’ incentives: that is, litigation can serve economic and informational objectives for both private and public gain. Normatively, this Article highlights the importance of an oft-neglected function of adjudication: information transmission. Accounting for litigation’s effects in court of public opinion enables us to better distinguish between socially desirable and undesirable “public relations litigation.” Practically, this insight allows us to design better rules for encouraging the former while discouraging the latter.
This paper describes the organization of a trade network along the Silk Road in the seventh and eighth centuries, a trade network dominated by an ethnically homogeneous Sogdian merchant group. I will apply my theory of the ethnically homogeneous middleman group (EHMG, Landa 1981) - involved in the marketing of smallholders' rubber in SouthEast Asia - to explain the success of the Sogdian merchants in the medieval period. A new twist in this paper is that unlike the Chinese EHMG, which is a private ordering organization, the Sogdian merchant group had some governmental participation, hence the Sogdian merchant group was a semi-private ordering phenomenon.
We look into the formation of risk-sharing groups in social networks. In particular, we are interested in risk-sharing link formation among agents of different risk types. Previous empirical studies almost consistently find that informal mutual insurance links are largely formed based on homophily. In this study, we point out that the evidence of homophily, established in the previous literature, is not robust if we use panel data documenting people’s network connections instead of using snapshot self-reported social links, and if we introduce degree heterogeneity in the econometric model for testing. We retrieve networks in 16 Thai villages based on records of economic in- teractions over 84 months. Our results show negative assortative matching with respect to risk types in kinship networks, which is consistent to the pre- diction of a standard risk-sharing matching game. However, links beyond kinship tend to follow a positive assortative matching process, even though the tendency is trivial. We apply the model of risk sharing in social networks (Ambrus et al. (2014)) to further explore the mechanism of the pattern of sorting. Our theoretical deduction indicates that the benefit of risk diversification through informal risk-sharing increases with the aggregated social value of network connections in the risk-sharing network.
Global art sales now exceed $60bn a year. In 2015, just over a quarter of this volume came from objects sold for more than $1mn at auction sales. With rising prices, art and cultural property crime has become a major criminal market. What underpins the trust of buyers in this market which is potentially riddled with “lemons”– i.e. fakes, forgeries and items with defective legal titles? Public funding to tackle art theft and fraud is very limited. We study the complex private governance system ordering this market. A multiplicity of experts screens high value objects for ownership and authenticity before each sale. Afterwards, there is a further layer of inspection. Generally, mistakes are resolved informally and confidentially. We show that the system is a polycentric governance system in which different actors govern distinct but overlapping issue areas, each of them working for individual profit (and prestige). The system is constantly challenged by changes in regulation or societal norms, litigation and criminal innovations. If private governance fails, entire sub-markets disappear until agents develop credible new solutions. We thus observe an evolving private governance regime rather than one in “steady state”.
We document determinants of incompleteness, rigidity, and delegation in union contracts using a new corpus of 30,000 collective bargaining agreements from Canada from 1986 through 2015. Using ideas and methods from computational linguistics, we extract measures of rigidity and worker control from the text of the contract clauses. We then analyze how rigidity and authority in contracts varies according to firm-level factors and external factors. We document that contracts impose obligations equally on firms and workers but give entitlements mostly to workers. Worker entitlements have increased as a share of contract clauses over the last forty years. An increase in personal income tax rates is associated with an increase in worker entitlements, consistent with a substitution effect away from taxed compensation (income) and toward untaxed compensation (amenities). Control of province government by the labor-supporting New Democratic Party is associated with higher worker authority, consistent with higher bargaining power for workers due to political support. We further document a role for contracts as reference points as proposed by Hart and Moore (2008): negative wage shocks due to low COLA adjustments mis-predicting inflation are associated with higher strike rates and strike intensity, consistent with conflict due to frustrated worker expectations relative to a reference point. However, this wage-strike effect is attenuated by contracts with higher worker authority, consistent with a better-managed relationship.
Despite the decrease in occupational segregation by gender since the 1970s, men’s share in historically female jobs has been fairly constant between 1970 and 2009 in developed countries. In this paper, I ask to what extent firms’ personnel recruitment strategies can impact the historical inertia in the selection into female-dominated sectors and attract qualified men to these jobs. Do recruitment messages containing cues against or aligned with the job stereotype affect adult occupational search and entry into a female-dominated job? If so, through which channels and for which types of people? I provide both a theoretical framework and experimental evidence to answer these questions. Theoretically, I study the strategic interaction between an employer and potential employees and generate predictions on the potential quality/diversity trade-offs involved in attracting minority workers through targeted advertising (i.e. men). I bring the theory to the field and perform two distinct experiments in collaboration with a UK organization, which recruits workers in social care on a national scale. Both experiments introduce exogenous variation to the content of recruitment materials. The first experiment explores whether recruitment materials which portray counter-stereotypical workers encourage information gathering by people who represent a minority in the occupation. Results indicate that men show a significant positive reaction to contents portraying other men. The second experiment explores whether the effectiveness of cues against or aligned with the job stereotype depends on people’s performance expectations. People interested in applying were randomly assigned to different registration emails that manipulated 1) salience on gender of past workers and 2) expected performance. Results show that performance expectations and gender salience interact in similar ways for both men and women, triggering 4% to 6% more applications.
In a firm-based field experiment, we randomly assigned over 650 agents to 4 different managerial treatments alongside an off-site hold-out group. The treatments include a $100 team incentive, structured face to face interactions, both the team incentive and structured interaction, and two control groups (one internal and one external). We find productivity gains of 14% with team incentives, 25% with structured interactions, and 27% with both. These estimates are similar when contrasted with the internal or external control group and in levels and differences with a pre-period. We find the performance gains are persistent for the structured interactions and fade out for the team incentives---underscoring the importance of management led processes, rather than incentives alone, to capture the benefits of peer interactions. The productivity gains for agents that received team incentives and structured interactions are submodular, suggesting these practices may have redundancies or crowd each other out. We also find evidence in support of these treatments inducing knowledge transfer and increased sales effort, albeit, in different proportions.
United States copyright law has a reputation as a tangled mess of overlapping legal doctrines. Although commonly maligned, such redundancy can play a positive role. Redundancy that is well designed and implemented can achieve a better balance between copyright law’s benefits and costs, can safeguard interests in competition and technological innovation, can improve protection of freedom of speech, and can enable flexibility and doctrinal evolution. On the other hand, doctrinal redundancy can have unfortunate results when it is excessive or otherwise unmoored from underlying purpose. Design principles of redundancy and anti-redundancy are thus virtually tailor-made to analyze copyright law’s structure for purposes of identifying potential justifications, flaws, and opportunities for reform. Building on prior work on legal redundancy and on copyright doctrine, this Article analyzes the promise and risks of doctrinal redundancy as a design principle for copyright. Specifically, the Article analyzes redundancy in multiple areas of copyright doctrine: (1) fair use and nonfunctionality, (2) fair use and improper appropriation, (3) copyrightable subject matter and originality, and (4) rights in reproductions and derivative works. The analysis indicates that distinct but overlapping doctrines of fair use, originality, and copyrightable subject matter can better police the boundaries of an expansive copyright regime than could a single doctrine alone. Such reinforced policing is particularly important to secure interests in free speech and competition from improper copyright encroachment. On the other hand, there is reason to question the social value of redundancy as embodied in distinctly identified rights in reproductions and derivative works. More generally, our analysis illustrates how attention to the structural design of legal doctrine can help to improve the content and operation of law.
In most contexts, making up data is forbidden - considered fraudulent, even immoral. Not so in patents. Patents often contain experimental data, and it is perfectly acceptable for these experiments to be entirely fictional. These so-called “prophetic examples” are not only explicitly permitted by both the Patent Office and federal courts, but are considered equivalent to factual data in patent doctrine. Though prophetic examples are thought to be common, there are no in-depth studies of the practice, nor any explanation for why fictional data are allowed in patents. Here, I provide the first historical, theoretical, and empirical analysis of prophetic examples. I collect and analyze a novel dataset of over 2 million U.S. patents and applications from the biology and chemistry industries. I find that at least 17% of experiments in this population are fictional. Through both empirical and theoretical analyses, I weigh the potential costs and benefits of prophetic examples and find that the costs prevail. Prophetic examples could be beneficial if they help patentees; but I find little evidence that they do so, even in the specific situations in which they should be the most useful. Instead, prophetic examples likely hinder innovation because they prevent others from conducting their own experiments – even after the patent has expired and even if the prophetic example is incorrect. Prophetic examples also hopelessly confuse scientists – a shocking 99% of scientific articles incorrectly cite prophetic examples as if they contained factual information – which means that made-up results from patents contaminate the scientific literature.
An informed (potential) plaintiff can demand a payment from an uninformed (potential) defendant with the threat of a law suit that may not be credible. The communication takes place before the law suit is filed and is costless to both sides. A unique equilibrium that satisfies the intuitive criterion exists and exhibits partial pooling—cases below a cutoff of legal damage reach pre-litigation settlement, while those above are filed for suit. This equilibrium offers an explanation for the distinctive behaviors of litigation PAEs who aggressively file law suits for settlements and portfolio PAEs who obtain licensing revenues through pre-litigation settlements. Among other results, we shows that, in the US legal system, increasing a plaintiff’s legal costs or adopting the fee-shifting rule reduces the number of filed law suits while risking driving more cases toward pre-litigation settlements. Surprisingly, reducing a defendant’s legal costs or increasing trial costs has the opposite effects.
This paper investigates how machine learning might bring clarity to human decisions made during the criminal justice process. Our data comes from all cases at the New Orleans District Attorney’s office for the years 1988-1999. We exploit random assignment of prosecutors, prosecutorial discretion, and heterogeneity across prosecutors in charge rates to compare prediction models to judicial decision makers. Our model of defendant rearrest, trained using de- fendant and offense characteristics, selects higher-risk individuals to prosecute than its human counterparts did. In particular: given a set charge rate, our model would reduce rearrest rates by five to nine percentage points. This model could have several important policy implications: it might identify defendant characteristics that are particularly ‘noisy’ to prosecutors; it could suggest ways of alleviating criminal caseloads without increasing crime rates; and it might provide important insights into how a prosecutor’s background relates to the quality and nature of their charging decisions.
This paper estimates the effect that wealth and power have on criminal justice outcomes by exploiting the random matching of drivers to pedestrians in traffic accidents. If justice is impartial, we should observe the same share of rich offenders both for poor and rich victims, conditional on location and time. Rich victims act as a control group to estimate the proportion of missing rich offenders whose victims are less powerful. I use this estimation approach on data from Russia, and find that its justice system is not impartial. The same approach can be applied not only to other countries but also to other characteristics that should be irrelevant to judicial outcomes in an impartial legal system, such as race and gender.
The share of offences that can be related to organized crime and subversive activities is increasing. Organized crime engages in systematic violation of the law with serious effects on society and is able to cover these violations in a very effective way. The same is true for subversion, which can be seen as “the paralysis of the (regional) society”. Notwithstanding the serious negative effects of these activities, it is difficult to combat them as they are performed illegally and ‘under the shadow of the law’. In this paper, we disentangle patterns of organized crime and subversion on Dutch industrial areas. Based on patterns and best predictors, we develop a method with which policy makers can judge the level of criminal and subversive activities taking place in a certain area. This method provides an instrument, think of a ‘sliding scale’ or an ‘organized crime hot spot’ providing insights in the state of a certain industrial area. Besides data we scrape from the Internet (and eventually the Darknet), we use all types of available data and information related to different aspects of organized crime and subversion. For example information from a suspicious person or firm; all sorts of files, for example on ‘clients’; annual reports and balance sheets; tax information; and registries from the Chamber of Commerce. In theory, also social media data and the browse/search behavior of a suspicious person or firm can be analyzed with respect to interesting trends and patterns. To mine, cluster, and analyze these structured as well as unstructured data sources, we mainly use techniques related to natural language processing and machine learning techniques. Based on all the patterns found, we can derive the best predictors for organized crime and subversion on Dutch industrial areas. This provides a method and an instrument with which policy makers can judge the level of criminal and subversive activities that take place in a certain area.
Using data on public procurement, we assess the impact of opening a public investigation into French municipalities’ choice of award procedures. We observe that municipalities that are suspected of being corrupt do not change their practices. We argue that such municipalities have no interest in change as long as the investigation is pending. Conversely, our results indicate that neighboring municipalities do adapt their award procedures to reduce the probability of being identified as corrupt. We conclude that even if investigations rarely lead to convictions, they are nevertheless more efficient than might appear at first glance through their positive externalities in the form of disciplining potentially corrupt neighboring municipalities.
What is the connection between crony capitalism, corruption, and the state apparatus in an autocracy? How much does corruption help the economy and when does it undermine state power? We investigate those questions by building a model that, instead of looking at the state as a black box, analyzes the link between various positions in the hierarchy of an autocratic state. The model is inspired by the party-state in China where crony capitalism and corruption play a central role in the economy. We show how the state's distortionary role in the economy encourages corruption between local officials and businesses, and how this corruption creates vertical corruption chains in the party-state hierarchy that threaten loss of political control by the Center over the hierarchy. We show the trade-off between the incentive effects of corruption and the danger of loss of control, leading de facto to define boundaries of corruption. The response by the Center to too high corruption depends on the power distribution within the Center and the de facto dependence of central leaders on support by provincial officials. Our results are consistent with recent developments in China.
In many developing countries, economic statistics (such as the growth rate of GDP) are highly imprecise--which makes it difficult to evaluate economic reforms and learn "what works". Improving economic statistics has thus become a top priority of development organizations. This paper, however, isolates a mechanism through which a push for better statistics can make matters worse. Precise statistics require the collection of data from a large number of firms. If firms suspect that sensitive information, when spreading through the bureaucracy, is misused to exact bribes, they have weaker incentives to invest. As a result, the effects of economic reforms are muted, making it even harder to detect "what works". To suppress this harmful mechanism, efforts to improve economic statistics should be accompanied by institutional measures such as the strengthening of the independence of the statistical office.
In the aftermath of the global financial crisis, a fiscal devaluation, understood as a shift in taxation from labor to consumption and deregulation in upstream service sectors, have been debated as possible tools of restoring competitiveness in peripheral countries of the Euro area. The relevant empirical evidence of the effects of these two measures in the EU countries is however very limited. Our study tries to fill this gap. We explore an impact of fiscal devaluation and regulation in upstream service sectors on sector-level economic activity in the EU countries in years 1995-2015. Our results indicate that fiscal devaluation boosts export performance, gross value added, gross fixed capital formation, employment as well as it contributes to lower growth of compensation per employee. We found that the higher share of labour costs in total production costs, the larger magnitude of the favourable effects induced by FD. We also found that generous unemployment benefits decrease the effects of FD and that these effects are on average stronger in euro area countries than among non-euro EU member states. Furthermore, we confirmed that stringent regulations of up-stream services hamper the magnitude of the effects triggered by FD. The results provide profound implications for economic policy.
We developed a dataset on state-owned enterprises across 27 European countries, over more than a decade (1999-2012). To achieve this, we relied on a representative firm-level dataset, AMADEUS. This dataset enables us to observe and identify state investors operating at several levels of government (local, province and federal), investing domestically and abroad. After documenting our identification procedure we present various examples pointing towards the accuracy of our dataset. We document a large presence of state firms in the Eastern part of Europe, in former Command Economies. State presence is heavily concentrated in certain sectors and we record differences in state orientation across the different Legal Origins present in our dataset. The extent to which states interfere in the economy correlates with several measures of general economic development, political freedom and corruption. Based on a simple regression framework, imposing a mixture of fixed effects, we present evidence that firms with a higher investment stake by state investors have a lower level of total factory productivity on average, employ more workers and pay higher wages, hereby reaffirming existing studies on the link state firms-efficiency and different firm objectives for a much larger cross-country panel.
This paper studies privatization as an agency problem, where ex ante neither investor nor the state know the productive value of the capital stock in a given firm. We study the case of an economy in transition from a centrally planned to a market-based system. Because under central planning prices did not provide adequate incentives, many of the firms to be privatized are characterized by a suboptimal combination of capital and labor. Our model replicates well the stylized features of privatization processes, as described by novel and unique data on privatization in Poland. We study the optimal pricing strategy by the state and buying decision of the investor. We allow for a variety of firms to be sold (denoted by the extent of misallocation) and heterogeneity of investors (denoted by the extent of capital constraints). We study whether privatization leads to improved allocation of resources in that economy, i.e. the effective use of resources. We also study two policy instruments – employment guarantees or investment guarantees – as potential policy tools to improve allocative efficiency of the economy.
By allowing networks to split, decentralized blockchain platforms protect members against hold up, but hinder coordination, given that adaptation decisions are ultimately decentralized. The current solutions to improve coordination, based on “premining” cryptocoins, taxing members and incentivizing developers, are insufficient. For blockchain to fulfill its promise and outcompete centralized firms, it needs to develop new forms of “soft” decentralized governance (anarchic, aristocratic, democratic, and autocratic) that allow networks to avoid bad equilibria.
We study delegation to a group of career-concerned experts, who can acquire information of different, type-dependent accuracy. The alternative to delegation - consulting the experts individually - induces more acquisitions of costly information. However, the acquired information is better aggregated under delegation. Which of the two effects dominates, depends on the cost of information. We characterize this trade-off theoretically and test our model's predictions in an experiment. While most of them are confirmed, we also find that principals do not rely on groups as often as predicted. This result even holds when the group merely takes the role of an advisory committee and the principal keeps the decision power.
Critics of American universities disparage the prevailing system of shared governance, in which boards, administrators, and faculty participate in institutional decision making, as a primary obstacle to solving — if not the ultimate cause of — the many problems confronting higher education. The extent to which bad governance is to blame for poor performance raises the question of how we ended up with our current system and why it has persisted: If superior arrangements exist, why were they not adopted? This paper associates the emergence and persistence of shared governance in universities with commitment problems created by the introduction and diffusion of research as major academic activity, thereby adding a temporal dimension to what were previously relatively discrete transactions. The paper uses a panel of 528 American colleges and universities to characterize the equilibrium relationship between research and decision-making authority and examine the performance implications of deviations from the equilibrium pattern.
Do frictions in the labor market prompt salience in the ethnic conflict and induce a shift in voting towards extremist political platforms in a privileged minority group? We address this question by exploiting a natural experiment of history that occurred in the late 1960s in South Tyrol, a northernmost and predominantly German-speaking region of Italy. During the 1930s, the region underwent a massive process of Italianization that strengthened markedly entry barriers into public offices for the German- relative to the Italian-speaking population. The resulting ethnic division of labour was brought back to question by a new reform package that aimed at redistributing jobs in the public administration sector proportionally to the numerosity of each language group. Following the announcement of the reform, we document: (i) an increase in the vote share of the post-fascist party in the general elections; (ii) a higher support for the post-fascist party in those municipalities where Italians were fewer; and (iii) an even higher support for the post-fascist party in those municipalities where Italians were more specialized as public officers. We interpret this result as evidence of the salience of ethnic conflict when institutional changes induce competition between ethnic groups and put at risk historical-established economic rents of a privileged group.
The internal affairs doctrine is the sine qua non of modern corporate law. It assigns to a corporation’s chartering state sole authority to govern relations among constituents “inside” the firm—its stockholders, directors, and officers—while leaving to territorial law the relations between “outside” constituents and the firm. But why law should cleave an enterprise in this way is a puzzle. Economic theories of the firm can’t explain it, and the academic literature is short on answers. This article offers an account of the internal affairs doctrine that simultaneously explains the doctrine’s contours, accords with its historical emergence, and defends its status as one of the economy’s central organizing principles. It argues that the internal affairs rule is best understood as the law’s adaptive response to a collective-action problem distinctive (historically) to stockholders. Because selling shares across state borders is cheap, shares would, absent the rule, tend to flow into jurisdictions that provide stockholders with robust capital withdrawal and control rights, even where such rights, in the aggregate, would undermine the corporate form’s signal virtues. The internal affairs doctrine forestalls opportunistic trading and so facilitates capital formation. Moreover, as this article shows, the doctrine in fact emerged in the years following economic and legal changes that made such trading a threat for the first time. The prospect of opportunism, then, rather than anything inherent in the idea of the firm, defines the corporate boundary.
Co-evolutionary theory in institutional approaches to international business posits that, contrary to traditional institutional theory, multinational enterprises (MNEs) can and do alter the institutional environments of host countries where they operate. MNEs therefore can act as institutional entrepreneurs. This paper complements co-evolutionary theory by arguing that MNE’s engage in institutional entrepreneurship with local institutions in two overarching ways: directed and diffused. Directed institutional entrepreneurship is when the MNE targets one specific local institution and actively engages with it to foster change. In contrast, diffused institutional entrepreneurship is widespread and the MNE’s institutional entrepreneurship can be seen throughout several institutional interfaces. Using case studies based on a mining multinational, Vale S.A., and its investments in the Global North (Canada) and the Global South (Mozambique), this paper explores the differences between directed and diffused institutional entrepreneurship.
By facilitating business transactions, generalized trust may alleviate the impact of economic downturns on firm performance. We advance this literature by studying how trust influences a firm’s reaction to a crisis depending on the ownership structure. Exploiting geographic variations in trust across Italian regions and the occurrence of the financial crisis in a difference-in-differences setting, we show that while trust alleviates the negative effect of a crisis on the profitability of non-family firms, it aggravates the negative effect for family firms. Trust is especially harmful for the profitability of firms with a high level of family representation in board positions. Studying the financing channel, we show that trust impairs the ability of family firms to access debt from suppliers in times of crisis.
Politics is believed to distort decisions in regulated private firms as well as in government enterprises. In order to compare the magnitude of these distortions, I examine one of the very few large U.S. industries where both for-profit and government enterprises sell goods to the public: electric utilities. I follow the existing literature in measuring political distortions in two ways: differences between government decisions in election years versus in non-election years, and governments' inability to quickly adapt to change. Using comprehensive U.S. data for the years 1964 through 2014, I find that for-profit electricity rates are more likely to be manipulated before elections, but are more responsive to costs, compared to government electricity rates. Thus private ownership need not reduce political distortions, and may actually increase them. I further provide a theoretical framework that explains the findings.
We examine the return of cultural goods to their home country. The cultural good can be unified or separated into two countries. We show that nonintegration and separation of the cultural good is initially optimal when the host invests in the restoration of the cultural good and his unique restoration skill makes him an indispensable trading partner. The return of the cultural good to its home country and shift of ownership becomes optimal when the restoration stage is over and the host’s investment changes to human capital, which reduces the spillover from his investment, and technological changes make him a relatively dispensable trading partner. Alternatively, the cultural good can be returned due to changes in the valuation of the cultural good. The return can be triggered when unification is efficient but it is possible that the return is triggered even when separation is efficient.
We demonstrate that political geography has value to firms. We do so by exploiting shocks to political maps that occur around constitutionally mandated redistricting cycles in the United States. These shocks keep some firms in Congressional districts that are largely unchanged at one extreme and move firms to entirely new districts with a different set of constituents at the other extreme. We find that firms benefit from relatively less geographic change and firms suffer from being moved into districts that are more competitive across parties relative to safer districts or no change. The effects are not trivial in magnitude. Moreover, they do not depend on whether the firm will retain the same politician or is active in making campaign contributions.
We present a simple model of informational lobbying by competing interest groups. In the model, lobbying effort is costly and endogenous while information revelation is explicit and strategic. We examine the impact on lobbying expenditures of 1) partisan policy bias in the legislature, 2) differential party control over proposal power and veto power, and 3) two different budgetary institutions (annual and biannual budgeting). Many of the predictions are new to the literature. We then test the model’s predictions with lobbying expenditure data from 590 firms and unions operating in 12 states. The predicted patterns are clearly present in the data.
The collective action literature predicts that less-concentrated industries spend less than more concentrated industries on lobbying activities. This paper presents a robust empirical fact that is at odds with this core result. To explain this fact, I include a neglected but, arguably, important dimension in the analysis: the level of excludability of the goods being lobbied. I present examples of excludable US political goals and, using new measures of excludability at the industry level, I show that less-concentrated industries tend to lobby more heavily for excludable goods. The central point is that neglecting the fact that different industries can lobby for goals that differ by their level of excludability can bias the estimates that link market concentration and group efforts. Then, I show that once one controls for the level of excludability in the industry-level lobbying goals, the standard collective action prediction is reestablished. I end this chapter by using national-level mergers as an exogenous source of changes in city market concentration. I show that, controlling for the level of excludability of their advocacy goals, firms that faced these shocks increased their lobbying expenditures disproportionately, providing validity to Olson's seminal prediction.
How does team structure affect productivity? We address this question with an application to healthcare by examining the teams that primary care physicians (PCPs) assemble when they refer patients to specialists. Our theoretical model analyzes how PCPs trade off costly coordination against beneficial specialization, predicting that coordination improves when PCPs concentrate their referrals within a smaller set of specialists. Empirically we find that patients of PCPs with concentrated referrals have lower healthcare costs. This effect exists for commercially insured and Medicare populations; is statistically and economically significant; and holds under identification strategies that account for unobserved patient and physician characteristics.
Learning on the job presents a tradeoff in making team decisions: Workers with less knowledge have less to contribute to team decisions, yet in order to learn, they may need to have an experiential stake in decision-making. This paper studies learning and influence in team decision-making among physician trainees. Exploiting a discontinuity in relative experience, I find reduced-form evidence of influence due to seniority between trainees. I specify a simple structural model of Bayesian information aggregation and define a benchmark of static efficiency that allocates influence to make the best decision using knowledge at hand. The vast majority of learning occurs only after trainees are senior and can influence decisions. Influence is approximately efficient between trainees, but trainees exert much more influence than is statically efficient relative to their supervisors, possibly because such influence contributes to experiential learning.
A large literature on "small area variations" in medical care documents large differences in practice style across areas. It is generally assumed that these variations indicate inefficient provision of care. Using the case of treatment for depression, we show that there is as much variation within areas as across areas. We develop a model of physician behavior which demonstrates that doctor's propensity to experiment varies with individual characteristics of physicians, and that some amount of experimentation (and therefore error) is likely to be necessary in order to match the optimal treatment to each patient.
We examine the impact of emergency department (ED) treatment on future healthcare costs and outcomes. We postulate that ED physicians may affect patient outcomes through acumen in diagnosis and appropriate disposition conditional on diagnosis. We make use of a unique dataset and quasi-experiment on patients who seek treatment at an ED in Montreal, Canada. Physicians there rotate across shifts between simple cases and difficult cases, implying that the assignment of patients will be quasi-random across physicians in an ED. We examine how the initial assignment of ED physician affects the use of resources (what we call physician practice style) during the initial ED visit and the patient outcomes (what we call physician skills). We consider three serious conditions, that present frequently in the ED, angina, appendicitis, and transient ischemic attacks. We find that physician practice style and outcomes (from ED revisits to hospitalizations) vary across ED physicians practicing in the same ED. We also find a strong correlation of physician practice style across the three illness categories. Similarly, we find that physician skills correlate positively across outcomes and (weakly) across illness categories. Our results also suggest that physicians associated with costly practice styles are not associated with better outcomes. Finally, our results suggest that differences in outcomes when treating patients who may be suffering from angina or TIA are driven by diagnostic ability.
This paper studies the causes and consequences of civil service reforms creating an independent bureaucracy -- that is, moving from a spoils system (where the civil service is controlled by politicians) to a merit system (where bureaucrats are more independent). We first demonstrate theoretically that divided government is a key trigger of civil service reform: legislators have a stronger incentive to establish an independent bureaucracy when their interests diverge from the governor's. Taking this idea to comprehensive civil service reforms in U.S. states in the second half of the 20th century, we find that states tended to introduce stronger merit systems when there was divided government. Next, we examine the impact of these reforms on legislation using new methods from computational linguistics. We find that after civil service reform, legislators start writing more detailed statutes that contain more legal provisions. This is consistent with an agency cost model where a more independent bureaucracy requires more specific instructions to avoid bureaucratic drift, rather than an expertise model where a more professionalized bureaucracy should be given more discretion.
There is an ever-present danger that a private association may evolve into an enterprise with an elitist structure that extensively exploits its powers. While it is well known that the key role in limiting the excessive powers of state elites belongs to civil society, the question of policing the elites of monopolistic private orders is understudied. We use the case of the Federation Internationale de Football Association’s (FIFA) private order to illustrate how private orders evolve under constraints imposed by public orders. Although private ordering has advantages compared to public ordering, much of the credit for the success of FIFA’s private order goes to the state. Regulatory privileges granted to FIFA, and the refusal to intervene widely in FIFA’s affairs, have made private ordering possible in the first place. The challenge is, however, that private association capture by powerful interest groups can easily limit advantages of private ordering. In this situation, the proper role of the state is to act in the role of civil society by employing strategic interventions to help the private order deal with its governance failures without endangering the private order’s existence. Accordingly, when the power within a monopolistic private membership association becomes heavily imbalanced, it invites the state to intervene in an attempt to restore the lost balance. However, opening the door to the state—as in the case of so-called FIFA-gate—increases the danger that other and greater interventions will undermine the existence of the private order and remove its advantages.
A central finding from research on authoritarian regimes is that institutionalized forms of dictatorship tend to be the most stable. A key assumption underlying this argument is that institutions can always credibly constrain autocratic leaders. This article examines this assumption by examining how and when certain institutions can provide commitment power in dictatorships. I argue that institutions successfully constrain leaders only when they provide other elites with access to the state, thereby empowering potential challengers and limiting the amount of discretion the leader has over power and resources. I formalize this argument in a game theoretic model where the implementation of executive constraints functions to shift the future distribution of power in favor of elites, alleviating commitment problems by enhancing elites’ ability to overthrow the leader in future periods. I show that leaders are likely to place constraints on their own authority when they enter power weak and susceptible to being deposed. Even if the leader receives a particularly “bad” draw of weakness in the first period and is, on average, much stronger, the need to alleviate commitment problems in the first period swamp future considerations.
This paper aims to shed light on the constraints to and the linkages between the marriage, work and migration decisions of women in developing countries. Using the construction of a major bridge in Bangladesh as a source of plausibly exogenous variation in migration costs – along with data from a purposefully designed nationally representative survey of women – we address the question of how a drop in the cost of migration to the industrial belt affected (i) female migration; (ii) marriage patterns; (iii) female labour force participation; (iv) male and female educational attainment. Our empirical findings are consistent with the hypothesis that social norms restricting female mobility prevented women from the economically deprived northwestern regions of Bangladesh from taking direct advantage of the reduction in migration costs. However, by paying a higher dowry and marrying male migrants from the local marriage market, a subset of women were able to migrate to the industrial belt and thus take up employment in the manufacturing sector.
Policies change the economic environment, changing the incentives that allow cultural practices to persist. Since these practices can play multiple roles in society, policies can have unintended consequences. In this paper, I study kinship traditions that determine whether boys or girls support their parents in their old age in Indonesia and Ghana. I hypothesize that these traditions play the dual role of increasing old age support while incentivizing parents to invest in their children’s education. Both across and within-countries, parents invest more in the human capital of the child who, according to these practices, is more likely to care for them in old age. In both countries, the entry and expansion of pension plans reduces education for these children, and crowds out the practice of the traditions themselves. Thus, policy leads to cultural change.
This paper estimates the impact on fertility of a 1999 reform that reduced litigants' rights for Muslim women in certain states of Nigeria. Using data from Demographic and Health Surveys, I find that, where enforced, the Reform increased the yearly probability of giving birth by 0.026. This effect stems from both a shift of fertility decisions within marriage towards husbands' preferences and an increase in the probability of being married. The change in marital status alone may explain 60% of the total increase in fertility. I also find that the enforced Reform increased women's labour supply.
We study a contracting problem in which the agent’s action is two-dimensional. First, the agent controls the marginal distribution of a performance signal. Second, the agent manipulates the correlation between this performance measure and some exogenous signal like the business cycle. The model allows us to revisit the Informativeness Principle, which originally assumes that the agent’s action is one-dimensional and the information structure fixed. In the latter model, the principal is better off the higher the exogenous correlation is between the two signals. However, in the model with endogenous correlation, the principal may be better off incentivizing the agent to lower the correlation between the two signals. The optimal contract then appears less sensitive to exogenous signals than suggested by the standard approach. We examine the difference in the structure of the optimal contract in the two models. Several other applications of the new model are pursued as well.
This paper considers a Principal–Agent model with hidden action in which the Principal can monitor the Agent by acquiring independent signals conditional on effort at a constant marginal cost. The Principal aims to implement a target effort level at minimal cost. The main result of the paper is that the optimal information-acquisition strategy is a two-threshold policy and, consequently, the equilibrium contract specifies two possible wages for the Agent. This result provides a rationale for the frequently observed single-bonus wage contracts.
The purpose of the paper is to analyze theoretically how social image concerns affect motivation problems in team production. One prominent feature of teams is mutual monitoring. Under close teamwork it is likely that team members can observe their effort each other, and they care about how their intrinsic motivation toward team performance and extrinsic incentives to do well for their own sake are evaluated by (some of) the other members. Image concerns can either attenuate or aggravate the free-rider problem. When the free-rider problem is mitigated by image concerns, increasing team size brings two positive incentive effects into the team. The first direct effect is that the agent cares more about his image concerns in larger teams because "more eyes" are observing his behavior. Second, even if the first effect is absent, the average team effort can still increase with team size because the weaker monetary incentives in larger teams raise the marginal reputational return to effort. Furthermore, these two effects interact with each other. I show that the average team effort per agent can even be increasing in team size. I next classify the agents into two categories, "insiders" and "outsiders" and show that replacing insiders by outsiders may have positive incentive effects. The results explain why increasing the number of independent directors or hiring a new CEO from outside ("new blood") can have significant and positive effects on firm performance.
I study role of sharing region of birth with a prominent political figure on ideological views of local inhabitants (hometown effect). I consider the case of popularity of the late Soviet dictator Joseph Stalin (born Jughashvili) in Georgia and in particular in its Eastern part where Gori, his hometown, is located. Today, the Eastern Georgia retains many elements of Stalin’s personality cult, like museums and statues, although there is no evidence that left-wing views were particularly popular in the Eastern Georgia before Stalin’s reign, or that the region was hit particularly hard by the hardships of the transition to the market. I use the share of surnames with ending shvili across the Georgian municipalities to measure local inhabitants’ affinity to Stalin according to Caucasus Barometer 2012. I show that respondents in high-shvili municipalities are more likely to hold positive view of Stalin and his deeds, controlling for an extensive set of socio-demographic variables. On the second stage, I instrument the Stalinism index with the share of shvili surnames in municipality and show that Stalinism is positively related to approval of government ownership of businesses, opposition to Georgia’s accession to EU and NATO, and dissatisfaction with compensation for a respondent’s work. These results imply that regional affinity even to a late but prominent politician can affect individual ideological positions on a broad range of contemporary issues. Also, the hometown effect is stronger for people socialized after the independence, when centralized ideology broadcasting ceased, and people got more chances to be socialized within the local culture.
This dissertation gleans lessons on institutions and economic development by looking at Haiti's historical experience. Chapter 1. Many developing countries are stuck in small, low-productivity farms. Such countries also have poor property rights institutions, which create transaction costs towards reallocating land to large farms. I look at how transaction costs from historical property rights institutions affected the agricultural structure of Haiti, the poorest country in the Western Hemisphere. Using a simple model and new data on land adoption in Haiti from 1928 to 1950, I find transaction costs prevented farmers from starting large farms. The results imply that development policy might require violating property rights to achieve the optimal agricultural distribution Chapter 2. Many developing countries have not established secure property rights despite the benefits found in the literature. In this paper, I examine whether the beneficiaries of property rights reforms support the reforming party. I test this hypothesis using Haiti’s 2014 cattle registration program, which increased property rights over some livestock but not others. In the 2015 election, districts with more beneficiaries voted more for the incumbent party. The results suggest countries with weak property rights sacrifice not only economic benefits, but political gains as well. Chapter 3. The final chapter examines the roll state capacity plays in respecting property rights.
How persistent is the effect of early European colonization on current institutions in former colonies? An important school of thought argues that European settlers adopted their colonial policies in response to initial disease environments. Where disease conditions were hostile to settlement, Europeans were more likely to pursue extractive colonial policies (Acemoglu et al. 2001). However, the persistence of the effect of the early settler mortality rates on modern day institutions has been debated by others (Austin 2008, Maseland 2017). This paper argues that the movement and mixing of officials and populations caused by World War II makes a persistent effect very unlikely. We use newly collected biographical data for the 14,000 senior colonial officers who served in 54 British colonies between 1939 and 1966. The colonial administrations employed a wide range of professions, and we observe substantial variation in the mix of professions across these 54 British colonies. If the latter-day colonial institutional regimes were indeed based on early settlement conditions, then the distribution of professions within each colony should be consistent over the period 1939-1966. Extractive colonial regimes for example, would steadily employ more prison guards and policemen than, say, postmen and teachers. For the first time, the fine-grained biographical data for senior British officers allow us to test this assumption empirically. Preliminary results show a connection between early settler mortality rates and the distribution of professions within colonies. (The robustness of results varies across regions.) Subsequent conscription and movement of troops during WWII led to a geographic relocations for the officers, which can be followed through their detailed biographical records. After 1945 we find no robust connection between early settler mortality rates and the distribution of professions in the colonial administrations.
Firms may acquire innovative targets to discontinue the development of the targets' innovation projects in order to preempt future competition. We call such acquisitions ``killer acquisitions.'' We develop a parsimonious model and provide empirical evidence for this phenomenon in drug development by tracking detailed project-level development histories of more than 60,000 drug projects. We show theoretically and empirically that acquired drug projects are less likely to be continued in the development process, and this result is particularly pronounced when the acquired project overlaps with the acquirer's development pipeline and when the acquirer has strong incentives to protect its market power. We also document that alternative interpretations such as optimal project selection, organizational frictions, and human capital and technology redeployment do not explain our results. Conservative estimates indicate that about 7% of all acquisitions in our sample are killer acquisitions and that eliminating their adverse effect on drug project development would raise the pharmaceutical industry's aggregate drug project continuation rate by more than 5%. These findings have important implications for antitrust policy, startup exit, and the process of creative destruction.
There are distinct strategies to make spectrum available for 5G. The U.S. plan creates three overlapping access regimes for the 3.55 – 3.7 GHz band: ¥ incumbent Fixed Satellite Services (FSS) with reception rights fixed and immutable; ¥ Priority Access Licenses (PALs) delivering exclusive rights of access (secondary to incumbent FSS users) and sold at auction, but in very small geographic areas (Census Tracts) and for very short terms (2-3 years); ¥ unlicensed, non-exclusive access rights (GAA) regulated by power limits and exclusion zones. The tri-level scheme is advanced by Paul Milgrom, Eric Posner, and others as a major improvement over standard property bundles, eliminating transaction costs and monopoly hold-ups. But the proffered “market failure” and its asserted policy fix mimic the Pigouvian welfare analysis that Coase famously revealed to be a product of asymmetric assumptions. Meanwhile, EU policy seeks to auction unencumbered, nationwide, long-lived, liberal licenses granting exclusive access to 3.4 to 3.8 GHz. This property approach reduces borders and, therefore, transaction costs. A comparison of the evolving systems should test the theoretical arguments made for narrow v. broad resource ownership rights. That the applications are nested in wireless markets yields historical continuity in Coasean thinking about property rights and public policy.
All platforms are not created equal. And the first key to properly assessing competitive effects in high-tech platform markets is to do so in a manner that takes account of actual competitive dynamics. Among other things, this means taking account of complex and shifting markets, actual competitive constraints, the unique consequences of network effects, the role of data and advertising, and other important at-tributes of high-tech, online, platform competition. Accommodating today’s high-tech markets in antitrust enforcement does not necessitate a wholesale overhaul of well-established legal and economic principles of antitrust. But it does require a shift in the understanding of the nature of competition to ensure that those principles further, rather than impair, social welfare. The most significant risk confronting antitrust enforcers, courts, practitioners and scholars today is the use (and potential abuse) of standard antitrust tools to overly preference the status quo, which is unlikely to be optimal — least of all in high-tech industries characterized by rapid and jarring change. As our paper will discuss in detail, too often it is some kind of change from established practice that precipitates antitrust complaints and undergirds enforcement. But in high-tech industries, change is the hallmark of competition. Moreover, it is precisely in the situation of allegedly anticompetitive innovation (i.e. change) that intervention may be more likely, despite being exactly what we want and expect from competition. This is the “nostalgia bias” in antitrust. Antitrust is (often) too quick to hold that because a practice has benefited competition before, changing it will harm competition going forward. Paradoxically, excessive concern for the quite-possibly costly, static effects of innovation — business model change, product design change, price change — on current users or competitors can harm welfare overall.
ABSTRACT: A unique database on numbers and pay of all employees earning more than $150,000/year in all New Zealand listed companies between 1995 and 2014 reveals substantive similarities in the determinants of pay of the CEO and of the senior managers reporting to the CEO. The results are unsupportive of recent theories assuming CEO exceptionalism.
A significant fraction of the labor force in developing countries is “informally” employed outside the “formal” sector. Much of academic thinking uses this dichotomous view to study (urban) labor markets in developing countries, although in the presence of imperfectly enforced institutions employers and employees could choose any contract that satisfies their preferences and meets their constraints. I employ labor force survey data from Tanzania and unsupervised Bayesian machine learning to estimate the latent structure of observed contracts in the urban private sector of Dar-es-Salaam. The results suggest that around 30% of the relevant population cannot be adequately captured using a dichotomous view of the market. Controlling for employees’ observable characteristics, I estimate wage distributions that suggest that workers are willing to trade off formal protections against higher pecuniary remuneration. Taken together the results suggest that a non-negligible fraction voluntarily chooses non-formal employment. An economic contracting framework is presented that formalizes the argument’s underlying principles.
I study the effect of career concerns on research productivity through effort and selection effects using the introduction of performance pay in German academia as a natural experiment. To this end, I consolidated information from various, unstructured data sources to construct a data set that encompasses the affiliation history and publication records of the universe of academics in Germany. The reform introduced attraction and retention bonuses that give rise to strong career concerns, and relatively weaker on-the-job performance bonuses that take effect at a later point in time. I estimate the pure effort effect of these incentives in a DiD framework, comparing changes in research productivity in cohorts of academics that are differentially impacted by the reform. I find a positive effort effect of career concerns that is economically large; amounting to a 12 to 16% average increase in research productivity. This increase manifests itself most robustly as an increase in research quantity and persists for a number of years. Furthermore, the effort response is strongest and most robust for below-median productive academics, with increases in pure quantity as well as quality-adjusted research output, while top quartile academics do not significantly increase output. I then estimate the selection effect using the single-crossing property of the old and new wage schemes, which gives rise to selection incentives that are inversely related to age. Exploiting this variation in another DiD framework, I find that more productive academics are more likely to select into performance pay. Hence, performance pay, particularly in the form of career concerns, increases research output in academia through both effort and selection effects. However, because the effort effect is strongest for relatively less productive academics, while relatively more productive academics select into performance pay, the selection effect partially counteracts the effort effect.
The aim of the present work is to study the effect of risk governance on the profitability of a sample of listed banks in Mexico during the period 2007-2015. To conduct this analysis, a dynamic panel data model is used, and also a random effects model. The evidence presented here shows that functions of risk governance have an impact of only slight significance on the profitability of banks, which suggests that the dispositions and recommendations for risk governance are only fulfilled in a limited way. One possible explanation for this finding is related to patterns of ownership structure, due to the presence of banks linked to business groups, that give risk management a secondary role while other objectives are given greater emphasis. These banks co-exist with foreign banks from developed economies, which creates contrasting patterns of corporate governance.
In 2002, Argentinean companies of natural gas transportation had to endure a breach of contract. After a serious devaluation of the domestic currency, the government decided to freeze transmission rates. Despite high inflation rates, this disruptive policy lasted more than a decade. That rate-freezing mechanism could be interpreted as a contractual problem known as hold-up, which in turn affects many economic aspects such as investment decisions and operating performance (i.e. efficiency). In particular, this paper studies the relationship between the hold-up problem and operating efficiency in the regulated natural gas transport industry. We conducted a study that involved a two-step analysis based on financial data from 2005 until 2016. First, a Cost Stochastic Frontier model was applied to a panel of 8 companies operating worldwide, two of which had been held up in 2001. Then, the technical efficiency estimates were regressed in a panel data model to establish the possible correlation between contract breach and operating restraints. The results suggest that the companies whose real rates were decreased due to held-up contracts could have been motivated to reduce their inefficiency. Although rate levels might not affect efficiency straightforwardly, a rise in price of held-up firms could ease operating restrictions. Therefore, inefficiency in held-up companies might increase under rate revisions.
This manuscript contributes towards the discussion about the central and local governments’ strategies to retain office in a federal setting using the tools of redistribution. Rural constituencies represent an important group of potential voters, especially in transition autocratic regimes like Russia. We examine whether different governmental tiers in Russia target core or swing voters by redistributing agricultural subsidies from the federal and regional budgets. Using a unique panel dataset of agricultural subsidies in Russia (2008-2015), we find that both federal and regional governments target swing voters. In doing so they explicitly consider the relationship between the federal and regional governments, the level of local business integration in regional parliaments and regional revenue generating capacity. Large agricultural business plays a major role in mobilizing rural constituents and is explicitly targeted by different tiers of the government in subsidies distribution. This distribution scheme ensures federal government’s central role in the politics of a competitive autocracy.
In this paper, we ask what, if anything, is distinctive about the bidding and contracting behaviors of for-profit firms and non-profit organizations in markets for social goods. We explore the empirically rich setting of open, scoring auctions used by U.K.’s Department for International Development to procure aid services. We identify patterns of differentiation --for-profits tend to act as transactions-centric, agenda-takers, non-profits as solution-centric, agenda-setters; contracts with for-profits typically involve much higher cost overruns, contracts with non-profits are cheaper but jeopardize public interests. We also identify areas of convergence, where non-profits and for-profits compete, and deviate from prototypical non-profit and for-profit behaviors. Our findings shed novel light on the intricate interdependencies between public and private actors/interests, ex ante legitimacy of for-profit firms in markets for social goods, and hybrid organizing.
In response to a need for enhanced water governance, water institutional reforms are taking place around the world. Common among these reforms is a shift from monocentric to polycentric water governance arrangements, bridging multiple scales of stakeholders through a mix of institutional arrangements. Benefits of a polycentric approach are commonly associated with higher performance in diverse contexts through better adaptation to changing conditions, customized rules that meet local needs and a sense of trust amongst stakeholders. In British Columbia, these findings are recognized in the Province’s new Water Sustainability Act, which offers the opportunity for alternative governance arrangements that could better respond to the unique challenges and needs of British Columbia’s diverse physical and biological landscapes. Building on new institutional economics and Williamson’s transaction cost economics work that suggests institutions that minimize transaction costs within and across situations optimize decision-making, I conducted a province wide survey to evaluate the perceptions of transaction costs amongst two alternative water governance arrangements throughout British Columbia. This poster presentation explores the ex-ante transaction costs of these alternative arrangements and how this information can be used to assist with the implementation of the Province’s new Water Sustainability Act.
Although we know that geographical climate is associated with economic development, there have only been a few studies yet that try to explain the exact mechanisms through which climate and development are related. In this paper, we assess a cultural channel, most famously suggested by de Montesquieu, linking cooler climates to economic development through a stronger work ethic. On the basis of a novel approach exploiting individual-level happiness data in 98 countries to estimate the value attached to work, we show that people who live in a cold climate value working significantly more than people who live in a warm climate do. However, subsequent analysis at the national level suggests that the national average work ethic that we estimate from individual level data translates only marginally into a better economic performance at national level. Our results support de Montesquieu’s hypothesis that a cold climate creates informal norms encouraging people to value work more, but, in contrast to his suggestion, the impact of this channel on economic development appears very limited. We conclude that de Montesquieu was only half right when he stated that differences in economic development can be traced back to differences in climate-induced work attitudes.
What drives individuals to place their trust on different political institutions? Is it a process solely driven by personal characteristics and economic outcomes or do individuals respond and alter their behaviour based on the performance and quality of the underlying institutions? These are the questions that this research attempts to explore by analyzing data from the European Social Survey (2002 - 2014). At first using a principal-agent model, we try to identify how information asymmetries might provide an answer on how an individual takes a decision to trust an institution based on prior beliefs, current political agents and institutional quality. Subsequently, we attempt to explore propositions of the model empirically by analyzing three institutional variables trust in politicians, trust in the legal system and trust in national parliament. Using an hierarchical model, we attempt to combine information from the micro level (individuals) and macro level (countries) in order to explore if and how individuals respond to aggregate institutional data conditionally to their personal characteristics. Results show that there is significance difference in the role of institutions in high quality and low quality institutional frameworks. Keywords: Trust, political trust, institutions, hierarchical analysis, principalagent, asymmetries
Crowdfunding represents a new form of financial intermediation that entails raising funds from a large number of dispersed investors via web-based platforms. The main regulatory challenge in this industry concerns the question whether mandatory disclosure, the most widely used tool in conventional financial markets, is an appropriate solution to information asymmetry. Drawing on insights from the economics of voluntary disclosure, this paper theoretically examines whether market forces alone are expected to generate sufficient information. After discussing incentives for fundraising firms to unravel information, the paper addresses the issue whether crowdfunding platforms as two-sided markets are expected to design optimal disclosure rules. The desirability of mandatory (regulatory) disclosure is finally discussed in the light of conditions that might lead to the failure of voluntary disclosure.
In water industry, frauds committed by customers to access water without paying affect firm´s revenue, contribute to increase physical losses and interfere in the economic order causing harm to society. Ex post transaction costs involve inspection in loco if fraud is suspected and legal enforcement in case a fraud is confirmed. However, individuals may react differently to the costs and benefits of complying with contractual and legal standards. We analyzed the 115,695 frauds registered in management system of the concessionaire between january 2010 and june/2016 in the Metropolitan Region of São Paulo. The results indicated that the inspections did not have an important influence on frauds quantity. Beyond that, frauds were much more numerous in residential category of use in poorest areas with low level of formal education. It is concluded that typical fraudster in this category is at the border of crime. Therefore, he needs an ‘incentive’ to choose not commit fraud. In this case we propose two interrelated paths: to impose a more educational than punitive character on the inspections and to institute a type of multilateral exchange (Coase, 1960). On the other hand, in commercial category of use frauds were much more numerous in areas with high and very high socioeconomic level. This result is supported by Becker (1968; 1974), whose argument incorporates the ilegal rational behavior and brings to the scene Hirschmann´s argument (1977), that it is up to society and firms to make effective repressive political structures in adherence to civilized self-interest (Hirschmann (1977). Due to differences in governance within the firm and in legal and social environment, the validity of the results is limited to the MRSP.